ML041280351

2003 Annual Financial Reports

ML041280351
Person / Time
Site:	Kewaunee
Issue date:	04/28/2004
From:	Coutu T Nuclear Management Co
To:	Document Control Desk, Office of Nuclear Reactor Regulation
References
NRC-04-049
Download: ML041280351 (177)

Text

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NoI Committed to Nuclear xc Kewaunee Nuclear Power Plant Operated by Nuclear Management Company. LLC April 28, 2004 NRC-04-049 10 CFR 50.71(b)

U.S. Nuclear Regulatory Commission ATTN: Document Control Desk Washington, DC 20555 KEWAUNEE NUCLEAR POWER PLANT DOCKET 50-305 LICENSE No. DPR-43 2003 ANNUAL FINANCIAL REPORTS Enclosed please find one copy of the 2003 Annual Financial Reports for WPS Resources Corporation and Alliant Energy Corporation. The enclosed reports are submitted in accordance with the requirements of 10 CFR 50.71(b).

Thomas Coutu Site Vice-President, Kewaunee Nuclear Power Plant Nuclear Management Company, LLC cc:

US NRC - Region IlIl (w/o enclosure)

NRC Senior Resident Inspector (w/o enclosure)

Enclosure AW4 N490 Highway 42

• Kewaunee, Wisconsin 54216-9511 Telephone: 920.388.2560 Ad,

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At Alliaht Energy, we are building strength and value for our eo e

customers, employees and others who have a vested interest nour success. But just what does that mean? Of course, it means that we are strengthening our financial position in order to enhance earnings, pay a market competitive dividend and deliver stock price appreciation. It's about 42 p

building long-term shareowner value.

But, it's even more than that.

You should also take our annual report theme literally. Our updated strategic plan focuses on growing our earnings by building new domestic utility generating capacity to serve our customers' increasing energy needs while - at the l

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same time-protecting the environment.

We are building strength and value by continuing to do what we already do well -providing the reliable utility service our customers demand. As you will read in the following pages, our domestic generation plans call for utilizing a diversified portfolio approach to meet our customers' future needs through coal, natural gas and renewable energy sources as well as continuing our focus on energy efficiency.

We expect to continue to augment this domestic utility-centric focus by maintaining our strategic investments in the international energy market as well as other targeted energy-related investments.

Our domestic utilities are not only our foundation, they are our future. We will seek modest, yet sustainable growth. We will remain committed to maintaining our investment-grade credit ratings and a strong balance sheet. And we will build strength and value for all of our stakeholders.

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This annual report containsforward-looking statements. These statements should be considered in light of the disclaimer on page 18.

F INA NC IA L O V ER VIEW (Dollars in millions, except per share data)

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2003 2002 Change Operating revenues Net income:

Income from continuing operations Income from discontinued operations Cumulative effect of changes in accounting principles Net income Diluted earnings per average common share:

Income from continuing operations Income from discontinued operations Cumulative effect of changes in accounting principles Net income Domestic utility electric sales to retail customers (thousands of megawatt-hours)

Total domestic utility electric sales (thousands of megawatt-hours)

Domestic utility gas sold and transported (thousands of dekatherms)

Construction and acquisition expenditures (a)

Total assets at year-end Cash flows from operating activities (continuing operations)

Total debt to capitalization ratio Common shares outstanding at year-end (in thousands)

Dividends declared per common share Market value per share at year-end Book value per share at year-end

$3,128

$2,487 26%

$160

$88 82%

$30

$19 58%

($6)

N/A

$184

$107 72%

$1.57

$0.30

($0.06)

$1.81 25,573 31,252 105,889

$839

$7,775

$420 48%

110,963

$1.00

$24.90

$21.37

$0.97

$0.21

$1.18 25,455 30,457 103,038

$657

$7,814

$555 60%

92,304

$2.00

$16.55

$19.89 62%

43%

N/A 53%

3%

3%

28%

(24%)

N/A 20%

(50%)

50%

7%

(a) These amounts do not include construction and acquisition expenditures for discontinued operations of $42 million and $214 million for 2003 and 2002, respectively.

The financial data should be read in conjunction with the audited financial statements and related notes of Alliant Energy. The reported financial data are not necessarily indicative of future operating results or financial position.

Diluted earnings per average common share Total shareowner return*

at Dec. 31, 2003 Total assets at year-end (in millions)

$2.50

$2.00

$1.50

$1.00

$0.50

$0.00 58%

$2.14 I I77 77 601% r

$1.81 40% (-

• Alliant Energy IS&P 500 Index

• S&P Utilities Index

• S&P Midcap Electric Utilities Index 2%

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$7,814.4 7,775

$6,000 F 20% [-

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$4,000 _

III 2001 2002 2003

• Continuing operations Other (includes discontinued operations and the cumulative effect of changes in accounting principles) 0% I-e I Tear

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• Domestic utility business Non-regulated businesses

• Other

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5ALLIANT i& ENERGY-xvwe are..

A liant Energy, headquartered in Madison, Wis., is an energy holding company traded on the H New York Stock Exchange under the symbol "LNT." Over the last year, we've undergone several changes in order to better align our strategy with the current market. Today, we are building strength and value by capitalizing on new opportunities in our 9

X domestic utility business.

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Alliant Energy Resources, nc. is the parent company for the Alliant Energy's non-regulated businesses. With the exception oF anticipated activities by our non-regulated generation business in support of our domestic utility generation plan, we do not expect these businesses to be consumers of significant amounts of additional investment capital going forward.

However, we expect these businesses to be strong operations that contribute increasingly to earnings and shareowner value, and provide appropriate returns on the capital already invested. As a result,'we view these businesses as ongoing business platforms in comparison to our

'-growth platform, our domestic utility business Primary non-regulated business platforms

• Non-regulated generation: In 2003, we refined the focus of our non-regulated generation business 3

to primarily support the development, financirng and con struction of generation to meet the needs

.of our domestic utility business, Although we own one tolled; 309 MW, natural gas-fired power -, -

plant in Neenah, Wis., we wilt defer pursuit of other new non-regulated generation projects, other ta n p -than potential projects to utilize existing equipmient held by Non-regulated generation, or further

-acquisitions of existing tolled generation in the near term.;--; >-=-"-

- International: International has invested in'energy generation and distribution companies and projects in select'growing markets. We currently have investments in Brail,-China and New Zealand.

-Integrated Services: AilntEergintegrated Services Company is invo ed in selling and delivering

'high value energy and environmental services to commerciallindustriat and institutional customers. -

Such services include energy infrastructure project development and

-construction management energ plann curement and risk,,

.management services, and enviometlengineering and site remediation' d-d m'

services.--i addition,'Integrated Services'also provides gas marketing and management services, and asset management Iservices forpipelines and onsite generation.'--'

- Other investments: This includes investments

-in Laguna del Mar, Synfuel and transportation S U P P 0 R T assets. In addition we have vario'usoth'ermodest S E R V I

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-investments related to economic development, Alliant Energy Corpor

.'energy technologies and telecommunications Inc. supports the oth i

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of the company with

-administrative functii strategy, risk manage (bu r sI on :.

performance improve O urv ision accounting and finan To be the customer's first choice for energy solutions.

supply chain, corpora legal, r corpor

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ement, ce, fuel procurement, ite communications, regulatory, internal audit, ate governance, information

'logy, human resources, labor ns infrastructure security, vironmental and safetyv

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We were'acutely aware that we needed to turn things around

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financially in 2003 -

and we delivered. By reducing debt by $875 Tmillion through asset divestitures, our debt to total capitalization ratio now stands at 48%, down from 60% at the end of 2002. We tdelivered a 58% total return to shareowners in 2003 and increased diluted eamings per share from continuing operations by 62% over 2002. We further narrowed our focus and announced a flexible and balanced plan to build new generation to serve our domestic utility customers. Taken together, we believe these results are the very definition of successful execution. Without question, the Alliant Energy team delivered Sn in 2003.

Szareowners With 2003 diluted earnings per share from continuing operations at $1.57 and income from continuing operations of $159.7 million, we improved significantly over our 2002 financial performance of

$0.97 per diluted share from continuing operations and income from continuing operations of $87.5 million. Earnings per share also improved from $1.18 in 2002 to $1.81 in 2003.

In 2003, we also outperformed the market in terms of total shareowner return (dividends plus stock price appreciation),

beating not only the S&P 500 Index, but also the S&P Utilities Index. Through the determination, strength and hard work of our employees, we have now completed all of the strategic actions we outlined in late 2002 to strengthen our financial profile. We did exactly what we said we would.

However, we are not resting on our laurels. The success we've enjoyed in meeting our most recent strategic challenges has energized this team to position the company for continued future success. We have learned much over the past two years, and the experience has made us stronger, more disciplined and more resolved.

But, before we discuss where we want to be tomorrow, we felt it appropriate to review just how we got to where we are today.

November 2002 Plan Understanding the context for specific actions is always important, but never more so than when evaluating the U.S. energy market.

Over the past two years, we have seen dramatic developments in our business and a virtual sea change in how many within the industry define themselves. In November 2002-after the Enron debacle, the Arthur Andersen meltdown, the California energy crisis, tightened credit markets and some financial challenges of our own we announced a series of strategic actions designed to strengthen our financial profile. In a letter to all shareowners dated Nov. 22, 2002, I listed five actions we said we were going to take in order to improve our financial strength. And, I am proud to say that we have successfully executed each and every one of them.

First, we said we would reduce z

our anticipated aggregate 2002 and 2003 capital expenditures a

I by approximately $400 million, God primarily in our non-regulated businesses. And, we did just that.

Second, we said we would make the difficult, but prudent, decision to reduce our annual common stock dividend to $1 per share. As difficult as it was, we took that action. Our targeted annual dividend rate, which is now $1 per share, is at a sustainable, yet still competitive, level. And, we believe the current tax treatment for dividend income, which we worked very hard to see enacted, further enhances the appeal of our dividend.

Third, we committed to enhanced cost controls. For example, Lean Six Sigma processes are now becoming a part of our culture at Alliant Energy. And, we expect they will yield cost savings as well as productivity enhancements far into the future. We also continue to focus on numerous other cost control initiatives, which is a normal part of our ongoing business. While we surpassed our cost savings goals in 2003, we probably will never be in a position to state this component of our strategic actions is complete. Instead, it is a commitment to continuous improvement.

Fourth, we announced we would issue additional common equity of approximately $200 to $300 million. In July, we delivered on that promise by issuing 17.3 million shares of our common stock. We raised net proceeds of $318 million from this transaction and infused $200 million into Wisconsin Power and Light Company and $118 million into Interstate Power and Light Company.

Finally, our plan called for us to divest certain non-core, non-strategic assets and, ultimately, to achieve debt reduction in excess of $800 million. Toward this end, we sold our Australian assets, our affordable housing business -

primarily made up of Heartland Properties, K.

Inc. -

and our SmartEnergy, Inc. business, as well as various other modest asset sales. We crossed the last hurdle with the successful initial public offering of our oil and gas subsidiary, Whiting Petroleum Corporation.

Through these combined efforts, we reduced our debt levels by $875 million through asset divestitures.

As you can see, we made five commitments to take action, followed by successful execution, in each of these five areas. The market recognized our progress, as our stock price appreciated about 60% between Nov. 22, 2002, and Dec. 31, 2003. We are executing on our promises and we are proud of our achievements in that regard. But, we also fully recognize that we owe our investors nothing less than that.

2004 and Beyond As 2003 closed, these five strategic actions became part of our proud history. And, with a new focus on the future, we turned our attention to, "What's next for Alliant Energy?"

Our strategic priorities for 2004 and beyond are rather straightforward. They are centered on three key themes: strategic focus, financial discipline and successful execution.

In short -

we plan to build on our strengths which, in turn, will build strength and value.

We remain steadfast in our commitment to provide our customers with safe, reliable, affordable and environmentally sound energy a commitment we have delivered on year-after-year.

And, while we expect annual sales growth within our domestic utility service territory to be a modest I% to 3%o, we do expect to increase, over time, our earnings and cash flows by prudently investing in utility infrastructure.

As we have all learned, we must maintain our commitment to financial prudence and discipline. We are committed to maintaining investment-grade credit ratings and a strong balance sheet. We will seek modest, yet sustainable, growth with our domestic utility business serving as our growth engine. We are committed to delivering solid long-term returns for our shareowners and maintaining an impeccable "say/do" ratio.

Domestic Utility Business Without question, our industry has changed; the market has changed; and we have changed with it. Not all of that change has been painless. But, through this transformation, we now have investment opportunities in our domestic utility business that did not exist several years ago.

Progressive legislation

- 3was passed in Iowa that provides companies with the necessary ratemaking principles -

and resulting increased regulatory and investment certainty -

prior

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i to making certain generation investments in Iowa.

I 7aWisconsin also enacted Wlegis lation with the goal of fo assuring reliable electric energy il for Wisconsin. The law allows construction of merchant power plants in the state and streamlines the regulatory approval process for building new generation and transmission facilities. Recently, the Public Service Commission of Wisconsin approved a lease-back structure for an affiliate plant, which provides a similar level of investment certainty.

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These changes have enabled Alliant Energy to pursue additional generation investments in its domestic utility business to serve its customers and to provide shareowners with greater certainty regarding the returns on these investments.

We intend to put these enlightened policies to work for the benefit of our customers and our investors. Specifically, we plan to add 1,600 MW of nameplate generating capacity to our fleet from 2004 through 2010 (985 MW in Iowa and 615 MW in Wisconsin). This new generation capacity will be a mix of coal, natural gas and renewable energy sources. Our plans are modest, balanced, flexible and financially viable.

In order to continue to provide safe, reliable and affordable energy to our customers, the company has conducted a thorough review of future demand and believes that new generation will be needed to meet increasing customer demand, reduce reliance on purchased-power agreements and mitigate the impacts of potential future plant retirements. But, through a host of actions, we remain committed to our continuing efforts to improve the environmental performance of our generation fleet. Even beyond our belief that this is the right thing to do, it's just good business.

We will continue to support legislation that creates greater certainty around environmental protection. And, we staunchly believe the investors in companies that take a lead role in protecting the environment should be rewarded for achieving these goals, not penalized.

I would be remiss if I didn't emphasize just what underlies all of our generation plans: our continuing and persistent commitment to the safe, reliable, affordable and environmentally sound delivery of energy to our 1/4 !

customers. Understand that we will invest in the appropriate infrastructure to ensure we meet this commitment. Through our domestic utility business, we will strive for continued excellence in Do, electric and natural gas services with superior I

customer service.

We have also refined the focus of our non-regulated generation business; it will now focus primarily on supporting the development, financing and construction of generation to meet the needs of our domestic utility business. We will defer pursuit of Station ne other new non-regulated generation projects, other than Iowa, is sc potential projects to utilize existing equipment held by generating Non-regulated generation, or further acquisitions of second qu existing tolled generation in the near term.

Clearly, we are concentrating on our core domestic utility business. However, through Alliant Energy Resources, we plan to continue our utility focus on select non-regulated businesses as well. We will continue to operate in the international arena, maintaining our investments primarily in Brazil, China and New Zealand, as well as investments in the non-regulated generation market and other select areas.

Non-regulated Businesses Because they have been the target of much discussion and 7

debate, I would emphasize that our international investments are making solid progress.

We have strong partnerships in China and our investment there is profitable... and we expect it will remain profitable in the coming years. Our Wisconsin Power and Light investment in New Zealand also was profitable in 2003. Aside Company signed a purchased-from some modest capital power agreement for 453 MW investments in our generation of electrical output from the portfolio in China that will Riverside Energy Center in the bergenerated througtha winte l

town of Beloit, Wis. Commercial operation of the plant is expected cash flows from our existing to begin in May 2004.

China investments or from non-recourse debt, we do not expect to make significant additional investments in either of these markets.

On balance, we made great progress in Brazil in 2003. Rate increases were implemented at all five of the Brazilian operating companies throughout 2003. Electric sales volumes increased approximately 7% in 2003 over 2002 and were also higher than the sales levels in the last year before drought related and government imposed electricity rationing. Foreign currency rates improved in 2003 as well. We made progress on improving the in-country debt profile of our Brazilian investment by restructuring 3

approximately $245 million of Brazil-based short-and long-term debt.

In 2003, our in-country Brazil earnings were positive, but we still incurred a net loss of

$14 million after allocated debt capital and overhead charges. However, I emphasize that the e 550 MW

$14 million loss compares favorably to a loss of tural gas-fired

$47 million in 2002. The results for the fourth iery Generating quarter of 2003 were positive, which marks the aery Genertin first quarter that the bottom-line results have been ias on Cegit positive since we made our initial investment in luled to begin Brzl ctricity in the Brazil.

rof 2004.

We are encouraged to see our considerable efforts in Brazil now beginning to bear fruit.

But, while significant progress has been made in turning these investments around, I would note that we will not be satisfied until we translate that progress into realizing a consistent and reasonable rate of return on our Brazilian investment. We fully recognize that we still have considerable work yet to do.

Th na En ar M hed I ele arte

We will also maintain several other non-regulated businesses.

Although we expect these businesses to add to shareowner value over time, we do not expect to invest significant additional capital in them.

In short, Alliant Energy Resources will continue to play a role at Alliant Energy. But, rather than serve as a growth platform, it will serve as an ongoing business platform to augment and support our core domestic utility business.

Financial Plan Going Forward After living through what has been a most tumultuous time in our industry's history, we >

very carefully reviewed the financial viability Ace of our strategic actions going forward. We believe it will take an investment of roughly

$650 million over the next seven years to implement our domestic utility generation plan.

We anticipate having the time and the ability to adapt our plans to meet changing conditions as necessary. These changes could be related to various factors, including energy demand in our service territories, environmental regulations, capital markets or technology shifts.

We project our capital expenditures to be $700 million in 2004 and $610 million in 2005. Of those amounts, 87% in 2004 and 89%

in 2005 will be directed toward our domestic utility business. Going forward, we are committed to maintaining investment-grade credit ratings that were affirmed in January 2004 after reviews by both Moody's and Standard & Poor's.

Building Strength and Value We have certainly shifted our strategic direction over the last several years at Alliant Energy.

But, be assured, there are many things at your company that have

-not changed.

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Our commitment to our customers is unwavering. Despite the industry turmoil, we have never lost sight of our responsibilities to our customers. That commitment is certainly evident in industry benchmarks, including our customer satisfaction levels and plant reliability. Our commitment goes far beyond just keeping the lights on... it's about providing an exceptional energy value for our customers.

We remain committed to supporting the communities we are proud to serve, protecting the environment and providing our employees with a meaningful and diverse work environment... a place where everyone is treated with respect. Understand that while our strategic plan may change or bend with market conditions, our commitment to these core values is unyielding.

And, of course, we are staunchly committed to creating value for you, our shareowners. In fact, all employees take the execution of our strategic plan and mission personally and have a vested interest in our success.

As a personal aside, I'd like to bid farewell to two long-time Board members who will retire following our 2004 Annual Meeting of Shareowners. Alan Arends has provided impeccable leadership and sound guidance since he joined our Board in 1993. Second, I want to give special thanks to Wayne Stoppelmoor who has served as a director since 1986, as Vice Chairman of the Board on two occasions since the merger and has devoted 44 years to Alliant Energy and its predecessor companies through both the prosperous and the challenging times. On behalf of the Alliant Energy Board, its employees and all its shareowners, I extend a heartfelt thank you to both of these fine gentlemen.

While I am sad to see Alan and Wayne leave, I am pleased to welcome Michael Bennett and Ann Newhall as new members of our Board. We look forward to leveraging success from their fresh ideas, perspectives and outlooks.

1111 1 1While I am continuing as chairman and chief executive officer of Alliant Energy, William (Bill) Harvey has now taken over more of the day-to-day operational responsibilities as the company's new president and chief operating officer. I am confident that, with Bill's broad-based utility operational experience, Alliant Energy will continue to build on its progress.

I'd also like to recognize and welcome Eliot Protsch as our new chief financial officer. Eliot has been an integral part of our senior management team for many years and has now agreed to take an even greater role in the financial management of Alliant Energy...

and I couldn't be more pleased.

On behalf of the entire Board of Directors, I want to thank our shareowners, customers and employees for their patience and support as we've engineered this very successful turnaround in 2003.

We remain committed to continued excellence going forward as we focus on building strength and value for you, our shareowners.

Sincerely, Erroll B. Davis, Jr.

Chairnan and Chief Executive Officer

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-did not exist a few short years ago -opportunities, I might add,

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growing energy needs will require additional infrastructure,

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,needed to help reduce reliance on purchased-power agreements and I,-12J mitigate the impacts of potential future plant retirements. We will continue to purchase energy and capacity in the market and intend

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to remain a net purchaser of both, but at a reduced level. And, when we do purchase power, we will focus our efforts on purchasing from

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While our domestic utility business is our foundation and current growth platform, we will also maintain certain non-regulated businesses, including our international and non-regulated generation investments and our Integrated Services business.

You said you plan to add new generation capacity; just what are your specific plans?

From 2004 through 2010, we expect to add approximately 1,600 MW of nameplate generating capacity to our fleet:

985 MW in Iowa and 615 MW in Wisconsin.

Through our new strategic actions, we are also reaffirming our already strong commitment to environmental stewardship by reflecting this commitment in any plant we are involved in building.

We will continue to improve the environmental performance of our existing plants through our proven NOx reduction SmartBurnsm technology, as well as through other pollution-abatement equipment.

We expect the capital expenditures associated with our proposed new generation to be approximately $650 million over the next seven years. Timelines and sites will be announced as plans for specific projects are finalized over the course of the plan timeframe.

I would also note that our strategic plan stresses not only building new generation, but also flexibility. After all, our ability to continue to maximize long-term shareowner value requires the continuous evaluation of current economic, political and regulatory environments, as well as our resulting organization structure and strategic plan and actions. In other words, every aspect of our operation is examined frequently in order to maximize our long-term financial health. In short, if changes in our course must be made, we will make them.

Does nuclear energy play a role in Alliant Energy's future energy portfolio?

We believe that the best way to continue to provide our customers with safe, reliable, affordable and Genvironmentally sound energy is by maintaining a diverse energy portfolio. That way, we're protected if one source temporarily becomes unavailable or is too expensive.

Our current portfolio includes coal, Alliant Energy maintains a natural gas, renewable and nuclear diverse energy portfolio that power. In 2003, nuclear energy includes nuclear energy.

represented roughly 13% of our In 2003, nuclear energy electric power sources.

represented roughly 13% of The benefits of nuclear power our electric power sources.

are very clear. Nuclear power plants generate no emissions and, therefore

-with prudent safety and security precautions -

remain an important and clean source of power. But, clearly, there are also financial risks associated with nuclear power.

Operating and maintenance costs, as well as significant capital expenditures, are part of operating any facility. But changing regulations and the age of a facility make it extremely difficult to predict what these operating costs would be.

In 2003, we were presented with a unique opportunity to sell Wisconsin Power and Light Company's interest in the 543 MW Kewaunee Nuclear Power Plant (KNPP) to Dominion Resources, Inc., a large and experienced operator of nuclear power plants.

Pending regulatory approvals, we expect the transaction to be completed by the fall of 2004.

Although we decided to sell, we will continue to buy energy and capacity from KNPP, at least equivalent to the amounts received from the plant had current ownership continued. With this long-term contract, our actual reliance on nuclear power will not change; it will simply be reflected in the future as purchased power. The purchased-power agreements also provide a stable price for energy generated by nuclear power until 2013, when the plant's current operating license will expire.

Our top priorities in this transaction were to proceed in the best interests of our customers, shareowners and employees. By selling this plant and securing a long-term purchased-power agreement, we expect to continue enjoying the benefits of having nuclear power in our energy portfolio while obtaining greater certainty on our operating and maintenance costs.

Note that we do not currently have any plans to sell our 70% ownership interest in our only other nuclear facility, the 583 MW Duane Arnold Energy Center, located in Palo, Iowa.

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It appears that the company has been very active in filing rate cases over the past several years. Why is that?

The only way for a regulated utility to recover the costs it prudently incurs to provide safe, reliable, affordable and environmentally sound utility service is to work through the regulatory process of filing a rate case.

Raising rates is never a decision that we take lightly, however.

Throughout the United States, there is an increasing recognition of the importance of investing in utility infrastructure -power

plants, pipelines, substations, transmission lines and the technology that ties the system together. After a period of relatively low investment as energy consumption caught up with the infrastructure constructed in the 1970s and 1980s, we have now entered into a cycle of new construction. Unlike the steady or falling prices experienced during the 1980s and 1990s when few new plants or new transmission lines were being built, prices for utility service historically tend to increase as new facilities are brought into service.

For example, in March 2004, we filed a rate case in Iowa to begin seeking recovery of the $400 million Emery Generating Station.

The Emery Generating Station plays a key role in providing continued reliable electric service in Iowa and will make the state less dependent on out-of-state generation sources. But, the cost of our investment in this plant must be reflected in the prices customers pay for electric service and is a major component of this rate i increase request.

Unquestionably, there is a price to be paid for having the reliable utility service our customers have come to expect and demand. We have a variety of energy efficiency programs and other services in place to help customers manage their energy use which, in turn, helps address the issues related to rising prices. However, there is a far greater price to be paid for unreliable utility service. The wide-scale blackouts that occurred in August 2003 provided ample evidence of just how dependent our entire economy and quality of life have become on electricity. We are committed to ensuring our customers have that reliable service and will make the investments necessary to meet that commitment. Our ability to meet that commitment is, of course, conditioned on being able to recover the costs of making those investments.

What is your philosophy about dividends?

We take our commitment to our traditional income investors very seriously and realize they rely on a stable and market competitive dividend from Alliant Energy.

In addition, it is our obligation to create enhanced value for our investors. We also must consider the impact the dividend has on our various credit metrics and associated credit ratings as well as our continued ability to fund our capital requirements and debt maturities.

Our general intention is to maintain a dividend payout ratio similar to standard industry averages. That currently is in a range of approximately 60% to 70% of our utility earnings.

That said, our Board of Directors, which is charged with balancing these obligations and setting the dividend each quarter, will continue to re-evaluate our dividend policy and will consider all constituents and the implications of its decision on an ongoing basis.

What is the status of your investment in Brazil?

As we have discussed in the past, this investment has not met our return expectations to date for a variety of reasons. While some of the significant factors leading to this disappointing performance have been outside our control, we have focused on improving those aspects that are within our control. As evidenced by the $0.36 per share improvement in our financial results from Brazil in 2003 compared to 2002, that focus is beginning to bear fruit.

We made great progress in 2003 and we expect that trend to continue in 2004. But, challenges remain. While we are pleased with the significant improvement we realized in 2003 as it relates to the financial performance of our Brazilian investments, we are re-examining the operations and the structure of our investments in order to accelerate operational and financial improvements. This includes further cost reductions and more advantageous financing. To this end, we are currently discussing with our partners in Brazil various options to accomplish E

gthese goals.

For example, we believe paying down debt, rather than paying dividends to the shareowners of the Brazilian investments, would result in improved financial results. As can be the case in any business relationship, our discussions with our partners in Brazil

on these issues and the other challenges we have faced related to these investments, have strained our current relationship with our partners. Given the circumstances, this is certainly understandable.

We are, however, committed to working with our partners to reach reasonable resolution of these issues.

On balance, when we look at both our progress and the challenges that remain, we continue to believe there is potential for enhanced growth in Brazil despite the setbacks of the last few years.

What is Lean Six Sigma all about?

Cost control is one of the key elements of the five strategic actions we announced in November 2002. Our employees have always sought out ways to control costs and, like most companies, we have gone through multiple exercises in significant belt tightening. In looking at our own past efforts, and some of the "slash and burn" efforts taking place at other companies in our industry, we have observed these approaches will generally reduce costs in the short term, l

S butnot in the long term. We 1

• ]

• 3 are committed to controlling costs for the benefit of both our customers and our shareowners, but that commitment rings hollow if it is not sustainable.

Lean Six Sigma provides a tool to reduce costs, improve processes and create efficiencies that will drive down costs, not only in a given time period, but for years to come.

• Lean Six Sigma is a tool to reduce variability in processes, thereby improving predictability and efficiency, ultimately resulting in significant cost reduction.

The focus of Lean Six Sigma is to understand the process based on tangible and measurable data and then "fix it for the last time." We have consulted with a number of Fortune 500 companies, which includes a number of our customers, that have successfully deployed Lean Six Sigma within their respective organizations and we are adopting those best practices as we implement Lean Six Sigma at Alliant Energy.

While still early in the deployment process, Lean Six Sigma is already delivering results beyond our expectations and we expect greater results in the coming years.

If we are to provide the returns our shareowners deserve while doing all that we can to control the costs that impact what our customers pay for service, we must utilize the best tools available.

We believe Lean Six Sigma provides just such a tool.

7

.J 4-.-

'4-u

ials?

How does Alliant Energy's organizationa structure help the company achieve its go Most companies have organizational charts and structures that have simply evolved over time. For example, changes or reorganizations may have occurred to suit individual skills or to meet the immediate needs of the organization -

needs that may have already changed. Team members simply get used to the way things are and organizations continue to operate... but probably not up to full potential.

At Alliant Energy, we recognize that the deregulated utility industry we thought would occur following our merger will not likely be implemented in our markets any time soon. Therefore, in 2003, we created a cross-functional group to look at the way the entire company was organized and to study if we were structured in a way to achieve our current financial and operational goals, and be responsive to the realities of our markets today.

Through this extensive evaluation, we decided that certain organizational changes

_ could improve our performance and increase accountability for both results and cost control measures.

Specifically, we have separated our corporate center activities, or our strategy, risk management, accounting and finance, legal, regulatory, corporate communications, performance improvement, internal audit, corporate governance and administrative functions, from our operations. Now, all groups responsible for core operations

~

.report to our president and chief operating officer, Bill Harvey, while our corporate center activities are under the direction of other executives and report directly to me, as does Bill.

We expect this new structure will provide stronger operational alignment while limiting multiple reporting relationships, clarify

jf decision rights and streamline work.

In short, we made these changes to help ensure that Alliant 2'

Energy becomes more effective and efficient, positioning us to meet our strategic goals. Note that we also are continuing to improve accountability for results, ensuring that individuals do what they commit to do. Therefore, as has been the case in the past, progress toward our goals will help determine individual performance assessmenits which, in turn, will influence monetary rewards.

1 As with many other things -

our organizational structure remains a work in progress. We will continue to evaluate our progress and make changes to ensure we are structured in a way that will help us meet our current goals and -

ultimately -

allow us to improve our operational and financial performance.

i III

Meet Allian I.

11 - r.'

-'.L I.

iA'

11..

I'_I P

U.-

I

. I Erroll B. Davis, Jr.

Chairnnan of the Board Director since 1982 Age 59 Wayne H. Stoppelmoor Vice Chairnan of the Board, Director since 1986, Age 69 Alan B. Arends Director since 1993 Age 70 Michael L. Bennett Director since 2003 Age 50 Jack B. Evans Director since 2000 Age 55 Katharine C. Lyall Director since 1986 Age 62 Mr. Davis has served as Chairman of the Board since 2000 and as Chief Executive Officer of the Company since 1990. He also served as President of the Company from 1990 through 2003. Mr. Davis joined WP&L in 1978 Mr. Stoppelmoor served as Vice Chairman of the Board of the Company from April 1998 until April 2000 and from May 2003 until present. He was Chairman, President and Chief Executive Officer of Interstate Power Mr. Arends is Chairman of the Board of Directors of Alliance Benefit Group Financial Services Corp.. Albert Lea, Minn.,

an employee benefits company that he founded in 1983. He has served as a Director of IP&L (or Mr. Bennett has served as President and Chief Executive Officer of and served as President of WP&L from 1987 to 1998. He was elected Chief Executive Officer of WP&L in 1988. He has also served as Chief Executive Officer of AER and iP&L (or predecessor companies) since 1998.

He is a member of the Boards of Directors of BP p.l.c.; PPG Industries, Inc.; Electric Power Research Institute; and the Edison Electric Institute.

Mr. Davis has served as a Director of WP&L since 1984, of AER since 1988 and of IP&L (or prede-cessor companies) since 1998.

Company (a predecessor company of Alliant Energy) from 1986 until his retirement in 1997.

Mr. Stoppelmoor has served as a Director of IP&L (or predecessor companies) since 1986 and of WP&L and AER since 1998.

predecessor companies) since 1993 and of WP&L and AER since 1998.

Terra Industries, Inc., an international producer of nitrogen products and methanol ingredients headquartered in Sioux City, Iowa, since April 2001. From 1997 to 2001, he was Executive Vice President and Chief Operating Officer of Terra Industries, Inc. He also serves as Chairman of the Board for Terra Nitrogen Corp., a subsidiary of Mr. Evans is a Director and since 1996 has served as President of The Hall-Perrine Foundation, a private philanthropic corporation in Cedar Rapids, Iowa. Previously, Mr. Evans was President and Chief Operating Officer of SCI Financial Ms. Lyall is President of the University of Group, Inc., a regional financial services firm.

Mr. Evans is a Director of Gazette Communications, Nuveen Institutional Advisory Corp., and Vice Chairman and a Director of United Fire and Casualty Company.

Mr. Evans has served as a Director of IP&L (or predecessor companies),

WP&L and AER since 2000. Mr. Evans is Wisconsin System in Madison, Wis. In addition to her administrative position, she is a professor of economics at the University of Wisconsin-Madison. Ms. Lyall has announced that she will retire as President of the University of Wisconsin System no later than Aug.

31, 2004. She serves on the Boards of Directors of M&l Corporation and the Carnegie Foundation for the Advancement of Teaching. Ms. Lyall has served as a Director of WP&L since 1986, of AER since 1994 and of Terra Industries, Inc.

Mr. Bennett has served as a Director of IP&L, WP&L and AER since August 2003.

IP&L (or predecessor companies) since 1998.

Chairperson of the Audit Committee.

Singleton B. McAllister Director since 2001 Age 51 NMs. McAllister has been a partner in the public law and policy strategies group of the Washington, D. C. law firm office of Sonnenschein, Nath &

Rosenthal, LLP. since 2003. She previously was a partner at Patton Boggs LLP. a Washington, D.C.

law firm from 2001 to 2003. From 1996 until 2001, Mis. McAllister was General Counsel for the United States Agency for International Development. She was also a partner at Reed, Smith, Shaw and McClay where she specialized in government relations and corporate law.

Mis. McAllister has served as a Director of IP&L (or predecessor companies),

WP&L and AER since 2001.

Ann K. Newhall Director since 2003 Age 52 Ms. Newhall is Executive Vice President, Chief Operating Officer, Secretary and a Director of Rural Cellular Corporation, a cellular communications corporation, located in Alexandria, Minn. She has served as Executive Vice President and Chief Operating Officer since August 2000. as Secretary since February 2000 and as a Director since August 1999. Prior to assuming her current positions, she served as Senior Vice President and General Counsel from 1999 to 2000. She was previously a shareholder and President of the Moss

& Barnett law firm in Minneapolis, Minn.

Mis. Newhall has served as a Director of IP&L, WP&L and AER since August 2003.

David A. Perdue Director since 2001 Age 54 Mr. Perdue is Chairman of the Board and Chief Executive Officer of Dollar General Corporation, a retail sales organization headquartered in Goodlettsville, Tenn.

He was elected Chief Executive Officer and a Director in April 2003 and elected Chairman of the Board in June 2003.

From July 2002 to March 2003, he was Chairman and Chief Executive Officer of Pillowtex Corporation, a textile manufacturing company located in Kannapolis, N.C. From 1998 to 2002, he was employed by Reebok International Limited, where he served as President of the Reebok Brand from 2000 to 2002.

Mr. Perdue has served as a Director of IP&L (or predecessor companies),

WP&L and AER since 2001.

Judith D. Pyle Director since 1992 Age 60 Ms. Pyle is President of Judith Dion Pyle and Associates, a financial services company located in Middleton, Wis. Prior to assuming her current position in 2003. she served as Vice Chair of The Pyle Group, a financial services company located in Madison, Wis.

She previously served as Vice Chairman and Senior Vice President of Corporate Marketing of Rayovac Corporation, a battery and lighting products manufacturer located in Madison, Wis. In addition, Ms. Pyle is Vice Chairman of Georgette Klinger, Inc., and a Director of Uniek, Inc. Ms. Pyle has served as a Director of WP&L since 1994, of AER since 1992 and of IP&L (or predecessor companies) since 1998.

AMs. Pyle is Chairperson of the Compensation and Personnel Committee.

Robert W. Schlutz Director since 1989 Age 67 Mr. Schlutz is President of Schlutz Enterprises, a diversified farming and retailing business in Columbus Junction, Iowa.

Mr. Schlutz has served as a Director of IP&L (or predecessor companies) since 1989 and of WP&L and AER since 1998.

Mr. Schlutz is Chairperson of the Environmental, Nuclear, Health and Safety Committee.

Anthony R. Weiler Director since 1979 Age 67 Mr. Weiler is Chairman and President of A.R.

WVeiler Co. LLC, a consulting firm for home furnishings organizations.

He was previously a Senior Vice President of Heilig-Meyers Company, a national furniture retailer headquartered in Richmond, Va. He is a Director of the Retail Home Furnishings Foundation. Mr. Weiler has served as a Director of IP&L (or predecessor companies) since 1979 and of WT&L and AER since 1998.

Ser. Weller is Chairperson of the Nominating and Governance Committee.

I4 Ages are as of Dec. 31, 2003. Each election date represents thefirst year of Board affiliation with a company that ultimately became part of the Alliant Energyfamily

Audit Committee Jack B. Evans (Chairperson)

Alan B. Arends Michael L Bennett Singleton B. McAllister David A. Perdue Compensation and Personnel Committee Judith D. Pyle (Chairperson)

Alan B. Arends Michael L. Bennett Singleton B. McAllister David A. Perdue Nominating and Governance Committee Anthony R. Weiler (Chairperson)

Katharine C. Lyall Ann K. Newhall Robert NV. Schlutz Environmental, Nuclear, Health and Safety Committee Robert WV.

Schlutz (Chairperson)

Katharine C. Lyall Ann K. Newhall Judith D. Pyle Anthony R. Weiler Capital Approval Committee Erroll B. Davis, Jr. (Chairperson)'

Mlichael L. Bennett Jack B. Evans Anthony R. Weiler

• Non-voting committee member Committee members are as of Jan. 28, 2004.

Erroll B. Davis, Jr., 59 11978]

Chairman and Chief Executire Officer William D. Harvey, 54 [19861 President and Cltief Operating Officer Eliot G. Protsch, 50119781 Senior Erecutive Vie President and Chief Financial Officer James E. Hoffman, 50119951 Erecutive IWce President-Busintess Development Barbara J. Swan, 52 [1987]

Erecutive Vice President and General Counsel Pamela J. Wegner, 56 11993]

Executive Vice President-Strategy and Perfornance Thomas L. Aller, 54 119931 Senior Vice President-Energy Deliveer Kim K. Zuhlke, 50 [19781 Vice President-Neis Energy Resources F. J. Buri. 49 119991 Corporate Secretary Patricia L. Reininger, 51 1200)01 Assistant Corporate Secretary Joan NI. Thompson, 46 11977]

Assistant Cotro/ller Enrique Bacalao. 54 119981 Assistant Treasurer Officers are as of Jan. 28, 2004.

Ages are as of Dec. 31, 20)03.

Dates in brackets represent the -ear eant person joited a company that ultimately becarme parr of the Alliant Energyjamnily 4C i

i Timothy R. Bennington. 5911997]

Vice President-Generation Dundeana K. Doyle. 45 11984]

Vlire President-Strategy a'td Risk Robin NV. Gates, 51 119991 Vice Presidentt-Perforntonce Inmprovemnent Vern A. Gcebhart. 50 [19751 lice Presidentt-Customer Sen-ihe Operations-West Thomas L. Hanson, 50 [19801 Vice President and Treasurer Peggy Howard Moore, 53 [1987]

Vice President-Customner Sen ice and Operations Support John E. Kratchmer, 41 [1985]

Vice President-Controller aztd Chief Accounting Officer John 0. Larsen, 40 [1988]

Vice President-Technical and Integrated Sen-ices Christopher J. Lindell, 48 [19811 Vice Presidentt-Shared Sen-ices Theresa NM. Mulford, 46 [1996]

Vice President-Regtlatorn Affairs Barbara A. Siehr. 52 [1976]

Vice Presidentt-Ctcstomer Ser-ice Operations-East I I

I------- 11 i

i 071 To 6 0 0-t, ii i

Intgforeation sl>

9A listing of abbreviations and acronymns used in the text and notes in the financial infornation section of this report can befound on page 76.

VI

.\\I

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS Statements contained in this report that are not of historical fact are forward-looking statements intended to qualify for the safe harbors from liability established by the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in, or implied by, such statements. Some, but not all, of the risks and uncertainties include: weather effects on sales and revenues; economic and political conditions in Alliant Energy's domestic and international service territories; federal, state and international regulatory or governmental actions, including the impact of potential energy-related legislation in Congress and the ability to obtain adequate and timely rate relief to allow for, among other things, the recovery of operating costs and the earning of reasonable rates of return, as well as the payment of expected levels of dividends; unanticipated construction and acquisition expenditures; unanticipated issues in connection with Alliant Energy's construction of new generating facilities; issues related to purchased electric supplies and price thereof, including the ability to recover purchased-power and fuel costs through rates; issues related to electric transmission, including recovery of costs incurred, and federal legislation and regulation affecting such transmission; risks related to the operations of Alliant Energy's nuclear facilities and unanticipated issues relating to the sale of Alliant Energy's interest in Kewaunee; costs associated with Alliant Energy's environmental remediation efforts and with environmental compliance generally; developments that adversely impact Alliant Energy's ability to implement its strategic plan; the amount of premiums incurred in connection with Alliant Energy's planned debt reductions; improved results from Alliant Energy's Brazil investments and no material adverse changes in the rates allowed by the Brazilian regulators or from the expected utility sector reform currently being considered by Brazil regulators; improved performance by Alliant Energy's other non-regulated businesses as a whole; no material permanent declines in the fair market value of, or expected cash flows from, Alliant Energy's investments; Alliant Energy's ability to continue cost controls and operational efficiencies; Alliant Energy's ability to identify and successfully complete proposed acquisitions and development projects; access to technological developments; employee workforce factors, including changes in key executives, collective bargaining agreements or work stoppages; continued access to the capital markets; the ability to successfully complete ongoing tax audits and appeals with no material impact on Alliant Energy's earnings or cash flows; inflation rates; and factors listed in "Other Matters - Other Future Considerations." Alliant Energy assumes no obligation, and disclaims any duty, to update the forward-looking statements in this report.

STRATEGIC OVERVIEW November 2002 Plan - In 2003, Alliant Energy completed the plan it outlined in November 2002 to strengthen its financial profile. A summary of the five strategic actions completed under the plan follows.

Asset sales and related debt reduction -

o By July 2003, Alliant Energy had completed the sales of its Australian, affordable housing and SmartEnergy businesses.

o In November 2003, Alliant Energy completed an IPO of WPC, leaving Alliant Energy with a 5.76% ownership interest in WPC. Alliant Energy currently plans to divest its remaining interest in WPC during 2004, subject to market conditions.

o In 2003, Alliant Energy sold its water utility serving the Beloit area. Alliant Energy continues to pursue the sale of its water utilities serving the Ripon and South Beloit areas.

o As a result of the above completed asset sales, Alliant Energy reduced debt by approximately $875 million during 2003. Alliant Energy incurred charges to continuing operations of approximately $0.10 per diluted share in the fourth quarter of 2003 related to debt repayment premiums from long-term debt repurchases. Alliant Energy also had $242 million of cash and temporary cash investments as of Dec. 31, 2003.

Common equity offering - in July 2003, Alliant Energy sold 17.25 million shares (net proceeds of $318 million) of its common stock in a public offering and infused $200 million and $118 million into WP&L and IP&L, respectively, in support of their respective domestic utility generation and reliability initiatives.

Common stock dividend - Alliant Energy reduced its targeted annual common stock dividend from $2.00 per share to

$ 1.00 per share effective with the dividend paid in the first quarter of 2003.

Anticipated construction and acquisition expenditures for 2002 and 2003 - Alliant Energy reduced such aggregate expenditures by approximately $400 million, largely in its non-regulated business, from the plan that existed earlier in 2002.

Cost control - Alliant Energy has implemented a comprehensive Lean Six Sigma program, which it expects to help reduce its operating costs and improve the efficiency of its operations.

18

Updated Strategic Plan - Alliant Energy's domestic utility business is its core business and the sole growth platform within its updated strategic plan. As a result, Alliant Energy views its domestic utility business as the area of its business that is expected to provide the larger share of its long-term earnings growth. It will also be the area of the business that Alliant Energy will invest the bulk of its capital in during 2004 and 2005. Alliant Energy's remaining non-regulated businesses will serve as ongoing business platforms. Alliant Energy expects these businesses to contribute to its earnings growth, but to a lesser degree than its growth platform (i.e., domestic utility business). Alliant Energy does not expect to invest significant capital into these ongoing business platforms in 2004 and 2005. In addition, Alliant Energy's Non-regulated Generation business has refined its focus to support the development, financing and construction of generation to meet the needs of Alliant Energy's domestic utility business. Refer to "Liquidity and Capital Resources - Construction and Acquisition Expenditures" for additional information.

Alliant Energy's updated strategy reflects the fact that it has investment opportunities in its domestic utility business that did not exist several years ago. Progressive legislation was passed in Iowa that provides companies with the necessary rate making principles - and resulting increased regulatory and investment certainty - prior to making certain generation investments in Iowa. Wisconsin also enacted legislation with the goal of assuring reliable electric energy for Wisconsin. The law allows the construction of merchant power plants in the state and streamlines the regulatory approval process for building new generation and transmission facilities. More recently, the PSCW approved a plan proposed by another Wisconsin utility which provides a similar level of investment certainty by leasing generation from an affiliate. These changes have enabled Alliant Energy to pursue additional generation investments in its domestic utility business to serve its customers and to provide shareowners with greater certainty regarding the returns on these investments.

In December 2003, Alliant Energy announced its updated domestic utility generation plan, which is expected to add a diversified portfolio of nameplate generation between 2004 and 2010 as follows (in MW):

IP&L W

AP&L Total Natural gas-fired generation 840 300 1,140 Wind (purchased-power and/or generation) 130 100 230 Coal 200 200 Other 15 15 30 Total 985 615 1,600 Alliant Energy intends to add this new generation to meet increasing customer demand, reduce reliance on purchased-power agreements and mitigate the impacts of potential future plant retirements. Alliant Energy will continue to purchase energy and capacity in the market and intends to remain a net purchaser of both, but at a reduced level assuming the successful completion of these generation projects. Alliant Energy expects that 590 MW of the natural gas-fired generation will be installed as combustion turbines for peaking generation. The plan also reflects continued commitments to Alliant Energy's energy efficiency and environmental protection programs. The capital expenditures associated with this plan are expected to be approximately $650 million over the seven-year period of 2004 to 2010.

IP&L is currently constructing a $400 million 550 MW natural gas-fired plant (Emery) near Mason City, Iowa under its Power Iowa program to develop new electric generation capacity in Iowa. The Emery plant is expected to be placed in-service late in the second quarter of 2004. The rate making principles established for this investment reflect, among other things, recovery of the investment over 28 years based on a fixed 12.23% return on the common equity component of this investment. In January 2004, Alliant Energy announced that Resources' Non-regulated Generation business has assumed an option to purchase a site for a 300 MW natural gas-fired power plant outside Sheboygan Falls, Wisconsin. Subject to PSCW approval, Resources' Non-regulated Generation business would construct and own the approximately $150 million plant (of which $75 million has been expended as of Dec. 31, 2003 to purchase two gas turbines) and lease the facility to WP&L.

WP&L will operate the plant and utilize the plant's output. With the appropriate timely regulatory approvals, Alliant Energy currently intends to have this facility placed in-service in 2005. Both the Emery and Sheboygan Falls facilities are included in the figures in the previous table. In addition, Calpine Corporation is currently constructing a 600 MW natural gas-fired combined cycle power plant in Wisconsin at WP&L's Rock River plant (Riverside). WP&L has entered into a purchased-power agreement for 453 MW of this plant's output and the plant is expected to be placed in-service prior to the 2004 summer peak demand.

19

I a RATES AND REGULATORY MATTERS Overview - Alliant Energy has two primary utility subsidiaries, IP&L and WP&L. WP&L has one utility subsidiary, South Beloit Water, Gas and Electric Company (South Beloit). Alliant Energy's utility subsidiaries are currently subject to federal regulation by FERC and state regulation in Iowa, Wisconsin, Minnesota and Illinois. Such regulatory oversight covers not only current facilities and operations, but also the utilities' plans for construction and financing of new generation facilities and related activities.

As a public utility holding company with significant utility assets, Alliant Energy conducts its utility operations in an ever-changing business environment. Electric energy generation, transmission and distribution are facing a period of fundamental change resulting from potential legislative, regulatory, economic and technological changes. These changes could impact competition in the electric wholesale and retail markets in the event customers of electric utilities are offered alternative suppliers. Such competitive pressures could result in electric utilities losing customers and incurring stranded costs (i.e.,

assets and other costs rendered unrecoverable as the result of competitive pricing), which would be borne by security holders if the costs cannot be recovered from customers. FERC regulates competition in the electric wholesale power generation market and each state regulates whether to permit retail competition, the terms that would apply and the recovery of any portion of stranded costs that are ultimately determined to have resulted from retail competition. Alliant Energy cannot predict the timing of a restructured electric industry or the impact on its financial condition or results of operations. The pace of restructuring in its primary retail electric service territories has been delayed (and may continue to be delayed for a long period of time) due to uncertainty and developments in the industry.

Certain Recent Developments - Details of Alliant Energy's rate cases impacting its results of operations since 2001 are as follows (dollars in millions):

Expected Return Interim Interim Final Final Final on Utility Filing Increase Increase Effective Increase Effective Effective Common Case Type Date Requested Granted (l)

Date Granted (1)

Date Date Equity Notes WP&L:

2002 retail E/GIW 8/01 S104 S49 4/02 S82 9102 NhA 12.3%

2003 retail EIGAV 5/02 123 N/A 81 4/03 N/A 12%

(2) 2004 retail E/GAV 3/03 87 N/A 14 1104 N/A 12%

(3)

Wholesale E

2/02 6

6 4102 3

1103 N/A N/A (4)

Wholesale E

3/03 5

5 7103 5

2104 N/A N/A South Beloit retail - IL G/W 10103 I

N/A N/A TBD TBD 9/04 TBD 2004 retail (fuel-only)

E 2104 16 TBD TBD TBD TBD 8104 N/A IP&L retail - IA E

3102 82 15 7102 26 5103 N/A 11.15%

IP&L retail - IA G

7102 20 17 10/02 13 8103 N/A 11.05%

(4)

IP&L retail - MN E

5103 5

2 7103 TBD TBD 5104 TBD (1)

Interim rate relief is implemented, subject to refund, pending determination of final rates. The final rate relief granted replaces the amount of interihi rate relief granted.

(2)

A party representing selected commercial and industrial electric customers had appealed the rate case to a court, seeking remand back to the PSCW for further consideration on issues of revenue increase amount and rate design. In December 2003, the court denied the request for remand and affirmed the PSCW's earlier decision.

(3)

A number of factors contributed to the final rate relief being set lower than the original request, including lower projected fuel and purchased-power costs, reduced operation and maintenance costs, lower purchased-power incentive costs and reduced capital expenditures.

(4)

Since the final increase was lower than the interim relief granted, a refund to customers was made in 2003.

A significant portion of the rate increases included in the previous table reflect the recovery of increased costs incurred by IP&L and WP&L, or costs they expect to incur, thus the total increase in revenues related to these rate increases have not or are not expected to result in a corresponding increase in net income. IP&L expects to file for an Iowa electric rate increase in' March 2004 which will include costs associated with the Emery plant currently under construction in interim rates pursuant to the rate making principles approved earlier. Refer to "Strategic Overview - Updated Strategic Plan" for further information regarding Emery.

20 l I

WP&L's retail electric rates arc based on annual forecasted fuel and purchased-power costs. Under PSCW rules, NVP&L can seek rate increases if it experiences an extraordinary increase in the cost of fuel or if the annual costs are more than 3% higher than the estimated costs used to establish rates. Such rules were revised effective for 2003 for WP&L and significantly reduce the regulatory lag for Wisconsin utilities and customers related to the timing of changes in rates for increased or decreased fuel and purchased-power costs. The revised rules require that an interim increase/decrease in rates subject to increased/decreased fuel costs, if determined to be justified, be approved within 21 days of notice to customers. Any such change in rates would be effective prospectively, would require a refund with interest if final rates are determined to be lowver than interim rates approved, and would not include a provision for collection of retroactive fuel cost variances. The revised rules also include a process whereby Wisconsin utilities can seek deferral treatment of emergency changes in fuel costs between fuel-only or base rate cases. Such deferrals would be subject to review, approval and recovery in future fuel-only or base rate cases.

In 2002, IP&L filed with the Internal Revenue Service (IRS) for a change in method of accounting for tax purposes for 1987 through 2001 that would allow a current deduction related to mixed service costs. Such costs had previously been capitalized and depreciated for tax purposes over the appropriate tax lives. This change would create a significant current tax benefit that has not been reflected in IP&L's results of operations pending a decision from the IUB on the required rate making treatment of the benefit. In its April 2003 order, the IUB approved IP&L's proposed accounting treatment to defer the tax savings resulting from the change of accounting method until the IRS audit on this issue is complete. The rate making impact will be addressed once the issue is resolved with the IRS, which is expected to occur in 2004. There would be no material negative impact on IP&L's results of operations or financial position should the IRS reject IP&L's proposal.

Energy-related legislation is currently pending in the U.S. Congress that, among other proposals, would repeal PUHCA.

However, it is uncertain when or whether such legislation will be enacted or what impact it would have on Alliant Energy.

RESULTS OF OPERATIONS Unless othenvise noted, all "per share" references in the Results of Operations section refer to earnings per diluted share.

Refer to Note I (a) of the "Notes to Consolidated Financial Statements" for discussion of the various components of Alliant Energy's business.

Overview - Alliant Energy's EPS was as follows:

2003 2002 2001 Income from continuing operations

$1.57

$0.97 S.59 Income from discontinued operations 0.30 0.21 0.71 Cumulative effect of changes in accounting principles (0.06)

(0.16)

Net income S1.81

$1.18 S2.14 Additional details regarding Alliant Energy's net income were as follows (in millions):

2003 2002 2001 Continuing operations:

Domestic utility operations S197.2

$165.8

$164.9 Non-regulated (Resources)

(25.7)

(80.4)

(38.1)

Alliant Energy parent and other (primarily taxes, interest and administrative and general)

(11.8) 2.1 1.4 Income from continuing operations 159.7 87.5 128.2 Discontinued operations:

Operating results (includes SFAS 133 and tax adjustments) 27.9 15.9 57.1 Losses on sales of discontinued operations, net (22.9)

Discontinuing depreciation, depletion and amortization of assets held for sale 24.8 3.5 Income from discontinued operations 29.8 19.4 57.1 Cumulative effect of changes in accounting principles (6.0)

(12.9)

Net income

$183.5 S106.9

$172.4 The 2003 increase in domestic utility income from continuing operations was largely due to higher electric and gas margins, which were partially offset by higher operating expenses. The significant improvement in Alliant Energy's non-regulated results from continuing operations for 2003 was primarily due to improved results from its International and Integrated 21

I I I Services businesses and lower non-cash valuation charges of S0.35 per share, which were partially offset by S0.10 per share of charges in 2003 related to early debt reductions. Income from continuing operations for domestic utility operations increased slightly in 2002 as higher electric and gas margins were largely offset by increased operating expenses and a higher effective income tax rate. The lower 2002 results from continuing operations for Alliant Energy's non-regulated businesses were primarily due to higher losses of $23 million from Alliant Energy's Brazil investments, higher non-cash valuation charges of $0.15 per share and higher interest expense, partially offset by improved results from Alliant Energy's China and New Zealand businesses. Alliant Energy incurred non-cash valuation charges of $0.06, $0.41 and $0.26 per share in 2003, 2002 and 2001, respectively. Refer to "Cumulative Effect of Changes in Accounting Principles" for discussion of the charges recorded in 2003 and 2001.

Domestic Utilitv Electric MarEgins - Electric margins and MWh sales for Alliant Energy were as follows (in thousands):

Revenues and Costs 2003 2002 2001 2003 Residential S684,574

$626,947 9%

5599,074 5%

7,56; Commercial 409,704 376,365 9%

373,145 1%

5,663 Industrial 571,608 526,804 9%

543,471 (3%)

12,34 Total from retail customers 1,665,886 1,530,116 9%

1,515,690 1%

25,57:

Sales for resale 195,822 160,335 22%

184,507 (13%)

5,49:

Other 55.360 62,083 (11%)

56,359 10%

18-Total revenues/sales 1,917,068 1,752,534 9%

1,756,556 31,252 Electric production fuel and purchased-power expense 730,594 651,813 12%

695,168 (6%)

Margin

$1,186,474

$1,100,721 8%

$1,061,388 4%

• Reflects the % change from 2002 to 2003. ** Reflects the % change from 2001 to 2002.

5 5

MWhs Sold 2002 2001 7,616 (1%)

7,344 4%

5,542 2%

5,464 1%

12,297 12,469 (1 %)

25,455

-4,805 14%

t 197 (7%)

! 30,457 3%

25,277 1%

4,936 (3%)

168 17%

30,381 Electric margin increased $85.8 million, or 8%, and $39.3 million, or 4%, for 2003 and 2002, respectively, primarily due to the impact of rate increases implemented in 2003 and 2002, including increased revenues to recover a significant portion of higher utility operating expenses, lower purchased-power and fuel costs impacting margins, the impact of WP&L implementing seasonal rates in 2003 for the first time and increased sales resulting from continued modest retail customer growth. The 2003 increase was also due to higher sales to non-retail customers, partially offset by milder weather conditions in 2003 compared to 2002. The 2002 increase was also due to more favorable weather conditions, partially offset by reduced energy conservation revenues (which were largely offset by lower energy conservation expenses) and the impact of a sluggish economy.

In April 2003, WP&L implemented seasonal electric rates that are designed to result in higher rates for the peak demand period from June I through Sept. 30 and lower rates in all other periods during each calendar year. As a result, total annual revenues are not expected to be impacted significantly. However, given the seasonal rates were not implemented in 2003 until April, the impact of seasonal rates increased electric margins by approximately $6 million in 2003 compared to 2002 when no seasonal rates were in effect. As a result, the first quarter of 2004 margins are expected to be negatively impacted in comparison to the 2003 margin for' the same period by a similar amount.

Domestic Utilitv Gas Margins - Gas margins and Dth sales for Alliant Energy were as follows (in thousands):

Revenues and Costs Dths Sold 2003 2002 2001

• a 2003 2002 2001 Residential

$310,658 S218,746 42%

$270,248 (19%)

31,871 30,931 3%

29,580 5%

Commercial 162,651 111,343 46%

141,121 (21%)

19,947 19,348 3%

18,055 7%

Industrial 34,201 25,177 36%

31,262 (19%)

5,093 5,373 (5%)

5,344 1%

Transportation/other 59,416 38,720 53%

45,246 (14%)

48,978 47,386 3%

48,539 (2%)

Total revenues/sales 566,926 393,986 44%

487,877 (19%)

105,889 103,038 3%

101,518 1%

Cost of gas sold 396,102 248,994 59%

360,911 (31%)

Margin

$170,824 S144,992 18%

$126,966 14%

• Reflects the % change from 2002 to 2003. ** Reflects the % change from 2001 to 2002.

22 I a

Gas revenues and cost of gas sold were higher in 2003 and 2001 as compared to 2002 primarily due to increased natural gas prices. Due to Alliant Energy's rate recovery mechanisms for gas costs, these price differences alone had little impact on gas margin. Gas margin increased $25.8 million, or 18%, and $18.0 million, or 14%, for 2003 and 2002, respectively, primarily due to the impact of several rate increases implemented during 2003 and 2002, improved results of S3 million from WP&L's performance-based gas commodity cost recovery program (benefits are shared by ratepayers and shareowners), and continued modest customer growth. The 2003 increase was also due to slightly more favorable weather conditions during the heating season in 2003 compared to 2002. The 2002 increase was also due to the negative impact high gas prices in early 2001 had on gas consumption during that period, partially offset by reduced energy conservation revenues (which were largely offset by lower energy conservation expenses).

Refer to Note I (i) of the "Notes to Consolidated Financial Statements" for information relating to utility fuel and natural gas cost recovery.

Domestic Utility Other Revenues - Other revenues for the domestic utilities increased S18.8 million and decreased S 16.5 million for 2003 and 2002, respectively. The 2003 increase was largely due to increased revenues from WindConnectT"',

which includes Alliant Energy's wind farm construction management projects. The 2002 decrease was primarily due to lower non-commodity products and services revenues. These 2003 and 2002 variances were largely offset by variances in other operation and maintenance expenses for the domestic utilities.

Non-reaulated Revenues - Details regarding Alliant Energy's non-regulated revenues were as follows (in millions):

2003 2002 2001 Integrated Services

$382

$134

$193 International 117 100 77 Non-regulated Generation 15 Other (includes eliminations) 26 21 18

$540

$255

$288 The 2003 Integrated Services increase was primarily due to increased gas revenues at Alliant Energy's natural gas marketing business, NG Energy, largely due to the impact of a new accounting pronouncement, higher natural gas prices and increased volumes sold. Increased revenues at Alliant Energy's energy and environmental services businesses also contributed to the increase. Refer to Note 10(d) of the "Notes to Consolidated Financial Statements" for further discussion of the impact of the new accounting pronouncement. The 2002 Integrated Services decrease was primarily due to decreased gas prices and lower energy services revenues. The increased International revenues for 2003 and 2002 were primarily due to acquisitions of additional combined heat and power facilities in China during 2001, 2002 and 2003. The 2003 Non-regulated Generation revenues were due to generation from a 309-MW, non-regulated, tolled, natural gas-fired power plant in Neenah, Wisconsin.

Other Operatine Exnenses - Other operation and maintenance expenses for the domestic utilities increased $78.5 million in 2003, primarily due to increases in the amortization of deferred costs that are now being recovered in rates and increased employee and retiree benefits (primarily compensation, medical and pension costs), WindConnectT'l and nuclear expenses.

The increased nuclear expenses resulted primarily from a planned refueling outage at Kewaunee in 2003. There was no refueling outage in 2002. These items were partially offset by lower fossil generation expenses due to the timing of boiler plant maintenance. The 2002 increase of $36.7 million was primarily due to increased fossil and nuclear generation expenses, employee and retiree benefits, transmission and distribution expenses and higher regulatory amortizations, partially offset by lower energy conservation and non-commodity products and services expenses and uncollectible account balances.

A significant portion of these cost increases are being recovered as a result of the rate increases implemented during 2003 and 2002. Refer to "Rates and Regulatory Matters" for additional information.

Non-regulated operation and maintenance expenses were as follows (in millions):

2003 2002 2001 Integrated Services S366

$119

$181 International 90 77 59 Non-regulated Generation 10 7

5 Other (includes eliminations) 27 20 14 S493

$223 S259 23

l '

The Integrated Services, International and Non-regulated Generation variances were largely driven by the same factors impacting the revenue variances discussed previously. The 2003 Integrated Services increase was also due to an asset valuation charge of $6 million in 2003 related to a small waste-to-energy plant. Charges of S4 million, $5 million and $2 million are included in "Non-regulated Generation" in 2003, 2002 and 2001, respectively, for cancelled contracts and generation projects.

Depreciation and amortization expense increased $23.0 million and decreased $12.2 million in 2003 and 2002, respectively.

The 2003 increase was primarily due to utility property additions, an increase of $9.5 million in non-regulated depreciation and amortization due largely to acquisitions at the non-regulated businesses and higher contributions of $4 million to IP&L's nuclear decommissioning trust fund. The 2002 decrease was primarily due to: a decrease of S14 million from implementation of lower depreciation rates at IP&L on Jan. 1, 2002, resulting from an updated depreciation study; lower decommissioning expense based on reduced retail funding levels at WP&L; and the elimination of S5 million of goodwill amortization expense in compliance with new accounting rules effective in 2002. These items were partially offset by utility property additions, acquisitions at the non-regulated businesses and increased software amortizations.

Taxes other than income taxes decreased $ 14.4 million in 2003 primarily due to decreased property taxes related to a 2003 property tax settlement and expiration of provisions which required additional payments in the early years of the revised property tax regulations in Iowa at IP&L. In 2003, IP&L settled a property tax appeal it had filed with the Iowa Department of Revenue and Finance. In addition to the benefits realized in 2003, IP&L expects to realize reductions in property tax expense of $5.1 million, $3.6 million and S2.1 million in 2004, 2005, and 2006 and thereafter, respectively, in comparison to what property tax expense would have been without the settlement. The impact of the settlement on ratepayers will be addressed in future rate making proceedings.

Interest Expense and Other - Interest expense increased $24.4 million and SO.7 million in 2003 and 2002, respectively. The 2003 increase was due to higher average borrowing rates at Resources due to an increase in the mix of long-versus short-term debt outstanding, higher credit facility fees at Resources and higher interest expense at the parent company. These items were partially offset by the impact of lower average borrowings at Resources. The 2002 increase was due to higher non-regulated borrowings, substantially offset by the impact of lower interest rates on Alliant Energy's variable rate borrowings and lower short-term debt at the Alliant Energy parent level, largely due to the impact of proceeds received in 2001 from a common equity offering.

Loss on early extinguishment of debt in 2003 includes debt repayment premiums and charges for the unamortized debt expenses related to long-term debt retirements of $71.5 million of senior notes at Resources and S24.0 million of senior notes at the Alliant Energy parent company.

Equity (income) loss from Alliant Energy's unconsolidated investments was as follows (in millions):

2003 2002 2001 ATC

($16)

(S14)

(S15)

Brazil (9) 23 4

New Zealand (8)

(4)

WRPC (5)

(3)

(1)

Cargill-Alliant (sold in 2002)

(1)

(7)

Synfuel (began operations 5/02) 20 13 Other (1)

(1)

(S19)

S13

($19)

Equity income from unconsolidated investments increased $32 million and decreased $32 million in 2003 and 2002, respectively. The improved results for Brazil during 2003 were primarily due to: rate increases implemented at all five of the Brazil operating companies throughout 2003; an increase in electric sales volumes of approximately 7% in 2003 compared to 2002; foreign currency transaction gains of S2.4 million and losses of S6.5 million during 2003 and 2002, respectively, related to approximately $40 million in debt at one of the Brazilian operating companies; and charges of $7.7 million during 2002 resulting from the receipt of regulatory orders related to the recovery of various costs. The lower 2002 results from the Brazil investments were also due to higher interest expense at the Brazil operating companies, partially offset by an approximate 5% increase in electric sales volumes during 2002 (a drought-driven rationing program was in place for seven months in 2001 and only two months in 2002). The 2001 Brazil results included a charge related to the impacts of a settlement reached between the Brazilian government and the distribution companies on the economic resolution of various 24 I I

cost recovery issues. The increased earnings from New Zealand during 2003 were primarily due to higher energy prices and gains on asset sales in 2003. The 2002 increased earnings from New Zealand were primarily due to the negative impacts of drought conditions in 2001. In 2002, Synfuel purchased an equity interest in a synthetic fuel processing facility. The synthetic fuel project generates operating losses at its fuel processing facility, which are more than offset by tax credits and the tax benefit of the losses the project generates. All tax benefits are included in "Income taxes" in the Consolidated Statements of Income. Refer to "Other Matters -Other Future Considerations" for further discussion of the tax credits associated with the Synfuel investment.

AFUDC increased $13.0 million in 2003, primarily due to ongoing construction of the Emery plant. Preferred dividend requirements of subsidiaries increased $10.7 million in 2003 due to an increase in the aggregate amount of preferred stock outstanding at IP&L and a higher dividend rate. Refer to Note 9 of the "Notes to Consolidated Financial Statements" for discussion of the asset valuation charges recorded by Alliant Energy in 2002 related to its McLeod available-for-sale securities.

Miscellaneous, net income increased $22.9 million and decreased $4.7 million in 2003 and 2002, respectively, largely due to the recording of pre-tax asset valuation charges related to Alliant Energy's investments in Enermetrix, Inc. ($8.5 million in 2002) and Energy Technologies (S2.8 million in 2003 and $10.3 million in 2002). The 2003 increase was also due to improvements in the non-cash valuation adjustments related to Alliant Energy's McLeod trading securities, foreign currency transaction gains and gains from asset sales realized in 2003. These items were partially offset by lower interest income from loans to discontinued operations due to asset sales during 2003. The 2002 decrease was also impacted by lower interest income (the 2001 results included $10 million from tax settlements), gains from asset sales realized in 2001 and lower pre-tax, non-cash SFAS 133 valuation charges of $29 million, related to the net change in the value of the McLeod trading securities and the derivative component of Resources' exchangeable senior notes. Refer to Note I (p) of the "Notes to Consolidated Financial Statements" for further discussion.

Income Taxes - The effective income tax rates for Alliant Energy's continuing operations were 28.9%, 31.2% and 27.8% in 2003,2002 and 2001, respectively. Alliant Energy recorded tax benefits of $6.4 million in 2001 related to a court ruling on a federal tax case. Refer to Note 5 of the "Notes to Consolidated Financial Statements" for additional information.

Income from Discontinued Operations - Refer to "Overview" and Note 16 of the "Notes to Consolidated Financial Statements" for discussion of Alliant Energy's discontinued operations.

Cumulative Effect of Chances in Accounting Principles - In 2003, Alliant Energy recorded after-tax charges of $4 million and S2 million for the cumulative effect of changes in accounting principles related to the adoption on Jan. 1, 2003 of SFAS.

143 and EITF Issue 02-3 within WPC and Integrated Services, respectively. Refer to Notes 10(d) and 10(a) of the "Notes to Consolidated Financial Statements" for further information on the EITF Issue 02-3 charge and for discussion of the charge incurred in 2001 for a cumulative effect of a change in accounting principle, respectively.

LIQUIDITY AND CAPITAL RESOURCES Overview - Based on expected operating cash flows, coupled with actions Alliant Energy has taken and expects to take to strengthen its balance sheet, Alliant Energy believes it will be able to secure the capital it requires to implement its updated strategic plan. Alliant Energy believes its ability to secure additional capital has been significantly enhanced by the successful execution of the strategic actions it announced in November 2002. Refer to "Strategic Overview - November 2002 Plan" for further discussion.

Alliant Energy's capital requirements are primarily attributable to construction programs and its debt maturities. Cash flows from Alliant Energy's utility subsidiaries are expected to cover dividends and capital expenditures related to infrastructure and reliability investments. The capital expenditures associated with building additional generation are expected to total S650 million through 2010 and are expected to be financed largely through external financings, supplemented by internally generated funds. In order to balance its capital structure, Alliant Energy may periodically issue additional common equity as well as debt.

Cash Flows - Selected information from the Consolidated Statements of Cash Flows was as follows (in thousands):

Cash flows from (used for):

2003 2002 2001 Operating activities

$419,990

$555,338

$433,346 Financing activities 34,080 72,237 161,075 Investing activities (274,648)

(632,602)

(654,561) 25

I~I I

In 2003, Alliant Energy's cash flows from operating activities decreased S135 million primarily due to changes in working capital caused largely by changes in the levels of accounts receivable sold and higher inventory balances, partially offset by higher net income. Cash flows from financing activities decreased $38 million primarily due to changes in the amounts of debt and preferred stock issued and retired, partially offset by proceeds from a 2003 common equity offering and lower common stock dividends due to the dividend reduction implemented in 2003. Cash flows used for investing activities decreased S358 million primarily due to proceeds from asset sales, partially offset by construction and acquisition expenditures associated with the construction of the Emery plant. In 2002, Alliant Energy's cash flows from operating activities increased $122 million primarily due to changes in working capital. Cash flows from financing activities decreased S89 million primarily due to proceeds from the issuance of common stock in 2001, partially offset by a net increase in the amount of preferred stock outstanding at IP&L. Cash flows used for investing activities decreased S22 million primarily due to lower construction and acquisition expenditures, partially offset by proceeds received in 2001 from the transfer of WP&L's transmission assets to ATC.

Certain Reaulatorv Anprovals/Requirements - PUHICA - In 2001, Alliant Energy and Resources received SEC approval under an Omnibus Financing Order for their ongoing program of external financing, credit support arrangements and other related proposals for the period through Dec. 31, 2004. Among other things, the approval authorized Alliant Energy, directly or through financing subsidiaries, to issue common and preferred stock, unsecured long-term debt securities and other equity-linked securities up to an amount of S 1.5 billion; to provide guarantees and credit support for obligations of its subsidiaries up to an amount of S3 billion; to enter into hedging transactions to manage interest rate costs and risk exposure; and to increase its aggregate investment limit in exempt wholesale generators and foreign utility companies to 100% of consolidated retained earnings. The approval, among other things, also authorized Resources to provide guarantees and credit support for obligations of non-utility subsidiaries up to an amount of S600 million outstanding at any one time.

In June 2002, Alliant Energy received approval (valid through Dec. 31, 2004) from the SEC to issue and sell up to an aggregate amount of SI billion of short-term debt outstanding at any one time and to guarantee short-term borrowings by Resources in an aggregate amount that would not exceed S700 million at any one time in addition to its other guarantee authority granted in the Omnibus Financing Order discussed previously. In October 2002, IP&L received SEC approval (valid through Dec. 31, 2004) to issue short-term debt in a principal amount which would not at any one time exceed $300 million. Issuance of debt securities by WP&L is exempt from regulation under provisions of PUHCA.

In 2004, Alliant Energy and certain of its subsidiaries will file appropriate applications with the SEC for renewal of financing, guarantee and other authority required to accommodate its financing needs. Alliant Energy expects that such authority will be granted by the SEC on a timely basis.

Alliant Energy is also subject to a PUHCA requirement whereby Alliant Energy's common equity balance must be at least 30% of its total consolidated capitalization, including short-term debt. Alliant Energy's common equity ratio as of Dec. 31, 2003, as computed under this requirement, was 46.8%.

State Regulatory Agencies - At Dec. 31, 2003, IP&L and WP&L were authorized by the appropriate state regulatory agencies to issue short-term debt of S250 million and S240 million, respectively. The $240 million borrowing authority for WP&L includes S85 million for general corporate purposes, an additional $ 100 million should WP&L no longer sell its utility receivables and an additional S55 'million should WP&L need to repurchase its variable rate bonds.

Shelf Registrations - In 2003, Alliant Energy and Resources, in a joint filing, and IP&L filed shelf registrations. The joint filing relates to proposed offerings, from time to time, of an aggregate amount of up to S400 million of Alliant Energy's common stock, stock purchase contracts, and stock purchase units; and Resources' senior unsecured debt securities inclusive of the full and unconditional guarantee by Alliant Energy of Resources' debt securities. A total of S68 million of securities remains available under the joint shelf registration. The IP&L shelf registration relates to proposed offerings, from time to time, of an aggregate of up to S150 million of preferred stock, senior unsecured debt securities and collateral trust bonds. A total of SI10 million of securities remains available under the IP&L shelf registration.

Cash and Temporarv Cash Investments - As of December 31, 2003, Alliant Energy and its subsidiaries had approximately

$242 million of cash and temporary cash investments, of which approximately $67 million consisted of deposits in foreign bank accounts. Due to Alliant Energy electing permanent investment of earnings for federal income tax purposes for certain foreign subsidiaries, a majority of the cash held in foreign banks cannot be repatriated without material tax obligations.

Alliant Energy plans to use a portion of this cash held in foreign bank accounts to invest in future capital projects in China.

26 l

Sale of Accounts Receivable - Refer to Note 4 of the "Notes to Consolidated Financial Statements" for information on Alliant Energy's sale of accounts receivable program.

Short-term Debt -Alliant Energy and its subsidiaries are party to various credit facilities and other borrowing arrangements.

In September 2003, Alliant Energy completed the syndication of three 364-day revolving credit facilities (facilities) totaling

$650 million (S200 million for Alliant Energy at the parent company level, $250 million for IP&L and $200 million for WP&L),

available for direct borrowing or to support commercial paper. Alliant Energy has the option to convert these facilities into one-year term loans. The facility at the parent company level is used to fund Resources and Corporate Services as well as its ovn needs. It is expected that Alliant Energy, IP&L and WP&L will be able to renew or replace these facilities on favorable terms wvhen they mature in 2004. In addition to funding working capital needs, the availability of short-term financing provides the companies flexibility in the issuance of long-term securities. The level of short-term borrowing fluctuates based on seasonal corporate needs, the timing of long-term financings and capital market conditions. Information regarding commercial paper at Dec. 31,2003 and during 2003 was as follows (dollars in millions):

Alliant Parent Energy Company IP&L WP&L Commercial paper:

Amount outstanding at Dec. 31,2003

$107.5 S107.5 S--

Weighted average maturity at Dec. 31, 2003 13 days N/A 13 days N/A Discount rates at Dec. 31, 2003 1.20-1.22%

N/A 1.20-1.22%

N/A Available capacity at Dec. 31, 2003

$542.5

$200.0

$142.5

$200.0 Average daily amount outstanding during 2003

$187.7 S97.4 S60.5

$29.8 Maximum daily amount outstanding during 2003

$346.5

$215.0

$190.0 S84.5 Alliant Energy's, IP&L's and WP&L's credit facility agreements contain various covenants, including the following:

Covenant Status at Covenant Description (*)

Requirement Dec.31, 2003 Alliant Energy:

Consolidated debt-to-capital ratio Less than 65%

48.7%

Consolidated net worth At least $1.4 billion

$2.4 billion EBITDA interest coverage ratio At least 2.5x 3.6x IP&L debt-to-capital ratio Less than 58%

47.3%

WP&L debt-to-capital ratio Less than 58%

29.9%

(*) In compliance with the agreements, results of discontinued operations have been included in the covenant calculations.

The debt component of the capital ratios includes long-and short-term debt (excluding non-recourse debt and trade payables), capital lease obligations, letters of credit and guarantees of the foregoing and unfunded vested benefits under qualified pension plans. The equity component excludes accumulated other comprehensive income (loss). The EBITDA component of the interest coverage ratio is calculated by adding back depreciation and amortization expense to operating income.

Alliant Energy's credit facility contains a cross default provision providing it is a default under the credit facility if the majority-owned subsidiaries of Alliant Energy default on debt totaling $25 million or more. A default by a minority-owned affiliate would not create a cross default. A default by Alliant Energy or Resources would not be a cross default for WVP&L or IP&L, nor would a default by either of the utilities create a cross default for the other utility.

Alliant Energy's, IP&L's and WP&L's credit facilities contain negative pledge provisions, which generally prohibit placing liens on any of the property of Alliant Energy or its subsidiaries with certain exceptions, including among others, for the issuance of secured debt under first mortgage bond indentures by IP&L and WP&L, non-recourse project financing, purchase money liens, and liens on the owvnership interests in or assets of foreign subsidiaries to secure not more than S200 million aggregate principal amount of foreign debt.

Alliant Energy's, IP&L's and WP&L's credit facilities contain material adverse change (MAC) clauses. Before each extension of credit (each borrowing under the facilities), each borrower must represent and warrant that no MAC has occurred since December 31, 2002. A MAC is defined as a change that would create: (1) a MAC in, or a material adverse effect upon, the operations, business, properties, liabilities (actual or contingent), condition (financial or otherwise) or prospects of the borrower or the borrower and its subsidiaries taken as a whole; (2) a material impairment of the ability of the borrower to perform its 27

I'a obligations under a credit facility agreement to which it is a party; or (3) a MAC upon the legality, validity, binding effect or enforceability against the borrower of any credit agreement to which it is a party.

Alliant Energy's, IP&L's and WP&L's credit facilities contain provisions that require, during the term of the facilities, any proceeds from asset sales, with certain exclusions, in excess of 5% of their respective consolidated assets in any 12-month period be used to reduce commitments under their respective facilities. Exclusions include, among others, certain inter-company sales, certain sale and lease-back transactions and the WPC IPO.

Lon2-term Debt - In September 2003, IP&L issued $100 million of 5.875% unsecured senior debentures due 2018 and used the majority of the net proceeds to redeem $27.5 million of its 7.25% first mortgage bonds, $20 million of its 8.625% first mortgage bonds and $50 million of its 7.875% subordinated deferrable interest debentures. In October 2003, IP&L completed a $100 million issuance of 6.45% unsecured senior debentures due 2033 and used the majority of the net proceeds to redeem S94.0 million of its 7.625% first mortgage bonds.

In the fourth quarter of 2003, a portion of the proceeds from the WPC IPO were used to retire approximately $96 million of long-term debt, consisting of S24'million of Alliant Energy's 8.59% senior notes (at parent company), S 17.5 million of Resources' 7% senior notes, S39 million of Resources' 7.375% senior notes and $15 million of Resources' 9.75% senior notes. Premiums of approximately $0.10 per share were incurred in the fourth quarter of 2003 related to these long-term debt repurchases. Alliant Energy estimates it will incur SO.04 to $0.08 per share of debt repayment premiums in 2004 related to additional long-term debt repurchases by Resources. Refer to "Strategic Overview - November 2002 Plan" for additional discussion of Alliant Energy's debt reduction and other strategic actions to strengthen its financial profile.

In September 2003, WP&L retired $70 million of its 8.6% first mortgage bonds due 2027 largely from proceeds of a capital contribution from Alliant Energy.;

Refer to "Contractual Obligations" for the timing of Alliant Energy's long-term debt maturities. Depending upon market conditions, it is currently anticipated that a majority of the maturing debt will be refinanced with the issuance of long-term securities. Refer to Note 8 of the "Notes to Consolidated Financial Statements" for additional information on short-and long-term debt.

Preferred Stock - In September 2003, IP&L issued 1.6 million shares of 7.10% cumulative preferred stock at a price to the public of S25.00 per share in a public offering and received proceeds of approximately S38.7 million, which were used to reduce short-term debt.

Common Euuitv - Refer to "Strategic Overview - November 2002 Plan" for discussion of a common equity offering completed by Alliant Energy in July 2003. Subject to market and other conditions, Alliant Energy intends to sell additional equity in 2004. These equity sales may involve traditional underwritten offerings, continuous equity offerings or other transactions. The purpose of these equity sales would be to fund, among other things, the recently announced domestic generation build-out program. In addition to such common equity offerings, Alliant Energy also issues new common shares through its Shareowner Direct (dividend reinvestment and stock purchase plan) and 401 (k) Savings Plans and generally uses the proceeds from these issuances to assist in funding construction and acquisition expenditures and for general corporate purposes.

Credit Ratings and Balance Sheet - Access to the capital and credit markets, and costs of obtaining external financing, are dependent on creditworthiness. Alliant Energy is committed to taking the necessary steps required to maintain investment-grade credit ratings and a strong balance sheet. Refer to "Strategic Overview -November 2002 Plan" for a discussion of specific actions taken in this regard. Although Alliant Energy believes the actions taken in 2003 to strengthen its balance sheet will enable it to maintain investment-grade credit ratings, no assurance can be given that it will be able to maintain its existing credit ratings. If Alliant Energy's credit ratings are downgraded in the future, then Alliant Energy's borrowing costs may increase and its access to capital markets may be limited. If access to capital markets becomes significantly constrained, then Alliant Energy's results of operations and financial condition could be materially adversely affected. Alliant Energy's current credit ratings and outlook that were affirmed in January 2004 by both Standard & Poor's Rating Services (Standard &

Poor's) and Moody's Investors Service (Moody's) are as follows (long-term debt ratings only apply to senior debt):

28 I I

Standard & Poor's Moody's IP&L Secured long-term debt A-A3 Unsecured long-term debt BBB Baal Commercial paper A-2 P-2 Corporate/issuer I3BB+

Baal WP&L Secured long-term debt A

Al Unsecured long-term debt BBB+

A2 Commercial paper A-2 P-1 Corporate/issuer A-A2 Resources (a)

Unsecured long-term debt BBB Baa3 Commercial paper Not rated P-3 Corporate/issuer BBB+

Not rated Alliant Energy Unsecured long-term debt BBB Not rated Commercial paper A-2 P-3 Corporate/issuer BBB+

Not rated All Entities Outlook Negative Stable (a) Resources' debt is fully and unconditionally guaranteed by Alliant Energy.

Ratinas Trieaers - The long-term debt of Alliant Energy and its subsidiaries is not subject to any repayment requirements as a result of explicit credit rating downgrades or so-called "ratings triggers." Pre-existing ratings triggers in certain lease agreements were eliminated during 2003. However, Alliant Energy and its subsidiaries are parties to various agreements, including purchased-power agreements, fuel contracts, accounts receivable sale contracts and corporate guarantees that are dependent on maintaining investment-grade credit ratings. In the event of a downgrade below investment-grade, Alliant Energy or its subsidiaries may need to provide credit support, such as letters of credit or cash collateral equal to the amount of the exposure, or may need to unwind the contract or pay the underlying obligation. Both IP&L and WP&L are party to accounts receivable sale agreements that provide that any respective utility downgraded below investment-grade becomes ineligible to sell receivables under the program. In the event of downgrades below investment-grade, management believes the credit facilities at Alliant Energy, IP&L and WP&L provide sufficient liquidity to cover counterparty credit support or collateral requirements under the various purchased-power, fuel and receivables sales agreements.

Off-Balance Sheet Arrangements - Alliant Energy utilizes off-balance sheet synthetic operating leases to finance its corporate headquarters, corporate aircraft, certain utility railcars and a utility radio dispatch system. Synthetic leases provide favorable financing rates to Alliant Energy while allowing it to maintain operating control of its leased assets. Refer to Note 3 of the "Notes to Consolidated Financial Statements" for future minimum lease payments under, and residual value guarantees by Alliant Energy, of these synthetic leases. Alliant Energy's credit facility agreements prohibit it from entering into any additional synthetic leases. Alliant Energy uses special purpose entities for its limited recourse utility sale of accounts receivable program whereby IP&L and WP&L use proceeds from the sale of the accounts receivable and unbilled revenues to maintain flexibility in their capital structures, take advantage of favorable short-term interest rates and finance a portion of their long-term cash needs. The sale of accounts receivables generates a significant amount of short-term financing for IP&L and WP&L. Refer to Note 4 of the "Notes to Consolidated Financial Statements" for aggregate proceeds from the sale of accounts receivable. While Alliant Energy does not have any reason to believe this program would be discontinued, if this financing alternative were not available, IP&L and WP&L anticipate they would have enough short-term borrowing capacity to compensate. Refer to "Ratings Triggers" for the impact of certain credit rating downgrades on IP&L and WP&L related to the accounts receivable sales program. Alliant Energy has reviewed these entities during its implementation of FIN 46, for those entities that are considered to be special-purpose entities, and determined that consolidation of these entities is not required. Alliant Energy continues to evaluate non-special purpose entities that may require consolidation as of March 31, 2004.

Sales of Non-strateaic Assets - Alliant Energy is currently pursuing the sales in 2004 of its interest in its Kewaunee facility, its remaining interest of 1.1 million shares in WPC and its water utilities serving the Ripon and South Beloit areas. Alliant Energy also continues to divest other less material assets and will continue reviewing other ways to narrow its strategic focus and business platforms. The proceeds realized from these asset sales are expected to be available for debt reduction and other general corporate purposes.

29

Credit Risk - Alliant Energy's subsidiaries have limited credit exposure from electric and natural gas sales and non-performance of contractual obligations by its counterparties. Alliant Energy maintains credit risk oversight and sets limits and policies with regards to its counterparties, which management believes minimizes its overall credit risk exposure.

However, there is no assurance that such policies will protect Alliant Energy against all losses from non-performance by counterparties.

Construction and Acquisition Expenditures - Capital expenditures, investments and financing plans are continually reviewed, approved and updated as part of Alliant Energy's ongoing strategic planning and budgeting processes. In addition, material capital expenditures and investments are subject to a rigorous cross-functional review prior to approval. Changes in Alliant Energy's anticipated construction and acquisition expenditures may result from a number of reasons including economic conditions, regulatory requirements, ability to obtain adequate and timely rate relief, the level of Alliant Energy's profitability, Alliant Energy's desire to maintain investment-grade credit ratings and reasonable capitalization ratios, variations in sales, changing market conditions and new opportunities. Alliant Energy believes its capital control processes adequately reduce the risks associated with large capital expenditures and investments. Alliant Energy currently anticipates construction and acquisition expenditures during 2004 and 2005 as follows (in millions):

2004 2005 Domestic utility business:

IP&L utility infrastructure and reliability investments

$252

$262 IP&L Power Iowa (Emery) 80 WP&L utility infrastructure and reliability investments 228 248 Non-regulated Generation in support of domestic utility generation plan (Sheboygan Falls project) 50 30 China (anticipated to be funded with internally generated cash or non-recourse financings) 50 35 Other non-regulated (primarily synthetic fuel/energy services) 40 35

$700 S610 Alliant Energy has not yet entered into contractual commitments relating to the majority of its anticipated capital expenditures. As a result, Alliant Energy does have discretion with regard to the level of capital expenditures eventually incurred and it closely monitors and updates such estimates on an ongoing basis based on numerous economic and other factors. Refer to "Strategic Overview -Updated Strategic Plan" for a further discussion of Alliant Energy's domestic generation plan.

Contractual Obli2ations - Alliant Energy's long-term contractual cash obligations as of Dec. 31, 2003 were as follows (in millions):

Long-term debt (Note 8(b))

Capital leases (Note 3)

Operating leases (Note 3)

Purchase obligations:

Purchased-power and fuel commitments (Note 1 1(b))

Other (Note I I(b))

2004 2005 2006 2007 2008 Thereafter Total

$69 S102 S69 S199

$196 S1,985

$2,620 17 14 40 6

5 1

83 82 103 106 132 77 326 826 242 147 118 76 39 164 786 26 26

$436

$366 S333

$413 S317 S2,476 S4,341 At Dec. 31, 2003, long-term debt and capital lease obligations as noted in the previous table were included on the Consolidated Balance Sheet. The long-term debt amounts exclude reductions related to unamortized debt discounts.

Purchased-power and fuel commitments represent normal business contracts used to ensure adequate purchased-power, coal and natural gas supplies and to minimize exposure to market price fluctuations. Other purchase obligations represent individual commitments incurred during the normal course of business which exceeded SI million at Dec. 31, 2003. In connection with its construction and acquisition program, Alliant Energy also enters into commitments related to such program on an ongoing basis; these amounts are not reflected in the previous table. Refer to "Construction and Acquisition Expenditures" for additional information. In addition, at Dec. 31, 2003, there were various other long-term liabilities and deferred credits included on the Consolidated Balance Sheet that, due to the nature of the liabilities, the timing of payments cannot be estimated and are therefore excluded from the table. Refer to Note 6(a) of the "Notes to Consolidated Financial Statements" for anticipated 2004 pension and other postretirement benefit funding amounts, which are not included in the previous table.

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Environmental - Alliant Energy's pollution abatement programs are subject to continuing review and are periodically revised due to changes in environmental regulations, construction plans and escalation of construction costs. Alliant Energy continually evaluates the impact of potential future international, federal, state and local environmental rulemakings on its operations. While the final outcome of these rule makings cannot be predicted, Alliant Energy believes that required capital investments and/or modifications resulting from them could be significant, but expects that prudent expenses incurred by IP&L and NNTP&L likely would be recovered in rates from its customers. The environmental rulemaking process continually evolves and the following are major emerging issues that could potentially have a significant impact on Alliant Energy's

-operations.

Air Quality - WVith regard to current environmental rules, Alliant Energy's Edgewater facility spent $21 million from 1999 to 2003 to improve its combustion performance. This facility now meets the 2008 Wisconsin Department of Natural Resources (DNR) nitrogen oxides (NOx) compliance goal.

WP&L also has responded to multiple data requests from the U.S. Environmental Protection Agency (EPA), related to the historical operation and associated air permitting for certain major Wisconsin coal-fired generating units. Similar requests have been precursor to penalties and capital expenditures requiring installation of air pollution controls at other utilities.

However, WP&L has received no response in this regard from the EPA related to information submitted.

The 1990 Clean Air Act Amendments mandate preservation of air quality through existing regulations and periodic reviews to ensure adequacy of these provisions based on scientific data. In 1997, the EPA revised National Ambient Air Quality Standards (NAAQS) for ozone and fine particulate matter. In December 2003, the EPA proposed an Interstate Air Quality Rule related to transport of these emissions that would require significant upgrades to power plants. This rule would reduce the current level of nationwide sulfur dioxide emissions approximately 40% by 2010 and 70% by 2015, and NOx emission levels 50% by 2015. Additional reduction requirements may also be imposed at the state level for those areas that are in non-attainment with NAAQS.

In 2000, the EPA determined that regulation of hazardous air pollutant emissions from coal-fired and oil-fired electric utility steam generating units was necessary. Under an existing settlement agreement, Maximum Achievable Control Technology requirements or alternative regulations must be implemented by Dec. 15, 2004. Accordingly, the EPA has published rules for comment requiring control of mercury from coal-fired and nickel from oil-fired generating units. The impact of these regulations on IP&L's and WP&L's generating facilities is subject to the control level mandated in the final rules. In 2001, the Wisconsin DNR also independently developed proposed mercury emission control rules that could require reductions from Wisconsin generating facilities of 40% by 2010 and 80% by 2015. These rules have been sent back to the Wisconsin DNR for revision by the Wisconsin legislature due to the pending federal mercury regulations.

In December 2003, the State Environmental Protection Agency of China issued a regulation requiring thermal power plants to lower emissions to meet new limits for particulate, sulfur and nitrous oxide from coal-and oil-fired boilers. Facilities are required to meet the first phase of this emission standard by 2005 and the second phase by 2010. Alliant Energy is currently reviewing the impact of this new regulation on its China business.

Alliant Energy is also currently monitoring various other potential international, federal, state and local environmental rulemakings and activities, including, but not limited to: litigation of federal New Source Review Reforms; Regional Haze evaluations for Best Available Retrofit Technology; and several other legislative and regulatory proposals regarding the control of emissions of air pollutants and greenhouse gases from a variety of sources, including generating facilities.

Water Quality - In 2002, the EPA published a proposed regulation under the Clean Water Act referred to as "316(b)" that is anticipated to be finalized in 2004. This rule would require existing large power plants with cooling water intake structures to ensure that the location, design, construction, and capacity of cooling water intake structures reflect the best technology available for minimizing adverse environmental impacts to fish and other aquatic life. Alliant Energy is also currently evaluating proposed revisions to the Wisconsin Administrative Code concerning the amount of heat that WP&L's generating stations can discharge into Wisconsin waters.

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1X Land and Solid Waste - Alliant Energy is monitoring possible significant land and solid waste regulatory changes. This includes a potential EPA regulation for management of coal combustion product in landfills and surface impoundments that could require installation of monitoring wells at some facilities and an ongoing expanded groundwater monitoring program.

Compliance with the polychlorinated biphenols (PCB) Fix-it Rule/Persistent Organic Pollutants Treaty could possibly require replacement of all electrical equipment containing PCB insulating fluid which is a substance known to be harmful to human health. The Wisconsin Department of Commerce is proposing new rules related to flammable, combustible and hazardous liquids stored in above-ground storage tanks in which the main financial impact would be from a secondary containment requirement for all hazardous materials tanks and for hazardous material unloading areas. In addition, in December 2003, at the request of the Wisconsin DNR, WP&L submitted a,Titten plan for facility closure of the Rock River Generating Station landfill and clean-up of the support ponds and all areas where coal combustion waste is present.

Refer to Note 11 (e) of the "Notes to Consolidated Financial Statements" for further discussion of environmental matters.

OTHER MATTERS Market Risk Sensitive Instruments and Positions - Alliant Energy's primary market risk exposures are associated with interest rates, commodity prices, equity prices and currency exchange rates. Allianit Energy has risk management policies to monitor and assist in controlling these market risks and uses derivative instruments to manage some of the exposures.

Interest Rate Risk - Alliant Energy is exposed to risk resulting from changes in interest rates as a result of its issuance of variable-rate debt, utility customer accounts receivable sale program and variable-rate leasing agreements. Alliant Energy manages its interest rate risk by limiting its variable interest rate exposure and by continuously monitoring the effects of market changes on interest rates. Alliant Energy also periodically uses interest rate swap and interest rate forward agreements to assist in the management of its interest exposure. In the event of significant interest rate fluctuations, management would take actions to minimize the effect of such changes on Alliant Energy's results of operations and financial condition. Assuming no change in Alliant Energy's consolidated financial structure, if variable interest rates were to average 100 basis points higher (lower) in 2004 than in 2003, interest expense would increase (decrease) by approximately

$5.3 million. This amount was determined by considering the impact of a hypothetical 100 basis point increase (decrease) in interest rates on Alliant Energy's consolidated variable-rate debt held, the amount outstanding under the utility customer accounts receivable sale program and variable-rate lease balances at Dec. 31, 2003.

Commodity Risk - Non-trading - Alliant Energy is exposed to the impact of market fluctuations in the commodity price and transportation costs of electric and natural gas products it markets. Alliant Energy employs established policies and procedures to manage its risks associated with these market fluctuations including the use of various commodity derivatives.

Alliant Energy's exposure to commodity price risks in its utility business is significantly mitigated by the current rate making structures in place for the recovery of its electric fuel and purchased energy costs as well as its cost of natural gas purchased for resale. Refer to Note I (i) of the "Notes to Consolidated Financial Statements" for further discussion.

WP&L periodically utilizes commodity derivative instruments to reduce the impact of price fluctuations on electric fuel and purchased energy costs needed to meet its power supply requirements. Under PSCW rules, WP&L can also seek rate increases if it experiences an extraordinary increase in the cost of electric fuel and purchased energy costs or if the annual costs are more than 3% higher than the estimated costs used to establish rates. Such rules were revised effective for 2003 for WP&L and significantly reduce the regulatory lag for Wisconsin utilities and customers related to the timing of changes in rates for increased or decreased fuel and purchased energy costs. Based on these revised rules, WP&L does not anticipate any significant earnings exposure related to fuel and purchased energy costs.

WP&L periodically utilizes natural gas commodity derivative instruments to reduce the impact of price fluctuations on natural gas purchased and injected into storage during the summer months and withdrawn and sold at current market prices during the winter months. The natural gas commodity swaps in place approximate the forecasted storage withdrawal plan during this period. Therefore, market price fluctuations that result in an increase or decrease in the value of the physical commodity are substantially offset by changes in the value of the natural gas commodity swaps. A 10%

increase (decrease) in the price of natural gas would not have a significant impact on the combined fair market value of the natural gas in storage and related swap arrangements in place at Dec. 31, 2003. To the extent actual storage withdrawals vary from forecasted withdrawals, WP&L has physical gas price exposure.

IP&L also utilizes commodity derivative instruments to mitigate the risk of rising prices. Since the IUB allows for the prudently incurred costs associated with these instruments and the underlying supply of commodities to be recovered from ratepayers, IP&L does not have significant commodity risk exposure.

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NG Energy utilizes natural gas commodity derivative instruments to reduce the impact of natural gas price fluctuations on physical natural gas sales from storage. These natural gas commodity swaps and forward sales contracts are entered into at the same time and for the same volumes that are purchased and injected into storage, thereby minimizing natural gas commodity risk exposure. Based on the volume of natural gas sales from storage at NG Energy, a 10% increase (decrease) in the price of natural gas would not have a significant impact on Alliant Energy's results of operations or financial condition.

Refer to Note 10(a) of the "Notes to Consolidated Financial Statements" for additional information concerning the impact of SFAS 149 on NG Energy's earnings.

Equity Price Risk - JP&L and WP&L maintain trust funds to fund their anticipated nuclear decommissioning costs. At Dec.

31, 2003 and 2002, these funds were invested primarily in domestic equity and debt instruments. Fluctuations in equity prices or interest rates do not affect Alliant Energy's consolidated results of operations. In 2001, WP&L entered into a four-year hedge on equity assets in its nuclear decommissioning trust fund. In January 2004, WP&L liquidated all of its qualified decommissioning trust fund assets into money market funds as a result of the pending Kewaunee sale. Refer to Notes 10(c) and 17 of the "Notes to Consolidated Financial Statements" for further discussion. Refer to "Critical Accounting Policies -

Accounting for Pensions and Other Postretirement Benefits" for the impact on Alliant Energy's pension and other postretirement benefit costs of changes in the rate of returns earned by its plan assets, which include equity securities.

Currency Risk - Alliant Energy has investments in various countries where the net investments are not hedged, including Brazil, China and New Zealand. As a result, these investments are subject to currency exchange risk with fluctuations in currency exchange rates. At Dec. 31, 2003, Alliant Energy had a cumulative foreign currency translation loss, net of any tax benefits realized, of S81 million, which related to decreases in the value of the Brazil real of S92 million and increases in the value of the New Zealand dollar of Sl 1 million in relation to the U.S. dollar. This loss is recorded in "Accumulated other comprehensive loss" on the Consolidated Balance Sheets. Based on Alliant Energy's investments at Dec. 31,2003, a 10%

sustained increase/decrease over the next 12 months in the foreign exchange rates of Brazil, China and New Zealand would result in a corresponding increase/decrease in the cumulative foreign currency translation loss of $48 million. Alliant Energy's equity income (loss) from its foreign investments is also impacted by fluctuations in currency exchange rates. At Dec. 31, 2003, Alliant Energy also had currency exchange risk associated with approximately S40 million of debt outstanding at one of the Brazilian operating companies. Alliant Energy recorded equity income of S2.4 million and equity losses of $6.5 million in 2003 and 2002, respectively, related to its share of the foreign currency transaction gains/losses on such debt.

Based on the loan balance and currency rates at Dec. 31, 2003, a 10% change in the currency rates would result in a $2.9 million pre-tax increase/decrease in net income.

In addition, Alliant Energy has currency exchange risk associated with approximately $30 million of payables at a Canadian subsidiary within Alliant Energy's Integrated Services business. In 2003, Alliant Energy recorded pre-tax income of S3.2 million related to the foreign currency transaction gains on such payables. In November 2003, Alliant Energy acquired an option to protect S 1I million of its exposure against declines in currency rates while still retaining the opportunity to participate in the benefits of increases in currency rates. Based on the payables balance, option and currency rates at Dec. 31, 2003, a 10% increase and 10% decrease in the currency rates would result in a $3.0 million pre-tax increase and $2.2 million pre-tax decrease in income, respectively.

Refer to Notes 1(1) and 10 of the "Notes to Consolidated Financial Statements" for further discussion of Alliant Energy's derivative financial instruments.

Accounting Pronouncements - In January 2003, the FASB issued FIN 46 which addresses consolidation by business enterprises of variable interest entities. FIN 46 requires consolidation where there is a controlling financial interest in a variable interest entity or where the variable interest entity does not have sufficient equity at risk to finance its activities without additional subordinated financial support from other parties. Alliant Energy adopted FIN 46, related to those entities that are considered to be special-purpose entities, on Dec. 31, 2003 with no material impact on its financial condition or results of operations. Alliant Energy continues to evaluate tolling arrangements, renewable energy entities and any other non-special purpose entities, to determine if they require consolidation under the revised FIN 46 guidance issued by the FASB in December 2003. Alliant Energy will apply the provisions of the revised guidance as of March 31, 2004.

Alliant Energy adopted SFAS 143 on Jan. 1,2003, which provides accounting and disclosure requirements for retirement obligations associated with long-lived assets (AROs). Refer to Note 18 of the "Notes to Consolidated Financial Statements" for additional information.

Alliant Energy adopted SFAS 149 for contracts entered into or modified after June 30, 2003, except for certain implementation issues and certain provisions of forward purchase and sale contracts and for hedging relationships designated after June 30,2003. Refer to Note 10(a) of the "Notes to Consolidated Financial Statements" for additional information.

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In May 2003, the FASB issued SFAS 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity," which requires an issuer to classify outstanding free-standing financial instruments within its scope as a liability on its balance sheet even though the instruments have characteristics of equity. Alliant Energy adopted SFAS 150 on July 1, 2003 with no material impact on its financial condition or results of operations. Alliant Energy continues to evaluate the implications of FSP No. FAS 150-3, "Effective Date, Disclosures, and Transition for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests under FASB Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity" issued in November 2003, which defers the effective date for applying the provisions of SFAS 150 for certain mandatorily redeemable non-controlling interests.

In December 2003, the President signed into law the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act). The Act introduces a prescription drug benefit under Medicare Part D, as well as a federal subsidy to sponsors of retiree health care benefit plans, that provide a benefit that is at least actuarially equivalent to Medicare Part D. As permitted by FSP No. FAS 106-1, "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003," Alliant Energy has elected to defer reflecting the effect of the Act on postretirement net periodic benefit cost and the accumulated postretirement benefit obligation in the Consolidated Financial Statements, since specific authoritative guidance on the accounting for the federal subsidy is pending and that guidance, when issued, could require Alliant Energy to change previously reported information. Alliant Energy is currently evaluating the effect of the Act on its other postretirement benefits expense.

Alliant Energy does not expect the various other new accounting pronouncements not mentioned above that were effective in 2003 to have a material impact on its results of operations or financial condition.

Critical Accountine Policies - Based on historical experience and various other factors, Alliant Energy believes the policies identified below are critical to its business and the understanding of its results of operations as they require critical estimates be made based on the assumptions and judgment of management. The preparation of consolidated financial statements requires management to make various estimates and assumptions that affect revenues, expenses, assets, liabilities and the disclosure of contingencies. The results of these estimates and judgments forn the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates and judgments. Alliant Energy's management has discussed these critical accounting policies with the Audit Committee of its Board of Directors. Refer to Note I of the "Notes to Consolidated Financial Statements" for a discussion of Alliant Energy's accounting policies and the estimates and assumptions used in the preparation of the consolidated financial statements.

Regulatory Assets and Liabilities - Alliant Energy's domestic utility business is regulated by various federal and state regulatoryagencies. As a result, it qualifies for the application of SFAS 71, "Accounting for the Effects of Certain Types of Regulation." SFAS 71 recognizes that the actions of a regulator can provide reasonable assurance of the existence of an asset or liability. Regulatory assets or liabilities arise as a result of a difference between GAAP and the accounting principles imposed by the regulatory agencies. Regulatory assets generally represent incurred costs that have been deferred as they are probable of recovery in customer rates. Regulatory liabilities generally represent obligations to make refunds to customers for various reasons.

Alliant Energy's utility subsidiaries recognize regulatory assets and liabilities in accordance with the rulings of their federal and state regulators and future regulatory rulings may impact the carrying value and accounting treatment of Alliant Energy's regulatory assets and liabilities. Alliant Energy periodically assesses whether the regulatory assets are probable of future recovery by considering factors such as regulatory environment changes, recent rate orders issued by the applicable regulatory agencies and the status of any pending or potential deregulation legislation. The assumptions and judgments used by regulatory authorities continue to have an impact on the recovery of costs, the rate of return on invested capital and the timing and amount of assets to be recovered by rates. A change in these assumptions may result in a material impact on Alliant Energy's results of operations. Refer to Note I (c) of the "Notes to Consolidated Financial Statements" for further discussion.

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Asset Valuations -

Long-Lived Assets -The Consolidated Balance Sheets include significant long-lived assets, which are not subject to recovery under SFAS 71. As a result, Alliant Energy must generate future cash flows from such assets in a non-regulated environment to ensure the carrying value is not impaired. Some of these assets are the result of capital investments which have been made in recent years and have not yet reached a mature life cycle. Alliant Energy assesses the carrying amount and potential impairment of these assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors Alliant Energy considers in determining if an impairment review is necessary include a significant underperformance of the assets relative to historical or projected future operating results, a significant change in Alliant Energy's use of the acquired assets or business strategy related to such assets, and significant negative industry or economic trends. When Alliant Energy determines an impairment review is necessary, a comparison is made between the expected undiscounted future cash flows and the carrying amount of the asset. If the carrying amount of the asset is the larger of the two balances, an impairment loss is recognized equal to the amount the carrying amount of the asset exceeds the fair value of the asset. The fair value is determined by the use of quoted market prices, appraisals, or the use of valuation techniques such as expected discounted future cash flows. Alliant Energy must make assumptions regarding these estimated future cash flows and other factors to determine the fair value of the respective assets.

At Dec. 31, 2003, Resources' Non-regulated Generation business owned $96 million of generation equipment consisting of two gas turbines and one steam turbine. Alliant Energy plans to deploy the two gas turbines ($75 million) in a 300 MW natural gas-fired power plant outside Sheboygan Falls, Wisconsin and continues to review for potential generation projects to utilize the steam turbine ($21 million). As a result, Alliant Energy has assessed the recoverability of the S96 million equipment cost compared to the future anticipated cash flows from these generation projects. The future anticipated cash flows are a significant estimate. Alliant Energy has no current intentions to sell any of this equipment. If a decision was made to sell such equipment, the recoverability of the equipment cost would be assessed by comparing the future anticipated sales proceeds to the carrying value of the equipment.

Investments - The Consolidated Balance Sheets include investments in several available-for-sale securities accounted for in accordance wvith SFAS 115. Alliant Energy monitors any unrealized losses from such investments to determine if the loss is considered to be a temporary or permanent decline. The determination as to whether the investment is temporarily versus permanently impaired requires considerable judgment. When the investment is considered permanently impaired, the previously recorded unrealized loss would be recorded directly to the income statement as a realized loss. In 2002, Alliant Energy incurred pre-tax valuation charges under the provisions of SFAS 115 of S27 million and $10 million related to its McLeod and Energy Technologies investments, respectively. The Consolidated Balance Sheets also contain various other investments that are evaluated for recoverability when indicators of impairment may exist. Refer to Note 9 of the "Notes to Consolidated Financial Statements" for further information related to Alliant Energy's investments accounted for in accordance with SFAS 115.

Resources holds a non-controlling interest in five Brazilian electric utility companies accounted for under the equity method of accounting. The recoverability of these equity method investments is assessed by comparing the future anticipated local currency cash flows from these investments and the local currency carrying value of these investments. The future anticipated cash flows currently include anticipated periodic distributions that, when aggregated, exceed the carrying value of these investments. The future anticipated cash flows represent a significant estimate. The $283 million carrying value of Alliant Energy's Brazil investments has been reduced by S162 million of pre-tax cumulative foreign currency translation losses. The net of tax balance of $92 million has been recorded in "Accumulated other comprehensive loss" on the Consolidated Balance Sheet at Dec. 31, 2003. Cumulative foreign currency translation losses are reflected in Alliant Energy's results of operations only if the related investment is sold or substantially liquidated. If Alliant Energy would decide to exit these Brazil investments in the future, the recoverability of these equity method investments would be assessed by comparing the future anticipated sales proceeds to the carrying value.

Resources' investment in Mexico consists primarily of a loan receivable (including accrued interest income) from a Mexican development company aggregating approximately $79 million at Dec. 31, 2003. The proceeds from the loan have been used by the Mexican development company to complete substantially all of the construction and development of the infrastructure of a master planned resort community. The loan accrues interest at 8.75% and is secured by a first lien on the land parcels to be developed for the master planned community. Repayment of the loan principal and interest will be based on a portion of the proceeds from the sales, performed by the Mexican development company, of real estate lots in the master planned community and therefore is dependent on the successful development of the project and sale of real estate. The recoverability of this loan receivable is currently assessed by comparing the fair value of the land used to secure the loan and the carrying value of the loan including accrued interest. An updated, independent appraisal completed in the fourth quarter of 2003 indicated that the fair value of the collateral, which is a significant estimate, exceeded the carrying value of the loan and accrued interest at Dec. 31, 2003, by a modest amount. Notwithstanding the developers' expectations regarding the 35

I'U development of the project and the impending lot sales, Alliant Energy has expressed concerns with the developers regarding the pace of the project and its marketing efforts. Alliant Energy is providing options to the developers to hasten the marketing and sales of the lots of the master planned community and to ensure faster recovery of its secured loan. If the development of the project and related real estate sales are not successfully executed, it is possible that Alliant Energy could incur material asset valuation charges and/or be required to discontinue recording interest income on the loan in the future.

Refer to Note 9 of the "Notes to Consolidated Financial Statements" for additional information concerning Alliant Energy's investments in Brazil and Mexico.

Goodwill - In accordance with SFAS 142, Alliant Energy is required to evaluate its goodwill for impairment at least annually and more frequently when indicators of impairment may exist. At Dec. 31, 2003, Alliant Energy had S56 million of net goodwill (including $41 million and $10 million within its Cogenex and China reporting units, respectively) on its Consolidated Balance Sheet. If the fair value of a reporting unit is less than its carrying value, including goodwill, a goodwill impairment charge may be necessary. Alliant Energy estimates the fair value of its reporting units utilizing a combination of market value indicators and the expected discounted future cash flows. This process requires the use of significant management estimates and judgments regarding cash flow assumptions from future sales, operating costs and discount rates over an indefinite life. Alliant Energy's cash flow assumptions are derived using a combination of historical trends, internal budgets, strategic plans and other market information. Each reporting unit is evaluated separately based on the nature of its operations and therefore the assumptions vary by reporting unit relative to its applicable circumstances. To determine its discount rates, Alliant Energy utilizes the capital asset pricing model which is based upon market comparables adjusted for company-specific risk. In the event market comparables are not available, Alliant Energy utilizes expected industry returns based upon published information. Refer to Note 14 of the "Notes to Consolidated Financial Statements" for further discussion.

Derivative Financial Instruments - Alliant Energy uses derivative financial instruments to hedge exposures to fluctuations in interest rates, certain commodity prices, certain currency rates, volatility in a portion of natural gas sales volumes due to weather and to mitigate the equity price volatility associated with certain investments in equity securities. Alliant Energy does not use such instruments for speculative purposes. To account for these derivative instruments in accordance with the applicable accounting rules, Alliant Energy must determine the fair value of its derivatives. In accordance with SFAS 133, the fair value of all derivative instruments are recognized as either assets or liabilities in the balance sheet with the changes in their value recognized in earnings for the non-regulated businesses, unless specific hedge accounting criteria are met. For IP&L and WP&L, changes in the derivatives fair values are generally recorded as regulatory assets or liabilities. If an established, quoted market exists for the underlying commodity of the derivative instrument, Alliant Energy uses the quoted market price to value the derivative instrument. For other derivatives, Alliant Energy estimates the value based upon other quoted prices or acceptable valuation methods. Alliant Energy also reviews the nature of its contracts for the purchase and sale of non-financial assets to assess whether the contracts meet the definition of a derivative and the requirements to follow hedge accounting as allowed by the applicable accounting rules. The determination of derivative status and valuations involves considerable judgment.

SFAS 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS 133. Although SFAS 149 is expected to result in more energy contracts in Alliant Energy's domestic utility business qualifying as derivatives, changes in the fair value of these derivatives are generally reported as changes in regulatory assets and liabilities rather than being reported currently in earnings, based on the regulatory treatment. SFAS 149 will likely result in more earnings volatility at NG Energy given the majority of its derivatives may not qualify for hedge accounting. Additionally, Alliant Energy has some commodity purchase and sales contracts that have been designated, and qualify for, the normal purchase and sale exception. Based on this designation, these contracts are not accounted for as derivative instruments.

A number of Alliant Energy's derivative transactions are in its domestic utility business and are based on the fuel and natural gas cost recovery mechanisms in place, as well as other specific regulatory authorizations. As a result, changes in fair market values of such derivatives generally have no impact on Alliant Energy's results of operations. Alliant Energy does have an embedded derivative within its exchangeable senior notes that is impacted by the value of McLeod stock. Changes in the fair value of this derivative impact Alliant Energy's results of operations and the changes did have a material impact on Alliant Energy's 2001 results of operations. However, given a significant decline in the value of the McLeod stock, Alliant Energy does not expect changes in the fair value of this derivative to have a material impact on Alliant Energy's results of operations in the foreseeable future. Refer to Notes 10(d) and 10(a) of the "Notes to Consolidated Financial Statements" for a further discussion of the impacts of EITF Issue 02-3 and SFAS 149, respectively, on the derivatives entered into by NG Energy.

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Unbilled Revenues - Unbilled revenues are primarily associated with Alliant Energy's utility operations. Energy sales to individual customers are based on the reading of their meters, which occurs on a systematic basis throughout the month. At the end of each month, amounts of energy delivered to customers since the date of the last meter reading are estimated and the corresponding estimated unbilled revenue is recorded. The unbilled revenue estimate is based on daily system demand volumes, estimated customer usage by class, weather impacts, line losses and the most recent customer rates. Such process involves the use of various estimates, thus significant changes in the estimates could have a material impact on Alliant Energy's results of operations.

Accounting for Pensions and Other Postretirement Benefits - Alliant Energy accounts for pensions and other postretirement benefits under SFAS 87, "Employers' Accounting for Pensions" and SFAS 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," respectively. Under these rules, certain assumptions are made which represent significant estimates. There are many factors involved in determining an entity's pension and other postretirement liabilities and costs each period including assumptions regarding employee demographics (including age, life expectancies, and compensation levels), discount rates, assumed rate of returns and funding. Changes made to the plan provisions may also impact current and future pension and other postretirement costs. Alliant Energy's assumptions are supported by historical data and reasonable projections and are reviewed annually with an outside actuary firm and an investment consulting firm.

As of Dec. 31, 2003, Alliant Energy was using a 6% discount rate to calculate benefit obligations and a 9% annual rate of return on investments. In selecting an assumed discount rate, Alliant Energy reviews various corporate Aa bond indices. The 9% annual rate of return is consistent with Alliant Energy's historical returns and is based on projected long-term equity and bond returns, maturities and asset allocations. A 100 basis point change in the discount rate would result in approximate changes of $102 million and S23 million in Alliant Energy's pension and other postretirement benefit obligations and $7 million and $2 million in expense, respectively. A 100 basis point change in the rate of return would result in an approximate change of S5 million and $I million in pension and other postretirement benefit expense, respectively. Refer to Note 6(a) of the "Notes to Consolidated Financial Statements" for discussion of the impact of a change in the medical trend rates.

Income Taxes - Alliant Energy accounts for income taxes under SFAS 109, "Accounting for Income Taxes." Under these rules, certain assumptions are made which represent significant estimates. There are many factors involved in determining an entity's income tax assets, liabilities, benefits and expense each period. These factors include assumptions regarding Alliant Energy's future taxable income and its ability to utilize tax credits and loss carryovers as well as the impacts from the completion of audits of the tax treatment of certain transactions. Alliant Energy's assumptions are supported by historical data and reasonable projections and are reviewed quarterly by management. Significant changes in these assumptions could have a material impact on Alliant Energy's financial condition and results of operations. Refer to Note 5 of the "Notes to Consolidated Financial Statements" for further discussion.

Other Future Considerations - In addition to items discussed earlier in MD&A, the following items could impact Alliant Energy's future financial condition or results of operations:

Exchangeable Senior Notes -At Dec. 31, 2003, the carrying amount of the debt component of Resources' exchangeable senior notes was S37.9 million, consisting of the par value of $402.5 million, less unamortized debt discount of $364.6 million. The terms of the exchangeable senior notes required Resources to pay interest on the par value of the notes at 7.25%

from February 2000 to February 2003, and at 2.5% thereafter until maturity in February 2030. As explained in Note 10(a) of the "Notes to Consolidated Financial Statements," Resources accounted for the net proceeds from the issuance of the notes as two separate components, a debt component and an embedded derivative component. In accordance with SFAS 133, Alliant Energy determined the initial carrying value of the debt component by subtracting the fair value of the derivative component from the net proceeds realized from the issuance of the exchangeable senior notes. This resulted in a very low initial carrying amount of the debt component which results in the recording of interest expense at an effective rate of 26.8% of the carrying amount of the debt component. For 2003, interest expense on the notes was S 10.2 million. Interest payments in excess of interest expense are recorded as a reduction of the carrying amount of the debt component. As a result of the higher interest payments for the first three years, the carrying amount of the debt component declined until it reached S37.8 million in February 2003, and then gradually increases over the next 27 years to the ultimate repayment amount of $402.5 million in 2030. Interest expense on the debt component of the notes will be S 10.2 million in 2004,2005 and 2006.

The interest deductions Alliant Energy has taken on its federal tax returns related to Resources' exchangeable notes are currently under audit by the IRS. Alliant Energy believes these interest deductions comply with the Internal Revenue Code, however, if Alliant Energy receives an adverse ruling related to these interest deductions it could have a material impact on its results of operations.

37

I I Brazil - In the fourth quarter of 2003, the Brazilian electric utility companies Alliant Energy holds unconsolidated investments in completed the restructuring of approximately S245 million, as converted from local currency to U.S. dollars, of short-and long-term debt into new long-term debentures and commercial loans. The Brazilian electric utility companies have also arranged for the restructuring of the approximately $40 million loan for the joint venture gas-fired generating facility (Juiz de Fora) in which Alliant Energy holds a 50% direct ownership interest. Alliant Energy does not expect these debt restructurings will have a material impact on its 2004 earnings as the primary changes relate to extending the debt repayment dates. However, interest rates in general have been declining in Brazil, which would have a favorable impact on the comparison of Alliant Energy's 2004 and 2003 earnings, should the average 2004 rates remain lower than the average 2003 rates.

To complete earlier plans, the Juiz de Fora facility is scheduled for a 20-MW expansion from a single cycle to a combined cycle facility at an estimated cost of $24 million. If the Juiz de Fora combined cycle construction is not completed as anticipated, the future performance obligations of this generation asset might be significantly adversely affected. In such an event, Alliant Energy is not required to invest any additional capital in Brazil, however, it could lead to material asset valuation charges with respect to Alliant Energy's investment in the Juiz de Fora facility.

Alliant Energy continues to closely monitor the financial performance of its Brazilian investments. While such performnance, improved significantly in 2003, and Alliant Energy expects continued improvements in 2004, Alliant Energy believes more can be done to hasten the rate of improvement -particularly in regard to controlling costs and reduction of debt - and this has been a source of dispute with its Brazilian partners. Alliant Energy believes the potential of the Brazilian market is significant and it is discussing with its Brazilian partners various alternatives in order to strengthen and secure its investments in this market. Alliant Energy continues its ongoing review of options related to its Brazilian investments. Alliant Energy cannot currently predict the ultimate outcome of these reviews and discussions.

Synfuel -In June 2003, the IRS announced it was reviewing the scientific validity of test procedures and results used by companies claiming tax credits for producing synthetic fuels from coal and may withdraw such credits for operations that fail to meet federal standards which require, among other things, a significant chemical change to occur in the process. In October 2003, the IRS stated this review was complete and that the test procedures and results used by taxpayers for chemical change are scientifically valid if the procedures are applied in a consistent and unbiased manner. Since the second quarter of 2002, Alliant Energy has been an investor in a synthetic fuel facility and continued to record these tax credits as of Dec. 31, 2003. Currently, the IRS is auditing this facility to determine if its procedures are applied in a consistent and unbiased manner. Alliant Energy expects the audit to be completed in 2004 and cannot predict its outcome. The synthetic fuel facility Alliant Energy partially owns previously received a private letter ruling from the IRS, which states that based on the facts submitted, a significant chemical change was achieved in its process. Alliant Energy has recognized tax credits for producing synthetic fuels of $23 million and S 15 million for 2003 and 2002, respectively, and expects to recognize approximately $23 million of additional credits in 2004.

38

REPORT ON THE FINANCIAL INFORMATION Alliant Energy Corporation management is responsible for the information and representations contained in the financial statements and in other sections of this Annual Report. The consolidated financial statements that follow have been prepared in accordance with accounting principles generally accepted in the United States of America. In addition to selecting appropriate accounting principles, management is responsible for the manner of presentation and for the reliability of the financial information. In fulfilling that responsibility, it is necessary for management to make estimates based on currently available information and judgments of current conditions and circumstances.

Through a well-developed system of internal controls, management seeks to ensure the integrity and objectivity of the financial information presented in this report. This system of internal controls is designed to provide reasonable assurance that the assets of the company are safeguarded and that the transactions are executed according to management's authorizations and are recorded in accordance with the appropriate accounting principles.

The Board of Directors participates in the financial information reporting process through its Audit Committee.

Erroll B. Davis, Jr.

Chairman and Chief Executive Officer Eliot G. Protsch Senior Executive Vice President and Chief Financial Officer John E. Kratchmer Vice President-Controller and Chief Accounting Officer March 3, 2004 39

INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareowners of Alliant Energy Corporation:

We have audited the accompanying consolidated balance sheets and statements of capitalization of Alliant Energy Corporation and subsidiaries (the "Company") as of December 31, 2003 and 2002, and the related consolidated statements of income, cash flows and changes in common equity for each of the three years in the period ended December 31, 2003. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes 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, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2003 and 2002, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 18 to the consolidated financial statements, on January 1, 2003, the Company adopted Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations."

DELOITTE & TOUCHE LLP Milwaukee, Wisconsin March 3, 2004 40 I

CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED STATEMENTS OF INCOME Year Ended December 31, 2003 2002 2001 (in thousands, except per share amounts)

Operating revenues:

Domestic utility:

Electric S1,917,068

$1,752,534 S1,756,556 Gas 566,926 393,986 487,877 Other 104,194 85,415 101,894 Non-regulated 539,999 254.655 287.903 3,128,187 2.486,590 2,634.230 Operating expenses:

Domestic utility:

Electric production fuel and purchased power 730,594 651,813 695,168 Cost of gas sold 396,102 248,994 360,911 Other operation and maintenance 701,784 623,240 586,550 Non-regulated operation and maintenance 493,457 223,389 259,021 Depreciation and amortization 305,074 282,098 294,339 Taxes other than income taxes 89,442 103,865 102,136 2,716,453 2,133.399 2,298,125 Operating income 411.734 353.191 336,105 Interest expense and other:

Interest expense Loss on early extinguishment of debt Equity (income) loss from unconsolidated investments Allowance for funds used during construction Preferred dividend requirements of subsidiaries Impairment of available-for-sale securities of McLeodUSA Inc.

Miscellaneous, net 207,150 16,864 (19,121)

(20,719) 16,891 (20,859) 180,206 182,741 12,825 (7,696) 6,172 27,218 2,074 223.334 182,008 (18,799)

(11,144) 6,720 (2,662) 156,123 Income from continuing operations before Income taxes 231,528 129,857 179,982 Income taxes 71,827 42,401 51,823 Income from continuing operations 159.701 87.456 128,159 Income from discontinued operations, net of tax (Note 16) 29,825 19,425 57,071 Income before cumulative effect of changes in accounting principles 189.526 106,881 185,230 Cumulative effect of changes in accounting principles, net of tax (5,983)

(12,868)

Net income

$183,543

$106,881

$172,362 Average number of common shares outstanding (basic) 101,366 90,897 80,498 Average number of common shares outstanding (diluted) 101,544 90,959 80,636 Earnings per average common share (basic and diluted):

Income from continuing operations

$1.57 50.97

$1.59 Income from discontinued operations 0.30 0.21 0.71 Cumulative effect of changes in accounting principles (0.06)

(0.16)

Net income

$1.81

$1.18 52.14 Dividends declared per common share

$1.00

$2.00 S2.00 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

41

I 4 l

CONSOLIDATED BALANCE SHEETS December 31, 2002 ASSETS 2003 (in thousands)

Property, plant and equipment:

Domestic utility:

Electric plant in service Gas plant in service Other plant in service Accumulated depreciation Net plant Construction work in progress:

Emery generating facility Other Other, less accumulated depreciation (accum. depr.) of S3,242 and S2,952 Total domestic utility Non-regulated and other Non-regulated Generation, less accum. depr. of $3,380 and $73 International, less accum. depr. of $33,708 and S20,737 Integrated Services, less accum. depr. of S32,903 and S31,021 Other Investments, less accum. depr. of $26,179 and $24,108 Corporate Services and other, less accum. depr. of $25,283 and $9,427 Total non-regulated and other

$5,707,478 646,439 538,340 (2,985,285) 3,906,972 304,332 152,684 68,611 4,432,599 204,480 198,875 60,617 53,819 68,415 586.206 5.018,805 S5,295,381 613,122 530,456 (2,791,891) 3,647,068 10,651 252,445 68.340 3,978,504 156,699 171,179 73,983 54,303 75.282 531.446 4,509,950 It Current assets:

Cash and temporary cash investments Restricted cash Accounts receivable:

Customer, less allowance for doubtful accounts of $5,522 and $4,364 Unbilled utility revenues Other, less allowance for doubtful accounts of S786 and $845 Income tax refunds receivable Production fuel, at average cost Materials and supplies, at average cost Gas stored underground, at average cost Regulatory assets Assets of discontinued operations (Note 16)

Other 242,281 11,418 80,664 83,385 94,733 20,878 54,148 60,518 90,964 61,777 82,137 882,903 62,859 9,610 69,413 50,624 60,107 97,469 63,126 58,603 62,797 46,076 969,291 105,487 1,655,462 Investments:

Investments in unconsolidated foreign entities 481,525 373,816 Nuclear decommissioning trust funds 381,524 344,892 Investment in ATC and other 260,511 217,992 1,123,560 936,700 Other assets:

Regulatory assets 339,261 302,365 Deferred charges and other 410,917 409,607 750,178 711,972 Total assets S7,775,446 S7,814,084 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

42 II

CONSOLIDATED BALANCE SHEETS (Continued)

CAPITALIZATION AND LIABILITIES December 31, 2003 2002 (in thousands, except share amounts)

Capitalization (See Consolidated Statements of Capitalization):

Common stock - $0.01 par value - authorized 200,000,000 shares; outstanding 110,962,910 and 92,304,220 shares Additional paid-in capital Retained earnings Accumulated other comprehensive loss Shares in deferred compensation trust - 264,673 and 239,467 shares at an average cost of $27.84 and S28.80 per share Total common equity

$1,110 1,643,572 840,417 (106,415)

(7,370) 2,371,314

$923 1,293,919 758,187 (209,943)

(6,896) 1,836,190 Cumulative preferred stock of subsidiaries, net Long-term debt, net (excluding current portion) 243,803 2,123,298 4.738.415 205,063 2,609,803 4.651.056 Current liabilities:

Current maturities and sinking funds 69,281 46,591 Variable rate demand bonds 55,100 55,100 Commercial paper 107,500 195,500 Other short-term borrowings 21,495 113,721 Accounts payable 309,816 282,855 Accrued interest 43,962 34,819 Accrued taxes 70,835 105,521 Liabilities of discontinued operations (Note 16) 138,251 Other 176,120 149,952 854,109 1,122,310 Other long-term liabilities and deferred credits:

Accumulated deferred income taxes 702,648 661,798 Accumulated deferred investment tax credits 49,085 54,375 Regulatory liabilities 632,230 94,300 Asset retirement obligations (Note 18) 345,680 Pension and other benefit obligations 188,324 181,010 Cost of removal obligations 781,516 Other 212,413 224,294 2,130,380 1,997,293 Minority interest 52,542 43,425 Commitments and contingencies (Note 11)

Total capitalization and liabilities

$7,775,446

$7,814,084 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

43

I a

CONSOLIDATED STATEMENTS OF CASH FLOWVS Year Ended December 31, 2003 2002 2001 (in thousands)

Cash flows from operating activities:

Net income Adjustments to reconcile net income to net cash flows from operating activities:

Income from discontinued operations, net of tax Depreciation and amortization Other amortizations Deferred tax expense (benefit) and investment tax credits Equity (income) loss from unconsolidated investments, net Distributions from equity method investments Non-cash valuation charges Cumulative effect of changes in accounting principles, net of tax Other Other changes In assets and liabilities:

Accounts receivable Sale of utility accounts receivable Gas stored underground Accounts payable Accrued taxes S183,543 (29,825) 305,074 73,716 59,133 (19,121) 24,252 11,035 5,983 (12,821)

(52,638)

(26,000)

(28,167)

(16,415)

(34,686)

(23,073) 419.990 S106,881 (19,425) 282,098 51,567 13,192 12,825 21,671 59,463 (8,473)

(16,576) 24,000 (5,683) 37,997 18,764 (22.963) 555,338 S172,362 (57,071) 294,339 52,724 (19,937)

(18,799) 16,961 33,706 12,868 (4,693) 64,567 24,000 (15,755)

(55,872) 11,392 (77.446) 433.346 Other Net cash flows from operating activities

=

Cash flows from financing activities:

Common stock dividends (101,313)

(180,987)

(158,231)

Proceeds from issuance of common stock 345,606 56,066 288,553 Proceeds from issuance of preferred stock of subsidiary 38,738 144,602 Redemption of preferred stock of subsidiary (56,389)

Net change in Resources' credit facility

( (383,610) 63,110 Proceeds from issuance of other long-term debt 338,623 300,023 513,530 Reductions in other long-term debt (367,783)

(20,818)

(145,359)

Net change in commercial paper and other short-term borrowings (180,226) 200,145 (320,449)

Net change in loans with discontinued operations (10,574) 37,467 (49,006)

Other (28,991)

(24.262)

(31.073)

Net cash flows from financing activities 34.080 72.237 161,075 Cash flows used for investing activities:

Construction and acquisition expenditures:

Domestic utility business (580,808)

(405,761)

(340,789)

Non-regulated businesses (248,517)

(218,242)

(332,183)

Corporate Services and other (9,568)

(32,749)

(40,019)

Nuclear decommissioning trust funds (14,091)

(22,923)

(22,100)

Proceeds from asset sales 523,045 27,643 107,934 Other 55.291 19,430 (27.404)

Net cash flows used for investing activities (274.648)

(632,602)

(654.561)

Net Increase (decrease) in cash and temporary cash Investments 179,422 (5,027)

(60.140)

Cash and temporary cash investments at beginning of period 62.859 67.886 128.026 Cash and temporary cash investments at end of period S242,281 S62.859

$67,886 Supplemental cash flows Information:

Cash paid during the period for Interest S198,582 S184,135

$180,351 Income taxes, net of refunds S17,488

$30.649 T70.8 Noncash investing and financing activities:

Debt repaid directly by buyer in the sale of Australian business S127,595 S-Debt assumed by buyer of affordable housing business S87_986 S

Capital lease obligations incurred and other S14,801 S19 101-_

S19,967 The accompanying Notes to Consolidated Financial Statements are an Integral part of these statements.

44 I

CONSOLIDATED STATEMENTS OF CAPITALIZATION December 31, 2003 2002 (in thousands)

Common equity (See Consolidated Balance Sheets)

S2.371314 S1.836.190 Cumulative preferred stock of subsidiaries, net (Note 7(b))

243.803 205.063 Long-term debt:

Domestic utility:

First Mortgage Bonds:

7.75%, due 2004 1.73% variable rate at Dec. 31, 2003 to 7.6% fixed rate, due 2005 8% at Dec. 31, 2003, due 2007, partially retired in 2003 1.37% variable rate at Dec. 31,2003, due 2014 1.29% to 1.73% variable rate at Dec. 31, 2003, due 2015 7-5/8%, retired in 2003 8.6%, retired in 2003 8-5/8%, retired in 2003 Collateral Trust Bonds:

7.25%, due 2006 6-7/8%, due 2007 6%, due 2008 5.5% to 7%, due 2023 Pollution Control Revenue Bonds:

2.5% to 4.2% through 2004, due 2005 to 2023 6.25% to 6.35%, due 2009 to 2012, partially retired in 2003 2.4% variable rate at Dec. 31,2003, due 2010, partially retired in 2003 Other long-term debt:

Debentures, 7%, due 2007 Debentures, 5.7%, due 2008 Senior debentures, 6-5/8%, due 2009 Debentures, 7-5/8%, due 2010 Senior debentures, 6-3/4%, due 2011 Senior debentures, 5.875%, due 2018 Senior debentures, 6.45%, due 2033 Subordinated deferrable interest debentures, 7-7/8%, retired in 2003 Total domestic utility 62,000 88,000 25,000 8,500 30,600 214,100 60,000 55,000 50,000 69,400 234,400 25,900 12,250 7,700 45,850 105,000 60,000 135,000 100,000 200,000 100,000 100,000 1,294,350 62,000 88,000 52,450 8,500 30,600 94,000 70,000 20.000 425,550 60,000 55,000 50,000 69,400 234,400 25,900 14,930 10.100 50,930 105,000 60,000 135,000 100,000 200,000 50.000 1,360,880 Non-regulated and other:

Senior notes, 4.55%, due 2008 Senior notes, 7.375%, due 2009, partially retired in 2003 Alliant Energy Neenah, LLC credit facility,2.69% at Dec. 31, 2003, due 2010 Senior notes, 7%, due 2011, partially retired in 2003 Senior notes, 9.75%, due 2013, partially retired in 2003 Exchangeable senior notes, 2.5%, due 2030 Senior notes, 8.59%, retired in 2003 WPC credit facility, 3.63% at Dcc. 31, 2002 (a)

Multifamily housing revenue bonds, 1.75% variable rate to 7.55% at Dec. 31, 2002 (b)

Other, 1% to 6.70%, due 2004 to 2010 (c)

Total non-regulated and other 75,000 210,955 55,139 282,500 285,000 402,500 14.943 1,326.037 2,620.387 250,000 300,000 300,000 402,500 24,000 185,000 38,830 223.841 1.724.171 3,085,051 (46,591)

(55,100)

(373.557) 2.609.803 Less:

Current maturities Variable rate demand bonds Unamortized debt discount, net Total long-term debt, net (excluding current portion)

(69,281)

(55,100)

(372,708) 2,123,298 Total capitalization S4.738,415 S4,651,056 (a) Not included on Alliant Energy's Consolidated Balance Sheet at Dec. 31, 2003 as a result of the %VPC IPO.

(b) Balance at Dec. 31, 2002 was assumed by buyer of affordable housing business in 2003.

(c) Balance at Dec. 31, 2002 includes debt repaid directly by buyer in the sale of Australian business and debt assumed by buyer of affordable housing business.

The accompanying Notes to Consolidated Financial Statements are an Integral part of these statements.

45

I a CONSOLIDATED STATEMENTS OF CHANGES IN COMMON EQUITY Additional Common Paid-In Stock Capital Accumulated Other Retained Comprehensive Earnings Income (Loss)

Shares in Deferred Compensation I Trust Total Common Equity (in thousands) 2001:

Beginning balance (a)

Net income Unrealized holding losses on securities, net of tax of (S240,579)

Less: reclassification adjustment for gains included in net income, net of tax of $-

Net unrealized losses on securities Foreign currency translation adjustments Minimum pension liability adjustments, net of tax of (SI 1,022)

Unrealized holding losses on derivatives, net of tax of (S1,569)

Less: reclassification adjustment for losses included in net income, net of tax of ($2,078)

Net unrealized gains on qualifying derivatives Total comprehensive loss Common stock dividends Common stock issued Ending balance 2002:

Net income Unrealized holding losses on securities, net of tax of ($8,544)

Less: reclassification adjustment for losses included in net income, net of tax of ($14,393)

Net unrealized gains on securities Foreign currency translation adjustments, net of tax Minimum pension liability adjustments, net of tax of(S1 8,874)

Unrealized holding losses on derivatives, net of tax of (S2,765)

Less: reclassification adjustment for gains included in net income, net of tax of S 1,658 Net unrealized losses on qualifying derivatives Total comprehensive income Common stock dividends Common stock issued Redemption of preferred stock of subsidiary Ending balance 2003:

Net Income Unrealized holding gains on securities, net of tax of S6,467 Less: reclassification adjustment for gains Included In net income, net of tax of $1,420 Net unrealized gains on securities Foreign curre ncy translation adjustments, net of tax Milinimum pension liability adjustments, net of tax of $4,279 Unrealized holding losses on derivatives, net of tax of (S886)

Less: reclassIfication adjustment for losses included in net Income, net of tax of ($3,802)

Net unrealized gains on qualifying derivatives Total comprehensive Income Common stock dividends Common stock issued Ending balance

$790

$947,504

$818,162 172,362

$271,867 (343,285) 259 (343.544)

(66,830)

(16,378)

- (1,003)

($851)

S2,037,472 172,362 (343,285) 259 (343.544)

(66.830)

(16.378)

(1,003)

(3,454)

(3,454) 2,451 2,451 (251,939)

(158,231)

(158,231) 107 292.289 (1,357) 291.039 897 1,239,793 832,293 (152,434)

(2,208) 1,918,341 106,881 (11,069)

(23,146) 12.077 (37,785)

(27.226)

(2,671) 106,881 (11,069) 4 i

(23,146) 12.077 (37,785)

(27.226) i (2,671) 1; 1.904 1.904 (4.575)

(4.575) 49,372 (180,987)

(180,987) 26 58,338 (4,688) 53,676 (4,212)

(4,212) 923 1,293,919 758,187 (209,943)

(6,896) 1,836,190 183,543 11,203 2,408 8,795 83,646 6,291 (1,655) 183,543 11,203 2,408 8,795 83,646 6.291 (1,655)

(6,451)

(6,451) 4.796 4,796 287,071 (101,313)

(101,313) 187 349.653 (474) 349.366

$1,110

$1,643.572 S840,417

($106,415)

(S7370)

S2371.314 (a) Accumulated other comprehensive income (loss) at January 1, 2001 consisted of $335,523 of net unrealized gains on securities, (S59,978) of foreign currency translation adjustments and (S3,678) of net unrealized losses on qualifying derivatives.

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

46

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1)

SUMMARY

OF SIGNIFICANT ACCOUNTING POLICIES (a) General - The consolidated financial statements include the accounts of Alliant Energy and its consolidated subsidiaries.

Alliant Energy is an investor-oxvned public utility holding company, whose primary subsidiaries arc IP&L, WP&L, Resources and Corporate Services. IP&L and WP&L are utility subsidiaries that are engaged principally in the generation, transmission (IP&L only), distribution and sale of electric energy; and the purchase, distribution, transportation and sale of natural gas in Iowa, Wisconsin, Minnesota and Illinois. Resources (through its numerous direct and indirect subsidiaries) is comprised of four primary business platforms: Non-regulated Generation, International, Integrated Services and Other Investments. Non-regulated Generation owns a 309-MW, non-regulated, tolled, natural gas-fired power plant in Neenah, WVisconsin and intends to support the development, financing and construction of generation to meet the needs of Alliant Energy's domestic utility business. International holds interests in various businesses to develop energy generation, delivery and infrastructure in growing international markets, including Brazil, China and New Zealand. Integrated Services provides a wide range of energy and environmental services for commercial, industrial, institutional, educational and governmental customers. Other Investments includes ownership of transportation companies, an equity interest in a synthetic fuel processing facility, Alliant Energy's loan receivable from a Mexican development company and related utility operations and various other investments.

Corporate Services is the subsidiary formed to provide administrative services to Alliant Energy and its subsidiaries as required under PUHCA.

At Dec. 31, 2002, the assets and liabilities of Alliant Energy's oil and gas (WPC), Australian (including Southern Hydro Partnership (Southern Hydro)), affordable housing and SmartEnergy businesses were classified as held for sale. In 2003, Alliant Energy completed the sale of the Australian, affordable housing and SmartEnergy businesses, as well as the sale of over 94% of the WPC stock. The operating results for these non-regulated businesses for all periods presented have been separately classified and reported as discontinued operations in the Consolidated Financial Statements and Notes to Consolidated Financial Statements. Refer to Note 16 for additional information.

The consolidated financial statements reflect investments in controlled subsidiaries on a consolidated basis. FIN 46, issued by the FASB in January 2003, requires consolidation where there is a controlling financial interest in a variable interest entity or where the variable interest entity does not have sufficient equity risk to finance its activities without additional subordinated financial support from other parties. All significant intercompany balances and transactions, other than certain energy-related transactions affecting the utility subsidiaries, have been eliminated from the consolidated financial statements.

Such energy-related transactions not eliminated are made at prices that approximate market value and the associated costs are recoverable from customers through the rate making process. The consolidated financial statements are prepared in conformity with GAAP, which give recognition to the rate making and accounting practices of FERC and state commissions having regulatoryjurisdiction. The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect: a) the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements; and b) the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Certain prior period amounts have been reclassified on a basis consistent with the current year presentation. The most significant reclassifications relate to the reporting of accumulated costs of removal which are non-legal retirement obligations and accumulated decommissioning costs accrued prior to January 1, 2003. Previously, these costs were included as components of "Accumulated Depreciation" but in accordance with recent SEC guidance are now shown in "Cost of removal obligations" on the Consolidated Balance Sheet at Dec. 31, 2002.

Unconsolidated investments for which Alliant Energy does not control, but does have the ability to exercise significant influence over operating and financial policies (generally, 20% to 50% voting interest), are accounted for under the equity method of accounting. These investments are stated at acquisition cost, increased or decreased for Alliant Energy's equity in net income or loss, which is included in "Equity (income) loss from unconsolidated investments" in the Consolidated Statements of Income and decreased for any dividends received. These investments are also increased or decreased for Alliant Energy's proportionate share of the investee's other comprehensive income (loss), which is included in "Accumulated other comprehensive loss" on the Consolidated Balance Sheets. Investments that do not meet the criteria for consolidation or the equity method of accounting are accounted for under the cost method.

(b) Regulation - Alliant Energy is a registered public utility holding company subject to regulation by the SEC under PUHCA.

The utility subsidiaries are subject to regulation under PUHCA, FERC and their respective state regulatory commissions.

(c) Regulatory Assets and Liabilities - Alliant Energy is subject to the provisions of SFAS 71, "Accounting for the Effects of Certain Types of Regulation," which provides that rate-regulated public utilities record certain costs and credits allowed in the rate making process in different periods than for non-regulated entities. These are deferred as regulatory assets or accrued as 47

regulatory liabilities and are recognized in the Consolidated Statements of Income at the tine they are reflected in rates. As of Dec. 31, 2003 and 2002, IP&L had S24 million and $7 million and WVP&L had S7 million and S6 million of regulatory assets that were not earning returns, respectively. At Dec. 31, 2003 and 2002, regulatory assets and liabilities were comprised of the following items (in millions):

Regulatory Assets Regulatory Liabilities 2003 2002 2003 2002 Tax-related (Note 1(d))

$187.2

$177.6 S92.0 S83.8 Environmental-related (Note I1(e))

58.6 64.9 5.2 5.1 Energy efficiency program costs 36.8 46.7 Asset retirement obligations (Note 18) 28.8 Cost of removal obligations 535.8 Other 89.6 59.2 16.9 22.3 S401.0 S348.4

$649.9

$111.2 Alliant Energy believes it is probable that any differences between expenses for legal AROs calculated under SFAS 143 and expenses recovered currently in rates will be recoverable in future rates, and is deferring the difference of S28.8 million as a regulatory asset. Alliant Energy also collects in rates future removal costs for many assets that do not have an associated legal ARO. Alliant Energy records a liability for the estimated amounts it has collected in rates for these future removal costs less amounts spent on removal activities. At Dec. 31, 2003 and 2002, non-legal removal obligations of $535.8 million and S497.1 million were recorded in "Regulatory liabilities" and "Cost of removal obligations," respectively, on the Consolidated Balance Sheets.

If a portion of the utility subsidiaries' operations becomes no longer subject to the provisions of SFAS 71 as a result of competitive restructuring or otherwise, a write-down of related regulatory assets would be required, unless some form of transition cost recovery is established by the appropriate regulatory body that would meet the requirements under GAAP for continued accounting as regulatory assets during such recovery period. In addition, each utility subsidiary would be required to determine any impairment of other assets and write-down such assets to their fair value.

(d) Income Taxes - Alliant Energy is subject to the provisions of SFAS 109, "Accounting for Income Taxes," and follows the liability method of accounting for deferred income taxes, which requires the establishment of deferred tax assets and liabilities, as appropriate, for temporary differences between the tax basis of assets and liabilities and the amounts reported in the consolidated financial statements. Deferred taxes are recorded using currently enacted tax rates.

Except as noted below, income tax expense includes provisions for deferred taxes to reflect the tax effects of temporary differences between the time when certain costs are recorded in the accounts and when they are deducted for tax return purposes. As temporary differences reverse, the related accumulated deferred income taxes are reversed to income.

Investment tax credits have been deferred and are subsequently credited to income over the average lives of the related property. Other tax credits reduce income tax expense in the year claimed and are generally related to nonconventional fuel and research and development.

Consistent with Iowa rate making practices for IP&L, deferred tax expense is not recorded for certain temporary differences (primarily related to utility property, plant and equipment) because rates are reduced for the current tax benefits. As the deferred taxes become payable (over periods exceeding 30 years for some generating plant differences) they are recovered through rates. Accordingly, IP&L has recorded deferred tax liabilities and regulatory assets for certain temporary differences, as identified in Note I (c). In Wisconsin, the PSCW has allowed rate recovery of deferred taxes on all temporary differences since August 1991. WP&L established a regulatory asset associated with those temporary differences occurring prior to August 1991 that will be recovered in future rates through 2007.

(e) Common Shares Outstanding - A reconciliation of the weighted average common shares outstanding used in the basic and diluted earnings per share calculation was as follows:

Weighted average common shares outstanding:

2003 2002 2001 Basic earnings per share calculation 101,365,877 90,896,885 80,497,823 Effect of dilutive securities 178,510 62,177 138,006 Diluted earnings per share calculation 101,544,387 90,959,062 80,635,829 48

In 2003, 2002 and 2001,3,799,938, 3,338,978, and 1,501,854 options, respectively, to purchase shares of common stock, with average exercise prices of S28.68, $29.67, and $31.08, respectively, were excluded from the calculation of diluted earnings per share as the exercise prices were greater than the average market price.

(f) Temporary Cash Investments and Restricted Cash - Temporary cash investments are stated at cost, which approximates market value, and are considered cash equivalents for the Consolidated Balance Sheets and the Consolidated Statements of Cash Flows. These investments consist of short-term liquid investments that have maturities of less than 90 days. Alliant Energy's short-term restricted cash at Dec. 31, 2003 and 2002 primarily related to borrowing requirements for various power plants in China. At Dec. 31, 2003, Alliant Energy also had $6.7 million of long-term restricted cash related to borrowing requirements for the acquisition and maintenance of Resources' 309-MW, non-regulated, tolled, natural gas-fired power plant in Neenah, Wisconsin, which was acquired in 2003.

(g) Property, Plant and Equipment - Domestic utility plant (other than acquisition adjustments) is recorded at original cost, which includes overhead, administrative costs and AFUDC. At Dec. 31, 2003 and 2002, IP&L had S20.8 million and S22.0 million, respectively, of acquisition adjustments, net of accumulated amortization, included in utility plant (S4.6 million and $4.9 million, respectively, of such balances are currently being recovered in IP&L's rates). The aggregate AFUDC recovery rates, computed in accordance with the prescribed regulatory formula, were as follows:

2003 2002 2001 IP&L 7.9%

6.9%

7.7%

WP&L 9.5%

2.6%

7.9%

IP&L and WP&L use a combination of remaining life, straight-line and sum-of-the-years-digits depreciation methods as approved by their respective regulatory commissions. The remaining life of the Duane Arnold Energy Center (DAEC), of which IP&L is a co-owner, is based on the Nuclear Regulatory Commission (NRC) license end-of-life of 2014. The remaining depreciable life of Kewaunee, of which WP&L is a co-owner, is based on the PSCW approved revised end-of-life of 2010.

Depreciation expense related to the decommissioning of DAEC and Kewaunee is discussed in Note I I (I. The average rates of depreciation for electric and gas properties, consistent with current rate making practices, were as follows:

IP&L WP&L 2003 2002 2001 2003 2002 2001 Electric 3.3%

3.4%

3.5%

3.7%

3.6%

3.7%

Gas 2.7%

2.9%

3.6%

4.0%

4.1%

4.1%

Nuclear fuel for DAEC is leased. Annual nuclear fuel lease expenses include the cost of fuel, based on the quantity of heat produced for electric generation, plus the lessor's interest costs related to fuel in the reactor and administrative expenses.

Nuclear fuel for Kewaunee is recorded at its original cost and is amortized to expense based upon the quantity of heat produced for electric generation. This accumulated amortization assumes spent nuclear fuel wvill have no residual value.

Estimated future disposal costs of such fuel are expensed based on kilowatt-hours (KWhs) generated. Refer to Note 3 for additional information on DAEC's nuclear fuel lease.

Non-regulated property, plant and equipment is recorded at cost. The majority of the non-regulated property, plant and equipment is depreciated using the straight-line method over periods ranging from 10 to 32 years. Upon retirement or sale of property and equipment, the cost and related accumulated depreciation are removed from the accounts and any gain or loss is included in the Consolidated Statements of Income. Ordinary retirements of utility plant and salvage value are netted and charged to accumulated depreciation upon removal from utility plant accounts and no gain or loss is recognized. Removal costs reduce the regulatory liability previously established.

(h) Operating Revenues - Revenues from IP&L and WP&L are primarily from electric and natural gas sales and deliveries and are recorded under the accrual method of accounting and recognized upon delivery. Revenues from Alliant Energy's non-regulated businesses are primarily from the sale of energy or services and are recognized based on output delivered or services provided as specified under contract terms. Alliant Energy's non-regulated businesses also account for the revenues of certain contracts on the percentage of completion method. Alliant Energy accrues revenues for services rendered but unbilled at month-end. Revenues and expenses from non-regulated gas marketing contracts that are designated as trading are reported on a net basis in the Consolidated Statements of Income. Refer to Note 10(d) for discussion of energy-trading contracts. Certain of Alliant Energy's subsidiaries serve as collection agents for sales or various other taxes and record revenues on a net basis.

The revenues do not include the collection of the aforementioned taxes.

49

I 1

(i) Domestic Utility Fuel Cost Recovery - IP&L's retail tariffs provide for subsequent adjustments to its electric and natural gas rates for changes in the cost of fuel, purchased energy and natural gas purchased for resale. Changes in the under/over collection of these costs are reflected in "Electric production fuel and purchased power" and "Cost of gas sold" in the Consolidated Statements of Income. The cumulative effects are reflected on the Consolidated Balance Sheets as a current regulatory asset or liability, pending automatic reflection in future billings to customers. At IP&L, purchased-power capacity costs are not recovered from electric customers through Energy Adjustment Clauses (EACs). Recovery of these costs must be addressed in base rates in a formal rate proceeding.

WP&L's retail electric rates are based on annual forecasted fuel and purchased-power costs. Under PSCW rules, WP&L can seek rate increases if it experiences an extraordinary increase in these costs or if the annual costs are more than 3% higher than the estimated costs used to establish rates. WP&L has a gas performance incentive which includes a sharing mechanism whereby 50% of all gains and losses relative to current commodity prices, as well as other benchmarks, are retained by WP&L, with the remainder refunded to or recovered from customers.

U) Generating Facility Outages -The IUB allows IP&L to collect, as part of its base revenues, funds to offset other operation and maintenance expenditures incurred during refueling outages at DAEC. These costs include incremental internal labor costs, contractor labor and materials directly related to activities performed during the outage. As these revenues are collected, an equivalent amount is charged to other operation and maintenance expense with a corresponding credit to a reserve. During a refueling outage, the reserve is reversed to offset the refueling outage expenditures. Operating expenses incurred during refueling outages at Kewaunee are expensed by WP&L as incurred. The maintenance costs incurred during outages for Alliant Energy's various other generating facilities are also expensed as incurred. The timing of the DAEC and Kewaunee refueling outages during 2001-2003 and anticipated refueling outages for 2004-2006 are as follows:

2001 2002 2003 2004 2005 2006 DAEC Spring None Spring None Spring None Kewaunee Fall None Spring Fall None Spring (k) Translation of Foreign Currency - Assets and liabilities of international investments, where the local currency is the functional currency, have been translated at year-end exchange rates and related income statement results have been translated using average exchange rates prevailing during the year. Adjustments resulting from translation, including gains and losses on intercompany foreign currency transactions which are long-term in nature, and which Alliant Energy does not intend to settle in the foreseeable future, have been recorded in "Accumulated other comprehensive loss" on the Consolidated Balance Sheets.

(I) Derivative Financial Instruments -Alliant Energy uses derivative financial instruments to hedge exposures to fluctuations in interest rates, certain commodity prices, certain currency rates and volatility in a portion of natural gas sales volumes due to weather. Alliant Energy also utilizes derivatives to mitigate the equity price volatility associated with certain investments in equity securities. Alliant Energy does not use such instruments for speculative purposes. The fair value of all derivatives are recorded as assets or liabilities on the Consolidated Balance Sheets and gains and losses related to derivatives that are designated as, and qualify as hedges, are recognized in earnings when the underlying hedged item or physical transaction is recognized in income. Gains and losses related to derivatives that do not qualify for, or are not designated in hedge relationships, are recognized in earnings immediately. A number of Alliant Energy's derivative transactions are in its domestic utility business and based on the fuel and natural gas cost recovery mechanisms in place, as well as other specific regulatory authorizations, changes in fair market values of such derivatives generally have no impact on Alliant Energy's results of operations. Alliant Energy has some commodity purchase and sales contracts that have been designated, and qualify for, the normal purchase and sale exception and based on this designation, these contracts are not accounted for as derivative instruments.

Alliant Energy is exposed to losses related to financial instruments in the event of counterparties' non-performance. Alliant Energy has established controls to determine and monitor the creditworthiness of counterparties in order to mitigate its exposure to counterparty credit risk. Alliant Energy is not aware of any material exposure to counterparty credit risk related to its derivative financial instruments. Refer to Note 10 for further discussion of Alliant Energy's derivative financial instruments.

50

(m) Accounting for Stock Options - At Dec. 31, 2003, Alliant Energy had two stock-based incentive compensation plans, which are described more fully in Note 6(b). Alliant Energy accounts for stock options issued under these plans under the recognition and measurement principles of Accounting Principles Board Opinion (APB) 25, "Accounting for Stock Issued to Employees." No stock-based compensation cost is reflected in net income in the Consolidated Statements of Income, as all options granted under those plans had an exercise price equal to the quoted market price of the underlying common stock on the date of grant. The effect on net income and EPS if Alliant Energy had applied the fair value recognition provisions of SFAS 123, "Accounting for Stock-Based Compensation," to the stock options issued under these plans was as follows (in thousands):

2003 2002 2001 Net income, as reported

$183,543

$106,881 S172,362 Less: stock-based compensation expense, net of tax 2,044 2,541 2,446 Pro forma net income

$181,499 S104,340

$169,916 EPS (basic and diluted):

As reported

$1.81

$1.18

$2.14 Pro forma

$1.79

$1.15

$2.11 (n) Pension Plan - For the defined benefit pension plan sponsored by Corporate Services, Alliant Energy allocates pension costs and contributions to IP&L, WN'P&L, Resources and the parent company based on labor costs of plan participants and any additional minimum pension liability based on each group's funded status.

(o) Asset Valuations - Long-lived assets, excluding goodwill and regulatory assets, are reviewed for possible impairment whenever events or changes in circumstances indicate the carrying value of the assets may not be recoverable. Impairment is indicated if the carrying value of an asset exceeds its undiscounted future cash flows. An impairment charge is recognized equal to the amount the carrying value exceeds the asset's fair value. The fair value is determined by the use of quoted market prices, appraisals, or the use of other valuation techniques such as expected discounted future cash flows. The estimated fair value, less cost to sell assets held for sale, is compared each reporting period to their carrying values. Impairment charges are recorded for assets held for sale if the carrying value of such asset exceeds the estimated fair value less cost to sell.

Goodwill represents the excess of the purchase price over the fair value of the identifiable net tangible and intangible assets acquired in a business combination. In accordance with SFAS 142, goodwill is required to be evaluated for impairment at least annually and more frequently if indicators of impairment exist. If the fair value of a reporting unit is less than its carrying value, including goodwill, an impairment charge may be necessary. The fair value of reporting units is determined by utilizing a combination of market value indicators and expected discounted future cash flows. Refer to Note 14 for additional information.

If events or circumstances indicate the carrying value of investments accounted for under the equity method of accounting may not be recoverable, potential impairment is assessed by comparing the future anticipated cash flows from these investments to their carrying values. If an impairment is indicated, a charge is recognized equal to the amount the carrying value exceeds the investment's fair value.

(p) MIiscellaneous, net - The other (income) and deductions included in "Miscellaneous, net" in the Consolidated Statements of Income are as follows (in millions):

2003 2002 2001 Interest income:

From loans to discontinued operations

($3.8)

(S16.9)

($10.0)

Other (14.0)

(12.8)

(23.7)

Valuation charges/(income):

Unconsolidated investments 2.8 18.8 McLeod trading securities (Note 10(a))

(0.6) 5.0 215.1 Derivative component of Resources' exchangeable senior notes (Note 10(a))

(0.4)

(181.6)

(Gains) losses on asset sales, net (5.8) 0.1 (4.4)

Currency transaction (gains) losses, net (5.6) 0.7 (0.4)

Minority interest of subsidiaries' net earnings 4.8 5.2 4.9 Other 1.3 2.4 (2.6)

($20.9)

$2.1 (S2.7) 51

I I (2) DOMESTIC UTILITY RATE MLATTERS In February 2004, WP&L received approval from the PSCW to refund $5.3 million to its natural gas customers as relates to its annual performance under the gas performance incentive. The PSCW has not yet audited the refund calculation, but agreed with WP&L's request to refund approximately 80% of the total refund amount at this time. This refund was completed in February 2004 and the remainder of the refund will be completed after the PSCW completes their audit and issues a ruling. At Dec. 31,2003, WP&L had reserves for all amounts related to these refunds. Refer to Note 1(i) for further discussion of WP&L's fuel cost recovery.

(3) LEASES IP&L has a capital lease covering its 70% undivided interest in nuclear fuel purchased for DAEC. Annual nuclear fuel lease expenses (included in "Electric production fuel and purchased power" in the Consolidated Statements of Income) for 2003, 2002 and 2001 were S12.7 million, $15.5 million and S14.1 million, respectively. Alliant Energy's operating lease rental expenses, which include certain purchased-power agreements, for 2003, 2002 and 2001 were $46.3 million, $44.5 million and S40.2 million, respectively. The purchased-power agreements total below includes S464 million and S69 million related to the Riverside and RockGen plants, respectively, in Wisconsin. Riverside is expected to be placed in-service in 2004. Alliant Energy continues to evaluate Riverside, RockGen and other tolling arrangements, renewable energy entities and any other non-special purpose entities, to determine if they require consolidation under the revised FIN 46 guidance issued by the FASB in December 2003. Alliant Energy will apply the provisions of the revised guidance as of March 31, 2004. The synthetic leases relate to the financing of the corporate headquarters, corporate aircraft, utility railcars and a utility radio dispatch system.

These leases do not meet the consolidation requirements per FIN 46 and are not included on the Consolidated Balance Sheets. Alliant Energy has guaranteed the residual value of its synthetic leases totaling S75 million in the aggregate. The guarantees extend through the maturity of each respective underlying lease with remaining terms up to 12 years. Residual value guarantees have been included in the future minimum lease payments noted in the table below (in millions):

Operating leases:

Certain purchased-power agreements Synthetic leases Other Total operating leases 2004 2005 2006 2007 2008 Thereafter Total S52.6

$69.5

$70.9 S72.2

$64.8

$235.0 S565.0 11.5 18.8 24.5 50.2 3.9 26.6 135.5 17.7 14.5 11.1 9.2 8.2 64.9 125.6

$81.8

$102.8 S106.5 S131.6 S76.9 S326.5

$826.1 Less:

Present value Gross amount of net assets repre-minimum under There senting capital lease lease at 2004 2005 2006 2007 2008

-after Total interest payments 12-31-03 S15.4

$12.0

$11.2

$5.6 S4.6

$1.1 S49.9

$5.2 S44.7 S75.5 1.5 1.5 28.8 31.8 3.8 28.0 15.7 (a) 0.2 0.1 0.2 0.2 0.2 0.9 1.8 0.5 1.3 1.4

$17.1 S13.6 S40.2

$5.8 S4.8 S2.0 S83.5

$9.5 S74.0 S92.6 Capital leases:

Nuclear fuel (IP&L)

Office building (IP&L)

Other Total capital leases (a) The difference between the gross assets under the lease and the present value of the net minimum capital lease payments relates to cash received by IP&L at the inception of the lease.

(4) SALES OF ACCOUNTS RECEIVABLE Domestic utility customer accounts receivable, including unbilled revenues, arise primarily from electric and natural gas sales. At Dec. 31, 2003 and 2002, the utility subsidiaries were serving a diversified base of residential, commercial and industrial customers and did not have any significant concentrations of credit risk.

Alliant Energy's utility subsidiaries participate in a combined utility customer accounts receivable sale program whereby IP&L and WP&L may sell up to a combined maximum amount of $250 million of their respective accounts receivable to a third-party financial institution on a limited recourse basis through wholly-owned and consolidated special purpose entities.

Corporate Services acts as a collection agent for the buyer and receives a fee for collection services. The agreement expires in April 2006 and is subject to annual renewal or renegotiation for a longer period thereafter. Under terms of the agreement, the third-party financial institution purchases the receivables initially for the face amount. On a monthly basis, this sales price is adjusted, resulting in payments to the third-party financial institution of an amount that varies based on interest rates and length of time the sold receivables remain outstanding. Collections on sold receivables are used to purchase additional receivables from the utility subsidiaries.

52

At Dec. 31,2003 and 2002, Alliant Energy had sold $176 million and S202 million of receivables, respectively. In 2003, 2002 and 2001, Alliant Energy received S1.8 billion, $2.3 billion and $2.2 billion, respectively, in aggregate proceeds from the sale of accounts receivable. The utility subsidiaries use proceeds from the sale of accounts receivable and unbilled revenues to maintain flexibility in their capital structures, take advantage of favorable short-term rates and finance a portion of their long-term cash needs. Alliant Energy paid fees associated with these sales of S2.6 million, $4.2 million and $7.9 million in 2003, 2002 and 2001, respectively.

Alliant Energy and its utility subsidiaries account for the sale of accounts receivable to the third-party financial institution as sales under SFAS 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" which do not require consolidation per the guidelines of FIN 46. Retained receivables are available to the third-party financial institution to pay any fees or expenses due it, and to absorb all credit losses incurred on any of the sold receivables.

Resources also sells receivables in its Integrated Services business that allows financing without incurring additional debt.

(5) INCOME TAXES The components of income taxes for Alliant Energy were as follows (in millions):

2003 2002 2001 Current tax expense:

Federal State Deferred tax expense (benefit):

Federal State Foreign tax expense Research and development tax credits Amortization of investment tax credits Nonconventional fuel credits Other tax credits

$19.2 12.7 62.3 0.5 8.2 (1.1)

(5.1)

(23.1)

(1.8)

S71.8

$21.7 21.6

• 20.8 (2.5) 5.5 (4.5)

(5.2)

-(14.9)

(0.1) 542.4

$52.1 16.2 (9.1)

(5.6) 4.2 (5.2)

(0.5)

(0.3)

S51.8 Included in "Cumulative effect of changes in accounting principles, net of tax" in the Consolidated Statements of Income for 2003 and 2001 were income tax benefits of S3.8 million and $5.5 million, respectively, related to the adoption of EITF Issue 02-3 and SFAS 143 byAlliant Energy on Jan. 1,2003, and the adoption of SFAS 133 by an equity method foreign affiliate of Alliant Energy on Jan. 1,2001, respectively. Refer to Note 16 for discussion of taxes associated with Alliant Energy's discontinued operations.

Alliant Energy's subsidiaries calculate income tax provisions using the separate return methodology. Separate return amounts are adjusted to reflect state apportionment benefits net of federal tax and the fact that PUHCA prohibits the retention of tax benefits at the parent level. Any difference between the separate return methodology and the actual consolidated return is allocated as prescribed in Alliant Energy's tax allocation agreement.

The overall effective income tax rates shown in the following table were computed by dividing total income tax expense by income from continuing operations before income taxes and preferred dividend requirements of subsidiaries.

Statutory federal income tax rate Effect of rate making on property related differences State income taxes, net of federal benefits Research and development tax credits Adjustment of prior period taxes Amortization of investment tax credits Foreign operations Nonconventional fuel credits Other items, net Overall effective income tax rate 2003 35.0%

4.0 3.2 (0.4)

(0.6)

(2.1)

(2.7)

(9.2) 1.7 28.9%

2002 35.0%

0.1 8.5 (3.3) 0.9 (3.8) 6.5 (11.0)

(1.7) 31.2%

2001 35.0%

2.3 5.5 (11.4)

(3.0)

(0.7)

(0.3) 0.4 27.8%

53

I I The accumulated deferred income tax (assets) and liabilities included on the Consolidated Balance Sheets at Dec. 31 arise from the following temporary differences (in millions):

Property related Exchangeable senior notes Capital loss carryover Decommissioning related Other Total 2003 Deferred Deferred Tax Tax Assets Liabilities Net (S37.2)

$711.0

$673.8 153.7 153.7 (37.6)

(37.6)

(30.1)

(30.1)

(67.4) 1.8 (65.6)

($172.3)

$866.5

$694.2 2002 Deferred Deferred Tax Tax Assets Liabilities Net

($45.1)

$692.5

$647.4 140.8 140.8 (34.4)

(34.4)

(33.1)

(33.1)

(90.1)

(90.1)

($202.7)

S833.3 S630.6 Other current assets Accumulated deferred income taxes Total deferred tax liabilities 2003

($8.4) 702.6

$694.2 2002

($31.2) 661.8

$630.6 At Dec. 31, 2003, Alliant Energy had the following tax carryforwards: alternative minimum tax credits of $31.6 million, capital losses ofSI07.4 million, net operating losses (primarily state) of S422.9 million, and general business credits of$17.7 million. The alternative minimum tax credit carryforwards can be carried forward indefinitely. The majority of the capital loss carryforwards expire in 2007. The net operating loss carryforwards have expiration dates ranging from 2004 to 2023.

The general business credit carryforwards have expiration dates ranging from 2022 to 2023. Due to the uncertainty of the realization of certain tax carryforwards, Alliant Energy has established valuation allowances of $35.8 million and $21.4 million as of Dec. 31, 2003 and 2002, respectively. At Dec. 31, 2003 and 2002, S19.6 million and $16.3 million, respectively, of these valuation allowances have been recorded to "Accumulated other comprehensive loss" on the Consolidated Balance Sheets and relate to unrealized tax benefits on certain foreign currency translation losses that are subject to capital loss carryover limitations.

At Dec. 31, 2003, 2002 and 2001, Alliant Energy had not recorded U.S. tax provisions of S19.2 million, $16.3 million and S6.8 million relating to $54.9 million, S46.6 million and S19.5 million of unremitted earnings from foreign investments, respectively, as these earnings are expected to be reinvested indefinitely.

U.S. and foreign sources of income (loss) from continuing operations before income taxes were as follows (in millions):

V, 2003 U.S. sources S174.9 Foreign sources 56.6 Income from continuing operations before income taxes S231.5 2002 2001 S132.8 S159.0 (2.9) 21.0 S129.9 S180.0 54

(6) BENEFIT PLANS (a) Pension Plans and Other Postretirement Benefits - Alliant Energy has various non-contributory defined benefit pension plans that cover a significant number of its employees. Benefits are based on the employces' years of service and compensation.

Alliant Energy also provides certain postretirement health care and life benefits to eligible retirees. In general, the health care plans are contributory with participants' contributions adjusted regularly and the life insurance plans are non-contributory. The weighted-average assumptions for qualified and non-qualified pension benefits and other postretirement benefits at the measurement date of Sept. 30 were as follows:

Discount rate for benefit obligations Discount rate for net periodic cost Expected return on plan assets Rate of compensation increase Medical cost trend on covered charges:

Initial trend rate Ultimate trend rate Pension Benefits 2003 2002 2001 6%

6.75%

7.25%

6.75%

7.25%

8%

9%

9%

9%

3.5-4.5%

3.5-4.5%

3.5-4.5%

Other Postretirement Benefits 2003 2002 2001 6%

6.75%

7.25%

6.75%

7.25%

8%

9%

9%

9%

3.5%

3.5%

3.5%

N/A N/A N/A N/A N/A N/A 9.5%

10.8%

5%

5%

12%

5%

The expected return on plan assets was determined by analysis of historical and forecasted asset class returns as well as actual returns for the plan over the past 10 years. An adjustment to the returns to account for active management is also made in the analysis. The obligations are viewed as long-term commitments and a long-term approach is used when determining the expected rate of return on assets, which is reviewed on an annual basis.

The components of Alliant Energy's qualified and non-qualified pension benefits and other postretirement benefits costs were as follows (in millions):

Service cost Interest cost Expected return on plan assets Amortization of:

Transition obligation (asset)

Prior service cost Actuarial loss (gain) 2003

$16.1 43.6 (40.6)

(0.5) 3.2 8.7 S30.5 Pension Benefits 2002

$13.7 42.1 (41.8)

(2.0) 3.2 2.7

$17.9 2001 S11.6 40.4 (48.5)

(2.4) 3.2 (1.4)

S2.9 Other Postretiremcnt Benefits 2003 2002 2001

$7.6 S5.5

$4.0 14.7 12.7 10.6 (5.4)

(5.5)

(6.1) 3.7 (0.3) 2.6

$22.9 3.7 (0.3) 0.5

$16.6 3.7 (0.3)

(1.5)

S10.4 The assumed medical trend rates are critical assumptions in determining the service and interest cost and accumulated postretirement benefit obligation related to postretirement benefits costs. A I % change in the medical trend rates for 2003, holding all other assumptions constant, would have the following effects (in millions):

1% Increase Effect on total of service and interest cost components

$2.5 Effect on postretirement benefit obligation

$24.8 I% Decrease

($2.2)

($21.8) 55

I A reconciliation of the funded status of Alliant Energy's qualified and non-qualified pension benefit and other postretirement benefit plans to the amounts recognized on the Consolidated Balance Sheets at Dec. 31 was as follows (in millions):

Pension Benefits 2003 2002 Other Postretirement Benefits Change in projected benefit obligation:

Net projected benefit obligation at beginning of year Service cost Interest cost Plan participants' contributions Plan amendments Actuarial loss Gross benefits paid Net projected benefit obligation at end of year Change in plan assets:

Fair value of plan assets at beginning of year Actual return on plan assets Employer contributions Plan participants' contributions Gross benefits paid Fair value of plan assets at end of year Funded status at end of year Unrecognized net actuarial loss Unrecognized prior service cost Unrecognized net transition obligation (asset)

Net amount recognized at end of year Amounts recognized on the Consolidated Balance Sheets consist of:

Prepaid benefit cost Accrued benefit cost Additional minimum liability Intangible asset Accumulated other comprehensive loss Net amount recognized at measurement date S646.7 16.1 43.6 1.7 47.8 (34.9) 721.0 466.7 86.2 12.6 (34.9) 530.6 (190.4) 175.2 22.4 (0.8)

S6.4 560.1 (53.7)

(77.1) 141.2 62.9 6.4 S587.8 13.7 42.1 1.1 36.0 (34.0) 646.7 483.3 (25.1) 42.5 (34.0) 466.7 (180.0) 181.8 23.9 (1.3)

S24.4 S70.4 (46.0)

(90.0) 16.5 73.5 24.4 2003 S215.7 7.6 14.7 1.9 (19.1) 34.6 (13.0) 242.4 67.3 9.9 12.2 1.9 (13.0) 78.3 (164.1) 90.9 (4.6) 17.9 (S59.9)

$2.2 (62.1)

(59.9) 2002 S 174.5 5.5 12.7 1.8 (0.9) 34.3 (12.2) 215.7 73.8 (7.2) 11.1 1.8 (12.2) 67.3 (148.4) 63.4 I(0.9) 36.7 (S49.2)

S2.3 (51.5)

(49.2)

Contributions paid after 9/30 and prior to 12/31 Net amount recognized at 12/31 0.6

$7.0 0.5

$24.9 6.7 (S53.2) 4.0

($45.2)

The funded status of the qualified pension plans based on the projected benefit obligation at Sept. 30, 2003, w'as ($147.6) million. Included in the following table are Alliant Energy's accumulated benefit obligations, aggregate amounts applicable to pension and other postretirement benefits with accumulated benefit obligations in excess of plan assets, as well as pension plans with projected benefit obligations in excess of plan assets as of the measurement date of Sept. 30 (in millions):

Pension Benefits Other Postretirement Benefits 2003 2002 2003

$663.2

$596.9 S242.4 2002 S215.7 Accumulated benefit obligation Plans with accumulated benefit obligations in excess of plan assets:

Accumulated benefit obligation Fair value of plan assets Plans with projected benefit obligations in excess of plan assets:

Projected benefit obligations Fair value of plan assets 497.5 355.6 721.0 530.6 453.8 313.2 646.7 466.7 240.7 75.1 N/A 213.9 64.3 I

N/A N/A 56 I I

Alliant Energy's net periodic benefit cost is primarily included in "Domestic utility - other operation and maintenance" in the Consolidated Statements of Income. Alliant Energy calculates the fair value of plan assets by using the straight market value of assets approach.

Postretirement benefit plans are funded via specific assets within certain retirement plans (401(h) assets) as well as Voluntary Employees' Beneficiary Association (VEBA) trusts. The asset allocation of the 401(h) assets mirrors the pension plan assets and the asset allocation of the VEBA trusts are reflected in the table below under "Other Postretirement Plans." The asset allocation for Alliant Energy's pension and other postretirement benefit plans at Sept. 30, 2003 and 2002, and the pension plan target allocation for 2003 were as follows:

Pension Plans Other Postretirement Plans Target Percentage of Plan Percentage of Plan Assets Allocation Assets at Sept. 30 at Sept. 30 Asset Category 2003 2003 2002 2003 2002 Equity securities 50-65%

61%

55%

47%

40%

Debt securities 25-40%

33%

35%

41%

44%

Other 0-5%

6%

10%

12%

16%

100%

100%

100%

100%

For the various Alliant Energy pension and postretirement plans, Alliant Energy common stock represented less than I% of total plan assets at Dec. 31, 2003 and 2002. Alliant Energy's plan assets are managed by outside investment managers. Alliant Energy's investment strategy and its policies employed with respect to pension and postretirement assets is to combine both preservation of principal, and prudent and reasonable risk-taking to protect the integrity of the assets in meeting the obligations to the participants while achieving the optimal return possible over the long-term. It is recognized that risk and volatility are present to some degree with all types of investments; however, high levels of risk are minimized at the total fund level. This is accomplished through diversification by asset class, number of investments, and sector and industry limits when applicable.

For the pension plans, the mix among asset classes is controlled by long-term asset allocation targets. The assets are viewed as long-term with moderate liquidity needs. Historical performance results and future expectations suggest that equity securities will provide higher total investment returns than debt securities over a long-term investment horizon. Consistent with the goals to maximize returns and minimize risk over the long-term, the pension plans have a long-term investment posture more heavily weighted towards equity holdings. The asset allocation mix is monitored quarterly and appropriate action is taken as needed to rebalance the assets within the prescribed range. Assets related to postretirement plans are viewed as long-term. A balanced mix of both equity and debt securities are utilized to maximize returns and minimize risk over the long-term.

Prohibited investment vehicles related to the pension and postretirement plans include, but may not be limited to, direct ownership of real estate, real estate investment trusts, private placements, unregistered or restricted stock, options and futures unless specifically approved, margin trading, oil and gas limited partnerships, commodities, short selling, commercial mortgage obligations and securities of the managers' firms or affiliate firms.

Alliant Energy estimates that funding for the pension and postretirement benefit plans for 2004 will be approximately S60 million and S15 million, respectively.

In December 2003, the President signed into law the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act). The Act introduces a prescription drug benefit under Medicare Part D, as well as a federal subsidy to sponsors of retiree health care benefit plans, that provide a benefit that is at least actuarially equivalent to Medicare Part D. As permitted by FSP No. FAS 106-1, "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003," Alliant Energy has elected to defer reflecting the effect of the Act on postretirement net periodic benefit cost and the accumulated postretirement benefit obligation in the Consolidated Financial Statements, since specific authoritative guidance on the accounting for the federal subsidy is pending and that guidance, when issued, could require Alliant Energy to change previously reported information. Alliant Energy is currently evaluating the effect of the Act on its other postretirement benefits expense.

Alliant Energy has various life insurance policies that cover certain key employees and directors. At Dec. 31, 2003 and 2002, the cash surrender value of these investments was S35 million and $32 million, respectively. Under Alliant Energy's deferred compensation plans, certain key employees and directors can defer part or all of their current compensation in company stock or interest accounts, which are held in grantor trusts. At Dec. 31, 2003 and 2002, the fair market value of the trusts totaled S7.6 million and $4.9 million, respectively, the majority of which consisted of Alliant Energy common stock. A significant number 57

I I of Alliant Energy employees also participate in defined contribution pension plans (401(k) and Employee Stock Ownership plans). Alliant Energy's contributions to the 401 (k) plan, which are based on the participants' level of contribution, wvere S8.0 million, $9.2 million, and S8.2 million in2003,2002 and 2001, respectively. Forthe Alliant Energy4Ol(k) plan, Alliant Energy common stock represented 22.6% and 18.2% of total plan assets at Dec. 31, 2003 and 2002.

(b) Equity Incentive Plans - Alliant Energy has an EIP that permits the grant of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares and performance units to key employees. At Dec. 31, 2003, non-qualified stock options were outstanding under this plan. The maximum number of shares of Alliant Energy common stock that may be issued under the plan is 4 million. Alliant Energy also had an LTEIP, under which no awards may be granted after January 2004, and under which non-qualified stock options, restricted stock and performance shares were outstanding at Dec. 31, 2003.

Options granted to date under the plans were granted at the quoted market price of the shares on the date of grant, vest over three years and expire no later than 10 years after the grant date. Options become fully vested upon retirement and remain exercisable at any time prior to their expiration date, or for three years after the effective date of the retirement, whichever period is shorter. Options become fully vested upon death or disability and remain exercisable at any time prior to their expiration date, or for one year after the effective date of the death or disability, whichever period is shorter. Participants' options that are not vested become forfeited when participants leave Alliant Energy and their vested options expire after three months. A summary of the stock option activity was as follows:

2003 Weighted Average Exercise Shares Price 3,842,136

$29.48 957,200 16.82 2002 Weighted Average Exercise Shares Price 2,917,229 S30.03 945,863 27.79 2001 Weighted Average Exercise Shares Price Outstanding at beginning of year Options granted Options exercised Options forfeited Outstanding at end of year Exercisable at end of year (582,622) 4,216,714 2,514,908 28.49 26.74 29.68 (20,956) 3,842,136 2,242,187 29.41 29.48 29.93 2,265,862 721,072 (42,432)

(27,273) 2,917,229 1,593,047 S29.67 31.14 29.87 30.07 30.03 29.94 The weighted-average remaining contractual life of outstanding options at Dec. 31, 2003, 2002 and 2001 was 7.1 years, 7.4 years and 7.7 years, respectively. Additional information as of Dec. 31, 2003 is as follows:

Options Outstanding Range of, Exercise Prices Weighted Average Exercise Price Weighted Average Remainine Contractual Life Options Exercisable Weighted Average Options Exercise Price Options

$16.82

$27.50-S31.56 907,714 3,309,000

$16.82 29.46 9 years 7 years 6,228 2,508,680

$16.82 29.71 The value of the options granted during the year using the Black-Scholes pricing method was as follows:

Value of options Volatility Risk free interest rate Expected life Expected dividend yield on date of grant 2003 S1.94 22.8%

3.5%

7 years 5.9%

2002

$9.14 40.6%

5.0%

10 years 6.0%

2001 S4.30 18.9%

5.0%

10 years 6.6%

At Dec. 31, 2003 and 2002, Alliant Energy had 1,745 shares of restricted stock outstanding. Any unvested shares of restricted stock become fully vested upon retirement. Participants' unvested restricted stock is forfeited when the participant leaves Alliant Energy. Compensation cost is measured at the date of the award based on the fixed number of shares awarded and the market price of the shares at the award date. Compensation cost, which is recognized ratably over the three-year restriction period, was SO, S0.2 million and $0.6 million in 2003, 2002 and 2001, respectively.

58 II

The payout to key employees of Corporate Services for performance shares granted through 2002 is contingent upon achievement over a three-year period of specified EPS growth and total return to shareowners of Alliant Energy compared with an investor-owned utility peer group (TSR), and for performance shares granted in 2003 is contingent solely upon TSR.

The payout to key employees of Resources is contingent upon achievement over a three-year period of specified Resources EPS growth. Performance shares are paid out in shares of Alliant Energy's common stock or a combination of cash and stock and are modified by a performance multiplier, which ranges from zero to two, based on the performance criteria.

Performance shares have an intrinsic value equal to the quoted market price of a share on the date of payout. Pursuant to APB 25, Alliant Energy accrues the plan expense over the three-year period the services are performed and recognized (income) expense of $4.1 million, ($1.6) million and $2.4 million in 2003,2002 and 2001, respectively.

(7) COMMON AND PREFERRED STOCK (a) Common Stock - The number of shares of common stock issued by Alliant Energy under its various stock plans was as follows:

2003 2002 2001 Beginning balance 92,304,220 89,682,334 79,010,114 Shares issued:

Public offering 17,250,000 9,775,000 Shareowvner Direct Plan 970,445 1,877,032 668,379 401(k) Savings Plan 438,245 689,336 161,239 Equity incentive plans 55,518 67,602 Ending balance 110,962,910 92,304,220 89,682.334 In July 2003, Alliant Energy completed a public offering of its common stock generating net proceeds of $318 million, which were used to make capital contributions to WP&L of $200 million and IP&L ofS 118 million in support of their respective generation and reliability initiatives. In November 2001, Alliant Energy completed a public offering of its common stock generating net proceeds of $263 million which were used to repay short-term debt. From January 2001 to June 2001, Alliant Energy satisfied its requirements under the Shareowner Direct Plan (dividend reinvestment and stock purchase plan) by acquiring Alliant Energy common stock on the open market, rather than through original issue. At Dec. 31, 2003 and 2002, Alliant Energy had a total of 4.7 million and 6.8 million shares, respectively, available for issuance in the aggregate, pursuant to its Shareowner Direct Plan, LTEIP, EIP and 401(k) Savings Plan.

Alliant Energy has a Shareovner Rights Plan whereby rights will be exercisable only if a person or group acquires, or announces a tender offer to acquire, 15% or more of Alliant Energy's common stock. Each right will initially entitle shareovners to buy one-half of one share of Alliant Energy's common stock. The rights will only be exercisable in multiples of two at an initial price of $95.00 per full share, subject to adjustment. If any shareowner acquires 15% or more of the outstanding common stock of Alliant Energy, each right (subject to limitations) will entitle its holder to purchase, at the right's then current exercise price, a number of common shares of Alliant Energy or of the acquirer having a market value at the time of twice the right's per full share exercise price. The Board of Directors is also authorized to reduce the 15%

ownership threshold to not less than 10%.

IP&L and WP&L each have dividend payment restrictions based on their respective bond indentures, the terms of their outstanding preferred stock and state regulatory limitations applicable to them. In its December 2003 rate order, the PSCW stated WP&L may not pay annual common stock dividends, including pass-through of subsidiary dividends, in excess of $89 million to Alliant Energy if WP&L's actual average common equity ratio, on a regulatory financial basis, is or %vill fall below the authorized level of54.01%. In accordance with the IUB order authorizing the IP&L merger, IP&L must inform the IUB if its common equity ratio falls below 42% of total capitalization. As of Dec. 31, 2003, IP&L and WP&L were in compliance with all such dividend restrictions.

In 2003,2002 and 2001, 13, 11 and 14 non-employee directors voluntarily elected to purchase up to 1,000, 1,000 and up to 1,000 shares each of Alliant Energy common stock through the Shareowner Direct Plan utilizing cash compensation received as part of the directors' compensation program, for a total of SI81,000, S337,000 and $338,000, respectively.

(b) Preferred Stock - In September 2003, IP&L issued 1.6 million shares of preferred stock at $25.00 per share in a public offering and received net proceeds of $39 million. The fair market value of Alliant Energy's cumulative preferred stock of subsidiaries, based upon the market yield of similar securities and quoted market prices, at Dec. 31, 2003 and 2002 wvas S286 million and S198 million, respectively. Information related to the carrying value of Alliant Energy's cumulative preferred stock of subsidiaries, net (none are mandatorily redeemable) at Dec.31 was as follows (in millions):

59

II Liquidation Preference/

Authorized Shares Stated Value Shares Outstanding Series 2003 2002 S25 6,000,000 8.375%

S150.0 S150.0 S25 1,600,000 7.10%

40.0 S100 449,765 4.40% - 6.20%

45.0 45.0 S25 599,460 6.50%

15.0 15.0 250.0 210.0 Less: discount (6.2)

(4.9)

S243.8

$205.1

• 16,000,000 authorized shares in total. ** 3,750,000 authorized shares in total.

(8) DEBT (a) Short-Term Debt - To provide short-term borrowing flexibility and security for commercial paper outstanding, Alliant Energy and its subsidiaries maintain committed bank lines of credit, all of which require a fee. Information regarding short-term debt was as follows (dollars in millions):

2003 2002 At Dec. 31:

Commercial paper outstanding

$107.5

$195.5 Discount rates on commercial paper 1.2%

1.6-1.9%

Bank facility borrowings S85.0 Interest rates on bank facility borrowings N/A 2.3-2.4%

Other borrowings (primarily at foreign subsidiaries)

$21.5

$28.7 Interest rates on other borrowings 5.3-10.8%

5.3-6.9%

For the year ended:

Average amount of short-term debt (based on daily outstanding balances)

$269.8

$337.9 Average interest rates on short-term debt 2.6%

2.7%

(b) Long-Term Debt - Substantially all of IP&L's utility plant is pledged as collateral under one or more of several outstanding indentures. These indentures secure IP&L's Collateral Trust and First Mortgage Bonds. WVP&L's First Mortgage Bonds are secured by substantially all of its utility plant. IP&L, WP&L and Resources also maintain indentures related to the issuance of unsecured debt securities.

In October 2003 and September 2003, IP&L issued $100 million and S100 million of 6.45% and 5.875% unsecured senior debentures due 2033 and 2018, respectively, and used the majority of the net proceeds to redeem long-term debt. In December 2002, Resources issued S300 million of 9.75% senior notes due 2013 and used the proceeds to repay short-term debt.

Alliant Energy utilized the proceeds from its non-regulated asset sales in 2003 to reduce short-term debt outstanding and also retired various "Non-regulated and other" long-term debt as noted on the Consolidated Statements of Capitalization.

Debt maturities for 2004 to 2008 are $69 million, $102 million, S69 million, S199 million and $196 million, respectively.

Depending upon market conditions, it is currently anticipated that a majority of the maturing debt will be refinanced with the issuance of long-term securities.

The carrying value of Alliant Energy's long-term debt (including current maturities and variable rate demand bonds) at Dec.

31, 2003 and 2002 was S2.2 billion and S2.7 billion, respectively. The fair market value, based upon the market yield of similar securities and quoted market prices, at Dec. 31, 2003 and 2002 was S2.6 billion and $2.9 billion, respectively.

Alliant Energy has fully and unconditionally guaranteed the payment of principal and interest on various debt securities issued by Resources. No other Alliant Energy subsidiaries are guarantors of Resources' debt securities. Alliant Energy does not have any intercompany debt cross-collateralizations or intercompany debt guarantees.

(9) INVESTMENTS AND ESTIMATED FAIR VALUE OF FINANCLkL INSTRUMENTS The carrying amount of Alliant Energy's current assets and current liabilities approximates fair value because of the short maturity of such financial instruments. Since IP&L and WP&L are subject to regulation, any gains or losses related to the difference between the carrying amount and the fair value of their financial instruments may not be realized by Alliant Energy's 60 I I

i shareowners. Information relating to various investments held by Alliant Energy at Dcc. 31 that are marked-to-market as a result of SFAS 115 was as follows (in millions):

2003 Unrealized Carrying/Fair Gains, Net of Value Tax Available-for-sale securities:

Nuclear decommissioning trust funds:

2002 Unrealized Carrying/Fair Gains, Net of Value Tax Debt securities S215

$6

$206

$9 Equity securities 167 39 139 13 Total 382 45 345 22 WPC 20 2

N/A N/A Various other investments 29 11 21 4

Trading securities (McLeod) 1 N/A I

N/A In accordance with SFAS 115, the carrying values of the investments are adjusted to estimated fair value based upon market values at the end of each quarter. Changes in fair value of investments designated as available-for-sale securities are reported in other comprehensive income, and impact current earnings when gains or losses are realized through sale or if a decline in value is determined to be "other-than-temporary." Changes in fair value of investments designated as trading securities are reflected in earnings in the "Miscellaneous, net" line in the Consolidated Statements of Income.

Nuclear Decommissioning Trust Funds - At Dec. 31, 2003, $110 million, $65 million and $40 million of the debt securities mature in 2004-2010,2011-2020 and 2021-2040, respectively. The fair value ofthe nuclear decommissioning trust funds, as reported by the trustee, was adjusted for the tax effect of unrealized gains and losses. In 2003, net unrealized holding gains were recorded as part of regulatory liabilities or as an offset to regulatory assets related to AROs (recorded in 2002 as part of cost of removal obligations). The funds realized gains (losses) from the sales of securities of ($6.0) million, $10.4 million and $2.0 million in 2003,2002 and 2001, respectively (cost of the investments based on specific identification was S385.6 million, $ 111.1 million and S 169.8 million, respectively, and proceeds from the sales were $379.6 million, $ 121.5 million and $171.8 million, respectively). In January 2004, WP&L liquidated all of its qualified decommissioning assets into money market funds as a result of the pending Kewaunee sale.

Investment in McLeod - Alliant Energy has investments in the common stock of McLeod, a telecommunications company.

On Jan. 31,2002, McLeod filed a pre-negotiated plan of reorganization in a Chapter 11 bankruptcy proceeding and the trading of McLeod's common stock was suspended by Nasdaq. Consequently, Alliant Energy discontinued accounting for its investment in McLeod under the provisions of SFAS 115 and reduced the cost basis of its investments to the last quoted market price on Jan.30,2002. In June 2002, Alliant Energy received from McLeod under its plan of reorganization an initial distribution of 3.3 million shares of new common stock and classified 0.9 million and 2.4 million shares as trading and available-for-sale securities, respectively. With the receipt of the new McLeod common shares and the resumption of trading on Nasdaq, Alliant Energy resumed accounting for its McLeod investments under SFAS 115 and adjusted its cost basis to the quoted market price on the date the shares were received. As a result of these events, Alliant Energy recognized pre-tax impairment charges in 2002 for available-for-sale securities totaling $27.2 million.

Investments in Foreign Entities - The geographic concentration of Alliant Energy's significant foreign investments at Dec.31 was as follows (in millions):

Brazil China New Zealand Mexico Total 2003 Unconsolidated

$283 S17

$103 S79

$482 Consolidated 178 178 Total

$283

$195

$103 S79

$660 2002 Unconsolidated

$214 S19

$86

$55

$374 Consolidated 161 161 Total

$214

$180

$86

$55

$535 Brazil - Resources holds a non-controlling interest in five Brazilian electric utility companies through several direct investments accounted for under the equity method of accounting. At Dec. 31, 2003 and 2002, Resources' direct investments included a 49.9% direct ownership interest in GIPAR, S.A., an electric utility holding company; a 39.4% direct ownership interest in 61

Companhia Forca e Luz Cataguazes - Leopoldina, S.A., an electric utility; a 45.6% direct ownership interest in Energisa, S.A.,

an energy development company; a 49.9% direct ownership interest in Pbpart - SE I Ltda., an electric utility holding company; and a 50.0% direct ownership interest in Usina Termeletrica de Juiz de Fora S.A., a thermal power plant. The increase in Alliant Energy's foreign investments in Brazil from Dec. 31, 2002 to Dec. 31, 2003 is largely due to the impacts of changes in the Brazil currency exchange rate.

China - Resources' consolidated investments included a controlling interest in Peak Pacific Investment Company, Ltd., a company that develops investment opportunities in generation infrastructure projects in China, and Anhui New Energy Heat &

Power Co., Ltd., a combined heat and power facility. Resources' unconsolidated investments included a 50.0% ownership interest in Jiaxing RIES Power & Heat Co., Ltd. and a 30.0% ownership interest in Tongxiang TIES Power & Heat Co., Ltd.

Both of these combined heat and power facilities arc accounted for under the equity method.

New Zealand - Resources' investments included a 23.8% ownership interest in TrustPower Ltd., a hydro and wind generation utility company, accounted for under the equity method, and several other smaller investments accounted for under the cost method. Based on the exchange rates and trading prices at Dec. 31, 2003 and 2002, the TrustPower Ltd. investment carrying value was S81 million and $65 million, respectively, and the market value was $157 million and $69 million, respectively.

Mexico - Resources' investment in Mexico consisted of a loan receivable (including accrued interest income) from a Mexican development company. Under provisions of the loan, Resources has agreed to lend up to S65 million to the Mexican development company to build the utility infrastructure of a master planned resort community. The loan accrues interest at 8.75% and is secured by a first lien on the land parcels of the master planned community. Repayment of the loan principal and interest will be based on a portion of the proceeds from the sales, perfonned by the Mexican development company, of real estate lots in the master planned community and therefore is dependent on the successful development of the project and sale of real estate. Additionally, in the third quarter of 2003, Alliant Energy Servicios de Mexico, S. de R. L. de C. V. and Alliant Energy Operaciones de Mexico S. de R. L. de C. V. began operations in Mexico and provide contract services solely to the resort community's utility company, which are paid monthly on a cost-plus basis.

Investment in ATC - At Dec. 31, 2003 and 2002, WVP&L had ownership interests in ATC of approximately 25% and 27%,

respectively, and accounts for this investment under the equity method. At Dec. 31, 2003 and 2002, the carrying value of WP&L's investment in ATC was S121 million and S1 12 million, respectively. Pursuant to various agreements, WP&L receives a range of transmission services from ATC. WP&L provides operation, maintenance, and construction services to ATC. WP&L and ATC also bill each other for use of shared facilities owned by each party. ATC billed WP&L $41.3 million, S38.7 million and S36.4 million in 2003, 2002 and 2001, respectively. WP&L billed ATC $12.4 million, $18.1 million and S18.4 million in 2003,2002 and 2001, and recorded equity earnings of$16.2 million, $14.3 million and S14.6 million in 2003, 2002 and 2001, respectively.

Unconsolidated Equity Investments - Summary financial information from Alliant Energy's unconsolidated equity investments' financial statements is as follows (in millions):

2003 2002*

2001 Operating revenues S1,804.9 S1,440.6

$2,214.1 Operating income 220.4 159.8 138.2 Net income 19.8 36.6 52.1 As of Dec. 31:

Current assets 395.1 383.0 Non-current assets 2,488.5 1,976.4 Current liabilities 452.4 435.9 Non-current liabilities 815.4 505.1 Minority interest 172.8 133.4

• Alliant Energy's investment in Cargill-Alliant was sold in 2002.

(10) DERIVATIVE FINANCIAL INSTRUMENTS (a) Accounting for Derivative Instruments and Hedging Activities - Alliant Energy records derivative instruments at fair value on the balance sheet as assets or liabilities and changes in the derivatives' fair values for non-regulated entities in earnings unless specific hedge accounting criteria are met. For IP&L and WP&L, changes in the derivatives' fair values are generally recorded as regulatory assets or liabilities. At Dec. 31, 2003 and 2002, Alliant Energy had $15.4 million and S6.4 million of derivative assets included in "Other current assets" on its Consolidated Balance Sheets and S 17.1 million and $9.1:

million of derivative liabilities included in "Other current liabilities" on its Consolidated Balance Sheets, respectively.

62

In the first quarter of 2001, Alliant Energy recorded a net loss of $12.9 million for a cumulative effect of a change in accounting principle representing the impact of adopting SFAS 133 as of Jan. 1, 2001 at Alliant Energy's equity method investees. This transition adjustment represents Alliant Energy's share of the difference between the carrying amount of Southern Hydro's electric derivative contracts under the applicable accounting principles in effect at Dec. 31, 2000, and the carrying values of these electric derivative contracts as determined in accordance with SFAS 133 as of Jan. 1,2001. Alliant Energy sold its Southern Hydro business in 2003.

In April 2003, the FASB issued SFAS 149, which amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS 133. Although SFAS 149 is expected to result in more energy contracts in Alliant Energy's domestic utility business qualifying as derivatives, changes in the fair value of these derivatives are generally reported as changes in regulatory assets and liabilities rather than being reported currently in earnings, based on the regulatory treatment. SFAS 149 will likely result in more earnings volatility at NG Energy given the majority of its derivatives may not qualify for hedge accounting.

Cash Flow Iledaino Instruments - During 2003 and/or 2002, Alliant Energy held various derivative instruments designated as cash flow hedging instruments. WP&L utilized natural gas commodity financial swap arrangements to reduce the impact of price fluctuations on natural gas purchased and injected into storage during the summer months and withdrawn and sold at current market prices during the winter months pursuant to the natural gas cost incentive sharing mechanism with customers in Wisconsin. NG Energy utilizes natural gas commodity derivative instruments to reduce the impact of natural gas price fluctuations on physical natural gas sales from storage. WP&L utilized physical coal purchase contracts, some of which did not qualify for the normal purchase and sale exception, to manage the price of anticipated coal purchases and sales. Treasury rate locks and interest rate swaps were used by Resources to mitigate risk associated with movements in the 10 year treasury yield used to price $300 million of Resources' senior notes issued in November 2001 and a portion of long-term debt used to finance the 309-MW, non-regulated, tolled, natural gas-fired power plant in Neenah, Wisconsin purchased by Resources in February 2003.

In 2003 and 2002, SO and a net loss of $0.1 million, respectively, were recognized relating to the amount of hedge ineffectiveness in accordance with SFAS 133. In 2003 and 2002, Alliant Energy did not exclude any components of the derivative instruments' gain or loss from the assessment of hedge effectiveness and in 2003, Alliant Energy reclassified net gains of $2.9 million into earnings as a result of the discontinuance of hedges. At Dec. 31, 2003, the maximum length of time over which Alliant Energy hedged its exposure to the variability in future cash flows for forecasted transactions was eight months and Alliant Energy estimated that an insignificant amount still be reclassified from accumulated other comprehensive loss into earnings in 2004 as the hedged transactions affect earnings.

Other Derivatives Not Desiunated in IHedge Relationships - Alliant Energy's derivatives that were not designated in hedge relationships during 2003 and/or 2002 included the embedded derivative component of Resources' exchangeable senior notes; electric, coal, gas and oil contracts; and a foreign currency option.

At maturity, the holders of Resources' exchangeable senior notes are paid the higher of the principal amount of the notes or an amount based on the value of McLeod common stock. SFAS 133 requires that Alliant Energy split the initial value of the notes into debt and derivative components. The payment feature tied to McLeod stock is considered an embedded derivative under SFAS 133 that must be accounted for as a separate derivative instrument. This component is classified as a derivative liability on the Consolidated Balance Sheets. Subsequent changes in the fair value of the option are reflected as increases or decreases in Alliant Energy's reported net income. The carrying amount of the host debt security, classified as long-term debt, is adjusted for amortization of the debt discount in accordance with the interest method as prescribed by APB 21, "Interest on Receivables and Payables."

Changes in the fair value of the McLeod shares designated as trading are reflected as increases or decreases in Alliant Energy's net income. These trading gains or losses are expected to correspond with, and partially offset, changes in the intrinsic value of the embedded derivative component of Resources' exchangeable senior notes. Changes in the time value portion of the derivative component will result in non-cash increases or decreases to Alliant Energy's net income. Refer to Note l(p) for the valuation charges (income) recorded in 2003,2002 and 2001 related to the exchangeable senior notes and the McLeod trading securities.

Electric contracts were used to manage utility energy costs during supply/demand imbalances. Coal, gas and oil contracts that do not qualify for the normal purchase and sale exception were used to manage the price of anticipated coal, gas and oil purchases and sales. The foreign currency option was used to mitigate fluctuations in Canadian currency rates. Refer to Note 10(d) for additional information on NG Energy's derivatives.

63

.II (b) Weather Derivatives -Alliant Energy uses weather derivatives to reduce the impact of weather volatility on its domestic utility natural gas sales volumes. In 2003 and 2002, Corporate Services, as agent for IP&L and WP&L, entered into non-exchange traded options based on heating degree days in which Corporate Services receives payment from the counterparty if actual heating degree days are less than the strike price in the contract. Corporate Services paid premiums to enter into these contracts, which are amortized to expense over the contract period. Alliant Energy has used the intrinsic value method to account for these weather derivatives.

(c) Nuclear Decommissioning Trust Fund Investments - Historically, WP&L has entered into combinations of options to mitigate the effect of significant market fluctuations on its common stock investments in its nuclear decommissioning trust funds. The derivative transactions are designed to protect the portfolio's value while allowing the funds to earn a total return modestly in excess of long-term expectations over the hedge period. In 2003, fair value changes of these instruments did not impact net income as they were recorded as equally offsetting changes in the investment in nuclear decommissioning trust funds and regulatory liabilities or, for AROs, as an offset to regulatory assets (in 2002 as an offset to cost of removal obligations).

(d) Energy-trading Contracts - Resources is the majority owner of a natural gas marketing business, NG Energy. NG Energy enters into financial and physical contracts for the sale, purchase, storage, transportation and loan of natural gas. NG Energy accounts for gas in storage at the weighted average cost of gas. NG Energy is impacted by EITF Issue 02-3, which requires that all sales of energy and the related cost of energy purchased under contracts that meet the definition of energy trading contracts and that are derivatives under SFAS 133, must be reflected on a net basis in the income statement for all periods presented. Alliant Energy adopted EITF Issue 02-3 on Jan. 1, 2003 for all of NG Energy's trading contracts and storage gas acquired prior to Oct. 25, 2002, and reclassified prior period trading contracts on a net basis in the income statement. The impact of transitioning from reporting inventory and existing contracts that were not derivatives under SFAS 133 at fair value to historical cost resulted in a cumulative effect charge of $2.1 million (net of a deferred tax benefit of$1.4 million) in the first quarter of 2003. Any new contracts entered into after Oct. 25, 2002 have been reported on a historical cost basis rather than at fair market value unless the contract meets the definition of a derivative. Commencing Jan. 1, 2003, NG Energy has very few contracts that are accounted for as derivatives under SFAS 133 and that are also classified as trading contracts, therefore almost all of its sales of energy and cost of sales in 2003 are reported on a gross basis. Because substantially all of its contracts prior to 2003 were classified as trading contracts under EITF Issue 98-10, "Accounting for Contracts Involved in Energy Trading and Risk Management Activities," primarily all of its sales of energy and cost of sales for 2002 and 2001 are reported on a net basis. NG Energy recorded gas revenues and gas costs on the Consolidated Statements of Income as follows (in millions):

2003 2002 2001 Non-regulated operating revenues S209

$6 SI Non-regulated operation and maintenance expenses 204 (t1) COMMNITMIENTS A 1ND CONTINGENCIES (a) Construction and Acquisition Expenditures - Certain commitments have been made in connection with 2004 capital expenditures. During 204, total construction and acquisition expenditures are estimated to be approximately S700 million (unaudited).

(b) Purchase Obligations -Alliant Energy, through its subsidiaries Corporate Services, IP&L and WP&L, has entered into purchased-power, coal and natural gas supply, transportation and storage contracts. Certain purchased-power commitments are considered operating leases and are therefore not included here, but are included in Note 3. The natural gas supply commitments are all index-based. Alliant Energy expects to supplement its coal and natural gas supplies with spot market purchases as needed. The table includes commitments for "take-or-pay" contracts which result in dollar commitments with no associated tons or Dths. At Dec. 31, 2003, Alliant Energy's minimum commitments related to its domestic utility business were as follows (dollars and Dths in millions; MWhs and tons in thousands):

Purchased-power Coal Natural gas Dollars MNVhs Dollars Tons Dollars Dths 2004 S38.4 1,032

$109.9 11,905 S84.7 5

2005 2.3 85.0 8,596 52.8 2006 2.3 59.4 6,110 51.4 2007 0.1 33.2 2,685 39.0 2008 0.1 19.0 1,078 16.1 Thereafter 0.2 68.6 153 40.0 64

In addition, Alliant Energy, through its non-regulated business, has entered into coal and natural gas supply, transportation and storage contracts. At Dec. 31,2003, Alliant Energy's minimum fuel commitments related to its non-regulated business were $8.9 million, $6.6 million, $4.9 million, $3.8 million, $3.8 million and $55.1 million for 2004,2005, 2006, 2007, 2008, and 2009 and thereafter, respectively.

Also, at Dec. 31, 2003, Alliant Energy's other purchase obligations, which represent individual commitments incurred during the normal course of business which exceeded $1 million at Dec. 31,2003, were S26.4 million for 2004. This excludes lease obligations which are included in Note 3.

(c) Legal Proceedings -Alliant Energy is involved in legal and administrative proceedings before various courts and agencies with respect to matters arising in the ordinary course of business. Although unable to predict the outcome of these matters, Alliant Energy believes that appropriate reserves have been established and final disposition of these actions will not have a material adverse effect on its financial condition or results of operations.

(d) Guarantees -In accordance with the provisions of FIN 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others," as of Dec. 31, 2003 and 2002, Alliant Energy had guarantees outstanding to support unconsolidated affiliate and third-party financing arrangements of S5 million and S4 million, respectively. Such guarantees are not included on the Consolidated Balance Sheets. At Dec. 31, 2003, the maximum remaining term of the guarantees and the underlying debt was 10 years. Refer to Note 3 for discussion of Alliant Energy's residual value guarantees of its synthetic leases.

Under the purchase and sale agreement (Meridian Agreement) with Meridian Energy Limited (Meridian) relating to the sale of Alliant Energy's Australian business, Alliant Energy agreed to indemnify Meridian for losses resulting from the breach of the representations and warranties made by Alliant Energy as of the closing date, and for breach of its obligations under the Meridian Agreement. Based on exchange rates as of Dec. 31,2003, the indemnification is limited to $223 million until July 2004, and will then be reduced to S64 million until October 2007. Alliant Energy believes the likelihood of having to make any material cash payments under this indemnification is remote.

Alliant Energy provided certain indemnifications associated with the sale of its affordable housing business for losses resulting from breach of the representations and warranties made by Alliant Energy as of the closing date, for the breach of its obligations under the sale agreement and for its obligations for periods prior to the date of sale. The indemnifications are limited to S 1I million in aggregate and expire in July 2005. Alliant Energy also retains any tax obligations that may arise from its ownership prior to the date of sale. Alliant Energy believes the likelihood of having to make any material cash payments under these indemnifications is remote.

Alliant Energy continues to guarantee the abandonment obligations of WPC under the Point Arguello partnership agreements. As of Dec. 31, 2003, the guarantee does not include a maximum limit, but is currently estimated at approximately $4 million, which is the present value of the abandonment liability. Alliant Energy believes that no payments will be made under this guarantee.

(e) Environmental Liabilities - Alliant Energy had recorded the following environmental liabilities, and regulatory assets associated with certain of these liabilities, at Dec.31 (in millions):

Environmental liabilities 2003 2002 Reeulatorv assets 2003 2002 MGP sites

$45.5

$49.3 MGP sites S51.1

$54.1 NEPA 5.0 6.6 NEPA 6.2 7.9 Other 0.1 0.2 Other 1.3 2.9

$50.6

$56.1 S58.6

$64.9 M1GP Sites - IP&L and WP&L have current or previous ownership interests in 43 and 14 sites, respectively, previously associated with the production of gas for which they may be liable for investigation, remediation and monitoring costs relating to the sites. IP&L and WP&L have received letters from state environmental agencies requiring no further action at nine and six sites, respectively. IP&L and WP&L are working pursuant to the requirements of various federal and state agencies to investigate, mitigate, prevent and remediate, where necessary, the environmental impacts to property, including natural resources, at and around the sites in order to protect public health and the environment.

IP&L and WP&L record environmental liabilities based upon periodic studies, most recently updated in the third quarter of 2003, related to the MGP sites. Such amounts are based on the best current estimate of the remaining amount to be incurred for investigation, remediation and monitoring costs for those sites where the investigation process has been or is substantially 65

I I completed, and the minimum of the estimated cost range for those sites where the investigation is in its earlier stages. It is possible that future cost estimates will be greater than current estimates as the investigation process proceeds and as additional facts become known. The amounts recognized as liabilities are reduced for expenditures made and are adjusted as further information develops or circumstances change. Costs of future expenditures for environmental remediation obligations are not discounted to their fair value. Management currently estimates the range of remaining costs to be incurred for the investigation, remediation and monitoring of IP&L's and WP&L's sites to be $34 million to $61 million.

Under the current rate making treatment approved by the PSCW, the MGP expenditures of WP&L, net of any insurance proceeds, are deferred and collected from gas customers over a four-year period effective with rates set to recover such amounts. The MPUC also allows the deferral of MGP-related costs applicable to the Minnesota sites and IP&L has been successful in obtaining approval to recover such costs in rates in Minnesota. The IUB has permitted utilities to recover prudently incurred costs. Regulatory assets have been recorded by IP&L and WP&L, which reflect the probable future rate recovery, where applicable. Considering the current rate treatment, and assuming no material change therein, IP&L and WP&L believe that the clean-up costs incurred for these MGP sites will not have a material adverse effect on their respective financial conditions or results of operations. Settlement has been reached with all of IP&L's and WP&L's insurance carriers regarding reimbursement for their MGP-related costs.

NEPA - NEPA requires owners of nuclear power plants to pay a special assessment into a "Uranium Enrichment Decontamination and Decommissioning Fund." The assessment is based upon uranium enrichment services provided in conjunction with prior nuclear fuel purchases. IP&L and WP&L elected to pay their assessment in 15 annual installments.

The costs associated with this assessment for IP&L and WP&L are being recovered through EACs and fuel costs, respectively. The final installment payment is scheduled to be made in fall 2006. Alliant Energy continues to pursue relief from this assessment through litigation.

(f) Decommissioning of DAEC and Kewaunee - Decommissioning expense is included in "Depreciation and amortization" in the Consolidated Statements of Income and the cumulative amount for 2003 is included in "Regulatory liabilities" or, for AROs, is netted in "Regulatory assets" on the Consolidated Balance Sheets. For 2002, the cumulative amount is included in "Cost of removal obligations." The PSCW, in an order effective Jan. 1, 2002, eliminated WP&L's recovery from retail customers for the cost to decommission Kewvaunee, due to the trust fund being adequately funded. Additional information relating to the decommissioning of DAEC and Kewaunee was as follows (dollars in millions):

DAEC Kewaunee Assumptions relating to current rate recovery amounts (1):

Alliant Energy's share of estimated decommissioning cost

$374.3

$263.2 Year dollars in 2002 2002 Method to develop estimate Site-specific study Site-specific study Annual inflation rate 4.30%

6.50%

Decommissioning method Prompt dismantling Prompt dismantling and removal and removal Year decommissioning to commence 2014 2013 After-tax return on external investments:

Qualified 7.10%

6.12%

Non-qualified 4.70%

5.14%

Current annual rate recovery:

Iowa

$10.6 N/A Minnesota (interim rates effective July 2003, subject to refund)

$1.0 N/A FERC

$2.9 External trust fund balance at Dec. 31, 2003

$147.9

$233.7 Internal reserve at Dec. 31, 2003

$21.7 After-tax earnings (losses) on external trust funds in 2003

$4.1 (S4.7)

(1) Information for DAEC and Kewaunee is related to their most recent IUB order and FERC settlement, respectively.

The current rate recovery amounts for DAEC only include an inflation estimate for three years. Both IP&L and WP&L are funding all rate recoveries for decommissioning into external trust funds and funding on a tax-qualified basis to the extent possible. In 2003, the earnings accumulate in the external trust fund balances and as an offset to regulatory assets for ARO related earnings or regulatory liabilities for non-ARO related earnings. Refer to Note 17 for information regarding the pending sale of WP&L's interest in Kewaunee and Note 18 for information related to the impact of SFAS 143.

66

(g) Credit Risk - Alliant Energy's subsidiaries have limited credit exposure from electric and natural gas sales and non-performance of contractual obligations by its counterparties. Alliant Energy maintains credit risk oversight and sets limits and policies with regards to its counterparties, which management believes minimizes its overall credit risk exposure.

However, there is no assurance that such policies will protect Alliant Energy against all losses from non-performance by counterparties.

(12) JOINTLY-OWNNED ELECTRIC UTILITY PLANT Underjoint ownership agreements with other Iowa and Wisconsin utilities, IP&L and WP&L have undivided ownership interests injointly-owned electric generating stations. IP&L also has joint ownership agreements related to transmission facilities. Each of the respective owners is responsible for the financing of its portion of the construction costs. KWh generation and operating expenses are divided on the same basis as ownership with each owner reflecting its respective costs in its Consolidated Statements of Income. Information relative to IP&L's and WP&L's ownership interest in these facilities at Dec.

31,2003 was as follows (dollars in millions):

Accumulated Construction Fuel Ownership Plant in Provision for Work In Type Interest %

Service Depreciation Progress IP&L DAEC Nuclear 70.0

$576.4 S336.4

$7.1 Ottumwa Coal 48.0 193.8 122.5 1.1 Neal Unit 4 Coal 25.7 90.1 61.5 1.9 Neal Unit 3 Coal 28.0 62.1 37.4 0.7 Louisa Unit I Coal 4.0 25.3 15.6 0.1 947.7 573.4 10.9 WP&L Edgewater Unit 5 Coal 75.0 Columbia Energy Center Coal 46.2 Kewaunee Nuclear 41.0 Edgewater Unit 4 Coal 68.2 237.0 120.7 0.8 192.5 118.5 2.5 175.8 127.6 7.7 66.8 39.5 1.7 672.1 406.3 12.7

$1,619.8

$979.7

$23.6 Refer to Note 17 for information regarding the pending sale of WP&L's interest in Kewaunee.

(13) SEGMENTS OF BUSINESS Alliant Energy's principal businesses are:

Domestic utility business - includes IP&L and WP&L, serving customers in Iowa, Wisconsin, Minnesota and Illinois, and Alliant Energy's investments in the Nuclear Management Company, LLC (NMC) and TRANSLink Transmission Company LLC (TRANSLink) (investment has been fully reserved as of Dec. 31,2003). The domestic utility business is broken down into three segments: a) electric operations, including the impacts of NMC and TRANSLink; b) gas operations; and c) other, which includes the steam business, water business, various other energy-related products and services including construction management services for wind farms and the unallocated portions of the utility business. Various line items in the following tables are not allocated to the electric and gas segments for management reporting purposes and therefore are included in "Total Domestic Utility Business."

Non-regulated businesses - represents the operations of Resources, its subsidiaries and Alliant Energy's investment in Cargill-Alliant (sold in 2002), and is broken down into three segments: a) International (Int'l); b) Integrated Services (ISCO); and c) other, which includes the operations of the Non-regulated Generation and Other Investments business platforms described in Note I (a); the operations of Resources (the non-regulated holding company); and any non-regulated reconciling/eliminating entries.

Other - includes the operations of Alliant Energy (the parent company) and Corporate Services, as well as any Alliant Energy parent company reconciling/eliminating entries.

67

II Alliant Energy's administrative support services are directly charged to the applicable segment where practicable. In all other cases, administrative support services are allocated to the applicable segment based on Alliant Energy's corporate services agreements, as prepared and approved pursuant to PUHCA. Intersegment revenues were not material to Alliant Energy's operations and there was no single customer whose revenues were 10% or more of Alliant Energy's consolidated revenues. Refer to Note 9 for a breakdown of Alliant Energy's international investments by country. Certain financial information relating to Alliant Energy's significant business segments, products and services and geographic information wvas as follows (in millions):

Domestic Utility Business Electric Gas Other Total Alliant Non-regulated Businesses Energy Int'l ISCO Other Total Other Consolidated 2003 Operating revenues Depreciation and amortization Operating income (loss)

Interest expense, net of AFUDC Loss on early extinguishment of debt Equity (income) loss from unconsolidated Investments Preferred dividends Miscellaneous, net Income tax expense (benefit)

Income (loss) from continuing operations Income (loss) from discontinued operations, net of tax Cumulative effect of changes In accounting principles, net of tax Net income (loss)

Total assets Investments in equity method subsidiaries Construction and acquisition expenditures

$1,917.1 S566.9 $104.2 S2,588.2 S117.5

$382.3

$46.1 S545.9 (S5.9) 238.8 25.7 3.8 268.3 15.t 8.7 12.9 36.7 0.1 363.6 42.4 2.5 408.5 11.6 4.1 (11.2) 4.5 (1.3) 82.6 52.1 10.4 35.8 98.3 5.5

$3,128.2 305.1 411.7 186.4 15.2 15.2 1.7 16.9 (20.9)

(18.1)

(0.3) 20.2 1.8 16.9 (3.5)

(2.3)

(8.2)

(7.8)

(18.3) 0.9 136.2 (16.7) 0.5 (50.6)

(66.8) 2.4 197.2 (3.4) 1.7 (24.0)

(25.7)

(11.8)

(19.1) 16.9 (20.9) 71.8 159.7 29.8 (6.0) 183.5 7,775.4 44.7 (14.9) 29.8 (2.1)

(3.9)

(6.0) 197.2 41.3 (0.4)

(42.8)

(1.9)

(11.8) 5,007.5 671.3 393.0 6,071.8 751.6 283.9 557.7 1,593.2 110.4 137.0 137.0 380.1 1.7 23.7 405.5 542.5 9.3) 838.9 649.5 37.2 3.0 689.7 24.3 4.9 219.3 248.5 (9(

Alliant Domestic Utility Business Non-regulated Businesses Energy Electric Gas Other Total Int'l ISCO Other Total Other Consolidated 2002 Operating revenues SI,752.5 S394.0

$85.4 $2,231.9

$99.7 $133.8

$27.9 S261.4 (56.7)

$2,486.6 Depreciation and amortization 225.0 26.1 3.8 254.9 11.2 9.1 6.9 27.2 282.1 Operating income (loss) 320.1 26.2 9.0 355.3 11.3 2.0 (14.9)

(1.6)

(0.5) 353.2 Interest expense, net of AFUDC 96.2 39.0 8.4 29.1 76.5 2.3 175.0 Equity (income) loss from unconsolidated investments (17.6) 17.1 (0.1) 13.4 30.4 12.8 Preferred dividends 6.2 6.2 Impairment of available-for-sale securities of McLeodUSA Inc.

27.2 27.2 27.2 Miscellaneous, net (2.4) 4.9 8.3 (8.1) 5.1 (0.6) 2.1 Income tax expense (benefit) 107.1 (12.1)

(6.0)

(42.3)

(60.4)

(4.3) 42.4 Income (loss) from continuing operations 165.8 (37.6)

(8.6)

(34.2)

(80.4) 2.1 87.5 Income from discontinued operations, net of tax 10.5 8.9 19.4 19.4 Net income (loss) 165.8 (27.1)

(8.6)

(25.3)

(61.0) 2.1 106.9 Total assets 4,472.2 642.5 383.4 5,498.1 955.1 270.5 1,037.6 2,263.2 52.8 7,814.1 Investments in equity method subsidiaries 125.4 125.4 297.1 1.7 27.4 326.2 451.6 Construction and acquisition expenditures 372.4 28.6 4.8 405.8 65.5 14.2 138.6 218.3 32.7 656.8 68 II

Domestic Utility Business Electric Gas Other Total Non-regulated Businesses Int'l ISCO Other Total Alliant Energy Other Consolidated 2001 Operating revenues Depreciation and amortization Operating income (loss)

Interest expense, net of AFUDC Equity (income) loss from unconsolidated investments Preferred dividends Miscellaneous, net Income tax expense (benefit)

Income (loss) from continuing operations Income from discontinued operations, net of tax Cumulative effect of a change in accounting principle, net of tax Net income (loss)

Total assets Investments in equity method subsidiaries Construction and acquisition expenditures S1,756.6 238.1 313.6

$487.9 28.2 11.2

$101.8 3.2 14.1

$2,346.3 269.5 338.9 97.0

$77.1 8.3 9.1 54.4

$192.6 13.0 (0.5) 11.2

$23.8 3.5 (9.5)

(1.5)

$293.5 24.8 (0.9) 64.1

($5.6)

(1.9) 9.8

$2,634.2 294.3 336.1 170.9 (18.8) 6.7 (2.7) 51.8 (15.6) 6.7 (8.3) 94.2 4.1 (0.6)

(6.6)

(3.1)

(0.1)

(1.0)

(22.7)

(2.8) 14.0 10.2 (3.3)

(8.0)

(34.0)

(4.6)

(8.4) 164.9 (25.7)

(5.0)

(7.4)

(38.1) 1.4 128.2 11.3 45.8 57.1 164.9 4,014.1 557.6 470.1 5,041.8 (12.9)

(27.3) 817.8 (5.0) 38.4 254.3 782.4 (12.9) 6.1 1,854.5 1.4 75.4 57.1 (12.9) 172.4 6,971.7 119.2 298.7 36.9 1 119.2 448.3 1.1 31.5 480.9 600.1 5.2 340.8 173.0 31.5 127.7 332.2 40.0 713.0 Products and Services - In 2003, Alliant Energy's domestic utility electric and gas revenues represented 67% and 19% of consolidated operating revenues, respectively. No other products or services represented more than 10% of Alliant Energy's consolidated operating revenues in 2003.

Geoaraphic Information Non-regulated and other - Long Lived Assets Year Domestic Foreign Total (in millions) 2003

$386.7

$199.5

$586.2 2002 359.8 171.6 531.4 2001 196.3 157.9 354.2 (14) GOODWILL AND OTHER INTANGIBLE ASSETS Alliant Energy adopted SFAS 142 on Jan. 1,2002, which resulted in goodwill no longer being subject to amortization. Had SFAS 142 been adopted Jan. 1,2001, net income for 2001 would have increased $4 million and basic and diluted EPS would have increased SO.05 per share. Alliant Energy continues to monitor its equity method investments in accordance with APB 18, "The Equity Method of Accounting for Investments in Common Stock." Certain information regarding net goodwill and other intangible assets included on the Consolidated Balance Sheets at Dcc. 31 was as follows (in millions):

2003 2002 Net goodwill:

Deferred charges and other (consolidated investments):

Integrated Services International Investments in unconsolidated foreign entities (equity method investments)

International Net other intangible assets:

Deferred charges and other (consolidated investments)

Investments in unconsolidated foreign entities (equity method investments)

Investment in ATC and other (equity method investments)

$46 10 17 19 26 20

$47 10 9

19 22 25 In February 2003, Resources acquired 100% of an entity that owns a 309-MW, non-regulated, tolled, natural gas-fired power plant in Neenah, Wisconsin for $109 million. Substantially all of the purchase price vas allocated to property, plant and equipment and resulted in no goodwill from this acquisition.

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(15) SELECTED CONSOLIDATED QUARTERLY FINANCIAL DATA (UNAUDITED)

All "per share" references refer to earnings per diluted share. Summation of the individual quarters may not equal annual totals due to rounding.

2003 2002 March31 June30 Sept.30 Dec.31 March31 June30 Sept.30 Dec.31 (in millions, except per share data)

Operating revenues S908.2

$659.5 S779.1

$781.4

$583.0 S553.8 S674.1

$675.7 Operating income 76.9 58.2 165.6 110.9 69.2 59.5 131.7 92.9 Income (loss) from continuing operations 14.6 11.8 85.2 48.1 (7.8)

(5.5) 46.6 54.1 Income (loss) from discontinued operations, net of tax (9.1) 20.4 18.0 0.5 17.5 11.8 (1.9)

(8.0)

Cumulative effect of changes in accounting principles, net of tax (6.0)

Net income (loss)

(0.5) 32.2 103.2 48.6 9.7 6.3 44.7 46.1 EPS:

Income (loss) from continuing operations 0.16 0.13 0.78 0.43 (0.09)

(0.06) 0.51 0.59 Income (loss) from discontinued operations (0.10) 0.22 0.16 0.01 0.20 0.13 (0.02)

(0.09)

Cumulative effect of changes in accounting principles (0.07)

Net income (loss)

(0.01) 0.35 0.94 0.44 0.11 0.07 0.49 0.50 (16) DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE Alliant Energy announced in November 2002 its commitment to pursue the sale of, or other exit strategies for, certain non-regulated businesses during 2003. Alliant Energy applied the provisions of SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," to certain of its assets which were held for sale. SFAS 144 requires that a long-lived asset classified as held for sale be measured at the lower of its carrying amount or fair value, less costs to sell, and to cease depreciation, depletion and amortization. At Dec. 31, 2002, the assets and liabilities of Alliant Energy's oil and gas (WPC),

Australian (including Southern Hydro), affordable housing and SmartEnergy businesses were classified as held for sale. The operating results for these non-regulated businesses for all periods presented have been separately classified and reported as discontinued operations in the Consolidated Financial Statements.

Alliant Energy completed the sale of its Australian, affordable housing and SmartEnergy businesses in the second, third and third quarters of 2003, respectively. In the fourth quarter of 2003, Alliant Energy completed an IPO of WPC, leaving Alliant Energy with an approximate 6% ownership interest in WPC that is accounted for under the cost method as of Dec. 31, 2003.

Prior to the IPO, Alliant Energy and WPC entered into a tax separation and indemnification agreement pursuant to which Alliant Energy and WPC made tax elections with the effect that the tax basis of the assets of WPC's consolidated tax group were increased based on the sales price of WPC's shares in the IPO. This increase will be included in income in the consolidated federal income tax return filed by Alliant Energy. WPC has agreed to pay Resources 90% of any tax benefits realized annually due to the increase in tax basis for years ending on or prior to Dec. 31, 2013. Such tax benefits will generally be calculated by comparing WPC's actual taxes to the taxes that would have been owed by WPC had the increase in basis not occurred. In 2014, WPC will be obligated to pay Resources the present value of the remaining tax benefits assuming all such tax benefits will be realized in future years. As of the IPO closing date, Resources recorded a receivable from WPC based on the estimated present value of the payments expected from WPC. As of Dec. 31, 2003, Resources estimated the present value of these anticipated future tax benefits from WPC was approximately $30 million and has recorded this as a receivable from WPC in "Deferred charges and other" on the Consolidated Balance Sheets.

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-1

A summary of the components of discontinued operations in the Consolidated Statements of Income was as follows (in thousands):

Operating revenues Operating expenses (a)

Interest expense and other (pre-tax numbers):

Gain on sale of Australian business Loss on sale of affordable housing business Loss on sale of oil and gas business (a)

Loss on sale of SmartEnergy business Southern Hydro SFAS 133 income Other Income before income taxes Income tax expense (benefit)

Income from discontinued operations, net of tax 2003

$187,677 101,084 2002

$231,027 195,624 2001

$158,575 105,935 (72,115) 60,685 16,696 13,645 (14,689) 17,949 64,422 34,597 S29,825 (16,081) 38,891 12,593 (6,832)

$19,425 (15,570) 3,122 65,088 8,017

$57,071 (a) Operating expenses were lower in 2003 as compared to 2002 partially due to Alliant Energy ceasing depreciation, depletion and amortization (DD&A) of its assets held for sale. Ceasing DD&A of WPC's assets also resulted in a higher carrying value of WPC's assets and had a direct impact on the amount of loss on the sale.

Alliant Energy's Australian business entered into electric derivative contracts that were not designated as hedges (as defined by SFAS 133) to manage the electric commodity price risk associated with anticipated sales into the spot market. SFAS 133 income in the previous table reflects the change in the fair value of these electric derivative contracts. In 2002, Alliant Energy recorded a SFAS 142 after-tax non-cash goodwill impairment charge related to SmartEnergy of $4.5 million primarily due to less favorable market conditions. "Income tax expense (benefit)" in the previous table includes $3 million,

$10 million and $10 million of affordable housing tax credits earned by Alliant Energy's affordable housing business during 2003,2002 and 2001, respectively. These tax credits, along with 2003 income tax impacts of the sales transactions, had a significant impact on the effective tax rate of Alliant Energy's discontinued operations.

A summary of the components of assets and liabilities of discontinued operations on the Consolidated Balance Sheet at Dec.

31, 2002 was as follows (in thousands):

2002 Assets of discontinued operations:

Property, plant and equipment, net Current assets Investments Deferred charges and other Total assets of discontinued operations Liabilities of discontinued operations:

Current liabilities Other long-term liabilities and deferred credits Minority interest Total liabilities of discontinued operations Net assets of discontinued operations S644,910 113,866 6,824 203,691

$969,291

$73,344 64,783 124 138,251

$831,040 71 i

A summary of the components of cash flows for discontinued operations for the years ended Dec. 31 was as follows (in thousands):

2003 2002 2001 Net cash flows from operating activities

$61,015

$72,820

$44,327 Net cash flows from (used for) financing activities (43,228) 153,087 41,529 Net cash flows used for investing activities (33,831)

(215,638)

(88,752)

Net increase (decrease) in cash and temporary cash investments (16,044) 10,269 (2,896)

Cash and temporary cash investments at beginning of period 16,044 5,775 8,671 Cash and temporary cash investments at end of period S-

$16,044

$5,775 Supplemental cash flows information:

Cash paid (refunded) during the period for:

Interest

$19,517

$14,704

$6,355 Income taxes, net of refunds (S34,618)

($9,002)

($3,331)

(17) PENDING SALE OF WP&L'S INTEREST IN KENVAUNEE WP&L has signed a definitive agreement to sell its 41% ownership interest in Kewaunee to Richmond, Va.-based Dominion Energy Kewaunee, Inc. (Dominion), a subsidiary of Dominion Resources, Inc. Joint owner of Kewaunee, Wisconsin Public Service Corporation, also agreed to sell its 59% ownership interest in Kewaunee to Dominion. Pending various regulatory approvals, including the PSCW and NRC, the transaction is expected to be completed by fall 2004. WP&L anticipates that, based on an expected Nov. 1, 2004 closing date, it will receive approximately $90 million in cash and retain ownership of the trust assets contained in one of the two decommissioning funds it has established to cover the eventual decommissioning of Kewaunee. The fund that will be retained had an after-tax value of $67.3 million on Dec. 31, 2003. The gross cash proceeds from the sale are expected to slightly exceed WP&L's carrying value of the assets being sold. WP&L has requested deferral of any gain and related costs from the PSCW. Because any gain realized and the retained decommissioning fund will likely be returned to customers in future rate filings, WP&L does not expect this transaction will have a significant impact on its operating results. Dominion will assume responsibility for the eventual decommissioning of Kewaunee and WP&L is required to provide qualified decommissioning trust assets of at least $160.7 million on an after-tax basis. The after-tax value ofthe qualified fund was S166.3 million on Dec. 31, 2003. InJanuary2004, WP&L liquidated all ofthe qualified decommissioning assets into money market funds as a result of the pending Kewaunee sale. At the closing of the sale, WP&L will enter into a long-term purchased-power agreement with Dominion to purchase energy and capacity equivalent to the amounts received had current ownership continued. The purchased-power agreement, which also will require regulatory approval, will extend through 2013 when the plant's current operating license will expire.

(18) ASSET RETIREMENT OBLIGATIONS Alliant Energy adopted SFAS 143 on Jan. 1, 2003, which provides accounting and disclosure requirements for AROs associated with long-lived assets. SFAS 143 requires that when an asset is placed in service the present value of retirement costs for which Alliant Energy has a legal obligation must be recorded as liabilities with an equivalent amount added to the asset cost. The liability is accreted to its present value each period and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity settles the obligation for its recorded amount or incurs a gain or loss.

The scope of SFAS 143 as it relates to Alliant Energy primarily includes decommissioning costs for DAEC and Kewaunee.

The differences beaween the estimated decommissioning costs disclosed in Note 1 I(f) for DAEC and Kewaunee and the recorded SFAS 143 liability are primarily related to fuel management costs, non-nuclear demolition costs and the timing of future cash flows. It also applies to a smaller extent to several other domestic utility and non-regulated assets including, but not limited to, active ash landfills, water intake facilities, underground storage tanks, groundwater wells, transmission and distribution equipment, easements, leases and the dismantlement of certain hydro facilities. Other than DAEC and Kewaunee, Alliant Energy's current AROs are not significant. A reconciliation of the changes in the AROs is depicted below (in millions):

IP&L WP&L Total Balance atJan. 1, 2003 S180

$175

$355 Accretion expense 11 13 24 Change in cash flow estimates (33)

(33)

Balance at Dec. 31,2003

$158

$188

$346 72 iU

If SFAS 143 had been adopted as of Jan. 1,2001, IP&L and WP&L would have recorded ARO SFAS 143 liabilities of$180 million and $175 million at Dec. 31, 2002 and $168 million and $161 million at Dec. 31, 2001, respectively. Refer to Note 17 for information regarding the pending sale of WP&L's interest in Kewaunee.

Upon adoption of SFAS 143, Alliant Energy also recognized a $3.9 million impact as a cumulative effect of a change in accounting principle at WPC (in the fourth quarter of 2003, Alliant Energy completed an IPO of WPC).

At Dec. 31,2002, prior to the adoption of SFAS 143, Alliant Energy recorded S284.4 million of legal AROs in "Cost of removal obligations" on the Consolidated Balance Sheet.

73

I I SELECTED FINANCIAL AND OPERATING STATISTICS FINANCIAL INFORM.ATION 2003 (1) 2002(1) 2001(1) 2000 (2) 1999 (3)

(dollars in thousands, except per share data)

Income Statement Data:

Operating revenues

$3,128,187

$2,486,590 S2,634,230 S2,270,975

$2,048,158 Income from continuing operations 159,701 87,456 128,159 330,915 154,334 Income from discontinued operations, net of tax 29,825 19,425 57,071 51,039 42,247 Income before cumulative effect of changes in accounting principles 189,526 106,881 185,230 381,954 196,581 Cumulative effect of changes in accounting principles, net of tax (5,983)

(12,868) 16,708 Net income 183.543 106,881 172,362 398,662 196,581 Common Stock Data:

Earnings per average common share (diluted):

Income from continuing operations

$1.57

$0.97

$1.59 S4.18

$1.98 Income from discontinued operations

$0.30

$0.21

$0.71 SO.64

$0.53 Cumulative effect of changes in accounting principles

($0.06)

($0.16)

SO.21 Net income

$1.81

$1.18

$2.14 S5.03

$2.51 Common shares outstanding at year-end (000s) 110,963 92,304 89,682 79,010 78,984 Dividends declared per common share

$1.00

$2.00

$2.00 S2.00

$2.00 Market value per share at year-end

$24.90 S16.55

$30.36 S31.88 S27.50 Book value per share at year-end (4)

S21.37

$19.89

$21.39

$25.79 S27.29 Other Selected Financial Data:

Cash flows from operating activities (continuing operations)

$419,990 S555,338 S433,346

$393,090 S423,794 Construction and acquisition expenditures

$838,893 S656,752 S712,991

$845,454

$418,371 Total assets at year-end (4)

$7,775,446

$7,814,084

$6,971,735 S7,399,468

$6,663,175 Long-term obligations, net

$2,321,634

$2,784,216 S2,586,044 S2,128,496

$1,660,558 Times interest earned before income taxes (5) 2.20X.

1.74X 2.03X 4.35X 3.05X Capitalization ratios:

Common equity (4) 47%

36%

41%

44%

50%

Preferred stock 5%

4%

2%

2%

3%

Long-and short-term debt 48%

60%

57%

54%

47%

Total 100%

100%

100%

100%

100%

(1) Refer to 'Results of Operations" in MD&A for a discussion of the 2003, 2002 and 2001 results of operations.

(2) Includes S204 million ($2.58 per diluted share) of non-cash net income related to Alliant Energy's adoption of SFAS 133 and

$ 16 million (S0.20 per diluted share) of net income from gains on sales of McLeod stock.

(3) Includes S25 million ($0.32 per diluted share) of net income from gains on sales of McLeod stock.

(4) Alliant Energy adjusts the carrying value of its investments in McLeod to its estimated fair value, pursuant to the applicable accounting rules. At Dec. 31, 2003, 2002, 2001, 2000 and 1999, the carrying amount reflected an unrealized gain (loss) of approximately $2 million, SI million, ($13) million, $543 million and S1.l billion, respectively, with a net of tax increase (decrease) to common equity of$1 million, $0.4 million, (S9) million, $317 million and $640 million, respectively.

(5) Represents income from continuing operations before income taxes plus preferred dividend requirements of subsidiaries plus interest expense divided by interest expense.

74 I I

ELECTRIC OPERATING INFORMATION (DOMESTIC UTILITY ONLY) 2003 2002 2001 2000 1999 Operating Revenues (000s):

Residential S684,574

$626,947

$599,074

$567,283

$541,714 Commercial 409,704 376,365 373,145 349,019 329,487 Industrial 571,608 526.804 543.471 501,155 476,140 Total from retail customers 1,665,886 1,530,116 1,515,690 1,417,457 1,347,341 Sales for resale 195,822 160,335 184,507 173,148 155,801 Other 55360 62,083 56,359 57,431 45,796 Total S1,917,068 S 1,752,534

$1.756.556 SI,648.036

$1.548,938 Electric Sales (000s lIkNN'h):

Residential 7,565 7,616 7,344 7,161 7,024 Commercial 5,663 5,542 5,464 5,364 5,260 Industrial 12,345 12.297 12,469 13,092 13,036 Total from retail customers 25,573 25,455 25,277 25,617 25,320 Sales for resale 5,495 4,805 4,936 4,906 5,566 Other 184 197 168 174 162 Total 31,252 30,457 30.381 30,697 31,048 Customers (End of Period):

Residential 830,559 822,229 807,754 799,603 790,669 Commercial 129,130 128,212 125,539 123,833 122,509 Industrial 2,902 2,905 2,826 2,773 2,730 Other 3.362 3.344 3,324 3.316 3,282 Total 965,953 956,690 939,443 929.525 919,190 Other Selected Electric Data:

Maximum peak hour demand (MWV) 5,887 5,729 5,677 5,397 5,233 Sources of electric energy (000s MVh):

Coal 18,451 17,674 18,190 18,669 18,585 Purchased power 9,155 8,596 8,727 8,058 8,619 Nuclear 4,498 5,012 4,116 4,675 4,362 Gas 631 675 472 470 493 Other 240 379 452 427 528 Total 32,975 32,336 31,957 32,299 32,587 Revenue per KVh from retail customers (cents) 6.51 6.01 6.00 5.53 5.32 GAS OPERATING INFORMATION (DOMESTIC UTILITY ONLY) 2003 2002 2001 2000 1999 Operating Revenues (000s):

Residential S310,658

$218,746

$270,248

$245,697

$185,090 Commercial 162,651 111,343 141,121 127,104 89,118 Industrial 34,201 25,177 31,262 27,752 21,855 Transportation/other 59,416 38,720 45,246 14,395 18.256 Total S566,926 S393,986 S487,877 S414,948

$314,319 Gas Sales (000s Dths):

Residential 31,871 30,931 29,580 32,026 30,309 Commercial 19,947 19,348 18,055 19,696 18,349 Industrial 5,093 5,373 5,344 5,350 5,963 Transportation/other 48,978 47,386 48,539 43,931 46.954 Total 105,889 103,038 101,518 101,003 101.575 Customers at End of Period (Excluding Transportation/Other):

Residential 361,835 358,384 353,430 351,990 347,533 Commercial 45,826 45,793 45,480 44,654 44,289 Industrial 766 799 951 953 1,037 Total 408,427 404.976 399,861 397,597 392,859 Other Selected Gas Data:

Revenue per Dth sold (excluding transportation/other)

$8.92

$6.38

$8.35

$7.02

$5.42 Purchased gas costs per Dth sold (excluding transportation/other)

S6.11

$4.02

$6.31

$4.88

$3.30 75

II DEFINITIONS Certain abbreviations or acronyms used in the text and notes of this report are defined below:

Abbreviation or Acronym AFUDC Alliant Energy ARO ATC Cargill-Alliant Corporate Services Dth EBITDA EIP EITF EITF Issue 02-3 Emery EPS FASB FERC FIN FIN 46 FSP GAAP ICC Integrated Services International IP&L IPO IUB Kewaunee LTEIP McLeod MD&A MGP MPUC MW MWh N/A NEPA NG Energy PSCW PUHCA Resources SEC SFAS SFAS 115 SFAS 133 SFAS 142 SFAS 143 SFAS 149 SmartEnergy Synfuel TBD U.S.

WPC WP&L WRPC Definition Allowance for Funds Used During Construction Alliant Energy Corporation Asset Retirement Obligation American Transmission Company LLC Cargill-Alliant, LLC Alliant Energy Corporate Services, Inc.

Dekathern Earnings Before Interest, Taxes, Depreciation and Amortization 2002 Equity Incentive Plan Emerging Issues Task Force Issues Related to Accounting for Contracts Involved in Energy Trading and Risk Management Activities Emery Generating Station Earnings Per Average Common Share Financial Accounting Standards Board Federal Energy Regulatory Commission FASB Interpretation No.

Consolidation of Variable Interest Entities FASB Staff Position Accounting Principles Generally Accepted in the U.S.

Illinois Commerce Commission Alliant Energy Integrated Services Company Alliant Energy International, Inc.

Interstate Power and Light Company Initial Public Offering Iowa Utilities Board Kewaunee Nuclear Power Plant Long-Term Equity Incentive Plan McLeodUSA Incorporated Management's Discussion and Analysis of Financial Condition and Results of Operations Manufactured Gas Plants Minnesota Public Utilities Commission Megawatt Megawatt-hour Not Applicable National Energy Policy Act of 1992 NG Energy Trading, LLC Public Service Commission of Wisconsin Public Utility Holding Company Act of 1935 Alliant Energy Resources, Inc.

Securities and Exchange Commission Statement of Financial Accounting Standards Accounting for Certain Investments in Debt and Equity Securities Accounting for Derivative Instruments and Hedging Activities Goodwill and Other Intangible Assets Accounting for Asset Retirement Obligations Amendment of SFAS 133 on Derivative Instruments and Hedging Activities SmartEnergy, Inc.

Alliant Energy Synfuel LLC To Be Determined United States of America Whiting Petroleum Corporation Wisconsin Power and Light Company Wisconsin River Power Company 76 I I

S HA RE OWN ER IN F OR MAT IO N 0

0 W5 01

• C Stock Exchange Listings Stock Trading Newspaper exchange symbol abbreviation Common Stock COarterly Prile Ranges and Dividends 2003 2002 Quarter High Low Dividend High Low Dividend AlliantEnergy-Common NewYork tNT AlliantEngy Stock Exchange Interstate Power and Light Company New York 8.375%

Preferred Stock Exchanoe IPL Pr B IntstPwrtt pil

-7.10% Preferred IPLPrC IntstpwrttpIC Wisconsin Power American and Light Company Stock Exchange

-4.50% Preferred WIS-PR WIP&Lpf All other Wisconsin Power and Light Company preferred are traded on the over-the-counter market.

First Second Third Fourth Year S 18.30 20.60 22.70 25.09 25.09 S14.98 16.03 18.69 21.94 14.98 S.25

.25

.25

.25 1.08 S31.61 30.85 25.77 19.89 31.01 S 28.67 24.75 16.35 14.28 14.28

$.50

.50

.50

.50 2.00 Alliant Energy Corporation 2003 year-end common stock price: $24.90 2004 Record and Dividend Payment Dates Anticipated record and payment dates are as follows:

COMMON STOCK Record dates Payment dates Jan. 30 Feb. 14 Apr. 30 May1s July30 Aug 14 Oct. 29 Nov. 15 Web cite address:

www.alliantarergy.convShereowners Alliant Energy had 53,231 shareowners of record as of Dec. 31, 2003. Shareowner records are maintained in the corporate headquarters in Madison, Wis.

Street-name accounts Shareowners whose stock is held by banks or brokerage firms and who wish to receive quarterly reports directly from the company should contact Shareowner Services to be placed on the mailing list. Reports also may be obtained through our Web site.

Annual meeting The 2004 Annual Meeting of Shareowners will be held at the Grand River Center, 500 Bell St., Dubuque. Iowa, on Friday, May 21, 2004, at I p.m. (Central Daylight Time).

Form 10-K Information Upon request, the company will provide, without charge, copies of the Annual Report on Form 10-K for the year ended Dec.

31, 2003, as filed with the Securities and Exchange Commission (SEC). All reports filed with the SEC also are available through our Web site.

Analyst Inquiries Inquiries from the financial community may be directed to:

Alliant Energy Attn: Investor Relations P.O. Box 77007 Madison, WI 53707-1007 Phone: (608) 458-4950 Fax: (608) 458-4824 E-mail: Invest@alliantenergy.com Shareowner Inquiries Inquiries from individual shareowners may be directed to:

Alliant Energy Attn: Shareowner Services P.O. Box 2568 Madison, WI 53701-2568 Phone: (608) 458-3110 Toll-free: 1-800-356-5343 Fax: (608) 458-3321 E-mail: shareownerservices@alliantenergy.com The company's Shareowner Services representatives are available to assist you from 8:30 a.m. to 4:30 p.m. (Central Standard Time) each business day.

Stock transfer agent and registrar Contact Shareowner Services for Alliant Energy common stock and all preferred stock of Interstate Power and Light Company and Wisconsin Power and Light Company.

Mail written inquiries to the address in the section above.

Shareowner Connection - electronic on-line access - just a click away!

With 24-hour access via the Web, seven days a week, shareowners and prospective shareowners can:

• Examine reinvestment and certificate account details and balances

• Obtain payment information

• View statements

• Vote proxies

• Change address information

• Find and print tax information

• Open a new account at any time Go to %twwwalliantenergy.com/shareowners.

Follow instructions for first-time visitors.

Duplicate mailings If you receive duplicate mailings of proxies, dividend checks or other mailings because of slight differences in the registration of your accounts, please call Shareowner Services for instructions on combining your accounts. To reduce the volume of paper you receive from us, you may wish to consider electronic access (see Shareowner Connection-electronic on-line access section preceding).

Shareowner Information The company's annual report and shareowner communications focus on the shareowner audience. Your questions and ideas are always welcome. Please direct them to Shareowner Services.

Shareowner Direct Plan The Shareowner Direct Plan is available to all shareowners of record, first-time investors, customers, vendors and employees. Through the plan, shareowners may buy common stock directly through the company without paying any brokerage commissions, fees or service charges.

Full details are in the prospectus, which can be obtained through our Web site or by calling Shareowner Services.

Direct deposit Shareowners who are not reinvesting their dividends through the Shareowner Direct Plan may choose to have their quarterly dividend electronically deposited in their checking or savings account through this service. Electronic deposit may be initiated or changed through our Web site at www~alliantenergycom/shareowners or by contacting Shareowner Services.

I I

I I

Alliant Energy Corporate Headquarters 4902 North Biltmore Lane P.O. Box 77007 Madison, WI 53707-1007 General information: 1.800.ALLIANT Shareowner Services: 1.800.356.5343 Operating Headquarters 200 First St., S.E.

Cedar Rapids, IA 52401 1.800.373.1303 1000 Main St.

Dubuque, IA 52001 1.800.611.9330 Current information about Alliant Energy is available on the Web at wivwitalliantenergycomn.

z ALLIANT ENERGY.

We'r onfory'u.z LNT The common stock of Alliant Energy Corp is traded NYS E on the New hark Stock Exchange under the symbol WNT.

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dieI WPS Resources Corporation

Year Ended December 31 Consolidated revenues - nonregulated (Millions)

• Consolidated revenues - utility (Millions)

• Margins - nonregulated (Millions)

Margins - utility (Millions)

Income from continuing operations (Millions)

• Income available for common shareholders (Millions)

Earnings per average share of common stock Basic income from continuing operations

• Diluted income from continuing operations

• Basic income available for common shareholders Diluted income available for common shareholders 2002 Percent Change

$ 410.8 663.8 1_0503 12.7 71.1 70.2 6313 3.2 118.5 (6.7) 109A (13A)

$3.64 (10A) 3.61 (10.2) 3.45 (16.8) 3.42 (167)

$ 2.12 1.9 24.62 113

$38.82 19.1 31,808,779 15.1

$3,671.2 16.9 Dividends per share Book value per share Common stock price at year end Shares outstanding at year end (excludes treasury stock and shares in deferred compensation trust)

Total assets (Millions)

• Refer to Management's Discussion and Analysis for explanation of changes in revenue and a discussion of discontinued operations.

0 Year Ended December 31 (Millions)

Net cash operating activities Net cash investing activities Net cash financing activities

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L 2002

$188.

5

$144.1 (265.4)

(134.8) 93.1 33.

$ 16.2

$ 42.9 2001 Change in cash and cash equivalents - continuing operations J

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'A WPS ENERGY SERVICES, $29. 70 ELECTRIC UTILITY, $60.0 0I OTHER, $( !:!i)

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WPS R ESO U RC E S CO R PO RATI ON

Business Established in 1883.

Regulated electric and natural gas utility.

Operates in northeastern and central Wisconsin and an adjacent portion of Upper Michigan (see map above).

2,483 employees.

Business Established in 1884.

Regulated electric utility.

Operates in primarily rural countryside covering 10 of the 15 counties in the Upper Peninsula of Michigan (see map above).

171 employees.

Market Serves 414,370 electric and 300,859 natural gas customers.

Provides electric and natural gas products and services to residential, farm, commercial, and industrial customers.

Also provides electric power to wholesale customers.

Electric operations accounted for 64% and gas operations accounted for 36% of 2003 revenues.

Electric revenues are comprised of 87% retail sales and 13%

wholesale sales.

Wisconsin customers accounted for 96% and Michigan customers accounted for 4% of 2003 revenues.

Market Serves 51,556 electric customers in 99 communities.

Provides electric energy to 35 wholesale customers.

Main industries served are forest products, tourism, and small manufacturing.

Electric revenues are comprised of 88% retail sales and 12% wholesale sales.

Failitis Electric generating capacity based on 2004 summer capacity ratings is Z206 megawatts, including share of jointly owned facilities. A peak demand was reached on August 21,2003, with a system demand of 2,185 megawatts.

Electric property includes 20,490 miles of electric distribution lines, 90% of which are operated at 24.9 kV.

Gas property includes 6,845 miles of gas main, 70% of which is plastic main, and 85 gate and city regulator stations.

Facifties Electric generating capacity based on 2004 summer capacity ratings is 79 megawatts. A peak demand was reached on January 22,2003, with a system demand of 154 megawatts.

Electric property includes 2,826 miles of electric distribution lines.

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CON-wpS RESOURCES CORPORATION

a WPS Energy Services, Inc.

WPS Potwer Dlevleiament, In<,

Both WPS Energy Services, Inc.

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and WPS Power Development, Inc.

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Business Established in 1994.

Diversified nonregulated energy supply and services company.

Principal operations in the United States include Illinois, Maine, Michigan, New York, Ohio, and Wisconsin. Principal Canadian operations include Alberta, Ontario, and Quebec (see map above).

Provides retail and wholesale products primarily in the northeast quadrant of the United States and adjacent portions of Canada.

Develops nonregulated assets.

183 employees.

Market Operates in the retail and wholesale nonregulated energy marketplace.

Emphasis is on serving aggregated residential and small commercial, large commercial, industrial, and wholesale customers in the northeast quadrant of the United States and adjacent portions of Canada.

Products and Services Provides individualized energy supply solutions, structured products, and strategies that allow customers to manage energy needs while capitalizing on opportunities resulting from deregulation.

Provides natural gas, electric, and alternate fuel products, real-time energy management services, energy utilization consulting, and project development and management.

Provides acquisition and investment analysis, market management services, and optimization of energy assets in the competitive marketplace.

Patented DENet" computer technology allows customers to continuously monitor and actively manage their energy usage.

B Business Established in 1995.

Owns and operates various nonregulated electric generation facilities.

Owns a portion of a synthetic fuel facility.

Provides electric power generation services.

193 employees.

Market Operates nationwide and in adjacent portions of Canada (see map above).

Significant focus on the northeast quadrant of the United States.

Products and Services Provides engineering and management services and operations and maintenance services.

Areas of expertise include cogeneration, distributed generation, generation from renewables, and generation plant repowering projects.

Facilities

-74 megawatts of hydro and diesel generation facilities in the state of Maine and in New Brunswick, Canada.

503 megawatts of primarily coal-fired generation facilities in Pennsylvania.

259 megawatts of combined cycle and fluidized bed generation facilities in upstate New York.

-S-megawatt cogeneration facility in Combined LocksWisconsin. megawatt coal-fired generation facility in CassvilleWisconsin.

A minority interest in a synthetic fuel facility located in Kentucky.

Landfill and wood waste gas generating facilities in Wisconsin and steam boilers in other states.

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WPS R ESOURCE S CORPORATION [3

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WPS Resources Corporation At A Glance 4

Letter to Shareholders 10 The Energy Within 16 Forward-Looking Statements 17 Management's Discussion

• and Analysis 47 Consolidated Statements of Income 48 Consolidated Balance Sheets 49 Consolidated Statements of Common Shareholders' Equity Wisconsin Public Service agreed to sell to the Wisconsin Department of Natural Resources more than 5,000 acres of laod heroiFr High Falls hydro plantand several other areas along

- the PeshtigoRiverinWisconsin,and

->donate mrlore than 5,000 acres to the state. RogerTrudeau, Director of Real

- Estate, nearthe High Falls flowage, is

• implementingthis agreement,which 0 ensuresthe jority of land will-

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'irt.y remain accessible to the public and remain in its natural state.

50 Consolidated Statements of Cash Flows 51 Notes to Consolidated Financial Statements

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88 88 89 I

90 90 92 i..

- Report of Management Independent Auditors'Report Financial Statistics Board of Directors Officers

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Investor Information Pictured on covertop to bottom: In theWisconsin Public Service X-Rhinelander,Wisconsin, service center, Steve BoneckGas Maintenance -

Mechanic, and David Detert, Service/Street Mechanic, assemble a-natural gas burner for a gate and regul-ator station. Sara Hurley, Manager of Financial Analysis, arid Margaret Graese,Accountant, =

make sure WPS Power Development's financial reeporting adheres-

• to current standards.

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I The energy within. That's what makes a company strong. It's the internal energy that keeps

- things rolling within a company. Without this energy, a company would falter And for a company in the energy industry, the energy within takes on additional significance.

Our business is energy. We strive to understand that business better than' any other company.

Our mission is to provide the best value in energy and related services. Creating value for our customers, shareholders, employees, and the communities we serve is not a small task. It takes a tremendous amount of energy to pull it off-energy that comes from our employees. Their internal drive helps us fulfill our mission and reach our goals. That energy will propel us into becoming a world-class energy company.

I am happy to report that 2003 put us firmly on track to be that company. We once again made substantial progress'toward our goals, and the energy within is enabling us to succeed.

Let me tell you how.

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We filed an application to construct and operate a 500-megawatt electric generating facility at our existing Weston power plant site.

We agreed to sell our Sunbury generating station in Pennsylvania to Duquesne Power.

We purchased a one-third interest in the Guardian Pipeline.

We increased the dividend on our common stock for the 45th consecutive year.

For the seventh time in eight years, we met the challenge of a new all-time peak in energy demand when we supplied 2,185 megawatts on August 21.

We completed credit line syndications for WPS Resources and Wisconsin Public Service.

We won the bid to provide standard-offer electric service to northern Maine for a 34-month period beginning March 1,2004.

We agreed to sell the Kewaunee Nuclear Power Plant to Dominion Energy.

We sold an additional 4,025,000 shares of our common stock at $43 per share, and investor demand exceeded the number of shares offered.

We issued $125 million of utility senior notes at very favorable rates.

We sold 542 acres of land near the Peshtigo River to the Wisconsin Department of Natural Resources.

We began construction of a 50,000-square-foot addition to our Green Bay Service Center to house our 24-hour call center and additional customer support operations.

We announced a long-term agreement to provide more than 55 megawatts of wholesale electric service to two northeastern Wisconsin communities-Shawano and Clintonville.

We completed remediation efforts on a former manufactured gas plant site in Green Bay, Wisconsin, and won the Mayor's Beautification Award at the same time.

We sold a seven-acre former manufactured gas plant site after completing environmental remediation efforts.

Our NatureWise-and SolarWise' for Schools renewable energy programs were ranked among the top 10 in national Green Power programs based on customer participation.

_R We also faced a number of challenges during 2003. First, when approval of Wisconsin Public Service's 2003 rate case was delayed for three months due to other priorities at the Public Service Commission of Wisconsin, we lost approximately

$5 million of potential electric revenue. We expected to receive an order before the end of 2002, but the Commission did not grant approval until March 21,2003. The delay in receiving the needed rate increase caused a decline in utility earnings that we were not able to overcome during the remainder of the year.

Maintenance issues, purchased power, and fuel costs took a toll on the performance of WPS Power Development's assets during 2003. We diligently corrected the maintenance issues, lowered fuel costs, and steadily improvred the overall condition of the facilities and enhanced their long-term operation.

The environment in the nonregulated energy marketplace has become more challenging due to, among other things, high and volatile natural gas prices, major accounting changes, the dramatic overbuild of capacity and, to a lesser extent, the reduction in wholesale market participants. Although electric prices have been dose to projections made at the inception of our investments, the forward value of nonregulated capacity markets was vasty overestimated by most industry experts and us.

Although WPS Energy Services' financial performance has been good the past few years, the overall financial performance by WPS Power Development's assets is not acceptable.

In 2003, WPS Power Development took decisive actions to adjust to the new merchant marketplace. We announced the pending sale of our Sunbury plant to Duquesne Power.

We downsized the workforce for our New York assets by about 20 percent and have still maintained reliable operations. We also downsized WPS Power Development's central office staff and focused the company on the efficient operation and optimization of its assets. In addition, we imoved nonregulated business development activities to

/WPS Energy Services to facilitate its ability to market power from WPS Power Development's generation assets. Given current market conditions, we don't expect to see significant agrowth in the form of acquired generation assets, but we

• are continuing to look for growth opportunities for our nonregulated companies that will enhance shareholder value.

/WPS Energy Services made adjustments to better integrate its market focus withWPS PowerDevelopment's generation assets. WPS Energy Services hired personnel with experience in

= the market management of electric generation assets in New York, New England, and the Pennsylvania-New Jersey-Maryland markets and opened a new office in the Washington, D.C. area.

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, A This staff is focused on maximizing the value of company and customer energy assets in the northeast markets, with activities that include risk analysis, portfolio management, scheduling, and settlement.

The energy industry experienced volatile and high commodity market prices in 2003, and we expect these market conditions to continue into 2004. This can put a financial strain on undercapitalized market participants. We continue to be diligent and improve our credit processes to minimize credit-related damage. On the plus side, market volatility often creates opportunity and enhances the value of the products WPS Energy Services is able to provide to the nonregulated wholesale and retail marketplace.

This past year, 22 percent came from those two subsidiaries, which is down from 32 percent in 2002. We have chosen this range because it allows us substantial growth opportunities and still provides the benefits of a balanced portfolio of business operations that derives 75 percent or more of our earnings from utility investments.

Our final financial goal is to provide investors with a solid return on their investment. That includes sustained dividends and dividend growth. Our total return to shareholders has exceeded 12 percent on an average annual basis for the last five years, and we have increased dividends annually for the last 45 years.

The energy within an organization is a key to success. But energy must be harnessed and driven in the direction of goals with sustained effort. A company must develop its goals, lay out its strategy for accomplishing those goals, and then put the right leadership in place to ensure attainment of those goals. It takes energy all along the way to keep us headed in the right direction.

Our financial goals are simple. We expect to provide 6 to 8 percent average annualized growth in earnings per share from continuing operations, but we know that the growth may vary-sometimes higher and sometimes lower than the targeted range in any given year. We have surpassed this goal over the past five years.

Another goal is to have between 15 percent and 25 percent of our earnings come from our nonregulated subsidiaries:

WPS Energy Services and WPS Power Development.

Our strategy continues to be balanced growth, adherence to our core competencies of energy and energy-related activities, and focusing our nonregulated efforts on the energy markets within the northeast quadrant of the United States and adjacent portions of Canada. We are continuing to place greater emphasis on growth of our regulated utility business while at the same time carefully growing our nonregulated subsidiaries.

A major part of our strategy is to develop the infrastructure that will be needed to provide reliable supplies of energy for many years and to provide customers with the best value for their energy purchases.

' Generating the Energy 5

With our strategy in mind, Wisconsin Public Service completed construction of Pulliam 31 at a cost of approximately

$38 million. This is an 83-megawatt natural gas-fired combustion turbine peaking plant, which is located at our existing Pulliam power plant site in Green Bay, Wisconsin.

Wisconsin Public Service also began work on the Weston 4 project. This is a new 500-megawatt, coal-fired plant that will be located at our existing Weston generating site near Wausau, Wisconsin. This will be a state-of-the-art unit that we plan to have available in 2008. It will be one of the most efficient and environmentally friendly units in Wisconsin and is expected to cost about $770 million.

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Wisconsin Public Service also announced a $250 million contract to buy power from a new gas-fired plant Calpine is building near Kaukauna, Wisconsin. The Fox Energy Center will be available early in 2005 and will provide up to 235 megawatts of capacity and energy to our system for ten years.

" Transmitting Energy to A Where It's Needed Transmission infrastructure must also be developed, and we made significant progress in that arena in 2003 through our partial ownership of American Transmission Company, LLC.

During 2003, we transferred about $20 million of assets related to the Wausau, Wisconsin, to Duluth, Minnesota, transmission line project to American Transmission Company for additional equity.

The Public Service Commission of Wisconsin approved construction of the 220-mile transmission line at a cost of about $420 million. We anticipate funding approximately 50 percent of total costs incurred, up to $198 million, and receiving additional equity in American Transmission Company. We expect to complete construction in 2008.

In December 2003, we invested approximately $6 million in American Transmission Company with the transfer of other recently completed projects to the American Transmission Company, increasing our ownership interest to about 20 percent.

We also signed an interconnection agreement with the American Transmission Company, which will provide for the development of the transmission infrastructure necessary to transport the output of the proposed Weston 4 plant.

" Ensuring Reliability with a Natural Gas Pipeline On the natural gas side of our business, we purchased a one-third interest in the Guardian Pipeline for $26 million.

The pipeline, which began operating in 2002, stretches about 140 miles from Joliet, Illinois, into southern Wisconsin. It can transport up to 750 million cubic feet of natural gas daily.

Even though our principal utility doesn't connect to it, we've supported the Guardian Pipeline since it was first proposed because it provides potential benefits of competition to current and future customers in the state of Wisconsin.

We think it will be a sound addition to our business holdings.

The pipeline is critical to natural gas reliability in Wisconsin, and more than 88 percent of its capacity is under contract

- through 2012.

r Managing and Reducing Risk A Another major part of our strategy is the management and, when possible, the reduction of risk. In that regard, we made substantial progress in 2003. We will reduce our exposure to the merchant plant markets with WPS Power Development's proposed sale of the 402-megawatt Sunbury Power Plant, located in Pennsylvania, to Duquesne Power, L.P., a subsidiary of Duquesne Light Holdings, for approximately $120 million.

We expect to complete this sale in the third quarter of 2004.

We also reached an agreement to sell the 543-megawatt Kewaunee Nuclear Power Plant to Dominion Energy Kewaunee, LLP, a subsidiary of Dominion Resources, for approximately $220 million. Wisconsin Public Service owns 59 percent of Kewaunee and an unaffiliated utility owns 41 percent. At closing, we expect to receive approximately

$130 million in cash, transfer our decommissioning liability, and retain ownership of trust assets contained in one of two decommissioning funds we established to cover the eventual decommissioning of the plant. The cash proceeds from the sale are expected to slightly exceed our carrying value on the assets being sold. We expect that the retained decommissioning fund, as well as most of the gain from the plant sale, will be available to Wisconsin Public Service's customers in future rate proceedings. The transaction is subject to approval by various regulatory agencies, including the Public Service Commission of Wisconsin, the Federal Energy Regulatory Commission, and the Nuclear Regulatory Commission.

We expect this transaction to be completed in 2004.

At the closing of the sale, Wisconsin Public Service will enter into a power purchase agreement with Dominion Energy to buy energy and capacity generated at Kewaunee. The agreement provides for an equivalent amount of electricity at substantially the same costs that we would expect if current ownership continued. The power purchase agreement, which also requires regulatory approval, will extend through 2013, when the plant's current operating license will expire.

This sale will transfer the risk of nuclear ownership and operation, including decommissioning and fuel disposal costs, away from our customers and shareholders. We believe our customers and shareholders will benefit from the sale and power purchase agreement. Additionally, the transaction fits with our asset management strategy and lowers our business risk profile.

The sale of Kewaunee was a bittersweet decision for our management team because Kewaunee has been a flagship for excellent operations in the industry throughout its 30-year history.

We are confident it will continue to operate well in the hands of its new owner and the existing competent staff at Kewaunee.

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-I I1 Benefiting from Our Asset Management Strategy Our asset management strategy calls for the addition or disposition of assets, including plants and entire business units, to create value for customers and enhance returns for shareholders. Sales of excess land, buildings, and other facilities are a part of this strategy.

The sales of Kewaunee and Sunbury are examples of our asset management strategy. This strategy will enable us to improve returns to shareholders by managing our assets in a manner that reduces risk.

Another example of our asset management strategy was the December 2003 sale of an additional 542 acres of land near the Peshtigo River to the Wisconsin Department of Natural Resources for $6.5 million. This was part of a multi-phase agreement reached in 2001. Under terms of that agreement, we sold more than 5,000 acres of land to the state for $13.5 million in 2001. The state recently exercised its option to purchase an additional 179 acres for $5 million in 2004. Following the close of the third and final phase of the agreement in 2004, we will donate 5,176 acres to the state. At that point, the Wisconsin Department of Natural Resources will have acquired nearly 12,000 acres of wilderness for $25 million. When this transaction is completed, it will ensure that this pristine wilderness will remain open and accessible to the public and in its present natural state. We have been the stewards of this land for more than 100 years, and it's important that the new owner, the state of Wisconsin, carry on our stewardship. We are retaining about 300 acres of land in the vicinity that will be sold for development at an auction to be held in late 2004.

We also sold a seven-acre waterfront site for $940,000 to the-city of Oshkosh, Wisconsin, for park expansion. The land was the site of a coal gasification plant on which we completed environmental remediation work. We are pleased that Oshkosh residents will be able to take advantage of this property to develop and improve the riverfront.

r Nonregulated Growth )

Another major part of our strategy is the continuing growth of WPS Energy Services. We made substantial progress in 2003 with the acquisition of a retail electric business in Michigan and integration of a retail natural gas business in Canada. WPS Energy Services also secured major, new contracts in the New Jersey and Maine markets. They are well on the way to many years of profitable growth.

We also decided that the time was right to take WPS Power Development in a new direction-one focused more on operational excellence than on development of power plants.

As a result, in 2003, WPS Energy Services assumed the development efforts for our nonregulated businesses.

Successful infrastructure development and profitable growth is possible only if the energy within our company is combined with a strong financial position.

( Rates to Sustain Us "

The ability to successfully conclude rate cases is essential for any regulated utility, and we are no different. During 2003, we were successful in a number of jurisdictions.

The Public Service Commission of Wisconsin granted Wisconsin Public Service authority to increase retail electric rates by 3.5 percent, or $21.4 million, effective March 21,2003.

The Michigan Public Service Commission granted authority for a $300,000 increase in Wisconsin Public Service's retail electric rates on July 23, 2003, and also authorized recovery of

$1 million of increased transmission costs through the power supply cost recovery fuel adjustment clause. In addition, the Federal Energy Regulatory Commission ordered a 21 percent, or $4.1 million, interim increase in wholesale electric rates, subject to refund if the final rate increase is less, for Wisconsin Public Service effective May 11, 2003, with final settlement anticipated in the second quarter of 2004.

Wisconsin Public Service also successfully concluded its 2004 Wisconsin rate case with authorization to increase retail electric rates by 9.4 percent, or $59.4 million, and retail natural gas rates by 2.2 percent, or $8.9 million, effective January 1,2004. As part of this order, the Commission allowed a 12 percent return on equity with 56 percent equity in our utility capital structure.

Rate increases of this sort are often hard on our customers, but the increased rates are needed to maintain the reliability and safety of our service to them. Our customers should know that we are taking advantage of every opportunity to reduce costs and passing those savings on to them. Even with the higher rates, our electric and natural gas rates are still among the lowest in Wisconsin and the nation.

. x 8j W P S R E S O U R C E S C O R P O R A T I N

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-:-::we are upgrading leaders' skills throughout'the company.

dership training cours ave been developed for new In 2003, we took steps to enhance our strong financial Leadies h

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Wisconsin Public Service. The 364-day senior unsecured

- augment our internal initiatives.

revolving credit line facilities give us greater financial flexibility Recognizing the energy that can be created by a diverse as we grow our regulated utilities and nonregulated businessees.

workforce, we are continuing our diversity efforts throughout WPS Resources. This initiative provides us with a workforce Our quality debt ratings provide flexibility and access to -

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o'erand culture that is rich in ideas and highly effective.

capital markets at reasonable rates to help grow the business.

This was apparent in December when we successfully issued $125 million of 4.80 percent 10-year senior notes for Wisconsin Public Service. Due to the high ratings of the This past year.brought about changes in our Board of utility issue, the notes were heavily oversubscribed prior Directors. Mike Ariens retired from our Board after serving to pricing; which resulted in a very favorable interest rate.

for 29 years. We thank Mike for the tremendous contribution We also completed an equity sale last fall, which netted he made to our success throughout that term.

$167 million. These debt and equity financings will help We are pleased to welcome Ellen Carnahan to our Board of maintain our financial strength as we grow. We are mainta nin Directors. Ellen has a strong background in venture capital.

our financial strength to support our quality credit ratings. -J She is proving to be a valuable asset to our future success.

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position as Chief Executive Officer of WPS Power Development We've paid a dividend on our common stock for.OS H cu V

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ad w e r d o Jerry has agreed to continue as a consultant for the company.

63 consecutive years, and we've rewarded our shareholders-I d-with 45 consecutive years of dividend increases. We feel it is -

Charlie Schrock left his position as President of WPS Power extremely important for us to continue to pay dividends to Development for an assignment at WPS Resources. Charlie is our shareholders, and we'll continue to strive to do so.

now responsible for several projects critical to our success.

Our successful public offering of 4,025,000 shares of cormon;-

In addition to his role as Senior Vice President - Development stock in November was oversubscribed, split about evenly of WPS Resources, in which he oversees all nonregulated between retail and institutional purchasers, and confirms the activity, Phil Mikulsky is now President of WPS Power value of our company to the investing public. During 2003, Development and will take responsibility for moving this we increased our common stock equity through that public nonregulated subsidiary in a new direction.

offering and increased investor participation in our Stock Investment Plan. In 2003, shareholders invested more than

$13.1 million to add additional shares to their accounts under the plan and reinvested about $10.1 million of dividends.

WPS Resources truly does have energy within. It is the force Our investors are recognizing the value of their WPS investment as our stock increases its value. We dosed the year 2002 with a stock price of $38.82 and ended 2003 with a stock price of

$46.23. The 52-week range was between $36.80 and $46.80.

For investors who held WPS common stock from December 31, 2002, through December 31,2003, and were able to reinvest their

$2.16 in dividends per share, their total shareholder return for the year was 25.3 percent-a very positive result for our investors.

The energy within WPS Resources must be combined with strong leadership to provide maximum value. In that regard, that keeps us strong and successful. It enables us to deliver the best value in energy and related services. It allows us to provide solid returns for our investors.

We plan to nurture the energy within and continue delivering value to our shareholders for many years to come.

Thank you for choosing WPS Resources for your investment.

We will put all our energy to work for you.

Sincerely, Larry L.Weyers Chairman, President, and Chief Executive Officer March 12, 2004 V1 2.

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-L 11 WPS Resources' subsidiaries use their abilities to generate and deliver energy to homes and businesses across the central and northeastern United States and adjacent areas of Canada. That's the kind of energy most people think of when they hear "WPS Resources.' But what about the energy needed to listen intently to our customers, to serve our communities with compassion, and to persevere in difficult times? That energy doesn't come from a generator, pipe, or wire.

It's an energy that resonates within each-of WPS Resources' employees.

The energy within our employees is, first and foremost, the energy to serve our customers exceedingly well. Whether that means repairing a broken gas main in below-zero weather or helping customers find ways to effectively use the energy we sell, our employees get the job done with spirit and integrity. We create products and services that are valuable to our customers, and in the end, create value for our shareholders as well.

"There's Energy in Every'thing We Do" )

At Wisconsin Public Service, our regulated electric and natural gas utility operating in northeastern Wisconsin and portions of Upper Michigan, we tell customers, 'There's Energy in Everything We Don-and there is, according to feedback from our customers. In benchmarking research we conducted in 2003, Wisconsin Public Service rated among the 'best in class" when compared with 3

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-- _ The energy-within other major investor-owned utilities in Wisconsin. Attributes investigated in the research included price, corporate character, and service quality.

We spend a great deal of energy searching for new ways to serve our customers better. We look for innovations that are convenient and customized for homeowners and businesses but that also enable us to provide service efficiently and at a lower cost.

Many of these innovations are on the Web. Some of our most popular new services are our free on-line 'Energy-Saving Tools" for homes and businesses. With Energy-Saving Tools, customers are learning ways to manage rising energy costs, based on their own billing data and patterns of energy use.

And, they're able to do so whenever they choose. The popularity of these energy management tools, along with on-line bill payment and other routine transactions available on our Web site, brought double the number of visitors to, http://www.wisconsinpublicservice.com in 2003 as compared with 2002.

Questions posed by small business customers receive specialized attention in the Wisconsin Public Service Business Information Center. These representatives are trained to meet the unique energy needs of small business managers and owners, who wear many hats in their operations and have little time or money to spend on energy issues. Making optimum use of phone and Internet technology, the Business Information Center cared for nearly twice as niany business customers in 2003 as compared to 2002. At the same time, the cost of serving each of those customers via the Business Information Center was cut in half.

These creative on-line and call center solutions for our residential and small business customers have allowed us to centralize many functions previously carried out by local offices. So while we have more opportunity to serve, our customers can choose the way they want to be served, and costs are actually reduced.

r "Check the Prices, and Do the Math" In early fall, more than 45,000 new residential and small business customers in Ohio signed up to buy natural gas fromWPS Energy Services, our nonregulated energy marketing subsidiary. This surge in business was prompted, in large part, by an independent article in the Akron Beacon-Journal. The reporter stated that "after checking out all the prices, doing the math, and talking with each company,"

WPS Energy Services was the obvious choice for gas supply.

Consumers flocked to http://www.wpsenergy.com. The site received 2.5 million hits in August alone, and two customers per minute signed up online for natural gas service. More than 40,000 individuals called WPS Energy Services, up 700 percent from the usual monthly call volume. That's a remarkable level of interest for an energy supplier to receive on short notice. But with a firm grasp of Internet technology and a reliable customer service call center, WPS Energy Services came through for customers. Our reputation in Ohio helped increase our market share by nearly 4 percent in a market of 1.2 million customers.

WPS Energy Services' reputation for a strong work ethic has earned our company an ever-increasing amount of business.

Since 2001, WPS Energy Services has been the supplier of choice for aggregated buying groups like Cleveland, Ohio.

In 2003, Northem Maine again chose us as its standard offer energy supplier. Under a 34-month contiract, we will be the electricity provider for all of Maine Public Service Company's service area, as well as customers of Houlton Water Company and the Eastern Maine Electric Cooperative.

With a focus on competitive energy prices, reliable energy, top-notch customer service, and innovative technology, WPS Energy Services is one of the fastest-growing energy marketers in the country.

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J WPS Resources is generating a ready supply of talented leaders who can continue our tradition of outstanding, reliable service to customers. Our forward-looking Mentoring Program, for example, is in its fourth year.

Mentoring is a powerful, time-tested way of supporting employees as they meet the challenges of being successful, productive employees. Right now in our formal mentoring program, 75 mentors-seasoned leaders with specialized experience-are bringing mentees access to developmental assignments, senior executive relationships, and growth opportunities. In return, these yearlong relationships are bringing a fresh perspective to our mentors, and the company is adding to a bank of strategic knowledge and potential leadership.

At WPS Resources, new leaders prepare to lead effectively by participating in our specially designed Leadership Training for New Leaders. This series of workshops focuses on how to lead using WPS Resources' corporate values and vision. It includes leadership basics as well as the five core competencies we have designated for all of our leaders: Coaching and Developing Others, Communication and Influence, Sales Ability and Negotiation, Planning and Organizing, and Managing and Valuing Diversity. In their final class, graduates of this program develop an ongoing development plan for themselves, so they continue to grow as leaders. More than 200 individuals have completed this program over the past two years.

But planning for future success doesn't stop there. At WPS Resources, we believe in inspiring future success even beyond our afour walls!' In the communities we serve, spirited employees give their time to help people and businesses thrive.

Small businesses are a case in point. They're the constant heartbeat behind the economic vitality of any community.

In Columbus, Ohio, where WPS Energy Services serves a significant portion of the residential and small business market, our employees work closely with the local chamber of commerce, helping members make sound energy choices.

In Maine, our involvement with the Maine Technology Institute is helping to promote new business in the state's technology sector.

Elsewhere, our employees are in schools, helping the very young become the leaders of tomorrow. From tutoring elementary school children who have English as a second language to leading teenagers in Junior Achievement, we're using our energy to inspire greatness.

Not every day is business as usual. That's when our employees draw from their reserves of energy to take their daily dedication even further.

r Recover Habitat and Riverway On May 14, 2003, a fuse plug and its foundation failed at Silver Lake reservoir, operated by Upper Peninsula Power Company, our regulated electric utility in Upper Michigan.

The flooding that followed disrupted power supply to some consumers in the Upper Peninsula and damaged property along the Dead River. This incident tested the mettle of our employees and confirmed the value of teamwork between Upper Peninsula Power's work groups.

Upper Peninsula Power employees immediately began working with local officials to ensure the safety of area residents. Within days, our hydroelectric managers conducted a flyover of the 25-mile stretch of rivers from the reservoir to Lake Superior and gained an understanding' of the waters' status. Portable diesel generators helped us fill our customers' energy needs. And our Environmental Department arrived on the scene, identifying areas of environmental concern.

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Our fomal security measures, led by Chief Security Officer Upper Peninsula Power, with assistance from the Tom Meinz and our Managers of Physical and Cyber Security, Natural Resource Conservation Service, seeded a portion --

"' '-- have increased tenfold over the past few years and have of Silver Lake, graded and stabilized the new channel become engrained into our daily activity.

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responsibility to protect their work space. Controlled access,

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a habitat, and told us what steps were still needed.

surroundings combine for our best defense. At WPS Resources, we're doing the best job we can to protect 'our homeland"-our Upper Peninsula Power will continue working cooperatively workplace and community-during times of national threats.

with the Federal Energy Regulatory Commission, state and local governments, state regulatory agencies, and local propert

-I owners toward recovery of the river area in 2004 and beyond.-

This will include a study of the economic feasibility of As the communities we serve grow and see success, so does rebuilding Silver Lake and restoring recreational use of the area.

our company. At Wisconsin Public Service, more homes and

____----businesses are driving the need for additional electric generation.

Protect Our Part of the Homeland On September 26, 2003, Wisconsin Public Service officially Energy stands steadfast behind the achievements of our country applied to the Public Service Commission of Wisconsin and modem society. For that reason, the U.S. Department of to build a new 500-megawatt electric power plant called Homeland Security has induded energy companies among the uWeston 4." The plant, to be fueled using clean coal many organizations who must take extra measures to protect technology, would be located on the company's existing themselves and their surroundings in light of world events.'

Weston power plant site near Wausau, Wisconsin.

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-- The energy withir l In itself, building a new power plant'isn't a tremendously,-

unusual idea. But the way we're doing it is. We strongly believe in the underlying principal that building a power plant is a community issue calling for community involvement.

Since first announcing our plans to build a plant, Wisconsin Public Service has taken extraordinary steps to involve and seek the opinions of the local community. One of our first moves was to form a Community Advisory Panel. This group of community leaders, business people, and residents is a valuable sounding board for our ideas and a great way to keep our hands on the pulse of the community. Panel members meet monthly with our Weston 4 team, discussing issues such as emissions control, aesthetics of the plant, and employment and tax benefits for the local community.

We also meet proactively with neighbors of the plant site and the public to keep them updated and allow everyone to be heard. Listening has led to several innovations in plans for the plant, including a 'loop track" that will reduce rail traffic and noise caused by coal cars.

At WPS Power Development, WPS Resources' nonregulated power producer, strategy is focused as well on the pulse of local communities and regions.

The energy marketplace WPS Power Development operates within has become more challenging, with extreme volatility, high gas prices, and new regulations and accounting rules, among other issues. The value of these markets was overestimated by many in the industry, including us.

7 -In 2003, we took decisive actions to adjust to the new merchant marketplace. Most notably, we announced plans to sell our Sunbury plant-a move that will reduce our risk in the merchant market. We'll close on this transaction in summer 2004 if the plant's buyer, Duquesne Power, receives approval by the Pennsylvania Public Utility Commission and other needed regulatory approvals.

Selling Sunbury fits well into our balanced portfolio and asset management strategy, reducing uncontracted merchant exposure and allowing us to focus our energies on markets that are more in line with our growth strategy.

WPS Resources continues to believe that success on the nonregulated side of our business is achievable in markets where we can both sell energy and operate, or contract for, physical assets-thus fully integrating the energy services we offer the market.

4 No matter where we operate, no matter which part of WPS Resources our employees work for, one thing is clear-we are all about energy. Knowing this helps us funnel our personal energies iinto doing the best job possible for our customers. And, it prevents us from entering business lines or markets that could bring unreasonable risk to our shareholders.

In 2003, corporations-especially energy companies-continued to be faced with public uncertainty. The news media provided additional coverage of corporate America's struggles with ethics, and energy prices across the country were on the rise and volatile.

According to research by Wisconsin Public Service in 2003, customers' trust in our principal subsidiary, Wisconsin Public Service, actually increased during this time. That confirms something we have always known: we are a company of

• integrity. Corporate character isn't just something we proclaim; it comes to life in the way our employees perform every day.

-- 1

-I

- Creating a World-Class Energy Company At WPS Resources, our vision is 'People Creating a World-Class Energy Company.".The simplicity of these words simultaneously provides a single direction for our company and allows for the ingenuity to get things done.

-Our companies are fueled by hardworking, ethical employees, who are focused on getting energy to customers.

-That's the energy within WPS Resources.

00 W PS R ES OUR CE S COR PO RATION

[1_

l 300 2.00 1.00 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2.00-1.50-1.00-1.D0-

.so-0 nT~I1 4 1 1

f4 NO 0

I Go M

OR dq eq M q

a q

-M 1

1 9540 1 90 1 9 9 1 9 1

9 2

2 0 1 20 2

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 This report contains forward-looking statements within the meaning of Section 21E 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 10-0, 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 that 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.

The pending sales of our Sunbury generation plant and our Kewaunee nuclear power plant Completion of planned hydro sales 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, including the inability to obtain necessary regulatory approvals Changes in generally accepted accounting principles Growth and competition and the extent and timing of new business development in the markets of subsidiary companies The performance of projects undertaken or acquired 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 Counterparty credit risk Federal and state tax policies Acts of terrorism or war 1

110rr 2r0r 2 1997 1998 1999 2000 2001 2002 2003 I Assumes $100 investment in common stock at year-end 1993 and all dividends reinvested quarterly. Cumulative total return for the ten-year period is equivalent to an average annual return of 9.72%.

C0(Q 16 WPS RESOU RCES CORPORATION

The energywithin Introductio WPS Resources Corporation is a holding company, which is exempt Om the Public Utility Holding Company Act of 1935. Our wholly ownedI--4 t.f:

subsidiaries include two regulated utilities, Wisconsin Public Service Corporation (which is an operating entity as well as a holding company exempt from the Public Utility Holding Company Act of 1935) and:-

4-UpperPeninsula Power Company. Anotherwhollyowned subsidiary-,-X 7R1

%BX

WPS Resources Capital Corporation, is a holding company for our nonregulated businesses, including WPS Energy Services, Inc and.

WPS Power Development, Inc.

Our regulated and nonregulated businesses have distinct competencies and business strategies, offer differing products and services, experience a wide array of risks and chalenges, and are viewed uniquely by--

m management The following summary provides insight into the'n.- -

0 operations of our subsidiaries.

i-REGULATED UTILITIES Merrill,Wisconsin,service area,

'Our regulated utilities include Wisconsin Public Service and Upper

=

George Henrich, Jr.,a Street/Service Peninsula Power. Wisconsin Public Service derives its revenues primanrily' Mechanic, takes the time to make from servicing retail electric and natural gas customers in northeastern surethe jobisdonecorrectly.

and central Wisconsin and an adjacent portion of Upper Michigan:L-7=i C Wisconsin Public Service also provides 'wholesale electric service to mkrules. As et c

e u wbwill lose some -

various customers, including municipal utilities, electric cooperatives generation load but will retain the delivery revenues iand margin.~Also, energy marketers, other investor-owned utilities, and a municipal joint thecapacity that is freed up should be comp'etitive in our marketplace.-

action agency. Upper Peninsula Power derives revenues from the sale Deregulation of electricity is present in Michigan; however, no customers of electic energy in he Upper Peninula of ichigan.

have chosen an altemative electric supplier and no alternative electric X The ability of our regulated utilities to earn their approved return on'_,=,- -

isuppliers have offered to serve any customers in Michigan's Upper equity is dependent upon accurate budgeting and forecasting techniques Peninsula due to the lack of transmission capacity in the areas we serve our ability to obtain timely rate increases to account for rising cost in the Upper Pennsula, which is a barrier to competitive suppliers structures, minimizing the required rate increases in order to maintain entering the market.

- f -

the competitiveness of our core industrial customer base and keep these -- -

Ow ER DEVELOPMENT customers in our service area, and certain conditions that'are outside r

. -- '- WPS Power Development competes in the wholesale merchant electric:

of our control, such as macroeconomic factors and weather conditions.

P oe D c

i t w

m electric

- t

- --= -:power generation industry, primarnly in the midwest and northeasternV An approximately three month delay in receiving retail electric rate p

get d

pial i t mw a

notestern z

°

-.- ted U nite~d Sttsand adjacent portions of Canada. WPSPoe vlpmn' relief played a significant role in Wisconsin Public Service not earning Stt a

i S

core competencies include power plant operation ari maintenance,'

its approved return on equity in 2003. As a result of this delay, we met c

c il p

p o

a a

maiiiten-nce, with the Public Servic Commission of Wisconsn an e a

_ waste disposal, and material condition assessment of assets. Revenues are with the Public Service Commission of Wisconsin and established =

i procdurs an fied imelnesforcompetin ofthe200 rat cae cleriived primarily through the sale of capacity and energy generated from

-procedures ans tis melines for completion of the 2004 rate case in

-ipnt sset through wholesale otaecontracts and into liquid financia I::

order to allow the Public Service Commission of Wisconsin to rule on p

ae t ot c

a i

l financial f

lo. ' ~rarkets, primarily the PJM (Pennsylvania, New Jerse and Maryland),

a more timely basis. These efforts led to a timely rate order for 2004 r

y Evn wh te h r r l e c r

, W i Ps

' New York, and NEPOOL (New England Power Pool) markets, at spot Even with the higher retail electric ratesWiscon-sin Public Service's :;

>=-prices or day ahead prices. Historically risk management activities have overall electric rates are among the lowest when compared to othe r e

y y,

g inestorowned utils in W i ad a s th no T

not been utilized significantly at WPS Power Development. Excluding investor-owned utilities in Wsconsin and across the natdon.The.~~~-

- ~-

elan -

discontinued operations (the operation of the.Sunbury generation plant, approved returns on equity for Wisconsin Public Service and ue o n (h o o th ub g

plant,.

e Upper Peninsula are 12.0% and 11.4%

=

r

-which is pending sale, and certain other related assets), WPS Power 0 : Upper Peninsula are 12.0% and 11.4%, respectively.

a

-Development has approximately 425 megawatts of existing capacity, Perhaps the most relevant risk to our regulated utilities'is deregulation with fixed price contracts in place to sell approximately 86 megawatts. -

Deregulation of the electric and natural gas utilities has begun in The majority of the remaining 339 megawatts of generation have Wisconsin, especially for natural gas service. Currently, the largest natural -

been leased to MPS Energy Services under an operating lease effective

-gas customerscanpurchasenaturalgasfromsuppliersotherth antheir January 2004, as discussed in more detail below.

local utility. Efforts are underway to make it easier for smaller natural ff

=.-' t- 'i-WP Poer evlopment, through its subsidiar ECO Coal Pelletization ~

- gas customers to do the same. In addition, the Public Service Commirssion -

P P

D t

i s of Wisconsin h be studying h t

_~

1. 12 LLC, also owns an interest in a synthetic fuel producing facility. See

.~of Wisconsin has been studying how to deregulate the state's electric-=-----

believe electric deregulate t state-- s tic -=:--Trends, Synthetic Fuel Operation for more information.

supply. We believe electricderegulation inside Wisconsin is at least several years off as the state is focused on improving reliability by PS Power Development's ability to generate revenues is dependent building more generation and transmission facilities and creating fair upon open access to physical markets and liquid financial markets.

WPS RESOU RCES CORPORATION L17

m- *I

'We are not currently awaie -of any significan't-change-sin-the phy--ical ~,----~other marketinig and retail entities. WPS Energy Services uses derivative markets in whichWPS rower Development operates. Ina addtonwe -,-3~~fina~ncial instruments to provide flexible pricing to customers and believe that financial markets are becoming more liquid with ihe -addition ~suppliers, manage purchase and sales commuitments, and reduce

--of large financial players'.

`-exposure relative to the volatility of market prices.

WPS Power Development is subject to dean air regulations enforced by The table below discloses future natural gas and electrc sale's volumes the United States-Environmental Protection Agenc and state andl local

'_under contract as of December 31, 2003. C-ontracts are generally one to_

-governments.

New legislation -could require signuificant capital outly three years in duration. WI'S Energy Services expects that its ultimate

that may impact WPS Power Development'sability to compete with-sales voues in 2004 and beyond will exceed the volumes shown i

• eultdutltes hchaealoe rcvry of tese costs. v-the table beI6~ as itcontinues to seek growth opportunities.

Ovesuply f cpactylowsprk srads (spark spreacl is the'diffeirence

-between the market price of electricity and its cost of production), and,..

204

-I 20-20 20209

• extreme volatility in the price of fuel, energy, and capacity values have 20 0520 0820 negatively impacted margins at WPS Po wer Development. in response Wholesale sales volumes -9585.

• to these market conditions; WIPS Power Development has taken steps bill ion cubic feet 95 11 I

.,tadjust to the current wholesale merchant environiment. WPS Po-wer Reta-.il ae vlms-Development has instituted workforce reductions at the central office blincbcfe 734 32 an t aiosNw ok n enslvnaTotal natural gas sales volumes 269.2 78.3 T ____

adavaou 4wYranPenyvnaplants. On October 23, 2003 a definitive 'agreement was entered into to sell WI'S Power Development's,Wholesale sales volumes -

I Sunbury generating-facility to a subsidiary of Duquesne Light Holdng milion kilowatt-hours 12) 3,176 238-mit sll onkloathures -

The pending sale of Sunbury will allow WPS Power Deveomn o Rti ae oue

-~3 reduce uncontracted merchant exposure and redeploy capia intoTotal electric sales volumes 8309I ~3,861I 37 markets with different risk profiles. In addition, in january2004,.':---'--

WP Pwe evlomnteneedinooprain eae geeens For comparative purposes, future natural ga aideeti ales. voluimes with WPS Energy Services as part of its asset management strategy.

- udrcnrc tDcme 1 02 r hw eo.Ata lcrc--

Tiparndrhi wi-enbl W oe Development-to-fnatural gas sales volumes for 2003 are dlisclosed within Results of J

efficient adeffective operation of it~s plants and is expected t6-rieduc prtos P nry

• market price risks associated with the merchant generationplns Snc'SeetOtertns utilizing WPS Energy Services' financial and physical product trading t

~

h exertise. WPS Energy Sevcswl tlze various finanicial toos- ~-

Forward Contracted including forwards and options,: to limit exposure, as well as to

~

IVlmsa 23120'

-03 20420+/-R072O~

extract additional value from volatile commodity prices.

Whlsl4ae oue

-billion cubic feet 67.6

'9.7 Giveni cuirrent market conditions, we do not expect to see si~f ~

Retail sales volumes -

allow ubc ee ust1etat1____________i 26.6 growth through the acquisitionof 'enerato ases7u7eaebilo ui et10.

66-cniintoloopotnte Total natural gas sales volumes

-178.0 1

36.3 synergies between WI'S Power Development: and WPS Energy Services -

Wholesale sales volumes-

-[

that will enhanc shareholder value, million kilowatt-hous 2

.3,833 3,147

[

WP NRYSRIE-million kilowatt-hours (2' 3

10 MIPS nerg Servces aturatgas electrcadRt i sales volumes 5

f I799___

altEernat Servcsoffers-nonregulated Totatelctrc slesvolmesl 5799-iI 3,86 1

atraefuel supplies, as well as, energy management and consulting

• sevics, o rtailandwhoesae cstomrspimailyin te nrtliatem (1) These tables represent physical sales contracts for natural gas and electric poe fo of th Unied Satesand ajacet potiohof

-delivery or settlement in future periods. Management has no reason to believe that'*'

quadantGrida.

lthugh gross margins that will be generated by these contracts will vary significantly from

-WI'SEnerigy Services has awideningarrayof products and

-evcethose experienced historically.*

revenues are primarily derived through sales of electricity'and naturial ga-s-12 l

-WPSEnergy Services acquired retail electric operations in Michigan in 2003.0Pror

'W' nryServices' marketing and tradinoprtosm agpoe to the acquisition, this operation was an eleri wholesal custome fWSEeg and natural gaprcrmnaanitgaepotoowihisealad Seriyesthrefore forward contracted volumes to this customer at Decemel20, were included in wholesale sales volumes. At Dejember 31,2003 forward cntracted wholesale sales commitments. In 2003, MIPS Energy Services pfhsd vlmsrltdt hsoeainwr nlddi ealslsvlms electricity required to fulfill these sales commitments primfarily from7 independent generators, energy marketers, and organized electifi6 power-markets and purchased natural gas from a variety of suppliers under MP nrySrie a xeine tayiaae neeti n

• dily mothi, sasoalandlon-tem cntrcci wih picig~dlivry natural gas sales voilumnes since its inception,~ and expects this trend to an vlue chduestoacomodt cstme rqureens onineas it continues to look for opportunities tht fit withinit' growt strategy. In2003, MIPS Energy Services grew its retai electric.

W.-MPS Energy Services' customers include utilitiesmncplte business thiroughthe acquisition of retail operations in Michigan and cooperatives, commercial and industrial consumers, aggegtrs ad patciaio n

the Nw ereyBaiGertonevcepgam 1 8 J

WPS RESOU RCES CO RPORATION

The ienergy within Natural gas volumes icese as a rsult of the expansion of its retail natural gas business in Canada. WI'S Energy Services expects to continue to target acquisitions and participate in generation service programs within the area it serves. Although revenues are expected to grow in 2004, we do not anticipate earnings growth in 2004 since 2003 growth included:

the favorable settlement o f several counterparty liabilities and the cumulative effect of a change 'in accounting arising from the required adoption of Emerging Issues Task Force Issue No. 0203 IssusIvle in Energy Trading and Risk Management Activities," with requirements that shifted margin recognition fromn 2004 to 2003. We antic'ipate long term earnings growth at WPS Energy Services.in the range of 15% /~to 25%/o.

As a company that participates in energy commodity markets, WI'S Energy Services is exposed to a variety of risks, includi ng market, operationl li quidity, and credit risks. Market risk is !measured as the potential gain:

or loss of a portfolio that is associated with a price movement within a given probability over a specific period of time, known as value-at-risk:-x Through the use of derivative financial instruments, we believe we have

• redu ce our vaue-at-risk to accptble levels. Operational risk is the isk

-of loss from less than flawless execu-tion of tra~nsactionsjorecasting

-~'1 scheduling, or other operational activities and is common to all

-. companies participating in the energy marketing industiy. WPS Eneg Services' continued investmant in computational infrastructure, bsiness process improvement, employee training, and 'intemnal controls has helped mitigate operational rnsk todate. Li~quidit rik i neegn risk, and one that has historically been less applicable to WI'S Energy Services than many industry participants because of the financial support provided by WIS Resources in the-form of guarantees to counterpa~rties.-

A significant downgrade 'in WI'S Resources' credit ratings, however_

could cause counterparties to demand additional assurances of pamet WI'S Resources' Board of Directors imposes restrictions on the amount of guarantees WPIS Resources is allowed to provide to these counterparties in order to protect its credit ratings, and WI'S Energy Services believes<

-it would have adequate capital to continue core operations unless 3/4_-

2. WI'S Resources' credit ratings fell below 'investment grade (Standard &

Poor's rating of BBB-/Moody's rating of Baa3).

~Jeff Tomcek, Special Events Coordinator, and retiree Arnie Rentmeester, set up a Wisconsin Public Service historical booth at Larnbeau Field for Green Bay's 150th birthday celebration.

Teother category of risk mentioned above that WI'S Energy Services faces; is credit risk fromn retail and wholesale counterpairties. In order to mitigate its exposure to credit risk, WI'S Energy Services has implemented stignt credit policies. As a result of these credit policies, WI'S Energy Services has not experienced significant write-offs from its large wholesale Ecounterparties to date. Write-offs pertaining to retail coisnterparties were

$31nillioiiin 2003, or 0.2%, and we believe this write-off percentage is within the range experienced by most energy comanies. The table below summarizes wholesale counterparty credit exposure, categorized by-mauiydate, as of December 31, 2003 (in millions):

.I i

I i

I 11 I

-i I

I I i

-- j i

I i

I I

i 4

I

- I I i

f

_F j

Counterparty Rating "Ii Investment grade - regulated utility IInvestment grade - other Non-investment grade - regulated utility INon-investment grade - other Non-rated -regulated utility 21 Non-rated - other

• Total exposure (1) The investm ent and non-investment -grade categories are determined by publicly-(2) Exposure considers ntting facuts eevbeadacut aal hr etn available credit ratings of the counterpartyor the rating of ny guarantor whichever:

agreements are in place as well as netting mark-to-market exposure. Exposure is before is higher. Investment grade counterparties are those with a senior unsecured Moody's consideration of collateral from counterparties. Collateral, in the form of cash and letters rating of Baa3 or above or aStandard &Poor's rating ofBEBB-or above.

of credt received from counterparties totaled $6.2 million at December 31,2003, all

- from non-rated counterparties:-

W PS R ESO U R CES CO0R POR A T ION Pi 19

p A

As discussed above, WPS Energy Services is aiding WPS Poiir Developmnt

Thedecrease in basic earnings per share in 2003 comparedto2002was

' with its as set management, starting in January 2004. Over the 'pastyear-largely driven by an $18.2 million decreasein after-tax gains recognized from

'WPS Energy Services has positioned itself to mitigate price risks 'and sales of portions of our interest in a synthetic fuel operation, a $10.0 milion optimize the market value'associated with WPS Power Development's '-inarease in losses from discontinued operations, and a $5.1 million reduction merchant generation facilities. WPS Energy Services expects to employ a' -. in tax credits recognized from the synthetic fuel operation. These decreases variety of physical and financial instruments offered in the marketplace> ~

'werepartially offsetbyan $18.0 nillion, or 164%, increase inincome available to limit risk exposure associated with fluctuating commodity prices and for common shareholders at WPS Energy Services. Strategic acquisitions,,

volumes, enhance value, and minimize cash flow volatility. While risks customer growth, and favorable settlement of certain counterparty liabilities associated with the power generating capacityretail electric, natural contributed to WPS Energy Services' increased eamings. :

=

gas sales will be commercially hedged, generally accepted accounting

-Alsoispacdog basic eigs per share was an increase of 1.3 mil principles related to recognition of changes in the fair value of derivative e instruments as represented in Statement of Financial Accounting a

g n o

tn s

o V R

counti 1

3common stock in 2003 compared to 2002. The increase was largely Standards No. 133, ccunting fo De e

-s an H-gig.due to issuing 4,025,000 additional shares through a public offering in Activities, as amended and interpreted and Emerging Issues Task Force November 2003. Additional shares were also issued in 2003 under th Issue No. 02-03, 'Issues Involved in Accounting for Derivative Contracts So I

t Plan.

Held for Trading Purposes and Contracts Involved in Energy Trading and RiskManagementActivities,"wilprecludeaperfectmatchingofgains OVERVIEW OF UTILITY OPERATIONS

and losses fromthe generating capacitywith the physical atyoperations include the electric utility segment consisting of the hedging instruments in some reporting periods. The result could cause=-

" electric operations of Wisconsin Public Service and Upper Peninsula volatility in the reported earnings of WPS Energy Services. However,;

Power and thegas utility segment comprising the natural gas operations the financial impact of this timing difference would be reversed at the at Wisconsin Public Service. Income available for common shareholders -

time of physical delivery and/or settlement of the transactions. ^

attributable to the electrc utility segment was $60.0 milion in 2003 V/-WPS Energy Services is also d by eamings volaty associated Li-cornpared to $61.0 million in 2002. Income available for common

-:with the natural gas storage cycle, which runs annuallyfromJunetovarh.

ishareholders attributable to the gas utility segment was $15.7 million In'ections of natural gas into inventory take place in the surmer and atu in 2003 compared to $18.4 miion in 2002.

gas is withdrawn in the winter months. WPS Energy Services' policy is to:

ELECTRIC UT SEGMENT OPERATIONS hedge the price risk of all purchases for storage with sales in the ovei-the-counter and futures markets, eliminating the price risk for the storage assets.

'S Current accounting rules allow for the marking to market of forward sales WPS Resources' Electric

' but do not allow for the marking to market of th related gas inventoryi--. (Th~i~tSemn~sulsl.200

'hne results in gains and losses that are recognized in different interim penods but M

e.

f evenoutbytheendofthe storagecyde.AtDecember 31,2003 thereewere---

'S. Revenues 7%

v::,^

s, 5'C:..j;=Fuel and purchased power costs -_

'-2.7

-10%-i pre-tax mark-to-market losses of $2.6 million recorded (related to the natural F

p p

costsS24 10%

gas storage cycle) that are expected to reverse in the first quarter of 2004.

ISales in kilowatt-hours 14,547.6 l

(1%)

Results of Operations Elect utilit seg enuesncreased $51.0 on,or 7%, for the

.year ended December31, 2003, cmpared to the year ended December31,

-2003 Comparedwith 202 i-2002Theincrease is largely due to retail andwholesale electric rate increases for our Wisconsinad Michigan customers in accordance with

-WPS RESOURCES CORPORATION OVERVIEW

-newrateorders.WisconsinPublicServicewasgrantedauthorityto VWPS Resources' 2003 and 2002 results of operations are shown in the increase retail electric rates 3.5%, effective March 21, 2003, by the following table:

Public Service Commission of Wisconsir. Wisconsin Public Service was

-(0

('

\\ _granted authority for a $0.3 million increase in retail electric rates from WPS Resources'Results l-theMichigan Public Service Commissioneffective July 23, 2003.'

f (Millions, except share aMOUnts) l -2002-Change =.'

The Michigan Public Service Commission also authorized recovery of I Consolidated operating revenues S,461.1 196%

$1.0 million of increased transmission costs through the power supply i ncome available for

=

cost recovery fuel adjustment clause. In addition, the Federal Energy common shareholders

$1094 I 13%)

Regulatory Commission ordered a 21% interim increase in wholesale 1Basic earnings per share

$3.45!

(17%)

Dilsuteed earn~ingspershare 42 (17%)'

electric rates forWisconsin Public Service effective May11, 2003,

=subject to refund to the extent final rates are lower (final rates are incree inific y

t the S'

-x

'~_

anticipated in the second quarter of 2004). Upper Peninsula Power was Total revenues increased significantly due to the required reclassification r

<-granted authority to increase retail electric rates by 8.95%, effective of previously reported 2002 revenues and cost of sales (see WPS Energy

- Dece Services'Segment Operatious for further information). Total revenuesalso r

2 2 b t c

P S

Commision increased due to sales volume growthatWPS Energy Services 2electrc----

-The lectricutility marginincreased$27.4nilionl, or5%, in2003 compared utility rate increases, and higher natural gas prices.

- -=

to 2002. Due primarily to the electric rate increases mentioned above, ra *V;teA

-=,*

S.i ii 4L 201 W PS RE SO U RC ES CO R PO RATION

The eneraywithin electric margins at Wisconsin Public Service increased $20.2 million, or 4%

henaturalgasutity rginfortheyear ended December 31, 2003, Electric margins at Wisconsin Public Service were also impacted favorably increased $1.1 million, or 1%, compared to the year ended December 31, by a change in sales mix in 2003. While total sales volumes remained 2002 The increase in the natural gas utility margin can be attributed to basically unchanged in 2003 compared to 2002, sales volumes to higher a i % increase in natural gas throughput volumes in 2003 compared to margin residential, and commercial and industrial customers increased 2002. Natural gas throughput volumes to our higher margin residential slightly. The increase in sales volumes to these higher margin customer-f=== ' and commercial and industrial customers increased 6% in the aggregate, classes reflects growth within Wisconsin Public Service's service area and -.

m-"-nostly as a result of colder weather in 2003 compared to 2002. Natural

recent changes in the economy. These increases were partially offset by - '.

'ga sthroughput volumes to our lower margin transport customers cooler weather during the cooling season for the year ended Decembier31 decreased 5% due to the rising price of natural gas together with their 2003, compared to the year ended December 31, 2002. Electric margiistat'S-ability to use alternate fuel sources.

Upper Peninsula Power increased $7.2 million, or 17%, due prmarily to-el electric rate increase mentioned above, partially offset bya 3%

Despite the modest increase in gas utility margins, gas utility earnings for

= - -

--;; -- =

the year ended December 3 1, 2003, decreased $2.7 mrillion compared to -

decrease in sales volumes. The decrease in sales volumes can be attributed th ya ended D m

31 20 d

$2. m c

to X - - -

okR --- 4. -202.The decline Is pnimarily due to risig operating expenses (primafly~

to less favorable weather conditions for the year ended December 31,2003 2

Th d i p d

t r o

ed o e r

d D r 3, 2 aD c c

-pension and medical costs) together with the decrease in natural gas rates compared to the year ended December 31, 2002, and customer cons ratio---. = -

e

---; mentioned above.-

of electricity made necessary due toa flood that occurred eariier'in 2003K jeg Wisconsin PublicService passechanges' in the totalcost ofgas on to Although the electric utity margin increasedelectric utilty segment W

u S

c

__nge=

earnings for the year ended December 31, 2003, decreased $1.0 umiln customers through a purchased gas adjustment clause, as allowed by the com d t, th yr e d De

, 2. Th p y r n f Public Service Commission of Wisconsin and the Michigan Public Service

.compared to the ye ar ended D~ecember 31, 2002. ' ne pnimary reasnr.- A*----------

X.-.

--Commission under regulatory practice, '- E-'I

the decrease in electric utlity segment earnings is due to a decrease in -

C n

rut practice.

earnings at Wisconsin Public Service attributed to a delay in receiving OV E RV I E W O F NONREGULATED OPERATIONS 2003 retail electric rate relief, together with rising operating expenses

--'Nonregulated operations consist of natural gas, electiic,and other sales at (primarily pension and medical costs). Rate relief for our increasing WPSEnergy a diversifip services company, operating costs was expected on January 1, 2003; however, the increase and the operations of WPS Power Development, an electrc generation in retail electric rates granted by the Public Service Commission of company. WPS ompny.WPSEnergy Services and WPS Power Development are both Wisconsin was not effective until March 21,2003. The delay in receiving -

reportable segments:

rate reliefwas a significant factorin our inability to achieve our authorized--

12% return on equity in 2003. The'decreas' in'eariings expenenced byz '--_WPS Energy Services' income available for common shareholders increased Wisconsin Public Service was partially offset by a modest increase-in.

' to $29.0 million in 2003 compared with $11.0 million in 2002,:primarily earnings at Upper Peninsula Power Company due to the increase in rates as a result of increased electic and ral gas r dis sed below.

The Public Service Commissionof Wisconsin allows Wisconsin-Public =

WPS Power Development recognized a net loss of $(7.9) million in 2003:

Service to adjust prospectively the amount billed to Wisconsin 'retail compared to income available for common shareholders of $24.0 million customers for fuel and purchased power if costs fall outside a' specified range in 2002. Despite an'increase in margins, WPS Power Development's earnings Wisconsin Public Service is required to file an application to adjust rates 3 were impacted by a decrease in gains recognized from the sale of portions either higher or lower when costs are plus or minus 2% from forecasted of its interest in a synthetic fuel operation, increased losses from discontinued costs on an annualized basis. See Lquidity and Cpital Resources - OtherFture - -- operations, and a decrease in the amount of tax credits recognized.

Considerations, Regulatory for information on fuel filings related to 2003..

E SERV:'--EGMENT OPERATIONS e -. i-e C -

-- fWPS ENERGY SERVICES'SEGMENT OPERATIONS :.:=

GAS UTILITY SEGMENT OPERATIONS Total segment revenues at WPS Energy Services were $3,081.2 million in 2003 compared to $361.2 million in 2002. The total margin at WPS Energy Services was $86.8 million in 2003 compared to $48.4 million in 2002.

WPS Resources' Gas IW;I^PaE UPS Energy Services' nonregulated natural gas and electric operations are (Millions) tl r2002 Change thepmary contributors to revenues and margins and are discussed below.

Revenues 1$310.7

l. -30%9--=:->

A=X -:-.

Purchase costs 198.6 47%

WPSEnergyServices' Margins Natural Gas Results 2

________i 3Throughputintherms 845.4 U

1;.-l%

P(Millionsexceptsalesvo es) l

-2002 llChange Nonregulated natural gas revenues i.:

$245.1

-:1000% '

Gas utility segment revenues increased $93.5 million, or 30%, for the Nonregulated natural gas I? -

osae 210.2 112 year ended December 31,2003, compared to theyear ended December31,i costofsales 26%

2002. The increase in gas utility revenues is mostly due to a 39%/o increase Mag 1

0

$4-_-2%I in the average cost of natural gas for the year ended December31l 20037" Wholesale sales volumes in bilin uicfet2338~

8% 1 compared to the prior year, partially offset by the 0.3% decrease in retail billion cubic feet.

inatural gas rates ordered by the Public ServiceCommission ofWisconsin,~. -eRetail sales volumes in 4

rvc nruson Ws 1sn-billion cubic feet

-135.7 77%

effectiveMarch21, 2003.:s

-. -I

.=Represents gross physical volumes.

W PS RE SO U RC ES CO R PO RAT ION [21

B A

-WPSEnergyServices'nonregulatednatural gas revenues increased

=-

WPS POWER DEVELOPMENT'S SEGMENT OPERATIONS

$2,451.5 million forthe year ended December 31,2003, compared to.

Al revenues and costs of WPS Power Developmen's discontinued.

the prior year. Approximately $997 million-of the increase relates 'to

-operations are combined and reported on a net basis in the WPS Resources the required adoption of Issue No. 02-03, effective Januay 1, 2003, Corp'oration CCosolidated Statements of Income for all periods presented.

- (see Trends for more information about this accounting change). Volume

"--'Accordingly, the table below does not indude the results of discontinued growthd riven by the acquisition of a retail natural gas business iK operations, which are discssed separately with Discontinued

-Canada accounted for approximately $500 milion of the increase in Operati6ns below..

revenues in 2003. Most of the remaining increase can be attributed'_

to higher natural gas prices compared to the prior year.

WPS Power Development's Production Results

,0-Naturalgasmargins atWPSEnergyServicesincreased $9.2 million, -

Millions 2002 Change or 26%, in 2003 compared to 2002. Approximately $6 million of the Nonregulated other revenues

-39%

increase related to the November 1, 2002, acquisition of a retail natural Nonregulated other cost of sales 37.8 1 53% 1

.ne

,,te tthN.

,r, 202

.a.

gas business in Canada. The remaining increase'related to favorable

=

=1 Margins l

$21.6,-

I l 13%

" settlements of pending liabilities with several counterpartiespartially --

offset by the change in accounting prescribed by the required adoption-WPS Power Development's revenues increased $23.0 million, or 39%, in'

=

of Issue 02-03. See Cumulative Effea of Chage in Accounting Prindple for -

2003 compared to 2002. WPS Power Developmert's margin increased

' further discussion.

$29miion,'ori3% in2003 compared to 2002.The increase in revenues and margin was primarily the result of increased generation fromgenerating I WPS Energy Services' assetsacquired in New York onJune 1, 2002,reveues from the Combined:

.t 17102 4Locs Energy Center that became fully operational in the second quarter of

.1 (Millions)

.2002 Change 2002. and an increase in generation at the hydroelectric plants in Maine -

Nonregulated electric revenues

$113.7 236%

- and Canada as a result of increased rainfall, higher capacity revenues, and Nonregulated electric cost of sales 102.6 233%

increased pricing on a'renegotiated outtake contract. Partially offsetting Hargins 11ll.1 l 264%

- theseincreaseswasadecrease in revenues an dmargins at WPS Power Wholesale sales in kilowatt-hours I

E 4,250.0 (35%) -'

Development's Cassville, Wisconsin, facility as a result of the expiration Retail sales in kilowatt-hours

-2,703.6 138%

- of an energy and capacity outtake contract that was not renewed.:

= R grs phyi volumes.

OVERVIEW OF-HOLDING COMPANY AND OTHERe.

WPS Energy Services'.nonregulated electric revenues increased S

=

EGMENT OPERATIONS

-$268.5 mnillon for the year ended December 31, 2003,-compared to H

olding Company and Other operations include the operations of

-the prior year. Approximately $130 million of the increase relates

-WPS Resources and WPS Resources Capital as holding companies and -

• to the required adoption of Issue 02-03. Another $88 milionof e no utilityactivities tWisconsinPubicSerceand Upper Peninsula the increase can be attributed to participation in the New Jersey Power. HoldingCompany and Otheioperations experienced a net loss Basic Generation Services program. WPS Energy Services acquired of $(2.i) million in 2003 compared to a net loss of $(5.0) million in'2002.

-700 megawatts of fixed price load and 250 megawatts of vable The decrease in the net loss experienced is largely r

elated to an increase price load for the period from August 1, 2003,to May31 2004 recogzed on hydioelectric land sales in 2003 compared to 2002 a result of its participation in this program. The remaining increase (recorded as a corponent of miscelaneousincome), primaril due to-in nonregulated electric revenues can be attributed to increased pnces -=

$62million pre-tax gain recognized in 2003 from land sales to the and expansion within existing service tenitories. WPS EnergyrService- -

Wisconsin Department of Natural Resources. The sale of these.

alo'qieretail electric oprations in Michigan in 2003. Pror to-yaso'acquirea peg hydroelectric lands is part of our asset management strategy, whic was the acquisition, this operation was an electnc wholesale customer -

'initiated in 2001, and is intended to optimize shareholder retun from of WI'S Enrgy Services; ther e

th acquisition did not he a.==

the sale, development, or use of certain assets or entire business units. -

significant impact'on total revenues in 2003 compared to 2002. The=.

acquisition did, however account for most of the increase in retail OPE RATI N G EXPENSES sales volumes and related decrease in wholesale sales volumnes f*'-

2003 comr

-=

re.t 200 WPS Resources' "-

WPS Energy Services' electric marginincreased $29.3 mujor on -or(Milions 2002 Change 264%, in 2003 compared to 2002. Approxim'ately $26 million of the Operating and maintenance

$42 improved angm t expense

$1 increaseisduettoa cquisitionssynergies anrdtit of retase opedons in Michigan and participation in the New Jersey- -

l Depreciation and decommissioning I

Basic Generation Serce prograi.cThe remainingmincrease iniWSn ergy expense

94.8 -

-46%'

Services' electric margis IS largely due to the impact of the change T

oh t i

3 in accounting prescribed by the required adoption of Issue 02-03, OPERATING AND MAINTENANCE EXPENSE which precludes mark-to-market accounting for nondevative Operating expenses increased $47.0miion,or 11%,fortheyearended trading contracts.

December31,2003,comparedtotheyear endedDecember31,2002.

U.tiliy operating expenses increased $30.7 millioor 9%,in 2003 compared 227 WPS R ESOU RCES CORPORATION

The energywithin to 2002. Approximately $18 million of the increase reflects higher pension, fuel operation.WPS Power Development recognized a $7.6 million postretirement medical, and active medical costs. The remaining increase pre-tax gain in 2003 compared with a $38.0 million pre-tax gain in 2002 pertains to costs incurred for plant maintenance related to the Kewaunee el'---related to these sell-'downs. An increase in operating losses generated nuclear powerplant'sscheduled refueling outage in 2003 (there was no '

by the synthetic fuei operaton due to increased production decreased refueling outage in 2002), additional opeatug expenses at the Kewaunee '

iscelaneous income by approximately $3.5 milion in 2003. The nuclear power plant, and wage increases. Operating expenses at WPS Energy -

increased operating losses were driven by our partner's ability to utilize Services increased $12.0 million, or 40%, in 2003 compared to 2002 tax credits in 2003 and were offset by minority interest, which is largely due to costs associated with business expansion, including the discussed below. In the aggregatethe items mentioned above relatng acquisition of a retail natural gas business in Canada and a'retail electric k to the synthetic fuel operation resulted in a $33.9 nillion decrease in business in Michigan. The remaining increase is largely due to higher' niscellaneous income.

incentive compensation costs and the costs associated with a full year T

he200 gi r fm t 200 tsa o a oin of WPS Power t d=

.. D e

' t

' ' _ -4,.--'. 5-:.~--

t---The 2003gain resulted from the Mm0 sale of a portion of WPS Power-l of operation of generation assets in New YorkYthatpwerepurchasedDevelopmnstrsc-

-; by WPSPower Development in June 2002.6f?

• f--

Peyel-opmenesinterest ini t

s n

teifeoperation.si agis by VP Power Develo t in Je 20.

-from the 2002 sale are expected to be recogniied annuay thr6ugh DEPRECIATION AND DECOMMISSIONING EXPENSE 2007 dependent upon production at the syntheti fuel facilit. The 7

Depreciation and decommissioning expense increased $3.6 ion',or i gain reported in 2002 resulted from a 2001 sell-down of a port of 46%, due primarily to an increase of $37.4 million resulting fromi ncreased WPS Power Development's interest in a synthetic fuel operation, realized gains on the decommissioning trust assets that resulte'd inrecording

which was recognized in its entirety by December 31,2002.

decommissioning expense approximatelyequaltothegMnsNogTzedY N in miscellaneous income pursuant to regulatory practice. The increase As

=

r o W P D

l e

s o a approximate 30%

~

~;

+

'XAs

'a-eult of WPS Poiwer Development's sale of an approxirnate 30%;

realized gains is due pnmarily to the change in investment strategy for intres i it s id-a-E C

1. L o Decemer19

=.

-- s:

iteret in its subsidiary, ECO Coal Peetization #12LCoDembr1,-

-i Wisconsin Public Service'squalified nuclear decommis.io-ng t as t 2002, $5.6 miion of losses related to the synthetic uel operation and Qualified decommissionrig trust assets were transferred to more r

in mi'sce__.5u i were a t V Poe conservative investments in 2003 pending the sale of the Kewaunee Develoment' patnr'n reported as a miority tereSt.

-a-

---

~~n.- --

Development's partner and r ported as aminorityirtrs~: '-0=-

nuclear power plant, thus triggering realized gains. Most of the remaining..-

.i increase resulted from plant asset additions at Wisconsin Public Service. e pPROVISION FOR IN COME TAXES

-; ;~and V/PS Power Development.

- 0 :

i =

The effective t rate was 23.4% in 2003 compared to i9.5% in 2002.

-- : :A ST RH lC E- -The increase intheeffe tax rate in 2003 c mpare to2002is TX OTHER THAN I

'largely due to a decrease in tax edits that could be recognized from':

-Taxes other than income micreased $3.9 million, or 10%, primailyv due -

.our ownership interest in a synthetic fuel operation. Tax credits to an increase in gross receipts taxes paid by Wisconsin Public Service as a result of increased revenues.

recognized during the year ended December 31, 2003, decreased

$5-1 million compared to the prior year, due to the sale of a portion OTHER INCOME (EXPENSE) 0 <-

ofourinterestinthesyntheticfueloperationonDecemberl9,2002.

" -=.

' Lowertaxable income in 2003 also reduced the amount of taxkcredits that could be claimed. Our ownership interest in the synthetic fuel WIPS Resources' Other u wes Income (Expense) 12 0021

- operation resulted inthe recognition of $18.1 million of Section 29 (Millions) 002I tax credits as a reduction of federal income tax expense in 2003 -

I Miscellaneous income

$47.8 33%

1 comparedto$23.2 ioni n202.;

Inte' f restfexpenseca sribti ons l

-The operations of our synthetic fuel facility generate tax credits, which we of preferred securities W

5 )0

Minority interest

use to reduce our current federal income tax liability, with any remaining

,Other income (expense)

St8.0)

.'credits increasing our alternative minimum tax credit available for future'-. -

years The cumulative amount of credits carried forward at December 31, K

• MISCELLANEOUS INCOME 0

'2003, relating to our interest in the synthetic fuelfacility was $523r ion.-

Miscellaneous income increased $15.8 million for the year ended

=

Based on a review'of al known facts and circurnstancs,'management has-December31, 2003, compared to the year ended December31 2'002 concluded that it is more likely than not that we will be able to use these The increase in miscellaneous income is largely due to an increase in

-redits in thefuture realized gainsonmthemde missioning trist asset of $36.4i on, DISONTIN ED OPERATIONS

which is primarily the result of the change in investment strategy for the On O 2 20 a i m

w e

r i

t sell On October 24, 2003, adefinitve a~greement was entered into to sell.E qualmfed nudlear decommissionimg trust assets. -1he realhe aswr

.~.

qualified nuclear dn tt

a.

T r

gs wre WPS Power Development's Sunbury generation plant, subject to certain offset by increased decommissioni ng expense, as discussed abov&

contingencies. As a result of such agreement, we have determined that Miscellaneous income also increased $6.2 million as a result of the sale of th o of t p

a c

o e

s m

the

'3'

'7

S the o erations of the plant and certain other related assets meet the -s land to the Wisconsin Department of Natural Resources and $8.1 milion' t

=;

.sidefimiton of lcontinued operabosprtheiovons o ttmn resulting from an increase in earmings from equity investments deiito of: dsotne

.oeain per the p n of St-at

-= -:

- 'of Financial Accounting Standards No. 144, 'Accouning for the

'The increases in miscellaneous income were partially offset bylowergains -Impairment or Disposal of Long-Lived Assets."

- from sales of ownership interests in WPS Power Developments synthetic WPS R ES O U RC ES CO R PO RATI O N

[ 23

The loss from discontinued operations increased to $22.7 million a 5 -on cumulative change in accounting principle to be recorded effective

($16.0 million after taxes) for the year ended December 31 2003 January 1, 2003, for all nonderivative contracts entered into on or prior from $9.9 million ($6.0 million after taxes) for the year ended to October 25, 2002. On January 1, 203, WPS Resources recorded a December 31, 2002. The increased loss is largely due to a decrease

-a:

6positive after-tax cumulative effect of a change in accounting principle of in capacity sales in 2003 due to the expiration of a sales contract, yaj.... ' $3.5 million (primarily related to the operations of WEPS Energy Services) an increase in variable production expenses related to increased to income available for common shareholders to remove from its balance emission costs, and an increase in operating costs. Operating costs sheet the mark-to-market effects of those contracts entered into on or prior ;.

increased in 2003 as a result of issues related to fuel quality and -a

. to October 25, 2002, that do not meet the definition of a derivative under associated mechanical difficulties involving fuel delivery systems;-.'-

Statement No. 133, as amended. The cumulative effect of adopting this earlier in the year, operational issues related to newly installed new accounting standard is expected to reverse upon the settlement of the environmental equipment in various boilers, and turbine outages.

contracts impacted by the standard. Most of these settlements are expected The increase in the loss from discontinued operations was partially to occur in 2004. The required change in accounting had no impact on offset by decreases in payroll and employee benefits as a result of -

the underlying economics or cash flows of the contracts. In addition, the:

a restructuring that took place at the end of 2002.

adoption of Statement No. 143 at WPS Power Development resulted in a

$(0.3) million cumulative effect of change in accoutng priciple related to thecdosure of an ash basin at the Sunbury generatinig plant.

2002 COM'Pared with 2001 WPS RESOURCES CORPORATION OVERVIEW.

XIPS Resources' 2002 and 2001 results of operations are shown in the

---following table:.

man!WIPS Resources'llesults (Millions, except share amounts) 2002 20 Change

-. Consolidated operating revenues

$1,461.1

$1,345.4 9%--

Income available for common

> shareholders

'$109.4

$77.6 41%

Basic earnings per share I

$3.45:

$2.75:

-25%

Diluted earnings per share

.$42 274 5%

The increase in basic ea s

e in 2002 compared to 2001 was

..largely driven by a gain atWVPS PowerDevelopmrnt related to the 2001 sale' 1of part of its synthetic fuel operations. The sale occurred in the fourth quarter of 2001, and we deferred recognition faportnof the related gain on the sale pending the satisfaction of certain contingences.

additionWPS Energy Services'income available for'common shareholders increased 72%, primarily due to improved natural gas margins A full year contribution from gas utility operations acquired in the spring of 2001, warmer than normal weather -

--.j -during the heating season in 2001, and a rate increase approved by regulators

-resulte in increased eamingsfrom our gas utility in 2002.

F Jim BarribeauJr., a Garage MechanicforWisconsin Alsro ipac basiceamings share was an increase of. milonin Public Service in Oshkosh, Wisconsin, welds a rack that the weighted average number of outstanding shares of VPS Resources' will hold reels of wire for electric installation crews.

co on stock in 2002 compared to 2001. The increase was largely due

~:' : Xi - --;- ';z ma~ ~

to issuing 2.3 million additional shares through a public offering in the fourth quarter of 2001 and issuing 1.8 milli6iisharei in the merger of CUMULATIVE XFECT 'OF CHANGE iN Wisconsin Fuel and Light into Wisconsin Public Service in the second ACCOUNTING PRINCIPLES quarter of 2001. Additional shares were also issued 2002 under the -

WPS EnergyServices had beenapplying theaccounting standardsf Sock nvestment Plan.

Issue 98-10, Accounting for Contracts Involved in Energy Tradig an OVERVIEW OF UTILiTYdOPERATIONS Risk Management Activities," from the first quarter of 2000 until this I

a f c m s

=

t e uit I --- Lncome available for c omnsaeldr attributable to ectric tlt=0En=S

'A standard was rescinded by Issue 02-03 in October 2002V WPS Energy, operatio w $

m i 2 c

e w m

in

-=>

=S°> a a peraionswas 61.0rniliorIin 2002 compared with $58.8 rnillion in:::.:

Services was defined as a trading company under Issue 98-10 and was 2001 Income available for common shareholders attributable to gas utility required to mark all of its energy related contracts to market On L.

. --.--=

-operations was $18.4 million in 2002 compared with $8.9 million in 2001.

October 25, 2002, the Emerging Issues!Task Force rescinded Issue 98-10 or n w $8 m i 20 c w $8. m i 2001.

thus precluding mark-to-market accounting'for energy tradingcontracs Utility margins at Wisconsin Public Service were impacted positively by a entered into after that date that are not derivatives and requiring a -

Public Service Commission of Wisconsin interim rate order, which was 24]

WPS RESOU RC ES CORPORATION

effective January 1, 2002, authorizing a 10.3% increase in Wisconsin

-tAn increase in overall natural gas throughput volumes of 14% and the:

retail electric rates and a 4.7% increase in Wisconsin retail natural gas' Wisconsin retail gas rate increase resulted in a higher gas utility margin-of rates. In late June 2002, Wisconsin Public Service received a final 2002

$20.7 million, or 23%, in 2002. Increased overall gas throughput volumes rate order that authorized a 10.9% increase in Wisconsin retail electric '

were partially the result of including 12 months of operations for former rates and a 3.9% increase in Wisconsin retail natural gas rates.The final '

Wisconsin Fuel and Light in 2002 compared with the inclusion of 9 months

' order authorized a lower retail natural gas rate increase than was f operations in 2001. Gas throughput lumes were also affected by a

- approved in the interim order resulting in a $0.4 million refund to heating season that was 5% colder in 2002 than in 2001, but 3% milder Wisconsin Public Service's natural gas customers.

than normal.

ELEfCTRICSf

-isconsin Public Service's gas revenues decreased $10.9 million1 or 3%,

ELCRCUTILITY SEGMENT OPERATIONS Our electric utility segment margin increased $84.2 million, or 19%/0due.

in 2002 and gas purchase costs decreased $31.6

nilion, r

largely as -

to the Wisconsin retail electric rate ncreases at Wisconsin Public Service the result of a 26% decrease in the average unit cost of natural gas in 2002. -

and higher overall electric utility sales volumes.

OVERVIEW-OF NONREGULATED OPERATIONS

-WPS Energy Services' income available for common shareholders

-:WSResources' Elect~ric utility Segment Results 1120011 Chane i

-ncreased to $11.0 million in 2002 compared ith $6.4 milion i 2001 (Millions l

2002

primarily due toa higher gas margin. PSPowerDevelopment's income IRevenues t$763.1 available forcornimoi shareholders increased to $24.0 rillion in 2002 Fuel and purchased powercosts 242.7 l239.5 1%

compared with $2.3 million in 2001 largely due to recognition of a gain Margins i $520.4 41-

$-436.2 i-p19% =

-. related to the 2001 sale of a portion of its synthetic fuel operation.

Sales in kilowatt-hours

.114,547.6 1I13,532.8 1l WP7 ENERGYSER VICS'SEGMENTOPERATIONS Our electric utility segment revenues increased $87.4 million,or l3%

Revenues at W S Energy Services were $361.2 million in 2002 compared i

in 2002 as the result of the electric rate increases and an 8% increase in

.with

$326.6 miion in 2001, an increase of 11%. The iicrease was

-overall electric sales volumes at Wisconsin Public Service. Sales volumes ima the result of higher retai natural gas sales lum in 2002.

p wereup25% for lower margin, wholesale customers whie leset'ig hier margin, residentialcustomersincreased6%andsales tohigher margyServices' commercial and industrial customers increased 3%. Summer weather.-

Gas Results 2

2001 C

(Mllon, x___e vlues 20 2____

Changed was 7% warmer in 2002 than in 2001, and 23% Swarmer than normal. >-P 4(ilos xept slsvlms 02 0l.I.Cag u-

~0 t

Nonregulated natural gas revenues 5245.1

$2l 0.l l%

Increased fuel costs for power generation were partially offset by lower N

n g rn

=-......Nonregulated natural gas.

purchased power expenses. Fuel expense for generation plants increased cost of sales

{

210.2 194.2 8%

. $4.9 milliontor4%,in2002.Purchasedpowerexpense,howeverdecreased

-=.lMargins

$ 34.9 I

$ 15.9 -1 119%

$2.7 million, or 3%, in 2002. Overall generation from Wisconsin Public Service's plants increased 10%'while purchased volumes decreased 3O Wobillon cubic fees vo es i4n Sbilocucfet 238.

4.8(4%)I.

The change in the energy supply mix was largely due to the availability of.

Retail sales volumes in

[..

less expensive power generation from the Kewaunee nuclear power plant -1 billion cubic feet 135.7 1045 '

30%

Wisconsin Public Service increased its ownership interest in the Kewaunee- -

-nudear power plant to 59% in September2001. Although Upper Peninsula Nonregulated gas revenues at WPS Energy Services increased $35.0 million, Power's purchased volumes remained fairly consistent, the unit cost of its or 17%/ in 2002 primrily as the result of higher natural gas sales volumes

'purchased power decreased 9%.

':in 2002 The nonregulated gas margin increased $19.0 million, or 119%,

-=-:'

-in 2002 due to'improved management of the retail gas procurement and As discussed previously, the Public Service Commission of Wisconsin volume risk processes and increased retail sales volumes.

allows Wisconsin Public Service to adjust prospectively the amount billed to Wisconsin retail customers for fuel and purchased power if costs fall WPS Energy Services' outside a specified range. Wisconsin Public Service did not submit any Electric Results 1

Lli:

2 fuel filings in 2002.

2002 2

-_21_Cne_

-1 Nonregulated electric revenues

$113.7

$112.7 1%

GAS UTILITY SEGMENT OPERATIONS Nonregulated electric cost of sales

- 102.6 99.4 3%

7 Effective April 1,2001, the gas utility margin at Wisconsin Public Service Margins

$ 11.1 S

13.3 ]j- -(17%)

F includes the merged Wisconsin Fuel and Light Company operations Wholesal sal si kilowatthours

-4250.0 l1696.6 l

151%

Whlsl ae nklwt-or 1

I 696 6 i Retail sales in kilowatt-hours 2,703.6 J 1 1,944.7 l1 39% -

-WPS Resources'Gas h sl volu-1ies The no iUtility Segment Results

-Nonregulated electric revenues at WPS Energy Services increased t0 I (Millio) 2002 2001 Change

$ 0 million, or 1%, in 2002 due to higher salesVoriregulated Revenues

$310.7

$321.6

(:-

13%) is 7 electric margin decreased $2.2 million, or 17%, in 2002 primarily due to Purchase costs 1986 2302 (14%) --

theslow economy,,which produced less favorable market conditions for Margins O$1121 i

$ 91.4 ii 23%

1 opportunity sales in2002. 3 Throughputintherms f

845A4 -- 1.742.7 l

14%

4 WPS RESOU R C E S C O R P OR AT I O N 25

p A

WPS POWER DEVELOPMENT'S SEGMENT OPERA TIONS

,-~-~-~.-OPERATING AND MAINTENANCE EXPENSE

____________Oeaigand maintenance expense increased $7.ml ion r24%, for WPSrPower Development's (Mlin)-

02 20 hne te year ended Dcmer 31; 2002 compared t201Uilty operating

• Production Results an aitnnc xpneincreased $67.6 millioni 2002 largely duto (Millions) amortization of regulatory deferrals, increased bnftcosts, highe Nonregulated other revenues

-$59.4

_$56.6 tasiso expenses associated with American Transmission Company, Nonregulated other cost of sales 37.8 cI]

48.7

(~~122%) inrased expenses at the Kewaunee nuclear ower pat(sareuto IMargins

$21.6 :1

$ 7.9 17%

Wsconsin Public Service acquiring additional ownership interest in the

% ~ ~ ~

~

~

~

~

~

'and increased energycosrainxessOeaign wee$59.4 millin

-cmae ma

.eaceepne vneatWPS Powe~r Delopment wronin 2002 cmae mannneexnssat WFS Energy Services increased $7.3 rillo with $66 riilloA in 2001, an iincreiase of5%.h increae wasprimailybus2002slargly to of il f-i' res a

j~il-~

02,lieydue tocosts assoiaed ith bsnsexansion and due to teoperation of he g;eneratio'n assets acquxre in New York in the

~increased bad debt jex-ense-.Operatingexpenses atWPS Power second quarter of 2002 and the operation of thei Combined Loc ksEnerg

_-De~rpI ent increased

$4.3 million in 2002 primarily du e to costs Center. As new generation assets are acquired or constructed, WFS Power -.associated with the generation assets in New York that were purchased De velopment's output is increased, providing new sales opportunities.

by WPS Power Development in June 2002 and op rtono6f the-Partially offsetting these 'increases were a chag iaconngfm-CmbedocsEryCnter.

consolidation to equity method accounting for WPS Power Developrmet's synhetc fel kertios ad lwe reenus fom teasals.~__

DEPRECIATION AND DECOMMISSIONING EXPENSE..

Depreciation and decommissioning expense increased $10.7 million, 'or __

WP oe eeopment experienced an icreasebof $13.7million,-

3/ for-the year ended Dcember 31, 2002,~ core t 00.Utlty.y 17%

nismri n20.The oprtion of the-generto ases depreciation and decommissioning expense increased $7.8 million in acuiedinNe Yr ad hestrtpofth Cmbne Lcs ffrg 202lrgely due tadionlpant assets at Wisconsin Public Service, Center contributed to WPS Power Development's higher -margin 'in 2002

-including its increased ownership interest in the Kewuencla

,A change in accounting for WPS Power Development's synthetic fu-el poe ln.twrdprcaii

'pneo iiorltdt oprains also 'increased 2002 miargins by -appioimtc y 4.

OIL.x sarsl-fth oebr20 sl fa o ~decreased decommissioning earnings partiall oftth cease d plant

--Asa e-ui f heNoeme201 al oaportion ofWSPower ased Poer Development's depeiain expense

• Deelomen's ynthticfue opratinsWPSPowr Deelomen no increased $2.4 million in 2002 due to adlditional plant assets, including

<longer consolidates thes prtosa ato eeu and costof the Combined Locks Energy: Center and the assets obtained in the sales. After the sell-down, WPS Power Development becm iot RR~ucsaqisto.Dpeito nd decommissioning expense o wner, and therefore acc-unts for its 'interest in the synthetic fula P

nergy Services didnochgesnicatyfmteprrya.

operations underthe equitynmethodof accountig.-As'aresultof no longerc onsodlidlating the Synthetic fuel operations, WPS Power Developmiente's TAXES OTHER THAN INCOME:

margins increased because this business had inegative margins in 201 Txsohrta noeicesd $3.2 million, or 9%; primarl due toanincrease in gross receipts taxes paid by Wisconsin Public Service OVERVEW OFHOLDI&COMPNY AN

~

-~as a result of increased revenues.

• OTH E RSEGMENT OPE RATIONS Holdin-g' Co-m-pany;and Other opeiations experienced a netloss-if O T OTER INCOME (EXPENSE)-

(5)miloin20comparedmwith income available for common-shareholder of $1.3 million in 2001. A net loss was experienced in 2002 MIPS Resources' Other I

primarily due to interest expens from fncing toPoiefnsfor IIncome (Expense) subsidiary operations.

(Millions)

.-2002: 1 2001 Chang

• Hydro, land sales, which are

• atof

'our asset management strategyMselnosicm

$78 I

75 I 7

part

~Interest expense and distributions I

resulted in pre-tax gaiiis of $3.3 mi'llion in 2002 compared with pre -tax o rfredscrte (55.81 (5341A I

4 gain oaproximately $17 million in 2001. In additin, earnings on Other income (expense)

-$ (8.01 ii

$(15.9) ii 50%

.equity investments were higher in 2002 compared with 2001 primarily, due to our investmenitin American Trainsmissio'nCompa~ny '-~,,--::-~--~~

MISCELLANEOUS INCOME

-- Miscellaneous income increased $10.3 million, or 27%, in 2002 compared~

O0PE RATING EXPENSES v:t201 P Power Development's miscellaneouis income increased

.$25.1 million in 2002 primarily as the result of recognizing a pre-tax MIWPS Resources' gainof $38.0Oilina related to the 2001sale ofPart of WPS Power Oprain Epese Development's synthetic fuloeain.WSPower Development (Mlins) 02 hne recogie retxgi f $2.2 million on the sale in the fourth quarter.

Operating and maintenance

[.of 2001 and deferred the rmingprtion of the gain pending expese

.$4125

$33.0 4%

stisfaction of certain contingencies, including the receipt of a private.

IDepreciation and decommissioning*

i f3hl i

S h

tn exeneI

4.

8.

.~e-tter rulig fom te Intema Revenue Service. Te contigencies were Taxe othr thn icome.

367 stisfied in 2002 and the remaining gain was recognized. WPS Power Development also recognized royalties of ~$2.3 million in 2002 related to I

26 J WPS R ESOU RC ES CO RPO RATIO0N

The energywithin its synthetic fuel operations. Partially offsetting these factors were equity 1--$31.0 million, or 23%, at December 31, 2003, compared to December 31, method losses for WPS Power Development's synthetic fuel operations.

-,2002, and long-term liabilities from risk management activities decreased

-$17.5 million, or 16%. These variances were largely due to changes in Ualtynmuscellaneousimcome decreased $8.1 milillon m2002 pnmalya =r

1 U ' ms e d d $8.1 r n in 22 p y a the forward price curve for natural gas and increased volumes.-

the result of lower earnings of $5.7 million onWisconsin Public Service s -

=

nuclear decommissioning trust assets. Due to regulatory practice, a Property, plant, and equipment, net, increased $116.4 million to decrease in earnings on the trust assets is largely offset by decreased

$1,828.7 million at December 31, 2003, compared to $1,712.3 million

-- =at December 31, 2002. WPS Resources adopted Statement No. 143, depreciation expense.

urce-

'Accounting for Asset Retirement Obligations,NeffectveJanuary2003, Miscellaneous income related to Holding Company and Other operatons and as a est aiz a net set eci r 203

- - -- -;=

and as a result, capitalzed a net assretirerment cost of $90.8 million also decreased in 2002 compared to 2001. The decrease is largely due to (decease-t $78. m a D 3 2 e t dp a $13.7 million decrease in gin rea omiisale Of y property, plant and equipment, net, primarily lands in 2002, partially offset y increased earnings on euity nvestments equa--

zsU: f-::'t.. -elates to capital expendtures at Wisconlsin Public SrvicefothPula

-- 3 due to the investment in American Transmission Company.

c e

a W P

S f t Pulliam

---

combustion turbine and gas and electrc distrbuton equipment. The INTEREST EXPENSE AND DISTRIBUTIONS OF PREFERRED SECURITIES.

staff of the Securties and Exchange Commission recently expressed IInterest expense inicreased $2.4 million, or 4%, in 2002 compa'red to 2001 their views on the balance sheet classification of costs of removal for primarilyndue to the increase in the amount of long-term debt cl' tilityindus ardrequiredthatthe mdunts bereclassified from

-.-1 ccumulated depreciation to a liability. As a result, WPS Resources

-TfPROVISION FOR INCOME TAXES s

costs of removal out of accumulated depreciation at The effective tax rate was 19.5% in 2002 compared to 95-in 2001 December 31, 2003, and 2002. See Trends for more information about Theincrease inetheeffecvetax ratein2002 comparedto2001 is largely ' <=theseaccountngchanges.

due to a decrease in tax credits recognized from our ownership interest Oh

-t a

i m

o 31% t D 31, i ina~yntheticfuel operation. We ued tax redits to th'eextethta ohhlntrmstinead$3m onr1°atcmb 1

-in a s ni f

o. W-ud ta c s to te x t te

-2003, compared to December 31, 2002, as a result of our investment in

lawt permits to reduce our'current fedea icmtalabiywth ay

f. --.

lw p s to r e -

t f l i e ta l y wh a

-Guardian Pipeline, additional investments in American Transmission rema mg credits increasing our altemrative minimum tax credit available Copn an th r o a i p

related t C -: e L C Cmpany and the recogrniton of anintangible penion asseeae to

~ for future years.

e -

f--X

. =

for-fu.tue yrs:.-

=the minimum pension liability we recorded at December 31, 2003.

D I S C O N T I N U E D O

P E R. AT I O

N S

-i.ceased 58.7 miion at Decemberi31 2003, compared The after-tax loss from discontinued operations'decreased to $6.0 million-to December 3, 2002. The accounts payable balance at WPS Energy in 2002 from $6.9 millionin 2001. While we were able to improve-the Services increased approximately$110 milionas a result of an increase in

.operatngperformance of our discontinued generaton plant market electric and niatural gas purchases required to supply its larger customer conditions for capacity in the area in which this plant participates base and the significant increase in natural gas prices compared to the continued to degrade, which resuletd in continued losses.

poryear. The increase experienced by WPS Energy Services was partially offset by a decrease in accounts payable at Wis onsin Public BS-Service largely due to a $48.4 million payable that was recorded at Balance Sheet December 31, 2002, resulting from the purchase of the De Pere Energy

-' -Center.Thisamount was paid in 2003.

2 3 -Co p e w h 2

-t

.n:Other current liabilities incrasd $33.8 million, or 64%, in20030 Accounts receivable, net of reserves, increased $209.1 million or 71%,

l d

to a i i c o pr-pa -me=ts I

atDecember31, 2003, compared toDecember3l,2002,largelydue to-at wi's Eneiti ervces.

e-a $199 million increase in WPS Energy Services' accounts receivable-.:

- The'increase in receivables atWPS Energy Services is due to a'significant Regulatory liabilities increased $254.7 million at December 31, 2003, increase in electric and natural gas sales volumes combined with compared to December 31, 2902, largely due to the reclassification significantly higher natural gas'prices.

of $180 0 million of non-legal costs of removal from nuclear -

$.0 or 3'decommissioning and other cost of removal to regulatory liabilities.

Inventories increased $68.0 million, or 62 %/ at December31 2003, Mostof the remaining increase relates to a regulatoiy liability that compared to December 31, 2002. Inventories at Wisconsin Public Service w

reore uo t a

o S 1

S T-e-d-

~~~~~~~~~~~~~~~~~~-,.e PrXmtl $8t o r3%i creao ihtewas recorded upon the adoption of Statemen o13S increased approximately $18 millionr 3 i

la th for more informatonabout this accounng change.

39% increase in the average price of natural gas experienced by this business in 2003. WPS Energy Services' stored gas'inventories increased.'-

Pension and postretirement benefit obligations increased $67.1 million, approximately $50 million, or 82%, due to higher anticipated salesiin

'or 95%, at December 31, 2003, compared to December 31, 2002 due the first quarter of 2004 compared to the first quarter of 2003 and primarily to the minimum pension liability that was recorded at

-increased natural gas prices.

December 31, 2003, for our administrative pension plan, driven by a i -f - -

0X f-

'deaeasei the discoun rate used tovlue our obligation under this plarn.

Current assets from risk managementactivities increased $111.5 million, d

i th d r

u to valu o ig une t plan.

or 27%, at December 31, 2003, compared to December 31, 2002 and The $344.0 million asset retrement obligatoi recorded at December31,:

current liabilities from risk management actvities increased $73.5 million, 2003, is related to a legal retirement obligation recorded as a result of our or 17%. Long-ternm assets from risk management actvites decresed adoption of Statement No. 143 for the decomissioning of the irradiated W PS RES OU RC ES CO R PO RATION L 27

ptg

• ~oAm portions oftheKewauneenuclearpowerplantSee Trendsformore INVESTING CASH FLOWS information about this accounting change.'

-Net cash used for investing activities was $244.0 million in 2003 compared to $265.4 million in 2002, a decrease of $21.4 million. The decrease is The $463.3 million liability fonuclear decomrnssiongand ohr costs f r l at 3, 2, es-t-largely attributed to a $34.1 million decrease in capital expenditures, mainly ofremovalatDecember-31,2002 was redassified from accumulated at the utilities,as well as a $24.3m in depreciation in accordance with recent views expressed by tthe staff -

s o

io i c

ie f the of the Securities and Exchange Commission for the utility indust, p et ta eqpmen a

lly osegs eease was Histricllythee csts f rmovl wee rfleced s acompnen of an increase in cash used for the purchase of equity 'investments and other.

Historically, these costs of removal were reflected as a compoetfi------'-

acquisitions. See Asst Sales ndA!quisitions below for further detail.

-depreciation expense and accumulated depreciation in accordance with e-aes a A s E f f detil r regulatory treatment: Upon adoption of Statement No. 143 on January 1 Cash used for investing activities was $265.4 million in 2002 compared

• 2003, costs of removal with associated legal obligations of $290.5 million to= $134.8 million in 2001, an increase of $130.6 mfiillion.' These factors were removed from nuclear decommissioning and other costs of removal were partially the result of surchase of equity as these costs are now accounted for as asset retirement obligaions' At investments and other acquisitions (discussed in more detail in Asset Sales.

December 31, 2003, costs of removal without an associated legal obligation, andAcquisitions below), a decrease in the sale of property, plant, and as defined by Statement No. 143, were redassified to a regulatory equipment, and a decrease in return of capital from the American liability pursuant to Statement No. 71. See Trends for more information-_

- Transmission Company. The 'increase was partially offset by a decrease about this accounting change..i

'in capital expenditures. The decrease in return of capital is due to the fact that in 2001 WPS Resources transferred transmission assets at their net book value to American Transmission Company in exchange for cash -

Liquidity and Capital Resources and an approximate 15% ownership interestinAmericanTransmission We-believe

that our cash balances, liquid assets,~ operaCompany.

The decrease in the sale of property4 plant, and equipment.

We believe th Sy from 2002 to 2001 was due to the 2001 sale of land on the Peshtigo access to equity capital markets and borrowing capacity made available iver in n W

t t W

Department of because of strong credit ratings, when taken together, provide adequate Z- -Natural Resources; as well as WPS Power Development's transactions resources to fund ongoing operating requirements and future capital surrounding its synthetic fuel facility.-

expenditures related to expansion of existing businesses and development -

of new projects. However, our operating cash flow and essto apital -

ASSETSALESANDACQUISITIONS markets can be impacted by macroeconomic factors outside of our

- Certain acquisitions and asset sales that have a significant impact on control. In addition, our borrowing costs can be impacted bY' short investing cash flows are discussed below. In addition, see Note 6 in,

' and long-term debt ratings assigned by independentrating agencies.: '.

Notes to WPS Resources Consolidated Financial Statements, Acquisitions

-Currently, we believe these ratings aie among the best in the energy - -'- -and Sales of Assets, for a more detailed discussion of asset sales industry (see Financing Cash Flows, Credit Ratings on page 31).

a and acquisitions.

OPERATING CASH FLOWS i =

OnDecember 30,2003, Wisconsin Public Service sold an additional During 2003, net cash provided by operating activities was $62.4 million, - -- 542 acres of land near the Peshtgo River to the Wisconsin Department

- compared with $188.5 minionin 2002. The decrease is primarily due to- '

of Natural Resources for $6.5 million as part of a multi-phase agreement increased working capital requirements, specifically at WPS Energy -

reached between the parties in 2001. Under the terms of the 2001

Services and Wisconsin Public Service. Inventories increased due to high i.e;- agreement, the Wisconsin Department of Natural Resources bought n atural gas prices at both WPS Energy Services and Wisconsin Public more than 5,000 acres of land for $13.5 million in 2001. The sale is Service, as wel as business growth at WPS Ener Services. The part of a five to seven-year asset management strategy adopted by

inventory increase is also the result of WPS Energy Services' taking: '-

WPS Resources in 2001. -

advantage of opportunities to put additional gas into storage at favorable On April 18, 2003, the Public Service Commission of Wisconsin

relationships to for-ward prices. The change in re-ceivables ar'dpayables =i

'=-

~.;

relatio s to f d p

. Te c e in r s ad p s'

aproved Wisconsin Public Service's request to transfer its interest in

- was also'attributable to the high natural gas prices as well as the business K - the W s Wisco grwha P

nrySrie.--

th cnsin; to Duluh Minnesota, transmission lieto te

- gY...

.AmericanTransmissionCompany.American TransmissionCompany During 2002, net cash provided by operating activities was $188.5 million-is a for-profit transmission-onily company created by the transfer of

compared with $144.1 million in 2001. The increase is primarly dueto an transmission assets previously owned by multiple electric utilities serving increase in income available for common shareholders after adjustment the upper Midwest in exchange for an ownership interest in American for certain non-cash items, partially offset by an increase in cash used for.- Transmission Company. Wisconsin Public Service sold approximately I:

working capital items. The increase in accounts receivable was the result

~::$20.1 milion of assets at book value related to the Wausau to Duluth of increased sales volumes at Wisconsin Public Service and WPS Energyh-- = transmission line to American Transmission Company in June2003. No -

i Services due to colder weather and customer growth. Increased natural gain or loss was recognized on the transaction.VWisconsin Public Service gas purchases at Wisconsin Public Service and WPS Energy Services as will continue to manage construction of the project and be responsible the result of colder'weather and customer growth contributed to the f

for obtaining property rights necessary for the construction of the project.

higheraccount payablebalnce.

'During 2003, WPS Resources invested an additional $19.9 million in nAmerican Transmission Company, increasing the consolidated 28 W P S R E S O U R C E S C O R P O R AT I O N

The energywithin

-WPSResourcesownershipinterestinArnericanTransmrission-Company APiTALEXPENDITURES

'to 19.8%. WPS Resources contributed capital of $14.0 million to Capital expenditures by business segment for the years ended ECO Coal Pelletization #12 in 2003 and $11.7 million in 2002 Dec 31,2003,2002,and2001areas follos:

L On May 30, 2003, WPS Resources purchased a one-third interest in End December31, Guardian Pipeline, LLC from CMS Gas TransmissionCompany for approximately$26milion. Guardian Pipeline owns a natural gas pipeline, -

' I -

-002 whichbeganoperatingin2002,thatstretchesabout140r ilesfrom-near Electric Utility

$164.3

$175.8 Joliet, Illinois, into-southem Wisconsin.

340 i

24.9 WPS EnergyServices 0.8 10.9 On December 16, 2002, Wisconsin Public Service purchased the

-:L i

WP5 Power Development 82 277 180-megawatt De Pere Energy Center for $120.4 million andterminated Other 30 5.0 the related existing purchased power agreement Wisconsin Public Service WPS Resources Consolidated

.t

$2103 S244.3 paid $72.0 million at the dose of the transaction and the remaining Cpt in th e i uf w

h i 2 as

^,.,

.. ;-= -- :Capital expen itufres in t

h lctrcuii were higher in 2002, as i-S::

3

$48.4 milliernon' December 2003.u

$48.4 million in December 2003.

s-.:.

compared to 2003, rainly due to the construction of portions of the Effective June 1,2002, WPS Power Development acquired CH Resources, Puliam combustion turbine at Wisconsin Public Service in 2002. Gas Inc. from Central Hudsor Eergy Services, I. for $61.1 rilion induding utility capital expenditures increased due to the instalation of automated acquisition costs. CH Resources owns three power plants and associated meter reading in 2003. WPS Power Development's capital expenditures '

assets in upstate New York with a combined capacityof 258 regwatts were higherin2002 compared to 2003 due to the conversior'ofthe

.]v'-

Combined Locks Energy Center to a combined cycle system in 2002.

In November 2001, WPS Power Development, through its subsidiar Capital expenditures at WPS Energy Services remained fairly consistent ECO Coal Pelletization #12, LLC, entered into a transaction to acquire b

2 a

2

=; -..

= -.

. -e --

-.0-between 2003 and 2002. :;

!.=

the remaing fnterest in the synthetic fuel producig faciliy (partialy owned by ECO #12) from its-partner. Concurrently, with this transaction, As partof its regulated utility operations, on September 26, 2003, PS Power Development ent'ered into a separate tra'nsaction with a Wisconsin Public Service submitted an application for a Certificate of subsidiary of a public company resulting in ECO #12 contributing 100/

Public Convenience and Necessiyto the Public Service Commission of its synthetic fuel producing machiney to a newly formed entiy in of Wisconsin seeking approval to build a 500-megawatt coal-fired exchange for cash and a ~one-third ownership interest in the newly gene on ar Wausau, Wisconsin. The facility is estimated to 7

formed entity. These transactions generated a pre-tax gain of $402 millioni,

-cost approximately $770 million (including the acquisition of coal trains),

of which $38.0 million had been deferred as of December 31,'2001, 's a iassuming the Public Service Commission of Wisconsin alows a current:

result of certain rights of rescission and put options being gr'ted to the -

return on construction costs. As of December 31, 2003, Wisconsin Public buyer. WPS Power Development recognized al of the $38.0 milion

'Service has incurred a total cost of $4.0 million related to this project.

deferredgainin2002.

In its 2003 rate ordeithe Public Service Commission of Wisconsin

'-i-

-z-T'3:'-~ -l0-authorized deferral of costs relate d

todeelpen toteaiy.Onf~t The actual payments for the purchase of the former partner's mterest ahi d

r of ct rt to of te f t O partne's

-Novemfber 12, 2003, Wisconsin Public Service received a declaratory ECO #12 were contingent upon the sameprovisions referred to above.-

As a result, $21.3 milion was originally held in escrow and released

-- related to the project incurred or committed to prior to the Public proportionately as the respectv edso rights and pUt options expired Service Commissi n of Wlcnms final decision regarding construction' As of December 31, 2003, the escrowv balance has been released as all S

C s

o sc i

f de-isio;rega contrutio con~g s have

-e

=-=.--authorization. In addition, Wisconsin Public Service'expectsto incur conuingencies have expired. --.

~=- E--z

, U

' i, -'~ ~

-~~',-~'additional construction costs of approximately $41 million to fund t

On December 19, 2002, WPS Power Development sold a 30 0 interest construction of the transmission facilities required to support the in ECO #12. WPS Power Development received consideration of generatng facility through the date the generating facility goes into -

$3.0 million cash, as well as a fixed note and a variable note. Payments -

service. American Transmission Company will reimburse Wisconsin under the variable note are contingent upon the synthetic fuel facility Public Service for the construction costs'of the interconnection and achieving specified levels of synthetic fuel production. In conjunction=

r-

'-3'related carrying costs when the generation facility bcomes-with the sale, WPS Power Developentagreed to make certain payments commercially operatonal.

1:

to a third party broker, conisisting of an up-front payment of$1.5 rniion' ~-. :'-5 t7-0--

to< '

a thid p r c-of an up-ft p t of $1.5 m

'= On February 11,2004, the Public Service Commission of Wisconsin (which was paid at the time of closing)X$1.9 million whichiwas paid in di ac The

~z 0^^

-=.S:determined Wisconsin Public Service's application is gcom le'te." The ;

a; 20-03~t and a'nadditonal$1.9 miilon to be paidim2004. Adeferred gam of s ; =

23, d an adit l $1.9 m to APublic Service Commission of Wisconsin and the Wisconsin Department

'--$z9.2 mi onand $11.6millionwas reflected onWPS PowerDevelopment's- -=

$9.2hmillion andt$11.6 million was reflecd o P owe Develo nt's a-of Natural Resources now have 180 days to make a decision on the balance sheet at December 31, 2003, and 2002, respectiveyio fWiquest from pre-tax gamin the amount of $7.6 million was recognizedasacomponent' this of which $24 milln

-,-the Dane County Court of Appeals one 180-day extension. The Public of miscellaneous income related to this transaction, of which $2A4 million"--=.-

a to t

o,-

Service Commission of Wisconsin and the Wisconsin Department of

-related to, the recognihon of a portion of the deferre gain referenced t 7-'$ ;-7 related to the recogn n of a p n of t gan r

-Natural Resources will create an environmental impact statement The above. Similar annual gains are expected to result from this transaction p

w hv o ri t t a p h

Technical through 2007. There was no gain recognized in 2002 related to hearings wll

-ale held Following a review heapplicati t

i4 2

t~~~~~~~~~~~histasco.

e '~1~E---f0f aring s wil also be held. Following a review of the app ication, the -~;'i this transaction.

--.,environmental impact statement, and the hearing testimony, the WPS RESOURCES CORPORAT`I ONN 29

I Wgso n :s:n wil de::t :\\

ermie a

Public Service Commission of Wisconsin will determine if the proposed during the third quarter of 2003. The 2002 credit line syndications were project will be approved, modified, or denied. -

$180.0 million for WPS Resources and $100.0 million for Wisconsin Public Service. The credit lines are used to back 100% of WPS Resources' On February 16, 2004, Wisconsin Public Service signed a Letter of Intent a

W P

S c

p borrowing programs

. -=

o and Wisconsmn Public Service s commercial paper borrowing programs with Dairyland Power Cooperative for electric supply altematives for and l

o c f VP

^

< -==.and letters of credit for WPS Resources.:;:-,

150 megawatts of energy from the proposed 500-megawatt coal-fired generation facility. According to the agreement, Dairyland could choose

/WPS Resources had outstanding commercial paper borrowings of

'--toprhsan interestin the planto buy electrict frorr it (we haves

$28.0millio and $16.0 rillion teebr1'03, and 2002, respectively.

- since received written notification from Dairyland, confirming thei r

VPS Resources had outstanding short-term debt of $10.0 million and intent to purchase an interest in the plant). In providing Dairyland with

$13.8 millioiai6f December 31, 2003, and 2002, respectively.

electric supply alternatives, Wisconsin Public Service can reduce the risks associated with a

the plan. Th In 2003 WPS Resources' shelf registration statement for $350.0 million

.:risks associated with building and operating the power plant.The f^^.':.-~-- '=~- -:

b operating powe

was declared effective by the Securities and Exchange Commission,

agreement is part of Wisconsin Public Service's continuing plan to wc a V/P Rsuc t i a

c o d and

~~~~~-

.- ~-..-.vwhich allowsWPS Resources to issue any comhbination-of debt arid-L provide least-cost reliable energy for the increasing electric demand em

~ :--

S- - -..

i } -.

-. ' "E.-- -:equity. In November 2003, 4,025,000 shares of WPS Resources commonC of its customers. This transaction is subject to a number of conditions e

. I v

2 4

5 s

o V r

includin successfy d o

g a jt pn o p an oraEtig

-stock were sold in a public offering at $43.00 per share, which resulted in

-: indluding successfully developing a joint plant ownership and operating ---:=f

--agreement,Dairyland obtaining finandng approval from the Rural Utity a net increase in equity of $166.8 million. Net proceeds from this ffei

• agreement-,

-,were used to retire $50.0 milion of 7.0% trust preferred securities in Services, and Dairyland securing firm transmission service from the Jna 2 r

s d

f

': ~ ::.

f---. -- =:' -:'Jnuary 204 euesOrt-emdbfn equity contri utions to:

t Midwest Independent System Operator on terms and conditions s

c f

r c p

oe 7 o;

,; -03 subsidiary comp anies, and frgenea oprt purposes.:

Dairyland deems acceptable. --:;--Q--

-,=a eems acceptable--...

Wisconsin Public Service, under a registration statement declared

-Capital expenditures at the'electnic utilty were $11.5 millionhger E;--.--

Ca'ital ex'enditure at the el c u w

$15 m n h r n

-effective in 2002, issued $125.0 million of 4.80% 10-year senior notes 2001, as compared to 2002, mostly related to steam generator replacement at the Kewaunee nuclear power plant tt o e in 2 r

-in December 2003. The senioi notes are collateralized by a pledge of

--at the Kewaunee nuclear power plant that occurred in2001. In the -g-a-sa=-:

.nni gas-first mortgage bonds and may become non-collateralized if Wisconsin utility segment, capital expenditures increased by $9.1 million'in 2002, PbiSevcrtrsaloftsusanngist aeod.Th v

v

.I;:.-Public Service retires all of its outstanding first mortgage bonds. Te ;

partially due to the installation of automated meter reading. The remaing inceas is atrbue to varou on-tim prjet tha ocure in 200

=.'net proceeds from-the issuance of the senior notes were used to call -

increase ISattributed to van'ous one-time proiects thatoccurred m 2002 -.- :.bT-we-e $1.1 million higher in

-$49 9 million of 7.125% first mortgage bonds on January 19, 2004, X;5Capital expenditures at WPS Energy Services were $10.1 million higher in o

X Capial xpeditresat

/PSEnegy ervcesfund construction costs and capital additions;' reduce short-term 2001 compared to 2002 due to the construction of a gas storage field in.

ndebenss, and forothlracorporateeutilityopurposes.

L -- --

=^

--if-.,.:- d.-indebtedness, and for other corporate utiliy prposes.

• 2001. WPS Power Development's capital expenditures were $19.5 million higher in 2001 compared to 2002 due to the completion of the Combined Effective January 2001, we began issuing new shares of common stock Locks Energy Center construction in 2001.

under our Stock Investment Plan and under certain stock-based employee

- i - '.benefitplans.Equityincreased$31.0milion,$28.3miRion,and.-

-FINANCINGCASH FLOWS

$18.6 million in 2003, 2002, and 2001, respectively, as a result of these Net cash provided by financing activities was $198.6 million in 2003 -

plans VPS Resources also repurchased $1.1 milion, $1.3 million, and compared to $93.1 million in 2002. The $105.5 million increase in cash

$1 1 millionof outstanding common stock for stock-based compensation

• provided by financing activities in 2003 is primarily related to the decrease plans in 2003, 2002, and 2001, respectvely.

in cash provided by operating activities in 2003 compared to 2002. A larger amount of investing activities was financed through comxnon Wisconsin Public Service used short-tem debt to retire $50.0 milion stock and debt issuances in 2003 as compared to the prior year i of 6.8% first mortgage bonds on February 1, 2003, that had reached

-.maturity Wisconsin Public Service also called $9.1 million of 6.125%,.

Our financing activities provided cash inflows of $93.1 million and tax-exempt bonds in May 2003. Wisconsin Public Service is evaluating

$33.6 million for the years ended December 31, 2002, and 2001 the potential for refinancing existng debt in 2004.

respectively. The 2002 increase was due to new debt issuances used to finance investing activities, offset by an increase in repayments of In-March 2003, Upper Peninsula Power retired $15.0 million of 7.94%

long-term debt and the capital lease (see Signifcant Financing Activit'es, '

first mortgage bonds that had reached maturity.

below for further detail). The net change in short-terin debt in 20002 7 In November 2003, WPS Power Development retired all of the notes from 2001 is attributable to the reduced need to rely on commercial:-

ovn cei noe in the amount of $1. mi payable under a revolvingcredit noteimthe ountof paper in 2001 due to the 2001 issuance of additional long-term' debt at Wisconsin Public Service and common stock at WPS Resources-In October 2002, Wisconsin Public S ervice retired $50.0 million of 7.30%

.. first mortgage bonds that had reached maturity.

SIGNIFICANT FINANCING ACTIVITIES As of December 31203 both PS Rsuc ad Wisconi-P c

WPS Resources issued $100 million of 5.375% 10-year senior non-As of December 31, 2003, both WPS Resources and lsions PUbIIC =-.

Se e -e in -:

wh al of te c s un t

collateralized notes in November 2002. We used approximately $55 million

.Service were in compliance with allof the covenants und'e'rth~eir les --E=

-s-

=*

A

E -

. -.- - -:=.:;

X--c.

.'of the net proceeds from the issuance of thesenotes to repaynshort-temm of credit and other debt obligations.

o th ne-poe s fo t o

to r srt

-debt incurred to provide equity capital to our subsidiaries and the VWPS Resources and Wisconsin Public Service established 364-day credit remainder for othe'r corporate purposes.

line syndications for $225.0 million and $115.0 million, respectively, 30 W PS R ES OU RC ES C O R P O R AT I O N

The energy within

-Wisconsin Public Service issued $150.0 million of 4.875% 10-year I

W S Resources and Wisconsin Public Service hold 'credit les to back senior notes in December 2002. The senior notes are collateralized by 100/ of their commercial paper borrowing and letters of credit. These a pledge of first mortgage bonds and may become non-coHateralized ' -a.>' cre.dit facilities are based on a credit rating of A-i/P-l'forWPS Res'ources if Wisconsin Public Service retires al of its outstandingfirst ortgage

.anddA-1+f/P-ifor WisconsinPublicService.Adecreas int com ercial bonds. Wisconsin Public Service used approximately $72 million of the paper credit ratings could adversely affect the companies by increasing net proceeds from the issuance oftheseniornotestoacquiretheDePere the interest rates at which they can borrow and potejitially limiting the Energy Center and $69 million to retire short-term debt. The balance-availability'of funds to the companies through the commercial paper

'of the net proceeds was used for other corporate utility purposes market A restriction in' the companies' ability to use commercial paper REiT '-RAT:'i--:S "borrowing to meet their working capital needs would require them to secure fundsthrough alternate sources resultinginhigherinterestepense, WPS Resources uses internallygenerated funds and commercial paper higher credit ne fees,and a potential dely in th eavailabilit of funds.

borrowing to satisfy most of its capital requirements. We also periodically

': issue long-term debt and common stock to reduce short-term debt,

.WPS nergyervices maintains underlying agreements to support its

-:"-_maintain desired capitalization ratios, and fund future growh W electric and gas trading petio. In the event of a deterioration of may seek nonrecourse financing for funding nonregulated acquisitions WPS Resources' credit rating, many of these agreements alow the.

WPS Resources' commercial paper borrowing program provides for counterparty to demand additional assurance of payment This provision orking capita requirements of th nonregulated busiesses and pertain to existing business, new business or both with the Upper Peninsula Power. Wisconsin Public Service has its own commeria counterart.

The additional assuiance requirements could be met with paper borrowing program. The specific forms of long-term financing letters of credit, surety bonds or cash deposits and would likely result in

'amounts, and timing depend on the availabiity of projects, market WPS Resources being required to maintain increased bank lines of credit conditions, and other factors.

-oin incurcadditional e penses, and could restrict the amountofbusiness WPSaEnergyServicescanconduct.

e The current credit ratings for WPS Resources and Wisconsin Public '

Service are listed in the table below:

WPS Energy Seivices uses the NYMEX and over-the-ounter fiancal

.arkets to hedge its exposure to physical custoier obligations. These Credit Ratings

..l l

- -hedges are closely correlated to the customer contracts but price I WPS Resources Corporation movements on the hedge contracts may require financial backing.

Senior unsecured debt 1

-Certain movements in price for 'contracts through the NYMEX exchange X Commercial paper require posting of cash deposits equal to the market move. For the over-Credit line syndication the-counter rarket, the underlying contract may allow the counterparty.

-

Wisconsin Public Service Corporation it require additional collateral to cover the net financial differential between the original contract price and the current forward market= Increased requiirements related to market price cha~nges usually only Credit line syndication result in a temporary liquidity need that v1 u nwnd as the sales contracts aefulfilled.

In November 2003, Moodys downgraded its long-term ratings for IWPS Resources and Wisconsin Public Service one ratings level, leaving oly commercial paper ratings unchanged. Moody's downgrade ofrc..;

IWPS Resources was based principally on a gradual shift in the companys financial and business risk profile attributable to the growth of nonregulated _

businesses, the impact of weaker wholesale power markets and a -5 relatively high dividen paoi.

ody's dwgaeoWiconsin Public Service is basedon theex ectation that the utilitys substantial capital-

-~

spending program will exceed its retai'ned cash fl

=

thiough 2007 which`;

is likely to lead to a meaningful increase in debt Following the downgrade, Moody's set the ratings outlook at stable for both WPS Resources and Wisconsin Public Service. We believe these ratings continue to be amon'.g the best in the energy industry and allow us to access commercial paper and long-term debt markets on favorable terms. Credit ratings are not recommendations to buy, are subject to change, and each rating should be evaluated independently of any other rating.

Rating agencies use a number of both qtiantitative and qualitative:-

measures in determining a company's credit rating. These measures include Each monthWisconsin.

- business risk, liquidity risk, competitive position, capital m>, f cial Public Service processes condition, predictability of cash flows, management strength, and future

'h

- 350.000 customer payments.-

direction. Some of the quantitative measures can be analyzed through a Nancy McAllister is the few key financial ratios, while the qualitative ones are more subjective Lead Payment Processor in Green BayWisconsin.

WPS RESOURCES CORPPOR AT ION L31

FUTURE CAPITAL REQUIREMENTS AND RESOURCES-:

CONTRACTUAL OBLIGATIONS The following table summarizes the contractual obligations =

WES Resources, including its subsidiaries.

I Contractual Obligations i

1 1 a 7 ]

As of December 31, 2003

(

(Millions)

-Long-term debt principal and interest payments Operating leases ICommodity purchase obligations Purchase orders iCapital contributions to equity method investment -- !Il 0

-fOther.

l--+

Total contractual cash obligations Long-term debt principal and interest payments represent bonds issued Wisconsin, to Duluth, Minnesota, transmission line to the American notes

issued, and loans made to WPS Resources and its subsidianes.

Transission Company. WEPS Resources committed to fund 50% of total

-We record all principal obligations on the balance sheet Com'moldit-5y project costs incurred up to $198 rillion, and receive additional equity purchase obligations represent mainly commodity purchase contracts in Arnerican Transmission Company. WPS Resources may terminate of WVPS Resources and its subsidiaries.'The energy supply contracts at

-funding if the project extends beyond January 1, 2010. On December 19,

- V/PS Energy Services summarized above generally have offsetting energy'.='2003, Wisconsin Public Service and American Transmission Company sale contracts. Wisconsin Public Service expects to recover the costs of received approval to continue the project with the new cost estimate its contracts in future customer rates. Purchase orders include obligations of $420.3 milion. The updated cost estimate reflects additional costs for the related to normal business operations and large construction obligations prect resulting from time delays, added regulatory requirements, changes Other mainly represents expected pension and postretirement funding and additions to the project at the request of local governments and American obligations for the years of 2004 and 2005.

TaSmission Company's management, and ov rhead costs. Cor pletion e i of the line is expected in 2008. WPS Resources has the right, but not the CAPITAL REQUIREMENTS obligation, to provide additional funding in excess of $198 million up to its Wisconsin Public Service 'makes large investments in capital assets.

portionof the revised cost estimate. For the penod 2004 through 2006, we Net construction expenditures are expected to be approximately expect to make capital contrbutions'of up to $128 milion for our portion.

$1,264 million in the aggregate for the 2004 through 2006 peniod (upon of the Wausau to Duluth transmission line. In exchange, we wil receivel the dlosing of the sale of the Kewaunee nucear power plant, expnditure s

increased ownership in the American Transmission Company.

would decrease approximately $44.9 rnillion during this period). The largest of these expenditures is for the construction of the 500-rnegawatt V/PS Resources expects to provide additional capital contributions of coal-fired generation facility near Wausau, Wisconsin, in which approxiately$i5 milion to American Transmission Company in 2004 Wisconsin Public Service is expected to incur'costs of $549 milioni forothr project

0 between 2004 through 2006. In addition, Wisconsin Public Service-Upper a P e

PprPeninsula Power is expected to incur construction expenditures

-expects to incur additional construction costs of approximately $12 million of about $45 milion in the aggregate for the period 2004 through 2006, betw~een 2004 and 2006 to Lund construction of the transmission pnmarily for electric distribution improvements and repairs and safety facilities required to support the generating facility. Other significant measures at hydroelectric facilities'.

anticipated expenditures during this three-year period include: -

I Capital expenditures identified at WPS Power Development for 2004

-.

• combustion turbines - $49 million

_ throug 006 are expeced to be approximately $5 mion

• pollution control equipment - $23 million

$2.5 million at the Sunbury facility, which will be reimbursed by l corporate services infrastructures - $41 milon Duquesne ight Hoiding if the sale of Sunbury is consummated (see au e m r radi

-$3 5

million Note 4 in Notes to WPS Resources Consolidated Financial Statements,

• nauto mated m

il$5on Assets Held for'Sale, for a more detailed discussion of the sale of the l

tnuclear fuel -$33 milion 0 ':-f::-0'-~ ~ St ubyciy 0-';;

Sunbury facility).

I Mercurycontrol projects

$59 nillion-i:;f.<~; ~-f0S00

~

-

I' mc c

project. 0.s

-$59 m-~il'ion.

Capital expenditures identified at WPS Energy Services for 2004 through Other capital requirements for the three-year period incaudea 2006areexpectedtobeapproximately$2.7million.

potential contribution of $3.3 million to the Kewaunee nuclear power plan decommissioning trust Lund (pd on th sl of the--,.

All projected capital and investment expenditures are subject to periodic plant decommissioning trust fund (depending on the Sale rte>-S-l Kewaunee assets).

7

=t t.-R;

-review and revision and may vary significantlyfromtheestimates depending on a number of factors, incuding, but not limited to industry On April 18, 2003, the Public Service Conmmission of Wisconsinapproved

' 'restructuring, regulatory constraints, acquisition opportunities, market Wisconsin Public Service's request to transfer its interest in the Wausau.--

volatility, and economic trends. Other capital expenditures for 32 J W PS R ESO U RC ES CO R PO RATIO N

The energywithin

WPS Resources and its subsidiaries for 2004 through 2006 could be O

October 24, 2003, WPS Power Development entered into a definitive significant depending on its success in pursuing development and a reement to sell its Sunbury generation plant to a subsidiary of

'acquisition opportunities. Whe appropriate, WPS Resources may seeks Duquesne Light Holdings for approximately $120 million, subject to nonrecourse financing for a portion of the cost of these acqus itions.

certain working capital adjustments and regulatory approval. See Note 4 i Notes to WPS Resources Consolidated Financial Statements, Assets

-CAPITALRESOURCES

.Held for Sale, for more information.

For the period 2004 through 2006, WPS Resources plans to use internally generated funds net of forecasted dividend payments, cash proceeds from KEWAUNEE NUCLEAR POWER PLANT

• f:

Vpending asset sales, and debt and equity financings to fund cap~ital '. .

7lOn0November 7, 2003, Wisconsin Public Service and Wisconsin Power:

requirements. WPS Resources plans to maintain current debt to equity and Light Company entered into a definitive agreement to sell the ratios. Management believes WPS Resources has adequate financial Kewaunee nuclear power plant to a subsidiary of Dominion Resources, flexibility and resources to meet its future needs.

Inc.-Wisconsin Public Service is a 59% owner of the Kewaunee nuclear

4.

-E

=:;

rttpower plant~ The transaction is'subject to approval from various

/WPS Resources has the ability to issue up to an additional $176.9 million e-r p T

t i s t

enl regulatory agencies, including the Public Service Comnmission of-of debt or equity under its currently effective shelf registration statement Wisconsin; the Fublaorv Commission, th Nuclear

-. ; X

/..

= -..;

wisconls n; the Federal Energy Regulatory Commnission, the Nuclear:

Wisconsin Public Service has the ability to6issue up to an additional R

C at

$25.0 million of debt under its currently effective shelf registration-agece and misspojected tcsevir04 Approvalty ready been

-~

~

-aences'and is projected to dlose in 2004. Approval has already been

:: -. statement. Wisconsin Public Servce intends to file a new shelf registration obaie f th Io-a statement in 2004 for an additional $350 million.

=

P U

Commisi V/P:

S Resources and Wi n P c S e he

y c t ine Wisconsin Public Service estimates that its share of the cash proceeds WPS Resources and WisconsinPubllc Service have 364-day credit lin.6;- f--=:

syndications for $225.0 million and $115.0 million, respectively The credit '-fro the sale will approximate $130 million, subject to various post-lines are used to back 100% of WPS Resources' and Wisconsin Public dosing adjustments. The cash proceeds from the sale are expected to Service's commercial paper borrowing programs and letters of credit for

=slightly exceed the carrying value of the Wisconsin Public Service assets S

t I-

-.-. being sold. In addition tothe cash proceeds, Wisconsin PublicService -

WPS Resources. As of December 31, 2003, there was a total of $260.9 million ben sold I a to t c

p W o P

Service C f s s5 z

s zz 45 r'==x s ~~

i rtmonrship of the assets c ntined m Its non-quafified *:

available under the lines of credit, net of $28 million of outstanding w= e-ti o-s o t a

c a

i it no-

-=---->--decommissioning trust, one of two funds that were established to cover commercial paper, and $50.7 million in cash and cash equivalents th enu d m

o o the K u

n p

plant X 7= -.f t.:

z -I.--.-

i.,

,'. =-.. -artheeventualde ommi sioningofthe Kewauneienuclearpowerplant.

In 2003, WPS Resources announced the sale of WPS Power Development's The pre tx fair value of the non-qualified decommissioning trust's assets Sunbury generation plant and Wisconsin Public Service announced the at December 31, 2003, was $115.1 milion. Dominion wil assume sale of its portion of the Kewaunee nuclear power plant. Both of these a- - tresponsibility for the eventual decommissioning of Kewaunee and will

sales are expected to dose in 2004. A portion of the proceeds related to

-.receive Wisconsin Public Service's qualified decommissioning trust assets the Sunbury sale may be used to pay the non-recourse debt related to :

that had a fair value of $239.7 million at December 31, 2003. Wisconsin E the plant. A portion of the proceeds related to the Kewaunee sale'will

~ =. Public Service will request deferral of the gain expected to result from be used to retire debt at Wisconsin Public Service. The remainder of the this transaction and related costs from the Public Service Commission of

-proceeds from both the Sunbury and Kewaunee sales wil be used by -- tV Wisconsin. Accordingly, the gain on the sale of the plant assets and the

/WPS Resources for investing activities and general corporate purposes. '-' '.relted non-qualified decommissioning trust assets is expected tobe of its subsidiaries, including reducing the amount of outstanding debt.- ' i.returned to customers under future rate orders.

• For more information regarding the Sunbury and Kewaunee sale`

see the discussion below.

REGULTORY

-Wisconsin OTHER FUTURE CONSIDERATIONS z

. -,-:. ---.EffectiveMarch21,2003,WisconsmPublicServicereceivedapprovalto

SUNBURY GENERATION PLANT t-

.increaseh Wisconsinretailelectricrates$21.4milion(3.5%)anddecrease As a result of both market conditions and issues related to the physicaI -.

Wisconsin retail natural gas rates $1.2 million (0 3%) :The 2003 electric

'; :performane of the plant, the Sunbury generation plant has not met and retail natural gas rates reflect a 12.0% return on equity and allowed our projected near-term financial performance levels. Market conditions

' -' averageequity of 55% in the utiit's capital structure. - -

continue to be depressed due to low prices for capacity. Sunbury also On April 1, 2003, Wisconsin Public Service filed an application with the incurred significant outage time during 2003 to maintain and repair fuel Public Service Commi'ssion of Wisconsin for authorization to increase

- handlng and recently instaled environmental control equipment that retail electric'rates and retail natural gas rates, effective January 1, 2004.

experienced accelerated wear from the use of low grade fuel in some of The rate increases are necessary to recover the costs associated with the' the units. Operational issues related to Sunbury have been resolved or a purchase of the De Pere Energy Center, fuel costs, maintenance of power plan has been put in place to resolve them. VPS Resources made capital production facilities, and employee benefits. On December 19, 2003, the contributions of $18.5 million to Sunbury in 2003 to compensate for Public Sevice Commission of Wisc nsiri issued a final written order the impact of decreased capacity revenues, as well as adjustments to authorizing a retail electric rate increase of $59.4 million (9.4%) and a fI Sunbury's operating plan.For2004, V/PS Resources'Board of Directors retail natural gas rate increase of $8.9 million (2.2%), effective January 1, has granted authorization to contribute up to $24.5 million of capital

-2004. The 2004 rates reflect a 12.0% return on equity. The Public Service to Sunbury. These funds will be used to cover operating losses, make

Commission of Wisconsin also approved average equity of 56% in the principal and interest payments, and purchase emission allowances.

l +-utility's capital structure..

W P S R E S O U R C E S C O R P O R AT I O N 33

I p

I VA The amount of fuel and purchased power costs Wisconsin Pubic Service' Mc4higanauthorizes a one-for-one fuel and purchased power recovery

• is authorized to recover in rates is established in its general rate fiiigs mechanism for prudently incurred costs. Under themechanism, the If the actual fuel and purchased power costs vary fror the authorized difference between actual and authorized fuel anpurc adpower costs level by more than 2% ona annual basis, Wisconsin Public Service is deferred until year-end. ByMarch 31 of the following year, the utility is allowed, or may berequired, to file an application adjusting rates must file a reconciliation of the actual costs to the authorized costs. Any for the remainder of the year to reflect actual costs for the yeai to date under or over recovery is then recovered from rates or returned to the and updated projected costs.'On October 29, 2003, Wisconsin Public=-

rat tepayer through the end of the following year. The reconciliation is subject Service filed to reduce rates by $1.9 million, due to a reduction in the to review and inteivention by customers.At December 31, 2003, Upper costs of fuel and purchased power, for the period August 15 2003 Peninsula Power had significantlyy under recovered fuel and purchased through December 31, 2003. On February 19, 2004, the Public Serice-power csts due t the high costs of purchased power. Upper Pe Insula Comnmission of Wisconsin approv'ed a refund of $2.7 rillion which Power intenids to filein March 2004, a reconciliation of the 2003 purchased represents the originally filed a mounts, adjustm ents, -and interest power cos requestig recover o f

$5.2 ion: In addition, costs

- -This refund is expected to be credited to customer accounts in March associated with the Presque Isle Power Plant outage have been deferred 2004. A liability of $2.6 million was accrued as of December31, 2003 and are expected to be addressed along with other Dead River flood

' in anticipation of this refund.

in='

issuesin the next rate case. Upper Peninsula Power expects a final decision Asi a

-esult of the Kewaunee

-regarding the recovery of the 2003 fuel cots no latert t e Jndof2004.

As a result of the Kewaunee nuclear power plant unplanned outa'ge in -=. =.

v-;----

y d n

r p r p t u o

Due'to the level of the under recovery relative toUpper Peninsula Power's late January and earlyFebruay 2004 and other fuel cost increases in 2004

.D=

a=.re v

eus t

edferred cost may be recovered over more than one%

yiear s, thed ea.

Wisconsin Public Service filed for a fuel cost increase of $7.4 million on -

the dE cost m be r e

m t

February 27, 2004. The Public Service Commission of Wisconsin s

Federal

.scheduled a hearing for March 22, 2004, to'determine the amount of =

t On April 30, 2003, Wisconsin Public Service received a draft order from the-the fuel cost increase to be recovered on an interim basis. Wisconsin =

Federal Energy Regulatory Commission approving a 21%, or $4.1 million, Public Service expects that a final order will be issued in summer 2004 =-.. interirn increase in wholesale electric rates. The new wholesale rates were regarding this rate icreaserequest.

e'ffectiveonMayll,2003,andaresubjecttorefundif thefinal rateincrease is less. The draft order also grated theuuse of folmula rates, which ow fora' Mic1higan th..-. :.=e adjutmentofwholesale electric rates to reflect actual costs without Wiscons Publc Servce fied for an crease in electric rates in the first to file additio rate requests. On Ma 4, 2004, the Fede

= quarter of 2003. OnJuly 21 2003 the Michigan Public Service Commission E

Energ oa 0 X - - -

. F -= = = > i > ' Enery Regulatory Commssion and WVisconsi Pubi evc ece

':ie'i~

authorized an increase in electric rates of $0.3 mllion and the

-reovery C

s ad recovery,--= tentative settlement regarding the final rate increase. Wisconsin Public Service of an additional $1.0 million of transmission costs trough the power --

r other-adjus. ents

-orevenues recorded

. X - - -

X ---.-

anticipates no materia[ refunds or other adjustments to revenues recorded E supply cost recovery mechanism, effective July 22, 2003anticip X_,=under the interim ratsbased on the term of the tentative agreement. The

' - On December 20, 2002, the Michigan Public Service Commission approved --final settlement is anticipated to be filed with the Federal Energy Regulatory an 8.95% increase in retail electric rates for customers of Upper Peninsula -' Commission in the second quarter of 2004. This is Wisconsin Public

. Power. The Michigan Public Service Commission granted an 11.4% re'tun '-

Service's first rate increase for its wholesale electric customers in 17 years.

-onequity with the newrates being effective'December 21,2002. This --

=

0 was the first base rate increase for Upper Peninsula Power in 10 years.

ASSETMANAGEMENTSTRATEGY

=

,In 2001, WPS Resources initiated an asset management strategy, whereby

.assets, or business units, no longer required for operations would be disposed

-. rover the next five to seven years in a manner that allows recognition 6f profits and provides capital for redeployment into new opportunities. -

In conjunction with the execution of a part of this strategy, the company-has identified certain assets to be disposed of consisting primarily of land and some buildings, the sale of which is expected to provide basic -

earnings per sharebetween $0.15 and $0.25, annually, through 2007.

Off Balance Sheet Arrangements 7Aspart of normal business; WPS Resources and itsi subsidiaries enter into~,

various guarantees providing financial or performance assurance to thiud-Perry Van Den Heuvel, Street/Service Mechanic for Wisconsin Public Service, installs a new automated gas meter-for easier r

and more accurate meter reading-on this house in Wausau, Wisconsin. Automated meter reading has many benefits for

-customers. including fewer estimated bills, reductions in outage tirnes, and improvements in meter reading accuracy 34 jW S RE S OURCES CORPORATION

The energy within WPS Resources'Outstanding Guarantees (Millions)

Guarantees of subsidiary debt Guarantees supporting commodity transactions of subsidiaries Standby fetters of credit Surety bonds Other guarantee December 31,2002

.: -. :$38.8.

i 584.3

- -- c22.7-:.--

6.4

_$652.2 Total guarantees WPS Resources' Outstanding Guarantees (Millions)

Commitments Expiring Guarantees of subsidiary debt Guarantees supporting commodity transactions of subsidiaries Standby letters of credit Surety bonds Other guarantee

- - i

- I-1

I

-1

11 iI r

I st3

-

I. II I4 Total guarantees I

in rnes a;Zk.ST==-reX parties on behalf of certai subsidiaries. These guaranteesae entered=== At December 31, 2003, WPS Resources had issued $34.1 million in into primrarily to support or enhance the creditworthiness othewise corporate guarantees to support the business operation of WPS Power attributed to a subsidiaiy on a stand-alone basis, thereby facilitating the "

'Development, which are reflected inBthe above table; WPS Resources extension of sufficient credit to accomplish the subsidiaries' intended

' issues the guarantees f6r'indemnification obligations related to business

- conmercalpurposes.

'purc ase agreements and counterparties in the wholesale electric

=

marketplace to meet their credit requirements and permit WPS Power

-: The guarantees issued by WPS Resources include intercompany gurntees- ----

Th garntesisue b W'SReouce icldeineromay garate D

L ---

evelopment to operate within these markets. The amount supported is between parents and their subsidiaries, which are eliminated in consolidation, on th ount of t

barkth WS and guara e o te sbsi.

such these dependent on the amount of the outstanding obligation that WPS Power.

anaguarantees of the subsidarines' own perrormance.-As sctee.-

AS-

=--

7 e eclud fm r'

-n

p.

Development has with the parties holding the guarantees at any point in guarantees are exduded from the recognition, measurement, and disclosure -=

n

-uaanee

= --.-

---

= 5' time. WPS Resources reflects WPS Power Developrn'ent's obligatioris requirements of Financial Accounting Standards Board Interpretation t'm

' R reflect

='

o Dvo e' olgtn

- ~~

-i 2=

r

~ '-E'-suppored by these parental gantes on its consolidated balance ---

No. 45, 'Guarantors' Accounting and Disclosure Requirements for spt by t p

a o i c Guarantees, incl g I t G s o Is f hr =

- sheet as either accounts payable or other liabilities. In February 2004, -

-~- Guarantees, 'including Indirect Guarantees of Indebtedness of Others."-

-Df

- -- -==-=-

WPS Resources' Board of Directors authorized management to issue At December 31, 2003,-arid December 31, 2002, outstanding guarantees corporguarauarantees in the aggregate amount of up to $30.0 million totaled $981.8 million and $652.2 million, respectively, as indicated in' -

to support business operations at WPS Power Development in addition the table at the top of this page.

guarantees that have received specific authorzations.

At December 31, 2003, WPS Resources had outstanding $39.7 millionrin

=Another $0.1 milion'of corporate guarantees support energy supply corporate guarantees supporting indebtedness. Of that total, $39.5 rillion '

at Upper Peninsula Power and are not reflected on WPS Resources':

-- supports outstanding debt at two of WPS Power Development's subsidianes.

'onsolidated balance sheet n February 200, WIS Resources' Board of The underlying debt related to these guarantees is reflected on the'.--.,

--'~..Directors authorized management to issue corporateguarantees in the" conso idae te amouint of up to $15 million to support the business operations

-: WI'S Resources' Board of Directors has authorized agm to issue~' :.:- of Upper Peninsula Power. Corporate guarantees issued in the future under B - P eore ord ofDirectors has authorized mana eet toise--'-=-T the Board authorized limit may or may not be reflected on WPS Resources' corporate guarantees in the aggregate amount of upto $1.2 billion to :

c-o t

as--ht

---=.

h

- R ; - <..

- - -----~- --- cnsolidated balance sheet, depending on the nature of the guarantee.

support the business operations of WPS Energy Services. WPS Resources primarily issues the guaranteesto counterparties in the wholesale electric At WI'S Resources' request, ancial institutions have issued $61.1 million and natural gas marketplace to'provide'counterparties'the assurance in'standby letters of credit for the benefit of third parties that have extended that WPS Energy Services will perform'on its obligations and permit credit t certain subsidiaries. If a subsidiar does p

amounts when WPS Energy Services to operate within these markets. The amount;'--

due under a covered contract, the counteipary may present its claim for of guarantees actually issued by WI'S Resources to support the business payment to the financial institution, which will request payment from operations at WPSI Energy Services at December 31, 2003, was $840.2 million WPS Resources. Any amounts owed by our subsidiaries are reflected iin and this is reflected in the table above. The amount actualy supported is the consolidated balance sheet.

-,'dependent on the amount of outstanding business WPS Energy Services At r 31203

'S R f

milli f s g s s-f

s.

Cr AtDecember 3 1, 2003, WPS Resources furnished $ 1.1 rnillion of surety has with the counterparties holding the guarantees at any point in time bod fo v r

i w

c c

and

~~~2,,4-f at--r-onds rrvanosre a

on m

cudmng worker compensation coverage and WIS Resources reflects WPS Energy Services' obligations supported by oan various lhs

, per-its, and h

L l

incurred

-- =-

-=

--;¢z -.

-. otarug anuslcen-ses pe ts, and ngjhtsof-way. iabi ties murd these parental guarantees on its consolidated balance sheet either as-"'

accounts payable or liabilities fm a -as a result of activities covered by surety bonds are included in the

-accountspayableorliabilitiesfromriskmanagement aconvitie s.

'". -6i g.datedbalan:,,c esheet.=.

• i I

.4

1

-4

• WPS R ES O U RC ES CO R PO RATI O N 35

p-g A

Other guarantee of $5.5 mlion listed on the above table was irsued by?, I pricing is the settled forward price curve of the NYMEX exchange, which Wisconsin Public Service to indemrnify a third party for exposuiresrelated.' includes contracts and options. Basis pricing is denved fror published' to the construction of utility assets. This amount is not reflected on the indices and documented broker quotes. WPS Energy Services bases consolidated balance sheet.

-electric prices on published indices and documented broker quotes.

WPS Resources has nt identified a at variable intert

-The following table provides an assessment of the factors impacting WPS Resources hsnt identified any material vanable interest entities-=-E.

created, or, interess in v e -'

ar J

, 2 the change in the net value of WPS Energy Services' assets and created, or interests in variable entites' obtained, after Jar'ary 31, 20031 l.. - -. iabilities from risk management activities durng the 12 months that require consolidation or disclosure under the Financial Accountingd-e Dcem

- - - --::- °.- -i.-eded December 31, 2003. - -

Standard Board's revised Interpretation No. 46 (C46R'), and we ccntinue

=

to assess the existence of any interests in variable interest entities, not iL WPSEnergyServices,Inc.

<-I-

'classified as special purpose entities, created on or prior to January 31,-2003. - -

Mark-to-Market

=

X

[ The application of Interpretation No. 46Rwas required for interests in A Roll Forward (Millions)

Natural Gas Electric

- - Total --

i special-purpose entities for periods ending after December 15, 2003.

Fair value of contracts WPSR Capital Trust I was deconsolidated from the Consolidated atJanuaryl,2003

$(7.1) 1.0-9 Finandal Statements of WPS Resources at December 31, 2003, as Less - contracts realized or required by the provisions of Interpretation No. 46R related to special--

settledduringperiod (15.0)

(2.1)

(17.1)

IPlus -fair value of new contracts purpose entities. As a result of the deconsolidation, WPS Resources) e into durineriod

- 9

1.

10.9 s

t

-- =

ax entered nto during period

-9.3 16

-0 recorded a $1.5 million investrnent in the Trust within other current kOtherchangesinfairvalue 16.4 i

16.4 -1 assets and a $51.5 million note payable to preferred stock trust,

--. J Cumulative effect of rescission respectively, withintheConsodatedBalanceSheet. Referi to Note 15 --

of Issue No. 98-10 9.7 (4.2) 5.5 0.

of WPS Resources' Notes to the Consolidated Financial Statements for'-.

Fair value of contracts further information about the deconsolidation of WPSR Capital Trust i

at December 31,2003 WPS Resources currently anticipates that we will disclose information i

about a variable interest entity u implementa.on of Interpretation L-The fair value of contracts at January 1, 2003, and December 31, 2003, about avariable 'mt-erest entity upon implementation of lnterpreiation __

=- = : -X:

-r *--reflect the values reported on the balance sheet for net mark-to-market' '-

No. 46R in the first quarter of 2004. Through an affiliate of WPS Power o th ba s

f n Development, WPS Resources owns a partial interest in a synfhetic' current and long-term risk management assets and liabilities as of those fuel production faciliy l e in K an r

tax dedts

dates. Contracts realized or settled during the period include the value fuel production facility located mn Kentucky and receives-tax cieadts -:--=

t to S 2 o t I

R C

b of contracts in existence at January 1, 2003, that were no longer included pursuant to Secthon 29 of the Internal. Revenue Code based onH sales to-in the net mark-to-market assets as of December 31, 2003, and the unaffiliated third-party purchasers of synthetic fuel produced fromn coal. '---';

unAffiliated thimbrd-par pSesurchasers ofnhe fuel podued frship inte-i7a

-amortization of those derivatives designated as normal purchases and At December 31, 2003, VPS.,.o had a 23% own p

tE st,

=sales under Statement No. 133. Mark-to-market gains and losses related -::

the synthetic fuel facility. Section 29 tax credits generated by the facility t c ta e

e i

t J 1 2 that

a-.=,.

=t cnrcts that were ent red into-subsequ nto Jaiur1, 2003, that A

~

- are currently scheduled to expire at the end of 2007. WPS Resources; maxi-um exposure to los as a result of our involv t wh t are still included in WPS Energy Services' portfolio at December 31, 2003; maximum exposure to loss as a result of our involveme'nt with ti is limited to our in=vestment

=-

i the

-tr are included in the fair value of new contracts entered into during the potential variable interest entity is limited to our investmrent in the entity,:--.--

E-v potential variable sig ntert Dentit r

2penod.

There were, in many cases, offsetting positions entered into and which is not signifnicant at December 31,2003. Currently we donoturing t

e resultingingainsorlossesbeingrealize believe that./PS Resources is the primary benefi ity t

urrnt period realize gains or losses frm tese offsetting

-i and do not anecdpate consofidaion of the synthetic fuel facility upona-

.=

d do nt a e c o t s

f f

positions are not reflected in the table above. The Other changes in fair -

adoption of Interpretation No. 46R in the first quarter of 2004.-:- -

-S

- adoption of Inte o N.

R in te ft q

r of 24

-value' line in the table primarilyrepresents the reversal of the change in T diA t

the fair value of gas storage contracts as of January 1, 2003. With the

-ai-g-iXe-

-'a' rescission of Issue No-98-10, natural gas storagecontracts are accounted WEPS Energy Services measures the fair value of contracts, including for on an accrual basis and are no longer adjusted to fair value. The NYMEX exchange and over-the-counter contracts, natural gas options, cumulative effect 6f rescission of Issue No. 98-10 is the reversal of the natural gas and electric power physical fixed price contracts basis Dem ber 31,2002, risk management assets and iabilites that no longer contracts, and related financial instruments on a mark-to-market basis qualify for mark-to-market accounting with the rescission of Issue using risk management systems. The primary input for natural gas No.98-10 as required by Issue No. 02-03.

Peris tse d ont moe and ot Valua meth

--.As ofDecember 31, 2003 1_!nm-d_ :-

Source of Fair Value {Millions} )l sif1fl !!lnIa l f

Prices actively quotedii__iii__i _iii_--

00lPrices baside~don bmYod~els and other valuation methods _'i Total fair value 36 W P S R E S O U R C E S C O R PO RAT I O N

The energywithin

-Prices actively quoted' includes NYMEX contracts. "Prices provided by '-common sharehol por to set ement of he hedge n addition, external sources' includes basis swaps and over-the-counter contracts.

W--

PS Resources may apply the normal purchases and normal sales "P.inces based onmodels and other valuation methods' includes some retail exemption, provided by Statement No. 133, as amended, to certain natural gas and electric contracts due to the volume optionalty that exists.'contracts. The normal purchasesarid sales exception provides that no in those contracts. We derive the pricing for all contracts in the table at recogrition of the contract's fair value in the consolidated financial -

the bottom of page 36 from active quotes or extemal sources. Pricing

'statements is required until the sttlemntof the contract.

- ;.is themostsignificantvariable i-themark-to-marketcalculitiorsi:

I

=i:i- 0' T-;

0

-- ;iff-- ;t is the most significant varie te mt Derivatives contracts that are determined to fall within the scope of iWPS Energy Services, as a result of WPS Power Developments acquisition Statement No. 133, is amended; are recorded at fair value on the of generating assets in New York, has acquired transmission congestion Consolidated Balance Sheet of WPS Resources. Changes in fair value, contracts, which are financial contracts, that hedge price risk between except those related to derivative instruments designated as cash flow zones within the New York Independent System Operator. The contracts hedges, aire generally included in the determiination of income available for were marked to fair value using a combination of modeled forward pices common shareholders at each financial reporting date until the contracts and market quotes. The fair market value of the contracts at December 31,r - are ultimately settled. When available, quoted market prices are used to 2003, was $1.3 million.

a-.record a contract's fair value. If no active trading market-exists for a commodity or for a contract's duration, fair value'is estimated through Critical Accounting Policies

-theuseofintemallydeveloped valuation technique sormodels.Such In May 2002, the Securities and Exchange Commission issued proposed' estimates require significant judgment as to assumptions and valuation rules regarding the identification and disclosure of accounting estimates a -methodologies deemed appropriate by WPS Resources' management. As company makes in applying its accounting policies and the disclosure Of a component of the fair value determination, WPS Resources maintains iitial adoption by a company of an accounting policy that has a matial reserves to account for the estimated costs of servicing and holding certain impact on its financial presentation. Under the first part of its contracts based upon administrative costs, credit/counterparty risk, a companywould have to identify.the accounting estimates reflected inits and servicing margin with both fixed and variable conponents. The effect

'. financial statements that required it to make assumptions about matters of changing both the administrative costs and creditctunterparty risk that were highly uncertain at the time of estimation. Disclosures about assumptions is as follows:

those estimates would then be required if different estimates that the

=

E

~~Change in Assumptio! SY_-

company reasonably could have used in the current period, or changes in Millions)-

the accounting estimate that are reasonably likely to occur from period to 0

increase period, would have a material impact on the presentation of the company's 50% decreas e financial condition, changes in financial condition or results of operations.

The Securities and Exchange Commission accepted comments on the These potential changes to the operating reserve would be shown as proposed rules through July 19, 2002, and has not made any final part of the Nonregulated cost of fuel, gas and purchased power on the decisions since that time. In anticipation of at least parts of this proposed

'- Consolidated Statements of Income and Assets/Liabiities from risk rule being made final, we have identified the following accounting management actvites on the Consolidated Balance Sheets.

policies to be critical to the understanding of our financial statements ASSET IMPAIRMENT; -

ast fo Statement f because their application requires significant judgment and reliance on P R-'e s a l r i

impairment.

^ =t.

.^

A p m -i

~- ::-WPS Resources annually reviews its assets for impairment Statement of :::

estimations of matters that are inherently uncertain.

n A

S N. 14 A n

f t I

. f

^ '

, S ' 0 : -= -

0'I.' --.-' Finncial Accoufiting Standards No. 144, Accounting for thelImpairment.-

RlSK AANAGEME NT ACTIVITIE S andDisposal of Long-Lived Assets," and Statement No. 142, 'Goodwill V/PS Resources has entered into contracts that are accounted for as and Other Intangible Assets, are the basis forthese an'alyses.

derivatives under the provisions of Statement of Financial Accounting The review for impairment of tangible assets is more critical to'VPS Power Standards No. 133, 'Accounting for Derivative Instruments and Hedging Developmentthantoourothersegmentsbecauseofitssignificant Actvities," as amended. At December 31, 2003, those derivatives not investment in property, plant, and equipment and lack of access to designated as hedges are primarily commodity contracts to manage price

-rgulatory relief that is available to our regulated segments. We believe risk associated with wholesale and retail natural gas purchase and sale -

that the accounting estimate related to asset impairment of power plants activities and electric energy contracts. Management's expectations aid is a critical accounting estimate" because: (1) the estimate is susceptible an

- intentions are key factors in determining the appropriate accounting for, to change from period to period because it requires company management a derivative transaction, and as a result, such expectations and intentions'.

to make assumptions about future market sales pricing, production costs; are documented. Cash flow hedge accounting treatment may be used and generation volumes and (2) the impact that recognizing an impairment whenWPS Resources contracts to buy or sell a commodity at a fixed would have on the assets reported on our balance sheet and the net loss price for future delivery corresponding with anticipated physical sales or on our incomeIstatement could be material. Managerment's assumptions

-purchases. Fair value hedge accounting may be used when WPS Resources -.

about future market sales prices and generation volumes require significant holds firm commitments and enters into transactions that hedge tme judgment because actual iarket sales prices ard generation volumes risk that the price of a commodity may change between the contract's -

have fluctuated in the past as a result of changing fuel costs, environmental i

inception and the physical delivery date of the commodity. To the extent changes, and required plant maintenance and are expected to continue' that the fair value of a hedge instrument is fully effective in ofettinge o do so in the future transactionbeinghedged,there'isno impactonincomeavailable for WPS R E S O U RC E S CO R PO RATI O N 3L7

I The primary estimates used at WPS Power Development in this process has not previously been identified as a-risk defaults, there could be are future revenue streams and operating costs.A combiriationof ifiput csig cant changes to the expense and uhcollectible reserve balance.-

from both internal and external sources is used to project revenue-

-streams.WPSPowerDevelopment'soperationsgroupprojectsifuture PENSION AND POSTRETIREMENT BENEFITS operating costs with input from external sources for fuel coststn ar so The costs of providing non-contributory defined pension benefits and X, forward energy prices. These estimates are modeled over the projected other postretirement benefits described in Note 19 to the Consolidated -

remaining life of the power plants using the methodology defined irn-

- i Financial Statements, are dependent-upon numerous factors resulting XStatement No. 144. WPS Power De velopmenevaluates property, plant from actual plan experience and assumptions of future experience.

and equipment for impairment whenever indicators of impairment exist Pension costgfor example, are impacted by actual employee demographis Statement 144 requires that if the sum of the undiscounted, d M (including age, compensation levels, and employ ent periods the level future cash flows from a company's asset is less than the caurying-value of contributions we make to the plan, and earnings on plan assets.

of the asset, an asset impairment must be recognized in-the finrancial

-Changesrnadet the plan provisions may aiso impact current and future stateme nts.

The amount of impairment recognized is calculated by pension costs: Pension costs may also be significantly affected by changes reducing the ca e ast to it f

value,

=, -

in k actarial assumptions, including icipated rates of return on plan

' Throughout 2003, WPS Power Development tested power plants for assets and the discount rates used in determining the projected benefit recoverabiit whenever events orchanges incircumstaices indicted igat andpensioncosts.

=

I

-rcariying amount may not be recoverable. No mpairment Other postretirement benefit costs, for example, are impacted by actual charges were recorded in 2003 as a result of these tests.

employee demographics (including age and compensation levels), the Wisconsin iIPublic Serie m level of contributions we make to the plans, earnings on plan assets, and The merger of Wisconsin Fuel and Light into Wsos ulcSriei v

-2001 resulted in Wisconsin Public Service recording goodwill related to its-health care cost trends. Changes made to the plan provisons may also, gas utility segment. The goodwill is tested for impairment yearly basieds -

r impact current and future other postretirement benefit costs. Other on the guidance of Statement No. 142. The test for impairment includes postretirement benefit costs may also be significantlyaffected by assumptions the changes in key actuarial assumptions, including anticipated rates of about~n futxre ~rofitability of the gas utly segment an~d h correlation between our gas utilit'y segment and published proje'ctions for return on plan assets, health care cost trend rates; and the discount

- other simlar gas utility segments. A significant change'in the utility rates used in determining the postretirement benefit obligation and m-arket and/or our projections of future profitability could resulti a loss postretirement coss.

being recorded on the income statement related to a-decrease in the W==SWResources' pension plan assets and other postretirement benefit -

, goodwil asset, as aresult of the empairment test.'

Upslan assets are primarily made up of equity and fixed incomeinvestments RECEIVABLES AND RESERVES -

interest ratesin actual equit mar ket returns as we as changes in general interest rates may result in increased or decreased pension costs in future Our regulated gas and electric utilities and WPS Energy Services accrue periods. Likewis, h

i u

r c

disount

-X

<-periods.

Likewise,-cane msuposeardng current discount-,.:I estimated amounts of revenue for services rendered but not yet biled.-l-=---. -

~ - --

= I== - -X i- -- -'I

'-~'rates arnd expected rates of return on plan assets could also mncrease or;- E--,-- -

Estimated unbilled sales are calculated using actual generation and rate

-a e

r o e o pa a d as i or

-r g

f

-; ^

A-=- ecreas recodedD loh costs. 'Change in assumptions regyardmzEing t

throughput volumes, recorded sales, and weather factors-The estimated '

asr d

ps costs. Cag i s

regarI based~=~E e

h-c e =- : L --current discount rates, health care cost trend rates, and expected rates

unbilled sales are assigned different rates base on hisona cutmr-I:=.

-9t unbilled sales are asge differentates on

-=-

-=of return on plan assets could also increase or decrease recorded other -

class allocations. Any difference between actual sales and the estimates

- C -,.

50 posretiemen benfit costs. Management believes that such changes-or weather factors would cause a change in the estimated revenue -

b cs. M am b

t s

-i-nges in costs would be recovered at our regulated segments through the WPS Resources reserves for potential uncollectible'customer accountsas i ratemaking process.

an expense on the income statement and an uncollectible reserve on the i

a regi as-.-----et to-,, -

The following chart reflects the sensitivities associated with a change

-balance sheet.Wisconsin Publc Service records aregulatory asset to--=.Hi-

--=

Q balance sheet isconsin Pl Serv---ice rcd

- in certain actuarial assumptions by the indicated percentage. The chart offset its uncollectible reserve. Due to the nature of the nonregulated an i o d i t p

f e

-a z

~~

1. ~

_~°r

-e_

yLSt2.

' 'below reflects an increase or decrease in teprcenaefrec I:--i-X:

-energ marketing business havn higher credit risk, the reserve is more E-- = -

-busnes hvn igh c

risk, t e

i mor assumption, and how each change would impact the projected benefit

cn-tcaltoWPSEnergy Services than to our other segments. AWI'S Energy,,

i-- o n a

~ 7 f

• Co L s

n 4 2s

!t;=Gobligation,-

our net amount recognized on the balance sh~eet, and ou r -~ i Services,- the reserve is based on historical uncollectible experience and bC-ga

- m r

o t b

s

, a o

x

'~

'~

'~

s_ R'

=~¢r Be!_

'ereported annual pension cost ontheincome state~ment as they relat to,-C;C specific customer identification where practical. If the assumption that -

p d a p

c o t i

s a t r

to historical uncollectib-e experience

- our two large qualified pension plans.-Each sensitivity below reflects an periencematches current customer default is-:--

incorrect, or if a specific customer with a large ac count receivable that evaluation of the change based on a change in that assumption only.-

incrre ccun reiabe.ha Actuarial Assumption (Millions, except percentages) 3 E. 3 I

ttr.;

I.

-iDiscount rate 1 Rate of return on plan assets I Rate of return on plan assets WPS RE SO U RC ES CO R PO RATION

The enerayVwithin Actuarial Assumption;: 1; i l ll 31 :

(Millions, except percentages)

-; :Discount rate

S 1

!! 13II:!E E1l Discount rate =t~E11i ~ 1I1, _l_

Health care cost trend rate Health care cost trend rate iRate of return on plan assets Rate of return on plan assets The chart above reflects the sensitivities associated with a change in assets is not assured, but are generally subje'ct t'review by regulators

-certain actuarial assumptions by the indicated percentage. The cha'rt.-

in rate proceedings for matter such as prudence and reasonableness.

reflects an increase or decrease in the'percentage for each assumption Management regularly assesses whether these regulatory assets and and how each changewould impact th e

projected othe r posretirement' libilities are probable of future recovery or refund by considering factors Abenefit obligation, our reported otherostretirement benefit liability on-such as regulatory environment changes'and the status of any pending or

^ the balance sheet, and our reported annual other postretirement benefit p'otential deregula'tion legislation Once approved we reduce regulatory cost on the income statement. Each sensitivity above reflects an ' -'assets and iabilities by recogition in income over the rate recovey -

evaluation of the change based on a change'in that assumptionlony -

perodIf not approved, these'regulatory assets cr liabilities would be

-recognized in income in the then current period.

Aa selecting an assumed discount rate;we consider long-term Corporate' Aa rated bond yield rates. In selecting an assumed rate of retumon op Ilan If our electric and gas utility segments no longer meet the criteria for

-assets; we consider the historical returns and the future expectations for a-'~ppl ying Statement No. 71, we would discontinue its application as returns for each asset class, as well as the target allocation of the benefit defined under Statement No. i01, 'Regulated Enterprises -Accounting for -

trust portfolios.

'=

the DiscontinuationofApplicationofFASB StatementNo.71." Assetsand fiabilitiesrecognizeds o

lelyduetotheacionsofrate regulatonr ayno' The fair value of pension plan assets increased $92.7 million in 2003 l

be rec e

d-t t o r regulation*may-no

• p-

-~~

5.~

=lne be recognized on the balance shieet and' -would be classified as an-i decreased $47.8rmillion in 2002; and decreased $137 million in 2001 rcnz n t b

s an w b classified-as an X-,

-- =i='extraordinary item in income for the period 'in which the disconitiniuation:=-.u u As further described in Note 19 to the Consolidated Financial Statements, e

ie i i f t p

i w t

dsotnai

.s S-- -

.--S.

-occurs A

'rte-off of all WPS Resources' regulatory assets and regulatory ~

-as a result of the declining interest rate environment, we were required ocr rt-f falVE eore'rgltr sesadrgltr lfiabilities at December 31,,2003, would result in a 3.0%/ decrease in total to recognize an additional minimum liability as prescribed by Statement V: ~ ~ ~

~

~

~

~

~

i r

-=asts, a9.4%-decrease in total,iabilities, and a 122.5% incr ease in---

No. 87. The liability was recorded as an intangible asset, a regulatory"-

a-sst a 4 e

n a l i

an a 1.

ie ility I ncome before taxes.:

=

asset, and a reduction to common equity through a charge to Other comprehensive income. The chargetTOtAerco prehensi income =

TAX PROVISION

.could be'restored throughcommon equity in future periods to the '

As part of the process of preparing our consolidated fincial statements, extent fair value of trust assets exceed the accumulated benefit we are required to 0estiate our income taxes in each of the jurisdictions obligationr. Aso, pension cost and cash funding requirements could i---'

n which we operate. This process involves estimating our actual current increase in future years without continued improved assetretus.---'

tax exposure togetherwith assessing temporary differences resulting The fair value of other postretiement beefit pianeassets inceased '

. ' -from differing treatment of items, such as depreciation, for tax and

$23.7 million in 2003, decreased $14.8 million in 2002, and decreased accounting purposes. These differences result in deferred tax assets and

$4.4 million in 2001. In selecting assumed health care cost tendrtes; e-liabilit w

a incud nourconsoidatedbalane eet.

consider past performance and forecasts of health care costs. WPS Resources We must then assess the likelihood that our deferrd tax assets will be adjusted its health care cost trend rates upwards each of the last two years recovered from future taxable income and, to the'extent we believe that in an attempt to keep our health care cost trend rates in line with thera'pidly recovery is not likely,we must establish a valuation allowance. Significant increasing health care costs the country and a

eS Resources have faced.' -. '=ana'gementljud6gmet is required in u nLemining our provision for income

= Also, other postretirement benefit cost and cash funding could increase

.=taxes our deferred tax assets and liabilities, and any valuation allowance

_ i future years without continued improved ass ret recorded against our deferred tassets. T the e tent we establish a REGUATOY vauation allowance or increase or decrease this allowAance in a period,-

rV --- REGULATOkY ACCOUNTING 0:

== juioaericasr Th ACUNIG

.. we mustm icudean bnefit within the tax provisions in te electric and gas utility segrments of WPS Resources follow Statement stamen udf o pens. o of Financial Accounting Standards No. 71, 'Accounting for the Effects of

Certain Types of Regulation" and our financial statements reflectthe effects S. --. -....--.. rRelated Partv Transactions r

of the different ratemaking principles followed by the vanious jursdictons R

Pat T s

i regulating these segments. We defer certain items that would other'ise WS Resources has investments in related parties that are accounted for e__ ' be immnediately recognized as expenses and revenues because'ourr or s -'under the equity method of accounting. These include the investment at have authorized deferral as regulatory assets and regulatory liabilities for '-'-WPS Investment, LLC, (a consolidated subsidiary of WPS Resources),

future recovery or refund to customers.-Future recovery of regulator in Amencan Transnission Company,

-LC, and Guardian Pipeline, LC, WPS RESOURCES CORPORATION 39

p g

A Wisconsin Public Service's investment in Wisconsin River Power -_

and Light, and Consolidated Water Power). The electric power from the Company, and WPS Resources' investment in WPSR Capital Trust Ir a

-'combustion turbine is sold in equal parts to Wisconsin Public Service and WPS Nuclear Corporation's (a consolidated subsidiary of WPS Resources) '.Wisconsin Power and Light. Wisconsin Public Service recorded related investment in Nuclear Management Company, LLC.

party transactions for service provided to and purchases from Wisconsin American Transmission ICisa-for-pr transmissRiver Power during 2003, 2002, and 2001. Revenues from service

. Amnerican Transmission Company, LLC is a for-profit, transmission`-or y -

h-.t o s t-provided to Wisconsin River Power were $1.4 million, $1.5 million, company that owns, plans, 'maintains, monitors, and operates electnic ompany o pates c ric.

=-and $0.9 million for 2003, 2002, and 2001, respectively. Purchases from transmission assets in portions ofWisconsinMcdligan and Ilinois==1:S-e-n s n p s o Ws,

Mic a

I Wisconsin River Power by Wisconsin Public Service were $2.0 million, At December 31, 2003, WPS Investmnent's ownership in American-- -- -

t b 3 Dn

-ns o w

-nhi i

ec

$2 1 million,-and $1.7 million for 2003, 2002, and 2001, respectively.

Transmission Company was 19.8%. Wisconsin Public Service and Upper Peninsula Power recorded related party transactions for services WPSR Capital Trust I was deconsolidated from the Consolidated

-provided to and network transmission services received from-Am enican Financial Statements of WPS Resources at December 31, 2003, as Transmission Company during 2003, 2002, and 200L Charges to Aencan required by the provisions of Financial Accounting Standards Board's Transmission Company for services provided by Wisconsin Public Service revised Interpretation No. 46 ('46R~) related to special purpose entities.

were $14.4 million, $12.9 million, and $11.3 million in 2003, 2002, I T

Refer to Note 15 of WPS Resources' Notes to the Consolidated Financial and 2001, respectively. Upper Peninsula Power charged $7.6 million,-

Statements for further information on the deconsolidation of WPSR

$5.8 million, and $2.7 million for 2003, 2002, and 2001,- respectively,-

'l,-: Capital Trust I. As a result of the deconsolidation, WPS Resources for services provided. Network transmission costs paid to American

= recorded a $1.5 million investment in the Trust within other current, Transmission Company by Wisconsin Public Service were $33.6 miion assets and a $51.5 million note payable to preferred stock trust, a related

$31.0 million, and $25.2 million in 2003, 2002, and 2001, respectively Upper pparty, within the Consolidated Balance Sheet at December 31, 2003.

Peninsula Power recorded network transmission costs of $44 million,-

- Prior periods have not been restated per the transition provisions of

$5.0 million, and $3.3 million in 2003,2002, and 2001, respectively. ~ ai-==

Interpretation No; 46R. The Trust remains consolidated within the December 31, 2002, Consolidated Balance Sheet and the interest Guardian Pipeline LLC ow ns a n-atural gas pipelime, which bega vrt Guardian Pip

, LC o s

gs p

, w h b n o payments on the debentures are reflected within interest expense and mn 2002, that stretches about 140 mi es frm near jobet, I~mll to in 2002 t h a-I into distributions on trust preferred securities on the Consolidated Statements southemn Wisconsin. WPS Investments, LLC purchased its 33%~ interest Gof Income for all years presented.

in Guardian Pipeline, LLC on May 30, 2003.

'-.f'

=

f~

~~f

n januaty8, 2004, we redeemed adof the su b

riae debetrs-Wisconsin River Power Company, of which Wisconsin Public Service

-y 8

we r e

al of t s

d t - v-that were ' 'tial issued to the Trust for $51.5 million and paid accrued '.:

owns 50% of the voting stock, operates an oil-fired combustion turbine w

i i

t t T

f d to

-c p

s o t W

R T

.- : interest of $0.1 million. This action required the Trust to redeem an equal

-and two hydroelectric plants on the Wisconsin River. The energy outpu t s--

amount of trust securities at face value plus any accrued interest and from the hydroelectric plants is sold in equal parts to the three companies unpaid distbutions. As a result of these transactions, the Trust has that previously owned equal portions of all the outstanding stock of -

X-v

< -- 2-- -been dissolved effective Januar 8, 2004..' -::=1.-

Wisconsin River Power (Wisconsin Public Service, Wisconsin Power

-bee d iv January 8 2004.

.Nuclear Management Company is owned by affiliates of five utilities in the upper Midwest and operates the six nuclear power plants of these utilities. At December 31, 2003, WPS Nuclear Coiporation's ownership in Nuclear Management Company was 20%. Wisconsin Public Service recorded related party transactions for services provided by Nuclear

'Management Company for the management and operation of the

-v Kewaunee nuclear plant. Management service fees paid to Nuclear

-Managemet Company by Wisconsin Public Service were $25.2 million, I$24.6miion, and$16.4milionin2003,2002,and2001, respectively.

i Management service fees paid to Nuclear Management Company in 2003 and 2002 reflect a 17.8% increase in Wisconsin Public Service's ownership:

of the Kewaunee plant after acquiring Madison Gas and Electric Company's

-wnership in the Kewaunee plant on September 24, 2001.

Wisconsin Public Service's and Upper Peninsula Power's Line '

Electricians have the skills to come through for our customers -

in any kind of weather, at any time of day or night, and in any type of terrain. Response time and reliability are of prime importance for ensuring customer satisfaction.

I e

eI ea 40]

W PS RES OU RC ES CO R PO RATION

The energywithin Trends Co-ission of Wisconsin has approved recovery of the costs associated

-w- ---ith voluntary nitrogenoxidereductions.

,-:ENVIRONMAENTA L-i:--: - -; -- :: ---= ---i E

Air quality modeling by the Wisconsin Department of Natural Resources WPS Resources and its subsidiaries are subject to federal, state and local r

a a W t i 1 n 2 i

a regulations regarding environmental impacts of their operations on air and wates quality and sd w

. T-a t

of f l

- -of the sulfur dioxide ambient air quality standard. Wisconsin Public

~~~~~~s-adwtrqayadsld waste. The application of federal and stte-.-.

-..;---...-...=..

tic s to p t te e t can e

ct o

Service expects that compliance with a future limit can be achieved by restrictions to protect the environment can involve review, certificationJ orm-

-=--S g

0aissuance of permits by various federal and state authorities, including the.

managing the coal suppy quality. Wisconsin Public Service is cooperating United States Environmentl P n A y,n t

a-ss with the Wisconsin Department of Natural Resources to develop an Ur=; itedStatesEnvironmentalProtec onAgencya anvaii-oussats

< tLs Itii0 approach to resolv this issue.

environmental agencies, including the Wisconsin Department of Natural.

Resources. These restrictions may limit, pre'vent, orsubstntiallyincaeasethe. In November 1999, the United States Environmental Protection Agency:

cost of the operation of generaton facilities and mayrequire substantial announced the commencement of a Clean Air Act enforcement initiative investments in new equipment at existing installations. Such restrictions rnay r targeting the utility industry. This initiative resulted in the issuance of

- require substantial additional investments for new projects and may delay y several notices of violation/findings of violaton and t

hef l g of lawsuits or prevent completion of Projects. We cannot forecast the effects of s ch against other unaffiliated utilities. In these enforcement proceedings, the i 'regulation on our generation, transmission, and other facilities or operatons United States Environmental Protection Agency claims that the utilities WPSd Power Development is: s to regulation b n

,~;-'

rat mde mbdification'sto thecoal-firedboilersdandorelatedrequipmentatthe

-- - --- r-5.....................................

T zultus eiculegenrahnctricnsw tene rstibtamggapropaten...without.....firs.....t..ini...g Environmental Protection Agency and environmental regulation in Maine ut et g

t wh fr o i

appropriate

-diute United States EnvironmenProtection Agency's New York, Pennsylvania, and Wisconsin with respect to thermal and other p

u t

U S

E t

a a

S-->

pe-constructiori 'erit program and without installing approritear -......................3

-discharges from its power plants New legislation could negatively impact futuhrge ashmflos ande iplacts WSPwreyopntsaity primpautoctemt rga adwthu n

withuregulated utlitwes, whdimach ae Pw recveryoftese to com~pete 'pollution control equipment. In addition, the United States Environmental alw css --

Protection Agency is claiming, in certain situations, that there were rfaccviolations of the Clean Air Act's 'new source performance standards."

• WESEnergyServicesis not directly subject to significantenvironmental I

n the matters where actions have been commenced, the federal government

regulations at this time.

is seeking penalties and the installation of pollution control equiprnent.

WisconsinPublicServicecton'inuesto investigatedhe environmer'ntal

' If tfederalgve tdecd dtobri a lai agant isconsin cleanup of ten manufactured gas plant sites, two of which were '

Public Service and if it were determined by a court that historic projects previously owned by Wisconsin Fuel and Light. Asof the fall of 2003,-.

at the Pulliam and Weston electric generating stations required either cleanup'of the land porton at five sites was substantially complete a state or federal Clean Air Act permit, Wisconsin Public Service may, Groundwater treatment and monitoring at these sites'will continue into under the applicable statutes, be required to:

the future. River sediment remains to be addressed at six sites with ut down ay unt found to be operan i n-comp nce, sedimentcontamination. Wisconsin Public Serviceestimates remaining

• it a

p o

equipment,

-.............. : *install additional pollution control equipment, future undiscounted investigation and cleanup costs for all remaining site work to be $36.2 million to $40.6 million and recorded a $36.2 million L

pay a fine, and/or

- liability for gas plant cleanup with an offsetting regulatory asset at.

pay fin and conduct a supplemental environmental project in December 31, 2003. Wisconsin Public Service expects to recover cleanup order to resolve any such claim.

costs net of insurance recoveries in future customer rates.

The Wyisconsin Department of Natural Resource's initiated a ruemaking The United States Environmental Protecton Agency has'designated '

effor to control mercury emissions: Coal-fired generation plants are the

' southeastern Wisconsin as an ozone non-attainment area. Under the:

primary targets of this effort. The proposed rule was open to comment in Clean Air Act, the state of Wisconsin'developed a nitrogen'oxide October 2001. As proposed, the rule requires phased-in'mercury emission reduction plan for Wisconsin's ozone non-attainment area: The nitrogen

-reductions reaching 90% reduction in 15 years. Wisconsin Public Service oxide reductions began in 2003 and will gradually increase through2007.:

estimates that it could cost approximately $163 million to achieve the Wisconsin Public Service owns 31.8% of Edgewater Unit 4, which is proposed 90% reductons. Presently, the prosed rule is on hold, and--

located in the ozone non-attainment area. A compliance plan-foi s'unit.it is uncertain if the state will proceed to finalize the regulations.

was initiated in 2000.-Wisconsin Public Service's share of the costs of this - -

D 20 t U

S E

r e

Protection

-gency

..~t_=,

2I --

n December 2003, 'the United States Environmental Protection'Agency-

.project is expected to be approximately $5 million. The project is nearly l.

t m-t Wisconsin Public S.e has ind a-

-~

.49 -il p---.

roposed mercury amaximum achievable control technology" standards co pete. Wisconsin Public Service has incurred approximate.y $4.9 milion o

2 and an altemative mercury cap and trade program substantially on this project as ofDecember 31 2003 -.;- -=$

o this project as of Decembr 3

3.

-modeled on the Clear Skies legislaton initiative. In addition, the United The state of Wisconsin is also seeking voluntaiy reductons from'utiy.

<States Environmental Protection Agency proposed the Interstate Air units outside the ozone non-attainment area,'which may lead to ' ='

t

~

Qu'ality rule, which wvould reduce sulfur dioxide and nitrogeri oxide additional expenditures for nitrogen oxide reductions at other units.' '

r emissions from utity boilers located in 29 states, including Wisconsin.'

Wisconsin Public Service is participating in volurtary efforts to reduce Wisconsin Public Service is in the process of studying the proposed rules.

nitrogen oxide levels at the Columbia Energy Center. Wisconsin Public As to the mercury 'maximum achievable control technology' proposal, it Service owns 31.8% of the Columbia facility. The Public Service

-requires existing units bumning sub-bituminous coal to achieve an annual:

W P S R E S O U R C E S CORPOR ATION 4

average mercury emnission rate lirit of 5.8 pounds per triion Btuon a -,-uncontracted merchant exposure and redeploy capital into markets unit-by-unit or plant-wide basis. New units must achieve an emission with different risk profiles. In addition, in January 2004, WPS Power

- rate limit of 0.020 pounds per gigawatt-hour. If the proposed rule is

_ Development entered into an agreement to lease most of its generation:

promulgated, Wisconsin Public Service's current analysis indicates that relating to continuing operations to WPS Energy Services. WPS Energy the'emirssion control equipment on theexisting units may be sufficientl-e Services wil utilize various financial tools, induding f6rwards'and to achieve the proposed limitation. New units will require additional options, to limit exposure and extract additional value from volatile mercury control techniques to reduce mercury emissions by 65% to

-commodity prices."'

85%. Mercury control technology s i

Wisconsin

-'PubicServiceis assessingpotential mercu controltechologies fo S

rN THE TJc.FJE OPERATION N-application to future new coal-fired units.

We have significantly reduced our consolidated federal income tax theaffeted Fi,=;

liability for the pastfour yeas thro t

credits available to usunder.

The Interstate Air Quality rule roposalallowsthafcestates'""t PP T n t i a '

p s

o t

f e

tSection 29 of the Internal Revenue Code for the production and sale

(including Wsconsin) to either require utilities located in the,stte to.

of solid synthetic fuel from coal. In order to maximize the value of participate in an interstate cap and trade program or meet the state's our synthetic fuel production facility, we have reduced our interest emission budget for nitrogen oxide and sulfur dioxide through measures -:,in the facility from 67% to 23% through sales to third parties (see

-to be determined by the state. Wisconsin has not stated a preference as-Note 6-Acquisitions and Sales of Assets). Our ability to fully utilize to which option it would select in the event the rule becomes firiial. While theSection29taxcreditsthatremainavailabletousinconnection theeffectoftherule'onWisconsinPublicService'sfc ties is uncertain ginterest nt faciitywi dependonwhether for planning purposes, it is assu mned that additional nitrogen ides and the amount of our federal income tax liabiity is sufficient to permit sulfur dioxide controls will be needed on existing units or the existing tuIiits-the use of suchcredits. The Internal Revenue Service strctly enforces will need to be c onverted to natul gas by 2010. The instalation 6ny corpliance with al of the technical requirerments'of Section'29.

• controls and/or any conversion to natural gas win need to be scheduled

-Section29 tax credits are currently scheduled to expire at the end

as part of Wisconsin Public Service's long-term maintenance plan 'for its of 2007.

- existing units. As such,controls or conversions mayneed to take place -

before the proposed 2010 compliance date. On a prelimiy basis and On June 27 2003, the Internal Revenue Service annrounced that it had assuming 'controls or conversion is required, Wisconsin Public'Serv'ice.

-reason to question the scientific validity of certain test procedures and estimates a cost of $288 miion in order to meet a 20 compance te results that have benpresented by certain taxpayers to qualify for

.This estimate is based on costs of current control technology Section 29 credits. The Internal Revenue Service also announced that it:

T.-

was reviewing information regarding these test procedures and practices.'

The generation'assets of WPS Power Developrnent are subject to However, on October 29, 2003, the Internal Revenue Service announced regulations on sulfur dioxide and nitrogen oxide emissions similarto thatit had osed'its'investigationandconcudedthatsuchtests'and those that apply toWisconsinPublcService. n addition, the Sunbury procedureswere scientificallyvalidif properly applied and indicated-generation facilities of WPS Power Development are locate ina Ane

_ it-would issue additional guidance on future sampling and testing.

- transport'region. As a result, these generation facilities are subject to WPS Resources believes that its synthetic fuel facility does and will

,:additional restrictions on emissions of nitrogen oxide. Although WPS Power complywithsuch guideines.

Development has some emission allowances for 2004 for the Sunbury:

facility, it may need to purchase approximately 10,000 to 15,000 additional -As a result of the June 2003 Intenal Revenue Service announcement

-allowances at market rates, to meet its 2004 requirements.

on August 1, 2003, W

PS Resources received notice fror the Internal Revenue Ser icethat the VPS Resources' affiat'through wi ch'it

-ENERGY AND CAPACITY PRICES holds an ownership interestina synthetic fuel facility was under.

Prices for electric energy and capacity have been extremely volatile over review for the 2001 tax period and that, depending upon the review, r

the past three years. VPS Resources' nonregulated entities are impacted

' of the affiliate's 2001 tax return, the Internal Revenue Service might by this volatility, which has been driven by the exit of many of the largest reexamine the affiliate's 2000 tax return. However, following the speculative traders, the slow down in the economy, and significant L October announcement that the Internal Revenue Service was closing overbuilding of generation capacity.

itsinvestiion, PS esourcesreceivedpre nary notice in J'-'

~~~~~~~~~~--

E, Ci. -f-F.,-:.-i 3-'auarv 2004 that both' au d

t reaed to t

hs i sehve cl1e witout

~i-Although electric energy prices are currently high due to increased -

Ju 2004 t b

a ra o ti i h

c without

,~~~~~~~~~~~~~~~~~d u

dutment Future years remain open to audit. We continueto betieve, =:

natural gas prices, we expect that electric capacity prices will ctioumntmute s

n n o e c L

t b d

-se Ps on c i pc that the facility has been operated in compliance with the requirements

to be depressed for several years. Pressure on capacity pnnces wl }----,=fS--2-==--...-;--

yearshe.b 1

-of Section 29.

'continue until existing reserve margins are depletedeitherbyload L growth or capacity retiremrents. WPS Power Development has been -

-,,The Permanent Subcommittee on nvestigations of the Se ate'Comrittee

[r negatively impacted by the'depr es eand volate-on Governmental Affairs has been conducting an investigation of the I energy prices discussed above, and as a result we have taken certain,->0=>=-,= synthetic fuel industry and their use of Section 29 tax credits. Pursuant

steps to reduce our exposure to-the merchant marketplace.

to its invitation, onJanuary 30, 2004, we'answered questions of the 0 3.- ;-- - : ~-

x j s ':-'ommittee regarding our syteuc fel facitity. It is not known when On October 23, 2003, a definitive agreement was signed to sell Committee regarding our synthetic fuel-

-acility It is no kno-n when--

V/PS Power

-unbury'

-enerating to a subsidiary the investigation will be completed a pact, if any, such'

-.WPS Power Development's Sunbury g-enerating facifity to-a-suibsidiarv Po--

of m

facility

-=;

investgation may have on future legislation or the enforcement policy Duquesne Light Holdings. The pending sale will allow uto reduce of t I

R Servce.

RESOUR EofSthenteral nu SeC 42 J W P S R E S O U RZ C E S C O R P O R A T I O N

The energywithin We have recorded approximately $81.3 million of Section 29 tax credits NEW ACCOUNTING PRONOUNCEMENTS asreducions of income tax expense fro the project's inception m.

IMPACTOFISSUE 02-03 ON WPS ENERGYSERVICES'REVENUES June 1998 through December 31, 2003. As a result of alternative.As

'reired, on January 1, 2003,.WPS Energy Services'adopted Issue m

minimum tax rules, about $52.3 million of this tax benefit has been No 02-03. Upon adoption, Issue 02-03 required revenues related carried forward as a deferred tax asset as of December 31, 2003 Future to derivative instruments classified as trading to be reported net of payments under one of the agreements covering the sale of a portion related cost of sales for all periods presented. Prior to January 1, 2003,-

K; 0 -: -of our interest in the facility are contingent on the facility's co'ntinued.-i

WPS Energy Services classified all its activities as trading'in accordance production of synthetic fuel.TAny disallowance of some or all of those with the accounting standards in effect at that time. Consistent with tax credits would materially affect the related deferred tax account i.-

the new'accounting standards under Issue 02-03, effective January 1, as well as future tax obligations. Additionally, such 'disallowances may -'-2003 S Energy Services classifies as trading activities only those also result in a reduction of the level of synthetic fuel production at the transactions that at inception are intenAed to be 'settled in the near

.facility, thus reducing the likelihood and amount of future payments t

wit the objectve of genertirng profit on sht-term differences under that agreement. Future tax legislation and Internal Revenue in prices. As'a result of the change in the definition of trading, a larger Service review may also affect the value of the edits and the value porton'of PS Energ Services' business activities were classified as of our share of the facility.

trading in 2002 than in 2003. herefore, previously reported revenues for 2002 and 2001 have been reclassified to be shown net of cost of fuel,

-NDUSTRY RESTUCT R G natural gas, and purchased power, while most 2003 revenue continue

-To the extent competitive pressures increase and the pricing and sale of r

t o a ba T

r r

t net electricity assumes more of th characteristicsof a comrodity business,'

be gross the conmic ourbusnes ma com uner ncrasin prssue ~

revenues and cost of sales for 2002 and 2001 trading activities resulted the econornics of our business may come under increasing prsure n-

^-zna$

2.

~ o rd$,4.

iindces oWSRsucs of

-- in a $1,127.4 million and $1,243.7 miillion decrease to VIES Resources' addition, regulatory changes may increase access to electric transmission previously reported 'onsolidatednonregulated revenues, respectively, grids by utility and nonutility purchasers and sellers of electnrcity thus and a corresponding $1,127.4 uilior and $1,243.7 million decrease to potentialy resulting in a significant number of additional competitors in -

preiosl reporte cosld;e oe d c. o f n

gas, generaon.nd purchased p for the years ended December 31, 2002 and 2001, whlsaepoe ndprcae foerth end Deregulation of the electric and natural gas utilities has be gunin respectively. Neither margins, income, nor cash flows for 2002 were, Wisconsin, particularly for natural gas service. Currently, the largest impacte by the reclassification of revenue upon adoption of Issue 02-03.

natural gascustomerscanpurchasen turalgasfromsuppliers othei-- '"-~ -

-- than their local utility. Efforts are underway to make it easier for smaller natural gas customers to do the same. In addition, the Public Service Comrnission of Wiscoinsin has been studying how to deregulate the state's electric supply. We believe electric deregulation inside Wisconsinri is at least several years off as the state is focused on improving reliability c

by building more generation and transmission facilities and creating fair market rules. As electric choice occurs, we believe we will lose some generation load, which could negatively impact future cash flows, but will retain the'delivery revenues and margin. Also, the capacity that is freed up should be competitive in our marketplace. Deregulation of

-1 electricity is present in Michigan; however, no customers have chosen-an alternative electric supplier and no alternative electric suppliers have : 8 ZW offered to serve any customers inMichigan's Upper Peninsuladue to'

-the lackof transmissioncapacityinthe areas weserve,which isabbarmer'

-.'l to competitive supplers enterng the markeLt' In February 2004 the Michigan Public Service Commission issued an interim order providing electric rate relief to Detroit Edison in a manner,.

that could negatively impact the competitive electric supply'market in the area served by this utility. As a result of the interim order, customers of competitive electric suppliers will experience a decrease in cost savings

=

compared to the bundled uty rate, potentially making electric choice

-less attractive to energy consumers. WPS Energy Services serves 7- 'customers in the impacted area and therefore the interim order could -

negatively impact future electric revenues and margins'at this busiss'-

Leah Charbarneau, Colledions We will work to obtain modifications to the interim order as the final Service Specialist in Rhinelander rateorderisnote xpectedunilSeptember2004.

isconsi coorinates redi l

activities for a number of, northern districts ofWisconsin

_Public Service.

W P S R E S O U R C E S C O R P O R AT I ON L 3

InWaupaca,Wisconsin,JoelAnderson (on the truck), Lead Line Electrician for Wisconsin Public Service, and

~: Todd Maas, Line Electrician, replace I-:t i

a i

ahollow pole with a ne wI safer pole-0 Ig _ A ItI iASSET RETIREMENT OBLIGATIONS COSTS OF REMOVAL Effective January 1, 2003, WPS Resources adopted Statement No. 143.

- The utility segments of WPS Resources recognize removal costs for utility Under the new accounting standard, WPS Resources recognizes,-at assets. Historically, these removal costs were reflected as a component of fair'value, legal obligations associated with the retirement of tangible '

depreciation expense and accumulated deprecation in accordance with '

long-lived assets that result from the acquisition, construction, or regulatory treatment. The staff of the Securities Exchange ommssion development and/or normal operation of the asset. The associated --:

-recently expressed their views on the balance sheet classification of these retirement costs are capitalized as part of the related long-lived asset '

costs of removal and required that the amounts be reclassified from and depreciated over their useful life. Legal retirement obligations accumulated depreciation to a liability. As a result, WPS Resources identified for the regulated segments of WPS Resources relate prinarily

-redassified $463.3 million-of removal costs from acepreciation -

f from a c cmulated d on to the final decommissioning of the Kewaunee nuclear power plant tonuceardecommissioningandothercostsofremovalatDecember31,

'The noiregulated segments identified a legal retirement obligation 2002. WPS Resources identified legal retirement obligations associated with r related to the closure of an ash basin located at the Sunbury generation the removal of certain utility assets upon implermentation of Statement plant. The adoption of Statement No. 143 had no impact on the No. 143 in January 2003. Upon the adoption of Statement No. 143 on earnings or cash flows of the regulated segment as the effects were January 1, 2003, costs of removal with associated legal obligations of offset by the establishment of regulatory assets and liabilities pursuant

$290.5 million were removed from nuclear decommissioning and other

'to Statement No. 71, "Accounting for the Effects of Certain Types of costs of removal as these costs are now accounted for as asset retirement Regulation," and reduced earnings of the nonregulated sejgmnt by obligations. Costs'of removal that were not identified as having an

$0.3 million, recorded as a cumulative effect of change in accounting

.associated legal retirement obligation were reclassified from nuclear Xprinciple. Upon implementation of Statement No. 143 in the first'4uarter I -dicommissioning and other costs of removal to a regulatory liability

'of 2003, we recorded a net asset retirement cost of $90.8 million

-at December 31, 2003. Income available forcommonshareholders.i (decreased to $78.5 million at December 31, '2003, due to depreciation-'

and cash flows were not impacted by this accounting change.,

being recorded) and an asset retirement obligation of $324.8 million uponadoptionofStatementNo.143(increasedto$344.0rnjiinat-VARIABLEINTERESTENTITIES.

December 31, 2003, as a result of accretion being recorded). The -

In January 2003, the Financial Accounting Standards Board issued.

F difference between previously recorded liabilities of $290.5 mnillicn-Interpretation No. 46r 'Consolidaton of Variable Interest Entities, an and the cumulative effect of adopting Statement No. 143 was deferred 9. - Interpretation of Accounting Research Bulletin No. 51,' in order to liabilitypursuant to StatementNo.71.'

':'improve financial reporting by companies involved with variable interest to a regul

tory ab t n

aE m.

.-- i.

f co 44 j WPS RESOURCES CORPORATION

The energywithin entities. Interpretation No. 46 requires certain variable interest entities Qua

- '. -5 Uantitative and Qlualitative:

to be consolidated by the primary beneficiary of the entity if the equity cDisclosures About Market Risk :

, investors in the entity do not have the characteristics of a controlling.-

-i' financial interest or do not have Aufflcient eqiityatriskforthe entityto KET RISKS finance its activities without additional subordinated finani s t

-WPS Resources has potential market risk exposures related to from other parties. On December 24, 2003, the Financial Accountin

'gcommbdity price risk, interest rate risk, equit retun, and principal Standards Board issued a revision to Interpretation No 46 ( 46R ) in preservation risk. The current exposure to foreign currency exchange order to clarify some of the provisions of Interpretation No' 46 and to

, -rate risk is not significant. WPS Resources has risk management exempt certain entities from its requirements. The effective implementation ipolicies in place to monitor and assist in controlling these market date of Interpretation No. 46 was also modified by Interpretation No 46 risks and may use derivative and other instruments to manage some The applicationofInterpretationNo. 46Rwas required for financial of these exposures.

statements of public entities that have interests in special-purpose entities I

EREST RATE RISK

'" fforperiodsendingafterDec-emb-er15,2003.WPSRe-o'urce~s'idenutfied-.

0-0---

=

f perimodas ending after December15, 2003. WS Re*.s'.ces identif WPS Resources and Wisconsin Public Service are expo sed to interest rate WPSR Capital Trust las a special purpose entity that is within the scope ris: r--

et

.f - -a*i-b.e-r-.

l-an short-ter:

of Interpretation No. 46R See Note 15 -Comn Obligated Mandatorily -

crcialthe br owing. Epse toingter est anri ismanaged Redeemable Trust Preferred Secuties f Preferred Stock Trust, for further by limiting amount 'o variable rate g

n n

discussion of the impacts of implementing this portion of Interpretation-.7'-. morting the effcts of market cage obinainrs rat WPSuResurces

, No. 46R on the financial statement of WPS Resources. For all other types and isonn Pbi Serv e enter in lntered rate deb wen i of variable interest entities, the application of Interpretation No 4-6R sa d

P va entageo ito

- ~

~

~

~

~

~

~

L

=-

-=>

is advantageous to do so. WPS Resources and Wisconsin Public Service will be required in the first quarter of 2004. We do not anticipate a d so.

Rsuc a W

P Service

- z. R :.

R R

?

-.--I-may also enter into derivative financial instruments; such as swaps to -

significant impact to the financial statements of WPS Resources in the my as ee it d

v f l i n

sc as s first quarter of 2004 as a result of adoptning

'mitigate interest rate exposure. At December 31, 2003, and 2002, the emaiing roviions WI'S Resources utilized one interest rate'swap to fix the interest rate

--'a dof Interpretation No. 46R'0;-.

-0~-;0-

~id e r of Inerprtatio No.46R.on a

narable rate loan at one of its nonregulated subsidiaries.

MEDICAREPRESCRIPTONDRUG,IMPROVEMENT Based o-the va iable rate debt of WPS Resources and Wisconsin Public ANDMODERNIZATIONACTOF2003 V

X Serviceoutstanding at December 31, 2003, a hypothetical increase in In January 2004, 'the Financial Accounting Standards Board issued Staff.

/. market interest rates of 100 basis points in 2004 would increase annual Position (FSP) 106-1, 'Accounting and Disclosure Requirements Related interest expense by approximately $0. million and $0.1 million, to the Medicare Prescription Drug, Improvement and Modernization respectively Comparatively, based on the variable rate debt outstanding at Act of 2003.' FSP 106-1 permits a sponsor of a postretirement health i.

ADecember 31,'2002, an increase in interest rates of 100 basis points would care plan that provides a prescription drug benefit to make a one-time have increased interest expense in 2003 by approximately $0.6 million and

' election to defer accounting for the effects of the Medicare Prescription9

$0 3 r

.million. These amounts were determined by performing a sensitivity Drug, Improvement and Modernization Act of 2003, which was signed -- a-nalysis on the impact of a hypothetical 100 basis points increase in

' into law on December 8, 2003: Regardless of whether a sponsor elects interest rates on the variable rate debt of WPS Resources and Wisconsin that deferral, the FSP required certain disclosures pending further Public Service outstanding as of December 31, 2003, and 2002. This consideration of the underlying accounting issues. In accordance with -.

sensitivity analysis was perfored assuming a constant level of variable -

FSP 106-1, we have elected to defer accounting for the effects'ofthis '- Orate debt anlyis wae performed assmng a cnteant levels of variabl

• legislation until authoritative guidance on the accounting o h'drn'h eidada meit nraei h eeso egislation i ue.

o enit n

interest rates with no other subsequent changes for the remainder of the legislation is issued. Refer to Note 19 - Employee Benefit Plans for period In the event of a significant change in interest rates, management'

further inrmation.

':would take action to itigate WPS Resources' and Wisconsin Public vImpactof Inflationi Seces exposure to the change.

Our financial statements are prepared in accordance with accounting COMMODITY PRICE RISK'

principles generally accepted inthe United States of America 'and reportV-PS Resources is exposed to cornmodity price risk resulting from the operating results in terms of historic cost.The statements providea.

impact of market fluctuations in the price of certain commoditiess, reasonable, objective, and quantifiable statement of financial results ;

-- including but not imited to electricy natural gas, coal, fuel oil and but they do not evaluate the impact of inflation. Under rate treatment uranium, which are used and/or sold by our subsidiaries in the normal prescribed by utility regulatory commissions, Wisconsin Public'Service's course of their business: We employ established policies ad procedures and Upper Peninsula Poer's "projected operating costs are' recoverable to reduce the market risk associated with changing commodity prices,

-m n

revenues. Because rateforecasting assumes inlation, most of the including using various types of commodity and derivative instruments.

inflationary effects on normal operating costs are recoverable in rates.

WPS Resources',exposure to commodity price risk in its' regulated utilities However, in these forecasts, Wisconsin Public Service and Upper is significantly mitigated by the current ratemaking process for the Peninsula Power are only allowed to recover the historic cost of plant recovery of its electrc fuel and purchased energy costs as well as its cost' via depreciation.

of natural gas purchased for resale. Therefore, the value-at-risk amounts discussedbelow donotincludemeasuresforWS Resources'regulated_ -

WPS RESOURCES CORPORATIO N -45

utilities. To further manage commodity price risk, our regulated uites Frthe year ended December 3l,2003, the'ave-rage, high, and low enter into contracts of various durations for the purchase and/or sale of VaR amounts for WI'S Energy Services were $0.5 million, $0.8 million,

-natural gas, fuel for electric generation, and electricity.

7 and $0.4 million, respectively. The same amounts for the year ended ecember 31, 2002, ere $0.5 million, $0.7 millio;n,'and $0.4 million.

V/P Pwe Dveopen uilze prcas ad/r al cntacs or For the year ended December 31, 2003, the average, high, and low.VaR electric fuel and electricity to help manage its commodity price risk.

aonsfrWSPwr eeomn ee$. mlin 13mlin WI'S Energy Services uses derivative financial and commodity instruments an$03ilorepcvlyThsmemutsfrheeredd to reduce mark-et risk associated with the changing prices-of natural gas Dembr3,20,we$15ilon$.2iload$.3ilo.

and electricity sold at firm prices to-customers.'WI'S Energy Services Tearaehianloamutwrec pudusgteVR also utilizes these finstrments to manage-rmarket risk associated with anicpaedenry urhaes-amounts at the beginin of the reporting period and the four quarter-

-end amounts.

- For purposes of risk mahage~ent disclosure, WPS Power Devel-pmne-n-t's~-----.-

andWPSEn~ergyServices'.activitiesareclas-sifiedasnon-tra~dm~g The -----.,EOUITY RETURN AND PRINCIPAL PRESERVATION RISK valu-atris amuntsdisussd blow re resnte sepratly or oth WI'S Resources and Wisconsin Public Service currently fund liabilities V/SPwrDvlomn n

/SEn ergy Services due to the ~differing related to employee benefits and nuclear decommissioning thirough vaouexealtrust fud.Tee fud r

a

-1 market and timing exposures of each eritity.'

t f varioussexternalre.managed by various inetetmanagers and hold investments in deb adeuty scriis VA L UE-AT-R I SK

-Changes in the market value of these 'investments can hae an impact on To measure commodity price risk exposure, V/PS Resources performs,-

the-future expenses-related to these liabilities: V/PS Resources maintains a value-at-risk (VaR) analysis of its exposures.

two maiqualified pension plans. The pension lability for the Non-

~- -AdmnistrtiveEmployees Retirement Plan is currently over funded VaRisusedto describea probabilisticapproach to quantiyig the exosure adn otiuin otepa r eurd h eso iblt o

• t maketris. Te VR aoun reresntsan stiateof he ote~til ;--_the Administrative Employees Retirement Plan has -risen due to plan change in fair value that could occur from changes in market factors, witi 1 digchneadhsoralyowneetrts.Teibltyfte

-a given confidence level, if an instrument or portfolio is held for a specified i timeperod:VaR odes ae reatielysophstiate. Hoeve e

-Adinstrative Employees Retirement Plan exceeded the value of the rsk nfomatin i liitedby he

~

bihd-

-Plan's assets by $64.9 million at December 31, 2003, and V/PS Resources creaing he odeLTheins~ents beng -

-was, therefore, required to recognize a minimum pension liability as crain hemdl.Te ntumns e-used may have features that coud rige ap~eni~l ossinexesofth clclaed m~mtiftie ~i z _prescnibed by SEAS No. 87. Declines in the equity markets or continued m thneligcomdt ieecedte5fdne-ee ft~~declines in interest rates may result in increased fuiture pension costs for indicative~

~ ~

ofatulreut ta myocu.

these plans anid posible future required contributions. Changesmi te 2

used. VR is nt necesarilymarket value of investrnents related to other employee benefits or nuclear

-VaR is estimated using a delta--normal approximation based on a _

dcmisongcould also impact future contributions. WI'S Resources

• one-day holding period and a 95% confidence level. The delta-normal monitors the trust fund portfolios by benchmarking the performance of

-approximation is based on the assumption that changes in the yvalue the-investments against certain security indices. All decommissioning of the portfofio over short time periods, such as one dayarer normally.

cssadms fteepoe eei ot eaet ISRsucs distributed. It does not take into account higher order risk expo'sures, so reuae tlte:ssctemjrt fteecssaerecovered in

-it may not prvd agoaprxmtooftersinaotolok'th csoers' rates, mitigating the equity return and principal preservation

• substantial option positions. We utilized adelta-normal approximation nsonteexpur.

• because our portfolio has limited exposure to optionality Our-VaR--i--,~

-calculation includes derivative financial and commodity' in strumrents,`

FOREIGN CURRENCY EXCHANGE RATE RISK

-22 suchas orwrdsfutres swas, nd ptios a wel ascomodiies V/PS Resouirces is exposed to foreign currency risk as a result of foreign held in inventory, such as natural gas held in storage tothe extent~,'-~

operations owned and operated in Cadandtnscisdeontd suc psiios resiniicnt..int Cndia dollars for the purchase and sale of natural gas 'and electricity Our aR mout fr W'S Srvies as alclate tobe 0.8~on by our nonregulated subsidiaries. Forward foreign exchange contracts OurVa aoun fr PSEnergy Sevcswscluae dob 0~esignated-a arvlue hedges are utilized to manarige the risk associated at December 31, 2003, compared to $0.5 million at December -31; 2002

--with curnyfluctuations on certain fir sals an sales commitments Our VaR amount for V/PS Power Development was calculated to be -

denominated inCanadian dollars and -certain Canadian dollar

-$1.2 million at Dec-ember 31,_ 2003, co mpared with $0.3 miullionat-

'denominated asset and liability positionii. V/PS Resources' exposure December 31; 2002. The increase for V/PS Power Development-was

-to foreign currency~ risk was not signiuficant at December 31, 2003,-

primarily due to increased volatility in our forward price curve for -=

'r20.

eectricity. A sinfcntprinof this VaR amount is mitigated by-V/PS Power Development's generating capabilities, whichaire excluded from the VaRk calculation as required by the Securities and Exchange Commnission rules.

46 W

WPS R E SOU R CES COR POR A TIO0N

The energy within

1nn.,

I I

*,nni.

YeairlEnded December31l (Millionsexcept per share data)

Nonregulated revenue Utility revenue Total revenues Nonregulated cost of fuel, gas, and purchased power Utility cost of fuel, gas, and purchased power Operating and maintenance expense Depreciation and decommissioning expense Taxes other than income 1 perating income.

Miscellaneous income IInterest expense and distributions on trust preferred securities IMinority interest 1Other income (expense)

Income before taxes Provision for income taxes Income from continuing operations Discontinued operations, net of tax Net income before cumulative effect of change in accounting principles Cumulative effect of change in accounting principles, net of tax Net income before preferred stock dividends of subsidiary Preferred stock dividends of subsidiary IIncome available for common shareholders Average shares of common stock Basic Diluted Earnings per common share (basic)

Income from continuing operations Discontinued operations

• Cumulative effect of change in accounting principles Earnings per common share (basic)

Earnings per common share (diluted)

Income from continuing operations Discontinued operations Cumulative effect of change in accounting principles Earnings per common share (diluted)

IDividends per common share 1,050.3 974.9 1,461.1 1

1,345.4 339.7 334.3 419.0 444.6 412.5 333.0 94.8 84.1 39.9 36.7

'-478 -

~

37.5 (55.8)

(53.4A (8.0) 1 (59

-147.2 96.8 118.5 1

87.6 (6.0) 1 (6.9)_ __

112.5 80.7 112.5 807

$109.4A 77.6 31.728.2 r 32.0 II 28.3

$3.64 I 30 (0.9) J (.5)

(0.1) j-$2.99 (0.19)

(0.25)

'$3.42

$2.74

• I 1,

-The accompanying notes to WPS Resources Corporation's consolidated financial statements are an integral part of these statements WPS RE SO URCES CO0R POR A TIO0N

[74

I At December 31 (Millions)

Assets Cash and cash equivalents Restricted funds Accounts receivable - net of reserves of $6.6 and $7.0, respectively Accrued unbilled revenues

-- Inventories Current assets from risk management activities Assets held for sale Other current assets Current assets Property, plant, and equipment, net Nuclear decommissioning trusts Regulatory assets Long-term assets from risk management activities Other Total assets

-
i 1

1 i

-I

- i

iI-II i

Liabilities and Shareholders' Equity Short-term debt Current portion of long-term debt Note payable to preferred stock trust Accounts payable Current liabilities from risk management activities Liabilities held for sale Other current liabilities I--2002

$ 43.3

.4.2 293.3 105.9 1 10.3 406.6 1212 i

67.1 0 0 1,151.9 ::-

1,712.3

-290.5 110.9 1353 270.3

$3,671.2 1

29.8 1

71.1

- 452.0

- -;t 443.8 0.6:

--53.1 1,050.4 824.4 73.7.

19.3 49.7 40.2 70.6 1

-0109.7

-- =-

I 4633-

=

- 86.0 1,736.9 -

50.0 51.1 782.8

$3,671.2 Current liabilities Long-term debt Deferred income taxes Deferred investment tax credits Regulatory liabilities Environmental remediation liabilities

• Pension and postretirement benefit obligations Long-term liabilities from risk management activities Asset retirement obligations Nuclear decommissioning and other costs of removal I Other Long-term liabilities Company-obligated mandatorily redeemable trust preferred securities of trust holding solely WPS Resources 7.00% subordinated debentures Preferred stock of subsidiary with no mandatory redemption Common stock equity Total liabilities and shareholders'equity

X

g:

=

_ < ^ g :

r X

. F W S g

= g

: X I



:

;

The accompanying notes to WPS Resources Corporation's

- 0

.====- a -

j - -

. consolidated financial statements are an integral part of these statements. - - S X f ; S  ::i i

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5 r T : -

z.....................

. =: 2:X.442==--= t '-.

=:: -- 5. -:

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ff f

t C-;

f i

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f-R:

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48 w Ps RE SO U RC ES CO R PORATION

The oenergywithin 0

• 6 0-idiu S

• 1

(

7 Employee Stock Plan Guarantees

omprehensive " nd Deferred-Common

'Income

-Total

~Cdffnoenation Trust ~Stock Accumulated

__Capital in Other Excess of Retained Treasury Comprehensive Par Value Earninqs Stock Income (Loss)

L I

(Millions)

Balance at December 31,2000 58 (3.2)

-. $26.9

$177.7

~$354.8,

$(8.1)

$0.0 Income available for common shareholders 77.6 76--

77.6-Other comprehensive income - cash flow hedge (net of tax of $1.8)

(2.7)

(7

.(7 Comprehensive income

~

$74.9>

Issuance of common stock 1234.6 147.7-Dividends on common stock (58.8)

(58.8)

Other

-(0.6) 1 10 I-I Balance at December 31, 2001 IIncome available for common shareholders Other comprehensive income -cash flow hedge (net of tax of $3.1)

Other comprehensive income - minimum p~ension liability (net of tax of $18)

Cmprehensive income Issuance of common stock Purchase of common stock Dividends on common stock Other S

-$715.9'

$(412) 109.4 1094 (4.6)

(4.6)

(2.7)

(2.7) 1102.1 28.3

(~67.1) 4.9 0.1

$31.5,_.-$325.4

• $373.6

$(7.7)-

109.4-0.5 ' _:

21.7 I - -

4.7

-_ $(2.7)

(4.6)

(2.7)

(6. ) 0 1 Balance at December 31,2002 Income available for common shareholders Other comprehensive income - cash flow hedge (net of tax of $4.8)

Other comprehensive income - minimum pension liability (net of tax of $8.2)

Other comprehensive income -

currency translation Comprehensive income Issuance of common stock Purchase of common stock

$$782.8 94.7 94.7:

7.2 7.2 (12.3)

(12.3) 0.1 0.1 1-$89.7 197.7.

(1.0

$32.0

,$351.8 4.8 1191.8

$4115

94 (112.3)

.9 $(1.5)

$$(0.0)

-jI Dividends on common stock ntk,~,

The accompanying notes to WPS Resources Corporation's.

- consolidated financial statements are an integral part of these statements:'__.__

E I-1 I

. II I I

4

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I I

i F

t I

I I

t I

I F

I -

., I z

j 1

. I I

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-- I-"---

r WPS R ESOU RCES CORPORATION L4

Year Ended December 31 (Millions)

Operating Activities Net income before preferred stock dividends of subsidiary Adjustments to reconcile net income to net cash provided by operating activities Discontinued operations, net of tax Depreciation and decommissioning Amortization of nuclear fuel and other Unrealized gain on investments Deferred income taxes and investment tax credit Unrealized losses on nonregulated energy contracts Gain on sales of partial interest in synthetic fuel operation Gain on sale of property, plant, and equipment Cumulative effect of change in accounting principles, net of tax Other Changes in working capital, net of businesses acquired Receivables, net Inventories Other current assets Accounts payable Other current liabilities Net cash operating activities Investing Activities Capital expenditures Sale of property, plant, and equipment Purchase of equity investments and other acquisitions

. Return of capital from equity investment Dividends received from equity investment Decommissioning funding Other Net cash investing activities 17_2002

_7___2001__-

$112.5 94.8 46.5 (1.7) 0.7 5.3 (38.0) 10.8)

(9.6)

(99.7) 17.8 59.1 1.8

$ 80.7 6.9 84.1 t 11.1:--:f (8.1)

(33.0) 14.4 (2.2)

(1 49):

=

(10.7) 84.0 (42.1)

.-1.1: Ed, (35.7) 8.5 I

t II I

tcaI t

It i

I L

i I

Financing Activities Short-term debt - net Issuance of long-term debt Repayment of long-term debt and capital lease Payment of dividends Preferred stock Common stock Issuance of common stock Purchase of common stock Redemption of obligations acquired in purchase business combination Other 1

144.1 (210.3)

(244.3):

7.1 58.8 (723)

-0.4 42.4 7.1 3.5 (2.6)

(2.6)

-5.2 7.4 (265.4)

(134.8) 3.9 (98.5)

250.3

-180.8 (129.6)

(64.7) -

(3.1)

(31)

(67.1)

.(58.8)-

28.3 96.4 (1.3)

(11)

(17.9) 1 1.7 0.5 93.1 1

33.6 16.2 42.9

( (16.8)

(11-8):

(0.6) 31.1 43.9 1

12.8 43.3

$43,9 I

I Net cash financing activities Change in cash and cash equivalents - continuing operations Change in cash and cash equivalents - discontinued operations Change in cash and cash equivalents Cash and cash equivalents at beginning of year iCash and cash equivalents at end of year The accompanying notes to WPS Resources Corporation's consolidated financial statements are an integral part of these statemenit&-

=

F y

.E 5J]

WPS RE SO URC ES CO RPO RATIO N

t=

The energywithin 0

L! _=; -S, ' - L i o 0

• 4

=

- -~3/4-Education is clearly valued in our organization. Upper Pe n-Peninsula Power encountered a shortage of trained electrical line technicians, so when an instructor at "Line School" unexpectedly dropped out, endangering the course, Jerry Le Page, Customer Service Manager, volunteered to help.

-- He took a leave of absence to teach local people electrical line technicians'skills. He is teaching the Electrical Line i_.

Technician Program at the Midwest Skills Development Center in Michigan, and UpperPeninsula Power supports this endeavor by maintaining Jerry's benefit coverage.

c NO CTE 1-UMMARY OF SIGN I FICA-NT AC COU NT NG POLI C I ES -

(A) NATURE OF OPERATIONS-WPS Resources Corporation is a States of America. We make estimates and assptions that affect reported -

holding com pany. Our wholly owned subsidiary, Wisconsin Public Service amounts. These estimates and assumptions include assets, liabilities, the Corporation, is an electric and gas utility. Wisconsin Public Ser'vice'supplies disclosure of contingent assets and liabilities at the date of the financial and distributes electric power and natural gas in its franchised Service statements, and the reported amounts of revenues and expenses during territory in northeastern Wisconsin and an adjacent portion ofthe Upper '

-the reporting period. Actual results may differ from those estirates.

Peninsula of Michigan. Our other wholly ownedutiliysubsidiary Upper

(

CS A

C c

so-term

=- --. --.-..-..-.- --.=c..=-;

-- t--~(D) CASH AND CASH EQUIVALENTS-We consider short-term Pemnnsula Power Company, is an electric unlaity Upper Peninsula Power a m r

f t moth or l t be

-: : -X

=- -

X;- -L

--investmients with an origia

-ntyoftremonths or less to be '-

-supphes and distributes electric energy to a portion of the Upper Peninsula 'I w

an o of Michigan. Another wholly owned subsidiary, WI'S Resources Capients.

Corporation, is a holding company for our nonregulated businessses, 0 Cash paid for taxes during 2003, 2002, and 2001 was $21.9 million,

- - WPS Energy Services, Inc. and WPS Power Development, Inc WPS Energy

$34 6 mlion, and $34.0 millionr, respectively. During 2003, 2002, '

Services is a diversified energy supply and services company. WPS Power -

and 2001, cash paid for interest totaled $57.9 million, $52.3 million,

- Developmentisanelectric generationcompany.

-.- - aiid $52.6 million, respectively.

The term "utility" refers to the regulated activities of Wisconsin Pub ic

=

Non-cash transactions were as follows:

Service and Upper Peninsula Power, while the term "nonutity" refers'i=

to the activities of Wisconsin Public Service and Upper Peninsula Power Millions) ii 1< 2002

-2001 which are not regulated.-The term "nonregulated" refers to activities 3Resticted cash

-other than those -of Wisconsin Public Service and Upper Peninsula Power '

Conversion of indebtedness to equityinQuestEnergyLLC _2.4 A-(B) CONSOLIDATION BASIS OF PRESENTATION-The Consolidated.

Liabilities assumed in connection Financial Statements include the accounts of WPS Resources Corporation i~-

==with CH Resources acquisition O.9 and all majority owned subsidiaries, after eliminating significant '-.'-

Minimum pension liability equity intercompanytransactionsandbalances.Ifaminorityowner'sequityis

adjustment (2.)

reduced to zero,it is our policy to record 100% of the subsidiary's losses Exchange of transmission assets until the minority-owner makes capital contributions or coromitments for equity interest in American L:

°

_--s-3Transmission Company

_V 93.1 9i to fund its share of the operating costs. The cost method of accounting Transissio Compay3_

- 93.

is used for investments where WPS Resourcesowns less than 20/0 of -

E-h-ang oommionstock due C

votingstock of the company, unless other evidefice indicates we o mnd Light W o Fue have significant influence over the operating and financial policies of the investee. Investments in businesses not controlled by WPS Resources (E) REVENUE AND CUSTOMER RECEIVABLES-Revenues are recogniized

-Corporation, but over whichwe have significant influence over thee

=

==

'on the accrual basis and include estimated amounts for eletric and natural operating and financial policies of the investee, are accounted for using gas services rendered but not billed; Approximately 5.7% of WPS Resources' -

the equity method. For additional information nour equity method total revenue is from companies in the paper products industry. -

investments see Note 10-Investments in Affiliates, at Equity.Method

-- Wisconsin Public Service and Upper Peninsula Power use automatic In the fourth quarter of 2003, certain assets and liabilities of WPS Po-wer fuel and purchased power adjustment clauses for' the Federal EnergyX Development's Sunbury generation-plant were reclassified as assets held Regulatory Commission wholesale electric and the Michigan Public X for sale for al periods presented. The operating results for thisbusiness -a. aService Commission retail electric portions of the business. At Upper 7

have been separately classified and reported as discontinued operations.-- Peninsula Power most wholesale electric contracts are special contracts in the consolidated financial statements for all periods-presented. Refer.

.'and have no automatic fuel and purchased power adjustment clauses. - L -

to Note 4 -Assets Held for Sale for more information.-

The Wisconsin retail electric portion of Wisconsin Public Services (C) USE OF ESTIMATES-We prepare our financial statements in.

<business uses a cost variance ranger approach, based on a specific conformity with accounting principles generally accepted in the siUnrttd fuelandpurchasedpowerco for hefoest ea If II i

I I

II i

IiI I.1 iI II I

rP i

I WPS R E S O U R C ES CO R PO RATI ON L 51

0 0

0 LA 0 1 A

Wisconsin Public Service's actual fuel and purchased power cost fall WPS Energy Services accrue revenues in the month'that energy isdelivered outside this range, the Public Service Commission of Wisconsin can and/or services are rendered. With the January 1, 2003, adoption of Emerging

-authorize an adjustment to future rates. Decreases to rates can be I.ssues sue Involved in Accounting for implemented without a heaning,-uhless requested by WiscohsinPublic Derivative Contracts Held for Trading Purposes and Contracts Involved Service, Commission staff or interveners, while increases'to rates would 'IY' :'= in Energy Trading and Risk Management Activities," revenues related to generally be subject to a hearing. For more information on current--

denvative instruments classified as trading are reported net of related cost regulatory actions relating to the fuel and purchased povwer adjustment

'of sales for all periods presented. Therefore, previously reported revenues for'

-clauses see Note 23-Regulatory Environment.-

devatives cassified as trading in 2002 and 2001 have been reclassified to be Th Public S C

o

-f Wisconsin approved a modifiedshowvn net of cost of fuel, natural gas, and purchased powex; while most 2003 The Public Service Commission of Wisconsin appoea dfi - -- :=. -.'-

E

-av=

-revenues continue tobe reported on agross basis see Note 1(T) -Cumulative1 one-for-one gas cost recovery plan for Wisconsin Public Service commencing. -- rev ct

- s N 1 T C

in January 1999. This plan allos W n P c S e to

.-- Effect of Change in Accounting Principles for more information. Neither

ijanuary l999.Thus plan aows Wiscons'mPubnc oerviceto pass cranges :-.-

rD= -

E :=- -margins nor income available for common shareholders were impacted by:-'

in the cost of natural gas purchased from its suppliers on to system natural m

no i a

f c s

w i

- =

R

-the reclassificaion of re venue upon adoption of Issue 02-03.-:---m gas customers, sublect to regulatory review. The regulatory review process ttt r s

t of r p

d o

02-03.

allows the Commission to review the changes for reasonableness. -

In accordance with the requirements of Emerging Issues Task Force Issue The Michigan Public Serv.ce Commission has approd f

-No. 02-03, WPS Energy Services' gross physical volumes of natural gas T he Michigan Public Service Commiussion has approved one-for-one

-=..----

=--

r r r f t:

~'and ecticiydelivered in 2003, 2002, and 2001 are're'porte'd in the;-'-'

recovery of prudently incurred gas costs for Wisconsin Public Service, i

e d

in 2 a

2 r r subject to regulatory'review. The Michigan Public Service Commission folowng tables:

hasalso approved a gas cost recovery factor adjustmentmechanism WPSEnergyServices for Wisconsin Public Service for the period November 2003 through Gas Results 2002 2001

'October 2004. This adjustment mechanism allows Wisconsin Public Wholesale s v

Service to upwardly adjust the gas rates'chargedtocustomers m in billioncubicfeet*

2338 2428-Michigan based on upward changes to the New York Mercantile Exchange t

s v

I E_-_____a____

===; =-

nSRetail sales volumes _i9---

natural gas futures price of gas without further Commission actionn cubic feet

• I

_105::____

Billings to Upper Peninsula Power's customers under the Michigah Public-

'Represents grossphysicalvolumes.

- Service Commiussion's jurisdiction include base rate charges and a power W

E S

~

=-

q

= 4

'§

,;Z

~

w 7ea

• r 7z~

>'WPS Energy Services'_ 0-

--l supply cost recovery factor. Upper Peninsula Power receives Michigan Electric Results (Millions) s

-2002 2001 Public Service Commission approval each year to recover projected W e s

vu I

power supply costs by establishment of power supply cost recovery i

kilowatt-hours

• j I

42500 16966 factors. Annually, the Michigan Public Service Commission reconciles :-=-

Reai sale voue u

, - e

- 5.==.

n^O e,,--

,- - R;'i Retil sales volumes_:-X 0

2j thlese factor to actual costs and perrruts 1uu % recovery esalwu-

,=

=-in Ikilowatt-hours 1

1 2,703.6 _

1,944.7;,:

power supply costs. Upper Peninsula Power recognizes any over or - -

.- 7

/ E _;

t X~~~-Representsgrossphysicalvolumnes.!-;: -X;-:

under recovery currently in its revenues and the payable or receivable epr-ent. -ross phys.cal v=lum esI

>WPS Enerr Services calculates the reserve for potential uncollecuible.-

is recognized on the balance sheet until settlement The deferrals are WPS E

nergy S c

t r t

uncollctibl d wh a l =-

or r

s. At D1 2

customer receivable balances by applying an estinated bad debt experience relieved with additional billings or refunds. At December 81, 2063,

-L -=--f-Peninsula Power has also recorded ae r t

-=-n-

-rate to each past due aging category and reserving for 100% of specific Uppe Per nsula Power has also recorded regulatory assets related to -=- - ;* vv _. =

Upper regula:-toy customer receivable balances deemed to be uncollectible. The basis for costs associated with the flooding on the Dead River for which the cut t r f r

calulang he esevefor rceivales-from wholesae counterparties =

'

&Vchigan Public Service COmmrrSSlOnhas authorized deferral.= -----

n c e o hs a e d-r-considers any netting agreements, collateral, or guaranties in place.

WisconsinPublicServiceandUpperPeninsulaPoweraireriequired to'

.: 0 f0 u -

-:.=.

aa -a--~-

(F)

NVENTORIES---Inventoriscons~ist of ntura gas in storage and fossiI--

provide service and grant credit to customers within their service temtones - ;-

VE.R;

-v c

o n g i s a

fossi g <_ - -==--= -fues/

cludmg coal. We value all fossil fuels using average cost. Average-The two compamies continually review their customers' credit worthiness f-e u

c W v a f f

u a

c Average an obai deost or reun depositsa.orin...

Both.A-utilties ae f

cost is also used to value natural gas in'storage for our regulated segments. --

-and obtain deposits or refund deposits accordmngly. Both utitiis a',-~.-~X---

precluded from discontinuin servic to re l c s din g

-Natural gas in storage for our nonregulated segments is valued at the lower precluded from disconuinuing service to residential customers during --:9s =

-E;-:;

=

+

= -

of co'st or market unless hedged pursuant to a fair value hedge. Through

= -'

=winter moratorium months. Our regulated segments calculate a reserve for of cs o m u

h p

t 7. -., -.,,.

Z g; =,- -

-December 2002, natural gas in storage for our nonregulated segments was =-i potential uncollectible customer receivables using a four-year average ofr 2

n ga i s f

t segment w d d s nt of r ries as a p e of tmarked to the current spot price'under fair value accounting rules. To bad debts net of recoveries as a percentage of total accounts rcial ?i- <.--

=

-'---E ~ comply with new accounting requirements'resulun from the rescission of The historical percentage is applied to the current year-end accounts c

p w n

a n

r e

f t

of reeval baac to deer th re-rv baac reuie

-..-..- :'Emerging Issues Task Force Issue No. 98-10, "Accounting for Contracts :0 'F0 r eceivable balance to deterimie the reserve balance requirea.= :,---:--

D' z47' 7n_-,

I.. nvolved inEnergyTrading and Risk Management Activities,' we adopted At WPS Power Development, electric power revenues related to the inventory valuation method described above for our nonregulated fixed-price contracts are recognized at the lower of amounts billable under natural gas inventories effective January 1, 2003.

thecontractoranamounte-qualtothevolumeofth-e'c-apa-cty~md:-:- r-0 ade::- -- 7I::-

-=--

e t r n

t l o te v e of (G) RISK MANAGEMENT ACTIVITIES-As part of our regular available or the energy delivered during the period multplied by the E

iln

options,

.,,--,--f.gy

~~ operations,'WPS Resources enters-i nto cnrcts, includirig opuions-- 1-5;- -

estimated average revenue per kilowatt-hour per the terms of the o

WPS R e

i

=o-trac

.L

=:.6

'--U'

3swaps, futures, forwvards, and other contractual commnitments, to manage :

contract. Under floating-price contracts, electric power revenues are s-ap ftrs f a

an contractual market risks such as changes in commodity prices, interest rates, and recognized when capacity is provided or energy is delivered fo crn e

-rates 5 ]

WPS RESOU RC ES CORPORATION

The energy within 0 WPS Resources evaluates its derivative contracts in accordance with "gains and losses did not have a significant impact on our financial

'Statement of Financial Accounting Standards No. 133, "Accounting-`

statements and neither margins, income available for common for Derivative Instruments and Hedging Activities,' as amended and shareholders, nor cash flows were impacted by the change.,

interpreted. Statement No. 133 establishes accounting and financial (H) P ET PLANT A ET p

i s a the

~~~-

z.::.

. '-':-(H)PROPERTYPLANTANDEQUIPME N

TWltplalt is stated at the reporting standards for derivative instruments and requires, in part, n inal

-- : r -;orignalcost of construction indluding an allowance for funds used during'-:

that we recognize certain envative instruments on the balance sheet g

-Th f

w g

o: ui o

=

7

- cnstruction. The cost of Ieeas and betterments of units of property (as-l as assets or liabilities at their fair value. Subsequent changes in fair value c

s a; -:. -. E <

i

-aid

-dlsenuished fro minor itemns-of property) is capitalizeda nadto o of the derivatives are recorded currently in earnings unless certain hedge di s

f mn i o r i c a

e =.

.: V EE ^: -tethe ulty plant accounts. Excep~tfor land, nogain or loss is recognized in -y; accounting criteria are met. If the derivatives qualify for regulatory deferral tconnection with ordinary retirements of utility property units. Maintenance, l

subject to the provisions of Statement No. 71, 'Accounting for the --

Effects of Certain Types of Regulation," the derivatives are marked to fair repair; replacemert and renewal costs associated with items not lifyig X value pursuantto StatementNo:-133 and are offsetwith a corresponding as units of property are considered operating expenses: The utility charges

- a t or lb

. Pr to te a o of E rgin the cost of units of property retired, sold, or otherwise disposed of, less

--regulatory asset or liability. Prior to the a option of Ee~n sus-g E D

-- 'I,

'i -- isalvage, to. the accumulated provision for depredatio.

Task Force Issue No. 02-03, 'Issues Ivolved Accounting for Dervave s

t t a

t p

f depreciati'n.

Contracts Held for Trading Purposes and Contracts Involved in Energy.

~

42=We record straight-line depreciation expense over the estimated useful life Trading and Risk Management Activities," effective January 1 2003, of utility property and include amounts for estimated removal and salvage.

WPS Resources accounted for contracts in accordance ith Issue'The Public Service Commission of Wisconsin approved depreciation rates No. 98-10, 'Accounting for Contracts Involved in Energy Trading and

-for Wisconsin Public Service effective January 1, 1999. On March 1, 2004,

'Risk' Management Activities." See Note 1T) - Cumulative Effect of Wisconsin Public Service filed a request for new depreciation rates to be RikMngmn ciiis Se No= 1S (

Of

=

to be Change in Accounting Principles for more information concerning the <a effectove January 1, 2005. Depreciation rates for Upper Peninsula Power transition from Issue 98-10 to Statement No. 133.

were approved by the Michigan Public Service Commission and are Effective July 1, 2003, WPS Resources adopted Statement of Financial-efeciv ary 20 g

em r 3 2006.

Accoun Standars s

No. 149, AmendmentofStatement 133 on Depreationforthe aunee nuclear power plant is being accrued based Derivative Instruments and Hedging Activities." Statement No 149 o n a Public Service Commission of Wisconsin order that became effective

' codifies and clarifies financial accounting and reporting for denvative a

.on January 1, 2001. The order included a change in the depreciation instruments and hedging activities under Statement No. 133 pmarily methodology for the Kewaunee nuclear power plant after the steam

in connection with decisios made by the Derivatives Implementation

-generators were replaced. The cost of the new steam generators that Group and for implementation issues raised in the application of went into service in December 2001 will be recovered over an 8-1/2 year -

Statement No.133. Statement No.149 is effective for contracts entered I

peiod using the sum-of-years-digits method of depreiation. Also under into or modified after June 30, 2003. The adoption of Statement this order, the unrecovered plant investment at January 1, 2001, and No. 149 did not have a significant impact on WPS Resources for 2003.

future additions will be recovered over a period ending 8-1/2 years after 0'.~, '

~

= ~ ~;- =tr_

drn inst~aBhtonofthesteamgeneratorsusingastraight-linerermaining-WPS Resources adopted Emerging Issues Task Force Issue 03 11 nat of t s

g u

a sig-line r

Reporting Realized Gains and Losses on Derivative I nstruments that edepreciatio methdlgy.X:

are Subject to FASB Statement No. 133 and Not 'Held for Trading Depreciation expense also includes accruals for nuclear decommissioning.

Purposes' as Defined in Issue No. 02-03," which resulted in recording These accruals are not included in the annual composite rates shown XTi revenues net of cost of fuel, gas, and purchased power for energy related below. An expIanation of this item is included in Note 8-Nuclear transactions that settle financially and for which the commodity does not PlantOperation.

- physically transfer for arrangements entered into after October 1 '-2003.

Had we applied the provisions of Issue 03-11 to'rrangements entered into prior to October 1, 2003, previously reported nonregulated revenue

- Depreciation Rates 2

2 20021 would have decreased $62.9 million for the nine months ending i

-6 =3_3%

September 30, 2003, with acorresponding $62.9 million decrease to 3.6%;

V-e Gas al

.9-3.37%-3l nonregulated cost of fuel, gas, and purchased power. Previously reported ;_

'wholesale natural gas salesvolumesfgNonutility ropertyinterestcpitalizationtakes placeduingconstruction,=

September 30, 2003, would have decreased 10.8 billion cubic feet.'

p c

Application of the provisions of Ie 03-l to r e

d and gain and loss recognition occurs in connection with retirements.

into prior to October 1,2003, would not have impacted the' 2002 an Nonutility property is depreciated using straight-line depreciation.

-2001 financialstatementsorreportedsalesvolumes.Neithermargins,-=-

Asset iesrange rom3to20years.

income, nor cash flows were impacted by the adoption of Issue 03 11 Nonregulated plant is stated at the original construction cost, which includes capitalized interest for those assets, or estimated fair value at In accordance with views recently expressed by the Securities and Exchange Commission staff, WPS Resources has reclassified mark the time Of acquisition pursuant to a business combination The costs of to-

-market gains and l s on

- instrum s n q -

.renewals, betterments, and major overhauls are capitalized as an addition' to-marke gasadlsses on denvative I srument not qulifymrg -!V

-a L-rS i

dervatveto plant. The g ains or losses associated wait ordinaiy retirements are for hedge accountin as a co-pn of ru al pi-d-s recorded in the period of retirement. Maintenance, repair, and minor presented. The retroactive reclassification of the mark-to-marketIt--. =re -cot a e a i 4--- = --f-- - ;;.>.A replacement costs are expensed asincurred. -0=:>f-

--- SDX WPS RESOU RCES CORPORATION l 53

I 0

0 0

0

• 

-*W Most of the nonregulated subsidianres compute depreciation usin

'- ': _:(J) ASSET IMPAIRMENT-We review the recoverability of long-lived F the straight-line method over the-following estimated useful lives:.-.-=- -=, tangible and intangible assets, excluding goodwill and regulatory assets, Structures and improveents X -15 to 40 years

'using Statement of Financial Accounting Standards No. 144, 'Accounting Office and plant equipment

.5 to 35 years -for the Ipairment and Disposal of Long-Lived Asses!' Statement No. 144 Office furniture and fixtures 3 to 10 years

.- -- requires review of assets when circumstances indicate that the carrying Vehicles

-5 years amount of the asset may not be recoverable; This evaluation is based Computer equipment 3 years on various aayses, including undiscounted cash flow projections. The Leasehold improvements: -

Shorter of life of the lease carrying amount isnot recoverable if it exceeds the undiscounted sum 0

or life of the asset j

=

of cash flows expected to result from the use andeventudispositionof TheCombinedLocksEnergy Centerhowevezis usingtheunits of 0-3 the asset. If the carrying value is not recoverable, the impairment lossis productiondepreciation method for selected pieces of equipment havii mesuredastheexcessoftheasset's ar valueoveritsfai value.

defined lives stated in terms of hou'rs of production:---"X-.---;

d ls s d in t s of h If events or circumstances indicate the carrying value of investments WPS Resources capitaliies certain costs related to software developed or ccounted for under the equity method of accounting may not be obtained for internal use and amortizes those costs to operating expense recoverable, potental impairment is assessed by comparing the future over the estimated useful life of the related software, which is us'uallyv:

L -anticipated cash flows from these investments to their carrying values.

three to seven years.

The estimated fairvalue less cost to sell for assets held for sale are I -

CAPITA D I T AD A C FR F U

compared each reporting period to their carrying values. Impairment

) CAPITALIZED INTEREST AND ALLOWANCE FOR FUNDS USEDe recorded for equity method investments and assets held for DURING CONSTRUCTIONOur nonregulated subsidiaies capita& ie'.-

sale if the cariying value of such assets exceeds the future anticipated interest for construction projects, whilee our utilities use an allowance cash flows or the estimated fair value less cost to sel, respectively.

for funds used during construction calculation, which includes boia-'

interest and an equity component as required by regulatoryac'counting

-(K) REGULATORY ASSETS AND LIABILITIES-Wisconsin Public Service

-and Upper Peninsula Power are'subject to the provisions of Statement of

'Approximately 50% of Wisconsin Public Service's retail jurisdictional Financial Accounting Standards No. 71, J~ILLuUIng for the Effects of construction work-in-progress expenditures are subject to allowance for Certain Types of Regulation. Regulatory assets represent probable

funds used during consuctio, except specific Public Service Commission Z.future revenue associated with certain incurred costs. Revenue will bel of Wisconsin approved projects that could have a larger percent of recovered from customers through the ratemaking process. Regulatory expenditures subject to allowance for funds used during construction

'liabiliies represent amounts that are refndable in future customer rates.

For 2003, Wisconsin Public Service's allowance for funds used during Based on a current evaluationof the various factors and conditions that' construction retail rate was9.61%.

'-'"are expected to inpact future cost recovery, we believe that future -

Wisconsin Public Service's construction work-in-progress debt and equity recovery of our regulatory assets is probable.

percentages for wholesale jurisdictional electric allowance for funds used (L) GOODWILL AND OTHER INTANGIBLE ASSETS-On January 1, 2002; during construction are specified under a formula in the Federal Energy WPS Resources adpe Statement of Financial Accounting Standards.

Regulatory Commission's Uniform System ofAccou-For No. 142, 'Goodwill and Other Intangible Assets," and amortization of

-allowance for funds used during construction wholesale rate was~ 4-03%

goodw.,ill was discontinued. There was no impairment of goodwill upon Upper Peninsula Power is subject to one allowance for funds used during adoption of Statement No. 142; WPS Resources has elected to perform its construction rate. That rate is specified in a formula in the Federal Energy'-

annual impairment test during the second quarter of each year, updated

- Regulatory Commission's Uniform System of Accounts, but limited by -

whenever events or changes in circumstances indicate that goodwill might the Michigan Public Service Commission's aowedrate of ret'.rimFor be impaired. Based upon the results of impairment testing performed in

§2003 n mareto o-wl a oe

' 2003, the allowance for funds 'used during construction rate was 2.5%...

, no imp'.- eiit o i wa noed Historically, there have been few calculations 'of allowance for fuds Other intangible assets with definite lives, consisting primarily of ermission

• during construction due to the small dollar amounts or short construction credits and customer related intangible assets, are amortized over periods periods of Upper Peninsula Power's constrcio rjet.n-c periosofUpntruction projects.

'from i to 30 years. For more information on WPS Resources' intangible Wisconsin Public Service's allowance for equity funds used during -"

assets, see Note 11 - Goodwill and Other Intangible Assets.

construction for 2003, 2002, and 2001 were $2.4 million, $3.0 million, (M) RETIREMENT DEBT-Premiums, discounts, and expenses and $1.9 million, respectively. Wisconsin Public Service's allowance for incurred with the issuance of outstanding long-term debt are amortized borrowed funds used during construction for 2003, 2002, and 2001 were

-;over the terms of the debt issues. Any call premiums or unamortized

'$1.0 million, $1.2 million and $2.1 million, respectively. Upper Peninsula s

-cost debt obligations used i'--Power did notrecord allowance for hinds used duringconstructionfor e

a with r h

db o used recor during construction to finance regulated assets and operations are amortized consistent 2003, 2002, or 2001.

A withregulatorytreatmentof those items,where appropriate.

Our nonregulated subsidiaries calculate capitalized interest on long--

(N) RESEARCH AND DEVELOPMENT-The only member of term construction projects for periods where financing is provided by WPS Resources' consolidated entity that incurs significant research WPS Resources through interim debt. The interest rate capit ed is and development costs is Wisconsin Public Service. Electric research-based upon the monthly short-term borrowing rate WPS Resources and development expenditures for Wisconsin Public Service totaled rsforsuch unds. a

-$0.6 million for 2003, $0.3 million for 2002, and $1.1 million for 2001.

54 w

Ps RESOU RC ES CORPORATION

The energyvwithin (0) ASSET RETIREMENT OBLIGATIONS-Effective January 1, 2003, At December 31, 2003, Wisconsin Public Service had an outstanding WPSResources adopted Statementof FinancialAccoungStandaidsN. 143, guarantee to indemnify a third-party for certain exposures related to

- Accounting for Asset Retirement Obligations!' Under the new accounting the constructioh of utility assets. In the event that 'the onstruction standard, WPS Resources recognizes, at fair value, legal obligations associated project is not completed, Wisconsin Public Service agreed to reimburse with the retirement of tangible long-lived assets that result from the the guaranteed party for certain unrecovered costs. At December31, 2003,

' acquisition, construction or'development and/or normal operation of the the guarantee carries a maximum exposure of $5.5 million. A liability for asset. The associated retirement costs are capitalized as part of the related

--the fair value of this obligation was not recognized in the Consolidated long-lived asset and depredated over the useful life of the asset For the utility.i'--Balance Sheets 'of Wisconsin Public Service, because the guarantee was segments of WPS Resources, we believe itis probable thai atnydifferences i-

-Issued prior to the effective date for initialmeasurementand recognition between expenses under Statement No.143 and expenses current recovered ~nf as defined by Interpretation No. 45.

through customer rates will be recoverable in future customer rates"'-=

-,-=

(S) STOCK OPTIONS-At December 31, 2003, WPS Resources had three Accordingly, the adoption of this statement had no Impact on the utility

> st o

n p h

a d m

f

- :=Vsegment s inco~me as the effects were offset by the establishment of regulatory i tc pinpas hc r ecie oeflyi oe2 tc se gments inomleas the ft waereo t by the RestalthmNotef t4AtOy =Option Plans. We account for these plans under the recognition and asstsorlibiitespursuant to State ment No. 71. Refer to' -Nte16Ase Retirement Olao for addi i

o St

N measurement principles of Accounting Principles Board Opinion No. 25, Retirement bfilgations for additionalinfomnation on Statement No. 143. -_-~z-.-

Accounting for Stock Issued to Employees," and related interpretations.

(P) INCOME TAXES-We account for income taxes using the liability' No compensation cost for stock options is reflected in income available method as prescribed by Statement of Financial Accounting Standards for common shareholders, as all options granted under those plans had No.109, "Accounting for Income Taxes." Under this method, deferred income an exercise price equal to the market value of the underlying common taxes have been recorded using currently enacted tax rates for the differences _, stock on the date of grant.

between the tax basis of assets and liabilities and the basis reported in thei:---

.financial statements.Due to the effects of reglationon Public-The following table illustrates the effect on income available for comm Service and Upper Peninsu era Wcs

l.

,----,=,--=

-shareholders and earnings per share if we had applied the fair value i--X Service an pe enula Power, certain adjustments made to deferred ;-; ---

f>&

-:-..-recognition provisions of EASB Statements'No. 123,_ Accounting fr income taxes are, in tum, recorded as regulatory assets or liabilities.'-.

r p

o

.A-t 1

for Stock Based Compensation," to employee stock options.

Investment tax credits, which have been used to reduce our federal income

- taxes payable, have been deferred for financial reporting purposes. These

-r deferred investment tax credits are being amortized over the useful lives -I -

(Millions, exceptpershare amounts) 2002 '

2001

--of the property to which they are related.

Incomeavailablefor

~~common shareholders WPS Resources is an indirect part owner in a facility that produces

$1094

$7 synthetic fuel from coal, as defined in Section 29 of the Internal Revenue ' 5 Deduct Total stock option employee Code. The production and sale of the synthetic fuel from this facility=

compensation expense determined

-qualifies for tax credits under Section 29 if certain requirements are --

under fair value method for all awards, net of related tax effects

__0_3 satisfied. Section 29 tax credits ire at the

~ a r t r urnl ceue oepr tte Pro forma

$0.

7.

end of 2007. Tax credits that are notutilized to reduce tax expense as a p

result of alternative minimum tax rules relating to United States federal Basicearnings per income taxes are carried forward as alternative minimum tax credits to -

cm ar reduce current tax expense in future years. Under current federal laws As Preportd

$3.45

$275 Pro forma

-. 4 27 alternative m'inimum tax credits do not expire.

Du e'arnins per

= I-X -

R.

e

= g :

c-A :=wDiluted earnings pe.- -t-H WPS Resources files a consolidated United States income tax retum that common share icludes domestic subsidiaries in which its ownership is 80 percent or As reported more. WPS Resources and its consolidated iubsidianres are parties to a tax =.- Pro faria allocation arrangement urder whicheach entity determines its income tax provision onastand alone basis, after which effects of federal (T) CUMULATIVEEFFECTOF CHANGE IN ACCOUNTING consolidation are ccountedfor.

RNCIPLESSEnergyServices had been applyng the accounting standards of Issue 98-10, "Accounting for Contracts Involvd in Energ

--i 0-(Q) EXCISE TAXES-WPS Resources presents revenue net of pasi-diioug- - '

p t

of ps-..th Tradog anuh gement Activities," from the first quarter of taxes on the Consolidated Statements of Income.-

t 20 nti this standard was rescinded by Issue 02-03 in October 2002..

(R) GUARANTEES-Effective January 1, 2003, WIS Resources adopted the <-WI'S Energy Service-was defined asa trading y under Issue 98-10 provisions of Financial Accounting Standards Board Interpretation No.45 and was required to mark all of its energy related contracts to market.

aGuarantoirs Accounting and Disclosure Requirements for Guarantees On October 25, 2002 the Emerging Issues ask Foice rescinded Issue 98-10, Including Indirect Guarantees of Indebtedn'ess of Others. Interpretation thus precluding mark-to-market accounting for energy trading contracts No. 45 elaborates on the disclosures to be made by a guarantor in its entered into after that'dct6that arenot derivatives and requiring a interim and annual financial statements about its obligations under certain cumulative change'inaccounting principle to be recorded effective v :

gurnesta thsise.Itrrtto o45 als6 requie tath January 1, 2003,jor all nonderivatiie contracts entered into oorprior guarantor recognize, -at the inception of the guaranltynfor to October25, 2002. OnJanuary 1, 2003, WIS Resources 'ecorded an the fair value of the obligation undertaken in issuing'the guarantee.

aftertx c l aveeffectofacangeii accountinglpiincipleof WPS R E SO U RC ES CO R PO RATI O N l 55

S 6

0

• M 0110 1

i

$3.5 million (primarily related to the operations of WPS EnergyServices) from its requirements. The effective implementation date of Interpretation to increase income available for common shareholders as a resultbof

- No. 46 was also modified by Interpretation No. 46R. The application of removing from its balance sheet the mark-to-market effects of thosee

=

Interpretation No. 46R was required for financial statements of public contracts entered into on or prior to October 25, 2002, that do no-t meet' - ~ entities that have interests in special-purpose entities for periods ending the definition of a derivative under Statement No. 133. The cumulative after December 15, 2003. WPS Resources identified WPSR Capital Trust I effect of adopting this new accounting standard is expected to reverse

--as a special purpose entity that is within the scope of Interpretation upon the settlement of the contracts impacted by the standard. Most of -'

No. 46R. Refer to Note 15 - Company-Obligated Mandatorily Redeemable this reversal is expected to occur in2004. The required change in accountingm

_ Trust Preferred Securities of Preferred Stock Trust for further discussion had no impact on the underlying economics or cash flows of the c6ntracts. _ of the impacts of implementing this portion of Interpretation No. 46R 3G t

onthe iacasae tf WPS Resoures. For a lter types of In addition, the adoption of Statement No. 143 at WPS Power Development -o

-F o

t

,vanable intrest entities, the application of Interpretation No..46R will resulted in a $0.3 mlllion negative after-tax cumulative effect of change -

=

- ' -=~~~~~~~=

be required in the first quarter of 2004.

-fo j-~--

-V--

in accounting principle related to recording a liability for the closure of - -

b r n t f

an ash basin at the Sunbury generating plant.

'- -7~-

i

+WPS Resources has not identified any material varable interest entities (U) year financil

-created, or interests in variable entities obtained, after January 31, 2003, (U) REC L

ASIIATIONS-We re'dassified certain priorya fincl eI-i. RELAS CATN-W raecltasosiofited cerrentyain preior that require consolidation or disclosure under the Financial Accounting t s to c m to t c

Standard Board's Interpretation No. 46R and continues to assess the '

(V) NEW ACCOUNTING PRONOUNCEMENTS-In January 2003 existence of any interests in varabl e interest entities not classified as special the Financial Accounting Standards Board issued Interpretation No 46 M

purpose entities, created on or prior to January 31, 2003. WPS Resources "Consolidation of Variable Interest Entities, an Interpretation of '

currently anticipates that we will discose information about a variable Accounting Research Bulletin No. 51,' in order to improve financial

--- interest entity upon implementation of Interpretation No. 46R in the first reporting by companies involved with variable interest entities. -

quarter of 2004. Through an affiliate of WPS Power Development, Inc.,

Interpretation No. 46 requires certain variable interest entities to be-WPS Resources owns a partial interest in a synthetic fuel production consolidated by the primary beneficiary of the entity if thee equity facility located in Kentucky and receives tax credits pursuant to Section 29 investors in the entity do not have the characteristics of a controlling of the Internal Revenue Code based on sales to unaffiliated third-party X

financial interest or do not have sufficient equity at risk for the entityj'

' purchasers of synthetic fuel produced from coal. At December 31, 2003, to finance its activities without additional subordinated financial siipport '

- WPS Resources had a 23% ownership interest in the synthetic fuel faclity. '

from other parties. The primary beneficiary is the party that absorbs -u-WPS Resources' maximum exposure to loss as a result of our involvement amajorityoftheexpectedlossesand/orreceivesthe majority oft wth this potential variable interest entity is limited to our investment in expected residual returns of the variable interest entity's activities.

- the entity which is not significant at December 31, 2003. Currently, we do.

On December24, 2003, the Financial Accounting Standards Board issued

-. not believe that WPS Resources is the primary beneficiary of this entity-a revision to Interpretation No. 46 ('46R") in order to clarify some of and do not anticipate consolidation of the synthetic fuel facility upon the provisions of Interpretation No. 46 and to exempt certain entities adoption of Interpietation No. 46R in the first quarter of 2004.

4 0

- The utility segments of WPS Resources recognize removal costs for utility assets. Historically these removal costs have been reflected as a component a1 of depreciation expense and accumulated depreciation in accordance with

.regulatorytreatment The staff of the Secunties and Exchange Commission-

-~

has recently expressedl their views~ on the balance sheet presentation o these removal costs for the utility industry and has required that the amounts be relassified fro accumulated depreciation to a liability for al years presented. As a result, MIPS Resources reclassified $463.3 million from accumulated depreciation to nuclear decommissioning and other costs of removal at December 31, 2002. Of the total amount reclassified, I-iX

^ le-Wisconsin Public Service recorded $451.6 million. Upon adoption of Fin-

.Fiancial Accounting Standards No. 143, 'Accounting for Asset Retirement -

Obligations" on January 1, 2003, costs of removal with associated legal, -

retirement obligations of $290.5 milion were removed from nuclear decommissioning and other costs of removal as these costs are now

-0 I Our commitment to being a world-class energy provider includes environmental responsibility. Connie Lawniczak (left) manages our -

environmental programs and environmental health and remediation.

_LShirley Scharff (right) is one of our Environmental Consultants and, also manages our lab and chemical procedures.

L~.

56 J WPS RESOU RCES CO R PORATION

The energywithin accounted for as asset retirement obligations. Refer to Note 16-Asset-:

=.X-n'ot have an associated legal obligation from nuclear decommissioning -

Retirement Obligations for more information on costs of removal with -HUH:' land other costs of removal to regulatory liability pursuant to Statement associated legal obligations. At December 31,2003, WPS Resources -

-No.

71. Wisconsin Public Service reclassified $167.9 million of costs of reclassified $180.0 million of costs of removal that were deterrined to.f remfoval that were determined to not have an associated legal obligation.

N O T E 2-F A I R V AL U E -O FT 1lN N C I AL I N STRU M E NTS The following methods and assumptions'were used to estimate the-fair

- value of each class of financial instruments for which it is practicable f to estimate such value:

Cash, Short-Term Investments, Energy Conservation Loans, Notes Payable (Millions) and Outstanding Commercial Paper: The carrying amount approximates Cash and c fair value due to the short maturity of those investments and obligations -

Restricted i Energy con Nuclear Decommissioning Trusts: The value of nuclear decommissioning Nuclear de

trust investments is recorded at fair value, net of taxes payable on unrealized Nuclear-e gains and losses, and represents the amount of assets available to

-" other asse accomplish decommissioning. The nonqualified trust investments Notes paya designated to pay income taxes -when unrealized gains become realized Commerci are classified as nuclear decommissioning trusts - other assets.

Note paaa Long-Term Debt and Preferred Stock: The fair value of long-term debt and preferred stock are estimated based on the quoted market Trust prefe price for the same or similar issues or on the current rates offered to Long-term WPS esoucesfor referred s WPS Resources for debt of the same remaining maturity.

i R mana The estimated fair values of our financial instruments as of-,

December 31 were:

=

=

S t

}

,,=.

=.

C ash equivalents cash servation loans commissioning trusts commissioning trusts -

Ats ble ia paper

)le to preferred rred securities debt tock gement activities - net

l; 0 0;2002 -

Carrying Fair

'Amount Value

$ 433

$ 433

-4.2 4.2 2'.2 2-2

--290.5 290.5

-13.0-13.0 I 13.8 13.8 16.0 16.0 ]

I

~

i 50.0 51.1 898.1 /

970.6

-51.1 45.5 (11.6)

(11.6) -

I i

E i

I I

I F

r I

E r

,- E I - L t

r

-V e-I=

I.

.=M-7

_ ;= 1 __~

NOTE 3-R I S K MAA NAGEMENT ACTIVITIES :

L.

r r

I

._ =.

X-F

- UTILITY SEGMENT

-2002 we recorded an asset from risk management activities Wisconsin Public Service has entered into a limited number of natural - -

of $255 million and a liability from risk management activities of gas and electric purchase contracts with customers thatare accounted for

-$23.2 million for those contracts entered into after October 25, 2002, as derivatives. The Public Service Commission of Wisconsin approved -

that qualified as derivatives and were not designated as hedges.

recognizing a regulatory asset or liability for the fair value of derivative -

Commodity contracts entered into before October 25, 2002, were amounts as a result of these contracts pursuant to Statement No.'7 accounted for as energy trading contracts under Issue 98-10 at Thus,management beLievesany gains or losses resulting from the December 31, 2002. At December 31,2002, WPS Energy Services eventual settlement of these contracts will be collected from or refunded -

recorded an asset from risk management activities of $514.9 million.

to customers. As of December 31, 2003, we have recorded an asset from and a liability from rsk management activites of $516.4 million -

risk management activities of $8.4 million related to these contracts'.

~-=D

t. related to energy trading contracts accounted for under Issue 98-10.

We recorded an asset from risk management activities of $1 4 millions Our' nonEg semet also enter into drvte Xotat tha.. t ar.e

.; s.,,,,,..

C.

ur nonregulated segments also enter int o denvative contracts that are.'E

- and a liability from risk management activities of $0.7 million related d

a designated as either fair value or cash flowr hedges. Fair value hedgqes are

.-to these contracts at December 31, 2002

)

-f-=-

to the c s at D r 3, 2

-- -~:- =used to mitigate the risk of changes in prices of natural gas held in NONREGULATED SEGMENTS inventoryandchangesinfairvalueofforeigncurrency.Thechangesinthe Our nonregulated segments have also entered into contracts that are fair vale of these hedges are recogned currently in eamngs as are the X accounted for as derivatives under the provisions of Statement No133 changes in fair value of the hedged items. To the extent that the fair value as amended. At December 31, 2003, those derivatives not designated.

hedge is fuly effective,there is no impact oneamings. At December31, - -

as hedges are primarily commodity contracts used to manage pnice

=

-2003 the fair value of contracts designated as fair value hedges, excluding -

rnsk associated with wholesale and retail natural gas purchase and 'sale foreign exchange contracts, are recorded as an asset from risk management

.. activities and electricenergycontracts. Changes inthe fair value-of activities of $0.3 million and a liability from risk management activities of

-thenon-hedge-derivativesarerecognizedcurrently'ineamings'At2

=

$40rmiliorxFairvaluehedgeineffectivenessrecordedin nonregulatedcost December 31, 2003, the fair value of these contracts is recorded as an of fuel gas, and purchased power on the Consolidated Statement of.

asset from risk management activities of $578.1 million and a liability income was not sigificant during 2003. At December 31, 2002, those from risk management activities of $582.1 million. At December 31,

-contracts designated as fair value hedges were not sinificant.

W PS RE SO U RC ES CO R PO RAT ION 57

0 6

0 6

I

Forward foreign exchange contracts designated as fair value hedges the changes in the values of these contracts are included in other are utilized to manage the risk associated with currency fluctuations

.comprehensive income, net of deferred taxes. Amounts recorded in other on certain firm sales and purchase commitments denominated in comprehensive income related to these cash flow hedges will be recogned Canadian dollars and certain Canadian dollar denominated asset and.

in earnings as the related contracts are setded or if the hedged transaction is-liability positions. The terms of our forward foreign exchange contracts :.:. discontinued. Through Decemnber 31, 2004, $6.3 nillion is expected to be are consistent with the terms of the underlying transactions, generalye recognized in eaings. The poron of these contracts that was determied one year or less. Unrealized gains and losses resulting from the impact to be ineffective was not significant at December 31, 2003, and was recorded..

of currency exchange rate movements on forward foreign'exchange-&.:

as a component of nonregulated cost of fuel, gas, and purchased power.

contracts designated to offset certain non-U.S. dollar denominated '7 =

When testirig for effectiveness, no portion of the derivative instruments assets and liabilities are recognized in earnings and offset the foreign.'

'was 'excdded. At December 31, 2002, th6se commodity contracts currency gains and losses on the underlying exposures being hedged. c designtedia cash flow hedges were not significant. 2--

TThe contractamnounts of forward foreignexchange'contracts outstanrdin-g -- i _ -- 'r-=SV

'~

i_0 C e

t s of f d feign exchg E

s The interest r

ate swap designated as a cash flow hedge is used to fix the at December 31, 2003, are recorded as an asset from s managementt=-= at at Dc b 31,2003=,.-,,

are recorded as an asset from -iskmanageminterest rate for the full term of a variable rate loan due in March 2018.-

activities f $10.6 million anda liability frm risk activities At December 31, 2003, we recorded a liability fro risk management of $4.3 million and were not significnt at December 31, 2002. Arll of:

the foreign exchange contracts designated as fair value hedges were activities of $10.1 million related to this swap. At Decemb 31 2002,.

d mid dto be erfectly effective.itiesof$12.7million related to this swap. Because the swap was determined to be perfectly Cash flow hedges consist of commodity contracts associated with our

-= _ -effective, the changes in the value of this contract are included in other

-- energy marketingactivities and an interest rate swap. At December31, comprehensive income, net of deferred taxes. Amorunts recorded in other*

2003, the fair value of commodity contracts designated as'cash flow hedges --7comprehensive income related to this swap will be recognized as expense -.

is recorded as an asset from risk management activities of $25.0 million

-as the interest is paid. Through December 31, 2004, $2.2 million is and a liability from risk management activities 'of $9.0 million.These expected -to be expensed, assuming interest rates comparable to those cash flow hedges extend through December 2005. The majorityof the,. -

at December 31, 2003. We did not excude any components of the commodity contracts were determined to be perfectly effective; th e,lefor derivative instrumnent's loss from the assessment of hedge effectiveness.

N O T E _ 4-A 5 S ETS -H E L D F O R SALE On October 24, 2003, WPS Power Development entered into a definitive agreement to sell its Sunburygeneration plant locatedin (Millions)

Pennsylvania. This facility currently sells power on a wholesale basis Inventories S 7.8 andprovidesenergyfora200-megawattaround-the-dockiouttake I

Other currentassets j

contract that expires on December 31, 2004. The sale will enable' P

p a

q net i-,

-f :: -

Other assets (includes emission-credits)

_37.5 WPS Resources to reduce uncontracted merchant exposure and Assets held for sale redeploy capital into markets with different risk profiles Based on Othercurrentliabilities 0

the terms of the asset sale agreement, the sale price is anticipated to Asset retirement obligations be approximately $120 million, subject to various working capital i Liabilities held for sale adjustments. WPS Power Development is also separately negotiating the sale of certain silt reserves that were utilized in the operations WPS Power Development financed Sunbury with equity from of the Sunbury generation plant.

WS Resources and debt financing, including non-recourse debt and a -:

At Decemnber31, 2003, and 2002, respectively, the assets and l

= =-related interest rate swap. -The interest rate swap is designated as a cash associated with the Sunbury generation plant tha w be transferred"r

-flow hedge and, as a result, the mark-to-market loss has been recorded as associated with the Sunbury-generation planit that will be iransfeiied

~

1~

m~

~~~~~,

,,.- -. s_: =a component of othercomprehensivemicome.If management detemiines :

to the buyer as well as certain silt reserves have been classified as held a c o o c

i I

dei for sale in accordance with Sta t of F l A t

.d ars that the hedged transactions (i.e. future interest payments on the debt) will for sale in accordance with Sttmnt of Financial Accounting Standards

-=-=-

-- not continue after the sale,'WPS Resources will be required to recognize the

-No. 144, 'Accounting for the Impairment or Disposal of Lorng-Lived a

u

=

a w

o c

h io

(

million n

^

=;

~°

.i.'

= -mur accumulated widlin other compre ensive incomre ($6.1 million.S Assets. Statement No. 144 requires that a long-lived asset clasified at D-cembe 3,-03 ce i

n

-N -

det r s sr s s '

' 1~

e.

~

~ ~ S -

S.

_atbDecembe~r 31, 2003) currently'in earnings. No such deterrnination has ~

as held for sale be measured at the lower of its carryig amount orfai been m a D 3 20

,, z,.

>.=-.J

. ~ -- -beenmad at December 31, 200.-----a value, less costs to sell, and cease being depreciated. No adjustinienfi to

-winte down assets held for sale were required in 2003. WPS Resources-'

WPS Power Development has an obligation to service a 200-megawatt plans to complete the sale of the Sunbury generation plant and certain '

outtake contract through December 31, 2004. WPS Power Development silt reserves in 2004 and, therefore, the assets and liabilities recorded ented d into the contract in conjunction with the acquisition of the Sunbury as held for sale are classified as current assets and current liabilities

-generating assets. At December 31,2003, WPS Power Development has:

'respectively, in the Consolidated Balance Sheets. The major classes

` hedged its obligationi to service its 200-megawatt outtake contract subsequent of assets and liabilities held for sale are as follows at December 31-:447=

, 'to the date of the anticipated sale of Sunbury (estimated to be August 31, 2004). The revenues from the outtake contract are $2.7 million less than 58 j W PS R E S O U RC E S CO R PO RATI O N

The energywithin When poles are hollow or rotten, Line Electricians quickly replace them With new, safer poles. On the left, Bernard Gauthier, Jr., in Wausa-ukee, Wisconsin, discards a damaged pole. On the right, Jim Fischer and Bernard (right) know the importance of doing anyjob safely.

the hedged cost of purchased power. This loss will be induded as a

[subsidiary and our discontinued operations did not occur in 2003 or-component'of the loss from discontinued operations in the Consolidated 7':>2002, and we have determined that similar sales will continue with Statements of Income when realized. The amount of the loss is subject-tto 3,',third parties after the discontinuance; therefore, the $3.4 million sales change if the sale does not close on August 31, 2004.

price is reflected in continuing operations in 2001. The market value E :..- - -- -

e - - ~ :: -; '

t ---,.ofthe related party sales was $4.3 rnilli'on in 2001..'P:, i '

A summary of the components of discontinued operations recorded of the rlepts-
les was $3 ml i 20 01

'in the Consolidated State ments of Income for the years ended

=Asummaryof thecomponts of cash usedi discontinued operations December 31 was as follows:

Lrecorded in the Consolidated Statements of Cash Flows' for the years 9- - -tf :;.ft-; ' -.- ; -~ 3' - t ="';-~~i 'i-ended December31 is asfollows.:

~

-;t9-:'0 (Millions)

W l 12002 I 2001 N onregulated revenue

-2

$ 864 2001 Operating expenses I9 A18 Interestexpense

- (5.8)

(59)

J Net cash operating activities

$ (1.2)

Loss before taxes

--- (9.9)

Net cash investing activities (19.4)

(4.5)

Income tax benefit 44 S Netcashfinancing activities (2.9)-

(6.1)

Discontinuedoperations,netoftax

$ (6.0) 1

$ (6.9) i Changeincashandcashequivalents

$(16.8)

$(11.8)

Interest expense represents the nonrecourse term loans directly related. <D7---During 2003, 2002, and 2001 cash paid for interest associated with toSunbury.

the non-recourse debt of discontinued operations was $5.5 million,

- ~ :. -:-;.;--............. -. ~;:- ;: ; =~............ 5.8 million, and $6.2riiillion, respectively. ~f3 In 2001, a consolidated subsidiary of WPS Resources sold electricity

$5.8 n a

.2 mi to our discontinued operations for $3.4 million. Sales between this

'4 ::

'-.G1 NOTE PR OP ER TY AN T, -A N D E Q U I P M E N T -

~

=

=

I-

~.

I I: _~.:R

,,~

,_ I-~1-

- A Ppty pn an eIpmn on si s -of I

t fl-w u

o-tly,

-,nd or a

Property, plant, and equipment

-cofnsists-of the follow~ing utility, nuttyan d no~nreigulated assets.;., -. 0 --.:e 0

. E I

(Millions)

Electric utility Gas utility Total utility plant j Less: Accumulated depreciation Net Construction in progress Nuclear fuel, less accumulated amortization Net utility plant I Nonutility plant Less: Accumulated depreciation i Net nonutility plant Electric nonregulated Gas nonregulated Other nonregulated Total nonregulated property, plant, and equipment Less: Accumulated depreciation Net nonrequlated property, plant, and equipment Total property, plant, and equipment

.'~~

9 i:_,

---

l

$2,058.8 -

-427.3

i

-2,486.1 9j 2

-1079.4 -

-1,406.7 -i 24.6 1 1,533.1 1

=191

. -v:C

-.0-441--

14.7 5

- 1758.3 I

-R -6.9 1

- 20.4".

-:185.6.1 - 4

_0. -

21.1 :1 -

1 64.5 1

$1,712.3.I L0'

_ 3. ' f W PS RE SO U RC ES CORI

0 0

0

• X

X L

N E6--ACQ UIS5ITION S AN D`SA LE.S ~OF AkSSET S SALE OF HYDROELECTRIC PROJECTS Sunbury generation plant that will be transfered to the buyer in this Wisconsin Public Service sold 542 ares of land near the Peshtigo River to transaction have been classified as held for sale on the Consolidated the Wisconsin Departrnent of Natural Resources in 2003 for $6.5 or'*on'4 Balance Sheets and the operations and cash flows related to the:

as part of a multi-phase agreement reached between the parties in 2001.

o--.=

perations of the Sunbury generation plant that will be eliminated upon' Under the terms of the 2001 agreement7 the Department of Natural Resources -

the -date of sale have been classified as discontinued operations within bought more than 5,000 acres of land for $13.5 million in 2001 an'd has U the Consolidated Statements of Income and Consolidated Statements an option to purchase an additional 179 acres in 2004 for appro'xi'mately

--of Cash Flo.'ws, respectively.

$5 million (in March 2004, the Wisconsin Department of Natural Resources exercised thisoption). Pending theclose of the third and final phaseofthe KEWAUNEE NUCLEAR POWER PLANT agreement in 2004, Wisconsin Public Service will donate an additional On November 7, 2003, Wisconsin Public Service entered into a definitive 5,176 acres to the state. The sale is a part of our asset management strateg

'agreement to sell its 59% ownership interest in the Kewaunee nuclear

,i.'

-rn.

-i power plant ito a subsidiary of Dominion Resources, Inc. The other joint WAUSAU, WISCONSIN, TO DULUTH, owner of Kewaunee, Wisconsin Power and Light Company; also agreed MINNESOTA, TRANSMISSION LINE to sell its41%ownershipinterestinKewaunee toDominionThe On April 18, 2003, the Public Service Commission of Wisconsin transaction is subject to approval from various regulatory agencies, approved Wisconsin Public Service's request to transfer its interestin including the Public Service Commission of Wisconsin, the Federal the Wausau, Wisconsin, to Duluth, Minnesota, transmission lie to=

fEnergy Regulatory Commission, the Nuclear Regulatory Commssion,'

the American Transmission Company. American Transmission Company '

and several other state utility regulatory agencies and is projected to

-is a foriprofit transmission-only company created by the transferCf Y' close in 2004. Approval has already been obtained from the Iowa transmission assets previously owned by multiple electric utilities serving Public Utility Commission.

the upper Midwest in exchange for an ownership interest in the of t a

proceeds

-0 D

~W~isconsin Public Service estimates that its share of the cash proceeds i company. Wisconsin Public Service sold, at book value, aWprosimaely P

Sv e

t i share

$20.1 million of assets relate

'the Wauu to D h afrom the sale will approximate'$130 million, subject to 'various post-

$20.1 millllon of assets related to the Wausau to Duluth transmission '-:'--:-:i A.

to transm.ssion closing adjustments. The cash proceeds from the sale are expected to '

lie to American Transmission Company in June 2003. No gain or loss si e

t c

a o t i

P S

asse was recognized on the transaction. In 2003, WPS Resources invested being soldI ono h

e Wisconsi Publc Service

~~~being sold. In addition to the cash proceeds, Wisconsin Public Serie-' --

$14.0 miion in American Transmission Company, related to its r

e ta in own ership of the assets contained in its non-qualified agreement to fund approximately half of the Wausau, Wisconsin, to -s; E

=A agreement to fund approx y hf o-th Wso nsi to decommissioning trust, one of two funds that were established to cover Duluth, Minnesota, transmission line. In December 2003,Wisconsin

=-

V e==.--=-the eventual decomnussionmng of Kewaunee. The pre-tax fair value of the Public Service also transferred other transmission assets to Amencan t--

h e of K E

r E v Transissin Copany inceasig it invstmet anaddiiona

$1i i mllioi. Dmir ssuwil asume pesposibiitytor teoevntua 'e:e'ntual

$5.9 million. At December 31, 2003, WPS Resources' ownership interest

$1 1 m D

wil s r

f t evnta NO-A-.-.=

decomniissioniqg of Kewaunee and willreceive Wisconsin Public

7 in American Transmission Company was 19.8%. Our investment indeoisongofewueadwllrcveWcninPbc AmericanTransmission Company is do-escribedmore 10 Service's qualified decommissioning trust assets that had a fair value CmayioefuyinNote 1;-----of $239.7 million at December 31, 2003 Wisconsin Public Service Will Investments in Affiliates, at Equity Method.

-- request deferral of the gain expected to result from this transaction

GUARDIlAN PIPELINE and related costs from the Public Service Commission of Wisconsin.

On May 30, 2003, WPS Resources purchased a one-third interestini Accordingly, Wisconsin Public Service anticipates most of the gain on the Guardian Pipeine, LC, from CMS Gas Transmission Comp an for sale of the plant assets and the related non-qualified decommissioning

'approximately $26 million. Guardian Pipeline owns a natural gas iist assets will be returned to customers under future rate orders. As of pipeline, which began operating in 2002, that stretches about 140 miles December31, 2003, Wisconsin Public Service's share of the carrying value from nearolietIllinois, intosouthemWisconsin.Thepipelinecan of assets and liabilities included within the sale agreement were as follows:

transport up to 750 million cubic feet of natural gas daily. Our interest

____.___X____

in Guardian Pipeline, LLC, is accounted for as an equity method investment (Millions) and is described more fully in Note 10 - Investments in Affiliates,-at Equity Method. As the consideration paid for Guardian Pipeline Property, plant and equipment net eOther current assets approximates the underlying equity in the net assets of this mivestment, Tt as-set

. < e -. t.tt:.-Total assets i

no purchase accounting adjustments were required. This pipeline.

improves natural gas price competition in Wisconsin and is critical 1

Regulatory liabilities to natural gas reliability in the state.

Asset retirement obligations SUNBURY

-0 Total liabilities As discussed in Note 4 - Assets Held for Sale, WPS Power Development The assets and liabilities disclosed above do not meet the criteria to be entered into a definitive agreement on October 24, 2003, to sell its classified as held for sale on the Consolidated Balance Sheets'under the Sunbury generation plant for approximately $120 million, subject to provisions of FASB Statement No. 144 due to uncertainties inherent in certain working capital adjustments. The assets and liabilities of the the regulatory approval process.

0 W P S R E SO U R C E S C O R P O R AT I O N

The enervyvwithin Uponthedosingofthesale,;Wisconsin-PublicServicewi enterintoa e

FederalEnergyRegulatoryCommissionandtheMichigan Public Service

- long-term power purchase agreement with Dominion to purchase energy Commission, began in 2003 and will also occur over 20 years.

and capacity equivalent to the amounts that would have been received The tr ai s

s a n pw p a

e w

W -

l

= ;.-

f

+5.

Te transaction alsoincludes anew power purchase agreement withia Lhad current ownership in the Kewaunee nuclear power plant contiinued._;

had urrnt onerhipin te Kwaune ndea powr pant ontnue 4Calpine's Fox Energy Center, which is currently under construction in

The power purchase agree ment, which also wilrequire regulatory almsFoEnryCtewchscuetyudrCntuhnm e power p e a

, w h ao wl r e rKaukauna, Wisconsin. The Fox Energy Center is being constructed as approval, will extend through 2013 when the plant's current operating -a 25 m g

f a

i s license will expire. Fixed monthly payments under the power piirchase= - sa35mgwtgs-iefcltyndsshdudfocmptoi l

w expire.

Fixed monthl= p s u r te p r pJune 2005. Wisconsin Public Service will purchase 150 megawatts of agreement win approximate the expected costs of production had Wicni Pub Service.cntinued to o t

plan. Therefore electricity from June 2005 through June 2006, increasing to an estimated

.Wisconsin Public Service co n te t

o own tne plant ThereTor1-.

J 0 -

-235mega attnnually in 2006 through 2015 fro 'this plant. The

=

management believes that the sale of Kewaunee and the related 2

m w

na i 20 t 2

fr ti p The n

55§-;';b

'additional cpacity is needed to serve expected rowth in northeast power purchase agreement will provide more price certainty for addti-: ct Wisconsin Public Service's customers and reduce our risk profile Wisconsin. The new power purchase agreement is' contingent on timely

-iplant construction and does not meet the requirements of a capital lease.

UEST ENERGY. LLC

-K-ECO COAL PELLETIZATION #12 Through 2002, WPS Resources provided financial support and energy I Novembe 2 P P D

t i s ia C

X

~~~~-N

-...lovember 2001, WPS Power Development,'through its subsidiary': i supply services to a third party, Quest Energy, LLC, a Michgan limited C-Ga i

C e i

a t to acquire 2

t V

D,~-',-~-=

ECO Coal Pelletizadon #12 LLC entered into atransaction to acquireI liability company that markets electric power to retail customers in.

=--

Michigan.E.

Finanl s t ws in te fm of w e e c sal from its partner the remaining interest in the synthetic fuel producing Michigan. Financial support was in the form of wholesale electric'sales

.r =-, -; -: -

I assuance,~a intres-beaing facilit (artiallyowneAbyECO #12). Concurrentlyv,with thistransaction, extended without generally required credit assurances,-an inteiest ty (p1r-o I

-,. --..,, E-.................. --.->- =-.~fWPS Power Development entered into a separate transaction with a -'l.....................

note including an equity conversion option with an initial maturity date D

e r

it a s t

i w

a of May 2

, ad te c

t -e all s d b-te a s of subsidiary of a public company resulting in ECO #12 contributing 100%

of May 2005, andtGrade credit indebtedness, allsecured bydhe assets of ---

. --. ~--

Quest V/PS Energy Services reported revenues related to wholesale of its synthetic fuel producing machinery to a newly formed entity in electric sales to Quest of $1.4 million in 2002 and $0.3 million in 2001 e=xchange for cash and a one-third ownership interest in the newly W

V/PS Resources assigned the'equity conversion option to WPS Energy '

-t-tA Services on January 29, 2003, and WPS Energy Services a&{uired a 100% I'

'As a result of these transactions, WPS Power Development w~as the sole

'ownership interest in Quest Prior to the acquisition, Quest Energy member of ECO #12.AECO #12 holds'a one-third minority ownership

- Holdings, ILC, an independent Michigan limited liability company and

"- interest in anentity, which produces synthetic fuel from coal qualifying owner of Quest Energy, LLC, appointed WPS Energy Services as manager -for tax credits under Section 29 of the Internal Revenue Code. The sale -

of Quest Energy, LLC, in November 2002. The appointment as manager,'

of synthetic fuel produced by this facility entitles ECO #12 to a portion as well as other factors, including the provision of substantial financial of the Section 29 tax credits generated.:

support, resulted in Quest's financial statements ben consolidated with

those of V/PS Resources as of December 31,2002. VPS Energy Services T hese transactions generated a pre-tax gain of $40.2 million of which utili;ed the,urc e a n m d t a t fr ts a

Cisi

$38.0 million had been deferred as of December 31,'2001, as a result of

utiuzed the purchase accotintirig method to account for this acqu ituon. -.

There was no cash consideraton paid; therefore, the purchase priceof of t

$7 m as e t to te carr=ng ve of ne r e

The rights of rescission and the put options expired in 2002 and, as a result, u :.i llilon was equivalent to the -carryig value of the note rece4vable-I 6_--

=.-

from Quest on December 31, 2002. There was no goodwill recorded E V-...WPS Power Development recognized ald of the $38.0 million deferred gain in miscellaneous income on the Consolidated Statement of Income in 2002.

in this acquisition as the purchase pric6-ap roximated the! fair value of the acquired assets and liabilities.

The actual payments for the purchase of the'formerpartner's interest in

'-'. ECO#12werecontingent uponthe same provisions referred to above.

DE PERE iENERGY CENTERL Asaresult, $21.3 million wa Hrgnly held in escrow and was released On December 16, 2002, Wisconi Pubic Service completed t purc e

proporonately as the respective rescission rights ad put options expired.

of the 180-megawatt De Pere Energy Center from Galpine Corporations As of December 31, 2002, this escrow had a balance of $3.5 million, a Califomia-based independent power producer. Prior to this purchase

$27 milion of which was released in 2003 as the remaining contingencies, the power from the De Pere Energy Center was under long-term contact not related to the recognition of the deferred gain, expired. As a result to Wisconsin Public Service and was accounted for as a capital lease --

of n wt o fre a t

r was

-*Sof ti ti hns with our f

re prnr the rea'm $0.8 million was.

This power purchase agreement required Calpine to expand the facility released to'VPS Power Development and recorded asa gain, within in the future. The power purchase agreement became uneconomical miscellaneous income-in 2003.

the currentmarket. Concurrentwiththe purchase,;thelong-term powerX:'

purchase contract was terminated. The $120.4 million purchase included On December 19, 2002, WPS Power Development sold an approximate a $72.0 million payment upon dosing and a $43.4 million payment in i 30 interest in ECO #12 to a third party The buyer purchased the December 2003. As a result of the purchase, the capital lease obligation Class A interest in ECO #12 which gives the buyer a preferential was reversed and the difference between the capital lease asset and the allocation of tons of synthetic fuel produced and sold annually.'The

' $120.4 million purchase price was recorded as a regulatory asset.Of the -

buyer may be allocated additional tons of synthetic fuel if WPS Power

• $47.8 million regulatory asset initially recorded, $45.6 millioDi is under Development makes them available, but neither party is obligated i

the jurisdiction of the Public Service Commission of Wisconsin and will 7 beyond the required ainual allocation of tons. The buyer's share of losses' be amortized over 20 years beginning on January 1,2004. Amortization

-generatedfromthesynthecfueloperation, $5.6 million in 2003, is of the remaining regulatory asset, which is under the jursdiction of recorded as minority interest in the Consolidated Statements of Income.

W P S RESOURCES C O R P O R AT I O N 61

WPS Power Development received consideration of $3.0 million ash, as value of th acquired assets and labilities e busines is part of the well as a fixed note and a variable note for the second sale transaction:--z operations of WPS Energy Services of Canada Corp a subsidiary of Payments under the variable note are contingent upon the synthetic fuel WPS Energy Services, which was created in October 2002.

production facility achieving specified levels of synthetic fuel prod8uction

In conjunction with the sale, WPS Power Development has agreed to makek W PS EM PI RE STATE, I NC.

certain payments to a third party broker, consisting of an up front paym ent Effective June 1, 2002, WPS Power Development acquired CH Resources, of $1.5 million (which was paid at the time of closing); $1.9 nilion

_ Inc from Central Hudson Energy Services, Inc. The corporate name of was paid in 2003 and a projected payment of $1m9 million in 2004. A CR Resources, Inc. was changed to WPS Empire State, Inc. WPS Empire deferred gain of $9.2 mniDion and $11.6 million was reflected 'on WPS Power State owns three power plants and associated assets in upstate New York Development's balance sheet atDecember 31,2003, and 2002, respectively

-with a combined capacity of 258 megawatts. WPS Power Development This deferred gain represents the present value of future payments under-

-=used the purchase method of accounting to account for the acquisition, the fixed note and the upfront cash payments net of transaction coAstisf -: 7 acordingly the operations of WPS Empire State areincluded in the financia I It does not include an amount for the variable note, which is co-ntingent

=

2statements presented for WPS Resources for all periods beginning June 1, upon the synthetic fuel production. Payments onthe variable note are a 2002but do not have a material impact. The purchase price, including function of fuel production and arerecognized as acomponentof the -'

acquisition costs, was $61.1 milion. There was no goodwill recorded in-i gain when received. In 2003, a pre-tax gain in the amount of $7.6 million -

Ahis acquisition, as the purchase price approximated the fair value of the was recognized as a component of miscellaneous income related to this acquired assets and liabilities. -'

transaction. Similar gains are expected to result from this transaction W

O R

P COMPANY through 2007. Therewas no gainrecognized in 2002from the 2002sale.-- -e

-0 0at 0

thrug 2007---.

Ther was no gain recognizedi:22 from the 2002 sale Wisconsin Public Service increased its ownership inWisconsin River Power

-CANADIAN RETAIL GAS BUSINESS-X-

Companytotwo-tirds by purchasing an additional one-third interest from if On November 1, 2002, WPS Energy Services entered into an agreement ConsolidatedWater PowerCompanyin2000. InDecember2001,Wisconsin.

to purchase a book of retail gas business in the Canadian provinces of Powerand Light Company exercised its option to purchase one-half of

• Quebec and Ontario. Consideration for the purchase consists of an earn- =.Wisconsin Public Service's additional one-third share 6f Wisconsin River out to the seller based on a percentage of gross margin on the oluneof -

Powe Both transactions were at net bookvalu' of Wisconsin River Power inatural gas delivered to certain customers during a two-year period endig

-atSAuguste31,2009.As and Wisconsin -

October 31, 2004. The eam-out is equivalent to fix ed percentages of gross Power and Light each own one-half of Wisconsin River Power with margin realized over this two-year period for customers already under C Wisconsin Public Service remaining the operator of the facility.

= contractandforcustomersappearingontheacquired customer list who i

entered into a contract with WPS Energy Services subsequent tothe dat ADDITIONAL INTERESTN of purchase. Total consideration paid from theacquisition dateth glv -KEWAUNEE NUCLEAR POWER PLANT 7?

December 31, 2003, approximated $0.8 million. ThisT transaction was On September24; 2001,WisconsinPublicService acquiredMadison accounted for using the purchase method G

d Electric Company's 17.8% interest in the Kewaunee nuclear acontdfr sn teprcaemehdof accoiinting~ therefore, the GsadEeti results of operations are included in the financial stateme'nts preeted for-' power plant including its decommissioning trust assets As a result of WPS Resources only since the acquisition date. Tihere w'as no goodwill

,the $17.5 millon purchase, Wisconsin Public Service now owns 59%'-1-:

recorded in the acquisition as the purchase price approximazted thee fair' of the plant with the remaining portion held by Wisconsin Power t -0 andLightCompany.Theadditionalshareoftheoperationsofthe r tfo LKewauneenuclearpowerplantisincluded inthefinancialstatements 0

- :-; - _ m l 'o' 'uof Wisconsin Public Service beginning September24 2001 Madiso n

lii a

Gas and Electric retains its obligations as they relate to the plant for I

f the penod ofit tim -

it an powr:.

- -L

!- pit ea Madison Gas and Electric maintained one decommissioning tr ust fund

_!52 q

that Soaccumulated its remainng contributions in accordance with its existing ' '-

f ei Lf-0

~~~funding plan, which extended to' December 31,2002. On January 3, 2003, --->-=

-Madison Gas and Electrc transferred the assets of the remaining trust fund to a Wsonsin Public Service trust fund. This trust fund has

-a n

p plabeen included in our financial statements since the initial transaction.

Wisconsin Public Service a

'ssu med Madison Gas and Electric s share i-of the decmm issioning obligations in exchange for thes e t

rust funds.t See earlier discussion in this section for additional iform ation related tothe aero of thie itewaane ownuear fn aWsoinPublic Service Watuke rvice center Thels keepfud a e-ourvehicles in top running order. --

initial tr=ci WEE~Eisconin-ubc0eri-ce '. assued adio~sr lecn-sa'e '0ff i

62 j WPS RESOURCES CORPORATION

WISCONSI5N FUEL AND LIGHT.COMPANY

'WeadoptedStatementofFinancial Accounting Standard No. 142,

-On April 1, 2001, Wisconsin Public'Service completed a nerger with Goodwill and Other Intangible Assets, on January 1, 2002. In Wisconsin Fuel and Light Company. Wisconsin Fuel and Light served '4.7'accordance with the requirements of this statement, we ceased residential, commercial, and industrial natural gas customers in

-amortizing the goodwill on January 1,2002. In 2003, Wisconsin Public Manitowoc and Wausau, Wisconsin. Wisconsin Fuel and Light's Service transferred $0.9 million from a regulatory acquisition premium shareholders received 1.73 shares of WPS Resources' common stock (previously classified as propertyplant, and equipment) to goodwill.

for each share of Wisconsin Fuel and Light comrnon stock. A total See Note 11 - Goodwill and Other Intangible Assets for more of 1,763,943 shares were issued resultinginapurchaseprice of i-.i....-formation.

X

.....................;$54.8 million based onanavrage price of

$31.0625 the eZ prviig"-

-0i; 0'--~~

$54-:.8 milln b d on an a e pe of '

- the premaining premium, $4.9 million after taxes, was recorded as price at the time of the merger announcement. -

-=-.--

price at the time of the merger announcemen.

an acquisition adjustment inplant, which we expect to be recovered in Wisconsin Public Service used the purchase method of accounting and ='-Wisionslir retail rates over the hree-year peiod of 2003 through 2005.

recorded $41.9 million of total premium'as'sociated with the purchase.-

The acquisition premium will be amortized over the recovery period.

Of the total premium, $36.1 million was recorded as goodwill and is included within other assets on the Consolidated Balance Sheets The operations of Wisconsin Fuel and Light are included in the financial

-During 2001, Wisconsin Public Service ortize fand WPS Resources for

• goodwillu sing the straight-line method over a periodof40y sthe period beginning April 1, 2001, but do not have a materia impact

• $ ; i; yer peri, o 40 y Tfars:.

0i

-N O T E.7-J O l N T LY:-O:W.N E D!---UT ILIT Y -FAC ILIT I E S.

Information regarding Wisconsin Public Service's share of major '

Wisconsin Public Service's share of direct expenses for these plants is jointly owned electric-generating facilities in service at December 31,'

=-

included in the corresponding operating expenses in the Consolidated 2003, is set forth below:

-.hi.

StatementsofIncome'WisconsinPublicServicehas supplied its own

-., financing for all jointly owned projects.

1 (Millions, except for percentages) sI It Ownership Wisconsin Public Service's share of plant nameplate capacity (megawatts)

Utility plant in service Accumulated depreciation In-service date

,;X

'.77,D-77_7-7=7777'777=

,i L,

DffXiff,77-:-

N OT E L8-N U CEL EA R PLANT OERAT I O N On November 7, 2003, Wisconsin Public Service and Wisconsin Power On an interim basis, spent nuclear fuel storage space is provided at the 2

• and Light Company entered into an agreement to sell the Kewaunee =

Kewaunee nuclear power plant. Expenses associated with interim spent

\\nuclear power plant to a subsidiary of Dominion Resources Inc. The afuel storage at the Kewaunee nucear power plant are recognized as.

transactionissubjecttoapproval fromvariousregulatoryagencies,,== -. -, curientoperatingcosts.Atcurrent productionlevelsthe'planthas including the Public Service Commission of Wisconsin, the Federal suffient storage for all fuel assemblies until 2009 with full core offload.'

Energy Regulatory Commission, -the Nuclear Regulatory Conmission, Additional capacity will be needed by 2010 to maintain full core offload and several other state utility regulatory agencies and is projected to capabiliy for fuel assemblies in use at shutdown in 2013.

- dosein the second half of 2004. Approval has already been obtained Teaccumulated provision fonuclear fuel; which reprsnsncerfe from the Iowa Public Utility Commission. See Note 6-Acquisitions The a for presents nuclear fuel and Sales of Assets for more information on the transaction purases and amorization totaled $265.1 ionatDecember31,2003, and$256.9 million at December 31, 2002.

The quantiy of heat produced for the generation of electric energy by the F

nf on X

L

=-

-- -S

-^ -i-For information~onnthe depreciation policy for the Kewaune~e nuclar Kewaunee nuclear power plant is the basis for the amortization of the costs i

ai t

d pi f t K

nuclear power plant, see Note 1()

Property, Plant,-and Equipment. -

- of nuclear fuel to electric production fuel expense, including an amount for -

P d

ultimate disposal. These costs are recovered currently from customers in

-Wisconsin Public Service's share of nuclear decommissioning costs to date rates. The ultimate storage of fuelis the responsibility of the United States has been accrued over'the estimated service life of the Kewaunee nucear Department of Energy pursuant to a contract required by the Nuclear Waste plant, recovered currently from customers in rates, and deposited Act of 1982. The Department of Energy receives quarterly payments for the ;--- in external trusts. Such costs totaled $3.0 million in 2003 and $2.6 million storage of fuel based on generation. During 2003, payments from Wisconsin : - "iiboth 2002 and 2001. In developing our decomrnissioning'funding plan, ' '

Public Service to the Department of Energy totaled $2.3 millionDunng we assumed a long-term after-tax earnings rate of approximately 5%. -

2002 and 2001, payments totaled $2.5 million and $1.4 million, respectively.

WPS RESOU RCES CORPORATION

[63

S

=

6 0

• ~

.At Upper Peninsula Power Company, the operating budget is carefully pianned, with input from individuals in key --.

areas.-This includes, from left to right, Frank Stipech, UPPCO Operations Manager; Robert Edwards, Superintendent i

L

.Regional Generation; Dan Crane,Regional Account

,.1 ::

Executive; George Mrosz, Superintendent - Substation and Transmission Operations, Grant Larsen, Senior Business

-Consultant;and Gary Erickson, Vice President.'. -

As of December 31, 2003, the market value of the external nuclear decommissioning trusts totaled $332.3 million.

'=

As part of the anticipated sale of the Kewaunee nuclear power'plant, Wilsconsin Public Service will transfer its qualified niudear decomission

£- Future decommissioning costs collected in customer rates and a charge trust assets to Dominion. Wisconsin Public Service will retain the nonqlualified L' for realized earnings from external trusts are included in depreciation trust assets, which totaled $115.1 million pre-tax ($92.6 million net of expense. Realized trust earnings totaled $38.7 million in 2003, $1.7 million tax) at December31, 2003. The funds collected from customers forth

-in 2002, and $8.1 llion in 2001. In 2002, unrealized gains and losses, -.

t decommissioning obligation related to the nonqualified trust are expected net of taxes, in the external trusts were reflected as changes to the to be refunded to customers in accordance with yet-to-be-determined '

decommissioning reserve, since decommissioning expense is recognized regulatory guidelines. Also in conjunction with the anticipated sale, the as the gains and losses are realized, in accordance with regulatory Public Service Commission'of Wisconsin suspended funding into the retail requirements. The noncurrent liability for nuclear decommissioning nof Wisconsin Public Service's decommissioning trustsfor2004 and other costs of removal included an accumulated provision for For the wholesale jurisdiction, funding during 2004 will de

$1m mmillion.-

d ssioning totaling $290.5 million at December 31, 2002. In 2003,

-the accumulated provision for decommissioning was removed from In the fourth quarter.of 2003, Wisconsin Public Service changed its nuclear decommissioning and other costs of removal as these costs are investment strategy for its qualified trust and placed the assets in short-term.:h'now accounted for as asset retirement obligations in accordance with investments. This was done to reduce volatility in the value of the trust for -'IStatement No. 143 (see Note 1 (V) --New Accounting Pronouncements).

the anticipated transfer to Dominion at the time of closing of the Kewaunee sale. A condition of the sale specifies a minimum amount of qualified trust <If the sale is not consummated, Wisconsin Public Service's share of the assets to be transferred. This liquidation and reinvestment resulted in a -

- Kewaunee nuclear power plant decommissioning, based on its 59%

sizable increase in realized earnings for 2003 and a corresponding increase st, is estimated to be

$331 millionin current (2003) in depreciation expense. It also resulted in a sizable decrease in the p'rcent dollars based on a site-specific study. The study was performed in 2002 of investments held in e ysecurities compared to prioryears by an external consultant and will be used as the basis for calculating equity regulatory funding requirements. The study uses several assumptions,:

Investments in the nucear decommissioning trusts are recorded at fair including immediate dismantlement as the method of decommissioning value. Investments at December 31,-2003, consisted of 279/0 equity and plant shutdown in 2013. Based on the standard cost escalation securities and 72.1 % fixed income securities. The investments are -

assumptions reflected in our current funding plan, which were determined presented net of related income tax effects on unrealized gains and==-

based onthe requirements of a July 1994 Public Service Commission of represent the amount of assets available to accomplish decommis'sioning.

isconsir order, the undiscounted amount of Wisconsinm Public Service's The nonqualified trust investments designated to pay income taxes when share of decommissioning costs forecasted to be expended btween thei unrealized gains become realized are classified as other assets.-At c years 2013 and 2037 is $929 million if the sale is iotconsumniated. See December 31, 2003, the amount classified as other assets was $22.5 million.

Note 6.-Acquisitions and Sales of Assets for further discussion of the An offsetting regulatory liability reflects the expected reduction in pending sale of the Kewvunee nucear pbwer plat.i future rates as unrealized gain in the nonqualified trust are realizd.

Information regarding the cost and fair value of the external nuclear Beginning January 1,2003, we adopted Statement No. 143. This statement cdecommissioning trusts, net of tax is set forth below:.-

apies to a entities with legal obligations associated with the retirement of a tangible long-lived asset that results from the acquisition, construction,

_-Z-or development and/or normal operation of that asset. We have identified 2003 Security Type A the final decommissioning of the Kewaunee nuclear power plant as an (Millions) asset retirement obligation and have recorded an asset retirement

Fixed income e i obligationof$343.6 millionatDecember31,2003.Thisamountisbased BaEquity Dcb31 on several significant assumptions, includingthescopeofdecmmissioning 2002 SecurityType Fir Unrelzed work performed, the timing of future cash flows and inflation and 2002SecurityType

aie discountrates. Someof theseassumptions differsignificantlyfrom the '

l(Millions)

Value aCost gain assumptions authorized by the Public Service Conmnissionof Wisconsin to iFixed income l

$119.7 = l [ $114.0

$ 57 calculate the nuclear decommissioningliability for funding purposes.-For IEquity l

170.8 - I !143.0

.1J27 8

more informationon StatenentNo. 143anditsiipact on the Kewaunee Balance at December31 I

$290.5 I l:

$257.0 5335=-'

enuclear power plant refer to Note 16-Asset Retirement Obligatons.

64 j W PS R ESOU RC ES CO R PO RATION

-: -NOTIE RIEGULATORY_ ASSSETS AN D 1IABIL ITIES-

The following regulatory assets and liabilities are reflected in our consolidated balance sheets as of December 31:

IWPS Resources' Regulatory Assets/Liabilities (Millions)

S 2002 Regulatory assets De Pere Energy Center 47.8 Environmental remediation costs (net of insurance recoveries) 40.0 Minimum pension liability Deferred nuclear costs 7.9 Automated meter reading costs 2.6 Plant related costs 0.3 -

Funding for enrichment facilities 3.0 Unamortized loss on debt 21 Other Total I $110.9 Regulatory liabilities Cost of removal reserve Asset retirement obligations Unrealized gain on decommissioning trust 13.0 -

Income tax related items Derivatives lk

-Demand-side management expenditures 5.9 Deferred gain on emission allowance sales 3.8 Deferred American Transmission costs 31 Interest from tax refunds 4.8 Other Total i49.7 Our utility subsidiaries expect to recover their regulatory assets and Wisconsin Public Service and Upper Peninsula Power will contnue to retum their regulatory liabilities through rates charged to customer

-'<recover from customers the regulatory assetdescnbed above.-

-based on specific ratemaking decisions or precedent for each item over See Note 6 - Acquisitions and Sales of Assets, Note 16 - Asset Retirement periods specified by the regulators or over the normal operating period O

Nt 1 Incom T a

N 1

E Bnf

-E

Oliaens, No-te 17 - Income Taxesan Note 19 - Employe Benefit n' of the assets and liabilities to which they relate. Except for amounts

-=-

-Plans for specific information on regulatory dfrasreltdothDePr.

• expended for environmental costs, Wisconsin Public Service is recovering P

fo s i

f o r d

r t t D Pere carrying costs for all regulator a s U r P--:!--Energy Center, asset retirement obligations and cost of removal, income -

ccarrymng costs for anl regulatory assets..UpperrPPeninsulPoweremayay taxes and pensions. See Note 18

-Co mmitents and Contingencies for recover carrying costs on environmental regulatory assets. Based on prior.

and current rate treatment for such costs, we believe it is probable tlja' nformaton on environmental remediaton deferred costs.

N O T E 1 0-I N V E S T M E N T S I N :AF F LI A T E S,

-A T - E 0 U I T Y M E T H O D I

I

I i

..i I

I Investments in corporate joint ventures and other companies accounted t ansmission-oily company. It owns, maintains, monitors, and operates for under the equity method at December 31, 2003 and 2002 follow.'

electic ansmission assets in portons of Wisconsin,'Michigan,-and Illinois. Amencan Transmission Company began operation on January 1, 2001. Its assets previously were owned and operated by multple electnc utilities serving the upper Midwest, all of which transferred their

-cTransmission aniststoAmericanTransmission Conany in'exchange G river P

oweri LCom y

for an ownership interest. A Wisconsin law encouraged utilities in the WisconsinRiverPowerCompany Other 96 state to transfer ownership and control of their transmission assets Investments in affiliates, at equitymethod r

$732 to a state-wide transmission company.

Wisconsin Public Service contributed its transmission assets on Investments in affiliates under the equity> rnethod are a component of other -January 1, 2001, and Upper Peninsula Power contributed its transmission assets on the Consolidated Balance Sheets and the equity income is recorded.-; 'assets on June 28, 2001. During 2003, Wisconsin Public Service made in miscellaneous income on the Consolidated Statements of Income.-'

-2 additional contributions and sold the Wausau, Wiscionsin, to Duluth,

l.:-''-

innesotawtrainsmissionlinetothe'AmericanTransmu'ssionCompany.

-~

.WPS Investments, LLC, a consolidated subsidiary of WPS Resources, had M

s t

l t

a 19.8% ow p i t in A n Tn C

See Note 6-Acquisitions and Sales of Assets for more information Dace9.8%ber 3o1 20n eriestinAmencan Transmission Company isC aorp it; th ions.

December31,2003.ArnericanTransrnissio'nCornpanyisafor-priofit,

0I WPS RESOURCES CORPORATION L 65

0 0

0Is*

Mimi-Wisconsin Public Service and Upper Peninsula Power record related &

Wsconsin Public Service recorded dividends received of $1.5 million; party transactions for services provided to anfd network trnsision foiWis-consn Rvr Pwer atDcmer3120.

services received from American Transmission Company. Charge to0

_~-Condlensed financial data of Wisconsin River Power Coinpany follows."-

American Transmission Company for services provided by Wisconsin Public Service were $14.4millfion, $12.9 millionand $11.3 rnilionin 2003, 2002, and 2001, respciely. Upper Peninsula Power charged Ol (Millions)e' 2

0 ][

0i

$7.6 million, $5.8 million, and $2.7 million for 2003, 2002, and 2001, inoesaeetdt respectively for services provided. Network transmission costs paid to RevenuesI

-American Transmission Company by Wisconsin Public Service were..

Operating expenses (4.9)

(43

$33.6 million, $31.0 millionand $25.2 million in2003, 2002, and 2001 Other income (expense)

___4_

I __2_

rjespectively. Upper Peninsula Power recorded network transmi'ssio-n I Net income S___

______2_

csts of $4.4 million, $5.0 million, and $3.3 million in 2003, 2002j~

icni ulcSrieseut 2001, respectIvely

.in net income WPS Resources recorded dividends received of $7.5 million from' Baac he aai Amrerican Transmiso opn t eebr3,03Current assets

[$

6 I $2 Noncurentassts2011 16.5 Conidensed financial data of American Transmiission Company follw Total assets

$23.7

$18.6 Current liabilities S.

6 12 0 ]

201 Other non-current liabilities (ilos202Shareholders'equi 19___2 13 I31Totlmiablitesandshaehldes'aquty 1$23.71

$18.6 Revenes1-205.

L$1745 Operating expenses [(131.1)i]

1) WPS Investments, LLC a consolidated siubsidayfWSRsucs Otherincoe exense

.~

112)sed a 33% ownership interest in Guardian Pipeline LLC, on r

Net income My 0, 2003: Guardian Pipeline owns a natura gaspplne hc WP Ivetmnts i

n etinom S

J$

.9 J$71 ean operating in 2002, that stretches abou 140 mile from na Balanc shee dataJoliet Illinois, into southern Wisconsin. It can transport up to 175 750 millon cubic feet of natural gas daily.-

Non-current assets 74.3' II 6 odne innil C

L so Total assets

• e i $795.0 -A ~$722.9 Deeber3;20,dt fu a

ieie Dece er81, 003and for the period from May 30, 2003, Current liabilities 36 4.9 J7 3 1

to December 31, 2003, follows...

Long-term debt

-348.0.I~9.9 1Other non-current liabilities 6.6 (Milins

[

Shareholders'equity 393.5 I.~35 noettmndt Total liabilities and shareholderseqiy

$795.0 I >$722.9 Rvne Wisconsin River Power Company, of which Wisconsin Public Service Operating expenses Other income (expense) owns 50 %'of the voting stock, is incorporated under the lawsof the7 Net income state of Wisconsin and has its principal office at the principal executive 4WPInetntsqu inetncm offices of Wisconsin Public Service. Wisconsin River Power's business consists of the operation of an oil-fired combustion turbine and two I Balance sheet data hydroelectric plants on the Wisconsin River. The energy' output of the Current assets hydreecrcplants is sold in e qual parts to the three companies that Nncretast the Total assets

previously owned equal proportions -of all of teoutstanding stock of Wisco nsin River Power (Wisconsin Public Service, Wisconsin Power; Current liabilities and Light; and Consolidated Water Powe) Th lcrcpower mrii-ILn emdb

'the combustion turbine is sold in equal parts to WisconsnPbi hareholdlers'e uit Servce nd WscosinPowe an Ligt..-

ITotal liabilities and shareholders'equity Wis~nsn ublc Srvce ecodsreltedpaty ranacion fo slesto Otherfinvestmrents ac counted for under the equity method include and purchases from Wisconsin River Power. Revenues from services WPS Nuclear Corporation's (a consolidated subsidiary of WPS Resources)-

provided to Wisconsin River Power were $1.4 million, $1.5 millions investment in Nuclear Management Company, LLC. Te Nucle arr

~

and $09 million for 2003, 2002,-and 2001, respectiey Prhssfrom ~'~ZManagemrent Company is owned by affiliates of five utilities in the upper Wisconsin River Power by Wisconsin Public Service were $2.0 million,-, ___Midwest and operates the six nuclear power plants of these utilities.'

$2.1 million, and $1.7 million for 2003, 2002, -and 2001,- respectively.

At December 31, 2003, WPS Nuclear Corporation's ownership in 66 WPS R ESO URC ES CO RPO RATIO0N

The energy within Nudear Management Companiywas 20%. Wisconsin Public Service recorded*

$16.4 million in 2003, 2002, and 2001, respectively. Management service related party transactions for s ervices provided bv Nuclear Management fees paid to Nuclear Managemen 'Companyi in 2003 and 2002 reflect

-Company for the maaement and operation of the Kewaunee nuclear-a 17'o increase in Wisconsin Public Service's ownership of the plant. Management service fees paid to Nuclear Managemen t Company-:i Kewauniee plant after acquirinig Madison Gas and Electric Company's

~by Wisconsin Public Service were $25.2milldfioni,$24.6 million a~ndc~~~ ow~n~nership in the Kewaunee plant on September 24, 2001:,

• L___

NOTE 11-GOODWILLI.- AND Goodwill recorded by WPS Resources Corporation was$34mlina

$35.5 million at December 31, 2003, and 2002, respectively. The goodwi is recorded in Wisconsin Public Service's natural gsemntrlatigt megrwit Wisconsin Fuel adLight. In 2003, Wisconsn Publi

-Service transferred $0.9 million from a regulatory acquisition prernium.

- (rvosyclassified as property, patndeument) to godwill. The

-increase in goodwill reflects an adjustment to the amount of recoverable (Millions)

OTHE INTAN GIB LE ~ASS ET S d

goodwill recorded from the Wisconsin Fuel and Light mrger allowed by 1I the Public Service Commission of Wisconsin in its March 2003 rate order.

Godiland purchas~d intangible assets are included 'in other assets on

<IteConsolidated Balance Sheets. Information in the tables-below relates

--Ito total purchased identifiable intangible-asseti for the' yekrs -indicated I (ecluingassts held for sale).

Asset Class Emission credits Customer related

~AOther Total I

I U

(Millions) f ~~~7-

--. December'31.2002 rAverage Life Gross Carrying Accumulated Asset Class (Years)

~

Amount Amortization Net Emission credits 1

lto3O

$S5.2 S0.6)

$4.6-Customer related to 5 3.5 (2.0) 1.5

-I Other

~

to 30 3.3 (0.4):

2.9 ITotal 7:-$12.0 r

$(3.0)

$9.0 The generation assets of WPS Power Development are -sublect toEstimated Amortization Expense:

regulations o n sulfur dioxide and nuitrogen oxide emisisions.-In 2003 Frya nigDcme 1 04$

ilo WFS Power Frya nigDcme 1 05Development had a net increase in the gross carrying value 1 milio of their emi'ssions credits d ue to additional purchases of emissio-n allowances to meet requirements, partially offset by the wnite-down FoyerndgDcmbr3,20 09miln of existing nitrogen oxide allowances to market value.FoyerndgDcmbr3,071miln Fo erieding December 31, 2008 1.4 million

.Intangible asset amortization expense,in the agreglate, forfthe--

years ended December 31, 2003, and 2002, was $1.7 million and__

$1.0 million, respectively.

N OTE 1~2 -LE A'S E

-i

-I

-I I-I The company leases various-proerty,plant and equipment.Terms Ya ndn eeme3 Milos of the leases vary, but generally require the company to pay property taxes, insuran~ce premiums, and maintenance costs associated wit te 20 2005 leased property. Rental expense attributable to operating leases was ~~-!z,2006

• $5.2 million, $5.1 million,1 and $7.1 million in 2003, 2002, and 2001,

2007, respectively. Future minimum rental obligations under non-cancelable 2008 operating leases, are payable as follows:

ae er Total payments WPS RESOURCES CORPORATIO 2.8

-1.7:

1.4 J

6.1

-J1 I$19.0-I-

-1 I I

. I 1

4 I

I I

i-[67

f S

-110101mm*

ml

F-77-7 N OTE T

1 3-S HO RT,-TE7R M :D:E BT AN D LINES' OF C RED IT

_n I

i I II I i I

WPS Resources Corporation has syndicated a $225 nillion 364-day The information in the table below re revolving'credit facility, and Wisconsin Public Service has synidicated =

flines of credit for the years indicated.

a $115 million 364-day revolving credit facility, to provide short-term--

borrowing flexibility and security for commercial paper outstanding.-

s

~

~

-X t

es L

{

lates to short-term debt and i,

2002 1

-, 02002 I

(Millions, except for percentages)

As of end of year Commercial paper outstanding Average discount rate on outstanding commercial paper Short-term notes payable outstanding Average interest rate on short-term notes payable Available (unused) lines of credit For the year Maximum amount of short-term debt Average amount of short-term debt Average interest rate on short-term debt The cornmercial paper had a maturity date of January 8,'2004.-, =

The short-term notes payable is due 'on demandf f;;01,7l S 16.0

$ 1!

135%:

1.95

$ 13.8.

$ 3'

-1.22%

1.61

$264.5

$13(

$133A.

$17;

$ 59.7

$11S 1.73%

4.3:,

5% ': I 1.2 i

I V0 -

'1 0.O

'7.6 :' --

0.6 'f:

2%

i NOTE 14-ONG-TE RM DE B T At December 31 (Millions)

First mortgage bonds -Wisconsin Public Service I Senior notes -Wisconsin Public Service First mortgage bonds - Upper Peninsula Power Unsecured senior notes - WPS Resources l Term loans - nonrecourse, collateralized by nonregulated assets Tax exempt bonds Notes payable to bank, collateralized by nonregulated plant Senior secured note Series 6.80%

6.125%

6.90%

7.125%

Series 6.125%

4.875%

4.80%

6.08%

Series 7.94%

10.0%

9.32%

Series 7.00%

5.375%

Year Due 2003 2005 2013 2023 Year Due 2011 2012 2013 2028 Year Due 2003 2008 2021 Year Due 2009 2012 f 20C

-$ 50 SC

`22 SC, 115C 15S

-SC 2o -,

1

0 -

.0i 9.1 I

15

.-- 1 I ;7

- I 150.0 100.0 4

_91.7:

- 27.0

. - 11.6-A

- 3.1 S 898.1

-I I-- (2.6) 895.5 (71.1)

I

_ $824.4 - -,

Total Unamortized discount and premium on bonds and debt Total long-term debt Less current portion I Total long-term debt 681 W P S R E S O U R C E S C O R P O R AT I O N

The energywithin On January 19, 2004, Wisconsin Public Service retired $49.9 million of its the proceeds of which were used in substantial part to provide facilities.

7.125% series first mortgage bonds.-These bonds had an orignnal matunit y Upon issuance of the refunding bonds, the original bonds were paid off.

date of July 1, 2023.

WPS Westwood Generation was paid $27.0 million from the proceeds of 6800/ :.-

'the refunding bonds for the retirement of the onginal bonds plus accrued In February 2003, Wisconsin Public Service retired $50.0 million of.

inerest WP0.swodeert firstmortgage bonds that had reached maturity Wisconsin Public Service bo;nds wth monl pyentsth haea ating interst rwated that r

=-g bns with monthly payments that haea foating interest rate ta also called $9.1 million of 6.125% tax-exempt bonds in May 2003 f

In December 2003, Wisconsin Public Service issued $125.0 million of is r w

A D 3 2 t

i r

w 1.10%

480%

senior notes due D r2013. Tesenior notesare collateralized The bonds mature in April 2021. WPS Resources agreed to guarantee D The

=_WIS Westwood Generation's obligation to provide sufficient funds to by a pledge of first mortgage bonds and become non-collateralized if V - pa te rfudmgbods ndthe related obligation and indemnities.

Wisconsin Public Service retires all of its outstanding first mortgage bonds p

t rn b

a I---`4n November 2003, WPS Power Development retired all of the notes In March 2003, Upper Pem~nsula Power reuired $15.Omilionof 7.94% -I~-

- X=r :-=

b In Mah 2, U r P a P r re payable under a revolving credit note, in the amount of $12.5 million.

first mortgage bonds that had reached maturity-, Uppe Peninsula Power

=---

first mo e b s tt hd r d m U

, P a PThe note was collateralized by the assets of the Stoneman plant and is required to make bond sinking fund payments for some of its was a

b W' R

V i

-:yments were R

X > ~~-

=; ---g.was guaranteed by WPS Resources. Variable interest payments were r_

outstanding first mortgage bonds.

m q

d 2003.

t; X

. g

-f-N4,madequrterly during2003.-

q; Borrowings by WPS Power Development under term loans and_

S P r -m u

t l

Upper Peninsula Power has a senior secured note of $2.9 million as of collateralized by nonregulated assets totaled $87.2 million at December 31 D

m 3 2

, wi r

s a

? S

. 8

-li.Decemrber 31,2003, wmicnrequires semuannuglpayrn~ents at animterest 2003. The assets of WPS New England Generation, Inc. and WPS Canada 9 rate ofer925%,-an mtres in 201 1.-

Generation, Inc., subsidiaries of WPS Power Development, collateralize

$5.8 million and $14.4 million, respectively, of the total outstanding At December 3i, 2003, WPS Resources and its subsidiaries were in amount Both have semiannual installment payments, an interest rate of -

compliance with all covenants relating to outstanding' debt. A schedule 8.75%, and mature in May 2010. Sunbury Generation, LLC, an'indirect

fall principal debt payment amounts, including bo-nd rmaturities and subsidiary of WPS Power Development, is the borrower of the reaining -

early retirements, for WPS Resources is as follows:

$67.0 million that is collateralized by its plant. Quarterly payments are made in relation to this financing that cares an interest rate of 78725 /o for the year ended December 31, 2003, and matures in March 2018.

Year ending December 31 (Millions)

_____:N This loan also has renewals in 2006 and 2012. However, if certain debt't 2004 1 S 56.6 covenants are not met, the lender is not required to renew the loans.

2005 I

7.0 1

2006 77 In April 2001, the Schuyllci County Industrial Development Authority-2007 83

/i issued $27.0 million of refunding tax-exempt bonds. At the time of 2008 9.4 issuance of the refunding bonds, WPS Westwood Generation LLC a Lateryears 842.2 subsidiary of WPS Power Development, owned the original bonds, Total payments

$931.2 f

~~~~~.

.f

=

t

r; m

f NOTE 15-COMPANY OBLIGATED MAN DATORILY REDEEMABLE TRUST PR ERRED SECURITIES FPRE F E-R R E D STOCK TRUST 0W F j-5

-.;7-

-sT?;

=l A-:

-On July 30, 1998, WPSR Capital Trust 1, a Delaware business trust, issued been determined that the preferred security holders bear the majority of

$50.0 million of trust preferred securities to the public. WPS Resources owns -te residual economic rsks associated with WPSR Capital Trust I and, -

all of the outstanding trust common securities of the Trust, and the only 5>-'

i'therefore, the Trust has been deconsolidated effective December 31, 2003.

Xassetof theTrustwas $515 millionof subordinated debentures issued by Aia result of the deconsolidation, WPS Resources recorded a $1.5 million WPS Resources. The debentures were due on June 30,2038, and bore investment in trust within other current assets and a $51.5 million note interest at 7% per year. The terms and interest payments on the debentures ' payable to preferred stock trust, respectively, within the Consolidated correspond to the terms and distributions on the trust preferred securities.

i.Balance Sheet at December 31, 2003. Prior periods have not been restated:

As d e in Ne 1(

Nw A g Pnts t

per the transition provisions of Interpretation No. 46R. he -Trust remains consolidated within the December 31 20027 Consolidated Balance Sheet provisions of Interpretation No. 46R were required to be applied to:

.an t i

p o t d

ar r w

interest special purpose entities as of the end of the first reporting perod ending aexpense and distributions on trust preferred securities onithe Consolidated after December 15, 2003. It has been determined that WPSR Capital Trust I Statemenso Income or yrs presented.

qualifies as a special purpose entity and; therefore, the provisions of Interpretation No. 46R were applied to the Trust at December 31 2003. -- On January 8, 2004, we redeemed all of the subordinated debentures Prior to this date, we consolidated the preferred securities of the Trust that we're initially issued to the Trust for $51.5 million and paid accrued into our financial statements as we held all of the voting securities.=

--- interest of $0.1 million. This action required the Trust to redeem an equal

'Per the provisions of Interpretation No. 46R, however, the voting interest :

amount of trust securities at face value plus any accrued interest and approach is not effective in identifying controlling financial interests in i:tunpaid distributions. As a result of these transactions, the Trust has '

which the equity investor does not bear the residual economic risks. It has

-been dissolved effective January 8, 2004.

WPSR E S O U R C E S C O R P O R AT I O N l 69

S a

a

• ~

-I

-N O T E 1 6-A S E T.- R E T i R E ME N T O B L I G A T I ONS Legaltio identified for the utility segments of V/

WPS Resources relate primarily to the final decommissionng of the (Millions) l Utility I [Nonregulated

-Total 1

Kewaunee nuclear'power plant. Wisconsin Public Service has a legal Asset retirement obligations 1 1 j

olgtotodecommission the irradiated poreions of te Ke=w au.&e =

at December 31,2002 0$;-- fi - :-

nuclear power plant in accordance with the Nudear Regulatory

=

Liability recognized in transition

- 324.8 2.0 32.

0'dAccretion expense

- 19.2,

. :0.

19.3 d

- Commission's minimum decommissioning requirements We have Accretioemens 19.2 01 1 1.

also dentfiedAsset retirement obligation also identified other legal retirement obligations related to utility plant at December 31,2003 assets that are not currently significant to the financial statements.

Upon implementation of Statement No; 143 on Januaryl1 2003 'we

.~_The following pro forma liabilities reflect amounts relating to asset

Uonmpemetaiooe'taemnto;13O~auarl,203,we-..............on.............

': o-bl Tefllwinprfomaiabliierefecamunsreatngoasett:

-No....143....had.....b..p.....ed.. d"u

' recorded a net asset retirement cost of $90.8 mdrli and an asset

, retirement obligations as if Statement No. 143 had been applied during retirement obligation'of $324.8 million. The-difference between i

al periods presented:

previously recorded liabilities of $290.5 million'and the cumulative effect of adopting Statement No. 143 was deferred to a regulatory liability'pursuantto StatementNo. 71.;

i December31,] l Januaryl1,

- (Millions)

-6 I

2002 I: 2002 The nonregulated segments of PSResourceshaveidentified alegal Utility segments:

I,

retirement obligation related to the closure of an ash basin located at Nuclear decommissioning e

$324.4

$306.7 theSunburyplant UponIimplementation of Statement No. 143te Othe r 03 nonregulated segments of WPS Resources recorded an increase m net 1 Nonregulatedsegments:

_ I property, plant, and equipment of $1.4 million, a liability of $2.0 i

Ash basin facility 20 1-1

~and a cumulative effect of adoption after tax that'reduced mncome..._'

available for cormon shareholders by $0.3 mi ion in the bist Pro forma income available for common shareholders and earnings per quarter of 2003.

s'-

'hare ha notbee presentedfo theperiods endedDecember31,2003,

=

2002, and 2001 because the pro forma application of Statement No. 143 See Note 6 -Acquisitions and Sales of Assets for information on the 2

a 2

b pending sa-es of the -uby p t ad th Kto prior periods would result in pro forma income available for common

- nning> sales of the Sunbur plant and the Kewaunee nuclear pwrnat;.-

-*-= - -

5

=

shareholders and eamings per share not materially different from the::,

The following table describes all changes to the asset retirement actual amounts reported for those periods in the Consolidated obligation liabilities of WPS Resources:

Statements ofncome.

'The principal components of our deferred tax assets and liabilities recognized in the balance sheet as of December 31 are as follows:

(1 Millions) 2002 Deferred tax assets Plant related 91.5 Deferred tax credit carry forwards 35.7 -

j Employee benefits

45.0 State capital and operating loss carry forwards 7.9

Other comprehensive income 6.9 Risk managemnent activities

-5.6)

Regulatory deferrals 1.6

-]Other--_

-- 43

=r

- Total deferred tax assets Valuation allowance (0.6)

Net deferred tax assets 1861-Deferred tax liabilities Plant related

$269.7 Employee benefits 38.2 Regulatory deferrals 6.7 Othercomprehensive income Other Total deferred tax liabilities

.$260.4 1

Net deferred tax liabilities

-733 70 W PS RE SO U RC ES CO R PORATION

The energy within Valuation allowances have been established for certain state operatingarnd JThe differences between income taxes determined by applying the capital loss carry forwards, due to the uncertainty of the ability to benefit

.federal statutory rate to income before tax expense for the periods from these losses in the future. Carry forward periods vary, but in'the'

-I -ended December'31 are as follows:

majority of states in which we do business the period is 15 years rrmorei.-

4 es 2002 2001-

-2 (Millions, except for percentages)

Statutory federal income tax State income taxes, net Plant related ESOP dividend Investment tax credit I Federal tax credits Other differences, net Effective income tax Current provision Federal State Foreign Total current provision i Deferred provision (benefit)

Recognition of Net Operating Loss carryforward Recognition of deferred investment tax credit

. Total income tax expense Rate Amount - I-Rate Amount 35.0% _::

$51.5 35.0%

- $33.9 5.3 7.8 5.2 5.0

-(1.6)

(2.4)

(3.3)

(313=)

' (1.0) t:

7-(1.4) -

-(0. 1):

(0.1) t (1.2) t

0(1.7)

(1.8)

-(1.7)

(1 6.4) -

(24.1)

(23.0)

- (223)

(0.6) - -

(1.0) _ ; (2.5)

(2.4) 19.5% -

$28.7 -

9.5%

$ 9.2

$17.3

$33.8 11.1-8.4

-- 0.4) 3.

28.0 -

42.2 3.2 -

(31.8) -

0.8).

0.5 (1.7)

(1.7)

$28.7-

$ 9.2

-1

.zx

-r I-L I

-i4

-t I r

. i

. t

-

f

. t I i

-I

. -i FI

-i I

Foreign income (oss) before taxes was $4.3 million in 2003 and

<-;for which deferred taxes were recorded in prior years at rates different il.

-E i

--than currentrates.The regulatory liability for these refunds and other---

$(1.2)mirlion in202 r

s--

=regulatory tax effects totaled $11.8 million as of Deember31,2003, As the related temporary differences reverse, Wisconsm Public Service and -

$17.

-milo as D

31,2002.

~:s ~-~ - - - - --......................

s -= '-and$17.7rnillionas'ofDecember31,2002.

Upper Peninsula Power are prospectively refunding taxes to customers -

,-OT PURH; E ORDE 1-COMMITMENTS C

COMMODITY AND PU R

C OMMITMENT WPSR es also has comrnitments in the form of urchase orders WPS Resources routinely enters into long-term purchase and sale

• 3 0

':issued to various vendors. At December 31, 2003, these purchase commitments that have various quantity requirements and durations.

orders totaled $168.8 million for WPS Resources and Wisconsin Public 0-?0.- -

Service committed $167.6 million of the total. The majority of these WPS Energy Services has unconditional purchase obligatons related to-shas unot n purase0 mionand gaoensrelated th 2oo9 -

commitments relate to large construction projects including the; -

energy supply contracts that total $2,136.0 million and extend through 2009.

cosruto.o.h.50mgaatcolfre.eerto fctyna

-T t

=--

X

- -e--construction of the 500-megaiwatt coal-fired generation facility near The energy supply contracts at WPS EnergyServices generaly have W-a-us Wiscosi f

offsetting energy sale contracts.

W'sconsin Public Service has obligations relatedtos alpurc p o r,

NUCLEAR PLANT OPERATION natural gas and nuclear fueLOblgatons related tocoal sIpply extendthrough Inaccordance withNudearRegulatory Commission industry requirements, 2016and total $321.4 million. Through 2015,Wisconsin Public Service has u.udunng the completed spring 2003 refueling outage, a visual inspection of obligations totalng $395.6 million for _either capacity or energy related to the Kewaunee nuclear power plant reactorvessel head was conducted.

I purchased power. Also, there are natural gas supply ard transportation -

There were no problems with the vessel head during the most recently contracts with total estimated demand payments of $129.3 milliong through 2010.'Nuclear fuel contracts total $48.0 million c

o cle After evaluating thecostofcontnuedrequired inspections of he-Wisconsin Public Service expects to recover these costs in future customer:-

exisg reactor vessel head and the cost to replace the reactor vessel head, rastes. Additionally, WisconsinPublic Service has contracts to sell electricity the Kewaunee nuclear power plant owners submitted a construction and natural gas to customers Many of these contracts have indefinite lives authonzation request to the Public Service Commission of*Wisconsin WPS Power Development also enters into long-term com m

odity for replacement of the reactor vessel head. Approval of the request was contracts, mainiy related to the purchase of coal for the Su'nbury plnt received in 2003. The replacement is scheduled to occur during the fall The contracts total $1.8 million and extend through 2007.

2004 refueling outage at a cost of up to $14.2 million for Wisconsin-Public Service's share of the project.

=

Upper Peninsula Power has made commirtments for the purchase of r 1

commodities, mainly capacity or energy related to purchased p

- The Price Anderson Act ensures that funds will be ayailable to pay that total $20.6 million and extend through 2006.

-- '=

-_ _j7foripublic liabilityclaimsaisingoutof a nuclearincident hisAc WPS R ESO U RC E S COR PO RATI O N L 71

S 6

6 0

• 

-S may require Wisconsin Public Service to pay up to a maximum of In December 2000, Wisconsin Public Service received from the United

$59.4 million per incident. The payments will not exceed $5.9 million.

States Environmental Protection Agency a request for information under per incident in a given calendar year. These amounts relate to Wisconsin Section 114 of the Clean Air Act. The United States Environmental Public Service's 59% ownership in the Kewaunee nuclear power plant.

Protection Agency sought information and documents relating to work -

>0'

~

'~'

~

efored on the coal-fired boilers located at the Pulliamand Westn-Ei ;

See Note 8 - Nuclear Plant Operation for detailed information on the' -

p o

on th b

l a

the Kewune pw-e electric generating stations of Wisconsin Public Service. Wisconsin Public

operations of the Kewaunee nuclear power plant. :m

-; operations of nu:ear plant.

,'=i Service filed a response with the United States Environmental Protection See Note 6-AcquisitionsandSalesof Assets forinformation onthev Agency in arly2001.

-pending'sale of the Kewaunee nuclear power plan t 4'. ':-I-9i:=~=

nV--

4-

-i-pending ale o'f-theKewaunee nuclear pw plant.-;

On May 22,2002, Wisconsin Public Service received a follow-up request

--CLEAN AIR REGULATIONS

-fromzthe United States Environmental Protection Agency seeking

-The United States Environmental Protection Agency has designated additional information egarding speci fic b

oiler-related work performedD

southeastern Wisconsin as an ozone non-attainment area. Under the on Pulliam Units 3, 5 and 7, asPwell as information onWisconsin Public

-':Clean Air Act,'theStateof Wisconsin developed a nitrogen oxidereductron Service's life extension program for Puliam Units 3-8 and Weston Units 1 o-thplan for Wisconsin's ozone non-attainmentarea. The nitrogen oxide and 2 Wisconsin Public Service made an initial response to the United t

.reductions began in 2003 and will gradually increase through 2'007..-.-~=~~,States Enrvironlmental Protection Agency's follow-up information request X- ~'V0 Wisconsin Public Service owns 31.8% of Edgewater Unit 4,whichs on June 12, 2002, and fed a final response on June 27, 2002.

located in the ozone non-attainment area. A conmpliance plan for this. -: 'in 2000, 2001, and 2002, Wisconsin Power and Light Company received 0

t unit w as initiated in 2000. Wisconsin Public Service's share of the cos a similar series of United States Environmental Protection

-o f this project is expected to be approximately $5 mnillion. The proje'ct is a=information requests relating to work performed on certain coal-fired ' --

~:0::f:

anearly complete.

Wisconsin Public Service has incurred approximately boilers and related equipment at the Columbia generating station (a facility

$4.9 illion on this project asof December 31, 2003.0--

l-ocated inPortage, Wsconsin, jointlyowned by Wisconsin Power and ~00

'0 T he State of Wisconsin is also seeking voluntaiy reductions from Light Company, Madison Gas an~d Electric Comnpany and Wisconsin Public -----!

utility units outside the ozone non-attainment area, which may.lead Service) Wisconsin Power and Light Company is the operator of the planto iXto additional expenditures for nitrogen oxide reductions at othernis.

a nd is responsible for responding to governmental inquiries rielating to theques Wisconsin Public Service is participating in voluntary efforts to reduced ;- operation of the facility. Wisconsin Power and Light Company filed its Wnitrogen oxide levels at the Columbia Energy Center. Wisconsin Public most recent response for the Columbia facility on July 12, 2002.

Service owns 31.8% of the Columbia facility. The Public Service

- Depending upon the results of the United States Environmental

Commission of Wisconisin has approved recovery of the costs

'.7 :Protection Agency's review' of the information, the United States

'-' -I '1

'associated with voluntary nitrogen oxide reductions-Ea ironnentalProtectionAgen a y

s eekaddition inormationefromntalXi

- Air'quality modeling by the Wisconsin Department of Natural Resources

'Wisconsin Public Service and/or third parties who have in-formiation e =0 -

revealed that Weston Units 1 and 2 contribute to a modeled il xeejce

- -relating to the boilers, close out the investigation or issue a cnotice of

-of the s

ulfur dioxide ambient air quality standard. Wisconsin Publi(c violation" or finding of violation asserting that a violation o f

the Clean-Service expects that compliance with a future limit can be achieved by r

Air Act occurred. To date, the United States Evironmental Protection managing the coal supply quality and does not expect these changto Agency has not responded to the 2002 follow-up filings made by31

- ~

Service andyWandnsincPower have a fmaterial ipact on the operations of Wisonsin Public Sey Mic

'siond Wisconsin Pb and Light Co p ny.

Wisconsin Public Service is cooperating withthe Wisconsin Department- '- In r t t U'd niom a

te

-tio e

- tlt unt ousd th ozon non-ttansen atoa whie Umae SttsleadmnalPoeho gny

of Natural Resources to develop an approach to resolve this issue Clean Air Act enforcement initiative, several utilities elected to settle UNITEDENVIRONMENTAL PROTECTION withthe UnitedStates Enviroental Protectiond Age while o t hers AGENCY SECTION 114 REQUEST are n ltga tion.

In general, those utilities that setted entered into -.

-ni

-e at th C m Er n.e consent decrees which require the companies to pay fines and penalties, Sri In November 1999, the United States Environmental Pr aounced the commencement of a Clean r c te ctfor n Agncy undertake supplemental environmental projects and either upgd g g ii~~~~Ac enoremnutryTi initiative resutdi h suneo evrl:trplace pollution controls at existing generating units o shu dow

,agtn th utlt inuty Thi

.n~av reule in th issuanc of seve= ra -xstig units and replace these units with new electric generating

-~:' -m notices of violation/findigs of violation and the filing of lawsuits against

-? -' facilities. Several of the scttlements involve multiple facilities. The fines'

-- other unaffiliated utilities. In these enforcement proceedings the UnitedS sitates vinth vlumental nro gen cis tir e

n m

e ntal

__tatesvi Iniomna Protectiongc Agency that seek additiona madeo-masionEf-om a

d n a th tiis

- projects) associated with these setdements range between $7 million i

oAir-uficaostyodte coagbyhed bilerns andrelartedeupenonaturatltesourilces-n $3 rmao.Fcostpial osdrdi stlmnsicue

-el e

ctric generating statons without first obtaining appropriate a

milo t to s u

cl cnidere the permits but are not necessarily limited to, the size and number of faclities asf teUnited States Environmental Protection Agency s pre-construeicinc -

-c t

IE v

or ass-ertwellastheaduraionofalegedviolationsandth or absencean

• permit program and without installing appropriate air pollution control of agrvtn cirumtace. The-reutr inerraion upon -:

equipment In addition, the United States Environmiental Protectuo whc th liawinsg of r

v setln tsaT regbasdmy changebased uon Agency is claiming, in certain situations, :that there were violations of future court dheciawsuios hasthatmayeed are need in p ing flitgas ons

-the CleanAir Act's new source performance standards.

e In the matoers

--- where actions have been commenced, the federal government is seeking -'.

o the U S

Environmental lr-t-cti-n-A tpenaleseandtheinstallationeofPpollutioncontolequipment.

i-others K

A f

72 WP 1

RESOURCES CORPORATION

The energy within If the federal government decided to bring a dain against Wisconsin f0-*rAs to the Interstate Air Quality rule p al e proposal allows the Public Service and if it were determined by a court that historic projects affected states (including Wisconsin) to either require utilitiesilocated at the PuUiam and Weston electric generating stations required either _

n the state to participate in an interstate cap and trade program or meet a state or federal Clean Air Act permit, Wisconsin Public Service may, the state's emission budget for nitrogen oxides and sulfur dioxide through under the applicable statutes, be required to:

i measures to be determined by the state. Wisconsin has not stated a

shut dw any to be o in non-c

---::'.'---:-=- preference as to which option it would select in the event the rule

:*shu dw ny untfudto be operating in non-compliance, -~-

uni foui

-bec6oes final. While the effect of the rule on Wisconsin Public Service's

- install additional pollution control equipment,

-facities Is uncertain, forplanningpurpses itisassumed that additional-

• epay a fine, and/or

'penditures for nitrogen oxide and sulfu dioxide controls will be

- pay a fine and conduct a supplemental environmental project eeded on eiisting or the existing units will need to be converted in order to resolve any such claim,._unt e0to natural gas by 2010. The installation of any controls and/or any At the end of December 2002, the United States Envirrnmental conversion to natural gas will need to be-scheduled as part of Protection Agency issued new rules governing the federal new source sconsin Public Service's long-term maintenance plan for its existing

review program. The rules are not yet effective in Wisconsin. They'are

-'i uits.'As such controls or conversions may need to take place before the alsonot retroactive. Wisconsin has proposed amending its new source proposed 2010 compliance date.On a preliminary basis and assuming review program-to substantially conform to the federal regulations.

I controls or conversion is required, Wisconsin Public Service estimates The rules are anticipated to be finalized in the second hal of 2004.

a cost of $288 million in order to meet a 2010 compliance date. This estimate is based on costs of current control technology.

MERCURY AND INTERSTATE QUALITY RULESi TheWisconsinDepartment of Natural Resources initiated a rulemaking WPS POWER DEVELOPMENT GENERATION FACILITIES effort to control mercury emissions. Coal-fired generation Plants aire the-

.-'The generation assets of WPS Power Development are subject to ryoento commenit in regulations on sulfur dioxide and nitrogen oxide emissions similar to those pnimai targets of this effort~ The proposed rule was oe

-cnm e

October200I. As proposed, the rule requires phased-in mercury emission that apply to Wisconsin Public Service. In addition, the Sunbury generation reductions reaching 90% reduction in 15 years. Wisconsin Public Service a..-facilities of WPS Power Development are located in an ozone transport estimates that it could cost approximately $163 million to achieve the region As a result, these generation facilities are subject to additional proposed 90% reductions. Presently, the proposed rule is on hold,and = -restrictions on emissions of nitrogen oxide. Although WPS Power it is uncertain if the state will proceed to finalize the regulations.

Development has some emission allowances for 2004 for the Sunbury

-facilityapproximately10,000to15,000additionalallowances may In December 2003, the United States Environmental Protection Agency need to be purchased, at market rates, to meet its 2004 requirements.

proposed mercury 'maximum achievable control technology standards and an altemative mercury 'cap and trade" program substantially modeled on the Clear Skies legislation initiative. In addition, the United States Environmental Protection Agency proposed the Interstate Air Quality rule, which would reduce sulfur dioxide and nitrogen oxide emissions from utility boilers located in 29 states, including Wisconsin. Wisconsin Public :IH Service is in the process of studying the proposed rules. As)to the mercury maximum-achievable control technology proposal, it requires existing units burning sub-bituminous coal to achieve an annual average mercury emission rate limit of 5.8 pounds per trillion Btu on a unit-by-unit or plant wide basis. New units must achieve an emission rate limit of 0.020 pounds per gigawatt-hour. If the proposed rule is promulgated, Wisconsin Public Service's current analysis indicates that the emission control equipment on the existing units may be sufficient to achieve the proposed limitation.-

New units will require additional mercury control techniques-to reduce -

mercury emissions by 65% to 85%. Mercury control technology is'still m development. Wisconsin Public Service is assessing potential mercury control technologies for application to future new coal-fired units.'i Wisconsin Public Service employees know the meaning of teamwork. Here, Stevens Point,Wisconsin.

Line Electricians (top to bottom) Christopher Klingler, Dale Kluetz,Todd Murphy, and Eric Ashenfelter work.

together on energized 115 kilovolt transmission lines to =, T make repairs for American Transmission Company. S ! i of i -=

IIi i

Ii III i

F WPS R ESOU RCES CORPORATION L

J lF 73

S S

S S

MV F-

• SystemsAnalysts support the company's software

--and answer employees' computer questions.Here, Lori Wickman,SeniorSystemsAnalyst,andJamesFrisch, Systems Analyst problem-solve in the Green Bay office.

1 Xcleanup of the land portion of the Oshkosh, Stevens Point,C Green Bay, Ai and two Sheboygan sites was substantially complete. Groundwater treatment and monitoring at these sites wi contin ue into the future.

River sediment remains to be addressed at six sites with sediment contamination. Wisconsin Public Service anticipates that remedial -

=

investigation work will commence on the sediment portion of the '

Sheboygan site in the first quarter of 2004. Sediment removal work

/

1i

.at the Mlarinette site is scheduled for the fall of 2004. Work at the

-,other sites remains to be scheduled.X:

Costs of these'deanups are within the range expected for these sites.

Wsconsin Public Service estimates fuue udsohe netgto

, -and cleanup costs to therange o $36.2 million to $40.6 million.

COLUMBIA (JOINTLY OWNED-GENERATION FACILITY) -

-WisconsinPublicServicemayadjusttheseestimatesinthefuture In the fourth quarter of 2003, the Wisconsin Efnvironrmental Law contingent upon remedial technology, regulatory r'uirement and Advocates filed a complaint in the United States District Court for the assessmeit of natural res urce daimages. Wiscnsin Public Service the Westem District of Wisconsin against Wisconsin Power and Uight currently has a $36.2 million liability recorded for cleanup with an Company and its parent, Aiant Energy Corporation, alleging violations = offsetting regulatory a7sset (deferred charge). Wrscorsir Public Service of the federal Clean Watei Act at the Columbia generating has received $127 mnillionininsurance recoveries that we recorded as as (a facility jointly owned by Wisconsin Po'wer and Light, Madison Ga's reduction to ihe regulatory asset. Wisconsin Public Service expects to and Electric Company and Wisconsin Public Service that is operated

,recover cleanup costs, net of insurance; recoveries, in future customer rates.

-byWisconsin Power and Light). The complaint seeks certain upgrades Under current Public Service Commission of Wisconsin policies, Wisconsin to the Columbia facility's wastewater treatment programas well as Public Service wil not recover carrying costs associated with the ceanup

-unspecified penaltis and atomey fee. InaddtionthW nint expenditures. Wisconsin Public Service will include long-term operation..

-Department of Natural Resources has beenpursuingenforement Of, and maintenance costs associated with these sites in future rate requests.

this same matter and hasirecently referred thermatter tothe Wisc-onsin DAMAG-Attomey Genera's office.To date, no action has been filed or settlement O-n May 14, 2003,a fuse plug at the SilverLake reseoir owned by demanded by the State of Wisconsin, hwever we expect a complaint Upper Peninsula Power was breached. This breach resulted in subsequent to be filed in due course. We believe that the total cost to resolve any o

downst ream t

ead which isulted in Mha

• potential penalties in this,matter will not be material.

Upper Peinsula near MarqulttedMichig X

t X -

0 S

- X e

Unpper Peninsula near Marquette, Mchigan.i-OTHER ENVIRONMENTAL ISSUES

-A dam oned by Marquet t

Bo of Light and Power, which is located Groundwater testing at a former ash disposal site of Upper Peninsula downstream from the Silver Lake reservoir near thedmouth of the Dead Power indicated elevated levels of boron and lithium. Supplemental River also failed 'dtiiing this 'vent. In

tddition, high water coiiitions remedial investigations were performed, and a revised remedial action and siltation resulted in damage at the Presque Isle Power Plant owned

. ;plan was developed. The Michigan Departrnent of Enlvironmnental Quality-0 -byWisconsin Electric Power Compny req Ilwuhiload approved the plan injanua 2003. A liability of $1.4 million and a

- downstream ftomthe Board of Light and Power dam, 'was associated regulatory asset of $1.4 million were recorded for est mated

-ultimtelyforcedi-toatemporaryshutdown.d E

X future expenditures associated with remediation of the site. Upper I aPower received norder permitting deferral future ecovey he Federal Energy Regulatory Commission's Independent Board of PnsuaPower has an informal ThR F ecosts. Upper Penisua Pn agreement, with Review issued its report in December of 2003 and concluded that the

the owner of another landfill, underwhich ithas agreed to pay 17% of the root cause of the incident was the failure of the design to take into investigation and remedial costs. It is estimated that the cost of addressing -

account the highly erodible nature of the fuse plug's foundation materials the site over the next three years is $1.7 million. Upper Peninsula Power

,and spillway channel, resulting in the'complete loss of the fuse plug, recorded 17% ($0.3 million) of this amount as a liability in December 2003.,- foundation and spillway channel hichcaused the release of Silver Lake

-. D-,farbeyondtheintended design of the fuse plug. The fus plug'was MANUFACTURED GAS PLANT REMEDIATION designed for the Silver Lake reservoir by an outside engineering firm.

Wisconsin Public Serice continues to investigate the environmental X WPS R m

a c i

p ta

==.

^- -it,-.

E.WPS Resources maintains a comprehensive insurance program that -i -:'

l cleanup of ten manufactured gas plant sites. As of the fall of 2003, iu U

P P

a wi p

b prpe:

X=-IncludesUpperPeninsulaPowerandwichprovidesJbothpropertyION 74 W P 5 R E 5 0 U R C E 5 C O R P 0 R AT I 0 N I

The energywithin

-insurance for its facilities and liability insurance for liability to third partie sy etic fuel production facility, we have reduced our interest in the WPS Resources is insured in amounts that it believes are sufficient to cover facility from 67% to 23% throughsales to third parties (see Note 6-its responsibilities in connection with this event Deductibles and self i-Acquisitions and Sales of Assets). Ourabit tofully t insured retentions on these policies are not material to WPS Resources.

tax credits that remain' available to us in connection with our remaining

-fS ini -November 2003, Up -

Pw received approva-

';'-.interest inthe facilitywill depend on whether'the amount of our federal r.=X~--XIn November 2003, Upper Peninsula Power received approval from the At Commission for Commisn ad te E

y

.- t=

.;income tax liability IS sufficient to permit the use of such credits. The

-:X

-:.Michigan Public Service Cornmussion and the Federal Energy Reuaoy_-I Michigan Public Service er Rut

+

..... ;..=.-Internal Revenue Service strictly enforces compliance with all of the thComnissicn f

or deferral ou costs tha t

a re not reimbursabled torough expi a---

t e

f 2007.

insurance or of Costs that are not reimbursabl htechnical requirements of Section 29. Section 29 tax credits are currently

-:X-:insurance or recoverable through the power supply cost recovery ~-.:d2'-'

i f

E

~~~' - --- e-scheduled to expire at the end -of 2007. ---

E--..-:

mechanism. Recovery of costs-deferred will be addressed in future rate.--

proceedigs.As of December 31, 2003, Upper Peninsula Power has OnJun 27,2003,theinternalRe enue Sericean nced that it had

-deferred $3.2 million pretax and expensed $1.0 rmillion pre-tax of costs reason to question the scientific validity of certain test procedures and for damages resulting from the flood. In addition, Upper Peninsula Power results that have been presented by certain taxpayer 'to qualify for has recorded a $1.6 milon irisurance receivable at December31, 2003 -- i Section 29 tax credits. The Intemal Revenue Service also announced that it was reviewing information regarding these test procedures and WAUSAUP WISCONSIN, TO DULUTH, practices.However,o October29nthe ARenueService--.

-MINNESOTA, TRANSMISSION LINE announced that it had closed its investigation and concluded that such Wisconsin Public Service, along with co-applicants Minnesota Power and tests and procedures were scientifically valid if properly applied and American Transmission Company, continues to 'pursue the developmnt

- indicated it would issue additional guidance on future sampling and of the 220-nile, 345-kilovolt Wausau, Wisconsin, to Duluth, Minesota, testing. WPS Resources believes that its synthetic fuel facility does

- X transmission line and expects the project to proceed despite opposition and will comply with such guidelines.

eniomnatgemnAeia ransmission e

Service l wt such auideiates ulgu it a

primaniy from local landowners the Citizens Utility Board, and n groups.

'Asa result of the June Internal Revenue Service announcement, on August 1,2003, WPS Resources received notice from the Internal Revenue Under a recent agreement, American Transmission Company will that the WPS' Resources' affiliate thro which it holds an assume primary responsibility for the overall management of the project

'ownership interestin the synthetic fuel facility was underireview for the and will own and operate the completed line. Wisconsin Public Service

- 2001 tax period and that, depending upon the review of the affiliate's 2001 received approval from the Public Service Commission of Wisconsin f

'tax return, the Internal Revenue Service might reexamine the affiliate's and the Federal Energy Regulatory Commission to transfer ownership 2000 tax r et u

rn.Howeve, following the October announcement that the

-of the project to the American Transmission Company. Wisconsin Public intenmal Revenue Service was closing its investigation, WPS Resources Service will continue to manage construction of the project and be responsible received preliminary notice in January 2004 that both audits have dosed

for obtaining property rights in Wiscoisin necessary for the construction without adjustment. Future years remain open to audit. We continue '

of the project. As part of the ownership transfer, Wisconsin Public Service to believe that the facility has been operated in compliance with the received approximately $20.1 million for the sale of its construction requirements of Section 29. -'

expenditures in June 2003.

The Permanent Subcommittee on Investigations of the Senate Committee WPS Resources commuitted to fund 50% of total project'costs incurred up on Governmental Affairs has been conducting an investigation of the

-to $198 million, and receive additional equity in American Transmission T synthetic fuel industiy and their use of Section 29 tax credits. Pursuant Company. In 2003, WPS Resources invested $14.0 million in American toitsinvitation, onJanuary30,2004,weanswered questions of the Transrmission Company, related to its agreement to fund approx y

Committee regarding our synthetic fu facility. It is nuotkn6wnwhe'l half of the Wausau to Duluth transmission line. WPS Resources may

='

the investigation S

wil be completed and what impact, if any, such terminate funding if the project extends beyond January 1, 2010. On -_

_ investigation may have on future legislation or the enforcement policy December 19, 2003, Wisconsin Public Service and American Transiioniin

- -of the Internal Revenue Service.

Company received approval to continue the project with the new cost

-estimates of $420.3 million. The updated cost estimate reflects additional We have recorded the tax benefit of approximately $81.3 illion ofi

-costs for the project resulting from time delays, added regulatory Section 29 tax credits as reductions of income tax expense from the

- requirements, changes and additions to the project at the request oflocal prolect s inceptioninJune 1998 throughDecember 31,2003. As a result-

-governments and AmericanTransmission Company's management, and of alternative minimutm tax rules, approximately $52.3 million of this tax -

-.overhead costs. Completion of the line is expected in 2008. WPS Resources' benefit has been carred forward as a deferred tax asset as of December 31, has the right, but not the obligation, to provide additional funding in excess 2003 Future payments under one of the agreements g the sale 6

of $198 milion up to its portion of the revised cost estimate. For the p'enod n

sof a portion of our innterest in the facility are contingenton the facility's 2004 through 2006, we expect to make capital contributions of up to cotinued production of synthetic fuel. Any disalowance of some or al of

-$128 million for our portion of the Wausau to Duluth transmission line, those tax credits would materially affect the related deferred tax account, as well as, future tax obligations. Additionally, such disallowances may SYNTHETIC FUEL PRODUCTION FACILITY.

resut areductionofthelevelofsyntheticfuelproducionatthefacity,

-We have significandy reduced our consolidated federal income tax -Ed thus reducing the likelihood and amount of future payments under that liability for the past four years through tax credits available to us under--agreement. Future tax legislation and Internal Revenue Service review may I

Section 29 of the Internal Revenue Code for the production and sale of 'a`-also affect the value of the credits and the value of our share of theyfaciy.

solid synthetic fuel from coal. In order to maximize the value of our W P _

R E S O U R C E S C O R P O R AT I O N 7 75

6 6

0 0

• 

-0

-LL.

A=

=w_,

e, NOTE1 9-EMPLOYE E B ENE FIT P LAN Si w

I:

r WES Resources has non-contributory qualified retirement-plans covering Th etrasition -obligation for current and future retirees under Statement substantially all employees under which we may make contributions to No 106 is recognized over 20 years beginning 1993. WS Resources -

an irrevocable trust. We established the plans to provide retired employees, uses a December 31 measurement date for the majority of its plans.

who meet conditions relating to age and length of service, with retire ment The recentl ~ncted~ Medicr Prescription Drug Improvementan payments. As a result of the plans funding levels, no contributions were S - adeto tem n'203,'002 or2001 ' - f -Gd -I--it =A_ TVModemnization Act of 2003 (the Act) provides a prescription drug benefit is made to them in 2

, 2

, r

.well as a federal 'ubsidy to sponsors of certain retiree health care benefit WE'S Resources also currently offers medical, dental, and life insurance plans. The Act may impact our postretirenent benefit obligations and benefits to employees and their dependents. We expense the-se items future net penrodic postretirement benefit costs, however, until regulations

-f for active employees as incurred. We fund benefits for retirees through necessary to implement the Act and specific accounting guidance are issued irrevocable trusts as allowed for income-tax purposes.' Wisconsin Public we cannot determine the benefit, if any, associated with the new law. We Service and Upper Peninsula Power expensed aid re'6vered through w--vill continue to monitor the new regulations and rhay amend the plan in customer rates the net periodic benefit cost. Our nonregulated subsidianes 'order to benefit from the new legislation. Certain accounting issues raised expensed allocated amounts. Our non-administrative plan is a collectively _- by the Act are not explicitly addressed by Statement No. 106. As a result, bargained plan and, therefore, is tax exempt. The investments in the trust the Financial Accounting Standards Board issued FASB Staff Position (FSP)

- covering administrative employees are subject to federal unrelated - I No. 106-1, 'Accounting and Disclosure Requirements Related to Medicare business income taxes-at a 35% tax rate.

Prescription Drug, Improvement and Moderization Act of 2003' which WXsns Publi Service se=s as pa s' for t qlfie

'irt 'allows the plan sponsor to elect to defer recognition of the effects of the zWisconsin Public Service serves as plan sponsor for the qualified retirement z-o-

.A-

-t-<-

lans and the ostretirement plans aid administers the p s

re n

.Act until authoritative guidance on the accounting for this Act is issued. As p p.

p p

AcrdLingly allowed by FSP 106-1, WES Resources has elected to defer recognition of Wisconsm Public Service's Consoliated Balance Sheets reflect te assets electd-the effects of the Act on the accumulated benefit obligation and net periodic and liabilities associated with these plans. The net periodic benefit cost

=.;

- -- E P -v4 --.=ostreremnt bnefi cot in thes financial statements and accompanig associated with the plans is allocated between WPS Resources' subsidiaries p

b cs i t f

s a

g -

y - -- - - -I x - -Is;4 E ~notes. The Company's deferral election expires upon the occurrence of any

-Actuarial calculations are performed (based upoon specific employees and --

n s Te

=

d r-et e

u t o o a v

= :-event that triggers a required remeasuremnent of plan assets or obligations -

their related years of service) in trder to determine the appropriat e vntatr benefit-cost allocation 4-.= -

or upon the issuance of specific authoritative guidance on the accounting benefitcostallocation.

sSi for the federal subsidy. Such guidance is pending and when issued could Pension costs are accounted for under Statement of Financial Accounting require the company to adjust previously reported information.

Standards No.87, 'Emdployers'Accounting for Pensions! Postrtrmnpa

-f f--':f'-'F z:

0:

No.,87,

.n fr P s

The following tables provide a reconciliation of the changes in the plan's costs are accounted for under Statement of Financial AccoungStdas cs are acclounteds for underrStat ement ofBFinancial AccOunting Standard7-

'benefit o bligations and fair value of assets over the three one-year

'No. 106, 'Employers' Accounting for Postretirement Benefits Ote Ta i.A=-eid ending December 31, 2003, 2002, and 2001, and a statement Pensions.! The standards require the company to accrue the cost of these -x-pem

- b s as e e or te p d i w

of the funded status as of December 31 for each year:

benefits as expense over the period inwhich the employee renders service.

Pension Benefits Other Benefits

-===-

c-

rffmm,

-~

r-.

-i I

(Millions)

Reconciliation of benefit obligation Obligation at January 1 Service cost Interest cost Plan amendments Actuarial loss -net Acquisitions Benefit payments (Settlements)/curtailments i Obligation at December 31 Reconciliation of fair value of plan assets Fair value of plan assets at January 1 Actual return on plan assets Employer contributions Acquisitions Benefit payments 4 Fair value of plan assets at December 31 Funded status at December 31 Unrecognized transition (asset) obligation I Unrecognized prior-service cost Unrecognized (gain) loss Net asset (liability) recognized 1 2002 I

2001

_ $495.2 I

$484.9

-11.5, 11.0 33.7 32.7 0.2 26.2 35A.

13.1

-(32.5)

(21.2) 7 3(60.9)1 L $534.1 i

$495.2 I 1-3 d

-$591.9 X

$676.1 (47.8)

(13.7)

--i0-:_4 18.i1

_ -(32.5) i (88.6)-_

I $511.6

$591.9 1

$ (22.5) 1

$96.7.

(0.2)

(2.2)

-. 53.6 i

59.1 1 53.2 (693)

-i$ 84.1 1 $ 84.3 I

1 2002 I

2001 I!- 7 :-X -

- $176.2

$102.6 5.3 3.0

-12.5 7.6 -

(4.7) 52.5 65.5 - I

-7_5 (6.2) 15234.3 I. $176.2

-i -

- -II 1

$134.7

$152.3 (14.8)

(4.4) 07.3 (7.0) !

.5)

(6.2)

I $119.7 1 I

$134.7

[5(114.6) -

(41.5 13.1 1 144 (16.3)

(129)

_ 66.0 (12A) t3S (51.8) it S(524)

I; 76J W PS R E SO U RC E S CO R PO RATI O N

Amounts recognized in the Consolidated Balance Sheets relating to the qualified benefit plans consist of:

(Millions)

Prepaid benefit cost Accrued benefit cost Intangible assets Regulatory asset Accumulated other comprehensive income (before tax effect of $7.3 million)

Net asset (liability) recognized Pension Benefits

- 2002 I

$84.1

$84.1

-Other Benefits 1 2002 -:

[(51.8) 1

_ 8

-.(.

.8 E_

r~

=

[ S$(51.8)I1 1fi- - -ation

,q-a: fe peso pln with an accuf 0-fib--lt bnfit The accumulated benefit obligation for the qualified defined benefit Iformation for qualified pension plans with an accumulated benefit plans was $549.5 million at December 31, 2003, and $424.4 million-,.

obligation in excess of plan a'ssets:

at December 31,2002.

December31,

-i

t 0 E 0 ~~~~d-e

-= wese; I (Millions)

Projected benefit obligation Accumulated benefit obligation

! Fair value of plan assets 2002 - -1 The following table provides the components of net periodic benefit -

cost (credit) for the plans for the years ended December 31, 2003, 7__

_ 3 r

2002, and 2001:

Pension Benefits

- :::7-7,7777b r

- 77

- ' Other Benefits r

I III t

(Millions)

Net periodic benefit cost Service cost Interest cost Expected return on plan assets Amortization of transition (asset) obligation Amortization of prior-service cost (credit)

Amortization of net (gain) loss Special termination benefits Net periodic benefit cost (credit) before settlement/curtailment (Settlement gain)/curtailment loss Regulatory liability/(asset) offset Amortization of settlement gain regulatory liability Amortization of curtailment loss regulatory asset Net periodic benefit cost (credit) 1 2002 1

2001 115 $1 1.0 733.7 2 32.7-(47.7)

(47.0)

(2.0)

(3.5) 5.5 5.5 (0.8)

(2.3) 0.2 3

(3.6)

-(12.7)

3 -

i l.8 8.l 1-l:S(3.5):

l $ (4.5) 2002.

2001

$5.3

$ 30 1 2.5 7.6.

i

-f110.2) :

(9.7) 1 1.3 1.3

- --(1 ) 4 (1.2);

(1.2)

(4.6):

- 65

$36

$ 6.5 IE

$(3.6).

Net periodic benefit cost (credit) recorded by Wisconsin Public Service

-Plans and for Termination Benefits.i Most of the 2000 curtailment loss -

related to pension benefits was $3.7 milion in 2003, $(7.2) mlion m was deferred as a reglatory asset.

2002, and $(7.4) million in 2001. Net periodic benefit cost (credit)

F th r metine a l

n b

of l su payments

--~V uFor the rt-asons menund aoe ag numbers of lump sum payments' recorded by Wisconsin Public Service related to other benefits was

$1-9 million in 2003, $4.7 million in 2002, and $(5.5) million m 2001

-were paid out of the pension plan during the course of 2001. This

required settlement accounting u

nder Statement No. 88. Most of the During 2000, WPS Resources nade substantial changes to the settlement gain was deferred as a regulatory liability.-

administrative employees' portion of the pension and postretirement Based on a rate order received from the Public Service Commission of benefit plans. Effective January 1, 2001, the administrative employees

Wsconsin,

' 2 W

P S

oi t

entire pension plan was changed to a pension equity plan with a lump sum.

scnidrg202WcoinPbcSeveamtzdtheue penn pn ws c d to a p n e y pn wt a lp su

-regulatory asset and regulatory liability relating to the aforemnentioned distribution option for all futureretirees. Additionally; all future curtailmentlos andettement gain. a administrative retirees will no longer be given subsidized postretirement medical and dental coverage. Due to employees who waited until 2001

AtDecember31, 2003, WPS Resources had to record am minimum to retire to take advantage of the new plan benefits and various Pension liability adjustment related to its large qualified Administrative reorganizations, including the formation of Nuclear Management-Employees' Retrement Plan. Part of that minimum pension liability Company, LLC, a significant number of employees left our pension plan adjustment was a charge to other comprehensive income. WPS Resources in early 2001. This required curtailment accounting for the year 2000 '

determined that the portion of what normally would have been charged under Statement of Financial Accounting Standards No. 88, 'Ernployers

-to other comprehensive income that related to the regulated portion of Accounting for Settlements and Curtailments of Defined Benefit Pension our operations should be recorded as a regulatory asset.

W PS R E SO U RC E S CO R PO RATI O N L 77

S S

Ui-.

rhuim g-j IASSUMPTIONS Pensiocn Benefits Other Benefits 20 12002 20 Weighted average assumptions used to determine benefit obliqations at December 31 LDiscount rate Rate of compensation increase IWeighted average assumptions used to determine net periodic benefit cost for years ended December 31 6.75 Ii 25%

5.50% [_____

2002 '~~ ~ 2001 7.25%

-7.50%

-8.75%

8.75%-

5.50%

1 5.50%

[6.75%

7125%

12002I~2001 I

7.25%

7.50%

8.75%

8.75%

I Discount rate

-- Expected return on plan assets IRate of compensation increase To develop the 8.75% expected long-term rate of return on assets;,_

Th& Board of Directors has esalished the Employ ee Benefits' WI'S Resources considered the historical returns and the futue-

'- 7 Administrator Conimittee tmageheopertosadamnsrto expectations; for retumns for each asset Has swl as the target LIII of all benefit plans and related trusts. TheC Cmmittee has nivsmn allocation of the benefi trsprlOS.

Z-i-)UpoliCy for te Pension Plan assets that establihe-st'aiget asse~tialocations The ssuptins sedforWI' Reoures'medcalanddenal ost~

i foi the above listed asset classes as follows: Equity securities 60%,

DTebt securities 35%,-and Real estate 5%. The Committee is committed tren raes re hownin he ollwingtabe:

todiversification to reduce the risk of large losses. To that end the

(.Th

(~

Committee has adopted policies requiring that each asset class will be 0'

2002

~

0 diversified, niultiple managers with differing styles of management iAssumed medical cost trend I

will be employed, and equity exposure willbeirtdto7% fth rate (under age 65)

I2%

10%

talprfiovalue On a quarterly ba sis, the Committee reviews-Ultimate trend rate 5.0%

[

5.0%

progesstowards achieving the performance objectives of the pension' Ultimate trend rate reached in I2011 2008 pA nsI adthe individual mages.

Assued mdicl cot tend i'sResources postretirement benefit plans weighted-average asset rat~ovrag65)*'

4.0 12%

1 allocations at December 31, 2003, and 2002, by asset category are I Ultimate trend rate

_65 6] 5 IUltimate trend rate reached in 2011 2008 as follows:

Assumed dental cost trend rate I.

6.0%

70 Ultiate ren rat 5.0%

50%

Plan Assets at December 31

• Ultimate trend rate reached in I

-2004 204 Astaegr Equity securities57-

• Assumed health care cost trend rates have a-significant effect on the Debt securities 3%

~amounts reported forthe health care plans. A1% chang'e m~a's-s~umed Rea esat health care cost trend rates would have the following effects:

Total 10 (Millions)

I-The Emp~loyee Ben~efits'Admini'strator Committeehia's an investment Effect on total of service and interest costL polic for the postretirement plans' assets that establishes target asset components of net periodic postretirement allocations for the above listed asset classes as follows: Equity securities

'650/ and Debt Securities 35%. The Committee is committed to

'Effect on the health care component Of th dive~rsific ation to redc th iko ag ossothatend the accumlate posretiemen benfit bligtionCommittee has adopted policies requiring that each asset classwl z!

be diversified, multipl managers wit difring sye fmngmn PLNASSETS Will be employed, and equity exposure will be liniited to 70 % of the WP'S Resources pension plans weighted-average asset allocations atl, pTTtotal portfolio value. On a quarterly baiis; the Committee reviews December31, 2003, and 2002,by asset category are as follows: L~~~~~-proggresstowards achieving the performnance obje'ctiv-es 6-f the other-postretirement plans and the individual managersi; Plan Assets at December 31

• g 2002

CASHzFLOWS.

Eqiyscuiis.

4 iS Resource expects tcoriute $1.6 million to its pensio plans IDebt securities 4%

and $18.7 million to its other postretirement benefit plans in 2004.

Real state%

I 78 J WIPS R ESO URC ES CO RPO RATIO0N

The energyvwithin NON QUALI FlED PLANS held 2.1 million shares of WPS Resources common stock (market value J

-WPS Resources sponsors severa non-qualiie peso ln oeig f aprxmtely $96 mi**on) at December 31, 2003. Total costs certain current and former employees. These non-qualified pension i~.,-.L.fincurred under these plans were $5.7 million in 2003, $4.8 million in plans are not funded. WPS Resources' projected benefit obligation under-47 2002 -and $4.5 million in 2001. Wisconsin Public Service's share of tese plans was $26.3 million at December 31,2003, $19.7 million at ~ ~ the total costs was $4.6 million in 2003, $.milon in 2002, and December 31, 2002, and $17.9 million at December 31,2001. The I$38B million in 2001.'

weighted aeaesumtions used to deer~n eei bligatioins-a and et eridicbenfit-ostforthe on-Resources maintains adeferred comp ensation plan that enables

-vefr ulfe las zare the tsame :

certamin ey' employees and non-emnployee directors to defer a portion as te asumpion dislosd a

thequaifie pins.

mouts

-f their compensation or fees on a pre-tax basis.

Key employees can recognized in the Consolidated Balance-Sheets related to the dfru o7%o hi aecmesto n

pt 0%o n non-ualiiedpenson lansareas fllos:

ncentive awards. Non-employee directors can defer up to 100%/ of r~w~

theircdirector fees. There are essentially two separate investment

-* programs available to lan pariciat lwn thn to directh invetmen ofdeferrals into various investment fund equivalents offered-IIntangible assets ytepa:Tefrtprogra.m ("Program 1") offers WP'S Resources Accumulated other comprehensive income comnstock as a hypothetical investent option for participants; (before tax effect of S2.7million in 2003 and deemd dividends paid on the common stock are automatically

$1.8 million in 2002)

• 45 reinvestedan all distributions must be made in WP'S Resources iNet liabilit recognized

$18) common stock. T'he second program ('Program 2") offers a variety of hyohetica inetment options indexed to mutual fundsK With the exception of Upper Peninsula Power's Supplemental EalyWI'S Resources return on equity and WI'S Resources ~ommon stock.

-Retirement Plan, the assets and liabilities related to the non-qulfidParticipants may not redirect investments between the two programs.

peso lans are rcrded on the Consolidated Balance Sheet of.All employee deferralsarreitdoWscnnPulcSvcen, Wisconsin Public Service. The net periodic benefit cost is allocated therefore,'the liabilities and costs associated with thed~eferred to W'S Resources' subsidiaries in asimilar mannierto the qualified

-compnainpasaeicue nWsosnPbi evc'

• retirement plans, as discussed above. Included in the table above is Consolidated Balance Sheets and Consolidated Statemfents of an accrued benefit cost of $1.8 million at-December31 2003, and Income respectively.

2002reltedto UperPennsua Poer' Suplemnta Ealy rogramn1 is accounted for as a plan that does not permhit diversification.

ReieetPa.As a result, the deferrdcmestoiragmn isclassified as WI'S Resources' net periodic benefit cost under these plans was -an equity instrument and changes in the fair value of the deferred

$3.5 mlin in 2003, $2.4 million in 2002, and $2 million in 2001

-comp ensation obligation are not recognized. The deferred compensation The -net periodic benefit costs allocated to Wisconsin Public Service%

-obligation associated with Program 1 was $03mlin atDecember31, under these plans was $2.8 millio in 2003,$2.1 inillionmir202ad03an$88mloatcebrl20.-

$1.7 million in 2001. The accumulaed benefit obligation for these plans has risen due to recent plan design-changes and the declie Porm2i cone o sapa htprisdvriiain

'in the discount rate used to estimate the plans' niabimry. T'herefore, A

eut h eerdcmesto biainascae ihti WI'SResurcs ws reuird t adust he inium ensin labiity program is classified as a liability in the Consolidated Balance Sheets recrdd n heDeembr 1,203,CosoldaedBaane het and adjusted, with a charge or credit to expense, to reflect changes in Beasetes djsmet wr nncah ter fec asbenecldd the fair value of the deferred compensation obligation. The obligation, from he Cosoliated tatemht o Cashlowsclassified within other long-term liabilities was $18.7 million at acopnigDecember 31, 2003, and $16.0 million at December 31, 2002. TheA

-DEFIN ED CONTRIBUTION BENEFI PLN ot incurred under Progrmws24iloi20,16ilo WI'S Resources maintains a 401(k) Savings Plan for substantially 0ii 02ad$.4mlini 01 fulltim emloyes.

mplyeesgenraly ma cotriute romi/oThe deferred compensation programs are partially funded through

-to 30% of their base compensation to individual accounts within the WISRsucscm on stock that is held 'in a rabbi trust. The common 401(k) Savings Plan. Participation in this plan automatically qualfistokhlinherbirutscassifid n qutyaan er simlrt eligible no-no-mlyesfrpriipto.nteEmlyeSok accounting for treasury stock. The total cost of WI'S Resources common Owerhi la (EOP).Te omay ath i

tefom fs tock held

'in the rabbi trust was

$6.5 million at Dcember 31, 2003,'

WI'S Resources shares of comnmon stock, is contributed to anemlys an$5miioatDc br3120.

K ESOP account. The plan requires a match equivalent to 100/0o the frst 4% and 50% of the n-ext'2% contributed by non-union emlyes.

Certain union employees receive a contribution to their ESOP account

• regardless of their participaton in the 401(k) Savings Plan. The ESOP-~

WPS R ESO URC ES CO RPO RATIO0N [7 9

S S

S S

~

NOTE 2O-PREFERRED--ST C K O F "SUBS I DI A RY 1
'_

1 I

I I

- II iA

j.-

I I

t Wisconsin Public Service has issued preferred stock with no mandatory redemption and a $100 par value. The following table shows the shares outstanding of the 1,000,000 shares authorized:

f:

(Millions, except share amounts) 1 2002 i

• l _ 13=

1 1

13.2 1

-3.0 4

1

-5.0-X 1

1i~lll

=15.0.

' el I 5.0'

Total s

51.2 -7 All shares of preferred stock of all series constitute one dass'a'nd are of -- preferred stock out of the corporate assets other than profits before any.-

equal rank except as to dividend rates and redemption terms. Payment of such assets are paid or distributed to the holders of common stock and of dividends from any eamed surplus or other available surplus is not.

(b) the amount of dividends accumulated and unpaid on their preferred restricted by the terms of any indenture or other undertaking by stock out of the surplus or net profits before any'of such surplus or net Wisconsin Public Service. Each series of outstanding preferred stock profits are paid to the holders of common stock. Thereafter, the remainder is redeemable in whole or in part at Wisconsin Public Service's 6ption of the corporate assets, surplus and net profits shall be paid to the holders at any time on30 days' notice at the respective redemption'prices.':=--

of common stock Wisconsin Public Service nay not redeem less than all, norpurcha's e

-,. -I

~

j:... ;The preferred stock has no pre-emptive, subscription or conversion:

any, of its preferred stock during the existence of any dividend default s

h n

s rights, and has no sinking fund provisions.

In the event of Wisconsin Public Service's dissolution or liquidation, the holders of preferred stock are entitled to receive (a) the par value of their N 0 T E 2 1 1_v

_=

5___

0 E

.UIY 00=

-0 ft-X; 0-0N O TE 2 1--CO M M ON -EQOU I T Y :

Effective January 2001, we began issuing new stock under our Stock Shares outstanding at December 31

' Investment Plan and under certain of our stock-based employee benefit Common stock,$1 parvalue, plans. These stock issues increased equity $31.0 million in 2003 and 200,000,000 shares authorized ZII 32,040,875

$28.3 million in 2002. WPS Resources also repurchased $1.1 million of Treasury stock bexisting common stock for stock-based compensation plans in 2003.

Average cost of treasury shares

$2362 Shares in deferred compensation rabbi trust i

166446 Average cost of deferred compensation Common Stock rabbi trust shares

$3229 Reconciliation of Common Shares Shremmoutstanding Balance at December 31,2000 i26409470 As part of a merger with Wisconsin Fuel and Light into Wisconsin Common stock offering 2,300,000 Public Service, 1,763,871 shares of common stock were issued on' Wisconsin Fuel and Light Merger 1,763 871 April 1, 2001 to former Wisconsin Fuel and Light shareholders k

Stock issued for Stock Incentive Plan and other stock-based employee benefit plans 581,392 On December 17, 2001, 2,300,000 shares of WPS Resources common Stock issued from Treasury Stock 29,333 stock were issued at $34.36 per share and resulted in a net increase Stock repurchased for stock-based compensation plans 1 (30,816) in equity of $76.0 million.-

Balance at December 31,2001 31,053,250 Stock Incentive Plan and other stock-based On November 24, 2003, 4,025,000 shares of WPS Resources common employee benefit plans 544,578 stock were issued at $43.00 per share and resulted in a net increase Stock issued from Treasury Stock 1-24 402 in equity of $166.8 million.

Stock repurchased for stock-based compensation plans (30,451)

Balance at December 31,2002

-31 808 779 Treasury shares at December 31, 2003, relate to our Non-Employee' Common stock offering 4025:000 Directors Stock Option Plan. The number of stock options granted Stock Incentive Plan and other stock-based employee 764681 under this plan may not exceed 100,000 shares. All options under this benefit plans

'64,681 plan have a ten-year life, but may not be exercised until one year after -

Stock issued from Treasury Stock 49950 the date of grt.

.-- -:I Stock repurchased for stock-based compensation plans (26,434) the date -of grant.,

I BalanceatDecember31,2003 80 wPs R ESOU RCES CO R PORATI ON

, I

The energywithin In December 1996, we adopted a Shareholder Rights Plai The'plan is'

.of al potentiay dilutive securities. Such dilutive items include in-the-money designed to enhance the ability of the Board of Directors to protect

.stock options and performance share grants. The calculation of diluted shareholders and WPS Resources if efforts are made to gain control of '-'-=.earnings per share for the years shown excludes some stock option plan our company in a manner that is not in our best interests or the best shares that had an anti-dilutve effect. The shares having an anti-dilutve

- interests of our shareholders. The plan gives our existing shareholders effect are not significant for any of the years shown. The following table under certain circumstances, the right to purchase stock at a discounted reconciles the computation of basic and diluted earnings per share:

price. The nghts expire on December 11, 2006.

• At December 31,2003, we had $416.1 million of retained earnings

_ i Reconciliation of Earnings Per Share

avaiable fordividends.

(Mllions exce t ershare amounts)

-2002 2001

Earnings per share is computed by dividing income avaiable for common M Incomeavailableforcommon shareholders

$104

$77.6 shareholders for the period by the weighted average number of shares of Basicweighted average shares 31.7 28.2 cormon stock outstanding during the period. Diluted earnings per share Incremental issuable shares -

03 0.1 is computed by dividing income available for common shareholders for' Diluted weighted average shares 32.0 28.3 f

the period by the weighted average number of shares of common stock X

Basic earnings per common share

'$3.45'

$2.75 outstanding during the period adjusted for the exercise and/or conversion Diluted earnings per common share

$3.42

$2.74 T-E

__ -i.-

Xt'i-

>;0-~

N'OTE X22 S:TOC0K=OPTION -PLANS

'0f j:.d0

-w In 2001, shareholders approved the WPS Resources Corporation 2001 pnces of $38.25 and $44.73, respectively The stock options vest and Omnibus Incentive Compensation Plan for certain management.

become exercisable iA equal 25% installments over a four-year period.

-'personnel. In 1999, shareholders approved the WPS Resource's -i 1~;';---.'--

p s

a t

' R u The number of stock options granted under the 1999 Non-Employee

-Corporation 1999 Stock Option Plan for certain management personnel.

D S

t P

m o e 1

a t

In December 1999, the Board of Directors approved the WI'S Resources isedth r

s con slely otreasuey shars toc ptn Corporation 1999 Non-Employee Directors Stock Option Plan.

-are granted at the discretion of the Board of Directors. No options may Under the provisions of the 2001 Omnibus Incentive Compen io Plan be granted under'this plan after December 31, 2008.A pion have a the number of shares for which stock options may be granted may not

-ten-year life, but may not be exercised until one year after the date of exceed 2 million, and no single ehmployee that is the chief executive officer grant Options granted under this plan are immediately vested. The

' - of WPS Resources or any of the other four highest compensated of icers exercise price of each option is equal to the fair market value of the of WPS Resources or its subsidiaries can be granted options for more-stock6on1the date the stock options were granted. Options were granted

- than 150,000 shares during any calendar year. Under the provisions of ':on December 9,- 1999, and February 10, 2000, with exercise prices the WPS Resources Corporation 1999 Stock Option Plan, the number of of $25.4375 and $25.6875, respectively. No additional stockoptions shares for which options may be granted may not exceed 1.5 million and 'are expected to be issued under this plan. -

no single employee can be granted options for more than 400,000 shares -

Th number of shar suect to each stock option plan, each ousta g

during any five-year period. No additional stock options will be issued-under the 1999 Stock Option Plan, although the plan will continue to exis tock option, and stock option exercise prices are subjIctto adjustmnt in

-for purposes of the existing outstanding options. Stock options aregranted -the event of any stock split, stock dividend, or other transaction affecting

'iby the Compensation Committee of theBoard of Directorsandmaybe ouroutstandingcommonstock.

granted at any time. No stock options wi have a term longer than ten ' -- ' The fair value of each stock option grant was estimated using the years. The exercise price of each stock option is equal to the fair marke't '

Black-Scholes stock option pricing model and the following assumptions value of the stock on the date the stock option was granted.

'for each grant date.

i Stock options were granted under the 1999 Stock Option Plan on

- February 11, 1999 (subject to shareholder approval of the 1999 Stock AnnuX

-uee

-r Option Plan that was received on May 6,1999, at which time the I,-

" iendYleld oatility i s-nt Fre e Divide-Itrs Rat exercise price was established for the initial grant), March 13'2000 '

65 20.-3% -

5.54%

and December 14,;2000, with exercise prices of $29.875, $23.1875, and July 12 2001

$45,rsetvl.-

-- 20,-December 13,2001 6.60%

20.19%'

5.62% A

$34.75, respectively. During 2001, stock options were granted under the JXanuar 28,2002

[6.60%

20.5%

5.40%

2001 Omnibus Plan on July 12 and December 13, with-exercise prices April 11 2002

.58%=--

19.53%

5.57%

-- of $34.38 and $34.09, respectively. During 2002, stock options were '

December 12,2002 6.23%

• 20.08%

4.43%

granted under the2001 Omnibus Plan onJanuary28, April 11,and 1 February 10,2003 1

1

- December 12, with exercise prices of $36.38, $41.29, and $37.96 December 10,2003

-:'i respectively. In 2003, stock optionswere granted under the 2001 Ornibus Plan on February 10 and December 10, having exercise pe life ( ye)

W P S R E SO U RC E S CO R PO RATI ON 81

I

~

A summary of the status of the stock option plans as of December 31, 2003, is presented below:

Stock Options Options outstanding at beginning of year Omnibus plan Employee plan Director plan Granted during 2003 Omnibus plan Exercised during 2003 Omnibus plan Employee plan Director plan Forfeited during 2003 Omnibus plan Employee plan Outstanding at end of year Omnibus plan Employee plan Director plan Options exercisable at year-end Omnibus plan Employee plan Director plan Weighted-average fair value of options granted during 2003 Omnibus plan A summary of the status of the stock option plans as of Decemnber 3i12002, is presented below.

I I

_._5.__b

[ Shares'-

Stock Options i

I i

I j

I i i

II 5

41

- i I

I Options outstanding at beginning of year Omnibus plan Employee plan Director plan Granted during 2002 Omnibus plan Exercised during 2002 Employee plan Director plan Forfeited during 2002 Omnibus plan Employee plan Outstanding at end of year Omnibus plan Employee plan Director plan Options exercisable at year-end Omnibus plan Employee plan Director plan "327,427

-705,916,

-- 23,150 "

'341,613 206,849 3,750:

5,492;

-7,046 663,548 492,021 19,400 80,484

. 256,011:

-119,400 lWeighted-]

Average Exercise Price

$34.1038 I 30.9806 25.4699 X

-38.0064 4 29.5512 25A4375 34.0900 326744 :'

-3611311 31.5572 25.4762 34.1040 31.6679-25.4762 I f -.:.,

i, 0

;D I.

I D.

4 J

i.G:0. !

1 A:"; ::;

n -

-I i: '

. It:

I I

i, -

I or

.E S

I:

I I

f D

,; i)':

! Hi s

x a=

I 151 r

! 0 i, 1, 0.

I X,..

I -. ;

?.

1

0. 0 I'..

1 L.

E r i

A..D.

F f.....

S; t;..

j;:

.1 Z

J t

l i:

3 f :: 'I l ;0 :' 0.0: J M

-D j 5 -;S.

f H

4 i

Off: C:

l f

If.:d, 4,

I Weighted-average fair value of options granted during 2002 I '-

Omnibus plan

$3.64 82 W PS R E S OU RC ES CC ) R P O R AT I O N

The energy within A summary of the status of the stock option plans as of December 31, 2001, is presented below:

I Stock Options Options outstanding at beginning of year Omnibus plan Employee plan Director plan Granted during 2001 Omnibus plan Exercised during 2001 Employee plan Director plan Forfeited during 2001 Outstanding at end of year Omnibus plan Employee plan Director plan Options exercisable at year-end Employee plan Director plan 71:1 pe-V

: -1 722,416 24,000 327,427

16,500-

-850 327,427 705,916 23,150.

283,604 23,150 I

i_.

leighted-3 Average Exercise Price 30.9322 25.4688 34.1038 28.8617 25.4375 Ij 34.1038 30.9806 25.4699 1- - 1 30.6072 25.4699 Weighted-average fair value of options granted during 2001 Omnibus plan

$3.23 The following table summarizes the status of the stock options outstandi The following table summarizes th'e status of the stock options outstanding'and exercisable at December 31, 2003, under the 1999 Stock Option Plan.

The following table summarizes the status of the stock options outstanding and exercisable at December 31, 2003, under the 1999 Non-Employee DirectorStockOptionPlan.

I i I

I -

__F8T `

WPS RESOU RCES CORPORATION

0 0

0 S

• 

e

-Inthe Oshkosh,Wisconsin, warehouse, Ket Vongsa, Supply'

'Clerk, keeps an eye on inventory levels for Wisconsin Public Service.

E I

-NOTE 23-R E-GU L'A'TORY ENVIRONMENT WI S CONS I N

-e of the De Pere Energy Center, fuel costs, maintenance of power Effective March 21, 2003, Wisconsin Public Service received approval to production facilities and employee benefits. On December 19, 2003, the-increase Wisconsin retail electric rates $21.4 million (3.5%) and decrease Public Service Commission of Wisconsin issued a final written order Wisconsin retail natural gas rates $1.2 million (0.30). The'new retal authorizng a retail electric rate increase of $59.4 million (9.4%) and a electric and natural gas rates reflect a 12.0% retum on equity-and allowed retail natural gas rate 'increase of $8.9 million (2.2 /), effective January 1,;'

average equity of 55% of total capital.

2004. The new rates reflec 12.0% retum on eq ity and allowed The amount of fuel and purchased power costs Wisconsin Publ Service averag q

of 5 o t capital.

isauthorizedtorecoverinratesisestablishedinth generalrate-filig. If

'the actual fuel and purchased-power costs vary from the authorizedlevel M IC CHIGAN:

by more than 2% on an annual basis, Wisconsin Public Service is' allowed Wisconsin Public Service filed for an increase in retail electric rates in the or may be required, to file an application adjusting rates for the remainder first quarterof 2003. On July 21, the Michigan Public Service Commission of the year to reflect actual costs for the year to date and updat'ed authorized an increase in retail electric rates of $0.3 milion and the projected costs. On October 29, 2003, Wisconsin Public Service fiid to recovery of an additional $1.0 miion of transrrmission costs through the -

reduce rates by $1.9 million, due to a reduction in the costs of fuei and power supply cost recovery mechanism, effective July 22, 2003.

purchased power, for the period August 15, 2003, throughDecember 31, OnDecember20,2002,the ichi PublicServiceCommission 2003. On February 19, 2004, the Public Service Commission of Wisconsin; =

approved an 8.95% increase in retail electric ratesfor customers of approved a refund of $2.7 million, which represents the originally filed Up P

n P

T c

P S

Commission

--- Upper Pennsu a Power. The Michigan Public Service Commission amounts, adjustments and interest. This refund will be credited to granted ffectiv an 11.4% 'return on equity with the new rates beingefctv customer accounts in March 2004. A liability of $2.6 million was accrued.

Deceber 21, 2002. This was the first base rate increase for Upper as of December 3l; 2003, in anticipation of this refund.-

Peninsula Power in 10 years.

-As a result of the Kewauneenuclear power plant unplanned outage n Michigan authorizes a one-for-one fuel and purchased power recovery.

late Januaryand early February 2004, and other fuel cost increases in mechanism for prudently incurred costs.' Under the mechanism, the 2004, Wisconsin Public Service filed for a fuel cost increase of $7.4 million difference between actual and authorized fuel and purchased power costs on February 27, 2004. The Public Service Commission of Wisconsin has is deferred until year-end. By March31 of the following year, the utility scheduled a hearing for March 22, 2004, to determine the amount of the m

f a r l

o t a

c t t a

c Any

-avmust file a reconiliation f the actual costs to the'authoriz d costs. Ay fuel cost iicrease to be recorded on an interim basis. Wisconsin Public under turned to ratepayers

. -. --- it i- = -= 4under or over recovery is then recovered from or retundt aeaes Service expects that a final order will be issued in summer 2004 regarding though theend of the following year. The reconciliation is subject to this rate increase.

,--review and intervention by customers. At December 31; 2003, Upper: -

On April 1, 2003, Wisconsin Public Service filed an application with

-. 1-Feninsula Power had significantly under recovered fuel and purchased Public Service ComMmission of Wisconsin for authorization to increase-L.. power costs due to the high costs of purchased power. Upper Peninsula electric rates and natural gas rates, effective Januay 1, 2004. Thee iate r'Power intends to file, in March 2004, a reconciliation of the 2003 costs increases are necessary to recover the costs associated with the purchase requesting recovery of $5.2 million. In addition; the costs assoriated with Ithe Presque Isle Power Plant outage have been deferred and are expected 84 J W PS RE SO U RC ES CO R PO RATI ON

The energy within to be addressed along with other Dead Flood issues in the next rate case Evaincrease is less. The draft order also granted the use of formula rates, Upper Peninsula Power expects a final decision regarding the recovery

'- 7which allow for the adjustment of wholesale electric rates to reflect actual of the 2003 fuel costs no later than the end of 2004. Due to the level of

'costs without having to file additional rate requests. On March 4, 2004, the under recovery relative to Upper Peninsula Power's revenues, te

-the Federal Energy Regulatory Commission and Wisconsin Public Service deferred cost may be recovered over more than one year.

'-' reached a tentative settlement regarding the final rate increase. Wisconsin

--'ubfic Service anticipates no material refunds or other adjust ents to

-FEDERAL-:-

rvu --c ed und C..er the erim rates based on the erms of the On April 30, 2003, Wisconsin Public Service received a draft order from the tentative agreement The final settlement is anticipated to be filed with

--7 Federal Energy Regulatory Commission approving a 21%or $41 million, the Federal Energy Regulatory Commission in the second quarter of 2004.

interim increase in wholesale electric rates. The new wholesale rates-Thiswas Wisconsin Public Service's first rate increase for its wholesale were effective on May 11, 2003, and are subject to-refund if the final rate-electric customers in 17 years.

L NOTE 2 4-S5 E-G ME N TS OVF BUS INES SS-::

We manage our reportable segments separately due to their diffefent cooperatives, commercial and industrial consumers, aggregatons and operating and regulatory environments.

Lother marketng and retail entites.

Our principal business segments are the regulated electric utility operao PS Power Development competes in the wholesale merchant electric

- of Wisconsin Public Service and Upper Peninsula Power and the rigulated

.Pwer generation industry, primarily in the midwest and northeastern gas utility operations of Wisconsin Public Service. Wisconsin Public Service's -.- United States and adjacent portions of Canada. WPS Power Development's revenues are primarily derived from the service of electric and natural gas core competencies include power plant operation and maintenance, waste retail customers in northeastern and central Wisconsin and an adjacent part disposal, and material condition assessment of assets. Revenues are derived of Upper Michigan. Wisconsin Public Service also provides wholesale 'Gil'

' =';'.'_primarily through the sale of capacity and energy generated from plant electric service to various customers, includingm'unicipal utilities, electnic --'.assets through wholesale outtake contracts and into liquid financial markets, cooperatives, energy marketers, other investor-owned utilities'and primarily the PJM (Pennsylvania, New Jersey, and Maryland), New.York municipal joint action agency. Portions of Wisconsin Public Service's electric and NEPOOL (New England Power Pool) markets, at spot prices or day and gas operations cannot be specifically identified as electric or gas ana ---

ahead prices.

instead are allocated using either actual labor hours, revenues; number of T

H C

n O s

i t

b

--- -- t-s. :.

43he Holding Company and Other segment includes the operations--

customers, or number of meters. Upper Peninsula Power derives revenues Of WPS Resources and IPS Resources Capital Corporation as holg from the sale of electric energy in the Upper Peninsula of Michigani.

a t

n i

a a W P

Service S.- L

=:

-a--.

companies and the nonutility activities at Wisconsin Public Service -

Our other reportable segments include WPS Energy Services and WPS Power '

!- and Upper Peninsula Power. The tables below present information for

• Development. WPS Energy Services offers nonregulated natural gas the respective years pertaining to our operations segmented by lines.

electric and alternate fuel supplies as well as energy management and

.:7 of business.

0 consulting services to retail and wholesale customers primarily in the

-L.-;

northeastern quadrant of the United States and adjacent portions of Ai Canada. Although WPS Energy Services has a widening array of products and services, revenues are primarily derived through sales of electricity -i and natural gas. WPS Energy Services' marketing and trading operationsc manage power and natural gas procurement as an integrated portfolio with its retail and wholesale sales commitments. Electricity required to fuil these sales commitments was procured primarily from independeti generators, energy marketers ad organized electric power markets.>

i Natural gas was purchased from a variety of suppliers under daily monthly, seasonal, and long-term contracts with pricing delivery and volume schedules to accommodate customer requirements.--

WPS Energy Services' customers include utilities, municipalities rgy s--) - ; '-?-f7 f-e_

WH Deanna Francisco leads e-Business Development and Services at Wisconsin Public Service. In 2003, http://www.wisconsinpublicservice.com won an Outstanding Web Site Award from the Web Marketing Association for easy navigation and customer-focused design.

ii I-WPS RES OU RC ES C O R P ORATION 85

rSegments of Business (Millions) 1 2003 Income Statement External revenues IInternal revenues Depreciation and decommissioning Miscellaneous income Interest expense IProvision for income taxes Discontinued operations Cumulative effect of change in accounting principle income available for common shareholders iBalance Sheet Total assets cash expenditures for long-lived assetsKi

• Includes only utility operations. Nonutility operations are included in the Other column.-

resources

olidated FISegi 2002 ments of Business (Millions)

Regulated Utlties 7

-Nonutility and Nonregulated Operation Electric Gas,-

Ttl WPS Energy IWPS Power Reconciling Utility

• Utility

• Utility

• Services Develoi~ment Other Eliminations WPS I

Con!

InoeStatement External revenues

$ 741.6

$3087

$1i,050.3

$358.8

$ 51.8 4 0.2 S.$1,461.1 Internal revenues 21.5 202 5-24 761.1 (34.6) i Depreciation and decommissioning 72.6 13.3 85.9

-1.1 7.3 0.5 9.

Miscellaneous income 6.3 0.3 661._7.

1.

(8.1) 47.8 Interest expense 876.3 35 1634

2.

(6.6) 55.8 Provision for income taxes 191 2.4

- 44.3

~

66(8.3)

(.)(0.3) 2.

Discontinued operations 0.6-(6.6)

(6.0)

Income available for common shareholders 61.0,-

1 84,.

779A4 11.0 24.0 (5.0) 109.4 Balance Sheet-Toa ses-1867 513.9 2,330.6

- 877.2 358.1

-172.7 (67.4) 3,671.2 Cash expenditures for long-lived assets 16334 198.3 0.8

--8.2 30-1.

• Includes only utility operations. Nonutility oerations are cincluedin the Other columni Segments of Business (Mlin)

Regulated Utilities -

Nonutility and Nonregulated Operations----

Electric GaIoa WPS Energy

-WPS Power

-.Reconcilinig PSResources-2001 Utility*

Utility *:-Utility*

Services Develoornrt-

-Other Eliminations Consolidated Income Statement IExternal revenues 4654.4

$320.6

$ 975.0

$322.3

$4.

.2

$1,345.4 Internal revenues 2

1.3 1.0 22.3 4.3 8.7-1.1 (36.4)

Depreciation and decommissioning 66.4 1 17 78.1 0749-04 8.

Miscellaneous income 145 2

1 47

-11

-2.6 27.2 81 3.

Interest expense

-,-28.3 6.0

~ 343 0.2 4.2 23.0 (8.3) 53.4 Provision for income taxes' 31.6

-5.9 37.5

-3.5 2.)

18 -

(0.1)

Discontinued operations

.9 (7.8 (6.9)

Income available for common shareholders 58.8-8.9 t 677 6.2 31.3 (0.1)-

77.6 Balance Sheet

-Total assets 1,725.9 4826 2,208.5 701 323.1 167.7 (7.)--,4.

Cash expenditures for long-lived assets 175.8 2 9 200.7 10.9 27.7 C

4.

t r-o I

j I

[

-*Includes only utility operations. Nonutility operations are included in the Other column.

86 ]

WPS R ESOU RC ES CO RPO RATIO0N

The enerev within 1Geographic Ir iUnited States K

Canada Total c7 ~ nn - :r 7nTh-iformation (Millions)

I. -

Long-Lived i IRevenu es Assets II Revenues 1$1,407.4

$2,358.5

$1,343.1 1 53.7 25.5 2.3 I $1,461.1

$2,384.0 I

$1,345.4 UA RT E RLY F-I NANWC iAl I N T E -2 5 ---C IFORMATION -(UNAUDIT:ED),

Three Months Ended r

(Millions, except for share amounts)

Operating revenues' Operating income Income from continuing operations Net income before cumulative effect of change in accounting principles Income available for common shareholders Average number of shares of common stock (basic)

Average number of shares of common stock (diluted)

Earnings per common share (basic)

Income from continuing operations

• Net income before cumulative effect of change in accounting principles Earnings per common share (basic)

Earnings per common share (diluted) ~

In come from continuing operations Net income before cumulative effect of change in accounting principles Earnings per common share (diluted) n i

i 11 (Millions, except for share amounts)

I[ Marchi,

, 2002

-, - I -

June 1 -

September, December-

,Total 11 Operating revenues"

$8.31

$3-10.5

$350.6

-~$19.7 146.

Operating income

.i48 22.8

-~

4573 37.9 155.2 ~

Income from continuing operations 31 I 23.6 z

-29.9 32.9 I 118.5

-i

.1

- I Earnings per common share (basic) (2)

Income from continuing operations Earnincqs per common share (basic)

~.-0.89

- $0.72 0.68

$0.91 10.96

-.0.91-

$3.64

- - 3.45 Iancome avilbefr common share hollut der)8

17.

3.

I 91 1 10, I Income from continuing operations

$09

$0.71

[

$0.91 H

$1i00 l

$3.61 Earnings per common share (diluted) 1 091 0.68 ~-

0.95 0.90 342 (11)Revenue have been reclassified, including revenues related to discontinued operatIon,-

Beas of vrious factors, which affTeath uiltbuiesthqarryrsls to conform to current year presentation.

-of'operations are not necesrycomabl.

(2) Earnings per share for the individual quarters do not total the year ended earnings per share amount because of the significant changes to the average number of shares outstanding and changes in incremental issuable shares throughout the year.

WPS R ESOU R CES CO RPO RATIO N L 87

z I ; -

WPS Resources Corporation The management of WPS Resources Corporai prepared, and is responsible for theinitegrity c consolidated financial statements and related information encompassed in this Annual Rep' consolidated financial statements have been p in conformity with generally accepted accoun

-principles, and financial information included e in this report is consistent'uith our conisolidai

• financial statenments.

We maintain a system of internal accountinig designed to provide reasonable assiuranc that are safeguarded and that transactions are prof executed and recorded in accordance with aul procedures; The system is monitored by man and our internal auditing department. -Written and procedures have been developed to supps

-intemal controls in place and are updated as r Our interal auditing department reviews anc the effectiveness of selected internal controls'a to management as to its findings and recomrr

--for improvement. Management takes approprin to correct deficiencies as they are identified.

'OurBoard of Directors has established an Au Committee, comprised entirely of independent

- which actively assists our Board in its role of o our financial reporting process and system of control. Our independent public accountants by and have full and free access to'theAudit C

'We also have a Disclosure Committee to ovej adequacy of our financial reporting and discio The accompanying consolidated financial stat have been audited by Deloitte & Touche, ind,

-public accountants, whose report follows.

Larry LWeyers Chairman, President, and Chief Executive Officer S.-

o!g:t,

h CX~seh.

'Leary G-

- Senior Vice President and Chief Financial Officer Diane L Ford Vice President - Controller and Chief Accounting Officer 88 W P S R ES O U RC ES CO R PO RA

j-

,

--

-

I.

_7 Deloitte.-

tion has -c -

To the Shareholders and Board of Directors of of, the r-WPS Resources Corporation-:

frt.-Oual

We have audited the acco'mpanying' consolidated -

rep'ared

_balance sheets of WPS Resources Corporation and subsidiaries (the `Company"), as of December 31, 2003 elswrn=

-and 2002, and the related consolidated statements lsewhere 7-i`

ted e 'i of income, common shareholders' equity, and cash e

-flows for eachof the three years'in the period ended

'December 31, 2003. These financial staternents are control the responsibility of the Company's management.

our assets =-

Our responsibility is to express an opinion on these erly f

- financial staternents based on our audits. '

oz e_

-,-We conducted our audits inaccordance with auditing a t- _=

standards generaly accepted -in the Unitdd States otf policies - c-sw-7s==...;..--t=.

ortlies

- Arnerica.-Those standards require that we plan and -`

perform the audit to obtain reasonable assurance about iecessarv.whtethfiacl e

the th financial tements are free of material

[as'sesses s

misstatement. An audit includes examining, on a test Lnid reports

~

=A f

basis, evidence supporting'the amounts and disclosures in Lendations the 'financial statements. An audit also indcudes assessing vate actions -- -0 fV Xthe accounting principles used and significant estimates ate ic e _=,-

-t prnie Use

=-

es made by management, as well as evaluating the overall -

financial statement presentation: We believe that our dit i

audits provide a reasonable basis for our opinion.

directors verseemg2--

-= zIn our opinion, such consolidated financial statements intemal

.present fairly, in all material respects, the financial are hired

[=r_

position of WPS Resources Corporation and subsidiaries ommittee.

as of December 31, 2003 and 2002, and the results of rsee the

[

their operations and their cash flows for each of the.

sure.

<>==-

j -

.'t00 three years in the periodendedDecember 31,2003 z

C e=

=

L 0 ~in conformity with accounting principles generally'- f -- ='

ements

.-As discussed in Note 1 to the consolidated financial statements, effective January 1, 2003, the Cornpany

-changed its method of accounting for'certain energy'"

trading contracts to adopt EITF 02-3,"Issues Involved

-in Accounting for Derivative Contracts Held for Trading -

- - Purposes and Contracts Involved in Energy Trading and Risk Management Activities! As discussed in -

Notes I and 16 to the consolidated financial statements, effective January i,2003; the Company changed its

-t-method of accounting for asset retirement obligations to adopt Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations.r Deloitte&ToucheLIP

,. =,

I

+

Milwaukee,Wisconsin s

1 March 1,2004 OTI O N

The energy within e

i Scott Bunker (foreground), Distribution Operations Center Dispatcher; Steven Heller,

-System Operating Supervisor; and Neil Hermus, Superintendent of the Distribution Operations Center; monitor gas and electric distribution facilities from the Green Bay headquarters of Wisconsin Public Service.They quickly respond to problems and maintain service to customers.

I c F

]

As of or for Year Ended December 31 (Millions, exceptpershare amounts, stock price, return on average equity, and number ofshareholders and employees)

Total revenues Income from continuing operations Income available for common shareholders Total assets 2000~

X 2001 61.1. -

1 8.5 09.4 --

$1,345.4 C7 -

0/.U -

77.6

- -3,346.5

$1,094.1

-- 75.61 67.0 3,202.7---

51.1 660.0

$1,086.5 X 61.9

=-

I =

59.6

- 2,185.1 71.2 51.1 l Preferred stock of subsidiaries 51.1 51.2 Long-term debt and capital lease obligation (excluding current portion) i 727.8 584.5 Shares of common stock (less treasury stock and shares in deferred compenisation trust)

Outstanding Average Earnings per common share (basic)

Income from continuing operations Earnings per common share Earnings per common share (diluted)

Income from continuing operations Earnings per common share Dividend per share of common stock Stock price at year-end Book value per share Return on average equity Number of common stock shareholders Number of employees

-- 31.8.

31.7 -

I 26.4 26.5 31.1 28.2

. 26.8

-26.6 :

$3.64 3.61 3.42 2,12

. $3.00

- 2.75

2.74 -y

- 2.08 -

-$2.74; 2.53

- 2.74:

2.53 2.04 - $2.21

-1 2.24

2.21-

- 2.24 - S

2.00:-

.-. $38.82

- $24.62

. $36.55 --

$23.02 -

12.80% ~~

- ~,23,478

~ ~~'2,856

$36.81

$20.76 12.30%

24,029 -

-3,030

$25.130=-,

$20.01; 1130%

25,020 2,900 i 22,768

2,963

*Revenues increased $2,860.2 million in 2003 compared to 2002.Approximately $1/127 million of the increase relates to WPS Energy Services'required adoption of -

Issue NoI02-03,"Issues Involved in Accounting for Derivative Contracts Held forTrading Purposes and Contracts Involved in EnergyTrading and Risk Management Activities,'

effective January 1,2003.Volume growth driven by WPS Energy Services'acquisition of a retail natural gas business in Canada accounted for another $500 million of the increase.The remaining increase in revenues was primarily related to increased natural gas prices at Wisconsin Public Service and WPS Energy Services and electric rate increases at the utilities.

J4!

I W PS RES OU RC ES -CO R PO RATION [89

f s

-0 iTWFS Resoui LarryL.Weyers Chairman, President, and Chief Executive Officer Age 58/Years of service 18 Thomas P. Meinz Senior Vice President -

Public Affairs Age 57/Years of service 34 Phillip M.Mikulsky I

Senior Vice President -

Development Age 55/Years of service 32 Joseph P. O'Leary Senior Vice President and -

Chief Financial Officer Age 49/Years of service 2 -

Charles A.Schrock Senior Vice President Age 50/Years of service 24

-:~

r.I.

rces Corporation Wisconsin Public Service Corporation Neal A.Siikarla Larry L.Weyers Charles A.Cloninger Vice President Chairman, President, and Assistant Vice President -

-Age 56/ears of service 5 Chief Executive Officer Operations and Engineering Bra Tr

--Age 58/earsofservice 18 Age45Nears of service 22 Bernard J.Treml

=J

'ice President - -;.Thomas P. Meinz James F. Schott Human Resources---

Senior Vice President -

Assistant Vice President -

Age 54/Years of service 31

- Public Affairs Regulatory Affairs

']

-'-Age 57/Years of service 34 Age 46/Years of service 1 William L.Bourbonnais,Jr.

Assistant Vice President Joseph PO'Leary-BarthJ.Wolf -

Transmission Senior Vice President and Secretary and Manager - -

Age 58/Years of service 35 Chief Financial Officer

-- Legal Services ara A N Age 49/Years of service 2 Age 46/Years of service 15 Barbara A. Nick,

9 U=9-

=

'AssistantVice President LawrenceT.Borgard BradleyA.Johnson Corporate Services Vice President - Distribution Treasurer-Age 45/Years of service 19 and Customer Service Age 49/Years of service 24 Glen-R.Schwalbach Age 42Nears of service 19 Jerome'J.Myers*

Assistant Vice President Diane L. Ford AssistantTreasurer i ' Corporate Planning,

-Vice President - Controller Age 58Nears of service 35 Age58/Yearsofservice35 and Chief Accounting Officer KMK

'Age 50/Years of service 28Jae Barth J.Wolf Assistant Treasurer I

Secretary and Manager

,-David W. Harpole Age 5oNears of service 7 Legal Service Vice President -EnergySupply

-'Age 46Nears of service 15 Age 48/Years of service 26 Pamela R.Clausen r

A.oh-o r

Assistant Controller -

Bern rAge 53/Years of service 16

-'r0BradleyA.Johnso

_i

= BenrJ.Treml

tAg5Nasfsevc1 Treasurer Vice President -

Age 49/Years of service 2 4 Human Resources

- Age 54/Years of service 31 Vice President - Controller and Chief Accounting Officer Age 50/Years of service 28 Richard E.James Vice President -

Corporate Planning Age 50Nears of service 28

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Phillip M. Mikulsky Michael W. CharCles Chief Executive Officer,

Vice President - Asset

-; -=

Age 55/Years of service 32 Development MarkA.Radtke Age 54Nears of service 26 President Bruce A. Rizor Age 42/Years of service 20 Vice President - Structured

..a:-

EnergyTracling~ ::-,

Daniel J.Verbanac

3.

Senior Vice President g' Age 42Nears of service 4.

Age 40/Years of service 19

-- Ruqaiyah Z. Stanley Mark W. t

'--Vice President

MarkW.Stiers' t._

Chif O rti OAge 49/Years of service 5 Chief Operating Officer -

S;:

Quest Energy Barth J.Wolf Age 41/Years of service 1 -

Secretary Age 46Nears of service 15

.RichardJ.Bissing Vice President Bradley A. Johnson Age 43/Years of service 14 Treasurer-

'Age 49/Years of service 24 Darrell W.Bragg Vice President '-

Gregory C. Lower --

Age 44/Years of service 8 Controller -

Boris A. Bevnv

.Age 49/Years of service 2 Boris A. Brevnov i

Vice President - Business Development and

Implementation Age 35/Years of service 1 Phillip M. Mikulsky President Age 55/Years of service 32-

-Terry P.Jensky-eVice President -Operations

/Y of service 26 Br J.Wolf Secretary Age 46/Years of service 15 Bradley A. Jonson Treasurer -

Age 49/Years of service 24

-George R

iesner Controller Age 46/Years of service 19

-Upper Peninsula Power Company P. Meinz Chairman and Chief Executive Officer

-Age 57/Yea rs of service 34 Lawrence T.- orgarld!

- President

• Age 42/Years of service 19 "Gary W.Erickion

.Vice President Ager /earnsuof service 35 Barth J. Wolf

-Secretary Age 46/Years of service 15 Bradley A.Johnson Treasurer

..Age 49/Years of service 24 Titleageand years of service re asofDecember3g,2003.

Years of service take into

• consideration service with

• WPS Resources Corporation ora sys4er company.

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• RetiredDecember3I,2003.

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~~7.7 Shareholder Inquiries 'idideds Our transfer agent, American Stock Transfer & Trust We have paid quarterly cash dividends on our'common stock Company, canbereached via telephone between the ours since 1953, and we expect to continue that trend. Future of 7:00 a.m. and 6:00 p.m., Central time, Monday through dividends are dependent on regulatory limnitations, earnings, R Thursday, or 7:00 a.m. and 4:00 p.m., Central tirieFriday,

= capitalrequirements, cash flows, and other financial by calling 800-236-1551. You also have direct access to your' cnsiderations.'

account through the Internet at http://wvw.amstockcom.

-- Anticipated record and payment dates for common stock Our Investor Relations staff is also available 'to assist you'-

divide'ds paid in 2004 are:

9'

'by calling 920-433-1050 between the hours of 8:00 am.m

=

'and 4:30 p.m., Central time, Mondaythrough Frday 4

Record Date Payment Date Internet addresses, alon w addi.ional

= =IFebruary 27 March 20 Mailing addresses and nter etaddresses, additonal May28 June 19 telephone numbers, are listed on the back cover of this report August 31 September 20 t

November 30 Deebr2 0

=; 1 ~- Common Sock- - X r 0 =- 'l eNew York Stock Exchange is the principal mart 'for As a record holder of our common stock, you may have your W'. S Resources Corporation common stock, which trades--

dividends electronicaly deposited in a checkingor savings under the ticker symbol of WVVS.

accountata financial institution. If youare a record holder z ~ -l

-g andyour dividends are not electronicaly deposited,we will Fr rS i

You may purchase or sel mail your dividend check directly to you '

ourcommon stock through

.our Stock Investment Plan If you are a record holder of our common stock and your

_______ourStock sIrveeivedttPlme

_b or thr divdend check is not receive on e payment date, wait described belowo throg iied c

brokerage firms and banks

.approximately ten days to allow for delays in mail delivery.

that offer brokerage 'services fter that time, contact American Stock Transfer & Trust f

W;SbL

'"Company to request a replacement check.

Comronstockcertificates -- --.- ----

issued befoefeptmbe P

blic Se ptice 1,1994, bear the name of Wisconsins Stock investment Plan k'

0-PublicService'Corporation and remain valid certificates.

-We maintain a Stock Investment Plan for Effective December 16, 1996, each share of our common stock the purchase of common stock, which has a Right associated with it, which would entitle the owner

--allows persons who are not already to purchase additional shares of common stock under specified 2 fshareholders (and who are not employees-terns and conditions. The Rights are not presently exercisable.- -- of WPS Resources or its system companies)

The Rights would become exercisable ten-daysafter a person I to become participan by making a.

or group (1) acquires -15% or more of WPS Resources

_ minir=um initial cash investment of

- Corporation's common stock or (2) announces a tender offer_

$100. Our Plan enables you to maintain I I

to acquire atleast 15% of WPS Resources' common stock.

-- registration with us in your own name - -

- OnDecember31,2003, wehad36,621,976shareso of rion rathrtha habrokerin "streetr name.

stockoutstanding, whichwereownedby22,172holders ofrecord. --.-- tTheStockInvestmentPlan alsoprovides youwith options

-- ; 01; X::- - -- ~':~; ;~-~' - :0;~ ' -;::' : : _--0for reinesting your'dividends'an dmak'ng optional cash:: f--

Year Ended December31

-Dividends Price Range purchases of corn mmon stock directly through the Plan without:

i(By Quarter)

. PerShare High Low paying brokerage commissions, fees, orservice charges.

\\

-'Optional cash payments of not less'than$25 per payment may be made subject to a maximum of $100,000 per calendar j

- - year. An automatic investment option allows you to authorize.

- the deduction of payments from your checking or savings 2002

- Ist quarter ---

-$.525

$39.93.. $35.65 -

accountautomatically once each monthon the third day of 2nd quarter

.525 42.68 37.00 -

- the month, by electronic means for investment in the Plan.

3rd quarter--

.535 41.12

-30.47

=

- 1 4thquer

.535 39.95

-3264 Cash for estment must be received by the 3rd or S2.0 l 8dhdayof themonth for investment, which generally 9 2 w P s R E S O U R C E 5 CORPORATION-

The energy within I. i commences on or about the 5th or 20th day of the month, or -

':It is anticipated that 2904 quarterlyeamings information will as soon thereafter as practicable.

=

be-released on April21, July 21, and October 20 in 2004 and on January 26 in 2005.

The shares you hold in our Stock Investment Plan may b' Sold by the agent for the Plan as you direct us, or you may request o-:You may obtain, without charge, a copy of our 2003 FornmIO-K, a certificate for sale through a broker you select. We will without exhibits, as filed with the Securities and Exchange accumulate sale requests from participants and, approximately Comrnission, by contacting the Corporate Secretary, at the every five business days, will submit a sale request-to the '7

- corporate office mailing address listed on the back cover, independent broker-dealer on behalf of those participants-'

--- or by using our Web site.-

Participation in the Stock Investment Plan is being offered only by means of a prospectus. If you would like a copy of nerne-the Stock Investment Plan prospectus, you may use American Visit our award-winning Web -

Stock Transfer's Web site; call American Stock Transfer at%-

site at http://www.wpsr.com.

t 800-236-1551, contact us via e-mail by using our e mail to find a

wealth of information

-address of investor@wpsr.com, or you may order or about our company and.

download the prospectus and enrollment forms using the its subsidiaries.

Intemet at http://www.wpsr.com under Investor Information The st wl give X V..-.

Theite witiveyou mstant access to Annual Reports, SECV filings proxy statements, financial news, presentations, news Safekeeping Services

releases, career opportunities, and much more. You may also

-As a participant in the Stock nvestment Plan, you may '-'-

download a copy of the prospectus for the Stock Investment transfer shares of common stock registered in your name into

- Plan and the associated forms for participation in the Plan.

a: :'Planaccountforsafekeeping ContactAmericanStock

-- Te ie

is updated regularly, so visit it often.

Transfer or our Investor Relations staff for further details Preferred Stock of Subsidiar 0

-AnnuaI Shareholders' Meeting The preferred stock of Wisconsin Public Service PuOrAihreodrsreting-w5iell be held trads o ovr-te-conte maket. Pymen Coportio K:ThursdayMay13,2004, atl10:00 am. atthe Weidner Center, trades on over-the-counter markets. Pa rent and record dates'=r- -

=:

': =

- =:

=:

Universityof Wisconsin-Green Bay, 2420 icolet Drive, -

for preferred stock dividends paid in 2004 are:

G B

2420 No D

~Green Bay, Wisconsin.

Record Date Payment Date Date --.. Proxy statementsfor ourMay13,2004, Annual Shareholders' X

0January 15

-:February1 Meeting were mailed to shareholders of record on April 8,2004.

-April 15 May1 -

July15

- August 1 -1 =

I AX October15 November 1 Annual Report '

If you or another member of your household receives

. __-___-_-_-_-____-______'___--__-'1=-_'=__'

more than one Annual Report because of differences in

{ StockTransferAgentandRegistrar the registration of your accountsplease.contactAmerican Questions about trans g c n or p

-'-i

-'Stock Transfer & Trust Company so that account mailing

- :Questions about transferring common or preferred stock. lost--i -=-.--

r - -

T...

-.~.

'. =

'instructions can be modified accordingly.:.'i;

.X certificates, or changing the name in which certificates are i

o can be m accrdigly registered should be directed to our transfer agent, American

-This Annual Report is prepared primarily for the information Stock Transfer & Trust Company, at the addresses or of our shareholders and is not given in connection with the telephone numbers listed on the back cover.

sale ofany security or offertosellorbuyanysecurity.

Address Changes: '~ :;

t Corporate GovernanceInformation If your address changes, write to American Stock Transfer &

Corporate governance information, including our Corporate Trust Company at the address on the back of this report ori Governance Guidelines, our Code of Conduct, and charters use their Web site at http://www.amstock.com.

for -the committees of our Board of Directors, is available on our Web site at http://www.wpsr.com under Investor

Availability of Information Information.You mayalsoobtaintheinformationrbywritten Company financial information is available on the Intemrnet. -

request to the Corporate Secretary at the mailing address for

. The address is http://www.wpsr.com.

0f the corporate office indicated on the back cover of this report.

T

,e ad rs is htJ w

wpr o

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• W P S RESOURCES CORPORATI ON

[93

WPS Resources Corporation Corporate Office Transfer Ai 700 North Adams Street For General Green Bay, WI 54301 American Sti Mailing Address 59 Maiden L

• WPS Resources Corporation NewYorkN1 P.O.Box 19001 Web Site Green BayWI 54307-9001 httpiwwwa~

Telephone E-Mail 920-433-4901 info~amstoc Fax~

Telephone --

'920-433-1526 800-236-155 Web Site 718-921-815 http://www~wpsr-com Fax 718-236-264 Investor Relations For Divide WPS Resources CorporationDietto 700 North Adams Street Green Bay, WI 54301AmrcnS PO..Box 922 Mailing Address Wall Street S WPS Resources Corporation NwYr.N R0. Box 19001NeYokN Green Bay~Wl 54307-9001 Telephone 800-236-155 Telephone 920-433-1050 or 92G-433-1 857 E-Mail investor~wpsr~com Financial Inquiries Mr. Joseph P. O'Leary Senior Vice President and Wso Chief Financial Officer.

Wiscon!

WPS Resources Corporation r(WUI-)

R 0. Box 19001 orga niz Green BayWI 54307-9001 voices c in Wiscc Telephone vlut 920-433-1463 iars and the calling Stock Exchange Listing contact New York Stock Exchange Equal E Ticker Symbol WPS Re:

.to equa all quali Listing Abbreviation t ae WPS Res nationa disabilit we supl with all

~executih policies