Integrys Energy Group

Earnings Conference Call - Fourth Quarter 2003

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

Joseph P. O'Leary
Senior Vice President and Chief Financial Officer

and

Mark A. Radtke
President of WPS Energy Services, Inc.

Good afternoon. Welcome to the quarterly 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, and Phil Mikulsky, our Senior Vice President - Development. Phil is responsible for our nonregulated subsidiaries and is currently President of WPS Power Development. Also with us is Mark Radtke who is President of WPS Energy Services.

We are here today to discuss our earnings for the year and the fourth quarter of 2003 and what you can expect from us in the future.

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 available on our Internet site. Once you are at the site, select Investor 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 Securities and Exchange Commission's safe harbor rules including the realization of projected results for 2004 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. Let me begin with a few highlights.

WPS Resources' income available for common shareholders for 2003 was 94.7 million dollars compared with 109.4 million dollars in 2002. This resulted in basic earnings per share of $2.87 for the year compared with $3.45 in 2002. Income from continuing operations was 110.6 million dollars, or $3.26 in basic earnings per share, for 2003 compared with 118.5 million dollars, or $3.64 in basic earnings per share, for 2002. The reduction in income from continuing operations reflects a smaller gain related to sales of portions of our ownership interest in a synthetic fuel facility. We recorded a 4.6 million dollar after-tax gain in 2003 compared with a 22.8 million dollar after-tax gain in 2002.

Our margins increased across the board. The acquisition of new customers and favorable market conditions enabled WPS Energy Services to significantly increase its electric and natural gas margins. This contributed to the 18 million dollar increase in earnings in 2003 from Energy Services. Excluding our merchant plant, Sunbury, WPS Power Development improved its margins through increased generation. Our utilities also increased their margins primarily through electric rate increases and increased natural gas throughput volumes.

Joe O'Leary will now discuss the details.

The Senior Vice President and Chief Financial Officer speaks.

Thanks, Larry.

WPS Energy Services' electric margin increased by 29.3 million dollars in 2003 compared to 2002 with about 26 million dollars of that amount due to acquisition synergies and improved management of retail electric operations in Michigan and participation in the New Jersey BGS Program, with the remaining increase resulting from the impact of changes in accounting described in detail in our press release. Energy Services' natural gas margin increased by 9.2 million dollars primarily due to the acquisition of a retail natural gas business in Canada and favorable settlements of pending liabilities with several counterparties. The increased margins contributed to the 18 million dollar increase in earnings at WPS Energy Services in 2003.

Excluding discontinued operations, WPS Power Development's margin increased in 2003 due to the acquisition of generating assets in New York during 2002 and increased generation from its Canadian and Maine hydro facilities. The 31.9 million dollar decrease in Power Development's earnings is mainly due to a decrease in gains recognized from the sales of portions of our ownership interest in a synthetic fuel facility, increased losses from discontinued operations, and a decrease in the amount of income tax credits recognized in 2003.

The loss associated with discontinued operations for all periods, increased by 10 million dollars after taxes in 2003 due to a decrease in capacity sales in 2003 resulting from expiration of a sales contract, increased variable production expenses related to increased emission costs, and an increase in other operating costs. These increases were partially offset by decreases in payroll and employee benefits due to a restructuring that took place at the end of 2002.

While margins increased by 28.5 million dollars for our combined utility segments for the year ended December 31, 2003 compared to 2002, earnings decreased by 3.7 million dollars due to increased utility operating expenses-primarily pension and medical costs-and a decrease in natural gas rates.

WPS Resources' consolidated operating expenses increased by 47 million dollars in 2003 primarily due to 30.7 million dollars of increased utility operating expenses for higher pension and medical costs, plant maintenance for the 2003 scheduled Kewaunee refueling outage, additional operating expenses at Kewaunee, and increased transmission expenses.

WPS Resources' consolidated depreciation and decommissioning expense increased by 43.6 million dollars primarily due to increased decommissioning expense recorded on the decommissioning trust assets that approximately equal the gain recognized in miscellaneous income pursuant to regulatory practice. The investment gain resulted from a change in investment strategy for Wisconsin Public Service's qualified nuclear decommissioning trust assets pending the sale of Kewaunee. Most of the remaining increase in depreciation resulted from plant additions at Public Service and Power Development.

Consolidated miscellaneous income increased by 15.8 million dollars during 2003 due to 36.4 million dollars of realized gains on the decommissioning trust assets, 6.2 million dollars due to a land sale to the Wisconsin DNR, and 8.1 million dollars due to an increase in earnings from equity investments. The gains were partially offset by 30.4 million dollars less in pre-tax gains-that's 18.2 million dollars after taxes-from sales of our ownership interest in a synthetic fuel facility, and 3.5 million dollars due to an increase in operating losses experienced by our synthetic fuel facility.

Consolidated tax credits recognized decreased by 5.1 million dollars in 2003 due to the second sell down of our ownership interest in a synthetic fuel facility and lower taxable income reducing the amount of tax credits that could be claimed.

Now, let's take a brief look at the fourth quarter.

WPS Resources' consolidated income available for common shareholders was 24.9 million dollars for the quarter ended December 31, 2003 compared with 29.2 million dollars for the same period in 2002. Basic earnings per share were 72 cents in the fourth quarter of 2003 compared with 91 cents in the same period in 2002. Income from continuing operations was 32.4 million dollars, or 92 cents in basic earnings per share, in the fourth quarter of 2003 compared with 33.1 million dollars, or $1.01 in basic earnings per share, for the same period in 2002. Income from continuing operations included an after-tax gain of 1.1 million dollars in 2003 compared with a 6 million dollar after-tax gain in 2002 related to sales of portions of our ownership interest in a synthetic fuel facility.

Please refer to our press release issued this morning for further information relating to our financial results.

Now I'll turn the conference call over to Larry Weyers.

The Chairman, President, and Chief Executive Officer speaks.

Thanks, Joe. Now I'll discuss how our operating segments fared and what you can expect in the future. I'll begin with our regulated utilities.

Wisconsin Public Service successfully completed several rate cases in Wisconsin and Michigan during 2003. We received approval from the Public Service Commission of Wisconsin to increase Wisconsin retail electric rates by 3.5 percent, or 21.4 million dollars, effective March 21, 2003. In July 2003, the Michigan Public Service Commission granted a 300,000 dollar increase in retail electric rates for our Michigan customers while also authorizing a one million dollar recovery of increased transmission costs through the power supply cost recovery fuel adjustment clause. The Federal Energy Regulatory Commission granted a 21 percent, or 4.1 million dollar, interim increase in wholesale electric rates, subject to refund, effective May 11, 2003. Finally, Wisconsin Public Service was granted authority to increase retail electric rates by 9.4 percent, or 59.4 million dollars, and retail natural gas rates by 2.2 percent, or 8.9 million dollars, effective January 1, 2004. As part of this order, the Wisconsin Commission allowed a 12 percent return on equity with 56 percent equity in our utility capital structure. Even with the higher rates, our electric and natural gas rates are still among the lowest in Wisconsin and the nation.

Upper Peninsula Power also completed a successful rate case that granted authority to increase its Michigan retail electric rates by 8.95 percent, or 4.9 million dollars, effective December 20, 2002.

For the seventh time in the past eight years, Wisconsin Public Service customers increased their electric demands, which resulted in our reaching another all-time high on August 21 at 2,185 megawatts compared to our previous record high of 2,173 megawatts on July 31, 2001.

We are continuing to work on our plans to build a 500-megawatt coal-fired electric generator at our Weston Power Plant site near Wausau, Wisconsin, based upon our anticipated retail and wholesale electric demand growth, potential changes in environmental regulations, and our fuel diversity strategy. The new unit will be Weston 4. In October, the Public Service Commission of Wisconsin approved our request for a declaratory ruling for Weston 4. The ruling stated that it is prudent for Wisconsin Public Service to spend about 70 million dollars on Weston 4 in 2003 and 2004 prior to obtaining final approval of the project. We submitted our application for a Certificate of Public Convenience and Necessity to the Public Service Commission in September seeking project approval. The Commission has not yet deemed our application complete. When deemed complete, the Commission has 180 days to rule on the Certificate of Public Convenience and Necessity, although they are able to grant a one-time extension for 180 days. Current projections indicate that the plant will cost about 750 million dollars. We expect the plant to be operational in 2008. We also completed an interconnection agreement with American Transmission Company and filed the agreement with the Federal Energy Regulatory Commission. We are required by American Transmission Company to fund construction costs related to transmission upgrades required to support Weston 4. We expect to fund up to 109 million dollars of the transmission upgrade construction cost based on current estimates of costs and expected construction schedules. When Weston 4 becomes operational, American Transmission Company will refund these expenditures.

On May 14, 2003, a fuse plug at the Silver Lake reservoir owned by Upper Peninsula Power Company was breeched resulting in flooding downstream on the Dead River. In October, an independent engineering study of the root causes of the release of Silver Lake into the Dead River basin was submitted to the Federal Energy Regulatory Commission. The Washington Group International conducted the study and concluded that a design error led to the premature activation of the fuse plug. In addition, the design did not take into account the highly erosive nature of the fuse plug's foundation materials and spillway channel, which caused the release of Silver Lake beyond what was expected upon activation of the fuse plug. The fuse plug was designed for the Silver Lake reservoir by an independent engineering firm in March 2002. In December, the Federal Energy Regulatory Commission's Independent Board of Review issued its findings, which generally support the findings of the root cause analysis report completed by Washington Group.

The extent of damage to Upper Peninsula Power's facilities and third-party property continues to be assessed. We are also working with state agencies in assessing environmental recovery needs associated with the Dead River Hydroelectric Project from this event.

WPS Resources maintains a comprehensive insurance program that includes Upper Peninsula Power. We believe we are insured in amounts that are sufficient to cover our responsibilities in connection with this event.

In November, the Michigan Public Service Commission and the Federal Energy Regulatory Commission granted authority to defer costs not covered by insurance, including deductible amounts, and to seek rate recovery in the future.

In 2003, Wisconsin Public Service transferred about 20 million dollars of assets related to the Wausau, Wisconsin, to Duluth, Minnesota, transmission line project to American Transmission Company. The Public Service Commission of Wisconsin recently reapproved construction of the line at an expected cost of about 420 million dollars. American Transmission Company hopes to complete construction of the line in 2008. We anticipate funding approximately 50 percent of total costs incurred, up to 198 million dollars, and receiving additional equity in American Transmission Company.

In December 2003, Wisconsin Public Service invested an additional 5.8 million dollars 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.

In November 2003, we signed a definitive agreement to sell the Kewaunee Nuclear Power Plant to Dominion Energy for approximately 220 million dollars. Wisconsin Public Service owns 59 percent of the plant and Wisconsin Power and Light, owns 41 percent. At closing, we expect to receive approximately 130 million in cash and retain ownership of trust assets contained in one of two decommissioning funds we have established to cover the eventual decommissioning of the plant. Dominion will assume responsibility for 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 for allocation to Wisconsin Public Service's customers in future rate proceedings. We don't expect a material net income impact at the time of the sale. The transaction is subject to approvals by various regulatory agencies, including the Public Service Commission of Wisconsin and the Nuclear Regulatory Commission. The transaction is expected to be complete 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, equivalent to the amounts and at about the same cost that would have occurred if current ownership had continued. The power purchase agreement, which also requires regulatory approval, will extend through 2013 when the plant's current operating license will expire. The risk of owning a single nuclear plant has become difficult for a company like ours. We believe our customers and shareholders will benefit from the sale and power purchase agreement. We are pleased with the proposed sale as it fits our asset management strategy and it lowers our risk profile.

Now let's take a closer look at WPS Power Development.

Maintenance issues and fuel costs took a toll on the performance of Power Development's assets during the first portion of 2003. In the fourth quarter, we saw improved performance for our Niagara Falls, Combined Locks, and Westwood plants and our hydro facilities in Maine and Canada. We have diligently corrected the maintenance issues and have taken time to do thorough repairs to steadily improve the overall condition of the facilities and enhance their long-term operation.

Energy pricing continued its strong trend in the fourth quarter. On-peak and off-peak energy pricing for the quarter was stronger than seen in the last two years. Capacity prices have remained very low.

The synthetic fuel facility in which we have an interest is continuing to produce synfuel according to expectations. The IRS has announced that they have closed their issue with respect to chemical change. Following that announcement, the IRS informed us that they have closed their audit for 2001 relating to this issue with no adjustment, and we expect a similar result for 2000. The Permanent Subcommittee on Investigations of the Senate Committee on Governmental Affairs continues to look into the synfuel industry. This Subcommittee has indicated their intentions to interview all taxpayers that are involved in the synfuel business. We have been invited to meet with the Subcommittee to help enhance their knowledge of the industry and will visit with them tomorrow.

The overall financial performance from WPS Power Development's assets has not been acceptable. The environment in the energy marketplace has become more challenging due to, among other things, extreme volatility, high gas prices, major accounting changes, the Enron scandal, and post-California market issues. Although energy prices have been close to projections made at the inception of our investments, the forward value of nonregulated capacity markets was vastly overestimated by most industry experts, including us.

In 2003, WPS Power Development took decisive actions to adjust to the new merchant marketplace. We downsized the workforce for our New York assets by about 20 percent and have still maintained a focus on reliable operation. We announced the pending sale of our Sunbury plant to Duquesne Power for approximately 120 million dollars. This is a win-win situation. We will reduce our exposure to the merchant market, and Duquesne will deploy the plant in a very different manner. We still plan to close on this transaction in the summer of 2004 after approval by the Pennsylvania Public Utility Commission of Duquesne Light Company's Provider of Last Resort plan and other typical regulatory approvals.

The sale of Sunbury fits well into our balanced portfolio and asset management strategy. Included in the strategy is the desire to reduce risk associated with uncontracted merchant exposure.

We've downsized our central office staff and focused Power Development on efficient operation and optimization of their assets. We have integrated nonregulated development opportunities with WPS Energy Services. In turn, Energy Services has added experienced staff to facilitate its ability to market power from Power Development's generation assets.

Given current market conditions, we don't expect to see significant growth 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.

Now, let's take a closer look at WPS Energy Services' operations. Here to tell us about this is Mark Radtke, President of WPS Energy Services.

The President of WPS Energy Services speaks.

Thanks, Larry.

Our natural gas business performed well in 2003, with margins increasing. Our retail segment was off slightly from 2002 due to some operational challenges in a couple of markets early in 2003, but that softening was more than offset by strong performance in our wholesale natural gas business. Our wholesale business benefited from the delivery challenges and price volatility experienced in the marketplace, which created increased demand for the type of structured products we provide to our customers. We tend to accumulate optionality, and volatility increases the value of those option-derived product offerings.

WPS Energy Services has continued its expansion into the Canadian market. We have rapidly grown our Canadian natural gas business, with sales volumes increasing to about 120 billion cubic feet in 2003. For 2004, we anticipate relatively modest sales growth from this business operation.

While our core retail segment is large commercial and industrial customers, we are able to deliver value to small commercial and residential customers through customer choice programs in the state of Ohio. This past year, we added over 45,000 new residential and small commercial customers with the majority beginning service in November 2003 under a two-year product offering.

Our gas storage field in Michigan is performing well. We are currently working with the Federal Energy Regulatory Commission on filings that should enable our offering of firm interstate storage services from the field to customers throughout the upper Midwest.

Our electric business performed very well in 2003.

In January of 2003, we exercised an option to purchase a competitive retail electric supplier operating in the state of Michigan. We focused our efforts on improving the financial and operational performance, with moderate customer growth. The results have been very positive. The portfolio is now profitably serving a capacity requirement of over 850 megawatts at year-end and is Michigan's largest competitive alternative electric supplier.

On February 3, 2003, the four electric utility distribution companies in New Jersey, all operating within the PJM market, conducted an auction allowing third-party suppliers to bid to provide service to a fixed percentage of their basic generation service load. We participated in this auction and were awarded 700 megawatts of fixed-price load and 250 megawatts of hourly-priced load for 10 months. Service to the electric distribution companies began on August 1, 2003 and ends on May 31, 2004.

WPS Energy Services is continuing to expand its customer base throughout the state of Maine and was again selected as the standard offer electric service provider for the Maine Public Service territory, this time for a 34-month period beginning March 1, 2004 and ending on December 31, 2006. Energy Services also serves Houlton Water Company and Eastern Maine Electric Cooperative as the standard offer electric supplier through February 2008. Supply sources have been contracted from WPS Power Development's generation and third-party generation sources that we have worked with since entering the Maine market in 2000.

Earlier, Larry mentioned the adjustments we have made to better integrate Energy Services' market focus and Power Development's generation assets. To that end, Energy Services has hired personnel with experience in the market management of electric generation assets in New York, New England, and PJM markets and opened a new office in the Washington D.C. area focused on managing company and customer energy assets in these markets, including energy trading around assets, risk analysis, portfolio management, scheduling, and settlement.

We 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 under-capitalized market participants. We continue to be diligent and improve our credit processes to minimize credit related damage. On the plus side, in many cases, market volatility creates opportunity and enhances the value of the products we provide to the wholesale and retail marketplace.

WPS Energy Services saw extraordinary growth in 2003, but we don't expect this to continue at the same pace into 2004. The business will continue to grow as we have a relatively small market share in a number of key energy intense markets such as Michigan, Illinois, and Ohio. We expect to continue growing our Energy Services business, recognizing some years have been more, and some will be less, than our targeted annualized rate of about 15 to 25 percent with a balance between electric and natural gas and retail and wholesale segments of the business.

Now, I'll turn the call back to Larry to discuss WPS Resources, the holding company.

The Chairman, President, and Chief Executive Officer speaks.

Thanks, Mark.

Our asset management strategy calls for the disposition of assets, including plants and entire business units, which are no longer required for operations. Excess land, buildings, and other facilities are a part of this strategy.

In December 2003, we completed the sale of an additional 542 acres of land near the Peshtigo River to the Wisconsin DNR for 6.5 million dollars. This was part of a multi-phase agreement reached in 2001. Under terms of that agreement, the Wisconsin DNR bought more than 5,000 acres of land for 13.5 million dollars in 2001, and we anticipate they will exercise their option to purchase an additional 200 acres for 5 million dollars in 2004. Following the close of the third and final phase of the agreement in 2004, we will donate an additional 5,176 acres to the State. At that point, the Wisconsin DNR will have acquired nearly 12,000 acres for 25 million dollars. 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.

Going forward, we are expecting an average annualized impact of 15 to 25 cents per share through 2007 from sales of land and buildings relating to our overall asset management strategy. For 2003, this portion of our asset management strategy contributed about 20 cents to earnings per share-right within the expected range.

Our financial strength and quality credit ratings continue to be among the best in the industry.

In August, we completed a credit line syndication that established 225 million dollars in revolving credit lines for WPS Resources and 115 million dollars in revolving credit lines for Wisconsin Public Service. The 364-day senior unsecured revolving credit line facilities give us greater financial flexibility as we grow our regulated utilities and nonregulated business.

In November, we sold 4,025,000 additional shares of common stock and received net proceeds of 167 million dollars. The offering was oversubscribed and was split about evenly between retail and institutional purchasers. Proceeds from the sale were used to reduce debt, fund equity contributions to subsidiary companies, and for general corporate purposes.

In December, Wisconsin Public Service issued 125 million dollars of 4.8 percent 10 year senior notes. Due to the high ratings of the utility issue, the notes were heavily oversubscribed prior to pricing, which resulted in a very favorable interest rate. Proceeds from the issuance were used to reduce debt having higher interest rates, to provide funds for construction, and to meet other utility needs.

In 2004, we are continuing to seek a balanced portfolio of utility and nonregulated growth but we are placing more emphasis on regulated growth, which reduces our exposure to the risks of nonregulated markets. Our long-term earnings per share growth rate target is 6 to 8 percent on an average annualized basis, with fluctuations in any given year that may be above or below that targeted range. We believe this strategy, combined with our dividend, will provide very good returns to our shareholders. Our target for 2004 earnings per share is between $2.95 and $3.10. Earnings per share from on-going operations are anticipated to be between $3.43 and $3.54. This includes a gain from the 2002 sale of a portion of our synthetic fuel operation of about 4.6 million dollars after taxes. Losses per share from discontinued operations are expected to be between 48 cents and 44 cents per share. Achieving our targeted range for 2004 earnings per share is dependent upon, among other things, weather, availability of our generating units, our hydro land sales, and completion of the sale of both the Sunbury and Kewaunee plants.

WPS Resources' conservative nature has served it well through the years. Our core competencies are in energy and energy related businesses. We intend to stay in those businesses within the United States and Canada. We understand the energy business, we have developed a business plan that capitalizes on that knowledge, and we are working on the competitive integration of energy services. Our utility base is solid and our nonregulated energy businesses are focused. We've rewarded our shareholders with increased dividends for 45 consecutive years. We effectively mitigate and minimize risk in the operation of our business. We strive to maintain quality credit ratings. Finally, we deliver value to our customers and our shareholders.

We plan to continue delivering shareholder value through our strong utility foundation, focused nonregulated energy and energy-related businesses, achieving our projected average annualized earnings per share growth of 6 to 8 percent, and maintaining our outstanding dividend record. We plan to continue delivering value to our investors for many years to come!

Now, Joe, Phil, Mark, and I would like to answer 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 800-677-7715.

The text for today's presentation is available on our Web site. Just select Investor Information and then Presentations.

If you have additional questions, you may contact Joe O'Leary at 920-433-1463 or Donna Sheedy at 920-433-1857.