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Earnings Conference Call - January 29, 2002

Larry L. Weyers
Chairman, President, and Chief Executive Officer

Good afternoon. Welcome to the fourth quarter earnings conference call for WPS Resources Corporation. I'm Larry Weyers, Chairman, President, and Chief Executive Officer for WPS Resources Corporation. With me today is Joe O'Leary, our Senior Vice President and Chief Financial Officer.

We are here today to discuss our earnings for the year and the fourth quarter of 2001 and to discuss what the future has in store for us.

WPS Resources' common stock is traded on the New York Stock Exchange under the ticker symbol WPS. Earlier today we issued a press release containing our earnings information. If you haven't seen the release, you might want to get it. It is also available on our Internet site at. Once you are at the site, select Financial Information, select Financial News, select Earnings, and finally select the release from today, January 29.

Before we begin, I need to point out that this presentation contains forward-looking statements within the definition of the Security and Exchange Commission's safe harbor rules including the realization of projected results for 2002 for WPS Resources and its subsidiaries. Forward-looking statements are beyond the ability of WPS Resources to control and, in many cases, WPS Resources cannot predict what factors would cause actual results to differ materially from those indicated by forward-looking statements. I refer you to the forward-looking statement section of today's press release and to our filed Securities and Exchange Commission disclosure documents for further information.

Now, back to the business at hand.

WPS Resources' consolidated net income increased by 10.6 million dollars during 2001 when compared with 2000. This resulted in basic earnings per share of $2.75 for the year compared with $2.53 in 2000. Although this was a very good year for us, we expect continuing growth.

Increasing profitability at our nonregulated subsidiaries offset a drop in net income at our utility segments, resulting in improved overall earnings.

For the second year in a row, our nonregulated subsidiaries, WPS Energy Services and WPS Power Development, have increased their earnings. Net income at our nonregulated subsidiaries increased by 6.1 million during 2001 when compared with 2000.

Our utility segments did not fare as well and recorded a 4.6 million reduction in net income for 2001 when compared with 2000.

This year we initiated a closer look at our utilization of assets. We decided to begin the sell down of excess hydro lands yielding about 8 million dollars of net income and expect ongoing earnings from this activity for the next 5 to 7 years.

WPS Resources increased revenue in 2001 by 37 percent, or 726 million dollars, when compared with 2000. Our nonregulated subsidiaries increased revenues by over 58 percent, or almost 633 million dollars. Our energy services subsidiary alone generated revenue of over 1 billion 575 million dollars in 2001. That's almost 579 million dollars more than our utility revenue for the year.

Now Joe O'Leary will discuss the details behind these financial results.

WPS Energy Services was able to increase sales in both existing and newly entered retail and wholesale electric markets, resulting in a 10.3 million dollar increase in electric margins during 2001. It was also able to improve its gas margins by 4.6 million dollars by stepping up activity in gas wholesale markets and exiting unprofitable market segments.

WPS Power Development generated a 13.4 million dollar increase in revenue in 2001 and a 1.4 million dollar increase in earnings. Its margins, however, decreased by 2 million dollars. This was a result of higher purchased power expenses and higher fuel costs at its Sunbury plant when it was forced to purchase coal at market prices. A coal supplier failed to deliver under the terms of a coal supply agreement for which we hope to recover a portion of the higher fuel costs through resolution of the lawsuit we filed against the coal supplier.

WPS Power Development, through its synthetic fuel operation, also generated 4 million dollars in additional tax credits in 2001 when compared with 2000.

Although our utility segments increased their revenue by 90.1 million dollars, they incurred a 4.6 million dollar reduction in net income in 2001.

Our electric and gas utility margin increased by 23.4 million dollars during 2001. There was an electric rate increase at Wisconsin Public Service of 5.4 percent, or about 27 million dollars, and a gas rate increase of 1.5 percent, or about 4 million dollars, that took effect on January 1 of 2001 for its Wisconsin retail customers. The electric rate increase, higher sales volumes to most classes of customers including a 2.4 percent increase in sales to residential customers at Wisconsin Public Service, and summer weather that was 17 percent warmer than normal-about 2 and one-half cents per share-increased our electric utility margin by 11.4 million dollars. However, a change in customer mix, a 2.3 percent decline in sales to large commercial and industrial customers, and lack of a new electric retail rate structure at Upper Peninsula Power negatively impacted our electric utility margins.

Our Wisconsin retail gas rate increase and an increase in overall gas throughput volumes of 6 percent resulted in a 12 million dollar increase in gas utility margin in 2001. The acquisition of Wisconsin Fuel and Light in April of last year was responsible for increased overall gas throughput volumes. However, gas throughput volumes decreased 9 percent to large commercial and industrial customers and 6 percent to interruptible customers due primarily to the slowdown in the economy. Winter weather that was 8 percent warmer than normal decreased earnings per share by about 2 cents.

There was a 36 million dollar increase in utility operating expenses that negatively impacted utility earnings. Increased transmission expenses from the American Transmission Company, increased payments for energy conservation activities mandated by the State of Wisconsin, and an increase in write-offs for uncollectible accounts caused the increased expense. There was also an increase of 8.3 million dollars for costs largely related to the refueling and steam generator replacement at the Kewaunee Nuclear Power Plant.

Although our nonregulated segments also increased their operating expenses by 13 million dollars, the increased revenue from these segments made our nonregulated picture positive.

The 17.3 million dollar increase in other income included a 13.1 million dollar pre-tax gain on the sale of hydro lands in Wisconsin. This was the first step in our 5 to 7-year strategy to realize value from under utilized assets. A 2.2 million dollar pretax gain on the sale of a portion of our ownership in our synthetic fuel operation in Kentucky was also realized.

Our earnings per share for 2001 were impacted as a result of issuing about 1.8 million shares of common stock to cover the merger of Wisconsin Fuel and Light into our company, more than 500 thousand shares of common stock throughout the year under our Stock Investment Plan, and 2.3 million shares of common stock in December.

Now, let's look at our performance for the fourth quarter.

For the three months ended December 31, earnings per share were 70 cents compared with 51 cents in 2000.

Consolidated revenues for the quarter ended December 31 were down 135.3 million dollars when compared with the same period in 2000. Utility revenues were down 37.2 million largely due to mild weather and reduced gas costs. Utility gas throughput volumes decreased 27 percent to interruptible customers, 21 percent to large commercial and industrial customers, and 4 percent to residential customers. In addition, the weather in the fourth quarter of 2001 was 25 percent warmer than in 2000 and 19 percent warmer than normal. The earnings per share impact for normal weather is about a 3-cent per share decrease for the electric utility and a 4-cent per share decrease for the gas utility.

Our electric utility margin declined by 2.5 percent resulting from fewer residential sales due to milder weather and a general slowdown in the economy. This was coupled with a 48 percent, or 6.5 million dollar, increase in purchased power costs at Wisconsin Public Service as a result of the planned outage at the Kewaunee Nuclear Power Plant for refueling and replacement of the steam generators and an unexpected outage of one unit at our Pulliam Power Plant for repairs. Partially offsetting these factors was a 17 percent, or 5.8 million dollar, decrease in fuel expense.

Our 6.8 percent higher gas utility margin resulted from the acquisition of Wisconsin Fuel and Light earlier in 2001, which was partially offset by decreased sales to both residential and large commercial and industrial customers due to warmer weather and a general slowdown in the economy.

Energy Services' electric margin increased by 4.5 million dollars due primarily to an increase in electric business from our activity in Maine and Ohio.

Energy Services' gas margin increased 86.1 percent, or 2.9 million dollars, due to improved business execution and the elimination of less profitable product lines during 2001.

Our power development subsidiary had an increase in its margin by 2.2 million dollars. This was due primarily to decreased costs at the Sunbury unit as a result of reduced production when Unit 4 of the plant was down for maintenance and less production at our synthetic fuel operation in Kentucky.

The increase in other income resulted in part from a 13.1 million dollar pretax gain on the sale of hydro lands in Wisconsin as the first step of our 5 to 7-year strategy to realize value from under utilized assets. A 2.2 million dollar pretax gain on the sale of a portion of our ownership in our Kentucky synthetic fuel operation was also realized.

The 11.9 million dollar increase in operating expenses was in part the result of:

These expenditures were partially offset by a 4.2 million dollar decrease in maintenance at our electric utility's coal-fired generation plants.

A 5.5 million dollar increase in depreciation and decommissioning expenses and a 3.3 million dollar reduction in tax credits also are reflected in the fourth quarter financial results.

Thanks, Joe. That gives you some background on our earnings story of the year. Now I'll discuss how our operating segments fared over the year and what you can expect in the future. I'll begin with our regulated utilities.

January of 2001 brought new electric and natural gas rates for our Wisconsin customers. While increasing our rates, we expect to remain one of the lowest cost providers in the upper Midwest.

April brought the completion of our merger of Wisconsin Fuel and Light into Wisconsin Public Service and the addition of more than 50,000 natural gas customers.

July brought a new peak when the electricity demand on our utility system reached 2,173 megawatts. We were able to meet the peak without implementation of load reduction programs because there was sufficient market supply available, so we did not need to run our higher-cost generating units.

August brought the Public Service Commission of Wisconsin's approval of the 220-mile electric transmission line that will stretch from Wausau, Wisconsin, to Duluth, Minnesota. The joint project of Wisconsin Public Service and Minnesota Power is a key step in improving the reliability of a fragile transmission system. Currently, we are not always able to either import necessary power into the state or move bulk amounts of power within the state to where it is needed.

As a result of contributing the transmission assets of Wisconsin Public Service and Upper Peninsula Power to American Transmission Company, we own approximately 15 percent of that company. When we complete the construction of the proposed new transmission line, our ownership is expected to increase to about 25 percent.

We increased our ownership in the Kewaunee Nuclear Power Plant to 59 percent in September by buying out Madison Gas and Electric Company's share. In December, we completed a 121 million dollar replacement of the plant's two steam generators. Our portion of the replacement project amounted to about 71 million dollars. This project will allow Kewaunee to produce competitively priced, reliable, and clean electricity through the end of its current license in 2013.

Upper Peninsula Power completed the 5 million dollar replacement of its 42-year-old penstock at its Victoria Hydro facility near Rockland with a 6,050-foot long, 9 and 1/2 foot diameter spiral-welded steel pipeline. The project confirms our commitment to renewable energy sources.

In April of 2001, Wisconsin Public Service filed a request to increase its electric rates by 16 percent and its gas rates by 4.5 percent in 2002. We received an interim rate order in December of 2001 and expect to receive the final rate order in April of this year. We're investing in service, reliability, and infrastructure that our customers require for the future. In spite of the requested rate increases, our rates should remain competitive with rates in the upper Midwest.

Wisconsin Public Service also joined other state investor-owned utilities in seeking to recover costs resulting from the changes to the state's electric transmission system. So that the transmission cost issues would not have to be presented individually before the Commission in separate utility rate cases, the companies agreed to a joint filing.

Our utilities are projecting capital expenditures of over 500 million dollars over the next 3 years. We are increasing security at our facilities as a result of September's terrorist activity. Completion of our automated meter reading project by 2003 will require expenditures in the range of 60 million dollars. The early expenditures for construction at our generating facilities to be constructed between 2004 and 2007 are expected to require about 68 million dollars during the 2002 through 2004 timeframe. Conversion of a combustion turbine to a combined cycle unit at a leased facility, accounted for as a capital lease, results in an 80-million-dollar asset increase in 2004. This demonstrates our desire to make significant investments in the continued growth of our utilities.

Now let me bring you up to date on the operations of our two nonregulated subsidiaries. I'll begin with WPS Power Development.

We own 503 megawatts of generation capacity in Pennsylvania, which consists of 473 megawatts from our Sunbury and 30 megawatts from our Westwood facilities. These plants performed reasonably well during this summer's hottest months, and we have performed additional maintenance to enhance reliability next summer. This type of reliability is very important in the liquid Pennsylvania, New Jersey, Maryland energy marketplace. Most of the output from these facilities is under off-take contracts for the next two years.

In September, WPS Power Development announced plans to construct a 250-megawatt, coal-fueled electric generating power facility in Cassville, Wisconsin. The Cassville Energy Center will be constructed as a redevelopment project of the existing 53-megawatt Stoneman Power Plant that was purchased in 1996. The plan calls for construction of an additional 200 megawatts of electrical capacity integrated with the existing 53-megawatt Stoneman Plant. We expect to complete this redevelopment project around 2005. WPS Power Development owns two-thirds of the Stoneman Power Plant.

In November, WPS Power Development completed construction of a 50-megawatt simple cycle combustion turbine facility in Combined Locks, Wisconsin, and we plan to complete construction of the cogeneration phase by May.

In November, we successfully sold down part of our interest in our synthetic fuel operation in Kentucky. We continue to maintain a one-third share in the facility, which more closely matches our appetite for tax credits.

In December, WPS Power Development announced an agreement to purchase CH Resources, Inc. whose primary assets are three upstate New York power plants. The three plants have a combined capacity of 257 megawatts. The 61 million dollar transaction includes certain transmission contracts and emission allowances. The facilities involved include the 109-megawatt combined cycle Syracuse Generating Facility, the 95?megawatt combined cycle Beaver Falls Generating Facility, and the 53?megawatt fluidized-bed Niagara Falls Generating Facility. These relatively new generating facilities are expected to sell power into the New York bulk power market through bilateral agreements or into the wholesale and retail open markets using WPS Energy Services as the marketer for the power. The addition of these plants brings the electric generating capacity of WPS Power Development to 930 megawatts.

WPS Power Development will also require capital for expenditures associated with the installation of the heat recovery steam generating system for the new 50-megawatt cogeneration facility at Appleton Coated Papers' mill located in Combined Locks, Wisconsin.

Additional acquisition and development projects continue to be evaluated.

WPS Power Development is an important part of our earnings growth projections. In addition to expecting profitable operations from its existing diversified asset portfolio, we're expecting to make new investments of about 150 to 200 million dollars per year on an average annualized basis with a return on investment commensurate with the assessed risks.

Now, let's take a closer look at WPS Energy Service's operations.

WPS Energy Services has enjoyed tremendous revenue growth over the last 6 years, and we expect it to continue expanding in the northeastern quadrant of the United States.

WPS Energy Services' participates in the electric and gas markets where our sales commitments have back-to-back transactions that allow us to effectively manage risk. Where possible, the transactions are backed by WPS Power Development's generation assets or by assets that we control through contract.

Energy Services is growing its electric sales volume, yielding greater margins than its natural gas segment historically has. We're expecting to see continually improving margins from Energy Services.

WPS Energy Services has a 3-year contract to serve northern Maine's electric market, a 5-year electric contract to serve the municipal aggregation program for the City of Cleveland, Ohio, and a 4-year contract to serve six communities surrounding Toledo, Ohio, who participate in an aggregated buying group.

In September, WPS Energy Services completed construction of a 3 billion cubic foot gas storage field in Michigan, and began injecting natural gas into the facility. The facility interconnects with the ANR Pipeline, which directly connects to the Michigan Consolidated Gas Company and the natural gas trading hub of Dawn in Ontario, Canada. The facility has access to both the Great Lakes Gas Transmission and Vector Pipeline gas transmission systems. Michigan's geology allowed for the cost-effective construction of this storage facility. The design of the system will allow for increased reliability and greater flexibility in meeting customers' peak day energy requirements.

More good news came our way during 2001 when WPS Energy Services was named the number one rated gas marketer in the country in terms of overall customer satisfaction as measured by Mastio and Company in its 2001 survey.

Finally, I'll turn to the financial side of WPS Resources.

We have worked hard to maintain our high credit ratings that give us access to the capital markets at reasonable rates.

In August, Wisconsin Public Service issued 150 million dollars of 6 and 1/8 percent senior notes that were rated double A one by Moody's and double A by Standard & Poor's.

In December, WPS Resources issued 2.3 million shares of common stock that were oversubscribed at $34.36 per share, the closing price for our stock on the day of pricing. This is a testament to the quality of WPS Resources' stock during troubled times in the stock market.

I'm also proud to report that in July of 2001 we increased our quarterly dividend to 52 and one-half cents per share, resulting in an annual dividend of $2.08 in 2001. This represented the 43rd consecutive year in which we increased our quarterly common stock dividend payment.

Between 2002 and 2004, we expect to fund the equity of the new transmission line that will eventually be transferred to the American Transmission Company, which could be in the range of 45 to 90 million dollars, depending upon Minnesota Power's decision on their level of participation.

So, what are we expecting for earnings in 2002?

Our target continues to be 8 to 10 percent annualized growth in earnings per share in 2002. We expect ongoing operations to result in earnings per share of $2.75 to $3.00, with the likelihood of a gain on the sell down of our synthetic fuel operation adding about 59 cents. And, we will have closed on the purchase of the power plants in New York. We are expecting between 15 percent and 20 percent of our future income from ongoing and growing operations to come from our nonregulated segments. Our Wisconsin rate case should be settled. We hope to have an Upper Peninsula Power rate case filed and settled as well. We are also expecting gains from our asset management strategy to contribute to our earnings picture for the next 5 to 7 years.

As you can see, we are expecting another good year in 2002. We plan to continue delivering shareholder value through our strong utility foundation, focused nonregulated energy and energy-related businesses, achieving our projected annualized earnings per share growth of 8 to 10 percent, and maintaining our outstanding dividend record.

Now, I'd like to take time to answer some of your questions about our financial picture and plans for the future.

Thank you for being a part of our fourth quarter earnings conference call. A replay of this conference call will be available through February 12 by dialing 800-253-1051.

If you have additional questions, you may contact Joe O'Leary at 920-433-1463.