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Earnings Conference Call - Fourth Quarter 2004

by 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 - WPS Energy Services and WPS Power Development

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; Phil Mikulsky, our Executive Vice President - Development; and Mark Radtke who is President of our nonregulated subsidiaries WPS Energy Services and WPS Power Development.

We are here today to discuss our earnings for the year and the fourth quarter of 2004 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 Web site. Once you are at the site, select Investor Information, select Financial News, select Earnings, and finally select the release from today, January 31.

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 projected results for 2005 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's begin with a few highlights. These are the key issues that you should take away from our call this afternoon.

Joe O'Leary will now discuss the details.

The Senior Vice President and Chief Financial Officer speaks.

Thanks, Larry.

WPS Resources' income available for common shareholders was 139.7 million dollars for the year ended December 31, 2004, compared with 94.7 million dollars in 2003. This resulted in basic earnings per share of $3.74 for 2004, compared with $2.87 for 2003. Income from continuing operations was 156.2 million dollars, or $4.09 basic earnings per share, for 2004, compared with 110.6 million dollars, or $3.26 basic earnings per share, for 2003.

Our electric utility margin increased 53.3 million dollars in 2004, compared to 2003, the majority of which can be attributed to a 52.3 million dollar increase in Wisconsin Public Service's electric margin. This increase is primarily related to retail and wholesale electric rate increases.

The natural gas utility margin increased by 5.8 million dollars for 2004, compared to 2003, largely due to a rate increase.

The return on utility equity earned by our Wisconsin Public Service utility operations in 2004 was about 11.4 percent compared to the 12 percent return authorized for 2004 rates.

WPS Energy Services' electric margin increased 12.4 million dollars in 2004, over 2003. Contributing to the increase were portfolio optimization strategies, improved management of retail operations, and improved supply procurement in Ohio. Also contributing to the increase was a favorable settlement of a pricing dispute with a counterparty and positive operating results from Advantage Energy, which we acquired in July of 2004. The natural gas margin at WPS Energy Services increased 12.5 million dollars in 2004, over 2003. This increase was primarily related to retail natural gas operations and mostly driven by higher natural gas throughput volumes in Ohio, operational improvements, and better management of supply for residential and small commercial customers. An increase in earnings related to the natural gas storage cycle and an increase in the Canadian natural gas margin also contributed to the improved natural gas margin.

Excluding discontinued operations, WPS Power Development's margin for 2004 decreased 1.2 million dollars, compared with 2003. The Niagara, Beaver Falls, and Wyman generating facilities experienced a combined 4.6 million dollar decrease in margin. These decreases were due to an increase in the per ton cost of coal used in the Niagara facility generation process, an unplanned outage at Beaver Falls, and unfavorable market conditions. These decreases were partially offset by a combined 2.9 million dollar increase in margins at the Combined Locks Energy Center and the Stoneman generation facility.

The Holding company and other operations experienced earnings of 11.9 million dollars during 2004 compared with a 2.1 million dollar loss in 2003. The increases in earnings resulted from the sale and donation of Wisconsin land and an increase in equity earnings from American Transmission Company and Wisconsin River Power Company. As part of our overall asset management strategy, we recognized net income from the sale and donation of land of 15 million dollars in 2004, compared to 6.5 million dollars in 2003.

WPS Resources' consolidated operating and maintenance expenses increased by 53.7 million dollars in 2004, compared to 2003. Utility expenses were up due to an increase in electric transmission rates, pension and post-retirement medical costs, and the amortization of previously deferred costs related to the implementation of the automated meter reading system and the purchase of the De Pere Energy Center. WPS Energy Services' expenses increased due to higher payroll, benefits, and other costs associated with continued business expansion. WPS Power Development's operating and maintenance expenses were higher due to repairs and maintenance associated with plant outages.

WPS Resources' consolidated depreciation and decommissioning expenses decreased by 31.4 million dollars in 2004, compared to 2003, due mostly to lower realized gains on nuclear decommissioning trust assets of 33.5 million dollars.

Consolidated miscellaneous income decreased by 15.9 million dollars in 2004, compared to 2003. This is mostly due to a decrease in realized gains on nuclear decommissioning trust assets partially offset by an increase in equity earnings from investments and gains from land sales.

Our ownership interest in the synthetic fuel facility resulted in the recognition of 24.2 million dollars of Section 29 federal tax credits for 2004, compared with 18.2 million dollars for 2003.

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

WPS Resources' income available for common shareholders was 57.7 million dollars for the quarter ended December 31, 2004, compared with 24.9 million dollars for the same period in 2003. Basic earnings per share were $1.54 for the fourth quarter of 2004, compared with 72 cents for the same period in 2003. Income from continuing operations was 61.3 million dollars for the quarter ended December 31, 2004, compared with 32.4 million dollars for the same period in 2003.

Please refer to our press release issued this morning for more information about our financial results.

Now, I'll turn to our rate cases over the past year.

There was significant rate proceeding activity during 2004. Three of the rate proceedings increased Wisconsin Public Service Corporation's Wisconsin retail electric or natural gas rates, a fourth rate proceeding increased Wisconsin Public Service's wholesale electric rates, and a fifth proceeding authorized Upper Peninsula Power Company to recover certain power supply costs.

First, effective January 1, 2004, the Public Service Commission of Wisconsin authorized Wisconsin Public Service to increase Wisconsin retail electric rates by 59.4 million dollars, or 9.3 percent; and to increase Wisconsin retail natural gas rates by 8.9 million dollars, or 2.2 percent. These rates were calculated using a 12 percent return on common equity and a 56 percent common equity ratio.

Second, as the result of an unplanned outage at the Kewaunee Nuclear Power Plant in the first quarter of 2004 and other fuel and purchased power cost increases expected in 2004, Wisconsin Public Service received a rate increase of 3.2 million dollars for increased fuel and purchased power costs.

Third, on December 21, 2004, the Public Service Commission of Wisconsin authorized Wisconsin Public Service to increase Wisconsin retail electric rates by 60.7 million dollars, or 8.6 percent; and Wisconsin retail natural gas rates by 5.6 million dollars, or 1.1 percent. These rates were effective January 1, 2005, and were calculated using an 11.5 percent return on common equity and a 57.35 percent common equity ratio.

Fourth, on November 19, 2004, the Federal Energy Regulatory Commission accepted an uncontested settlement of Wisconsin Public Service's request to implement a formula rate and true-up mechanism for wholesale electric service. The formula rate and true-up mechanism are intended to allow Wisconsin Public Service to recover the actual costs incurred in providing service. These rates were effective May 11, 2003, and are calculated using an 11 percent return on common equity and Wisconsin Public Service's actual capital structure. These rates apply to tariff customers only. New wholesale customers are under market based rates, which follows the Wisconsin return on equity and capital structure.

Fifth, on October 14, 2004, the Michigan Public Service Commission approved recovery of 5.2 million dollars of increased 2003 power supply costs relating to Upper Peninsula Power's integrated system. These costs will be recovered from customers through December 2005. Upper Peninsula Power also was authorized to defer 1.8 million dollars of power supply costs related to the 2003 Dead River flood for recovery in a future rate case.

Even with these higher rates, our electric and natural gas rates are still competitive in Wisconsin and the nation.

Relative to Wisconsin utility investment plans, Wisconsin Public Service expects to average about 175 million dollars per year of maintenance capital expenditures assuming continued Kewaunee ownership over the upcoming five-year time frame. Wisconsin Public Service's expected depreciation during this time frame ranges from about 120 million dollars to 170 million dollars per year and averages about 140 million dollars per year. In addition, Weston 4 is projected to total about 460 million dollars of capital expenditures assuming Dairyland closes on its purchase in January of 2006. Under this assumption the Weston 4 expenditure pattern is 260 million dollars in 2005, 90 million dollars in 2006, 85 million dollars in 2007, and 25 million in 2008. Other potential capital expenditures during this time frame include pollution control expenditures at existing generators and the second base load generator we are working on with Wisconsin Power and Light Company. Expenditures on the second base load unit could start in earnest as early as 2007 to meet a 2011 in-service date. WPS Resources expects capital calls from the American Transmission Company relating primarily to transmission line projects to total about 265 million dollars during the next five years with about 175 million dollars relating to the Wausau to Duluth transmission line.

The American Transmission Company is authorized to earn a 12.2 percent return on equity. Their rate structure includes a true-up mechanism that enables them to earn their authorized return.

Under WPS Resources' existing shelf registration statement, we have the ability to issue up to 176.9 million dollars of debt or equity. Wisconsin Public Service also has an existing shelf registration statement for an additional 350 million dollars. During 2005, we plan to do both debt and equity offerings to fund our utility capital expenditures. The size and mix of the offerings is dependent on the successful sale of Kewaunee and Sunbury and the capital needs for constructing Weston 4.

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.

Utility customers at both Wisconsin Public Service and Upper Peninsula Power enjoyed the most reliable electric service they've seen in years as both companies' customers saw a system average outage duration that was significantly below historical averages and well below the industry's historical average. Wisconsin Public Service's customers experienced their best reliability since 2001, while Upper Peninsula Power's customers haven't seen reliability that good since 1997.

Our fossil plants operated better than expected in 2004. We have found that our focus on sound maintenance programs, using preventive and predictive techniques, is paying off in improved performance. Two of our units—Weston 1 and Weston 2—established new records for consecutive days of operation, quite a feat since these units have been operating for a combined 95 years. As of yesterday, Sunday, Weston 1 is at 194 days, and Weston 2 is at 283 days of consecutive operation.

Construction on our Weston 4 project continues. We began construction on this 500-megawatt supercritical, pulverized coal plant in October of 2004, one day after receiving the air permit from the Wisconsin Department of Natural Resources and shortly after receiving the Certificate of Public Convenience and Necessity, or CPCN, from the Public Service Commission of Wisconsin. Two separate groups challenged the CPCN, but the Commission denied those challenges. The allowed time for CPCN challenges has expired with no additional challenges. We believe the air permit for Weston 4 is among the most stringent in the country. The air permit has been challenged, and we will participate in the Wisconsin Department of Natural Resource's rehearing process. We are allowed and intend to continue with construction while the contested case proceedings occur.

On December 1, 2004, Wisconsin Public Service and Dairyland Power Cooperative executed an agreement that will allow Dairyland Power to become a 30 percent owner of Weston 4. Wisconsin Public Service and Dairyland Power filed applications for this transaction with the Commission on January 12, 2005. We expect to close on this ownership arrangement sometime in 2005 or 2006, provided certain contingencies are met, for instance financing, transmission, and Commission approval.

In May of 2004, we announced that we were planning to build a 500-megawatt base load electric plant with Alliant Energy Corporation. We are currently in the planning process, which includes conducting feasibility and siting studies that will determine the fuel type, technology, size, and location. Based on current energy requirement studies completed by both companies, significant increases in energy demand as well as anticipated changes to environmental regulations may require that the new plant be operational as early as 2011.

We've previously reported on our proposed sale of the Kewaunee Nuclear Power Plant to Dominion Energy Kewaunee, a subsidiary of Dominion Resources, Inc. We announced this sale in November of 2003 and have received all necessary approvals, except one. The final approval is that of the Public Service Commission of Wisconsin. The Commission rejected the sale on November 19, 2004. In their discussion, the Commissioners cited three conditions they felt would be necessary for them to approve the transaction.

On December 20, Wisconsin Public Service, Wisconsin Power and Light, and Dominion Energy Kewaunee offered a proposal responsive to the Commission's concerns, and requested that the Commission reconsider the transaction. On January 13, the Commission agreed to re-open the docket and reconsider its decision on the transaction. On January 21, the Commission set the briefing schedule requiring initial briefs to be due on February 11, and reply briefs to be due on February 21. In addition, the Commission may ask for oral arguments. Based on this schedule, we expect a decision by the Commission in March of 2005.

In the meantime, the Kewaunee plant had a planned refueling outage last fall. This was a significant outage, with installation of a new reactor vessel head, several equipment change-outs, and a few important inspections being performed. Unfortunately, equipment problems during the outage led to an outage extension of about three weeks. We received approval from the Public Service Commission of Wisconsin to defer the additional 5.4 million dollars of replacement power costs and the 1.8 million dollars of operating and maintenance expenses caused by this outage extension. We expect to recover these costs in 2005, pending Commission approval. This is a good example of the kind of operating risks that would be transferred to Dominion if the transaction is approved. The Kewaunee plant is currently operating well, at full power.

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

The President of WPS Energy Services and WPS Power Development speaks.

Thanks, Larry.

Our retail natural gas business performed very well in 2004, turning in a solid 15 percent increase in sales volume driven entirely by organic growth in our established markets. This business includes a diversified customer base consisting of industrial, commercial, and residential customers. Each of those segments performed well in 2004, with a particularly strong improvement in the residential segment due to the addition of customers, the improved risk management of product offerings, and the correction of operational problems that dogged the segment in early 2003. While delivered volumes are up, we are seeing a decline in long-term contracted sales volumes. Although some customers are reluctant to make a longer-term commitment in a relatively high-priced market, this decline is more a function of our sales cycle in that we did have significant long-term business that we are in the process of recontracting. As we indicated with the November 2002 acquisition of our Canadian business, we expected our Canadian retail natural gas sales volumes to match that of our business in the United States. That expectation has been met even though our U.S. business has posted growth over the period. Additionally, we have extended the confidence that our Canadian retail natural gas customers have placed with us to support our initial entry into Canadian electric markets by offering an electric product to industrial customers in Ontario.

Speaking of our electric business, the Michigan Public Service Commission issued a final ruling on the Detroit Edison rate case, which returned some of the savings for competitive supply customers that was lost in the early 2004 interim rate case. The legislative bills attempting to limit electric competition expired with the last session, but we anticipate some form of legislation will be introduced in the coming session. We will continue to participate in the process on our customers' behalf. With the short-term resolution of this regulatory uncertainty and the drop in wholesale power costs, we are pursuing signing new contracts with customers in Michigan. Even though competition is heating up in that market, we have been extending and expanding our customer base.

In New York, the integration of Advantage Energy is progressing well. Our fixed price electric product is being well received by customers, and we are pleased with the competitiveness of our offering. We are a little behind our desired schedule on our natural gas product rollout in the state, but we continue to make progress on expanding our customer base and offering products that our New York customers value.

Our focus on electric portfolio optimization produced results that exceeded our expectations in 2004. Our retail business results, particularly in Ohio, are improved and more consistent given the reduced exposure to market movement. The improved economic dispatch of our generators resulted in 2.3 million dollars of margin in excess of tolling fees paid to WPS Power Development while reducing the overall risk to the organization by more than 40 percent, as measured by value at risk. We have added resources to expand our wholesale electric structured products business, which contributed to the nearly 15 percent growth in wholesale electric sales compared to 2003.

For both WPS Energy Services and WPS Power Development we have been preparing for the implementation of MISO Day 2, which includes the Michigan market. This market structure will increase the efficiency of the marketplace, and provide opportunities for us to optimize our delivery requirements in response to short-term market changes. With any market structure change like this, there are transitional issues we need to work through. The most notable issue, while related but not dependent on MISO implementation, is the Seams Elimination Charge Adjustment or SECA, a transitional charge that is scheduled to extend through March 2006. While we are participating in the process of SECA implementation, we do not know the final impact of SECA on 2005 and 2006 business, but the cost could be significant. Given our early stage involvement and experience with similar market transitions elsewhere, we believe we are prudently managing the transitional risks that MISO day 2 presents.

Now turning to our generation facilities, capacity factors on our merchant generation in New York increased in 2004. The capacity factors for Niagara and Syracuse improved 7 and 3 percentage points, respectively, compared to 2003. Beaver Falls' capacity factor, however, dropped 8 percentage points in 2004 compared to 2003 because of our more judicious dispatch of the unit given we are approaching the end of the service life of the turbine blades in that unit. Those blades will be replaced in the spring of 2006, so we plan to run this unit only to capitalize on the most significant opportunities during 2005.

Capacity factors at our Canadian hydro facilities declined from 48 percent to 41 percent in 2004 because we did not have the record rainfall that we had in 2003. However, our hydroelectric generation facilities still had a very good year.

The capacity factor for Sunbury Unit 4 was down 19 percent compared to the previous year because of reduced economics driven by high fuel costs and maintenance work. You will recall we discontinued the use of staggered term coal contracts in anticipation of selling the plant to Duquesne. This left us exposed to the spot market during a period of rising coal prices. This circumstance made it more economical to buy replacement power to meet our sales obligations in the latter portion of 2004. The remaining units at Sunbury improved their capacity factors an average of 4 percentage points on improved availability and economic conditions given their ability to burn lower cost fuel.

A little more than a year ago, we announced the pending sale of Sunbury to Duquesne Power for approximately 120 million dollars. However, on September 30, 2004, WPS Power Development received a letter of termination from Duquesne Power, following a decision by the Pennsylvania Public Utility Commission not to reconsider its earlier approved Provider of Last Resort plan, which Duquesne believes does not satisfy a closing condition in our agreement. We have resolved our contract termination issues with Duquesne, in a manner agreeable to both parties, and in line with our expectations, including our receipt of 4.4 million dollars that Duquesne had escrowed in the event of a termination.

We are continuing our efforts to sell Sunbury, though the process is taking a bit longer than we had hoped, in part because of the number of interested parties. The carrying value of Sunbury is about 117 million dollars, and the project carries approximately 66 million dollars of project-financed debt. Generally accepted accounting principles require a loss to be recognized if it is determined that the carrying value of Sunbury exceeds its fair value, net of selling expenses. Based upon consideration of all information available at this time, management determined that no adjustment to the carrying value of Sunbury was required in 2004. Although management cannot project the precise timetable or ultimate outcome, WPS Power Development is progressing with the sale process, and anticipates being able to complete the sale of Sunbury in 2005.

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.

Employees from each of WPS Resources' operating companies have been diligently working for months to prepare for the start of the MISO Day 2 market. We are participating in all of the market trials and believe our systems and processes to be in good shape, understanding the status of the Midwest ISO's preparedness. The market is scheduled to start on April 1, 2005, and although we believe that we are ready, the MISO still has a number of key issues to resolve prior to the market's start, including financial transmission rights allocations, business practices, and various tariff issues.

Our Peshtigo River land initiative reached a milestone on October 5, 2004, when we sold at auction 279 acres of development lands for about 12 million dollars. We completed our multi-phase agreement with the Wisconsin Department of Natural Resources with the sale of 179 acres for 5 million dollars to the Wisconsin DNR on December 9, 2004. When this final phase closed, Wisconsin Public Service donated an additional 5,176 acres to the state. This completed our agreement with the Wisconsin DNR.

Going forward, we are expecting an average annualized impact of 15 to 25 cents per share through 2007 from sales of land and related assets as part of our overall asset management strategy.

In 2005, we continue to seek a balanced portfolio of utility and nonregulated growth, but we are placing emphasis on regulated growth. Our asset management strategy will also continue to increase shareholder return from certain asset transactions. 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. We increased our dividend this year, for the 46th consecutive year. We have paid quarterly dividends for 64 consecutive years.

Our target for 2005 earnings per share from continuing operations is between $3.90 and $4.15. Achieving our targeted range for 2005 earnings per share from continuing operations is dependent upon, among other things, normal weather, the availability of our generating units, and completion of land sales. Completion of the potential sale of the Kewaunee plant, which would decrease earnings in 2005, has not been included in this target. As a result of the current status of the process for the potential sale of the Sunbury plant, we are not providing guidance on earnings per share from discontinued operations.

We plan to continue delivering shareholder value through our strong utility foundation, focused nonregulated energy and energy-related businesses, and maintaining our outstanding dividend record. We plan to continue delivering value to our investors for many years to come.

Please remember our three key points for today:

Now, Joe, Phil, Mark, and I are available 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 14 by dialing 866-467-2403.

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.