| WPS RESOURCES CORP ITEM 1A RISK FACTORS You should carefully consider the following risk factors, as well as the other information included or incorporated by reference in this Annual Report on Form 10-K, when making an investment decision |
| The risks and uncertainties described below are not the only ones we face |
| Additional risks and uncertainties not presently known or that we currently believe to be immaterial may also adversely affect us |
| We may not successfully integrate pending or future acquisitions into our operations or otherwise achieve the anticipated benefits of those acquisitions |
| As part of our growth strategy, we continue to pursue a disciplined acquisition strategy |
| While we expect to identify cost savings and growth opportunities before we acquire companies or assets, we may not be able to achieve these anticipated benefits due to, among other things: · Delays or difficulties in completing the integration of acquired companies or assets; · Higher than expected costs or a need to allocate additional resources to manage unexpected operating difficulties; · Parameters imposed or delays caused by regulatory agencies; · Reliance on inaccurate assumptions in evaluating the expected benefits of a given acquisition; · Inability to retain key employees or customers of acquired companies; and · Assumption of liabilities not identified in the due diligence process |
| These risks apply to our pending acquisition of Aquilaapstas Michigan and Minnesota natural gas distribution operations |
| We may not complete construction projects within estimated project costs |
| WPSC is currently in the process of constructing the 500-megawatt Weston 4 base-load generation facility at an estimated cost of dlra779 million (including the coal trains) |
| WPSC is also considering the possible construction of additional generation facilities in the future |
| These and other projects also may be subject to joint ownership or operation agreements, completion of which will impact estimated project costs |
| These are very large and complex construction projects, subject to numerous unpredictable events that could affect our ability to timely complete construction of these projects within estimated costs |
| We may not be able to meet these construction estimates due to, among other things: · Fluctuating or unanticipated construction costs; · Supply delays; · Legal claims; and · Environmental regulation |
| We have significantly reduced our consolidated federal income tax liability for the past several years through tax credits available to us under Section 29 of the Internal Revenue Code for the production and sale of solid synthetic fuel from coal |
| We have not fully utilized Section 29 tax credits previously available to us |
| Our ability to fully utilize the Section 29 tax credits available to us in connection with our interest in the production facility will depend on whether the amount of our federal taxable income and related income tax liability is sufficient to permit the use of such credits |
| The Internal Revenue Service strictly enforces compliance with all of the technical requirements of Section 29 |
| Section 29 tax credits are currently scheduled to expire at the end of 2007 |
| Any disallowance of some or all of those tax credits could materially affect our tax obligations and may also result in a reduction of the level of synthetic fuel production at the facility, thus reducing the likelihood and amount of future payments from other participants in the project |
| Future tax legislation and Internal -23- _________________________________________________________________ Revenue Service review may also affect the value of the credits and of our share of the facility |
| At this time, we cannot predict the potential for or the outcome of any Internal Revenue Service review |
| We may not earn Section 29 synthetic fuel production tax credits or match related hedge earnings to production due to increasing oil prices |
| The Internal Revenue Code provides Section 29 tax credits based on the price of crude oil |
| As the price of oil rises above certain thresholds, the allowable tax credit decreases |
| In order to manage exposure to the risk that an increase in oil prices could reduce or eliminate the recognizable amount of Section 29 credits, ESI has entered into a series of derivative contracts (options) covering a specified number of barrels of oil |
| These derivatives mitigate Section 29 tax credit exposure related to rising oil prices in 2006 (95prca hedged) and 2007 (40prca hedged) |
| However, the accounting period in which gains on these hedge agreements are recognized may not coincide with the accounting period projected for recognition of tax credits |
| As a result, if the price of oil rises above the Internal Revenue Code thresholds, income may be recognized in periods other than the period for which the Section 29 tax credits are projected |
| Our operations are subject to risks beyond our control, including but not limited to weather, terrorist attacks or related acts of war |
| Our revenues are affected by the demand for electricity and natural gas |
| That demand can vary greatly based upon: · Weather conditions, seasonality and temperature extremes; · Fluctuations in economic activity and growth in our regulated service areas, as well as Texas, the northeast quadrant of the United States and adjacent portion of Canada; and · The amount of additional energy available from current or new competitors |
| Weather conditions directly influence the demand for electricity and natural gas and affect the price of energy commodities |
| In addition, the cost of repairing damage to our facilities due to storms, natural disasters, wars, terrorist acts and other catastrophic events, in excess of reserves established for such repairs, may adversely impact our results of operations, financial condition and cash flows |
| The occurrence or risk of occurrence of future terrorist activity and the high cost or potential unavailability of insurance to cover such terrorist activity may impact our results of operations and financial condition in unpredictable ways |
| These actions could also result in disruptions of power and fuel markets |
| In addition, our natural gas distribution system and pipelines could be directly or indirectly harmed by future terrorist activity |
| Costs of environmental compliance, liabilities, fines, penalties and litigation could exceed our estimates |
| Compliance with current and future federal and state environmental laws and regulations may result in increased capital, operating and other costs, including remediation and containment expenses and monitoring obligations |
| Management cannot predict with certainty the amount and timing of all future expenditures (including the potential or magnitude of fines or penalties) related to environmental matters because of the difficulty of estimating clean-up and compliance costs and the possibility that changes will be made to the current environmental laws and regulations |
| Any future changes in the interpretation of the Clean Air Actapstas New Source Review provisions could potentially increase our operating and maintenance costs substantially |
| On March 15, 2005, the EPA adopted the Clean Air Mercury Rule, which is intended to reduce mercury emissions from coal-fired generation plants |
| The EPA has also issued the Clean Air Interstate Rule requiring reductions of sulfur dioxide and nitrogen oxide emissions |
| In addition, the possibility exists of future regulation of greenhouse gases emitted from generation facilities |
| We cannot be certain how these rules will affect us |
| There is also uncertainty in quantifying liabilities under environmental laws that impose joint and several liabilities on all potentially responsible parties |
| -24- _________________________________________________________________ Citizen groups that feel there are compliance issues not sufficiently enforced by environmental regulatory agencies may bring citizen enforcement actions against us |
| Such actions could seek penalties, injunctive relief and costs of litigation |
| The Sierra Club, Inc |
| and Clean Wisconsin, Inc |
| recently filed a complaint in the United States District Court, Eastern District of Wisconsin, claiming that WPSCapstas Pulliam facility violated provisions of its air permit |
| On November 15, 2004, the Sierra Club filed a petition with the WDNR under Section 285dtta61, Wis |
| seeking a contested case hearing on the air permit issued for the Weston 4 generation station |
| In February 2006, the Administrative Law Judge affirmed the Weston 4 air permit with modifications to the emission limits for sulfur dioxide and nitrogen oxide from the coal-fired boiler and particulate from the cooling tower |
| The modifications set limits that are more stringent than those set by the WDNR WPS Resources is currently evaluating the impact this decision may have on future operating costs |
| Any change in our ability to sell electricity generated from our nonregulated facilities at market-based rates may impact earnings |
| The FERC has authorized us to sell generation from our nonregulated facilities at market prices |
| The FERC retains the authority to modify or withdraw our market based rate authority |
| If the FERC determines that the market is not workably competitive, that we possess market power or that we are not charging just and reasonable rates, it may require our nonregulated subsidiaries to sell power at a price based upon the costs incurred in producing the power |
| Our revenues and profit margins may be negatively affected by any reduction by the FERC of the rates we may receive |
| Fluctuating commodity prices may reduce regulated and nonregulated energy margins |
| Our regulated energy margins are directly affected by commodity costs related to coal, natural gas and other fuels used in the electric generation process |
| The commodity price of market purchases of electricity also directly affects our regulated energy margins |
| Higher commodity prices increase energy prices and may impact customer demand for energy in the nonregulated market and increase counterparty risk |
| This may stress margins at our nonregulated subsidiaries |
| ESI may experience increased expenses, including interest costs and uncollectibles, higher working capital requirements and possibly some reduction in volumes sold as a result of any increase in the cost of fuel or purchased power |
| If market prices for electric energy decline below the cost of production at our nonregulated facilities, these units may be temporarily shut down and alternative sources of energy found to meet energy commitments |
| We are subject to changes in government regulation, which may have a negative impact on our business, financial position and results of operations |
| We are subject to comprehensive regulation by several federal and state regulatory agencies, which significantly influences our operating environment and may affect our ability to recover costs from utility customers |
| In particular, the PSCW, MPSC, FERC, SEC, EPA and the WDNR regulate many aspects of our utility operations, including siting and construction of facilities, conditions of service, the issuance of securities and the rates that we can charge customers |
| We are required to have numerous permits, approvals and certificates from these agencies to operate our business |
| Our acquisition of Aquilaapstas natural gas distribution operations in Minnesota is subject to the approval of the regulatory commission in the state |
| The rates our regulated utilities are allowed to charge for their retail and wholesale services are some of the most important items influencing our business, financial position, results of operations and liquidity |
| We are unable to predict the impact on our business and operating results from the future regulatory activities of any of these agencies |
| Changes in regulations or the imposition of additional regulations may -25- _________________________________________________________________ require us to incur additional expenses or change business operations, which may have an adverse impact on our results of operations |
| In addition, federal regulatory reforms may produce unexpected changes and costs in the public utility industry |
| A reduction in our credit ratings could materially and adversely affect our business, financial position, results of operations and liquidity |
| We cannot be sure that any of our credit ratings will remain in effect for any given period of time or that a credit rating will not be lowered by a rating agency if, in its judgment, circumstances in the future so warrant |
| Any downgrade could: · Increase our borrowing costs; · Require us to pay a higher interest rate in future financings and possibly reduce the potential pool of creditors; · Increase our borrowing costs under certain of our existing credit facilities; · Limit our access to the commercial paper market; and · Limit the availability of adequate credit support for ESIapstas operations |
| Actual results could differ from estimates used to prepare our financial statements |
| In preparing the financial statements in accordance with generally accepted accounting principles, management must often make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures at the date of the financial statements and during the reporting period |
| For more information about these estimates and assumptions, see &apos &apos Managementapstas Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies &apos &apos in this Annual Report on Form 10-K The use of derivative instruments could result in financial losses and liquidity constraints |
| We use derivative instruments, including futures, forwards, options and swaps, to manage our commodity and financial market risks |
| In addition, we purchase and sell commodity-based contracts in the natural gas and electric energy markets for trading purposes |
| In the future, we could recognize financial losses on these contracts as a result of volatility in the market values of the underlying commodities or if a counterparty fails to perform under a contract |
| As a result, changes in the underlying assumptions or use of alternative valuation methods could affect the reported fair value of these contracts |
| Additionally, realized values could differ from values determined by management |
| For additional information concerning derivatives and commodity-based trading contracts, see Note 3 - Risk Management Activities in this Annual Report on Form 10-K We are subject to provisions that can limit merger and acquisition opportunities for our shareholders |
| The Wisconsin Public Utility Holding Company Law precludes the acquisition of 10prca or more of the voting shares of a holding company of a Wisconsin public utility unless the PSCW has first determined that the acquisition is in the best interests of utility consumers, investors and the public |
| Those interests may, to some extent, be mutually exclusive |
| This provision and other requirements of the Wisconsin Public Utility Holding Company Law may delay, or reduce the likelihood of, a sale or change of control thus reducing the likelihood that shareholders will receive a takeover premium for their shares |
| Provisions of our articles of incorporation and bylaws may delay or frustrate the removal of incumbent directors and may prevent or delay a merger, tender offer or proxy contest involving our company that is not approved by our board of directors, even if the shareholders believe that such events may be beneficial to their interests |
| In addition, our shareholder rights plan may have anti-takeover effects by -26- _________________________________________________________________ delaying, deferring or preventing an unsolicited acquisition proposal not approved by our board of directors, even if the shareholders believe that the proposal may be beneficial to their interests |
| Further, the Wisconsin Business Corporation Law contains provisions that may have the effect of delaying or making more difficult attempts by others to obtain control of our company without the approval of our board of directors |