ML021090137

Nuclear Management Co., LLC, Kewaunee Nuclear Power Plant, 2001 Annual Financial Report for Wps Resource Corp, a Powerful Equation

ML021090137
Person / Time
Site:	Kewaunee
Issue date:	04/11/2002
From:	Coutu T Nuclear Management Co
To:	Document Control Desk, Office of Nuclear Reactor Regulation
References
Download: ML021090137 (72)

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A P0WER.FUL EQUAT10N FROM LARRY WEYERS CONTENTS DEAR FELLOW SHAREHOLDERS 2 HIGHLIGHTS 3 WPS RESOURCES CORPORATION AT A GLANCE 6 LETTER TO SHAREHOLDERS 10 A POWERFUL EQUATION 16 FORWARD-LOOKING STATEMENTS 17 MANAGEMENT'S DISCUSSION AND ANALYSIS 36 CONSOLIDATED STATEMENTS OF INCOME 37 CONSOLIDATED BALANCE SHEETS 38 CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY 39 CONSOLIDATED STATEMENTS OF CASH FLOWS 40 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 67 REPORT OF MANAGEMENT 67 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS 68 FINANCIAL STATISTICS 69 LEADERSHIP STAFF 70 BOARD OF DIRECTORS 71 OFFICERS 72 SHAREHOLDER INFORMATION Front Cover Top: Scott Phinney uses his knowledge of working in a bucket near energized electric lines to assist local governments in installing American flags around Lambeau Field prior to a Monday Night Football Game.

Front Cover Right: Healthy downtowns are relaxing places to spend time as is the case in Sheboygan Falls, Wisconsin, which has benefited from our donations to its Main Street Program.

Front Cover Bottom: Line Electricians Tee Jay Lansin from Rhinelander and John Lund from Tomahawk know what it's like to work aloft in any type of weather and in any environment-it's all in a day's work.

At Right: The Victoria pipeline in Upper Peninsula Power's territory provides a shady spot for crews to enjoy a break during installation, A powerful equation! That's what's needed to take a company beyond the ordinary to the ranks of outstanding.

It's the bits and pieces of a working model that must be put together with the utmost precision. It's the learning, planning, implementation, and fine-tuning necessary to ensure that a company is on the right track.

WPS Resources has spent a great deal of time developing the equation to yield the results we need and you want. We know our equation is powerful. It has delivered one of our best years ever, despite the events of 2001 that greatly impacted our industry and created substantial hurdles for our management team.

Let me tell you how.

A QUICK REVIEW OF 2001 In January, we transferred our transmission assets to the American Transmission Company and the Nuclear Management Company took over operations of the Kewaunee Nuclear Power Plant.

In April, we completed the merger of Wisconsin Fuel and Light Company into our electric and gas utility.

In August, we received approval to proceed with construction of a 220-mile transmission line stretching from Wausau, Wisconsin, to Duluth, Minnesota.

In September, we completed construction of a gas storage facility in Michigan.

We increased our ownership in the Kewaunee Nuclear Power Plant to 59 percent and successfully replaced the plant's steam generators.

In November, we sold down our interest in our synthetic fuel facility in Kentucky to a level that maximizes our investment and transferred operations to our new partner, In December, we offered an additional 2,300,000 shares of common stock and were pleased when investors snapped them up at $34.36 per share.

We changed our ownership in Wisconsin River Power Company, the owner and operator of two hydro facilities on the Wisconsin River, to 50 percent.

We wrapped up the year by closing one of the biggest land sales in Wisconsin's history by reaching agreement to transfer ownership of a portion of our Peshtigo River hydro lands to the Wisconsin Department of Natural Resources.

So, things are adding up for us, but what is the result of the equation?

A CLOSER LOOK AT THE EQUATION PROFITABILITY AT OUR NONREGULATED SEGMENT Our nonregulated subsidiaries continue to be profitable. The revenue component of our equation began adding up with the selection of WPS Energy Services, our nonregulated energy services subsidiary, as the standard offer provider for electric service in northern Maine for three years. This was soon followed with our being selected to serve the electric load in the City of Cleveland for five years and the electric load for six communities around Toledo, Ohio, for four years.

We are successfully developing our electric business at our nonregulated energy services subsidiary. We have over 600 megawatts of electric retail sales contracts annually, and we're protecting our margins by supplying our commitments from our own generation or through credit-worthy suppliers who own generation.

We are also developing our nonregulated gas wholesale segment and have nearly completed construction of a 3 billion cubic-foot gas storage facility in Michigan. The rapid-withdrawal, state-of-the-art facility will improve the region's energy delivery infrastructure, lower energy costs, and enhance the reliability of energy supplies in the region.

Serving our customers is important to us, and they recognize us as a leader in responsiveness to their needs. WPS Energy Services, Inc. received the number one ranking in the country from Mastio & Company for customer service provided in the natural gas marketing and services industry. This is the third year in a row that WPS Energy Services' customers rated it among the top handful of marketers in the nation. We believe that energy information is critical in a competitive environment, and we have worked hard to develop the technology that gives us the capability to help our customers effectively manage their energy needs.

Our nonregulated power development subsidiary, WPS Power Development, is also focused on increasing profitability.

Our successful synthetic fuel operation in Kentucky has the proven ability to generate more tax credits than we can use, so we negotiated the sale of a portion of our interest and transferred

F A POWEAPUL EQUATI0H operations of the facilty to a new partner This transaction brought a IAPOWERFULEQUATION gain in 200 1 of 6 cents per share and is expected to brng additional gains of about 59 cents per share in 2002 and about 13 cents per OUR FINANCIAL PERFORMANCE CONTINUES TO IMPROVE.

share in 2003. We expect our remaining ownership share in the synthetic fuel facility to provide earnings conthbutions of between 40 and 55 cents per share annually for each year through 2007 R.h We completed construction of a 50 megawatt simple cycle 3.=

a combustion turbine facility in Combined Locks, Wisconsin, in

$.0 November and will complete construction ofthe cogeneration 1'02 phase by May This is our entrance into cogeneration development, a market which we plan to pursue.

In December, we reached agreement to purchase CH Resources, which owns three upstate New York power plants and related assets, The plants have a combined capacriy of 2M 20A 7M0 20 257 megawatts The facilities include a 09-megawatt combined cycle facility in Syracuse. a 95 megawatt combined cycle facility in U

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using assistance from our energy services subsidiary. We expect I Ml "ls' the approximate $62,000,000 transaction, which is subject to u1.9449 regulatory approval, to close by May The addition ofthese plants brings our nonregulated electric generating capacity to about 930 megawatts.

GROWING OUR REGULATED UTILITIES An important part of our powerul equation is a strong utility 0

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2001 base, so we are growing our regulated utilities, We successfully completed the merger ofWisconsin Fuel

• N, LT SUBSIDAI and Light, which served neady 50.000 natural gas customers in Wisconsin--areas in which we already served electrc customers into our Wisconsin utility. This transaction enables us to take R-o I*,o) ltMIkre)

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nasI, redundancies, providing savings for our customers, and adding u,4 long-term value for our shareholders.

0 We set an electricity record for the sixth consecutive year when the electricity demand on our system surged to 2,173 megawatts on July 31 more than 125 megawatts greater than last year's peak and our system operators were able to meet that peak without relying on load reduction programs.

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2001 August brought the Public Service Commission of Wisconsin's approval for the construction of a 220-mile electric transmission line. This joint project ofWisconsin Public Service and Minnesota 4o-mi")

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improving the reliability of Wisconsin's transmission system.

is Is" Currently. we are not always either able to import necessary power into the state or able to move bulk amounts of power within the state to where it is needed A defcient electrical system hurts Wisconsin, Minnesota, and the Midwest. The benefits ofthis Ps project to everyone in the region necessitate its construction.

On September 23, we increased our ownership in the 20 200 2000 2001 2000 201 Kewaunee Nudear Power Plant to 59 percent by purchasing

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Madison Gas and Electric Company's 17.8 percent share in the plant. This transaction added to our low-cost, base load capacity at a very reasonable cost. We believe that Kewaunee will continue to produce competitively priced, reliable and clean electricity at least through the end of its current license in 20 13, and that's good for our customers, emoloyees, and shareholders.

To ensure Kewaunee remains reliable and is able to operate at its capacity, we completed a S 121.000.000 project to replace the plant's two steam generators that had degraded and were not operating efficiently. Our share of the project amounted to $71,000,000.

In September. we completed a $5,000,000 project that replaced the 42-year-old, 0-foot diameter wooden penstock at Victoria Hydro in Michigan with a 9.5-foot diameter steel pipeline stretching just over a mile. Hydro power is inexpensive power, and it is important that we maintain our facilities in the Upper Peninsula of Michigan where hydro power resulting from Lake Superior-effect snows and rains is plentiful.

We ended the year with initiation of our asset management strategy through an agreement to transfer more than 9.200 acres of pristine forest and waterfront land. as well as islands and water acreage, to the Smate of Wisconsin. The first step of the transaction closed in 2001 when we sold the State 5,740 acres for

$13,500,000. If the State exercises certain purchase options, the total sale price for all the lands will be $25,000,000. We chose to sell the land to the State so it could be preserved and continue to be available for public recreational use. The transaction price was one the State could afford, while at the same time ensuring a fair value for our shareholders, A STRONGER HOLDING COMPANY Our high-quality debt ratings provide flexibility and access to capital markets at reasonable rates to help grow the business.

This was apparent when we successfully issued $150,000,000 of bonds for our electric and gas utility and secured the issuance of $27,000,000 of tax-exempt municipal bonds for our power development subsidiary at very attractive rates.

Our successful common stock sale of 2,300,000 shares in December was substantially oversubscribed and confirms the value of our company to the investing public.

On February 8, 2002, after market close, WPS Resources was added to Standard & Poor's MidCap 400 Index. I am proud that WPS Resources' common stock was added to this market-value weighted index. This is having a positive effect on our stock price and its liquidity.

STRATEGY FOR ADDING VALUE Our strategy for the future includes building on our core competencies of energy conversion and energy delivery in both our regulated and nonregulated markets.

We plan to continue our development and growth in the northeast quadrant of the United States through nonregulated wholesale and retail energy sales.

We will continue to make generation investments in selected markets in the United States through acquisition and/or development and will specifically look to areas that can support our nonregulated energy services focus.

We have developed an electric generation plan for Wisconsin that includes the addition of more than 1,300 megawatts of electric capacity by 2007 in both regulated and nonregulated arenas.

We have developed an asset management strategy that will evaluate the use of all our lands, including our hydro lands and other facilities, to determine if they will play a part in our future or if sale or other utilization of the assets would be more appropriate. Our shareholders will reap the added return that our asset management strategy delivers.

We are patenting our formula for predicting energy needs.

The formula, developed by our employees, is accurately predicting when our power needs are the greatest and when we can plan to sell excess capacity. This ability is saving our customers money while increasing returns to our shareholders.

BALANCING OPPORTUNITIES AND RISKS Balancing opportunities and risks is an important part of any business equation.

Though we've increased our electric and natural gas rates in Wisconsin during 2001 and 2002, we are still one of the lowest-cost energy providers in Wisconsin and the Midwest.

Our regulated Wisconsin utility is seeking approval in 2002 for an increased authorized return that is reflective of the risk of a changing industry. Currently, we are authorized a 12.1 percent return on 54 percent equity at our regulated electric and natural gas utility.

We've rewarded our shareholders with 43 consecutive years of increasing dividends. We feel it is extremely important for us to continue to pay a healthy dividend to our shareholders, and we'll continue to strive to do so.

We've increased our common stock equity through the $54,800,000 acquisition of Wisconsin Fuel and Light, our

$79,000,000 common stock sale, and increased investor participation in our Stock Investment Plan. During 2001, Financial Goals for 2002

"* Continue our earnings growth at 8 to 10 percent on an annualized basis.

"* Achieve 15 to 20 percent of our earnings from WPS Energy Services and WPS Power Development.

"* Continue our moderate growth in the annual dividend paid and achieve a payout ratio of 70 percent in 2003 by increasing earnings.

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IA PWE RFUL EQUATION shareholders invested over S I 0.000.000 to add additional shares to their accounts under the plan and reinvested about $9.000,000 of dividends. The additional common stock shares outstanding had an 18 cents pei-share dilutive effect, and yet reported earnings per share of $2.75 are at a record level.

We are maintaining strong capital ratios to maintain a high-quality credit rating. This is important to us because it allows us to access the debt markets at reasonable rates.

Our investors are recognizing the value of their WPS investment as our stock holds its value. In spite of the economic downturn in 2001, our-stock yielded 5.7 percent at year-end compared with 1.2 percent for the S&P 500.

THE LEADERSHIP COMPONENT To ensure that the components of our equation are delivering value to our customers and shareholders alike, we must have a strong, dedicated workforce with insightful leadership. Though leadership comes in many forms, it begins with our Board of Directors, whom you have elected as stewards of your investment, and it continues through our officers and staff, The membership on our Board of Directors changed this year with the retirement of Clarence Fisher on February I, 2001 and the addition of Bill Protz on April I, 2001, Bill was a former Director of Wisconsin Fuel and Light.

The year also brought new faces to our leadership team with the retirement of Dan Bittner, our Senior Vice President and Chief Financial Officer, after 35 years o dedicated service and the addition of Joe O'Leary to fill that role. Joe comes to us with experience in both regulated and nonregulated industries. He has a record of increasing the profitability of the organizations he has served, and we are expecting more of the same from him.

In November we lost Wayne Peterson. one of our bright.

young vice presidents. to cancer. At 42, Wayne had already made a significant contribution to Wisconsin Public Service's success in his position as Vice President - Distribution and Customer Service, Many of us admired his leadership abilities during his 19-year career with the company. He will be missed.

Additional changes in our senior management team will occur when Ralph Baeten, our Senior Vice President - Finance and Treasurer, retires on February 28 after 31 years of service. Ralph will be followed into retirement by Pat Schrickel, our Executive Vice President (also President and Chief Operating Officer for Wisconsin Public Service and Chairman. President, and Chief Executive Officer for Upper Peninsula Power) on March 31 after 35 years of service.

I want to thank them for their leadership and countless contributions through the years.

ADDING IT ALL UP We are setting the stace for future growth and doing so through our core competencies. Our nonregulated businesses are in energy and energy-related services-the same core competencies we developed in our regulated operations.

We expect 15 to 20 percent of our future net income to come from our nonregulated segments.

We expect our regulated businesses to deliver 2 to 4 percent of our earnings growth and our-nonregulated businesses together to provide the rest of the earnings growth necessary to meet our 8 to 10 percent earnings per share growth target, We have had 43 years of consecutive dividend increases an outstanding record without any plans to change.

A payout ratio of 70 percent or less should be attainable in 2003 with our expected earnings growth.

THE RESULTS TOTAL We have a powerful strategy that blends our strong utility base with an opportunity for higher growth through disciplined nonregulated expansion.

About 70 percent of our shareholders are individual investors who rely on our quarterly dividend and stock price appreciation, Our highly motivated, loyal workforce believes in and supports the company. Our employee turnover rate is just 4 percent. Over 90 percent of our employees own WPS Resources' stock, which raesults in current and retired employees owning 9 percent of our outstanding common stock.

We are delivering shareholder value with our solid regulated utility foundation, out-focused energy and energy services strategy, projected earnings pet-share annualized growth of 8 to 10 percent, and an outstanding dividend record.

We believe that flexibility in the face of industry changes is important to our future. We also believe that financial strength, quality service, diversity of generation resources, and a knowledgeable staff with strong leadership are key to our future competitiveness. These elements are a pant of our powerful equation that is bringing value to you, our loyal shareholders.

Thank you for the support you have given us in the past, We promise to do eveytlhing possible to protect your investment in our company and ensure that it continues to grow for you.

Sincerely, Larry L. Weyers Chairman, President, and Chief Executive Officer February 22, 2002 0P REO RE CORPOATIO 9

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A P0W RFUL EQUATION Energy follows the laws of physics. We generate and deliver energy using fundamental engineering principles.

So it's not surprising that WPS Resources Corporation-an energy company-has developed a powerful equation for shareholder value, The factors in our equation aren't numbers but ways of conducting business. They set us apart in the energy field.

The components of our equation, examined here, combine the factors to bring financial rewards.

(n + r = B) nonregulated + regulated businesses = Balance Success in today's energy industry demands a carefully crafted balance between the steady growth offered by regulated utilities and the opportunities presented by new, competitive markets.

WPS Power Development, Inc. and WPS Energy Services, Inc. are our players in nonregulated energy markets. Together-with WPS Power Development investing in power generation and WPS Energy Services marketing the energy produced-these companies have become an energy force, "The bdaance is hard to ea't."

The State of Ohio opened its retail electric market to competitive suppliers in 2001, and WPS Energy Services emerged as a leading supplier. The City of Cleveland chose WPS Energy Services as the supplier for its aggregated buying program. During the second half of 2001, more than 75,000 residential and small commercial customers were served under this program. Typical customers are saving 10 to 20 percent on the nonregulated portion of their electric bill. In early 2002, they will be joined by 50,000 additional customers in communities across northern Ohio that have selected WPS Energy Services as their supplier.

The outstanding growth we've experienced in Ohio is in addition to existing business in the State of Maine, where WPS Energy Services and WPS Power Development have supplied more than 50,000 residential and business customers since 2000.

Compounding the synergies between marketing and supply is an important part of our strategy, and we're doing it well. We succeeded first in Maine where WPS Power Development acquired generating assets and WPS Energy Services was waiting in the wings to market the energy from those assets. As we enter new markets, these subsidiaries focus on what they do best-developing, owning, and operating nonregulated generation facilities or supplying energy and services in the nonregulated marketplace. As we consider and pursue business expansion in nonregulated markets, we look to these subsidiaries to continue capitalizing on the synergies they create by working together.

In Wisconsin and Michigan, our regulated utilities remain strong. In 2001, Wisconsin Fuel and Light Company merged into Wisconsin Public Service, expanding our service area and adding 50,000 customers. For the sixth consecutive year, customers of Wisconsin Public Service set a new peak for electricity demand, which surged to 2,173 megawatts on July 31. As our customers grow, and as Wisconsin Public Service grows, we continue doing a good job of keeping costs down. Wisconsin Public Service has maintained some of the lowest energy rates in the Midwest and the United States.

Also in 2001, Upper Peninsula Power Company completed replacement of a 42-year-old wooden pipeline at its Victoria Hydro facility near Rockland, Michigan, In its place stands more than 6,000 feet of 9.5-foot diameter steel pipeline. This major undertaking confirms our commitment to renewable hydro power.

The balance between WPS Resources' accomplishments in both nonregulated and regulated businesses is hard to beat.

(f + c = R) foresight + change = Results Anticipating the end-result and pursuing what you believe to be true is the only way to effect change. WPS Resources' resolve has paid off with the completion of several projects that will serve us-and our customers-well.

In 2001, Wisconsin Public Service increased its ownership of the Kewaunee Nuclear Power Plant to 59 percent. We also installed new steam generators at the plant-the largest project in its history. The condition of the generators had threatened 0P SOC S CORPORATIO C ýýwf 1A CJý

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the life of this low-cost generation resource. We're pleased to have the Kewaunee plant back at full capacity and to see the resurgence of a national interest in nuclear power for the future.

The year also marked the culmination of a two-year push for a stronger transmission system in Wisconsin. With the sole transmission interface to the west labeled "one of the most congested transmission lines in the Midwest," Wisconsin Public Service, along with Minnesota Power, Inc., took charge of informing the public about the need for a new line and gaining regulatory approval to build one.

In October, based on evidence of need, the Public Service Commission of Wisconsin approved a new high-voltage line running from Wausau, Wisconsin, to Duluth, Minnesota-along a route that minimizes environmental impact and maximizes use of existing rights-of-way. The line should begin operating in 2005. It will be built by Wisconsin Public Service, which will then transfer its interest in the line to the American Transmission Company, an independent company in Wisconsin that owns and operates the state's transmission system, ensuring fair use of this critical system.

Over the last few years, energy companies in retail markets have been notorious for speculating on price-and losing in the final analysis. At WPS Energy Services, we don't speculate. We back each power sale with generation we either own or another credit-worthy supplier owns. We focus on creating the energy solutions our customers require, at a price that's good for them and makes good business sense for us. We've upgraded our management systems, modified our gas inventory handling software, enhanced our credit function, improved our margins and operating performance, and implemented a next-generation risk management system.

"Companies that waver lose their equilibrium."

WPS Energy Services is long on practical solutions and short on second-guessing the market because solutions boost performance, Similarly, risk management comes into play at WPS Power Development, where every project we pursue must have the ability to stand on its own and be profitable over its life cycle.

A POWERFUL EQUATION The results of our subsidiaries' combined achievements in 2001 will bolster WPS Resources' business success. Wisconsin Public Service is helping to shape the energy environment in Wisconsin, which is integral to how we'll operate and serve our customers in that state. Our nonregulated businesses are contributing an increasing portion of the value WPS Resources provides to shareholders, which fulfills a promise we made to you.

[s(e + e) = HPC]

service to customers x (community service + environmental concern)

= Healthy Productive Communities We can form the energy environment around us and manage our risk-but without customers well served, we can't succeed.

WPS Energy Services has been selected as the energy supplier of choice in Ohio and Maine because of its reputation for satisfying customers and keeping costs down, Even though WPS Energy Services has grown significantly, with more than 225,000 customers, the company continually improves its ratings for customer service. In 200 1, WPS Energy Services was rated number one for customer satisfaction in the country, according to a survey by Mastio & Company.

On the regulated side of the equation, Wisconsin Public Service has been preparing for an array of new products and services our customers have told us are important to them. In 2001, customers gained the ability to complete many routine transactions, such as applying for new service, online at www.wisconsinpublicservice.com. We also introduced E-Bill, an option for customers who wish to receive and pay their energy bill online, and Energy-Saving Tools, including a free, convenient online analysis of customers' energy use and comparisons of their use with that by similar customers. Our next new product introduction will be NatureWise in 2002, giving customers the choice to receive energy from renewable sources.

In 2001, J.D. Power and Associates ranked Wisconsin Public Service number three in the country for customer service provided by a utility.

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I A POWERE UL EQUATION Our employees rise above the call of duty during catastrophic events, such as a June II storm that knocked out power to 38,000 customers-99 percent of our customers in the Oshkosh, Wisconsin, area. The damage was close to the worst the company has endured. Line crews, in addition to repairing downed lines, contended with nearly a quarter of the city's trees broken and uprooted. Employees worked back-to-back shifts, without going home. Others distributed dry ice for refrigeration of perishable foods and kept customers informed about the progress of restoration efforts.

WPS Resources' employees live in the communities we serve, so our involvement in these communities goes beyond business as usual.

In Cleveland, Ohio, WPS Energy Services helps bridge the digital divide with substantial contributions to the Cleveland Foundation. These contributions will create technology centers throughout the city, where residents can access the latest computer technology. This means greater hope and opportunity for the community.

Wisconsin Public Service and Upper Peninsula Power Company support Main Street Programs, helping to revitalize the hearts of our Wisconsin and Michigan communities.

A healthy, vibrant downtown is a symbol for the community surrounding it, a social and cultural attraction, and an employment center. Our economic development and community relations professionals combine forces with local government to assist in developing these areas.

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For 75 years, Wisconsin Public Service owned these lands along the Peshtigo River, surrounding the company's hydro operations in the area. We preserved the lands in their natural state as much as possible, and invited the public to enjoy outdoor recreation on the lands. With changes in the energy industry, however, we began reconsidering the ownership of property not directly needed for our operations.

We searched for new, caring hands to own these lands and preserve them for public enjoyment.

Under the agreement, the Wisconsin Department of Natural Resources is purchasing some of the land, and we're donating significant portions to the Department. Wisconsin Public Service is retaining small parcels for hydro operations and 383 acres for development in an environmentally responsible manner, We were able to sell the land to a caring steward, while at the same time ensuring we received a fair value for our shareholders.

Multiplying our service by support like this for the places where we live and work helps build healthy.

productive communities,

[s(e + f) = SV]

service to customers x (efficiency + flexibility)

= Shareholder Value WPS Resources can say objectively that our customer service is outstanding. Surveys by Mastio & Company and J.D. Power-and feedback from our customers confirm this.

Our history as a low-cost energy provider is proof positive of our efficient operations. We're saving customers money. And though we've requested rate increases in Wisconsin to cover the costs of improved customer service, our rates remain comparable to, if not lower than, those of other electric and gas utilities in the Midwest and the United States, The balance we maintain between nonregulated and regulated business yields flexibility to adapt to the changing energy environment. We're positioned to take advantage of profitable opportunities that fall within our risk parameters, yet we can flourish in regulated surroundings by growing through our traditional utility business.

High-quality debt ratings and a strong capital structure give us flexibility in accessing capital to help grow our businesses.

Simply put, all of this makes up our equation for shareholder value. By operating wisely and efficiently, and serving our customers well, WPS Resources is able to produce financial success that enhances shareholder value.

As events in the energy industry unfold, some companies are reaching great heights. Others are falling to all-time lows.

Knowing who we are as a company and what constitutes success is the key to WPS Resources' stability and growth.

We've found an equation that works.

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FORWARD-LOOKING STATEMENTS I

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• Assumes $100 investment in common stock at year-end 1991 and all dividends reinvested quarterly-Cumulative total return for the ten-year period is equilavent to an average annual return of 9.08%.

This report contains forward-looking statements within the meaning of Section 21 E of the Securities Exchange Act of 1934. You can identify these statements by the fact that they do not relate strictly to historical or current facts and often include words such as "anticipate," "believe," "estimate,"

"expect," "intend," "plan," "project," and other similar words.

Although we believe we have been prudent in our plans and assumptions, there can be no assurance that indicated results will be realized. Should known or unknown risks or uncertainties materialize, or should underlying assumptions prove inaccurate, actual results could vary materially from those anticipated.

Forward-looking statements speak only as of the date on which they are made, and we undertake no obligation to update any forward-looking statements, whether as a result of new information, future events, or otherwise. We recommend that you consult any further disclosures we make on related subjects in our 10 -Q, 8-K, and 10-K reports to the Securities and Exchange Commission.

The following is a cautionary list of risks and uncertainties that may affect the assumptions which form the basis of forward-looking statements relevant to our business.

These factors, and other factors not listed here, could cause actual results to differ materially from those contained in forward-looking statements.

"* General economic, business, and regulatory conditions

"* Legislative and regulatory initiatives regarding deregulation and restructuring of the utility industry which could affect costs and investment recovery

"* State and federal rate regulation

"* Growth and competition and the extent and timing of new business development in the markets of subsidiary companies

"* The performance of projects undertaken by subsidiary companies

"* Business combinations among our competitors and customers

"* Energy supply and demand

"* Financial market conditions, including availability, terms, and use of capital

"* Nuclear and environmental issues

"* Weather and other natural phenomena

"* Commodity price and interest rate risk

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[ N MANAGEMENT'S DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS WPS Resources Corpo-ator is a nocding company.

Our wholly-owned subsidiaries include two reguJated atilities, Wisconsin Public Service Corporation and Upper Peninsula Power Company. Another wholly-owned subsidiary, WPS Resources Capital Corporation, is a holding company "or our nonregulated businesses including WPS renegy Services, Inc. and W/PS Power Development, Inc.

200 CONPARED WITH 2000 WPS Resources Corporation Overview WPS Resources' 2001 and 2000 results of oper a-e shown in the followvng chart:

ions WPS Resources' Results (Mil/ions, except share amounts) 2001 2000 Change Consolidated operating revenues

$2,675.5

$1,949.0 37%

Income available for common shareholders

$77.6

$67.0 16%

Basic earnings per share

$2.75

$2.53 9%

Diluted earnings per share

$2.74

$2.53 8%

Consolidated operating revenrues increased cue to sales volume grovwth for al business segments and nigner natara gas nrices in The first nart o-' 200. Ir addition, rate irrreases at Wisconsin Public Service contribated to increased revenues in 2001. The Pablic Service Commission of Wisconsin authorized a 5.4% ncrease in Wisconsin r e-il electric rates and a 1.5/o increase in iVsconsin retair natural gas rates effectve January I, 2001.

increased proftabi ity at oar non-egalated segments offset a decrease in earnings at our electric and natural gas utility segments resulting in improved eanirgs in 200 1. A gain on the sale of hydro lands as pa-t of our asset management strategy, ncreased natura gas and electric animity margins, ncreased electic and natural gas margins at WPS Energy Services, additiona tax credi-s a& WPS Power Development and a gain on tne sale of a portion of V/PS Power u~tohn@Th~'r ugi srda l

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~ ~rILJC stv Development's investment in its synthetic fue operation contributed to higher earnrings. Partially offsetting tese 'actors were increased operating expenses at all segments and a lower margin at WPS Power Development.

Overview of Utility Operations Utility operations include tne e ecric ati ity operations at Wisconsin Public Service and Upper Pe ninsula Power and the natural gas utility operations at Wisconsin Public Service, Income from electric utilty operations was $58.8 mil ion n 2001 compared wvith $60,7 million in 2000. Incoime from gas ut ty operations was $8,9 imi Ion in 200 and S I 1.6 million in 2000.

Electric Utility Operations The conso'idated electric utility margin represerts electric revenue less cost of sales exclusive of intercompany transactions, Our consolidated electric uti ity margin inrcreased $1.,4 million, or 3%, primarily cue to a.4% Wisconsin retail electric ate increase at Wisconsin PuRnic Service which becarre effective on januaOy I, 2001.

Electric Utility Results (Millions)

Revenues Fuel and purchased power Margin Sales in kilowatt-hours 2001

$654.4 218.2

$436.2 12,741,024 2000

$623.8 199.0

$424.8 12,565,011 1999

$582.5 187.4

$395.1 12,503,487 The consolidated electric ut iity marg'n ncreased dae to the electric rate increase at Wisconsin Public Seorce and hirgher sales volumes to most customer classes at UDner Peninsula Power and Wisconsin Public Service. Summer weather was 66% warmer in 2001 than 'n 2000, and 17%

warmer than normal. Partially offsetning these mactors was a 2% decrease in sales ao large commercial and industrial customers at \\/iscons n Public Service due to declining economic conditions.

Affecting the electric utility margin was a change in the customer mix at Wisconsin Public Service. Sales no lower

MANAGEMENT'S DISCUSSION AND ANALYSIS margin, nortirm customýers increased more than sales to higher margin ccstomers. The lack of new reteail electric rates at Upper Peninsula Power also affected the margin negatively, Upper Peninsula Power's appl cation for a $5.7 million rate increase which had been penring before the Nichigar Public Service Commission since October 2000 was d smissed in August 2001 at Upper Peninsula Powe 's request.

Upper Peninsula Powe* requested a dismissal because the nformaton fled in the case was outdated, Upper Peninsula Power intends to submit a vew application for rate,ncreases in 2002, Our consolicatec fCel expense for produoion plants decreased $5.2 milion, or 4%, largely due to decreased o oduction at Wiscorsir Public Service's combustion turbine generation plants. Our consolidated purchased power expense. howbever increased $24.4 milion due to an increase in power purchases and a 9% ircrease in the cost per kilowats-hour of powaer purchases made by Wisconsin Public Service in 2001 compar-ed witn 2000, Power purchases were 006 hgher in 200 I duie to warmer summer weather and the avairability of ecoiomically p ced energy. Also contributing to increased powe-purhases were a schediuled outage at Wisconsin P3blic Ser, cice's ruc ear plant and an unscheduled outage aT ore of ts fossil fueled generation plants, Wisconsin Puolic Seicie's Kewaunee Nuclear Power Plant was off lise 0or a scKeduled refueling and replacement of its sseamr 0eneraiors nch began in late Septembe-of 2001.

Tne Kewaunee plart -eturned to service In early December as scheduled. Wisconsin Public Service is curresty a 59%

owvner of the Kevvaunee plant, Wisconsin Puulirr Service's Pul'lam Unit 7 was of line fo-unscheduled repasrs in -he fourtn cua' er of 200 1 and returned to serrice or Februry 3.

2002. Wisconsin Public Service c0ose to take acvantage ol purchased power' cu-ng these outages because o' economica./y favorable pricing.

The Public Service Commission of Wisconsin allows Wisconsin Public Sex ice the onportunity to adjust prospectively the amount billed to Wisconsin reail customers for fuel and purchased powev-i' costs fall outside a suecified range.

Wiscons n Pubic Senv ce is required to file an application to ad ust rates either higher or lowe.,hen costs are plus or minus 2% from forecasted costs on an annualized basis.

In the third cua-ter of 2001, Wisconsir Public Se-vice submitted a fuel filing witn the Public Service Commission of Wisconsin requesting a $ 1.9 millios retail electric rate reduction. The rate reduction was approved and imulemented on September 3, 2001. Wisconsin Public Service submitted an additional fuel ftring in November 2001, and a rate reduction of $0.3 million was approved and implemented on December 8. 200 Gas Utility Operations The consolidated gas utilty margin represents natural

,as revenues less purchases exclusive of r ntercompany transactions. Effective April 2001, the gas utility margin at WVsconsin Public Service includes the merged Wisconsin Fuel and Light Company operationsr Wisconsin Public Service Corporation's Gas Utility Results (Millions)

Revenues Purchase costs Margin Throughput in therms 2001

$321.6 230.2

$ 91.4 742,722 2000

$264.5 185.1

$ 79.4 701,094 1999

$191.5 117.6

$ 73.9 662,615 The gas utility margin at Wiscons n Pubic Service ncreased $ 12.0 miilion, o - 15%, in 2001, h s rnc-ase was due to a 1.5% nciease in Wscons n -etai natu-al gas rates effective January I, 2001. and higher overal natural gas throuohput volumes of 6%. increased gas hrioughput vo umes vwere largeiy the result of Wiscons n Pubirc Sernice's acquistion of Wisconsin Fuel and Light ir the second quarter of 200 1. Gas throughPut volumes to large commercial and industrial customers, however decreased 9% as a result of customers swtching to the gas transport customer class and decl ning economic conditions. Gas throughput volures to gas transport customerss inc-eased 15%. I1 addition, gas throughput volumes to interruptible customers decreased 6%. Gas throughput volumes were regatively affected by jwinter weather wnich was 9% milder n 2001 than n 2000, and 8% mlder than normal.

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I A P 0 W E ;F F U L E Q J A T O N MANAGEMENT'S DISCUSSION AND ANALYSIS Wisconsin Public Service's natural gas revenues increased 557. I million, or 22%/ as the result of an increase in the average unit cost of natural gas in the first half of 2001, increased throughput, and the 1.5/

increase in Wisconsin etai gas rates, Wisconsin Public Service's natural gas purchase costs increased 545. I mion, or 2 4/o, largely due to a higher average unit cost of natural gas in the first half of 2001.

The higher natural gas prices experienced earlier in 200l were passed on to customers and are reflected in both revenues ann gas purchases, this naving little impact on margin.

Under current regulatory practice the Public Service Commission of W isconsin and the Michigan Public Service Commission allow Wisconsin Public Service to pass changes in the cost of natural gas on to customers through a purchased gas adjustment ciause.

Other Utility Expenses/Income Utility operatiio exoenses increased $36.3 million largely due to increased transmission expenses associated with the traisfer of assets to American Transmission Company, increased pa.yments to the Wisconsin Department of Admin st-ataon for demand-side management (energy conservation) activities, increased maintenance costs at the Kewaunee plant during its refueling outage, and higher write-offs of uncollectile accounts.

The Public Service Commission of Wisconsin has allowed a poation of the higher transmission costs to be deferred.

The deferred transmission costs. $4.4 nillion for 200 1, are expected to be r ecovered in future regulatoryn proceedings.

Lower earnings on the nuclear decommissioning lund contributed to a decrease in other ncome fi-om utiity operations, Due to regulatory practice, lower earnings on the nuclear decommissioning find were offset by decreased depreciation expense. Also contributing to decreased deprecia-ion expense were an extension in the Kewaunee plant's assumed deGreciable life and a reduction in the nuclear decommissioning fund contribhiaon.

Interest expense increased die to the issuance of additional long-term deat by Wisconsin Public Service in August of 200 I.

Overview of Nonregulated Operations Nonregulated operations consist of the natural gas, electric, and other sales at WPS Energy Services, a diversified energy supply and serv:ces company, and the operations of WPS Power Development, an electruc generation asset development company.

WPS Energy Sevices oet income increased to 56.4 million in 2001 compared wth S.7 million n 2000, WPS Power Development's net income increased to $2.3 milion in 2001 compared with $0.9 million in 2000.

Overview of WPS Energy Services WPS Energy Se-vices' principal ausiness iivolves nonregu'ated gas sales. In additior, nonregulated lecatric sales have become an important factor in the growth of WPS Energy Services. Revenues at WPS Energ Services grew to $.575.1 millon in 2001 compared \\vth $955.6 mi lion in 2000, an increase of 65%. This increase was th-e result of additional natural gas and electric sales volumes coupled with a higher unit cost of natural gas in the first half of 2001.

The higher unit cost oa natural gas is also reflected in cost of sales, thus having little impact c-) margin. income increased $4.7 million in 2001 lie to increasec sales and improved ope-atiois.

WPS Energy Services' Margins WPS Energy Services Gas Results (Millions) 2001 2000 1999 Nonregulated natural gas revenues

$1,406.3

$919.5

$288.0 Nonregulated natural gas cost of sales 1,390.4 908.2 283.4 Margin 15.9 S 11.3

$ 4.6 Nonregulated gas revenues at WPS Energy Services increased $486.8 million, or 5358, primariy as the result ol sales volume growth and higher natural gas prices in the first half oa 200 The nonregulatea gas margin increased

$4.6 million, or 41 %, due to increased saaes volumes and exiting from unprofitabie market segments, WPS Energy Services Electric Results (Millions) 2001 2000 1999 Nonregulated electric revenues

$165.0

$33.8

$3.4 Nonregulated electric cost of sales 150.3 29.4 3.2 Margin

$ 14.7

$ 4.4

$.2 Nonrnegulated electric revenues at WPS Energy Services increased $ 131.2 n r!ion, or 3 88%/. The nonregulated electric margin increased S 0.3 million, or 2340o. Higher electric sales volumes in existing and newly-entered retail e!ecnaic markets, increased electric wholesale activities, as wel as impacts from marketing energy from WPS Power Development's Sunbury plant, contributed to these increases.

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MANAGEMENT'S DISCUSSION AND ANALYSIS WPS Energy Services' Other Expenses Other operating expenses at WPS Energy Services increased

$8.5 milion laigely due to costs associated with business expansion acd higher write offseo uncollectible accounts.

Impact of Enron Although VKP Energy Services is an energy marketer, :t nas exnericed little ripact on day to day operations as a

-esult of the bannr.rptcc Enron Corporation, and is in a net Dayable position with Kr on affil.ates. WPS Energy Services has iqudated all open posiions with the Enron affiliates and replaced them with othe' suppliers. The forward contracts with

-he Eron affiliates priovided -o-payments representing the net liquidation value of the con-racts at the time of liquidation, and

-h~s net liquidaton amount is reflected on the balance sheet as a current accounts payvbae, contingent upon tne oaccome of Enron's cankruptcy proceedirgs. Macagerment believes these liabilities are properly 'ecorded. The Enroc bankruptcy is expected to cave ar efect on other companies throughoat the industry As a resua.V WPS Energy Services s more closely monitoring its credit exposure viih other trading partners, Overview of WPS Power Development Revenues at /!PS Power Development increased

$13.4 million, or 10% primarily cue to higher revenues at its Sunbur, generation plant of 57,0 million and higher revenues from ýts steam operations of 57.1 million.

WPS Power Develoarcent s income was $2.3 million in 200l compared w tn $0.9 million in 2000, Additional

-ax credits of approximately S4 million from its synthetic fuel operation was tne primary factor in WPS Power Development's increased income in 20z, WPS Power Development's Margin WPS Power Development's Production Results (Millions) 2001 2000 1999 Nonregulated other revenues

$141.5

$128.1

$35.4 Nonregulated other cost of sales 110.2 94.8 18.6 Margin

$ 31.3

$ 33.3

$16.8 WPS Power Development experenced a decrease of

$2.0 mri lon in its marg n in 2001 from 2000, The primary factors n this decrease were a $2.8 nclhion margin decrease at Sanbury due to higher fuel costs as a result of purchasing coal at current market prices and higher costs of ren acement power during outages. WPS Power Development is attempting to recover a portion of the fuel cost increase through a lawsuit wnich it filed against a coal supplier for failure to deliver under the terms of a coal supp y agreement.

The Sunbury margin decrease was partially offset by nigher margins at the VVestwood generation plant. which was acquired in September of 2000.

WPS Power Development's Other Expenses/Income Other operating expenses at WPS Power Development ncreased by $4,5 million in 2001 compared with 2000, pnimarly due to costs associated wth operations at the WA testwood plant, higher payroll expenses, and ncreased deve opment costs for potentia new projects.

Other income increased $ 1.8 milion, primarly from a port on of the gan that was recognized n the sale of a partal interest in WPS Power Developments synthetic tuel facility.

Tax Credits WPS Power Deveropment recorded synthetic fuel tax credits of $2.5 million in 2001, an increase of approx ma-ely

$4 mi Ion over 2000. \\eA/ used these credits to the extent the tax aw permits to reduce our current feceral tax iahbiity, and the remainder increased our alternatve micimum tax credt available for future years. Approximately S 10 million of tax credits where carried over from 2001, which brings the cumulative c-edts being carned forward to approxnmately S2! mi iion. Alternative minimum tax cred ts can be used in I ture years to reduce our regular tax iability, subJec to various limitations. Based on a reveew of all known facts and circumstances, management has concluded that it is more ikely than not that we will be able to use these credits in the fature to reduce ou< federal tax liabi ity

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0 N MANAGEMENT'S DISCUSSION AND ANALYSIS Overview of Holding Company and Other Operations Holding company and other operations include the operations of WPS Resources and WPS Resources Capital as holding comnpanies and the nonutilitv activities at Wisconsin Pubeic Service and Upper Peninsula Power Holding company and otner operations experienced income of $1.3 mllion in 2001 compared with a loss of $7.9 million in 2000.

Other nonutility income at Wisconsin Public Service included a pre tax gain of $13. I million on the sale of hydro lands in December of 200 1,. The sale of these hydro lands was the first significant transaction in our five to seven-year asset management strategy to increase shareholder return f-om the sale, development, or use of certain real estate assets deemed to be no longer essential to operations.

In addition, earnings on equity investmenrs were higher in 2001 compared with 2000 primarily due to our investment in American Transmission Comuany.

Interest expense increased due to additional short-term borrowng at WPS Resources for working capital needs in the fnrst hafl of 200 I.

2000 COMPARED WITH 1999 WPS Resources Corporation Overview WPS Resources' 2000 and 1999 resuits of operations are snown in the follow Ing chant:

WPS Resources' Results (Millions, except share amounts) 2000 1999 Change Consolidated operating revenues

$1,949.0

$1,098.5 77%

Income available for common shareholders 67.0 59.6 12%

Basic and diluted earnings per share

$2.53

$2.24 13%

The substantia' reve0 cue growth was largely due to increased natural gas and electric sales at WPS Energy Services and increased sales at WPS Power Development as we acquired additionai customers and expanded into cew markets. Part of the increase in revenues was a result of the record high unit cost of natural oas experienced in 2000. Gas cost Der the m was 43% higher in 2000 than in ý999. The high unit cost of natural gas was refiected in both revenues and cost of sales, thus having litle impact on margin.

The increase in income and earnings per share was the result of higher electric and natural gas utility margins and increases in WPS Energy Services' eleccric and natural gas margins. Additionally a higher margin along vwih adcitonal tax credits at WPS Power Development coctributed to higcec income. Partially offseoring Ihese 'actors were increases 1i operating and rncerest expenses, coupled vith costs associated with an eectric energy contracr enterec in-o by WPS Resources as a hedge against potentiia sumncmer energy price spikes, Overview of Utility Operations Income from electric utility operations was $60.7 million in 2000 compared with $56. l millon in 1999. income from natural gas utility operatons was S 1.6 million in 2000 and

$ 11.2 million in 1999, Tie primary reasons for higher utility net income were a Wisconsin retail electric rate increase and increased natural gas sales volumes as the result of winter weather that wvas 8% clcer ii 2000 Thac n 999.

Electric Utility Operations Our consolidated electric utility marg n increased

$29.7 million, or 8%, primarily due to a 4.c% Wisconsin retail electric rate increase ats Wsconsin Public Serv'ice which became effective on ]anu.r7 I, 2000. Tcis -ate increase was primarily intended to recover additiocal :uel and purchased power costs for the year, The 2000 electric rate increase also took into account the expected cain on the sale of utility assets which is discussed under "Other Electric and Gas Utility Expenses/Incorne."

Although our consolidated kilowatt hour sales wNere only slightly higher, partia'ly due to a 3 I % cooler surime-in 2000 tcac in 1999, consolidated revenues increased 7% cue to the Wisconsin etai electric rate increase at Wiscocsin Public Service, Our consolidated fuel expense increased $15.7 million, or 14%. due to increased production at Wisconsin Public Service's fossil-fue'ed and combustion turbine gene-ation plants. In addition, tie averiae cost of generation at the combustion -urbine plants increased 90% largely as a result of a higher unit cost of natiual gas. Generation costs at the Kewaunee plant decreased 14% in 2000 due to its scheduled outage for refueling and mainrce nance in the second quanten of 2000. A similar outage did not occur in 1999. Tne Kewaunee plant was off-cine beginning April 22 2000 and returned to full power on June 2, 2000. During the scheduled outage, nuclear generation was replaced with additional fossil fuel and combustion turbine generation and additional purchased power. Wisconsin Public Service was the operator and 4.2 %

owner of the Kewaunee piant in 2000, Our consolidated purchased power excense decreased $4. I million, howvever,

MANAGEMENT'S DISCUSSION AND ANALYSIS largely due to a 50 decrease rn the cost per k lowaft-nour of power purchases mace by Wisconsin Public Service in 2000 compared with 1lo9.

Annual fuel costs at December 31, 2000 were within the 2% fuel vindew authorized by the Public Service Commission of \\A sconsrn and, accocdinghy no adjustment was made to electric 'ates for 2000 fuel costs.

Gas Utility Operations The gas ui ity m.argir at Wisconsin Public Service increased $3,4 rmilor or 7%, in 2000 die to an increase in throughput volumes, Winter weat-e r,as a factor for Wisconsin Public Service's natural gas operations in 2000. Weather was 8%

colder in 2000 than r 1999. nowever. weather was 2%

warmer tha n normal i-2000, Wisconsin Public Service's natural gas -everues icreased $73.0 million, or 38%. as the result of a 430 increase in the average unio cost ol natural gas coupled with a 6% increase in overall throughput volumes.

Wisconsin Public Service's natural gas purchase costs increased $67.6 mrllo, or 57%. Ths increase resulted from a higher average ani cost of natural gas and higher gas volumes porchasec of i0%. The hngher unit cost of natural gas was -efteced in beth revenues and gas purchases, thus having little impact on margin.

Other Electric and Gas Utility Expenses/Income Utility operatirng expenses increased $22.3 mirion.

Electric ctiityo operatirn expenses increased $18.4 million primarily due to costs associated with the schednled outage aid other maintenarce activties as the Kewaunee plant.

Higher ea-nirgs of $6.2 million on the Kewaunee plant's nuclear cecome issioning ftnd resu'ted in increased other income at \\Wisconsin Public Service in 2000. Due to regaatorv practces arhis higher income was offset by inrceased depreciatio-and decommissionring expense. Other income at Wisconsin Prblic Service also ircudec a gain of

$3.8 micion or the sale of a combustion turbine which Wiscoisin Public Service constructed for another Wisconsin ati ctyv The Public Secv ce Comnmssion of Wisconsin considered th s gain in 'he Wisconsin retail electric rate adjustment whvch was effective January

. 2000.

Nonregulated Operations WPS Eiergy Serv ces' neo income improved no

$1.7 million in 2000 ceipared with a loss of $3.5 million in 1999, Income at WPS Power Development also improved.

WPS Power Development's net income was $0.9 million in 2000 compared with a loss of $3.8 million n 1999.

Overview of WPS Energy Services Revenues at WPS Energy Services grew to

$955.6 million in 2000 compared with $292.2 million in 1999 an increase of 227%. This increase was the result of additional natural gas and electric sales volumes coupled cwith a higher unit cost of natural gas. The hioher unit cost of gas was also reflected in the cost of sales, thus having litle impact on margin. Income increased $5.2 million in 2000 die to a larger increase in alectc and gas margins than in the related other operating expenses.

WPS Energy Services' Margins The nonreguoated gas margin at WPS Energy Services inc"eased $6.7 million largeiy due to increased sales volumes.

Natuoal gas revenues at WPS Energy Services more than tripled in 2000 compared with 1999. This increase was due to sales volumes that doubled as the result of additional sales in the wholesale market and general business growth. In addition, a large pontion of the increase was due to a higher anit cost of natural gas in 2000.

\\PS Energy Services' gas cost of sales tripled dae to additional natural gas purchases coupled with a higher unit cost of natural gas.

Electric margins at WPS Energy Seovices increased

$4.2 million in 2000. Eelocrc revenues at \\A\\PS Energy Services were $33.8 minlion in 2000 and $3,4 million in 1999. This increase in reveice resulted from additional electsic saOes in Pennsylvania and Maine assocated with WPS Powe' Development's assets that were acquirec in the second and fourth quarters of !999, Electric purchases increased S26.2 million due to additional sales volumes.

WPS Energy Services' Other Expenses Other operating expenses at WPS Energy Services increased $4.2 million, or 4 2 %, primarly due to greater payroll and other operational costs associated with bhsiness expansion.

Overview of WPS Power Development Income at WPS Power Development was $0.9 mcilion in 2000 compared with a ýoss of $3.8 million in 1999. The increase in income was primarily due to a higher margin on opera-1ng activities and add'tional tax credits. Partially offsetting these factors were higher operating anc interest exoenses.

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-educe our tax liabil ty in subsequent years.

A arge Orion of -he tax credits at WPS Power Development re ate to the operations of its synthet cfeo facilities. Producton at the synthetic fuel fac itty was higher tnan anticipated n 20CC. despite the physicai relocation of the project from Alabama to Kentucky diring 2000. The fac Ity was taken out of operation in April 2000 to prepare for relocation, and WPS Pow/er Deve opment began operation of the facilities in the nev/ ocation or September I, 2000.

In addition, WPS Power Development reversed $0.9 million of Previously recorded 'osses in the first quarter of 2000 as a resuet of an equity contriburtio to.ts synthetic fuel Project by the minority ov/ner. Prior to this transaction, WPS Power Development had been 'ecodong ' 00% of the operating osses of tnis proJect because the minority owner's equity had been reduced to zero: however, iK had been alocated only 66.7% of the tax credits. Through an agreement with the minorty owner, WPS Power Development received 00%

of the tax c edts and operating results from the project until the minority owner was able to contribute furtner capital to fund its share of the operating costs, WPS Power Development's Margin WPS Power Deve opment experienced an increase of

$16.5 million in its margin in 2000. This Increase vvas largely due to the operation of the electric generation facilities acqu red in Maine and Canada ri the second quarter of 1999 and in Pennsylvania :n the lourto cuarter of 1999.

WPS Power Development's Other Expenses Other operating expenses at \\APS Power Deve opmenm increased $27.2 million n 2000 due to maintenance and higher product on costs a-its generation plants in Pennsylvania. Costs associated with tie investigation and stamt-uc of new projects at WPS Power Development also diraxt&

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zJO[ý increased in 2000. Higier nterest expense of 56.3 mrllion in 2000 was largely due to ionrecou-se debt put in place to finance the plart acquisitions.

Additional costs at the Sunbury generation plant in Pernnsylvania lowered result at WPS Power Developmenit.

particularly in the fourti quarter of 2000. This included higher production costs, higier maintenance costs (both planned and accelerated) and increased costs of replacemert power while the plant was undergoing maintenance. The dec Aion was made to move some m aintenance scheduled in future years into 2000 -o coincide with other plait downtime.

The accelerated mainterance ai the Sunbury plant was intended -o enhance availability in 200 and future yea's.

Overview of Holding Company and Other Operations Holding company and other operations experienced a loss of $7, mrillion ir 2000 comnared with a loss of

$0.4 million in 1999. The increased loss was urimarily due to additional irterest expense, increased operating expenses, and a cost of $3.8 rirlot for ar elec rc eerey contract entered into by WPS Resources in 2000 as a hedoe against potential summer energy nrice spikes BALANCE SHEET 2001 COMPARED WITH 2000 Customer and other receivables decreased 569.8 nirllion and accrued unbil ed revenues decreased 527.4 million as the result of milder weather and a substantially lower unit cos' of natural gas experienced it December of 2001 compared with December of 2000.

Regulatory assets increased S Ia.5 million as the result of deferred costs remiated to compliance with certain Nuclear Regulatory Commission requirements aid additional regulatory assets acquired as a result of the Wisco sin Fuel and LUg& merger, largely related to future environmental remecraTon costs. Other assets increased $ 04.7 million argely as a result of toe investment in American Transmission Company, goodwill associated wvth -he Wisconsin Fuel and Light merger, and an increase in pension assets,

MANAGEMENT'S DISCUSSION AND ANALYSIS Assets fi-om risk anagement activities decreased

$ 13.' million and I abilities from risk management activities decreased $21 9.6 r.imon largely due to charges in forward prices, Short-term debt decreased $83.4 million as tIe result of replacing short-term debt wit-) addtional orng-term debt at Wisconsin Pubic Se ice and common stock equty at WPS Resources. TIe current poatian of long-term deb includes S50.0 mlr ion of 7.30% first mortgaoe bonds at Wisconsin Public Serice which ma7jre or Otober I, 2002.

We currentny nave io Dlaris to refinance trese boncs with long-term debt. Long-term debt increased $67.8 million as the result of addit onal senior notes issued at Wisconsin Public Service in The thirid qu-arrer of 2001 and obtaining financing tnrougr tax-exempt bonds for WPS Power Deve opmenT Is Westvood p ant in the second quarter of 200 1

Regulato, liabilties increased $2_7.8 mil ion primarily due to -he deferral of S 1.8 milion in pension setlement gains resulting from enployees transferring from W'sconsin Public Service to Nuclear Management Comrany, LLC. Other lorg-term iabilites increased $47.9 milion primaily due to tre ceferred gain of $38.C million on the sale of a portion of WPS Power DeveloDment's oAnership interest in its synthetic fue oaeratior.

FINANCIAL CONDITION Investments and Financing Payments for etsr-n of capital of $35.0 mir lon we'e paid by Wisconsin Pubinc Servce to WPS Resources in 200 1.

WPS Resources ade equity cortribctions of 595.0 million

.o Wisconsin Public Sea,,ice n 200]. These payments and equity coarr butiors alowec W sconsin Pubic Searace's average equity capita izaton and its capit al zation ratio foa ratemaking to remain near target levels as estabcished by tne Pubnic Service Comir rrsson of W\\risconsin n Its mosi recent rate order, A!PS Resources also contributed $54.8 milion of equity to Wisconsin Pub]ic Se-mice for the Wisconsin Fuel and Ligrr acquisition.

WPS Resources also made equity contributions of SI 2.0 mirlion to Uppe-Peninsura Power Company in 2001.

Trese equiy conticuton> vere made ao maintain appronriate average common equity ratios. WPS Resources and WPS Power Development made equity contributions of $ 15.5 million and

$9.0 million, respectmvey, to Sunbury Generation, LLC for expenditures at tne Sunbury generation plant.

Cash requirements exceeded internally generated funds by $1 12.8 milion ;n 2001. Shnot-term borrowings througn commercial paper decreased $104.6 million as the result of issuing additiona long-eam debt at Wisconsin Pubiic Service and the sale of common stock at WPS Resources in 2001.

Our pre-tax interest coverage, including nonrecourse debt, was 2.33 times for the 12 months ended December 31, 2001.

in October 1999, WPS Resources ciled a shelf registration with the Secarities and Excha-ne Commission, which aliowed the issuance of $400.0 million in the aggregate of public long-term debt and common stock, Long-erm debt of

$ 50.0 million was issued in 2000 and common stock of

$79.0 million was issued in 200] under the shelf registration.

Effetive January 2001. we began issuing new shares of common stock for our Stock investment Plan and for certain of our stock-based employee benefit plans. Eqaity increased by $18.6 million in 2001 as a result of these alans, WPS Resources also repurchased $ I. I mil ion of existing common stock for stock based compensation plans.

Wisconsin Public Service issued $150.0 million of

6. 125% senior notes in the third quarter of 200 1, with part of the proceeds used to retire $53.

million of 8.8% first montcage bonds. The rema nder of tre proceeds was

-sec to reduce short-term debt and suppaot working capital requirements. The senior notes are secured by a pledge of first mortgage bonds but aecome ansecired if Wisconsin Public Service retires all of its outstanding first mortgage bonds.

WPS Resources sold $79.0 milaion of common stock in the fourth quarter of 2001 resulting in a net increase in common equity of $76.0 irlion after issuance costs.

n April 2001, the Schuylkill Coanty Industrial Deve opmenr Authority issued $27.0 million of refunding tax-exempt bonds. WPS Westwood Generation is obligated to repay the aefunding bonds. WPS Resources agreed to gua-anty WPS Westwood Generation's obligation to provide sufficent funds to Day the refanding bonds and the related obaigations and indemnities.

A POWE RFUL EQUATION MANAGEMENT'S DISCUSSION AND ANALYSIS Wisconsin Public Service makes large investments in canital assets. Net constreLion expecditures, inclading nuclear fuel, for Wisconsin Public Service are expected to be approximately $565 million n the aggregate for the 2002 thIough 2004 period. Larger projects include $60 million for automated meter readino, $27 miclion for computer software and systems, and S68 millior for 'he sta4t of construction of generat on facilities that wivI continue to be const.ruted through 2007.

Other capital requirements for Vt/isconsin Public Service for the three year period include contributions of $7.8 million to tce Kewaunee plant's decommissioning trust fund, In 2004, -he second phase of Wisconsin Pubi;c Service's agreement to purchase electricity from the De Pere Energy Center, a gas fired cooeneration facilitv will be accounted for as a capital lease. The De Pere Energy Center lease will be capitalized at approximately $80 million.

UpDper Peninsula Power is expected to incur net construction expedcitures of about $37 million in the aggregate for the period 2002 tnrough 2004 primarily for electric disntibution improvements and repairs at hydro facilities. In add'Lion, Upper Peninsula Power is considering the potential need "or constraction of a combustion turbine at an estimated cost of $4 1 mllio during the 2002 through 2003 timeframe.

Identified capital expenditures for WPS Power Development

'or 2002 through 2004 Include the acquisition of the CH Resources generating facilities for approximately $62 million in 2002, S13 million for handling NOx emissions at te Sunbury facilit. and $4.7 mi lion for generaton facilities at the Combined Locks Energ Center. Other capital expenditures for WPS Power Deve opmemn for 2002 through 2004 could be significant dependirg on its success in pursuing development and acquisition opportunities. WAnen applicable, non-recourse financing will be sought 'or fundino significant portions of these acquisitions.

WPS Resources expects to make capital contributions of up to $92 million to fund construction of our portion of the Wvausau to Duluth trarsmission ýire which wilI be transferced to American Transmission Company in exchange for an increase in our equity ownership in American T-ansmission Company, Regulatory On December 21, 2000, Wisconsin Public Service received an order fironc the Public Service Commission of Wisconsin authorizing a 5,4%o increase in retail electric rates and a 1.0% increase in retail natural gas rates for 2001 and 2002. A 12. % reurn on equity was approved. The new rates were imp emented on January I, 200 1.

On April 12. 200, VWisconsin Public Service filed an application with the Public Service Commission of Wisconsin for additional rate relief in 2002. Wisconsin Public Service requested an $86.8 millron, or 16. 1I%, increase in retail electric rates and a $13.5 million, o-4.5%, iccrease in retail natural gas rates for 2002. Wisconsin Public Service requested a 12.6% reiurn on equity, with equity constituting 559o of the capital structcie. The Public Service Commission of Wisconsin's order, o-iginally expected to be issued in january 2002. has now been deayed until April 2002.

Wisconsin Purblic Service received an interim rate order on December [9. 2001 and implemented interim rates on January I 2002. The orde-authorized a $55.5 million, or 10.3%, retail electric rate increase and an $11.2 million, or 4.7%, retail natural gas -te increase. Interim rates are based on a 12. 1% return on equity, witc equity constituting 550/

of -he capital structure, are subject to refund to the extent interim revenues exceed revenue authorized in the final rate order, and will be in effect until superseded by the final -ate order establishing new rates. Wisconsin Public Service anticipates that it will ro be required to -efund revenues collected under the interim rates.

Upper Peninsula Power intends to submit an application with the Michigan PublIc Service Commission for -ate increases sometime in 2002 and anticipates new rates will be effective In 2003.

Merger with Wisconsin Fuel and Light Company The merge-of Wisconsin Fuel and Light Company into Wisconsin Public Service was completed on April 1, 200 1.

Wisconsin Fuel and Ligc-shareholders received l,73 shares of WVPS Resources' common stock for each share of Wisconsin Fuel and Light's comnmon stock. A totaI of 1,763,943 shares were issued resulting in a purchase orice of $54.8 million based on an average price of 531.0625, the prevailing pnice at the time of the merger announcement, Wisconsin Public Service used -he purchase method of accounting and recorded $41.9 million of total premium associated with the purchase. Of that total, $36.I million was recorded as goodwill and $5.8 million after-tax was recorded as an aceuisition adjustment included in plant. The acquisition adjustment is expected to be recovered in Wisconsin retail rates over the period 2003 through 2005 as approved by the Public Service Commission of Wisconsin.

0P

• E~URE e**e*RATI0

MANAGEMENT'S DISCUSSION AND ANALYSIS American Transmission Company, LLC In the first anc second quarters of 200 1, Wsconsin Public Service and Upper Peninsula Power transferred transmission assets at their net book value to American Transmission Company in excharge r

ot cash and an approximate 15%

ownership interest in Ameican T~ansmission Company.

The Public Service Commission of Wisconsin initiated a generic docket to address the potential recovery of deferred 2000 and 2001 start um costs and increased transmission operating costs of American Transmission Company by the memner Wisconsin ýti it es including Wisconsin Public Service.

Completior of rhe docket is anticipated in the spring of 2002 and should identi5i the costs to be recovered and The method for recovery, viscorsin Punlic Service began recovering some of these costs, as a rsu t of Its interim rate case order whicn was implemented January I, z_002. The Interim recovery of these costs is subject to refund should the costs in the final generic docket be less than the costs included in the marm rate American

'-ansmission Company mplemented new Federal Energy Regulatory Commission tariffs, subject to refund on lanuay l. '00. Settlements related to issues surrounding these ariffs were approved in late 2001. The settlement reduced transmission ra es fo Wisconsin Pubnic Service by approximately S8 million during the 200 1-2005 pnase in period.

On August 17, 200 z

, th-e Public Service Commission of Wisconsin approved the construction of a 220-mile 345 kV transmission line from Wausau, Wisconsin -o Duluth, Minnesota. T he jc nt project of Wisconsin Public Service and Minnesota Power had aeceived tne approva of the Minnesota Public Service Comm sn on in March of 200o. Construction of tne line is expected to begin in 2002 with comnpleion in 2005.

Our finding obligation of the construction costs is estimatec to be between $4 0 muil on aod $92 million. Our interest in the line will eventually be contributed to American Transmission Company for an increased equity nterest in American Transmiss.on Company. We anucipate that our equity interest in American Transmission Compan, may increase to approximately 25%

after completion and contribution of the line, Kewaunee Nuclear Plant On January

, 200 1, Wisconsin Public Services administrative employees at the Kewaunee plant transferred

,o Nuclear Managemen-Company, LLC. As a resilt of these employees leaving 7he VWiscorsin Public Service benefit plans, a curtailment loss o $88 million was experienced. Most o&

the curtailment loss %,,as deferred as a regulator, asset. We recognized settlement gains of SI 2.8 million in 2001 as a result of these employees and other former employees taking wthdrawals from the pension plan during tne year. The majority of the settlement gains were recorded as a regulatory liability.

Wisconsin Public Service wil return the net of settlement gains and curtailment :osses to ratepayers in future rates, The Kewaunee plant's co owners received approval from -he Public Service Commission of Wisconsin to apply deferred accounting treatment beginning March 27, 2001 to the incremental costs associated with compliance with certain Nuclear Regulatory Commission requirements mandating improvements to plant procedures. Wisconsin Pubnic Service received an order to recover the deferred costs subject to review by the Pubic Service Commission of Wisconsin in a future rate proceeding. Wisconsin Public Service has deferred approximately $10 million as a regulatory asset through December 31 200].

On September 24, 200 1. Wisconsin Public Service acquired Madison Gas and Electric's 17.8% interest in the Kewaunee plant for S l7.5 million. This acquisicion increased Wiscorsin Public Service's ovwnership interest in tne Kewaunee plant to 59%.

Security On December 19, 2001, the Public Service Commission of Wisconsin authorized Wisconsin Pubnic Service to defer additional costs incurred with regard to increased security measures at Kewaunee and other facilities. The deferred security costs will be addressed in Wisconsin Public Service's rate proceeding to be filed in 2002 for 2003 rate relief, Wisconsin River Power Company Wisconsin Public Service's ownership interest in Wisconsin River Power Company decreased To 50% effective December 3 I, 2001 as the result of the sale of a portion of its ownership interest to Wisconsin Power and Lignt Company.

Acquisition of Generation Facilities On September 10, 200., Mid-American Power, LLC.

a joint venture of WPS Power Developmen-and Burns &

McDonnell, announced a plan for cons-iruction of an additional 200 megawatts of electrical capacity at the existing 53 megawatt Stoneman power plant in Cassville, Wisconsin.

Construction is expected to begin in 2003 with completion by the first quarter of 2006.

We expect the Combined Locks Energy Center, a cogeneration Project owned by WPS Power Development 0

COROA0

A POW-RFUL fQUATION MANAGEMENT'S DISCUSSION AND ANALYSIS and located at the App eton Coated paper mill in Combined Locks, Wisconsin, to begin ful operation by May I, 2002.

WPS Energy Services will market the electric energy produced by the facility in the wholesale electric marketplace. Construction is underway to install a near recovery steam generator which will complete tie cogeneratior aspect of the project.

In December 200 1, WPS Power Development reached an agreement to purchase the stock of CH Resources. Inc., which owns three power plants and other assets. The approximate

$62 million transactions subject to regulatory approvals and is expected to close n the second quarter of 2002.

WPS Resources s expected 7o issue short-term debt in order to provide equity funding to WPS Power Development for this acquisiton.

ECO Coal Pelletization # 12, LLC Operations In November 2001, WPS Power Develonment, through ts subs diary ECO Coal Pelletzation # 12. LLC. entered into a transactor with a subsid ary of a public company resulting in ECO # 2 contributing ts synthetic fuel producing machinery to a newly-formed entty in excnange for cash and a one-third ownership interest in the newly-formed entity.

The transaction generated a pre tax gain of 540. I ml ion of wh ch S38.0 million has been deferred as of December 3 1.

2001 as a resJt of certain inhts of rescission and written puts being granted to tne buyer As these rights of rescission expire and the amount of the nut options granted to the buyer dim nishes, WPS Power Development will recognize the deferred gain on the transaction.

Co ncurrenm with the partia sale ol this project WPS Power Deve opment bought oat the interem of ts previous partner in the ECO # 12 project. The actual payments to this former partner are contingent upon the same provisions referred to above. As a resut, on December 31, 2001, $2.3 million was held in escrow, which will be released proportonately as the respective rescission rights and put options expire.

Sunbury Generation, LLC WPS Power Development acqu red the Sunbury generation plant in November of 1999. As a result of both market conditions and ssues related to the physica

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performance of the plant, the project to date has no' me" management's proJected near term financial pernormance levels, Due to ths lower level of performance, WPS Resources aid WPS Power Development contributed additional capital into the proJen to fund operating expenses and capital expenditures and to ensure that tne project complies with its project financing debt covenants, In 2001, capital contributions amounted to $24.5 million, Projections going forward indicate that Sunbury will produce adequate cash flows for its operation, with capital contributions being required for capital expenditures. In 2002. capital contributons will be required primarily to fund a project to reduce NOx emissions fiom the plant. Those expenditures are estimated to be approximately $13 million and vwere anticipated when the plant was acquired.

TRENDS Critical Accounting Policies We prepare our financial statements in conformity with accounting principles generally accepted in the United States.

Judgments and uncertainties about the application of these accounting policies along with estimates and other assumptions may affect reported results. \\Ve consolidate the financial statements of all majority-owned subsidiaries. All significant intercompany transactions are eliminated, Wisconsin Public Service and Upper Peninsula Power follow Statement of Financial Accounting Standards No. 71,

'Accounting for the Effects of Certain Types of Regulation,"

and their financial s aterients reflect the effects of the different ratemaking principles followed by the various jurisdictions regulating each uti'ity. For Wisconsin Public Service, these include the Public Service Commission of Wisconsin, 90% of revenues: the Michigan Public Service Commission, 2% of revenues, and the Federal Energy Regulator-Commission, 8% of revenues.

Although unlikely, should Wisconsin Public Service or Upper Peninsula Power no longer meet tne criteria for applying Statement No. 7, we would discontinue its application as defined under Statement No. 10 1, "Regulated Enterprises - Accounting for the Discontinuatior of App ication

MANAGEMENT'S DISCUSSION AND ANALYSIS of FASB Statemernt No 71." Assets and liabilitres recognized solely due -o the actiors of rate regulation would no onger be recognized on tre Dalance sheet anc would be classified as an ext aoid naru irem in ncome for the period in which the d'scontinuatioi occurs

/*!e accrue estimated amounts for services rendered but not ye-billed. \\t/e reseo-ve an estiiiate fo' potential uncollectible custoie'- accounts based on historica, uncollectible exaer ence and specific customer identification where practical.

\\/PS Energy Serv ces follows the requirements of Emerging issues Task Force Issue No. 98-10, 'Accountino for Contracts involved in Energy Trading and Rcsk Management Activities." APS Fnergy Services uses derivative financial and commodity instriments to recuce market rsk associated with changng arices of natural gas and electricity sold a-firm prices to its customers. \\,,VPS -*-eov Services also uses deyivatives to manage market isk associated with anticipated energy purchases as well as trading activities, Derivatives may include futures and 'orard contracts, prce swap agreements, and call and pus opticns, Accordinvy under issue No. 98-10, WPS Energy Ser. ces mark s

renergy trading contracts to fair,alue on tre balance sheet. and recognizes changes in ma rket varue in ear ings.

Impact of New Accounting Standards We adopted Statemert of Finarcal Accourting Standards No. 133. Accourtinu 'or Derivative instruments and Hedging Activitres o on janu 0 ir 1, 2001, This statement equires oerivative instrumenti to De recorded at their fair value as assets or liabilities oi trne balance sheet. Changes in the derivative's farsjr ae to be recognized currently in earnings un ess specific hedge accounting criteria are me-.

\\'/e concuded tha-. tne majority of contracts at our tilty subsidiaries and at VPS Power Develoamener for the purchase, sale, and storage of natural gas. electricity, coal, and nuclear fuel do not meet The cefinition of a derivative as definec u.nder Statement No. 133 and, therefore, are not subject to tne accountng requiremenis of Statement No. 133.

Wisconsin Public Service entered inTo a limted namber o" commoditv -ontirct-that meet tie definition of a derivative, VVe believe that ary gains or losses resulting from the settlement of these contracts will ne collected from, or refunded to, retail customers. Denivative assets and liab:it es that are recorded as a result o' these derivative cont-acts a-e offset with corresponding regulatory assets and liabilities, At January I, 2001, Wisconsin Public Service recorded a uerivative asset and ar offselttng regulatory liability of approx mately $1 7 mil ion. The cumulative effect on income was not significant.

WPS Energy Services uses derivative financial and commodity instruments to reduce market risk assocated with changing prices of natara gas and elecrcty sold to customers at f rm prices. WPS Energy Services also uses derivatives to manage market rsk associated with anticipated energy purchases as well as trading activities. WPS Energy Sevices concluded that its energy contracts were trading contracts and, therefore, applies Emerging ssues Task Force Issoe No. 98-1I,

'Accounting for Contracts Involved in Energy Trading and Risk Management Activities." Accordingly,

/PS Energy Services

-ecorded its energy contracts at fair value on the balance sheet, with changes n fair value recognized in earnings.

Because WPS Energy Services marks its energy Tra ding contracts to market n accordance with Issue 98-10 and does not anticipate designatng any derivative contracts as hedges for accounting purposes, the adoption of StaTement No. 133 did not have a material impact a- \\t/PS Energy Services.

V/e adopted Statement of Financal Accounting Standaros No. 142, Goodwil and Other Itangible Assets," on Jaiuary 2002 The financial statement impact of adapting Standaro No. 142 was immaterial. In accordance with the requirements of this statement, we ceased amortizing the goodwill associated with the Wisconsin Fuel ano Light merger at January I, 2002, and prepared a preliminary evaluation of the fair market value of the gas utility business segment to assess the potential impairment of the goodwil balance. Based on the estimated fair value, an impairment charge was rot required.

Liquidity WPS Resources normally uses internally generated funds and commercial paner borrowing to satisfy most of its capital requirements. We may periodically issue org-term debt and

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MANAGEMENT'S DISCUSSION AND ANALYSIS common stock to reduce short term debt, maintain desired capitalization ratios, and cund future growth. We seek non-recourse financing for funding some nonregulated acquisitions. WPS Resources' commercial paper borrowing program Provides for working capital requirements of the nonreJulated businesses and Upper Peninsula Power. The scecific forms of financing, amounts, and timing depend on the availability of projects, market cotoditions, and other factors.

The current credit ranings for WPS Resources and Wisconsin Public Service are listed in tne table below:

Credit Ratings Standard & Poor's Moody's WPS Resources Corporation Senior unsecured debt A+

Aa3 Commercial paper A-I P-I Trust preferred securities A-A I Wisconsin Public Service Corporation Bonds AA-Aal Preferred stock A

Al Commercial paper A-I +

P-I These ratinos are among the best in the energy industry and have allowed us to access commercial paper and long term debt markets or favo-able terms.

Rating agencies use a tumber of both cuantitative and qualitative measures in determining a company's credit rating.

These measures include business risk, liquidity risk, competitive position, capital mix inancial condition, predictability of cash flows, management strength. and future direction. Some of the quantitative measures can be analyzed through a few key financial ratios, winle the qualitative ores are more subjective, The recapture of Its operating and capital costs through ratemaking mechanisms sich as the electric fuel window, purchased gas adjustment clause, and frequent rate adJustments based on projected test years have a positive impact on Wisconsin Public Service's liquidity WPS Resources and Wisconsin Public Service maintain separate commercial paper borrowing programs in comoliance wirt the Public Sec, ice Commission of Wisconsin's directives, Factors affecting the commercial paper credit ratings at both WPS Resources and Wisconsin Public Service include the overall credit strength for the company, the ratings on its long-term debt, the amount of its short-term debt, and the amount and quality of the bank facilities backing up its commercial paper borrowing. If the company's ong-term debt rating were to fall below a rating of A÷/A 1, the potential exists for a downgrade in its commercial paper rating.

WPS Resources holdc credit liner to.ack I00% of its commercial paper borrowing and letters of credit. Includec in the credit lines of WPS,Resources, and also of Wisconsin Public Service. are credit lines of S10 million and $ 5 tri lion, respectively, that require both companies -o mainta n a commercial paper 'atng of A liP

. A decrease in ratings below that level could adversely affect the company by increasing the interest rates at which -t car borrow, restricting its ability to obtain lines anc letters of credit, and potentially limiting the availability of funds to the company in the commercial paper market. A restrictio in the company's ability to use commercia. pacer or-owvlng 'or its working capital needs could require it to secure finds through bank loans resulting in higher interest expense and celayed availability o' funds, WPS Eneroy Services maintains underlyin:g agreements to support its electric and oas trading ope'atons. n the event of a deterioration of WPS Resources' crecit ratino. most of these agreements allow the counte r-party to demand additiona assurance of payment. This provision could certairi o existing business, new business, or both with the counter-party. The additional assurance requi-'reents could be me-with letters of credit, surety bonds, or cash deposits and wvoulc likely uesilt

.n WPS Resources being required to maintain increased bark lines of credit, incur additional expenses, anc coulc restrict the amount of business \\'VPS Energy Services car conduct.

WPS Energy Serices uses the NYMEX and over-the counter financral markets to hedge its exposure to physical customer obligat ons. These hedges a'e closely correlated o the customer contracts, but price movements orn tne hedge contracts may require financial backing. CeQ-a n movements in price for contracts througoh the NYNEX exchange require posting of cash deposits equal to the marke mnove. For the over the-coutOer market, the underlying contract may allow the counter-party to require additional collateral to cove-the increased obligation. Narke: price changes could cause signif cant near-term cash requirements to support tie business. Increased requirements relatec to market price charges should only result in a temporary liqu dity need that will unwind as the saYes contracts are fulfilled, WPS Power Development has some projects which are partially funded by non-recourse debt, These debt obligations have certain debt coverage covenants related to liqudi'ty that must be me. Factors that can impact iquidity at these projects are overall electric market conditions, the physical availability of the croject to meet contractual requirements, tne cost and availability of requi-ed nputs to production, and the level of 0

• ý RESOURCE 0OPRA

MANAGEMENT'S DISCUSSION AND ANALYSIS operating and maintenance costs. If any of these projects snou d fall below tne required debt coverage levels, WPS Resources can e0tmer contribute additional equity o-,

F market conditions are such thaI the projem is no longer considered vable, abancon the project.

Contractual Obligations and Commercial Commitments The following tables summarize the contractual obligations and commercial commitmenes of WPS Resources, including its subsidiaries.

Payments Due by Period Less than I to 3 4 to 5 After 5 Contractual Obligations (Milions)

Total I year years years years Long-term debt principal and interest payments

$1,173.2

$102.7

$230.3

$ 86.9

$753.3 Minimum capital lease obligations 124.7 5.2 16.9 12.3 90.3 Operating leases 4.9 2.7 1.9 0.2 0.1 Unconditional purchase obligations 1,228.2 694.9 444.3 28.2 60.8 Total contractual cash obligations

$2,531.0

$805.5

$693.4

$127.6

$904.5 Long-term debt a-incipal and interest payments Unconditional purchase obligations represent energy represent boncs, roei, and loans held by WPS Resources supply contracts at WPS Energy Services and certain and its subs diaries, \\We record ali principal obligations on commodity purchase contracts at Wisconsin Public Service the balance sheet.

and WPS Power Develoument. The energy supply contracts Wisconsin Public Service records minimum capital lease at WPS Energy Services have offsetting energy sale contracts.

obligations on its balance sheet at net present value, The Wisconsin Public Service expecs to recover the costs of its above table represents the total future obligation.

contracts in future customer rates, Amount of Commitment Expiration Per Period Total Amounts Less than I to 3 4 to 5 Over 5 Other Commercial Commitments (Millions)

Committed I year years years years Lines of credit

$1333

$60.0

$73.3 Standby letters of credit 18.4 18.3 0.1 Guaranties 4.5 4.5 Total commercial commitments

$156.2

$82.8

$73.4 The WPS Resources Board of D rectors has authorized management -o issue corporate guaranties in the agoreoate amount o' up to S50C Million to support the business operations of \\VPS Eaergy Services which are not reflected in the table aaove. \\tVPS Resources arimarilv issues 7he guaranties to counter-parties in the wvolesale electric and natural cas marketplace to meet the counter-parties' requirements and pert-nit WPS Energy Services to operate within tnese mar ets, The authorized amount of -the buaranties is in excess of the amount of obligations actually backed by the WPS Resources guaranties. The amount supported is depencent on the amounr of outstanding busiress WPS En.e.y Services has wi h the counter-pate holding the guranties at any point in time. VVPS Resources refects WPS Energy Services' ouigat'ons supported by these parentaý guaran-ies or ins consolidated balance sheet either as accounts payable or liabilites from risk management activities, The \\WVPS Resources Board of Directors has authorized corporate guaranties as needed to support certain specific business operations of WPS Power Development, WPS Resources has issued approximately $'30 million ir guaranties which are not reflected in the table above. WPS Resources issues the guaranties -or indemnificatior obligations related to business purcnase agreements, borrowings, and counter parties in the wholesale electric marketalace to meet tneir credit requirements and permrir VPS Power Development to operate within these markets, The authorized amount of the guaranties is in excess of the amount of obligations actually backed by WPS Resources' guaranties. The amount supported is dependent on the amount of the outstanding obligation that WPS Power Development has with the parties holding the guaranties at any point in time. The guaranties are required to suppor WPS Power Development in its normal operations of energy production a nd the sale of electricity, WPS Resources reflects WPS Power Development's obdigations supported by these parental guaranties on

[7s consolidated balance sheets or in -he footnotes to itq financial statements.

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SA P 0 V/ E P F U L E Q J A T O

0 N MANAGEMENT'S DISCUSSION AND ANALYSIS Since May 2000. WA/PS Resources has provided limited finarcal support and energy supply services to a third party, Quest Energy, LLC, a Michigan imited liability company, Quest is a retail eletricity marketirg entity, doing business as a registered Alternative Electric Supplier 'n 'he State of Michigan.

Financial support is in the form of an interest-bearing note with ar initia: maturity date of Nay 2005, secured by the assets o' Quest. O0 December 31, 200', the loan amount remaining was $1.0 msilior. The note contains certain restrietions on Quest's ability to enter into additional debt instruments. WPS Resources also provides corporate guaranties on behalf o-Quest tnat are not included in its consolidated 'inancal statements. Guaranties have been made to Quest's transmission Droviders in the amount of

$4.5 milHion. These guaranties assure Quest's ability to pay for the transmission services it purchases from these entities, These guaranties a-e reflectes in the table on the previous page.

WPS Eneriy Services provides substantially a'l of the electric energy supply to Quest on a whoesale basis without requiring the credit assurances required of other wholesale customers. WPS Energy Services exercises its right to evaluate Quest's sales portfolio to verfy the porfollo's ability to generate the revenues necessary to ay for purchased wholesale supply. V\\/PS Energy Services further provides computational infastructu-e and support services related to the daily operational activities or Quest At year-end, Quest was curirent in its payables to WPS Energy Services. On occasion, however, payments fror Quest have been late and WPS Energy Services imposes payment penalties on these late payments, Trading Activities WPS Energy Services measures the fair value of contracts, includino NYMEX exchange and over-the counter contrams, natural gas options. naturau gas and electric power physical fixed price contracts, basis contracts, and related financial nstruments or a rark-to-market basis using risk management systems. T-he primary input for natural gas pricing is the settled forvyard price curve of the NYNEX excnange which includes spreads. contracts. and options. Basis pricing is derived from published indices (Ges Dai!,, Noturrl Ges intelligence, and inside F-ERC) and well documented broker quotes, WPS Energy Services bases electric prices on published indices and well-documented broker quotes.

Because the majority of the contracts have a term of less than 36 months, the forward curves have a reasonable degree of iquidity and WPS Energy Services does not determine any forwyard price curves internally. Low tolerance for price risk causes WPS Energy Services to use firancial instruments to hedge substantially all its positions and, therefore, chances in tne primary variable, which is tne forard price curves, has litte impact on tne net fair value of the contracts as marked to-market. An outside Comsany with an esahlish-ed practice in energy risk evalation verified tme electric mark to-market position at Decermber 3 1, 2001 due to the large increase in new business and the introduction of new electric risk management soft'ware. The '-esuts of its independent calculation were consistent with those generatec by WPS Energy Services.

WPS Energy Services, Inc.

Mark-to-Market Roll Forward (Millions)

Fair value of contracts January 1, 2001 Less contracts realized or settled during period Plus fair value of new contracts entered into during period and other changes in fair value Fair value of contracts outstanding at December 3 1, 2001 Natural Gas Electric Total

$ 7,3

$0.3

$ 7.6 2.2 0.3 2.5 8.7 6.3 15.0

$13.8

$6.3

$20.1 The fair valie of contracts at January I, 2001 and December 3 l, 2001, reflect the values reported on the balance sheet fr net mark-to-marlet assets as of those dates.

Contracts realized o-settled include the value of contracts in existence at january I 0

that were no longer n the net mark-to-market assets as of December 3 I. 2001. Mark-toe market gains and losses related to contracs that are stil included in WPS Energy Services' portfolio at December 31, 2001, are included in the fair value of new contracts entered ih4.eilt~'uariri]C' r~t.

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MANAGEMENT'S DISCUSSION AND ANALYSIS into during the period. These amounts represent the marn-to market gain or loss at tne inception of these contracts. There were, in many cases, offsetting positions emered into and settled during the period resaling in gains or 'osses being realized during the current year. The gais ora losses from these offsetting positions are not reflected in tne table on the previous page.

Although WPS Energy Services strives to maintain a balanced book of back-no-back transactions, due To systems limitations, any ineffecnveness in hedging activity for 2001 has been included under "fair value of new contracts entered into during period" in the table on the previous page.

WPS Energy Services, Inc, Contract Aging at Fair Value Maturity Maturity Total less than Maturity Maturity in excess fair Source of Fair Value (Millions)

I year I to 3 years 4 to 5 years of 5 years value Prices actively quoted

$12.0

$(0.8)

$11.2 Prices provided by external sources 0.2 (0.1) 0.1 Prices based on models and other valuation methods 3.0 4.5 1.3 8.8 Total fair value

$15.2

$ 3.6

$1.3

$20.!

Prices actively quoted includes NYMEX and over-the counter contracts, Prices provided by external sources includes basis swaps. Prices based on models and other valuation methods n ude -etail natural gas and electric contracts due to tne vo ume optionality that exists in taose contracts. We deave from active quotes. or external sources provide, picrg, the most significant vahabie in the mark-to-market calculation, for all contracts in the above table.

Related Party Transactions We do not have material related party traasactons nor other relationshius which would allow us to negotiate terms of material transactions on less than an arm's-lengch basis, Electric Utility Restructuring - Wisconsin Eectric reliability continues to be the primary issue for the Public Senvice Commisson of Wisconsin. Industry restructuring and etanlc generaaon open access remain secondary issues in -he state, The Public Serv ce Commission of Wisconsin is evaluating proposals regarding future construction and ownership of generation facil ties in the state. The Public Service Commission of Wisconsin authorized Wisconsin Electric Power Company to proceed with its planning for generation construction. On FePruarv I, 2002, Wisconsin Electric Power applied for Certnficates of Public Convenience and Necessity for its generation cons-ruction proposals. This application is being reviewed.

owever, and further approval is required in order for Wisconsin Electric Power to proceed.

Electric Utility Restructuring - Michigan In June 2000, a law was enacted which provides Michigan retail electric customers the right to choose their generation supplier by January n,

2002. Wisconsin Pubic Service and Upper Peninsula Power. along wita other Michigan Electric and Cas Association members, jointly developed and filed open access tariffs and busiaess practices with the blichigan Public Service Commission prior to January I, 2002.

Gas Utility Restructuring - Wisconsin In its 2001-2002 Wisconsin retail rate application, Wisconsin Public Service proposed to facilitate customer choice of natural gas suppliers through the use of its new automated meter readiac system. -he proposa. was aproved by the Public Service Commission of Wisconsin and provided customer choice of gas suppliers for large commercial customers begnning oa November., 2001.

Customer choice will be offered to additioral commercial customers beginnino on November I 2002. This program

,wilI be expanded to all customers as the automated meter reading system is installed system-wide.

Gas Utility Restructuring - Michigan Most of Michigan's largest gas customers are allowed to choose their natural gas commodity supplier The smaler Michigan natural gas utilities. including Wisconsin Public Service.

are to propose a customer caoice program for all customer classes when it is in the best interests of each utility and its customers. Wisconsin Public Service intends to provide customer choice to its Michigan customers following the implementation of its automated meter reading system in that state.

0P RESOURCE COPRTO

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SA P 0 \\Y/ E R ý J L E C U

AT 1 0 N MANAGEMENT'S DISCUSSION AND ANALYSIS Environmental Wisconsin Public Service estimates future undiscounted investigation and cleanup costs of I0 former manufactured gas si-es to be In the range of $43 million to $50 million. We may adjust these est mates in the utute contingent upon remedial technology, regulatory requ irements, and the assessment of enviroormental damages.

Wisconsin Pub ic Service currently has a S43,4 million iab lity recorded for gas plant cleanup with an offsetting regu atory asset (deferred coarge). We expect to recover cleanup costs net of insurance recoveries in future customer rates. V\\e will not recover carrying costs associated with the cleanuo expenditures. W sconsin Public Service has received

$12.7 million n nsurance iecoveries which have been recorded as a reductror in toe regulatory asset.

The State of Wisconsin developed a nitrogen oxide reduction plan 'or all utilities in the ozone non-attainment area established by the Un'ted States Environmental Protection Agency io southern Wisconsin. The nitrogen oxide reductions begin io 2003, and the requirements are gradually increased through 2007. This redoction nlan affects Edgewater Unit 4.

W:.sconsin Public Servce owns 3 1,8% of ths unt. A compliance plan for Edgewater Uni. 4 was n:ntated in 2000. The plan innudes a combi-oat on of combhostion optimization and emission trading at a potential cost to Wisconsin Pub ic Service of approxirmatey S5 ml ion. The State of Wisconsn Is also seeking voluntary reduct ons from units outsrde the ozone noo attanmen-area which may ead to additionai expenditures Tor ntrocen oxide reductions at other units. W sconsin Public Service is particpating in voluntary efforts -o reduce nitrogen oxide levels at the Co umbia Energy Centern Wisconsin Public Service owns 3.8% of Columbia. The Publc Service Commission of Wiscoosin has approved recovery of the costs associated wito ntrogen oxide compliance.

The Wisconsin Department of Natural Resources ioitiated a ru emaking effort aimed at toe control of mercury emss ons, Coal fired generation plants are the primary target of ths effort. The proposed rue was open to comment n October 2001. A fina rule could be issued in the spring of 2002. As proposed, the rule requires poased in memcury emission reductions reacning 90% reduction in 15 years, oil ~D rrrnl

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-nro OX lttPt"jrr -in'ritirr \\rin.r rF; iniio Wisconsin Public Sewice estimates that it could cost $105 million Der year for it to achieve the 90% reduction.

Early compliance with the Federal Clean Air Act has generated surplus sulfur dioxide allowances at Wisconsin Public Service. Wisconsin Public Se-vice has sold and w Il continue to consider toe sale of any allowances in excess of its own needs. The Public Service Commission o Wisconsin has ordered that profits fiom the sale ol allowances be passed on to Wisconsin Publ'c Sewvice's customersi WPS Power Development acquired emission allowaoces as a result of the purchase of the Sunbury plant in 1999 and the Westwood plant in 2000. The costs assioned to these allowances are charged to expense as the allowances are used. The Sunbury plan-also purchases incremental emission allowances or the open market to comply with air regulations. WPS Power Development is installing additional technology in order -o comply with the 2003 nitrogen oxide standards. Expenditures for this technology could be significantm Asset Management Strategy In December 2001, Wisconsin Pubic Service sod 5,740 acres of lard on the Peshtigo River ir norilheasterr Wisconsin to the Wisconsin Department of Natural Resources for $ 13.5 minion. This sale uAas toe first significan-transaction in a five to seven-year asset manage ment strategy we adopted ir 2001. The agreement with the Depairtoent of Natural Resources includes two options, one exercisable in 2003 and the other in 2004, whereby the Department may acquire, at less than fair va ue, approximately 5,000 additio0al acres for $] 1.5 million f both options are exercised. The value associated with the difference betveen the option orice and the fair value toll be treatec as a chrithable contribution.

IMPACT OF INFLATION Our financial statements are preparec in accordance with accounting principles generally accepted in the United States and report operating results in terms of historic cost. The statements provide a reasonable, objective. and quantifiable statement of financial results: but the), do rot evaluate the

MANAGEMENT'S DISCUSSION AND ANALYSIS impact of nflation, Uider rate treatmen-prescribed by utiltty regulatory comm>sso.0s, Wisconsin Public Service's and Upper Peninsula Power's projected operating costs are recoverable in revenues. Because -ate forecasting assumes inflation, most of the inflationary effects on normal operating costs are recoverable ir rates. However, in these -or ecasts, Wisconsin Public Service and Upper 0erinsula Power are ony allowed to recove-tIe historc cost of plart via depreciaton.

QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK Market Risks W/PS Resources has potential marl<e-risk exposure for instruments entered into for tradinc purposes related to commodiry price rsk ard for instruments entered into for purposes other than trading reatec to interest rame risk, ecuity return and prin rpa! preservation risk. and commodity price risk. There cr rerty is no mater al exposure due to foreign currency exchange rate risk. WPS Resources has risk managernent policies in place to montor and assist in controlling these market risks and may use derivative and otner nstrumerts -o rranage some of these exposures.

Interest Rate Risk WPS Resources is exposed to in-erest rate risk resulting from its variable re long-term debt ard shont-te-m commercial paper borrowivno. Exposure to interest rate risk is managed by imiting the amount of variable rate obligations and continually noirtor ng tIe effects of market changes in irterest rates. W'7PS Resources enters into long-term fixed rate debt when it is acvantageous to do so. The company may also enter in-o derivative financial instruments, such as swaps. to mitgate interest rate exposure. At December 31.

2001. WPS Resources utilized one interest rate swap to fix ahe irteest r ate on a variable rate loan at oie of its nonregulated subsidiaries.

Based on \\ArPS Resources variable rate debt outstanding at December 3. 200, a hypothetical increase ia market interest rates of 00 basis points n 2002 would increase annual interest expense by approximately $0.6 million.

Comparatively. based on rWPS Resources variable rate debt outstanding at December 3 I, 2000, an increase in interest rates of 100 bas>s points would have increased interest expense in 2001 by approximately $1.8 million. These hypothetical changes are based or cerrain simplifying assumptions, including a constant level of variable rate debt during the period and an immediate increase in the level of interest rates with no other subsequent changes for the remainder of the period. In the event of a significant change in interest rates, management would take action to mitigate the company's exposure to ahe change.

Commodity Price Risk WPS Resources is exposed to commodity price risk resulting from the impact of market fluctuations in the price of certain commodities, including bun not limited to electricity, natural gas, coal, fuel oil, and uranium, which are used and/or sold by our subsidiaries in the normal course of their business. We employ established policies and procedures to reduce the market risk associated with changing commodity prices, including using various types of commodity and derivative instruments.

WPS Resources' exposure to commodity price risk in its utility business is significantly mitigated by the current ratemaking process for the recovery of its electric fuel and purchased energy costs as well as its cost of natural gas purchased for resale. Therefore, the below value-a -risk amounts do not include measures for WPS Resources' regulated utilities, To further manage commodity price risk, our regulated utilities enter into contracts of various duration for the purchase and/or sale of iatural gas, fuel for electric generation, and eiectrcty.

WPS Power Development also uses purchase and/or sale contracts for electric fuel and electricity to help manage its commodity price risk. For purposes of risk management cisclosure, al of WPS Power Development's activities are classified as non-trading.

WPS Energy Services uses derivative financial and commodity instruments to reduce marke-risk associated with the changing prices of natural gas and electricity sold at firm arices to customers. WPS Energy Services also utilizes these nstruments to manage market risk associatec with anticipated energy purchases, as we as trading activities. For purposes of risk management disclosure, al of WPS Energy Services' activities, including all of its energy commodity purchase and sale contracts and its gas in storage inventory, are classified as trading. WPS Energy Sercices, therefore, follows mark-to-market accounting as required by Emerging Issues Task Force Issue No. 98-10.

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A P 0 W E R F U L F Q U AT I N

MANAGEMENT'S DISCUSSION AND ANALYSIS Value-at-Risk To measure commodity price risk exposure, WPS Resources performs a value at risk ( VaR) analysis of its exposures.

VaR is used to descie a urobablist c approach to quantifying the exposure to market risk. The VaR amount oep eerts an estimate of tre potertial charge in fair value

-hat could occur from adverse changes in market factors, within a 6iven conficence evel, if an nstr ment or poetfoi is hed for a specified rime period. \\/aR models are relatvely sophisticatec. However the quantitatve risk information is limited by the parameters estabished in creating the model, The nstruments behng used ray rave features tMat may trigger a potential ioss in excess of the ca colated amount if the charges in the under ying commodity price exceed the confdence level of the model used. VaR is not necessarily indicatve of actual results whlcn may occur, At WIPS Resources, VaR is estimated using a delta-normal approxima ion based on a one-day holding period and a 95%

confidence level. The deeta-normal approximation is based on tne assumption that changes in -he value of the nortfolio over short time ner ods, such as one day, are normally distributed.

It does not take into account nigeer order risk exposures, so it may not provide a good approximation of the risk n a po-foloo with substantial option posttions. We utilized a deela-porma anproximat on because our portfol o has imited exnosure to ontionaity. Our VaR calculation includes derivatve financa and commodity instruments. surc as for*ards, futures, swaes, and optrons as well as commodtes reld r in ventory, such as natura gas heod in storage to the extent such positons are signfcant.

Our VaR aerourt for erading activities was calcu ated Lo be $0.5 million a-Decemner I, 2001 compared with SO.- million at December 31, 2000. Our VaR amount for non rad ng actrvities was ca culated -o be $3.2 m lion at December 3 i, 2001 compared wth S4,4 mllion at Decembeo

31. 2000. A signif cant portion of the VaR amount re ated to non trading activities is mitigatec by WPS Power Development's generating capabilities, which are excluded from the VaR calculaton as required by the Securities and Excrange Commissnon rules.

&VsUrtf 33 QLsfirurSta

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For the year ended December 31 2001, tie average, high, and low VaR amounts for trading activities were $0.4 million,

$0.6 million, ard 30.2 million. respetvely, The same amounts for the year ended December 31, 2000 were 30.3 million,

$0.4 million, and 50.2 million. For the year ended December 31, 2001 the average, high, and low VaR amounts "or non-trading activities were $3,0 mi lion.

4.4 million, and 31.4 million, respectively. The same amounts for tme year ended December 31, 2000 were $2,2 million, 34.4 million, and

$1. 1 millior. The average, hih. acd low amounts Were computed usng the VaR amounts at the begoinirg o the reporting perioc ard the four quarter-erd amounts, Equity Return and Principal Preservation Risk WPS Resources currentIy funds its ablities related o employee benefits and nuclear decommissioning through various external trust sueds. These funds are managed by various nvestrnert managers and rold irvestments in debt and equity securities Changes in the market value of these investments can nave ac impact on the future expenses re ated to these oiabilities. The pension liability is adequately funded ant l under noirmal n.arket conditions future required contributions to the plac are ornliely, Changes in the ma-ket value of nvestments :-elated to other employee benefits or nuclear decornmissionsno could impact future contributions, WPS Resources monitors the trust fund porteolios by benchmarkig the pe-formance of ahe investments against certain secuity irdices. All decommissionirn costs acd most of the emu oyee benlef-costs relate to \\WVPS Resources regulated utilities. As suc.r, the majority of these costs a-e recovered in customers' rates. nmrtgating tr e equity return and princioac preservation risk on these exposures.

Foreign Currency Exchange Rate Risk VW/e are exposed to foreign currency excha-oe rate risk primarily throuoh tee purchase and sale of gas in Canada ny one of our nonregoulted subsediaries. This risk to WPS Resources at December 3 l, 2001 is immaterial.

CONSOLIDATED STATEMENTS OF INCOME Year Ended December 31 (Millions, except per share data) 2001 2000 1999 Nonregulated revenue

$1,700.6

$1,060.7

$ 324.5 Utility revenue 974.9 888.3 774.0 Total revenues 2,675.5 1,949.0 1,098.5 Nonregulated cost of fuel, gas, and purchased power 1,639.6 1,014.3 301.5 Utility cost of fuel, gas, and purchased power 444.6 379.3 306.3 Operating and maintenance expense 361.2 311.5 255.5 Depreciation and decommissioning expense 86.6 99.9 83.7 Taxes other than income 36.2 33.8 31.8 Operating income 107.3 110.2 119.7 Miscellaneous income 37.5 20.2 8.9 Interest expense (55.8)

(50.8)

(32.7)

Distributions - preferred securities of subsidiary trust (3.5)

(3.5)

(3.5)

Other income (expense)

(21.8)

(34.1)

(27.3)

Income before taxes 85.5

76. I 92.4 Provision for income taxes 4.8 6.0 29.7 Net income before preferred dividends 80.7

70. I 62.7 Preferred stock dividends of subsidiary 3.1 3.1 3.1 Income available for common shareholders 77.6 67.0 59.6 Average shares of common stock 28.2 26.5 26.6 Earnings per common share Basic

$2.75

$2.53

$2.24 Diluted

$2.74

$2.53

$2.24 Dividends per common share

$2.08

$2.04

$2.00 The accomnpanying notes to V/PS Resoujrces Corporation consolidated financoia statements are son integral part of these statements.

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A P 0 \\X/ E R F J L

z Q U A T 1 0 N CONSOLIDATED BALANCE SHEETS At December 31 (Millions) 2001 2000 Assets Cash and cash equivalents 43.9 12.8 Restricted funds 21.3:3 Accounts receivable - net of reserves of $5.0 and $4.2, respectively 248.0 317.8 Accrued unbilled revenues 56.5 83.9 Inventories 102.5 84.1 Assets from risk management activities 487.4 642.5 Other current assets 61.5 60.1 Current assets 1,021.1 1,201.2 Property, plant, and equipment, net 1,463.6 1,350.8 Regulatory assets 91.0 74.5 Other 294.3 189.6 Total assets

$2,870.0

$2,816.1 Liabilities and Shareholders' Equity Short-term debt 46.2 129.6 Current portion of long-term debt 56.6 8.3 Accounts payable 334.6 334.3 Liabilities from risk management activities 439.9 659.5 Other current liabilities 69.4 50.9 Current liabilities 946.7 1,182.6 Long-term debt 727.8 660.0 Deferred income taxes 69.5 100.4 Deferred investment tax credits 21.0 24.0 Regulatory liabilities 78.4 50.6 Environmental remediation liabilities 45.0 38.9 Benefit obligations 53.6 47.3 Other 111.0 63.1 Long-term liabilities 1,106.3 984.3 Company-obligated mandatorily redeemable trust preferred securities of subsidiary trust holding solely WPS Resources 7.00% subordinated debentures 50.0 50.0 Preferred stock of subsidiary with no mandatory redemption 51.1 51.

Common stock equity 715.9 548.1 Total liabilities and shareholders' equity

$2,870.0

$2,816.1 The accompanying notes to WPS Resources Corporation consolidated financial statements are an integral part of these statements, WSRSOURCE C0P5 F0N

CONSOLIDATED STATEMENTS OF COMMON SHAR[HOLDERS' EQUITY Employee Stock Plan Guarantees Accumulated and Deferred Capital in Other Comprehensive Compensation Common Excess of Retained Treasury Comprehensive (Miliuons)

Income Total Trust Stock Par Value Earnings Stock Income (Loss)

Balance at December 31, 1998

$519.8

$(8.0)

$26.6

$166.0

$335.2

$0.0

$0.0 Net income before preferred dividends

$62.7 62.7 62.7 Dividends on preferred (3.1)

(3.1)

(3.I)

Income available for common shareholders 59.6 Other comprehensive income Comprehensive income

$59.6 Issuance of common stock 9.0 0.3 8.7 Dividends on common stock (53. I)

(53.1)

Other 4.6 3.6 1.0 Balance at December 31, 1999

$539.9

$(4.4)

$26.9

$175.7

$341.7

$0.0

$0.0 Net income before preferred dividends

$70.1 70.1

70. I Dividends on preferred (3.I)

(3.1)

(3.1)

Income available for common shareholders 67.0 Other comprehensive income Comprehensive income

$67.0 Issuance of common stock 0.4 0.4 Dividends on common stock (53.9)

(53.9)

Other (5.3) 1.2 1.6 (8.)

Balance at December 31, 2000

$548.1

$(3.2)

$26.9

$177.7

$354.8

$(8.1)

$0.0 Net income before preferred dividends

$80.7 80.7 80.7 Dividends on preferred (3.1)

(3.1)

(3.1)

Income available for common shareholders 77.6 Other comprehensive income - cash flow hedge (2.7)

(2.7)

(2.7)

Comprehensive income

$74.9 Issuance of common stock 152.3 4.6 147.7 Dividends on common stock (58.8)

(58.8)

Other (0.6)

(1.0) 0.4 Balance at December 31, 2001

$715.9

$(4.2)

$31.5

$325.4

$373.6

$(7.7)

$(2.7)

The accompanying notes to WPS Resources Corporation consolidated financial statements are an integral part of these statements.

A P W E R F _1 L f Q U AT I N CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31 (Millions)

Operating Activities Net income before preferred dividends Adjustments to reconcile net income cash provided by operating activities Depreciation, amortization and decommissioning Gain on nuclear decommissioning trust Deferred income taxes and investment tax credit Unrealized gains and losses on nonregulated energy contracts Gain on sale of property Other Changes in working capital Receivables Inventories Other current assets Accounts payable Other current liabilities Net cash provided by operating activities 2001

$ 80.7 102.1 (8.1)

(34.4) 14.4 (17.1)

(9.2) 83.6 (46.0) 0.9 (35.0) 11.0 142.9 2000

$ 70.1 119.5 (10.8)

(16.8) 17.0 (3.8) 4.3 1999

$ 62.7 98.6 (3.9)

(14.0) 7.6 17.0 (207.1)

(30.1)

(39.0) 230.9 9.7 143.9 (19.5)

(20.1)

(16.7)

(12.1) 18.3 1 17.9 Investing Activities Capital expenditures (248.7)

(199.1)

(273.2)

Return of capital from equity method investment 42.4 Sale of assets 58.8 31.3 Decommissioning funding (2.6)

(8.8)

(9.2)

Other 10.8 (15.5) 12.9 Net cash used for investing activities (139.3)

(192.1)

(269.5)

Financing Activities Short-term debt - net (104.6) 39.7 30.0 Issuance of long-term debt 180.8 87.4 174.4 Repayment of long-term debt and capital lease (64.7)

(10.3)

(I.5)

Payment of dividends Preferred stock (3.1)

(3.1)

(3.1)

Common stock (58.3)

(53.9)

(53.0)

Issuance common stock 96.4 9.0 Purchase of common stock (1.

1)

(10.5)

(0.6)

Redemption of obligations acquired in purchase business combination (17.9)

Other 1.2 (0.2)

Net cash provided by financing activities 27.5 50.5 155.0 Increase in cash and cash equivalents 31.1 2.3 3.4 Cash and cash equivalents at beginning of year 12.8 10.5 7.1 Cash and cash equivalents at end of year 43.9 12.8 10.5 The accompanying notes to WPS Resources Corporation consolidated fmnoncial statements are on integral part of these statements.

WSRSbJtS

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE I -

SUMMARY

OF SIGNIFICANT ACCOUNTING POLICIES (a) Nature of Operations-WPS Resources Corporation is a holding company. Our wholly-owned subsidiary, Wisconsin P b'ic Service Corporaion, is an electric and gas utility. Wisconsin Pub!ic Service supplies and distributes electric pDower atc natural gas in its franchised service territory in northeastern \\ scors n and an adjacent portion of the Upper Peninsua of Micnigan. Our other wholly-owned utility subsidiar7, Upper Pen nsula Power Company, is an electric utility. Upper Pentinsula Power supplies and distributes electric energ in the Upper Peninsula of Michicgan. Another wtolly owned subsidiaos, WPS Resources Capital Corporation. is a holding company for cur nonregulated businesses, WPS Energy Services. inc. and WPS Power Developmem. Inc, WPS Energy Services is a cive-sifed enetgy supply and services company.

WPS Power Development deve ops, owns and operates, through its ow in sibsd aies, electric generation projects.

The termn

.. i ity" 'efers to the regulated activities of Wisconsin Public Service and Upper Peninsu a Power. while

-he term "nonutiliy" refers to the activities of Wisconsin Public Serice and Upper Peninsula Power, wnich are not regilated.

The term "nonretgulaed" refers to activities other than those of W'sconsin Pubic Service and Upper Peninsula Power.

(b) Use of Estimates--We prepare our financial statements in con ormity with accounting principles generally accepted in the United SRaes. We make estimates and assumptons th-a afect reported amounts. These estimates and assumptions itrcl"ce assets, liabilities, the disclosure of contingent assets and liabilities at the date of the financial stateme-tts, and the reported amounts of revenues and expenses during tie reportng period. Actual results may ciffer from those estimates.

(c) Income Taxes-AWe account for income taxes

-ising the lIabnity method as prescribed by Statement of Financial Accounting Standards No. 109, 'Accounting for Income Taxes.' Un'le the liability methodc deferred income tax liabilities am estanlish ed for all temporany differences in the book and tax basis of assets atd lian bities based upon enacted tax laws and rates applicanle to the periods in wtich the taxes become payable, (d) Capitalized Interest and Allowance for Funds Used During Construction-WPS Resources' nonriegiuated sibsidiaries capitalize interest for constriction projects.

nwhile our utilities are required to use an allowance for funcs used diring consiruction calculation., which includes both an interest rnd an equity component.

Approximately 50% of Wisconsin Public Service's retail jurisdictional construction work n-progress expenditures are subject to allowance for funds used during construction. The Public Service Commission of Wisconsin allowed accrual of allowance for funds used during constriction on 100% of the Kewaunee plant's steam generator replacement project. For 200 1, Wisconsin Public Service's retail rate allowance for funds used during construction was I0. I%.

Wisconsin Public Service's corstructcon work-in-progress debt and equity percentages for wholesale Jurisdictionaý electric allowance for funds used during construction are specified in the Federal Energy Regu atory Commission's Uniform System of Accounts. For 2001, the allowance fo.

funds used during construction wholesale rate was 6.3%.

Upper Peninsula Power is subject to ore allowance for funds used during construction rate. That rate is the Michigan Public Service Commission's allowed rate of eturn. For 2001, the allowance for funds used during construction rate was 5.7%. Historically, there nave been few calculations of al!owance for funds used dunrig construction due to the small dollar amounts or short constriction periods of Upper Peninsula Power's construction projects. We expect larger projects to occur in the future that will be subject to the application of the allowance for funds used during construction calcilation.

Both WPS Energy Services and WPS Power Development calculate capitalized interest on long-term construction projects for periods where inancing is provided ny WPS Resources by intenim debt. The interest rate capitalized is based upon the monthly short-term borrowing rate WPS Resources incurs for such finds.

(e) Leases-Wisconsin Public Service accounts for the agreement to purchase power from De Pere Energy Center.

LLC as a capital lease. On june 14, l999, Wisconsin Public Service recorded a leased asset and a lease obligation equal to the present value of the minimum lease payments. The leased asset is depreciated over 25 years, the life of the contract.

(f) Revenue and Customer Receivables-We accrue estimated amounts for electric and natural gas service rendered but not billed. Approximately 9% of WPS Resources' total revenue is from companies in the paper products industsy.

Wisconsin Public Service and Upper Peninsula Power use automatic fuel adjustment clauses for the Federal Energy Regulatory Commission wholesale-electric and the Michigan Public Service Commission retail-electric portions of the business. The Wisconsin retail-electric portion of Wisconsin iS

• • • S' C

A P eV/ E k FU L E Q UAT S

0 N NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Public Service's business uses a "cost variance range" approachn based on a specific estimated fuel cost for the forecast year. If Wisconsin Public Service's actual :uel costs "all outside this range.

a hearing can be helc resulting in ar adjustment to future rates.

The Public Service Commission of Wiscorsir has approved a modified one-for-one gas cost recovery plan for Wisconsin Pablic Service. Implementation of the modified one-for-ore gas cost recovery plan began in January 1999.

This plan allows Wisconsin Pablic Se-vice to pass changes in the cost of natural gas purchased from its sappliers or to system natural gas customers, subject to regulatory reviewv.

Billings to Upper Peninsula Power's customers under the Michigan Public Service Commission's ur'sdotior include base rate charges and a power supply cost recovery factor Upper Penirsula Power receives Michigan Public Service Commission approval each year to recover projected power supply costs by establishment of power supply cost recovery factors.

Annually, the Michigan Public Service Commission reconciles mhese factors to actCal costs and permits 100% recovery of allowed pover supply costs. Upper Peninsula Power defers ary over or under recovery on the balance sheet. The deferrals are relieved with additional billings or refunds.

Wisconsin Public Service and Upper Peninsula Power are required to provide service and grant credit to customers within their service territories. The two companies contirually review their customers' credit-worthiness and obtain deposits o-refund deposits accordingly. Both utilities are precluded from discontinuing service to residential customers during winter moratorium months.

At WPS Power Development. electric power revenues related to fixed price contracts are recognized at the lower of amounts billable untder the contract or an amount equal Io the volume of the capacity mace available or the energy delivered dur ng the period multinlied by the estimated average revenue ner kilowatt-hour per the -erms of tne contract. Under loating-price contracts, electric power revenues are recognized when capacity is provided or energy is delivered.

WPS Energy Services accrues revenues in the month that energy is delivered and/or services are rendered. WVPS Energy Services calculates the reserve for potential uncollectible castomer receivable balances by applying an estimated bad debt experience rate to each past due aging category and reserving for 100% of specific customer receivable balances deemed to be uncollectible.

(g) Natural Gas in Storage-Average cost is used to value natural gas in storage used for nontrading activities.

Natural gas in storage used for trading activities is recorded at fair market value. Approximately 56% and 67% of the total natural gas in storage at December 31. 2001 and 2000, respectyvely, was recorded at fair market value.

(h) Regulatory Assets and Liabilities-Wisconsin Public Service and Upper Peninsula Power are subject to the provisions of Financial Accounting Standards Statement No. 7,

'Accounting for the Effects of Certain Types of Regulation."

Regulatory assets represent probable future reventue associated with certain incurred costs. Revenue will be recovered from customers through the raiemaking process.

Regulatory liabilities represent arnounts ttat are refundable in future customer rates. Based on a current evaluatiot of the various factors and conditions that are expected to impact future cost recoveryy, we believe that Auture recoven-of our regulatory assets is probable.

(i) Retirement of Debt-Amortization of 0 ains or losses resuating from the settlement of long-term utility debt obligations occurred concurrently with rate recovery as required by regulators.

(j) Stock Options-t tWe issue stock options under oar stock option plans and accoJnt for trhem using the intrinsic value-based method described in Accounting Principles Board Opinion No. 25, 'Accounting for Stock Issued to Employees" (Opinion 25). The intrirsic value-based method orly records compensation expense for the excess of the quoted market price of the stock at he issue date over the optiot exercise price. The exercise price is the arnount an employee must pay to acquire the stock.

(k) Consolidation Basis of Presentation-All significant intercompanv transactions anc accounts are eliminated. If a minority ov.wner's eqaity is nedaced to zero, it is our policy to record 100% of the subsidiary's losses until the minority owner makes capital contributions or commitments to fund its sha'e of the operating costs.

(I) Reclassifications--Ve -eclassified certain prior yea-financial statement amounts to conform to current year presentation.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 CASH AND EQUIVALENTS We consider short term investments with an original maturiry of thnee nmonths or less to be cash equivalents.

Cash paid fori taxes during 2001, 2000, and 1999 was

$34.0 million, 525.3 million, and $35.3 million, respectively.

During 2001, cash paic for interest totaled $52.6 million. For 2000 and 1999, S49.0 million and $34.. million were paid for interest, respec-Jvely.

The fo lowing noncash investing and financing activities occurred in 2001:

1. An investment in American Tansmission Company, LLC was made with the exchange of S93.1 millIon of transmission assets net of accumulated depreciation for an approximate 15% equity interest in American T-ansnmssion Company and a $42.4 million return of capital as showtn on the Consolidated Statements of Cash Flows.

2. As a result of the merger of Wisconsin Fuel and Light Company into Wisconsin Public Service, Wisconsin Puhlic Service acquired -he assets and assumed certain liabilities of Wiscons n Fuel and Light in exchange for 1.8 million shares of WPS Resources' common stock.

There were no noncash investing and financing activities during 2000.

The following noncash investing and financing activities occurred in 1999:

I. A capital lease obligation of $74.I million was incurred when Wisconsin Public Service entered into a long-erm lease agreement for utieity plant assets.

2. Net cash surrender value of a key executive life insurance policy of S I.8 million was transferred fiom Wisconsin Public Service to WPS Resources.

3. Nonutility assets of $0.1 million were transferred from Wisconsin Public Service -o WPS Resources.

NOTE 3-FAIR VALUE OF FINANCIAL INSTRUMENTS The fo'lowing methods and assumptions were usec to esrimate the fair value of each class of financial instruments for wnici it is mracticab e to estimate such value:

Cash, Snort-Term Investments, Energy Conservation Loans, Notes Payable, anm Outstanding Commercial Paper:

The carrying aimount approxima es fair value due to the short maturity of tnose iivestments and obligations.

Nucleam Decomonissroninig Tirusts: The value of nuclear decommissioning trust investments included n utiliti plant is recorided at maket va ue, net of taxes payable on unrealized gains and losses.

he announ-recorded in nuclear decommissioning -rcsts other assets represents income taxes cayable on urreoized gains and losses.

Long -Term Debt and Preferred Stock: The fair value of long term debt ard p-eferred stock are estimated based on the quoted market price for the same or similar issues or on the current rates offered to WPS Resources for debt of the same remairing maturity.

Risk Nanagement Activities: Most of the fair value of risk management acrvibes is c Je to WPS Energy Services' mark-to market activties uncer Emerging Issues Task Force Issue I8-10,

'Accounting for Contracts Involved in Energy Trading and Risk Managemeit Activities." See Note 4 for additional information.

The estimated fair values of out financial instruments as of December 31 were:

(Mifions) 2001 2000 Carrying Fair Carrying Fair Amount Value Amount Value Cash and cash equivalents

$ 43.9

$ 43.9

$ 12.8

$ 12.8 Restricted cash 21.3 21.3 Energy conservation loans 2.6 2.6 3.5 3.5 Nuclear decommissioning trusts - utility plant 311.3 311.3 207.2 207.2 Nuclear decommissioning trusts-other assets 22.4 22.4 18.3 18.3 Notes payable 31.3 31.3 10.0 10.0 Commercial paper 15.0 15.0 119.6 119.6 Trust preferred securities 50.0 49.9 50.0 49.0 Long-term debt (excluding capital lease obligation) 712.6 744.2 595.9 601.9 Preferred stock 51.1 43.9 51.1 41.9 Risk management activities 47.5 47.5 (17.0)

(I 7.0)

I A P0WERF L

EQUAT I

N NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 4-RISK MANAGEMENT ACTIVITIES On January 1, 200i, WPS Resources adopted Statemen of Financial Accounting Standards No. 133, 'Accounting fo Derivative Instruments and Hedging Activities." as amended, Statement No. 133 estaulinses accounting and financial reporting standards for derivative instruments, such as font/,ard contracts, futures, and op ions, and related hedging actnities.

Statement No. 133 requires, in pari, that we recognize al derivative instruments on the balance shee-as assets or liabilities a-their fair value. The treatment of subsequent changes in fair value of the derivatives are recorded currently in earnings unless certain hedge accounting criteria are met or if the derivatives are subject to -he provisions of Statement No, 71.

WPS Resources has concluded that the majority of its contracts do not meet tne definition of a derivative as defined by Statement No. 133. Therefore, at Decembe-31, 2001, such contracts are not subject to the accounting requirements of this statement, as amended, Wisconsin Public Service has entered into a limitec number of commodity contracts to service i7s customers that meet the definition of a derivative under Statement No. 133.

A majority of these contracts are ratural gas purchase agreements. Manaoemert believes any gains o-losses resulting from the eventual settlement of these gas purchase agreements will be collected fi0orn or refunded to custoirers.

Therefore. the derivative amounts to be recorded as a result o these natural gas contracts will be offset wvith a corresponding regulatory asset or liability pursuant to Statement No. 71. As of December 31, 2001, we have recorded an asset from risk management activities and a regulatory liability of $5.0 million related to these Wisconsin Public Se-eice contracts.

V/PS Resources nonregulated segments have also entered into a limited number of contracts that meet the definition of a derivative under Statement No. 133, One of these contracts was an electric energy contract that was used to protect VAPS Resources aoainst potential summer energy price spikes. Tnis contract expired during the third quartei.

The total pre-tax loss of $3.5 miilion for this contrac is included in other income in tne Consolidated Statements of Income. A similar contract was held in 2000 that resulted in a $3.8 million pretax loss.

We have also classified as a derivative an inteo.est rate swap that is used to fix the entire interest rate for the full term of an 8-year variable rate loan. In accordance with Statement No. 133, management has designated -his contract as a cash flow hedge. Because the swap was calculated to be 100%

effective, we have reco ded the S2.'

rail on mark-to-market loss, net of defer0ed taxes, for 2001 cirectly o other comprehensive nncome, WPS Resources did not exc'ude any components of the der vative instrument s loss from the assessment of hedge effectiveness.

Both Wisconsin Public Servce and WDS Resources' nonregulaied segments hold a limited number of other derivative instruments. The curulative effect on the balance sneet and income statement for these contracts at Decembe-31. 2001 vas not significant.

\\A/PS Energy Services uses derivative financal and commodity instruments to reduce market risk associated with changing prices of natural 0as and e0 ec rici>y sold at firm prices -o its customers. WPS Energy Services also utilizes these instruments to inanage market isk assoc ated with tradincg activities. V\\/PS Enoerg Services marks its energy contracts and related financia' instruments. includin intercompany contracts, to fair value in accordance wvt-n Emerging issues Task Force Issue 98-10 Accoenting for Cortiacts Involved in Lnergy Trading and Risk Yanagerrent Actvi-ies." As such, tre impac of Staterr'e No. 133 or WPS Energy Services at December 31 2001 was not significant. The majority o MWPS Resou-ces' assets and lnab lites from risk managemert actrvities are tne result of V\\/PS Energy Services' mar< kto-market activities under Issue 98 10.

WPS Energ> Serv ces nneasures the fair value of contracts, ncluding NHYPEX exchanrge and over the-counter cortracts, naturai gas oneions, na-ural cas and electric power physical fixed prce contracts, basis contracts and 'elated financial instruments on a mark to-market basis usng risk management systems. The primnar input foe natural gas p cino is the for,,arc price curve of the NYNEX exchange settled spreads, contracts, and options. Basis pricing is derived from published indices and documented broker cuotes.

WPS Ene'gy Sermices bases electric prices on NYNEX exchange sellement prices and documented broker cuotes.

Because the majoity of the contracts have a term of less than 36 months, the foeiat cminunves have a reasonable degree of liquidity and WA S Eneroy Services does not cetermine any forward price cur es inteirally. Low tolerance for price risk causes WPS Energy Sev ices to use firancial instrunnmens to hedge substantially all of its positions and. therefore, changes in the priona-variable, whnicn is 7he fohecvard price cures, have little impact on the neo fair value of the contracts as markedcto-market.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 5-PROPERTY, PLANT, AND EQUIPMENT Property, plant. and equipment consists of the following utility, nonatiliv.y and ronregulated assets, (Millions) 2001 2000 Electric utility

$1,906.3

$1,893.4 Gas utility 392.6 302.9 Property under capital lease 74.1 74.1 Total utility plant 2,373.0 2,270.4 Less: Accumulated depreciation and decommissioning 1,496.6 1,365.3 Net 876.4 905.1 Nuclear decommissioning trusts 311.3 207.2 Construction in progress 60.3 70.0 Nuclear fuel, less accumulated amortization 24.9 16.0 Net utility plant 1,272.9 1,198.3 Nonutility plant 4.7 4.7 Less: Accumulated depreciation 0.5 0.4 Net nonutility plant 4.2 4.3 Electric nonregulated 167.4 134.7 Gas nonregulated 12.3 1.1 Other nonregulated 25.0 25.3 Total nonregulated property, plant, and equipment 204.7 161.1 Less: Accumulated depreciation 18.2 12.9 Net nonregulated property, plant, and equipment 186.5 148.2 Total property, plant, and equipment

$1,463.6

$1,350.8 Utility plan-is sta-ed at the original cost of constriction ic.udinio an al ovance for funds used during construction.

The cost of renewa s and beterments of units of property (as distinguished Yom miror items of property) is capitalized as an addition to the utility alan-accounts. Except for land, no gain or loss is recoonized n conrection with ordinary retirements of utility property urits. The atility cearges the cost of units of property retired sold, o-otherwise disposed of. plus remov.I, less salvaoe, to the accumulated provision for deprecatior. Mlainteance, repair. replacement, and renewal costs associated with items rot qualifying as units of property are considerec operatirg expenses.

V/e record straight ne depreciatior expense over the estimatec useful Ife of utility p-oaerty and include amounts for estimated rerroval and salvage. The Public Service Commission o-Viscons'n approved depreciation rates for Wisconsin Pubnic Service effective January I, 1999.

Depreciatior for the Kewaunee plant !s being accrued based on a Public Service Commission of Wisconsin order that became effective on January 1, 2001, The order incudec a change in the methodology for the Kewaunee plant after the steam generators were replaced. The cost of the new steam gererators that went into service in December 2001 will be recovered over an 8-1/2 year period using -he sum-of years digits method of depreciation. Also under this order, the unrecovered plant investment at January I, 200 1, and future additions will be recovered over a period ending 8-I /2 years after the installation of the steam generators using a straight-line remaining life depreciation methodology.

Depreciation rates for Upper Peninsula Power were approved by the Michigan Public Service Commission on January 1, 1994 and were in effect through 2001. A new depreciation study was filed with the Michigan Puboic Service Commission in 2001, and new approved rates are effective January I, 2002 through December 3 I 2006.

Depreciation expense also inclades accruals for nuclear decommissioning. These accruals are not included in the annual composite rates shown below. An explanation of this item is included.n Note 8, Annual Utility Composite Depreciation Rates 2001 2000 1999 Electric 3.23%

3.52%

3.46%

Gas 3.37%

3.26%

3.23%

Nonuaility property interest capitalization takes place duaing constriction, and gain and loss recognition occurs in connection with retirements. Nonregulated property, plant, and equipment are capitalized at original cost. Significant additions or improvements that extend asset lives are capitalized, while repairs and maintenance are charged to expense as incurred.

Nonutility property is depreciated using straight-line depreciation. Asset lives range from 3 to 20 years.

Nonregulated plant is stated at the original construction cost, which includes capitalized interest for those assets, or estimated fair value at the time of acquisition, based upon Accounting Principles Bulletin No. 16, 'Accounting for Business Combinations." The costs of renewals, betterments, and major overhauls are capitalized as an addition to plant accounts. The gains or losses associated with ordinary retirements are recorded in the period of retirement.

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FA 0 IV E,FL U AT I 0ON NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Maintenance, repairs, and minor replacements are expensed as incurred.

Most of the nonregulated subsidiaries compute depreciation using the straight line method over the following estimated useful lives:

Structures and improvements 15 to 40 years Office and plant equipmert 5 to 35 years Office furniture and fixtures 5 to 10 years Vehicles 5 years Leasehold 'Improvements Shorter of:

life of the lease or life of the asset The Combined Locks Ere,,g Center, however, is using the units of production depreciation method for selected pieces of equipment having cefrned lives stated ir terms of houes of pr oductionr WPS Resources capitalizes certa n costs related to software developed or obtained for internal use and amortizes those costs to operating expense over the estimated useful life of -he re'ated softwvare, which is usually three to seven years.

NOTE 6-ACQUISITIONS AND SALES OF ASSETS On April I, 200i, Wiscorsin Public Service completed its merger with Wisconsin Fuel and Light Company. WVsconsin Fuel and Light sewed residental, commercial, and industrial customers in Manitowoc and Wausau, Wisconsin with natural gas. Wisconsin Fuel ard Light's shareholders received 1.73 snares of WPS Resources' common stock for each share of Wisconsin Fuel and Light common stock. A total of

.763,943 shams were issued resulting in a purchase price of $54.8 million based on an average price of $31.0625, the prevailing price at the time of the merger announcement.

Wisconsin Public Service used 'he purchase method of accounting and recorded $41.9 million of total premium assocrated with the purchase. Of the total premium,

$36. I million was recorded as goodwill and is included in other assets on the Consolidated Balance Sheets. During 2001, Wisconsin Public Service amortized $0.7 million of goodwill using the straight-line method over a period of 40 years. We adopted Statement of Financial Accounting Standard No. 142, "Goodwill and Other Intangible Assets,"

on January I, 2002. In accordance with the recuirements of this statement, we ceased amorizing the goodwill on January I, 2002 and prepared a preliminary evaluation of the fair market value of the gas utility business segment to assess the potential impairment of the goodwll balance, Based on the estimated

'air value, an impairment charge was not required at the time of the adoption of the statement.

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rrrllur Ir The remaining prern ium, $5.8 million after-tax, was recorded as an acquisition adjustment in plan. vwhich we expect to be recovered ir Wisconsin retail rates over tie three-year period of 2003 through 2005. The acquisition premium will be amontized over the recovery period.

The operations of Wisconsin Fuel and Light are included ir the financial statements presented for Wiscounsin Public Service and WPS Resources for the perion beginning AprI I, 2001 and erdirg December 3 I. 200 1. but do not have a material impact.

On September 24, 2001, Wisconsin Pubnic Seirvce acquired Madison Gas and Electric Company's 17.8% interest in the Kewaunee plant including its decommissioning trust assets. As a result of the $ 17.5 million purchase WVisconisin Public Service novw' owns 59% of the plant with the remainrng portion held by Wisconsin Power and Light Company. The additional share of the operations of the Kevaunee plant is included in the finarcial staeernents of Wisconsin Public Service beginning September 24. 2001. Madison Gas ani Electric will retain its obligations as they relate to the plant fo-the perion of time it was ar owner, Madison Gas and Elecmric wll maintain one decommissionirg trust fund that will accumulate its reeraining contributions in accordance with its ex sting funding plan, which extends -o December 31, 2002. On 0aruary 2, 2003, Madison Gas and Elecri c wvl transfer that trust fund to

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Wiscons n Pub ic Service. Wisconsin Public Service also assumed Madison Gas and EleSric's share of the decomtnm t ssioning obl:gatiors in exchatge for -he Trat> fhnds traisferred on Septermber 24, 2001 and to be transferred on January 2. 2003.

.n December

'LOCI: WPS Power Development reached ar agreement to pu -cnase the stock of CH Resoarces, Inc.,

wnich owns thr e p plants anr other assets. The plants have a comtbied Capacity o-257 megawatts and are located ii New York. The approximate 562 million transaction is subject to reguIato' arpprovats anc is expected to dose n the second quarter c-2_002. WPS Resource s expected to prov de *`nanc ng for ins project with snncr term rebt.

Mr/PS Nort'ern Nevada, LLC a direct, w-olly owned subsidiary of WAS Power Development, entered into anr asset purchase agreement on October 2_, 2000 -o acquire tne 545-megawatt TracyPinor Power Station and related assets from Ser-a Pacifc Power Company. a Nevada electric utility and waholly-ownmed s cbsidiary of Sierra Pacific Resources.

WPS Northern Nevada expected to close trris acquisitron during 2"C 1. On Apri 8, 2001, the Staae of Nevada passed a law placing a moraetorim on the sae of gene-atron assets by eiectric aiorities until JuLy

r.

200 3. As a result. t he purchase has not yet been closed. vWPS Power Development is currently workint witti Sierra Pacific to evaluate the engineering and economic feasibr Fy of modifying the coal gasification unit at tnc re !in order -o aheve commercial operation. The oniginal asset purct ase agreement does not contatn an automatic teminratior prey sion if closing does no-occur.

The agreement coes alow eitner oarty to terminate the agreement after specified dates in 2002.

In November 200 r, \\APS Power Development, tnrough its subsidiaai ECO Coal Pelletization # 12 LLC, entered into a transaocnon with t

stbsidiarb of a public company resulting in ECO # 12 coreir a ir -rs synthenic fuel roducing macrinery to a newly-orred enrtty in exchange for cash and a one-third ownershia interest r the tewly-for-ted entity.

The transaction generated a pr-e-tax gain of S40.1 Imr ion of which t38.0

-millie hoas een referred as of December 31, 2001 as a result of certain rights of rescission and pua options beng granted 7o the buyer. As these rights of rescission expire and the amount of the put options of the buyer diminishes, WPS Power Development will recognize through earnings the deferred gain on the transacion.

Concurrent with the sale of a por-Jon of its interest in this project, WPS Power Development boaoht out the interest of its previous partner in the ECO # 12 project, The acta payments to this former partner are contingent upon the same provisions referred to above. As a result, $2z.3 million is held in escrow th at wiil be released proportionately as the respective rescission rights and put options expire.

in 2001. Wisconsin Public Service sold 5.740 acres of land associated with several hydroelectric projects on the Peshtigo River in nor heastern Wisconsin to the Wisconsin Department of Natural Resources for $13,5 million. The sale resulted in a pre-tax gain of $13. I million. The agreement with the Department of Natural Resources includes two options, one exercisable in 2003 and the other in 2004, whereby the Department may acquire, at less than fair value.

approximate y 5,000 additional acres for $11 5 million if both options are exercised. The value associated with the difference between the option price and the fair value will be treated as a charitable contributon. Tne sale wvas the first par7 of a five to seven yea, asset management strategy adopted by WPS Resources in 200 1.

Wisconsin Public Service irncreaser its ownership in Whisconsin River Power Company to 1awo-thirds by purcnasing an additional onehtnird interest from Consolidated Water Power Company in 2000. In December 200.

Wisconsin Power and Liuht exerused its option to purchase one-half of Wisconsin Public Servce's additional onethird share of Wa/isconsin River Powver Both transactions were at net book value o Wisconsin River Power at August 31. 2000.

As a result Wisconsin Public Service and Wisconsin Power and Light each own one-half of Wisconsin River Power with Wisconsin Public Service remaining the operator of the facility.

SA P O \\V E R F -

L E Q U A T i 0 N NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 7-JOINTLY-OWNED UTILITY FACILITIES Information regardinr Wisconisin Public Service's share of major jointly-owned electric-generatino facilities in service at December 3 1, 200 1 is set :ýaorh below:

West Marinette Columbia Edgewater Kewaunee (Millions, except for percentages)

Unit No. 33 Energy Center Unit No. 4 Plant Ownership 68.0%

31.8%

31.8%

59.0%

Plant capacity (Megawatts) 77.0 322.6 105.8 315.0 Utility plant in service

$17.5

$118.7

$24.8

$235.7 Accumulated depreciation

$ 5.2

$ 75.6

$15.3

$151.7 In-service date 1993 1975 and 1978 1969 1974 The increase in ownership at the Kewaunee plant during 200! is the result of the purchase of Madison Gas and Electric's 17.8% interest. See Note 6 for more information on the transaction.

Wisconsin Public Service's share of direct expenses for these plant s included in the correspondirg operating expenses in the Consolidated Statements of income.

Wisconsin Public Service has supplied ias own financing for all jointy-owned projects.

NOTE 8-NUCLEAR PLANT OPERATION On September 2-, 2001, Wisconsin Public Service acquired "Madison Gas and Electric Company's V7.8/

interest in the Kewaunee plant includitg its decommissioning trust assets. In addition to the decommissioning trust assets Wisconsin Publlc Service received from Madison Gas and Electic in September 2001, Wisconsin Public Service will receive one remaining decommissioning trust fund on January 2, 2003. Wisconsin Public Service assumed Madison Gas and Electric's share of the decommissioning obligations in exchange for the trust funds transferred on September 24, 2001 and those to be transferred on January 2. 2003.

The additional share of the operations of the Kewaunee plant is included in the financial statements of'Wisconsin Public Service beginning September 24, 2001. The net book value of Wisconsint Public Sen/ice's 59% total share of the Kewaunee plant at December 3 1. 2001 was $88.5 million, Including construction work in-progress. For more information on the transaction with. Madison Gas and Electric, see Note 6.

The quantity of heat produced for the generation of electric energy by the Kewaunee plant is the basis for the amortization of the costs of nuclear fuel to electric production fuel expense, including an amount for ultimate disposal. These costs are recovered currently from customers in rates, The ultimate storage of fuel is the responsibility of the United States Department of Energy pursuant to a contract required by the Nuclear Vkaste Act of 1982. The Depatment of Energy receives quarterly payments ",or the storage of fuel based on generation. Dui ng 200u and 2000, payments "to the Deparntment of Enerry tota ed S I.4 million for each year.

Or an interim basis. spent nuclear fuel storage space is provided at the Kewaunee plant. Expenses associated with interim spent fuel storage at tne Kewaunee plant are recognized as current operating costs. With rninor plant modifications that were completed n 2001, the Kewaunee plant should have suffcbent fuel storage capacity u til the end of its useful life in 2013.

The accumulated Provision for nuclear fuel, which represents nuclear fuel purchases and amorization, totaled

$247.6 million a-December 3, 2001 and $167.7 million at December 3', 2000.

For information on the depreciation policy for the Kewaunee plant, see Note S.

Wisconsin Pubic Service's scare oa nuclea' decommissioning costs to date has been accrued over the estimated service ifeof the Kewaunee plant, recovered currently from customers in -ates. and deposited in external trusts. Such costs totaled $2.6 million in 2001, $8.9 million in 2000, and S9.2 milio n i999. The 1999 and 2000 funding levels used a recovery period ending in 2002. Beginning in 2001, the Public Service Commission of Wisconsin authorized use of a funding period ending in 2010. As a result of this 0PI RisUit

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS extension, the cortr butions for 200 1 decreased to S2.6 mirlion. In ceveloping our decommissioning funding plan, we assumed a long term after-tax earnings rare of aooroximately 59/.

Wisconsin Pubic Serv ce's share of the Kewaunee plant decommissionrrg. based on its 59% ownership interest, is estimated -o be $3 9 million in curre: dollars based on a site-specific s-tudy. The study, which was performed in 1998, uses immediate dismantlement as the method of decommission ng and assumes snutdovwn in 2013, As of December 31, 2001, the market value o-the external nutcear decommissioning trusts, which are recorded as a part of property, plant and equpment on the Consolidated Balance Sheets, totaled S31:.3 million, includirg the trust currently held by Madison Gas and Electric that is to be transferred to Wisconsin Public Se'ice on January 2, 2003. Therefore, the current cost of Wiscoensin Public Service's snare of the estimated costs -o cecommission the Kewaunee plant, assrming early retirement, exceeds the trust assets at December 3i. 2001 by about $7.7 million, Based on the stdndard cost escalanion assumptions required by a July 0194 Public Service Commission of WVsconsin order, tle undiscounted amount of Wisconsin Public Se-vice's share of decommissioning costs forecasted to be expended Det,.,,een the years 2013 and 2043 is

$967 million under tre cur-ent funding plan, Future decommissioning costs coilected in customer rates and a charge for realized earnings from external trusts are included in depreciation expense. As of December 31. 2001.

the accumulated provision for depreciation and decommissioning included accumu ated provisions for decommissioning totaling S31 1.3 million. Realized trust earrings totaled $8.1 million in 2001, $10.8 million in 2000, and $4.6 million in 1999, Unrealized gains and losses, nei of taxes, in external trusts are reflected as increases and decreases to the decomm ssioning reserve, since decommissioning expense is recognized as the gains and losses are realized. ii accordance with regulatory requirements.

Investments in the nuclear decomm ssioning,rusts are recorded at market value, Investmerts at December 31, 2001, consisted of 59.2% equity securities and 40.8% fixed income securities. The investments are classified as.tility plant and are presented net of related income tax effects on unrealized gains and represent the amount of assets avai able to accomnlish decommissioning. The ronqualified trust investments designated to oay income taxes when unrealzed gains become realized are classified as other assets. An offsetting regulatory liability reflects the expected reduction in future rates as unrealized gains in the nonquaied trust are realized.

Information regardino tne cost and market value of the external nuclear decommissioning trusts, net of tax is set foelh below:

2001 Security Type (Millions)

Market Cost Unrealized Gain (Loss)

Fixed income

$127.0

$123.8

$ 3.2 Equity 184.3 129.0 55.3 Balance at December 31

$311.3

$252.8

$58.5 2000 Security Type (Millions)

Market Cost Unrealized Gain (Loss)

Fixed income

$100.7

$ 98.9

$ 1.8 Equity 106.5 62.0 44.5 Balance at December 31

$207.2

$160.9

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A P 0 \\V ER F '; L z Q U AT I e N NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 9-REGULATORY ASSETS AND LIABILITIES The following regulato-y assets and liabilities are reflected i6 our Consolidated Balance Sh)eets as of December 3 I:

WPS Resources Regulatory Assets/Liabilities (Mi/lions) 2001 2000 Regulatory assets Demand-side management expenditures

$ 9.6

$20.7 Environmental remediation costs (net of insurance recoveries) 40.0 30.5 Funding for enrichment facilities 3.6 4.1 Pension curtailment loss 8.1 8.1 Deferred nuclear costs 9.9 Unamortized loss on debt 4.5 1.4 Deferred American Transmission Company costs 4.4 0.5 Other 10.9 9.2 Total

$91.0

$74.5 Regulatory liabilities Income tax related items

$26.1

$25.2 Unrealized gain on decommissioning trust 22.4 18.3 Pension settlement gain 11.8 Natural gas derivatives 5.0 Deferred gain on emission allowance sales 6.0 2.9 Interest from tax refunds 5.0 3.8 Other 2.1 0.4 Total

$78.4

$50.6 Our utility subsidiaries are recovering their regulatory assets and retrning their regulato-y liabilities through rates charged to custoimers nased o-) specific ratemaking decisions or precedent for each te-n, Except for amounts expended for environmental costs. Wisconsin Public Service is recovering carrying costs for ali regulatory assets. Upper Peninsula Power may recover carrying costs on environmental regulatory assets. Based on prior and current rate trearment for such costs. we believe it is probable that Wisconsin Public Service and Upper Peninsula Power will continue to recover from customers the regulatory assets descriLed above.

See Notes 13 and a for specific information on income tax and pens or related regulatoy liabilities, See Note I4 for informator or envi-onmental remediation deferred costs.

NOTE 10-INVESTMENTS IN AFFILIATES, AT EQUITY METHOD Investments iH corporate joint ventures and other companies accounted for under the equity method at December 31, 2001, 2000, and 1999 follow:

(Millions) 2001 2000 1999 American Transmission Company, LLC

$56.2 Other 13.6 15.0 9.7 Investments in affiliates, at equity method

$69.8

$15.0

$9.7 Investments in affiliates under the equity method are part of the other assets or tne Consolidated Balance Sheets and the equity income is recorded in miscellaneous income on the Consolidated Statements of Income, WPS Investments, LLC, a consolidated subscdiary of Wisconsin Public Service. has an approximate 159 ownership interest in American

]Tansissiorns Company, LLC, American Transimission Colpany is a for-proflt, transmiss ononly company. [t owns. plans. maintains, monitors, and operates electric transmission assets in portions of Wisconsin, Michigan, and Illinois, Ame-ican Tansmission Company becan 0R RE'URtL Ce****.

S"6

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS operations on 0r.jai-y I, 2001. Its assets areviously were own)ed and ope atec by multip e elect'ric utlities servng the uppe0 Midwest all of.h'c transferred tteir transmissior assets to Amnerica Tratsmission Company in exchange for ain ownership inte-est. A visconsin lawx etcouraged utilities in the stare to iansfe-osvrership and contolo of ter transm stion assets to a state-wide transmission compar.y, Wisconsin Pubic Se'vice contributed its transmission assets on january 1, 200 and Upper Peninsula Power contributed its transmission assets on June 28, 2001.

Our total ownershp inoterest in American Transmission Company fluctuated throughout 2001 die to other utiiities contributing assets and cash to become owners of American Transmitsson Comnany, Condensed financial data of American Transmission Company for 2001 ollows:

(Mi/lhons) 2001 Income statement data Revenues

$174.7 Operating expenses (I 10.1)

Other income (expense)

(11.4)

Net income

$ 53.2 WPS Investment's equity in net income 7.1 Balance sheet data Current assets

$ 56.7 Non-current assets 666.6 Total assets

$723.3 Current liabilities

$ 36.1 Long-term debt 297.9 Other non-current liabi ities 3.6 Shareholder's equity 385.7 I

1UI IcU.;L:I:

A kU AlC.....

it

$723.3 NOTE II-SHORT-TERN DEBT AND LINES OF CREDIT To arovide short-termn orrowing flexibility and security The information in the table below relates to short term for commerci D. pae-outstandingJ,

\\JPS Resources and its debt and lines of crecit for the years indicated:

subsidiar es mairta n Dark mines of credit. These lines of crecit recuire a fee.

(Millions, except fcr percenteges) 2001 2000 1999 As of end of year Commercial paper outstanding

$ 15.0

$119.6

$ 79.9 Average discount rate on outstanding commercial paper 1.95%

6.63%

6.55%

Short-term notes payabie outstanding

$ 31.2

$ 10.0

$ 10.4 Average interest rate on short-term notes payable 1.61%

6.73%

8.10%

Available (unused) lines of credit

$130.0

$132.0

$127.0 For the year Maximum amount of short-term debt

$177.6

$139.5

$218.5 Average amount of short-term debt

$110.6

$ 65.6

$ 68.6 Average interest rate on short-term debt 4.32%

6.39%

5.34%

W0R C

0.

S

AL P 0 \\V E R F U "

E Q U A T I N

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 12-LONG-TERM DEBT At December 31 (Mi/rions)

Capital lease obligation - Wisconsin Public Service Less: Current portion Long-term capital lease obligation First mortgage bonds - Wisconsin Public Service Series 7.30%

6.80%

6.125%

6.90%

8.80%

7.125%

Senior notes - Wisconsin Public Service Series 6.08%

6.125%

First mortgage bonds - Upper Peninsula Power Series 7.94%

10.0%

9.32%

Unsecured senior notes - WPS Resources Series 7.00%

Term loans - nonrecourse, secured by nonregulated assets Tax exempt bonds Notes payable to bank, secured by nonregulated plant Senior secured note Other long-term debt Total Unamortized discount and premium on bonds and debt Total long-term debt Less current portion Net long-term debt Total long-term debt and capital lease obligation 2001

$ 73.0 (0.9) 72.1 72.1 73.0 Year Due 2002 2003 2005 2013 2021 2023 Year Due 2028 2011 Year Due 2003 2008 2021 Year Due 2009 2000 7 13.6 (0.6) 50.0 50.0 9.1 22.0 50.0 50.0 150.0 15.0 2.1 18.0 150.0 95.8 27.0 20.3 50.0 50.0 9.1 22.0 53.1 50.0 50.0 15.0 3.0 18.0 150.0 102.8 19.3 3.5 0.1 595.9 (i.2) 594,7 (7.7) 587.0

$660.0 3.3 712.6 (1.2) 711.4 (55.7) 655.7

$727.8 In November 1995. VVisconsin Public Service signed a 25-yea: agforement to par cise cevver f-om De LLC, an independent povver producer arhic supplies the power feorr a cogeneration '0cilty t owns, tei~tr~sr

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In June 1099, Phase I of the pro ect went nto operation.

We have accounted -or the contract as a capital lease. In Phase I, an isitial asset and corcespoandhn obligation were aecorded at $7/4.

aiior. The asset and ob0igation represent the aresent value of m nirsum lease payrnents. Excluded f-om the payme-s are executorv costs such as insurance.

maintenance, ani taxes. When the contrat expires in 2,024, Wisconsin PubLic Serv ce may renew tMe contract for 5No additional five year periods wvith proper notice. We are amotazinr the eased asset on a straight ne basis over the original 25-3ear ter-ý o the contract. Following is a schedule of fCutre miri-nim ease paymen s, excluding executory costs, under ire De Pere Fnergv CenGer capital lease:

Year ending December 31 (Millions) 2002

$ 5.2 2003 5.4 2004 5,6 2005 5.9 2006 6.0 Later years 96.6 Net minimum lease payments 124.7 Less: Amount representing interest (51.7)

Present value of net minimum lease payments

$ 73.0 in Auoust 2001. Wisconsin Public Ser.ce retired S53. I n Ilion of 8a80% first mortgage Donds that would naae matured in 202, Aiso in Augjst 2001 Wiscorsir Public Service issued

! QI.0 millio oa 6. 125% senior notes, The serior no-es are sec-red by a pledge of tirst morLgage bonds and become usecuread if Wisconsin Public Serice retires all a-its outstandirg,frs-mortgage bonds. At oar utility subsiciaries, plart assets secure first ar-togage bonds.

Upper Penins.la Poker is requirec to make Dons sinkirg find payments for some of its outstanding fr-st mortgage bonrs.

Borrowirg 0

y "PS Power Development unclae term loans and secared by nonreguiated assets totals $95.8 million.

Tse assets of WPS New Esoland Generation, Inc. and 0/PS Canada Gsner on, Inc.. subsidiaries oa WPS Power Developmert. secure $6.6 mill on aod $11x msilion, respectively, of rae ao-al outstardiag amount. Both rave semiasnuai instalime-i paymrents. an interest rate of 8. 7 30/o and mature rn May 20 10. Sunbuhy Generation, LLC, an Indirect suhbsidiar of WPS Power Development, s the borrov,,er of ts)e remaniprg $73.0 millon that is secured by its plant. QuarLerly payments are made in relation to this financing that carnes an irterest rate of 7.8725% and matures in >arcc 2

8. This loan also has renewais in 2006 and 20 12. However, if certain debt covenants are not met, the ender is not recuired to renew the loanss In April 2001, -he Scruyk!i County idustrial Deveaopment Authority issued $27.0 million of refunding ax-exempt aonds. A, tse time of issuance of the refunding aonds, WPS Westwood Generation, LLC, a subsidiary of WPS Power Developmens. owned the original bonds, the proceeds of chich were used in substantial part to provide facilities. Upon issuance of the refundinc bonds, the original bonds were paid off. WPS Westwood Generation was paid S27.0 milion from the proceeds of the refunding bonds for the retirement of the original bonds alus accrued interest.

WPS VVestwood Generation s now obligated to pay she refunding bonds witn monthly payments thar have a floating siterest rate that is reset weekly. At Decembeh 3 1. 2001,

,he interest rate vas 1,51833%. The bonds rature in April 2021. WPS Resources agreed to guarantee WPS \\,Vest\\vaood Generation's obligation to provide sufficient funds to pay -he refunding bonds and the aelated obligations and indemnities.

As of December 3 2001, WPS Power Deve opment had aggregate outstarding indebtedness totaaing $20.3 million under notes payabhe -o banks including $1[c,9 msllion of indebtedness under its revolving credit nose af $12.5 million.

Ths note is secured by the assets of the Stoneman alant and is g.u.aranteed bh V/PS Resources. It is due in 2005 and requires cuarterly payments. In addition, the note has a variable interest rate that,vas at 3.85% aT December 3, 2001. The remarning portion of the S20.3 million of notes payable is secured by nonregulated Plant, and also matures in 200W.

The senior sec ired note of S3.3 million requires semiannual payments at ar interest rate oa 9.25%. and it matures in 2011.

A-Decemuer 3, 2001 WPS Resources and its subsidiaries were in compliance with al! covensants relating to outstanding debh. A schedule of all principal debt payment amounIs, including bond maturities and exciud ng cap tal lease payments, for WPS Resources is as follows:

Year ending December 31 (Millions) 2002

$ 55.7 2003 71.1 2004 6.7 2005 36.3 2006 7.7 Later years 535.0 Total payments

$712.5

A P 0 W E R F J L

ý Q U A T I e N

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 13-INCOME TAXES Deferred income taxes are recorded for temporary differences in the recognitron of certain assets or liabilities for tax and financial reporting pur oses. The prircipal components of outr deferred tax assets and liabilities recognized in the balance sheet as of December 3 !

are as followvs:

(Millions)

Deferred tax assets Plant related State capital and operating loss carry forwards Deferred tax credit carry forwards Employee benefits Regulatory assets Other Total Deferred tax liabilities Plant related Employee benefits Regulatory deferrals Other Total Net deferred tax liabilities 2001 2000

$ 89.4

$ 84.5 6.5 6.5 21.2 11.0 35.5 35.0 5.7 4.7 11.0 0.4

$169.3

$142.1

$184.1

$200.3 30.0 31.3 11.0 8.6 13.7 2.3

$238.8

$24215

$ 69.5

$100.4 A variety of factors are considered in determining the amount of the defer ed ncome tax assets to be recognized pursuant to Statement of Financial Accounting Standards No. 109, includicng: the number of Years that capital and operating losses and tax credits can De carried for.vard, the ex~stence of taxable temporary differences, and WPS Resources' earnings history and near-term earnings expectations, Although rea zation is not assured, we believe it is more likely than not that the entire net deferred tax asset will be realized.

WPS Resources is an owner in a faciii that produces syntnetic fuel frorn coal fines as defired in Section 29 of the internal Reven-ue Coce. The protuction and 4an of the syr[ ntic fuel from this facility qjalifies for tax cred s under Section 29 if certain recuirements are satisfied. Credits that are not ut IFzed to retuce current -ax expense in the current year are camed for,,vard as alternative rrinimurm tax c-edts o reduce curreni tax expense in future years. The production and sale of synthetic fuel resu'ted i a reduction in current Lax expense of $11,4 rm Iion in 2_00 1 The ollowing is a reconciliation of the difference between the current and fut..re tax expense tha t would be computed by applying the federal statuto7-rose to income before income taxes, and the a..ual current adr funure income tax expense that was recodeod on -he income staternent for the year-en-ed December 31:

(Mrirlons, except for percentages) 2001 2000 1999 Rate Amount Rate Amount Rate Amount Statutory federal income tax 35.0%

$29.9 35.0%

$26.6 35.0%

$32.3 State income taxes, net 5.3 4.5 5.5 4.2 5.0 4.6 Rate difference on reversal of income tax temporary differences (2.5)

(2.2)

(2.1)

(1 (1.6)

(1.5)

Plant related (1.2)

(1.0)

Federal tax credits (28.!)

(24.0)

(26.4)

(20.1)

(3.5)

(3.3)

Other differences, net (2.9)

(2.4)

(4.!)

(3.1)

(2.7)

(2.4)

Effective income tax 5.6%

$ 4.8 7.9%

$ 6.0 32.2%

$29.7 Current provision Federal

$29.2

$17.0

$33.8 State 8.5 8.5 9.4 Total current provision 37.7 25.5 43.2 Deferred benefit (32.9)

(19.5)

(13.5)

Total income tax expense

$ 4.8

$ 6.0

$29.7 tt:;.fl.

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0P REO RE COPORTIO

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 14-COMMITMENTS AND CONTINGENCIES Fuel and Purchased Power

\\/\\/PS Resources routinely enters into long-term commodity purc-,are and sale commitmerts that ha, vanous quantity requiremeuts ad duraec ons Wiscorsin Pubrc Se-,,ice nas obl gations -elated to coa.

pwrchasec powere and natural gas. Obligatons 0e'ated to coal supply extend r Iroud 2016 and total S 31.9 million. Of that amodnT, there os one rong term contract totalrng S3.7 millon that pi o',,ides app -oxi'ra-eiy 23% of thne total riemen o Wiscorsir Publ Secicee through 2016. Through 2000, Wiscorsir Public Se o

r,,ce has obliganions totaling $ 115.0 million fo, either capacity o-energy related to curchased cperi Also tohe-e a-e natara gas supply anc teansoor-atior contracts vit tota estimated denand payments of $97.0 million through October 20 0.

WSscons n Puoic Serv ce expects o recover these costs in future custo0ner rates. Admdiionally. Wiscorsir Public Service ha cotrrcts To S2 electyicit7 and ratural gas to customers.

Mary of these cort-ac-s have indefinrite Ives.

V\\PS Pova.,er Development also enters into ong term orrmod ty cotriacts, mairy -elatec to tre pdrchase of coal for the Sunbur7 olarT recn onracts eotal $11,9 milion and extend througr 2004.

W\\S Energy Ser.vces has unconritional pdrcase obligarons re ateo to enerIy sipply contracis that total

$8-2.9 mi! or arnd extend throigh 2007 All trie contracts have offse-ing sale cor racrs.

Capital Lease In Novemoer 1H9S, Wisconsir Public Service signed a 25-year agreemeut to purchase Dower erom De Pere Energy Center LLC an rde endent power rooCucer trat bult a cogeroateon facility and is selling electrical rov.,er to Wisconsin Pubic Serv ce.

In June 1999, Poase I of tre project went irto operat on.

W'\\e have accounted ior -he corract as a capital lease. Phase II of rre croject s currently Drojected to be oaeradonal n 2004.

When Pnase I :ecores operatioral, W\\sconsin Public Service will record ar addiortnra utility plant asset under a capital lease of apcroxime o $8-million.

VP 3..

Corporate Guaranties Since May 2000 WPS Resources has provided limited financial support and enerr, supply services to Ques-Energy, LLC. a Michigan 1mired liability company. Financial sipport is n the aorm of an irnerest bearirn note with an initial rat rity dare of May 2005, securec by the assets of Quest.

WPS Resources provices corporate guarantes to two transmission providers on behalf of Quest. At December 3 1, 2001. the guaranties totaled $4.5 million. These guaranties assure Quest's ability to pay for the transmission serices it purchases rom tiese entities.

Nuclear Liability The Price Andersor Act ensures that funds will be ava oable to oay for public liarility claims arising out of a nucleaý incident. This Act may require Wisconsir Pubkc Sevice to pay up to a maximum of $52.0 mi lior per ircdoent. The payments will noý exceed $3,9 millior per-incident in a given calendar year These amounts -ep-esert Wisconsin Public Service's 59% ownership in tre Kewaunee plant.

Nuclear Plant Operation See Note 8 fo-deoailed information on the operations of the Kewauree plant.

Clean Air Regulations Early compliance ny Wisconsin Public Servzice with the Federal Clean Air Act has generated surplus sulfur dioxide allowances. We will consideo tne sale of any al owances available in excess of Wisconsin Public Service's needs. The Publ'c Service Commission of Wisconsin has ordered that profits from tse aof alloeances be passed on to customers. During 200l. Wiscons n Public Service recorded

$4.2 million of proceeds from the sale of allowances.

The United States Envirormental Protection Agency has designated southeastern Wiscorsir as an ozone non-attainment area. Under the Clear Ar Act, the State of Wi sconsin developed a nit-ogen oxide reduction plan for Wisconsin's ozone non-attai mren area. -he niroger oxide reductions begin in 2003 and gradually increase to 2007.

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151

A P a \\XV f. eF U L F Q U AT I S N

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS This plan affects Edgewater Unit 4, of which Wisconsin Public Service owns 31.8%. A compliance plan for this unit was initiated in 2000, The plan includes a combination of combustion optimization and emission trading at a cost

,o Wisconsin Public Service of about $5 million, The State of Wisconsin is also seeking voluntary reductions from utility units outside the ozone non-attainment area, which may lead to additional expendtJres for nitrogen oxide recuctions at other units. Wsconsin Public Service is participating in voiunTary efo-ts to reduce nitrogen oxide levels at the Columbia Energy Center. Wisconsin Punlic Se oce owns 31.8% of Columbia. The Public Service Commission o' Wisconsin nas approved recoveny of the costs associated with nitrogen oxide compliance.

Recent air quality modeoing by the Wisconsin Department of Natural Resources revealed that Wes'on Units I and 2 contribute to a modeled deviation from the suflur dioxide ambient air quality standard, Wisconsin Public Ser-Vice and the Wisconsin Department of Natural Resources developed a plan to ejiminate the model deviation by extending the existing stacks at Weston Units I and 2 by 55 feet and limiting the sulfur content of the fuel to 1.2 pounds Der million Btu.

The cost of the stack extension is about $0.9 mnilion. The current and projected fuel meets the sulfur content limit. The Environmental Prote tion Agency was unwilling to agree with this approach unless further studies were done to justify the stack heighn increase, Wisconsin Public Serv ce is cooperaring with the Wisconsin Depar-ment of Natural Resources to develop an approacn to resolve this issue.

On November 3 1999, the Environmental Protection Agency announced that it was pursuing an. enforcement initiative against seven utilities, or their subsidiaries, located in the Midwest and the South as well as the Tennessee Valley Authority. The enforcemnen initiarive aileges that tre utilities undertook modifications at treir coal-fired power plants in violation of the Clean Air Act. The Environmental Protection Agency is seeking penalties and the installation of additional pollution control equipment.

As a continuation of this initiative, the Environmental Protection Agency requested on December 14, 2000 that Wisconsin Public Service provide information pursuant to Section 114 of the Clean Air Act relating to projects undertaken at the Pulriam and Weston plants. The information was submitted on January 1 6 2001 and no response nas been received from the Environmental Protection Agency.

Wisconsin Power and Lght Company, the operator of the Columbia and Edgewater plants jointly-owned with Wisconsin Public Service, also submitted information related

-o projects undertaken at those plants. The Env ronmental Protecion Agency requested add~tionar information on Febriary 26, 2001. The additional information was submitted on March 28. 200z and Apri 27. 2001, The Wisconsin Departmen. of Natural Resources has initiated a rulemaking effort aimed at the cortrol of ercuLry emissions. Coal-burning power plants are the orimary araget of this regulatory effort, The proposed rule was cccn to comment in October 2001. A final rule could be completed in the spring cf 2002. As proposed, tre rule requires phased in mercur>y emission reduction r-eaching 90% reduction 15 years after completion of the ruie. Wiscons n Public Service estimates that it could cost $105 million per year for ir to achieve the proposed 90% reduction.

WPS Power Developirenr acquired 30 years of emission allowances as a result of the acquisition of Surbury Generation, LLC in November 1999. The puorchase of \\,'\\'PS Westvvood GeCeration, LLC in September 2000 also ndudeu 30 years of emission allowarces. A consisten valuation acros vintage years is being rtilized to allocate the cost of these allowances.

The cost assignec to these allowances is being c raged co expense as tre alovances are used.

0 Vhen necessaar, yhe Sunbury plant also purchases incremertal emission allowances on the open market to con-ply with ar regulations. Additional technology is being instal0ed at the Sunrury planr to comply with nitrogen oxide standards thar become effecitve in 2003.

We expect total expenditures for tthis technology wi I be about

$16 million. During 2001 approximately 33 mnlIon was spent to begin instal in rg tne tchrology.

Partial Sale of ECO Coal Pelletization #12 In November 2001, WPS Power Developrent, tnrough its subsidiary ECO Coal Pelletization # 12, LLC, entered into a transaction wvith a subsit r of a public company resulting in ECO # 12 contributing its synthetic fuel pioducina machinery to a newly-formed entiy in exclrange for cash and a one-third ownership interest in tre rewly-formec entty. The transaction generated a pre-tax gain of S40. mi lion of which 538.0 milion has been deferred as of Decernmber 3, 2001 as a result of certain rights of rescission and cut options being granared c the buyer. All such options expire in 2003.

Concurrent witv the sale of a portion of tHs project, WPS Power Developmenet hougnt out the interest of ins previous partner in the ECO # 12 project. The actual payments to tris former partner are conringent upon the same provisions referred o above. As a result, $-Z.3 rnilion is held in escrow that willbe released proportionately as the respective rescission nghts and put option expire.

For more inormat~on on tre transactton, see Note 6.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Manufactured Gas Plant Remediation Wisconsin Public Service continues -o investigate the environmental leanuip of ten manufactured gas plant sites, including tv'o sites formeriy owned by Wisconsin Fuel and Light. Tie cleanup of Wisconsin Public Service's Stevens Point manufactu-ed gas pant sir e ls substantially complete vwi'th monitorinc of the site continuing. Costs of This cleanup were within the ranie expe-ced for tnis site. Cleanup began at both ire Sheboyoan sites ir November 2000, and cleanup of the

.and portion o the sites was substantially completed by August 2001. lnSed mendt cleanup remains to be addressed at one Sheboygan siter To-date, costs are at expected levels.

Wiscon Public Serv ce estimates future undiscounted investigation and clearup costs to be bnrveen $43 million and $5C million. These est mates may be adjusted in the future coninigent upon remediation technology, regulatory requiremenTs, and -he assessment of natural resources

damages,

\\Wisconsin Pubic Ser ice currently has a $43.4 million liability recorded 'or cleanup wivth ar offsetting regulatory asset (deferred charge. \\A e expew to recover cleanup costs net of insurance recoveries, i. future customer rates. Carrying costs associamed Aith the cleaa-u expenditures wvill not be recoverable Wisconsin Pun!ic Servrice has receved S 2.7 million in insurrnce recoveries ma-we recorded as a reduction to the regulator" asset.

NOTE I 5--EMPLOYEE BENEFIT PLANS VWPS Resources has non-contributo-y retirement plans covering substantially all employees under which the company may make annual corrhibutions to an irrevocable trust. We established the plans to provide retired emnloyees, who meet conditions relatirg to age and lengh of service, wvvtn a monthly payment. Vsconsin Public Service administers and maintalis the plans. These plans are fully funded. and no cont-riutions were mace to them in 2001, 2000, o. 1999.

WPS Resou,ces also currently offers medical, dental, and life insur ance bnet ts to employees and their dependents. We expense these items tor arive employees as incurred. WAe fund bnerets for renrees ttrough r-evocable trusts as allowed for income tax purposes, Wisconsin Public Service and Upper Peninsula Power expensed and recovered througn customer rates the net periodic benefit cost. Our neniregulated subsidiaries expensed allocated amounts. Ouw nor-administrative plan is a colleccivety barga ned plan and, nherefore, is tax exempt. The nvestnerts in the trust covering administrative Future Capital Expenditures We estimate utility plant const-uction expenditures at Wisconsin Public Se'vice for 2002 to be approximately

$208 million and construction expenditures at Upper Peninsula Power for 2002 to be approximately $9 million.

Wisconsin Public Service estimates demand-side management expenditures eo be $24 million in 2002. Recovery of previously deferred demand side management expenditures of about $6 million from cusTomers will occur through 2002. In addi-on to the 2002 estimated expenditures, Upper Peninsula Power is considering the potential need for construction of a combustion turbine aý an estimated cost of $41 million during the 2002-2003 timefirame.

There are no commitments for additional acquisition expenditures for the nonregulated subsidiaries at this time other than commitments made under the stock purchase agreement to acquire CH Resources and the asset purchase agreement to acquire the Tracy/Pinon Power Station. The CH Resources transaction is expected to close in the second quarter of 2002 for approximately $62 million.

The Tracy/Pinon transaction is currently subjec to a legislative moratorium and may be -erminated before

-he moratorium expires.

Fot more information on both transactions, see Note 6.

employees are subject to federal unrelated business income taxes at a 39.1c% tax rate.

A'l pension costs and postretirement plan costs are accounted for under Statements of Fnancaal Accounting Standards Nose 87 and 106, "mployers' Accounting for Pensions" and "Employers' Accounting for Postretirement Benefits Other Than Pensions. respectiveoy. The standards require the company to accrue the cost of these benefits as expense over the period in which the employee renders service. The transition obligation for current and future retirees under Statement of Financial Accounting Standards No. 106 is recognized over 20 years beginning in 1993.

The following tables provide a reconciliation of the changes in the plan's benefit obligations and fair value of assets over the three one-year periods ending December 31, 2001, 2000, and 1999, and a statement of the funded status as of December 31 for each year:

I A POWERFUL EQUATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Millions) 2001 2000 1999 Reconciliation of benefit obligation - pension Obligation at January I

$484.9

$396.7

$399.4 Service cost 11.0 10.2 10.9 Interest cost 32.7 31.5 27.5 Plan amendments 0.2 56.5 4.0 Actuarial (gain) loss 35.4 2.2 (31.5)

Acq uisitions 13.1 4.8 Benefit payments (21.2)

(19.4)

(18.4)

(Settlements)/curtailments (60.9) 7.2 Obligation at December 31

$495.2

$484.9

$396.7 Reconciliation of fair value of plan assets - pension Fair value of plan assets at January I

$676.1

$654.3

$610.5 Actual return on plan assets (13.7) 41.2 58.0 Employer contributions Acquisitions 18.1 4.2 Benefit payments (88.6)

(19.4)

(18.4)

Fair value of plan assets at December 31

$591.9

$676.1

$654.3 Funded status at December 31

$ 96.7

$191.2

$257.6 Unrecognized transition (asset) obligation (2.2)

(6.1)

(9.9)

Unrecognized prior-service cost 59.1 64.4 21.2 Unrecognized (gain) loss (69.3)

(186.5)

(204.0)

Net prepaid benefit cost

$ 84.3

$ 63.0

$ 64.9 (Millions) 2001 2000 1999 Reconciliation of benefit obligation - other Obligation at January I

$102.6

$135.2

$138.8 Service cost 3.0 2.7 4.6 Interest cost 7.6 7.8 9.4 Plan amendments (16.8)

Actuarial (gain) loss 65.5 (19.0)

(13.8)

Acquisitions adjustments 3.7 (1.3) 2.2 Benefit payments (6.2)

(6.0)

(6.0)

Obligation at December 31

$176.2

$102.6

$135.2 Reconciliation of fair value of plan assets - other Fair value of plan assets at January I

$152.3

$149.7

$139.8 Actual return on plan assets (4.4) 7.9 15.2 Employer contributions (7.0) 0.7 0.7 Benefit payments (6.2)

(6.0)

(6.0)

Fair value of plan assets at December 31

$134.7

$152.3

$149.7 Funded status at December 31

$(41.5)

$ 49.7

$ 14.5 Unrecognized transition (asset) obligation (12.4) 15.7 36.6 Unrecognized prior-service cost (12.9)

(14.1) 3.9 Unrecognized (gain) loss 14.4 (96.9)

(105.0)

Net accrued benefit liability

$ (52.4)

$ (45.6)

$ (50.0)

WSRS I OURCES 0OP RTO

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The oiloviun-table provides the components of ne-period c benefit cost for the plans for tne ore-year periods ended DeceIhber 3!, 200 1. 2000, ard 1999:

(Milions)

Net periodic benefit cost - pension Service cost

$11.0

$10.2

$10.9 Interest cost 32.7 31.5 27.5 Expected return on plan assets (47.0)

(46.3)

(42.4)

Amortization of transition asset (3.5)

(3.6)

(3.6)

Amortization of prior-service cost 5.5 4.7 2.1 Amortization of net gain (2.3)

(2.7)

Net periodic benefit cost before settlement gain/curtailment loss

$ (3.6)

$(6.2)

$(5.5)

(Settlement gain)/curtailment loss (12.7) 8.7 Regulatory liabilityi(asset) offset 11.8 (8.!)

Net periodic benefit cost

$(4.5)

$(5.6)

$(5.5)

Net periodic benefit cost - other Service cost

$ 3.0

$ 2.7

$ 4.6 Interest cost 7.6 7.8 9.4 Expected return or plan assets (9.7)

(9.3)

(8.3)

Amortization of transition obligation 1.3 1.8 2.8 Amortization of p-ior-service cost (1.2)

(0.7) 0.3 Amortization of net gain (4.6)

(4.6)

(2.7)

Net periodic benefit cost

$ (3.6)

$(2.3)

$ 6.1 Dui no 2000, ",., PS Resources mnade sbstantiai cnanges to the ad-tinlst,-atve emp oyees portion of the pension ard postretirement benefit placs. Effectrve jarua> 1, 2 001,-he admirs-rsa-ive employees' persion plar was changed to a per son eqaity plar v.th a ajmp sum distribution optior for alI fuLiure reaiees. Accdionally, all future administrative retirees I no orger be gC.er subsidized post-etirement medical and cental coverage. Due -o emp oyees Who waired until 2001 to retire to take o

0 che rew Clan benefits and variois reorianizations inctlcing tte formation of Nuclear Manage,-ient Company. a s cn ficant number of emnloyees left our pensior ran M early 2_OC'. Th s requred cur-ailment accounting for the year 2000 under Statement of Financial Accounting Standards No. 88, "Employers' Accounting for Settlements ane Curtailments of Defined Benefit Pension Pans and for Termination Benefits." Most of -he 2000 curtailment loss was deferred as a regulatory asset, For the reasons mentioned above, !arge numbers of lump sum oayments were paid out of the persion plar during tre course of 2001. This required se-lemernt accounting under Statement No. 88. Most of the settlement gain was deferred as a regulatory liarility, The assumptions used in measuring \\'/PS Resources' benefit obligation are shown in the following table:

2001 2000 1999 Weighted average assumptions as of December 3] - pension Discount rate 7.25%

7.50%

7.50%

Expected return on plar assets 8.75%

8.75%

8.75%

Rate of compensation increase 5.50%

5.50%

5.50%

Weighted average assumptions as of December 31 - other Discount rate Expected return on plan assets 7.25%

8.75%

7.50%

7.50%

8.75%

8.75%

Jtl[lll

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Fo' the December 3, 2001 disclosed pOStretiement obligation, we assumed medical COST trend rates of I C!% fo those under age 65 and re1 for those over age 65, decreasing to 5c ard 6,5%. oespectively, by the year 2008.

\\/Ve assumed dental cost trend rates of 8% decreasing to 5/C by -he yea' 200A. These trend rates represent a charge from our prior assumptions, At December 31. 1999, we assumed medical cost trend rates of 8% and dental cost treic rates of 7.5%, both decreasing to 7% at December 31, 2000 and eventually reaching 5% by 2006. Assumed health care cost tiend rates iave a sgnfican -effect or the amounts reoirted for 1he health care plans. A I% change in assumed health care cost trend 'ates woulc have the following effects:

(Millions)

Effect on total of service and interest cost components of net periodic postretirement health care benefit cost Effect on the health care component of the accumulated postretirement benefit obligation I% Increase I% Decrease

$ 1.8

$26.0

$ (IA)

$(21.8)

A P 0 \\X, E rD U L E Q J A O IN VWisconsin Public Se.i /ice )as ar Employee Stck Ownership Plan that -elc [.9 milion shares of \\/PS Resources common Stock (market value ofapproximately S69.2 million) at December 31, 20.

Tie Employee Stock Ownership Plan also had a loan cuar anteed by \\,s\\/!sons n Public Seorice and secured by common stock that was pad off rn June of 2000.

The company was paying principal and interest on tre loan usi-ig contributions fror Wisconsin Pubic Sevice anic divdencs on our common stock held by tie Err:Doye)

Stock Ownersnip Pan. The Employee Stock Ownershiu Plan allocated shares to parlicipants as the loa-i,va repaicd Tax berefits from certain dividerds aid to the Employee Stock Ownership Pla-i are recognized as a reduction ii Wiscorsi Public Service's cost of provicing service to c-stomers.

NOTE 16-COMPANY-OBLIGATED MANDATORILY REDEEMABLE TRUST PREFERRED SECURITIES OF SUBSIDIARY TRUST On July 30, 1998, WPSR Capital Trust i, a Delaware nusiness trust, issued S50.0 million of trust preferied securities 70 the public. WPS Resoueces owns all of the outstanding trus common securities of the -ust, and the only asset of the Tirust ls $5 1,5 million of subordinated debentures that ve issued. The debentures are due on June 30, 2038 and bear nterest a' 7%a per year The terms and interest payments on the debentures correspond 7o the terms and distributions on the trust pre0erred seouri ies. 'vVe have consolidated the preferred securit es of nhe Trust into our finiancial statements.

WVe ref ect the nterest uayments on the debentures as "Distnibutions - preiered securities of subsidiary trust."

These payments are tax deductible by \\A/PS Resources, We may defer interest payments on the debentures for up to 20 consecutive quarters. This would require tie deferral ol cis i butions on tl1e trust prefe-'ed securities as well. If we would de'er nteresr paiments, interest aid distributions would continue to accrue anic comouiding interest on -he ceferred amoiunts woulc aso accrue. Through 200 i, we have not deferred interest payments. Aftei July, 30, 2003, we may receem 0 or part of the cebertures, This would require the T-0 sý to redeem an equal amount of trust securiries at face value plus ani accrued rteresi aid unioaid distributions. We entered into a mi-ned Cluarantee of payment of disti butions, recemptLion paymerts, aid Iquicatior payments with respect to the trust preierred securities.

This guarantee, onether wit i our obligations unde r the debentures, and under otier relatec documents, :roeVldes a fill and unconditioral guarantee by us of amounts cue on the outstanding itust Preferred securities.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 17-COMMON EQUITY Shares outstanding at December 31 2001 2000 Common stock, $1 par value, 100,000,000 shares authorized 31,496,296 26,851,034 Treasury stock 307,052 336,385 Average cost of treasury shares

$25.17

$24.23 Shares in deferred compensation trust 135,995 105,179 Average cost of deferred compensation trust shares

$30.67

$29.78 As part of the rerger of Wisconsin Fue' and Light into Wisconsin Public S'-v>ce, 1,763,943 shares of common smock ere issuec on Apr ii 200 to Wiscons n Fuel and Lioht shareholders. See Note 6 for more irformation on -he meriger.

On December i1, 2001. 2,300.000 shares of WPS Resources common stock were issued at S34.36 per share and resultec in net increase in equity of $76.0 million, ffective Jana- '0 01, we began issuing new stock unde our Stock Irvestment Pan and under certain of our stock nased emp~oyee benefit plans. During 2C01, we issued 544,5 15 shares udcer <hese plans, which increased equity S 186 miillon.

In December 1996, we adopted a Sharetoider Rights Plan. The nan is ces gned to enhance the ability of the Board of Diredors to protect sharenolcers and the company if efforts are mace to gai control of our company in a manner

.hat is not in our best nterests or the best inte-ests of our shareholders. The nat gives our existing shareholders, under ceotain circumstances, the right to purchase stock at a discounted price. The nights expire on December I!, 2 00 6.

NOTE 8--STOCK OPTION PLANS In May of 2001, st-areholders approved the WPS Resources Corporation 2001 Omrnius Incentive Compensation Plan for certain manacement personnel. In 1999, shareholders approved the WPS Resources Corporation 1999 Stock Option Plan for cer.a n management personnel. In December 1999, the Board of Directors approved the WPS Resources Corporation l999 Non Employee Directors Stock Option Plan. Opinion 25 and related interpretations are usec to account for these plans. Accordingly, no compensation costs have been recognized for these plans in 2001, 2000. or 1999.

Had compensation cost been determined consistent with Financial Accounting Standards Board Statement of Financial Accounting Szandards No. 123, 'Accounting for Stock Based At December 31, 2001, we had $365,8 million of retained earnings avaiiabne or dividends.

Earnings per share is computed by dividing net income availabre for common shareholders for the period by the weighted average number of shares of common stock outstanding during the period, Diluted earning per share is computed by dividing net income availabne for common shareholders for tne period by the weignhed average number of stares of common stock outstanding during the period adjusted for the exercise and/or conversion of all potentially dilutive securities. Such dilutive items incluce in-the-money stock options and deferred compensation plan stares. The calculation of diluted earrings per share for the years shown excludes deferred compensat on plan shares and some stock option plan shares that had an anti-dilutive effect.

The foilowing table reconciles the computation of basic and diluted earnings per share:

Reconciliation of Earnings Per Share (Millions, except per shore amounts) 2001 2000 1999 Net income available to common shareholders

$77.6

$67.0

$59.6 Basic weighted average shares 28.2 26.5 26.6 Incremental issuable shares 0.1 Diluted weighted average shares 28.3 26.5 26.6 Basic earnings per common share

$2.75

$2.53

$2.24 Diluted earnings per common share

$2.74

$2.53

$2.24 Compensation,' net income and earnings per share would have been reduced to the pro forma amounts indicated below:

(Millions, except per share amounts) 2001 2000 1999 Net income As reported

$77.6

$67.0

$59.6 Pro forma 77.3 66.8 56.5 Basic earnings per common share As reported Pro forma Diluted earnings per common share As reported Pro forma

$2.75

$2.53

$2.24 2.74 2.53 2.23

$2.74

$2.53

$2.24 2.73 2.52 2.23 0

• E***'

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Under the provisions of the 2001 Omnibus Incentive Compensation Planr die rumber of shares for which stock options may be granted may not exceed 2 million and no single employee that is the chief executive officer-of the company or any of the other four highest compensated officers of the company and its subsidiaries can be granted options for more than n50.000 shares during any calendar yeai. Stock options ame granted by the Compensation and Nominating Committee of the Board of Directors and may be granted at any time. No stock options will have a term longer than ten years. The exercise price of each stock optior is equal to the fair market value of the stock on the date the stock option was granted. Stock options were granted under the 1999 Stock Option Plan on February I.1999 (subject to snareholder approval of the 1999 Stock Option Plan that was received on May 6, 1999, at which time the exercise price was established for the initial grant), March 13, 2000, and December 14. 2000 having exercise prices of $2 9.875,

$23. [875, and $34,75, respectively. Stock options were granted under the 200l Omnibus Plan on Jaly 12, 2001 and December 13, 200 having exercise prices of $34.38 and

$34,09. respectively. One-fourth of the stock options granted will become vested and exerc sanle each year on the anniversary date of the grant, No additional stock options wil be issued under the i999 Stock Ontion Plan, although tne plan will continue to exist for purposes of the existing outstanding options, Under the provisions of the [ 999 Non-Emp!oyee Directors Stock Option Plan, tne number of stock options granted under the plan may not exceed 100.000, and -he snares to be delivered will consist solely of treasury shares.

Stock options are granmed at the discretion of the Board of Directors. No options may be oranted under this elan after December 3, 2008. Ail options have a ten year life, but may not be exercised until one year after the date of grant. Options granted under this plan are immediate.y vested, The exercise price of each option is equal to -he fair market value of the stock on the date the stod. options were granted. Options were granted on December 9, 1999 and February 10, 2000, with exercise prices of $25.4375 and $25.6875, respectively.

The number of shares subject to each stock option plan and each outstanding stock option, and stock option exercise prices are subject -o adjustment in -he event of any stock split, stock dividend, or other transaction affecing our outstanding common stock.

The fair value of each stock the date of g-ant using the Black model assum ng:

oDtion grant is estimated on Scho es stock option pricing WPS Resources Corporation 2001 Omnibus Incentive Compensation Plan Annual dividend yield May 6, 1999 December 31, 1999 March 13, 2000 December 14, 2000 July 12, 2001 December 13, 2001 Expected volatility May 6, 1999 December 31, 1999 March 13, 2000 December 14, 2000 July 12, 2001 December 13, 2001 Risk-free interest rate May 6, 1999 December 31, 1999 March 13, 2000 December 14, 2000 July 12, 2001 December 13, 2001 Expected life (in years)

WPS Resources 1999 Stock Option Plan 6.63%

8.71%

5.93%

WPS Resources 1999 Non-Employee Directors Stock Option Plan 7.94%

6.58%

6.60%

14.00%

15.50%

20.40%

14.90%

20.93%

20.19%

5.52%

6.36%

5.23%

5.54%

5.62%

I0 i0n1 in 6.14%

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A summary of tie statjs o-the stocD< option plans as of December 31 2001 is presented below:

Weighted-Average Stock Options Shares Exercise Price Options outstanding at beginning of year Omnibus plan Employee plan 722,416 30.9322 Director plan 24,000 25.4688 Granted during 2001 Omnibus plan 327,927 34.1038 Exercised during 200 1 Employee plan 16,500 34.7394 Director plan 850 34.8400 Forfeited during 200 1 Outstanding at end of year Omnibus plan 327,927 34.1038 Employee plan 705,916 30.9806 Director plan 23,150 25.4699 Options exercisable at year-end Employee plan 283,604 30.6072 Director plan 23,150 25.4699 Weighted-average fair value of options granted during the year Omnibus plan

$3.23 A sun'mai,, of t-.e s-atss of the stock oD Jon plans as of December 3. 2000 is Dresented DeloN:

Weighted-Average Stock Options Shares Exercise Price Options outstanding at beginning of year Employee plan 478,000

$29.8750 Director plan 21,000 25.4375 Granted during 2000 Employee plan 244,416 32.9997 Director plan 3,000 25.6875 Exercised during 2000 Forfeited during 2000 Outstanding at end of year Employee plan 722,416 30.9322 Director plan 24,000 25.4688 Options exercisable at year-end Employee plan 119,500 29.8750 Director plan 21,000 25.4375 Weighted-average fair va4ue of options granted during the year Employee plan

$3.87 Director plan

$1.08

E R R 2 U L E

iOUAT 1

N NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A summary of the status of tVe stock option plans as of December 3 1a99 is presented Delo\\v:

Stock Options Options outstanding at beginning of year Granted during 1999 Employee plan Director plan Exercised during 1999 Forfeited during 1999 Outstanding at end of year Employee plan Director plan Options exercisable at year-end Weighted -average fair value of options granted during the year Employee plan Shares 478,000 21,000 478,000 21,000 Weighted-Average Exercise Price 29.8750 25.4375 29.8750 25.4375

$2.04 Director plan S1.38 The stock options outstanding a7 December 3, 2001 under the 2001 Omrirus Plan -or an agregoate of 327,327 shares have exercise prices of $34.38 and $34.09 and are summarized be ow:

2001 Omnibus Plan Options Outstanding Exercise Options outstanding Weighted-average Weighted -average remaining prices at December 31, 2001 exercise price contractual life (in years)

$34.3800 15,572 S34.3800 10 34.0900 312,355 34,0900 10 None of the 2001 Omnibus Pan stock options are currently exercisable, The stock ontions outstarding at December 31, 2001 under the 1990 Stock Optior' Plan for an agreiate of 705,916 Shares have exercise prices between S23,1875 and $34.7500 and are surnmarnzed below:

1999 Stock Option Plan Options Outstanding Exercise Options outstanding Weighted-average Weighted-average remaining prices at December 31, 2001 exercise price contractual life (in years)

$23.1875 34,500

$23.1875 8

29.8750 464,000 29.8750 8

34.7500 207,416 34.7500 9

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The stock opt ons outstanding at December 31, 2001 exercisable under the 1999 Stock Option Plan for an agoregate of 283,604 shares have exercise prices of

$23.1875, $29.875C, and S34.7500 and remaining lives ot 8. 8, and 9 years.

The stock options outstanding at December 31, 2001 under the 1999 Non-Emp oyee Director Stock Option Pan for an aggregate of 23, 150 shares have exercise prices of

$25. 4 3 7 5 and $25.6875 and are summarized below:

1999 Non-Employee Director Stock Option Plan Options Outstanding Exercise Options outstanding at Weighted-average Weighted -average remaining prices December 31, 2001 exercise price contractual life (in years)

$25.4375 20,150

$24.4375 8

25.6875 3,000 25.6875 8

All ý-emaining stock options granted undee the 1999 Non Employee Stock Option Director Plan for-an aggregate of 23. 150 shares are exercisable at year end at the above refererced exercise prices NOTE 19-REGULATORY ENVIRONMENT Wisconsin Public Service filed for and received an interim rate order in the Wisconsin jurisdicion effective January I. 2002.

The order autho.ized a S55,5 mli ion increase in electric revenues and an increase of $ 11.2 million in gas revenues on an annual bas s. The -everues are based on a 12. I% return on utility common ecuity, wi-h equi-v constituting 55% of the capital structure. These revenues are subece to refutd to the extent that they exceed 7he revenues authorized in the final rate order. The inter rr rates vi!l be supersedec when a final NOTE 20-SEGMENTS OF BUSINESS

\\A/e marage oLr -eportable segments separately due -o their dicnrernt operating and regulatory environments. Our principal business segments are the regulated electric utility operations of \\/isconsin PuNbic Service and Upper Peninsula Power and the regul.ated gas utility operations o-Wisconsin Public Service. Our otter reportable segments include WPS Ererg, Services and WPS Power Development.

-ate order is issued in this case which is expected early in the second quarter of 2002.

Upper Peninsula Power's application for a $5.7 miliion rate increase, which had been pending before the M chigan Puolic Service Commission since October 2000, was dismissed in August 200 at Upper Peninsula Power's request. Upper Peninsula Power requested a dismissal because the information filed in the case was outdated.

Upper Peninsula Power expects to submit a new app icatior

• or rate increases in 2002.

WPS Energy Services is a diversified ee'-gy supply and services company, and WPS Power Development is an electric generation asset development company, Nonutii ty operations and subsidiaries of WPS Resources not already mentioned are included in the Other column. The tables on the next page present information for the respective years pertaining to our operations segmented by lines of business.

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\\X/ E, F U L E Q U AT 1 0 N

Segments of Business (Millions)

Nonutility and Nonregulated Regulated Utilities Operations Electric Gas Total WPS Energy WPS Power Reconciling WPS Resources 2001 Utility*

Utility*

Utility*

Services Development Other Eliminations Consolidated Income Statement Total revenues

$ 675.7

$321.6

$ 997.3

$1,575.1

$141.5 1.3

$(39.7)

$2,675.5 Depreciation and decommissioning 66.4 11.7 78.1 0.7 7.4 0.4 86.6 Other income (expense) 14.5 0.2 14.7 1.1 2.8 28.1 (9.2) 37.5 Interest expense 28.3 6.0 34.3 0.2 10.3 22.8 (8.3) 59.3 Provision for income taxes 31.6 5.9 37.5 4.0 (34.8)

(1.8)

(0.1) 4.8 Income available for common shareholders 58.8 8.9 67.7 6.4 2.3 1.3 (0.1) 77.6 Balance Sheet Total assets 1,356.8 375.2 1,732.0 720.1 323.1 167.7 (72.9) 2,870.0 Cash expenditures for long-lived assets 175.8 24.9 200.7 10.9 32.1 5.0 248.7 Includes only utility operations. Nonutility operations are included in the Other column.

Segments of Business (Millions)

Nonutility and Nonregulated Regulated Utilities Operations Electric Gas Total WPS Energy WPS Power Reconciling WPS Resources 2000 Utility Utility*

Utility*

Services Development Other Eliminations Consolidated Income Statement Total revenues

$ 642.7

$264.5

$ 907.2

$955.6

$128.1 1.2

$(43.1)

$1,949.0 Depreciation and decommissioning 82.4 8.9 91.3 1.4 6.7 0.5 99.9 Other income (expense) 18.1 0.1 18.2 0.9 1.0 9.7 (9.6) 20.2 Interest expense 27.3 4.8 32.1 0.4 10.9 20.7 (9.8) 54.3 Provision for income taxes 33.6 7.6 41.2 0.9 (29.2)

(6.9) 6.0 Income available for common shareholders 60.7 1 1.6 72.3 1.7 0.9 (7.9) 67.0 Balance Sheet Total assets 1,239.0 305.5 1,544.5 924.9 233.1 178.0 (64.4) 2,816.1 Cash expenditures for long-lived assets 138.0 21.5 159.5 0.3 39.0 0.3 199. 1 Includes only utility operations. Nonutility operations are included in the Other column.

Segments of Business (Millions)

Nonutility and Nonregulated Regulated Utilities Operations Electric Gas Total WPS Energy WPS Power Reconciling WPS Resources 1999 Utility*

Utility" Utility*

Services Development Other Eliminations Consolidated Income Statement Total revenues

$ 590.4

$191.5

$ 781.9

$292.2

$ 35.4

$ 5.7

$(16.7)

$1,098.5 Depreciation and decommissioning 70.9 8.2 79.1 1.0 3.3 0.3 83.7 Other income (expense) 7.2 0.1 7.3 (0.2)

(0.3) 5.7 (3.6) 8.9 Interest expense 24.0 4.5 28.5 0.3 4.6 1 1.3 (8.5) 36.2 Provision for income taxes 32.0 7.4 39.4 (2.6)

(4.7)

(2.4) 29.7 Income available for common shareholders 56.1 1 1.2 67.3 (3.5)

(3.8)

(0.4) 59.6 Balance Sheet Total assets 1,247.9 267.4 1,515.3 64.8 190.2 184.3 (138.1) 1,816.5 Cash expenditures for long-lived assets 120.9 19.8 140.7 0.1 132.1 0.3 273.2 Includes only utility operations, Nonutility operations are included in the Other column.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 21 QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

(Millions, except for per share amounts)

Three Months Ended 2001 March June September December Total Operating revenues

$997.4

$577.2

$517. I

$583.8

$2,675.5 Net income

$ 23.6

$ 11.7

$ 21.8

$ 20.5 77.6 Average number of shares of common stock 26.5 28.6 28.7 29.2 28.2 Basic earnings per share *

$0.89

$0.41

$0.76

$0.70

$2.75 Diluted earnings per share *

$0.89

$0.41

$0.76

$0.70

$2.74 2000 March June September December Total Operating revenues

$398.8

$374.2

$456.9

$719.1

$1,949.0 Net income

$ 29.2

$ 11.4

$ 12.9

$ 13,5 67.0 Average number of shares of common stock 26.6 26.4 26.4 26.4 26.5 Basic earnings per share

$1.10

$0.43

$0.49

$0.51

$2.53 Diluted earnings per share

$1.10

$0.43

$0.49

$0.51

$2.53 Because of various foctors, which affect the utility business, the quarterly results of operations ore not necessarily comparoble.

Earnings per share for the individual quarters of 2001 do not total the year ended 2001 earnings per share amount because of the significant changes to the average number of shares outstanding throughout the year.

NOTE 22-NEW ACCOUNTING STANDARDS Effective January 1, 2002. WPS Resources adopted Statement of Financial Accounting Standards No, 142_

"Goodwill and Oher intangible Assets." Under Statement No. 142, amo-tizatior of goodwill s no longer allowed.

Instead, an assessmert of fair value,,ill be usec to test for impairment of goodwill on an annual basis or when circumstances incicate a possible impa rment.

Nost of -he goodw:,v' at WPS Resources is related to the Wisconsin Fuel and Light acquisition. in accordance with the requirements of toe statement, we prepared an evaluation of the fair market,,Le of the gas utility business segment to assess tie potential Mrairment of tne goodwill balance, Based on the estimated :a-i vaiue, an impairment charie was not required at January !, 2002 In June 2001. the Financial Accounting Standards Board finalized Statement of Financial Accountirg Standards No. 43,

'Accounting for Asset Retirement Obligations" This statemeni applies to all ertnie. wth legal obligations associated with the retirement of a tangible long-lived asset -hat result f-om the acquisition, construction, or development and/or norma operation of a long-lived asset. An asset retirement obligation should be recognized wvnen it meets the definition of a liability and be measured at fair value. We are still analyzing the impact this statement will have on WPS Resources and its subsidiaries. It will be effective for WPS Resources on january 1, 2003.

Effective January I. 2002, we adopted Statement of Finarcal Accounting Standards No. 144, 'Accounting for the Impairment or Disposal of Long-Lived Assets." The statement intends to unify the accounting for long-lived assets to be disposed of, based on the framewoirk established by Financial Accounting Standards No. 121. Accounting -or the mpairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." The statement didn't have a sionificant impact or WPS Resources.

A POWt RFUL EQUAT ON REPORT OF MANAGEMENT

0.

WPS Resources Corporation The management of WPS Resources Corporation has prepared and Is responsible for the consolidated financal statements and related financia. information encompassed in this Annual Report. Our consolidated fnancial statements nave been prepared in conformity with generally accepted accounting principles, and financial information included elsewhere in this report is consistent with our consolidated financial statements.

We maintain a system of internal accounting control designed to provide reasonable assurance that our assets are safeguarded and that transactions are executed and recorded in accordance with authorized procedures. Written policies and procedures have beer developed to support the internal controls in place and are updated as necessary.

We also maintain an internal auditing department that reviews and assesse the efectiveness of selected internal controls, and reports to management as to their findings and recommendations for improvement.

Our Boarc of Direcors has established an Audit Committee, comprised entirely of outside directors, which actively assists our Board in its role of overseeing our financial reporting process and system of internal control.

The accompanying consolidated financial statements have been audited by Arthur Andersen LLP independent public accountants, whose report follows.

arry L Weyers Chairman, President, and Chief Executive Officer Josp 10 OLeary Senior Vice President and Chief Financial Officer Diane L. Ford Vice President - Controller and Chief Accounting Officer REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

1) q-

.ANDERSEN To the Board of Directors of WPS Resources Corporation:

We have audited the accompanying consolidated balance sheets of WPS Resources Corporation (a Wisconsin corporation) and subsidiaries as of December 3 1, 2001 and 2000, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 3 I, 200. These financial statements are nhe responsibility of the Company's management, Our res onsibility is to express an opinion on these firancial statements based on our audits.

We conducted our audits In accordance with auditing standards generallv accepted in 7he United States. Those standards require that we plan and perform tne audit to obtain reasonable assurance about whether the financial statements are fee of material misstatement. An audit incdudes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.

An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present farly, in all material respects, the financial position of WPS Resources Corporation and subsidiaries as of December 31, 200 1 and 2000, and the results of their operations and Their cash flows for each of the three years in tne period ended December 31. 200 !

in conformity with accounting principles generally accepted in the United States.

Arthur Andersen LLP Milwaukee, Wisconsin January 28, 2002 0PS RERE C

• OAPOR S

FINANCIAL STATISTICS Year Ended December 31 (Millions, except per share amounts and number of employees) 2001 2000 1999 1998 1997 Total operating revenues

$2,675.5

$1,949.0

$1,098.5

$1,063.7

$ 935.8 Net income 77.6 67.0 59.6 46.6 55.8 Total assets 2,870.0 2,816.1 1,816.5 1,510.4 1,435.8 Preferred stock of subsidiaries 51.1 51.1 51.2 51.2 51.6 Long-term debt and capital lease obligation 727.8 660.0 584.5 343.0 347.0 Shares of common stock less treasury stock and shares in deferred compensation trust Outstanding at December 31 31.1 26.4 26.8 26.5 26.5 Average 28.2 26.5 26.6 26.5 26.5 Basic earnings per average share of common stock

$2.75

$2.53

$2.24

$1.76

$2.10 Diluted earnings per average share of common stock 2.74 2.53 2.24 1.76 2.10 Dividend per share of common stock 2.08 2.04 2.00 1.96 1.92 Stock price

$36.55

$36.8125

$25.125

$35.25

$33.8125 Book value per share

$23.06

$20.75

$20.16

$19.61

$19.56 Return on average equity 12.8%

12.3%

1 1.3%

9.0%

10.8%

Number of common stock shareholders 23,478 24,029 25,020 26,319 27,369 Number of employees 2,856 3,030 2,900 2,673 2,902

A P0W E FU L E Q UA NT 0 IN LEADERSHIP STAFF BARBARA A. NICK Manager - Corporate Services Ace 43/Years of service 17

, i:t(

} :: L II i I ',iJII

• V C

.j.'/'

ý'.

WILLIAM L. BOURBONNAIS, JR.

Manager - Rates anc Ecoromic Evaluation Age 56/Years of service 33 DONALD R. CARLSON Manager Energy S LDpy and Control Age SIiYears of service 26 CHARLES A. CLONINGER Reioral Customer Service Manager Age 43/Years of serice 20 HOWARD R. GIESLER Manage-- Pulliam Plant Age 3E/Years of serxvice 5

RICHARD J. BISSING D rector of Sales - Wisconsin Age 41 /Years ofse-xice I" JOHN T KEENAN Director roducer Pricing Structures Age 48/Years of service 2 ALAN M. BARGENDER P!ant Manager - Sunbur, Age 3/Years of servxce 16 MICHAEL W. CHARLES Assistant to President A~e S2/Years of service 24 JERRY A. JOHNSON Manager - information Services Age 52/Years of sevice 29 RANDALL G. JOHNSON Manager - Coiorate Transformation Age c4/Years of service 31 TIMOTHY J. KALLIES Manager - Customer Care Age 42!ear s of service 18 PAULJ. LIEGEOIS Utility Business Development Leader Age 5I/Years of service 28 DENNIS J. MAKI Maciager V/Vestor Part Ace 53iYears of service 31 CHRIS E. MATTHIESEN Director - Energy Supply Cost Management Age 4S/Years of service 22 DEBRA L. MC DERMID "Marager - Customer Serv ice and Business System Opeeation Age 45/Years oý service 22 JOHN K. MORTONSON D rector - Asset Management Age 44/Years of service 19 LEONARD J. RENTMEESTER General Manager - Engireeirng Services Age 36/Years of service 8 ROGER M. MC CAMBRIDGE Regioral Custone Service Manager Age a6/Years ol seaice 17 DALE N. MILLER Regional Customer Service Manager Age 56/Years of service 31 EDWARD N. NEWMAN Director-Environmental Services Age 59!Years o'service 27 DALE M. QUINN Manager - Substation ard Transmission A4e S6/Years of se ice 30 MICHAEL I. RADTKE "Ma1acer - Electric D stri'ation Erng ceering Age 47/Years of se-ce 23 JACK C. RASMUSSEN Manage - - Purchasir'g and Store, Age 54/Yea s of serice 31 PETER] JVAN BEEK Regional Cstomerrr Serv ce Maiager Age 56.e"Years of service 33 RALPH P ZAGRZEBSKI Reg onal Customer Service Manager Ace -7"'Years of service 35 BRUCE A. RIZOR Diector - Wholesale Pricing Structures Age 40/Years of servce 2 RICHARD J. SUSLICK Director - Power Developmert Ace S8/Years of service 10 GARY W. ERICKSON Regional Custome er-rve Vanager Age S9/Years o0 seovice 33 Titles, age, and years af service are as of December 31, 2001.

Years of service take into consideration service with WPS Resources Corporation or a system company.

WIP 0tb-11t

• • • 0*TI

BOARD OF DIRECTORS

-A3/4 A. DEAN ARGANBRIGHT (Age 7 I)

OshkosN.

cViscarsir)

Recired Charran, P-e dert, aId & ef IExeQCtve OIs ce Wisconscn Naieoal L,`e Insuranie CorpErny (Directo-since 1972)

MICHAEL S. ARIENS (Age 70 c

Bdllion,VWisconýsin c0airmar Ah-ens Company cD'recto simce 974)

RICHARD A. BEMIS (Age 60)

Sheboyean Falls, Wisconsir R-esiden and Cief Executive Officer Bemis "anufactur ng Company (D ector since !983, ROBERT C. GALLAGHER

,Age 63)

Greer Bay,. V,,iscor'si::

Presdelt and Cl" ef - xe o,t

,,e Officer Associatec Banc-Co,

'Dir-ector since 1992'I

'4 1/4 Cu S

JOHN C. MENG (Age 57)

Gieen Bay. \\AiSN CO s ChaiOrn ofehe oce' Schreiber Foocs, nc.

(Directo' sircce 2000" KATHRYN M.

HASSELBLAD-PASCALE "AgC 5 3 Green Bay 'e',scosin Ma ýlagir'g DtL 71asselb'ad MaYhine Coevai,', LLP (D

r s 987

,/

- 4,,

WILLIAM F. PROTZ, JR.

NoHtnfeid.! I Iois President and Cref Execut ve 0, cer Santa's Best

'Director sirce 2,0I1)

JAMES L. KEMERLING

,Age 62)

VWasau. VNisconsin Preside't a rd Chef ExcL.ive O.

a er Riiser Oil Com pany, anc (Dirctor since 1988)

LARRY L. WEYERS (Age 56¢a Green Bay, ",sconsin Crairman. Presidert. aac Cref Executve Ocer WtPS Resoerces Corporation (Director s ce 1996)

'A

I A P 0 W E R F U L E Q U AT I O N

OFFICERS WPS Resources Corporation LARRY L. WEYERS Chairman, Presicert, and Chief Executive Officer Age S6iYears of serCvce 6 PATRICK D. SCHRICKEL Execu ive Vice President Age 5T/Yearis of servire 35 RALPH G. BAETEN

• Seniar Vice President Finarce and Teasure, Age 58c/Years of service 31 THOMAS P MEINZ Senior Vice Presicert - Pblic Affairs Age 55iYears of serice 32 PHILLIP M. MIKULSKY Serior Vice Piesident - Deveop ment Age 53/Years of service 30 JOSEPH P O'LEARY Senioa Vice Presidet ard Chief Fina[cial Ocicec Age 47/Years o-service r

BRADLEY W. ANDRESS Vice aPDrciert Marketing Age "7iYea-s o' sevice 3 DIANE L. FORD V/ice President - Coatrol eCr a Chief Account ng Offiaer Age 48iYears of service 26 RICHARD E. JAMES Vice President Corporate PlaCD ig Age 48/Years ofse-vice 26 NEAL A. SIIKARLA Vice Presieent Age 541Years of service 3 BERNARD J. TREML Vice President - Human Resoirces Age 52/Years of sevice 2 9 GLEN R. SCHWALBACH Assistant V ce Piresident Corporate Plariryg Age 56/Years o' ses ce 33 BARTH J. WOLF Secr eta-y anc Manager-Legal Se,,aices Age +/Years of service 13 BRADLEY A. JOHNSON Assistart Treasirer A2e 77/Years of se-vice 22 Wisconsin Public Service Corporation LARRY L. WEYERS Chairman and Chief Executive Officer Age 56,iYea-s oa service 16 PATRICK D. SCHRICKEL Presicent and Chief Operatirg OFcea Age S5Years of serice 35 RALPH G. BAETEN.

Seaior Vice Presicert - Finance avd T-easurer Age 58iYears of service 31 THOMAS P MEINZ Seior aice a Presdent - Public Affairs Age 5S/Years of service 32 JOSEPH P O'LEARY Senior V ce President and Chief Francial Officer Age 47/"Yeams of service I LAWRENCE T BORGARD Vice Dresident - Distributior ad CustomrerSerice Age 40iears of seavice a7 DIANE L. FORD Vice President Coenroler anid Caief Accunting Offtcer Age 48iYeaas of seace 26 BERNARD J. TREML Vice Presidert-H-mar Resoarces Age 52/ ears of service 29 DAVID W. HARPOLE Ass stoat Vice Presicent -

5re-gy SpCcly Age 4'/Years of service 24 BARTH J. WOLF Secireta7 and Varager Legal Serices Age 44/Years of searce 13 JEROME J. MYERS

/Asistant l-easuaer Age 56,Yeaas of service 33 PHILLIP M. MIKULSKY Chie' Executive Ofice, Age 5Fr,/ears of service 30 MARK A. RADTKE President Age 40/Years of sera cc DAN I E L J. VE RBANAC Serior Vice President Age 38/Years of servlce 17 DARRELL W BRAGG Vice Fr"trernt Age 42/Years of service 6 BETTY J. MERLINA Vice "residena Ag e /Years of serice 6 RUQAIYAH Z. STANLEY-LOLLES Vice Pres deit Age 47.Years oa seavice 3 BARTH J. WOLF Se-eta, Age 44/Years o' service 13 RALPH G. BAETEN Tieasirer Age 581ears of sarvice 31 GREGORY C. LOWER aontroller Age 471Years of "eovice I GERALD L. MROCZKOWSKI "Cmiaý Executive Oficer Age a6,Years of seavce 33 CHARLES A. SCHROCK

ý'i-esicert Age 4S/Years of ser,'ce 22 TERRY P JENSKY Vice Pr esident - Oper tioas Ace 48/Yea-s ol service 24 BARTH J. WOLF Sec re tar" Age L4!Vears of sarvice 13 RALPH G. BAETEN' T-easu ar Age 58/Years of aerice 31 GEORGE R. WIESNER Coatoi er Age 44/Yea's oa sevice 7 PATRICK D. SCHRICKEL C~airman Pr-esident, and Ch efI Excuive t Oficer Age 57,iyearýs of ser-vice 35 BARTH J. WOLF Secre-ary A'ce 44'Vea s o' se rvice 13 RALPH G. BAETEN A T-easurer Ag" b8iYears of s arvi"c

-)

PAMELA R. CLAUSEN Assistant Cantroaler Age 5 /Years of service 1 4

' Retired February 28, 2002.

Titles. age, and years of service are as of December 3 1, 2001.

Years ofservice take into consideration service with WPS Resources Corporation or a system company.

SHAREHOLDER INFORMATION Shareholder Inquiries Our Sharehclcer Services staff (bottom of next page) can be reached via teleptone between tne hours of 7:30 a.m.

and 4:30 p.m-central time, Monday through Friday by calling 920-433- :00 or 800-236-1551.

Addresses and acdicional telephone numbers are listed on -he back cover o--his repor.

Common Stock The New York Stock Exchange is the principal market for WPS Resources Corporation common stock which trades under the ticker symbol of WPS.

You may purchase or sell our common stock through our Stock Investment Plan described below or through brokerage firms and banks whicl offer brokerage sevrces.

Common stock certificates issued before September I, 1994 bear the name of Wisconsin Public Service Corporation and remain valid certificates.

Effective December 16, 1996, each share of our common stock has a Rioht associated with it which would entitle the owner to purchase additiona, shares of common stock under specified te~rs and conditions, The Rights are not presently exercisable. The Rghts would become exercisabie ten days after a person or group (1) accuires 15% or more of WPS Resources Corporation's common stock or (2) announces a tender offer to acquire at east a 3

of WPS Resources' common stock.

On Decemuer 31, 2001, we had 3 1.182,878 shares of common stock outstanding which were owned Dy 23.478 holders of record.

Common Stock Comparison (By Quarter)

Dividends Price Range Per Share High Low

.2001 Ist quarter

$.515

$36.6250

$31.0000 2nd quarter

.515 35.2500 32.2000 3rd quarter

.525 35.4000 32.0000 4th quarter

.525 36.8000 33.2500

$2.080 2000 Istq-a-ter S.505

$26.68-5

$22.6250 2nd cuar-.er

.505

32. 2 500 25,2500 3rd cua.re-

.515 33,2500 29.6250 4t-qu arte-

.515 39.0000 30.0625

$2.040 Dividends We have paid quarterly cash dividends on our common stock since 1953, and we expect to continue that trend. Future dividends are dependent on regulatory [imitations, earnings, capital requirements, casn-flows, and other financial considerations.

Anticipated record and payment dates for common stock dividends paid in 2002 are:

Record Date Payment Date February 28 March 20 May 31 June 20 August 30 September 20 November 29 December 20 As a record holder of our common stock. you may have your dividends electronically deposited in a checking or savings account at a financial Institution. If you are a record holder and your dividends are not electronically deposited, we will mail your dividend check directly to you.

If you are a record holder of our common stock and your dividend check is not received on the payment date, wait approximately ten days to allow for delays in mail delivery. After that time, call Shareholder Services to request a replacement check.

Stock Investment Plan We maintain a Stock Investment Plan 'or the purchase of common stock which allows persons who are not already shareholders (and who are not employees of WPS Resources or its system companies) to become partic pants by making a minimum ininial cash investment of S 100. Our Plan enables you to maintain registration witn us in your own rame rather than with a broker in "street name.'

The Stock Investment Plan also provides you with options for reinvesting your divide-ids and making optional cash purchases of common stock directly through Shareholder Services without paying brokerage commissions, fees, or service charges. Optional cash payments of not less than $25 per payment may be made subject to a maximum of

$100,000 per calendar year. An automa-ic investment option allows you to authorize the deduction of payments from your checking or savings account automatically once each month, on the 3rd day of the month, by electronic means for investment in the Plan as optional cash payments.

Cash for investment mist be received by the 3rd or 18th day of the month for investment which generally commences on o-about the 5th or 20th day of the month or as soon thereafter as practicable.

The shares you hold in our Stock Investment Plan may be sold by the agent for the Plan as you direct us, or you may request a certificate for sale through a broker you select. We will accumulate sale requests from participants and,

1A POWERFUL EQUATION approximately every five business days, will submit a sale request to the independent broker-dealer on behalf of those participants.

Participation in the Stock Investment Plan is being offered only by means of a Prospectus. If you would like a copy of the Stock Investment Plan Prospectus, you may call us at 800-236-1551, contact us via e-mail by using our e-mail address of investor@wpsrcom, or order or download the Prospectus and enrollment forms using the Internet at http://www.wpsr.com under Financial Information.

Safekeeping Services As a participant in the Stock Investment Plan you may transfer shares of common stock registered in your name into a Plan account for safekeeping. Contact Shareholder Services for further details.

Preferred Stock of Subsidiary The preferred stock of Wisconsin Public Service Corporation trades on over-the-counter markets. Payment and record dates for preferred stock dividends paid in 2002 are:

Record Date Payment Date January 15 February I April 15 May I July 15 August I October 15 November I Stock Transfer Agent and Registrar Questions about transferring common or preferred stock, lost certificates, or changing the name in which certificates are registered should be directed to our transfer agent, U.S. Bank, N.A. at the address or telephone numbers listed on the back cover.

Address Changes If your address changes, call or write Shareholder Services.

Availability of Information Company financial information is available on the Internet.

The address is http://wvwv.wpsr.com.

It is anticipated that 2002 quarterly earnings information will be released on April 23, July 23, and October 29 in 2002 and on January 30 in 2003.

You may obtain, without charge, a copy of our 2001 Form 10-K, without exhibits, as filed with the Securities and Exchange Commission, by contacting the Corporate Secretary, at the Corporate Office mailing address listed on the back cover, or by using the Internet.

Internet Visit our award-winning web site at http://www,.wpsr.com to find a wealth of information on our company and its subsidiaries, The site will give you instant access to Annual Reports, SEC filings, proxy statements, financal news, presentations, news releases, career opportunities, and much more. You may also download a copy of the Prospectus for the Stock Investment Plan and the associated forms for participation in the Plan.

The site is updated regularly, so visit it often.

Annual Shareholders' Meeting Our Annual Shareholders' Meeting will be held on Thursday, May 9, 2002, at 10:00 a.m. at the Weidner Center, University of Wisconsin Green Bay, 2420 Nicolet Drive, Green Bay, Wisconsin.

Proxy Statements for our May 9, 2002 Annual Shareholders' Meeting were mailed to shareholders of record on March 28, 2002.

Annual Report If you or another member of your household receives more than one Annual Report because of differences in the registration of your accounts, please call Shareholder Services so that account mailing instructions can be modified accordingly.

This Annual Report is prepared primarily for the information of our shareholders and is not given in connection with the sale of any security or offer to sell or buy any security.

WPS Resources Corporation CORPORATE OFFICE 700 North Adams Street Green Bay, WI 54301 MAILING ADDRESS:

WPS Resources Corporation P 0. Box 19001 Green Bay, WI 54307-9001 TELEPHONE: 920-433-4901 FAX: 920-433-1526 WEB SITE: http://www.wpsr.com SHAREHOLDER SERVICES WPS Resources Corporation 700 North Adams Street Green Bay, WI 54301 MAILING ADDRESS:

WPS Resources Corporation P. 0. Box 19001 Green Bay, WI 54307-9001 TELEPHONE: 920-433-1050 or 800-236-1551 E-MAIL: investor@wpsr.com WISCONSIN UTILITY INVESTORS, INC.

Wisconsin Utility investors, Inc. ("WUI")

is an independent, non-profit organization representing the collective voices of utility shareholders. It monitors and evaluates industry issues and trends and is a resource for its members, regulators, and the public.

WUI can be reached by calling 414-967-8791.

EQUAL EMPLOYMENT OPPORTUNITY WPS Resources Corporation is committed to equal employment opportunity for all qualified individuals without regard to race, creed, color, religion, sex, age, national origin, sexual orientation, disability, or veteran status.

To that end, we support and will cooperate fully with all applicable laws, regulations, and executive orders in all of our employment policies, practices, and decisions.

4 Printed on paper that contains between 10% and 30% post-consumer fiber TRANSFER AGENT AND REGISTRAR Investor Services U.S. Bank, N.A.

P. 0. Box 2077 Milwaukee, WI 53201-2077 TELEPHONE: 414-276-3737 or 800-637-7549 FINANCIAL INQUIRIES Mr. Joseph P O'Leary Senior Vice President and Chief Financial Officer WPS Resources Corporation PR

0. Box 19001 Green Bay, WI 54307-9001 TELEPHONE: 920-433-1463 STOCK EXCHANGE LISTING New York Stock Exchange TICKER SYMBOL: WPS LISTING ABBREVIATION: WPS Res V 2002 WPS Resources Corporation