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Earnings Conference Call - Fourth Quarter 2005

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

Good afternoon. Welcome to the quarterly earnings conference call for WPS Resources Corporation. I'm Larry Weyers, Chairman, President, and Chief Executive Officer of 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 subsidiary, WPS Energy Services.

We are here today to discuss our earnings for the year and the fourth quarter of 2005 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, 2006.

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 2006 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 you should take away from our call this afternoon.

Now Joe O'Leary will discuss some details relating to our financial results. Joe…

The Senior Vice President and Chief Financial Officer speaks.

Thanks, Larry.

I'll begin by comparing our results for the year ended December 31, 2005, with the results for the year ended December 31, 2004.

WPS Resources' income available for common shareholders was 157.4 million dollars compared with 139.7 million dollars for the prior year.

The natural gas utility margin increased 5.6 million dollars, or 4.7 percent, largely due to a natural gas rate increase.

The electric utility margin decreased by 8.2 million dollars, or 1.4 percent, largely due to a 9 million dollar decrease in Wisconsin Public Service's margin, driven by the agreement to purchase power from the recently sold Kewaunee nuclear plant. Excluding the 43.2 million dollars of fixed payments made to Dominion Energy Kewaunee in 2005, Wisconsin Public Service's electric utility margin increased 34.2 million dollars, compared with 2004. This increase in margin was primarily related to the retail electric rate case and warm summer weather conditions, partially offset by higher fuel and purchased power costs associated with high natural gas prices and the Public Service Commission of Wisconsin's ruling in the 2006 Wisconsin Public Service rate case that disallowed recovery of certain costs that were previously approved for deferral.

WPS Energy Services' margin related to electric and other operations increased 80.5 million dollars, or 98.1 percent, in 2005, over 2004. The wholesale electric margin increased 92.6 million dollars, due to the margin at Sunbury increasing 43.7 million dollars, the liquidation of a forward contract with an electricity supplier for delivery in Maine, portfolio optimization strategies, realized and mark-to-market gains on derivative instruments utilized to protect the value of a portion of WPS Energy Services' Section 29 federal tax credits, and an increase in structured power transactions with wholesale customers. The retail electric margin decreased 12.1 million dollars, primarily related to a 15.7 million dollar decrease in margin from retail electric operations in Michigan due to higher transmission-related charges resulting from the Seams Elimination Charge Adjustment, as ordered by the Federal Energy Regulatory Commission.

The natural gas margin at WPS Energy Services increased 5.1 million dollars, or 9 percent, for the year ended 2005, compared with 2004. The retail natural gas margin increased 8.7 million dollars mostly due to improved management of supply for Ohio customers. The wholesale natural gas margin decreased 3.6 million dollars.

The holding company and other operations realized earnings of 5.9 million dollars in 2005, compared with 11.9 million dollars in the prior year. The decrease is primarily due to a 9.4 million dollar decrease in pre-tax gains related to land sales, an income tax benefit recognized in 2004 from the donation of land to the Wisconsin Department of Natural Resources, and a 5.5 million dollar increase in interest expense. Partially offsetting the decrease in 2005 earnings was a 9.1 million dollar increase in pre-tax equity earnings from American Transmission Company.

WPS Resources' consolidated operating and maintenance expenses increased 30.5 million dollars, or 5.7 percent, for 2005. Utility expenses increased mostly due to an increase in employee benefit expenses, transmission related expenses, the write off of a portion of the loss related to the sale of the Kewaunee nuclear plant, and the write off of previously deferred costs related to an extended outage at Kewaunee in 2004. The increases were partially offset by a decrease in operating and maintenance expenses related to Kewaunee as a result of the sale in July 2005. WPS Energy Services' operating and maintenance expenses increased 19.5 million dollars primarily because of higher payroll and benefits associated with recent business expansion, increased third-party commissions, and bad debt expense.

WPS Energy Services completed the sale of Sunbury's allocated emission allowances in May 2005. The sale proceeds were 109.9 million dollars, resulting in a pre-tax gain of 85.9 million dollars. WPS Energy Services also sold other emission allowances throughout the year, recognizing a gain on these additional sales of 1.2 million dollars. WPS Energy Services also recorded a non cash, pre-tax impairment charge of 80.6 million dollars at the time of the emission allowance sale to reflect the value of the plant without the emission allowances. The sale of emission allowances has provided time to evaluate options for the plant, which range from closing Sunbury, to retaining it and operating it during favorable economic periods, or selling it.

Our ownership interest in the synthetic fuel operation resulted in recognizing the tax benefit of Section 29 federal tax credits totaling 26.1 million dollars in 2005, and 27.8 million dollars in 2004.

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

WPS Resources' income available for common shareholders was 19.4 million dollars for the fourth quarter of 2005, compared with 57.7 million dollars for the same period in 2004.

Wisconsin Public Service's electric utility earnings were negatively impacted by the high natural gas fuel costs experienced in the latter half of 2005 and by the Commission's ruling in the Wisconsin Public Service 2006 rate case, which disallowed recovery of 13.7 million dollars of costs that were deferred related to the 2004 Kewaunee nuclear plant outage and the loss on the Kewaunee sale. We do not believe the Commission's conclusion related to these disallowances was appropriate given the facts and our interpretation of the law, and as a result Wisconsin Public Service has petitioned the Commission for a rehearing on these matters.

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

As Larry mentioned, our basic earnings per share guidance for 2006 is between $3.41 and $3.75. There are several major factors that will have a negative impact on earnings in 2006.

Our earnings per share guidance does not reflect potential future mark-to-market gains or losses on derivative instruments used to protect the expected value of a portion of Section 29 federal tax credits in 2007. The guidance does assume normal weather, availability of our generating units, completion of our planned land sales, and successful completion of the acquisition of the Michigan and Minnesota natural gas distribution operations.

Turning to our rate cases over the past year, in April 2005 Wisconsin Public Service filed for an increase in electric and natural gas rates for 2006, to ensure reliability for customers. In December 2005, the Public Service Commission of Wisconsin approved a 79.9 million dollar, or 10.1 percent, increase in retail electric rates, and a 7.2 million dollar, or 1.1 percent, increase in retail natural gas rates, based on an 11 percent return on equity. The equity component was 59.7 percent. These rates became effective as of January 1, 2006.

On January 3, 2006, Upper Peninsula Power Company filed a request to increase its overall electric base rates by 6.6 million dollars, or 8.1 percent, for an 11.5 percent return on equity, and a 55 percent common equity ratio. We will attempt to reach a negotiated settlement with our customers and the Commission. If a settlement is not reached, we anticipate the Michigan Public Service Commission to act on the request in the third quarter of 2006. We also asked for new interim rates to go into effect in the second quarter, subject to refund, while the Commission reviews the entire request. The requested increase is due to costs associated with improving service quality and reliability, technology upgrades, and managing rising employee and retiree benefit costs. Upper Peninsula Power Company's last retail rate increase was in December 2002.

Expected capital expenditures for our utility operations between 2006 and 2008 will amount to 915 million dollars. Wisconsin Public Service is expected to spend:

Upper Peninsula Power is expected to spend:

Anticipated nonregulated capital expenditures for the same period are not significant when compared with the regulated expected expenditures.

WPS Resources expects capital calls from the American Transmission Company relating primarily to transmission line projects to total about 164 million dollars for the years 2006 through 2009, with about 61 million dollars relating to the Wausau, Wisconsin, to Duluth, Minnesota, transmission line. We currently own about 31 percent of the ATC, and our ownership is expected to increase to approximately 33 percent by 2008. These amounts assume that Allete contributes 60 million dollars toward the Wausau to Duluth capital calls in 2006. The ATC is currently allowed a return on equity of 12.2 percent through 2012.

With regard to issuing equity and debt, WPS Resources plans to issue additional common equity and debt during 2006 to fund the proposed acquisitions from Aquila. The timing will depend on when the transactions close. The equity issued will be in addition to the issuance of shares and the draw down of the proceeds available under the equity forward contract entered into in November 2005. The amount available under this contract is approximately 140 million dollars, or about 2.7 million shares. In addition to the permanent financing required to support the Aquila acquisitions, WPS Resources may need to issue additional equity and debt, and Wisconsin Public Service may need to issue debt in 2006, to fund capital growth related to its regulated operations.

On January 17, 2006, Standard & Poor's affirmed its "A" corporate credit rating and "A" senior unsecured debt rating on WPS Resources and removed us from credit watch. Also, the corporate credit ratings of Wisconsin Public Service were affirmed at "A+" and removed from credit watch. Standard & Poor's said the consolidated ratings on WPS Resources reflect the strength and cash flow stability of our utility subsidiaries and the two relatively low-risk gas utilities being acquired.

Now I'll turn the call back to Larry Weyers.

The Chairman, President, and Chief Executive Officer speaks.

Thanks, Joe.

Now we'll take a look at our operating segments.

Construction of Weston 4, a 500-megawatt pulverized coal plant, in Wausau, Wisconsin, continues to go well. Construction began in October 2004, and we remain on schedule and on budget. The plant is scheduled to go into commercial operation in June 2008. The Wisconsin Department of Natural Resources issued an air permit for the facility in October 2004. This permit was challenged and the technical hearing regarding this challenge took place in late September 2005. The hearing addressed issues related to the emission limits specified in the permit and the pollution controls to be used to achieve those limits. We expect the ruling on this to occur in early 2006. In November 2005 Dairyland Power Cooperative acquired a 30 percent ownership interest in Weston 4. The agreement gives Dairyland a 150-megawatt share of the plant. Dairyland will also provide 30 percent of all remaining costs to complete the construction of the Weston 4 power plant, as well as its share of all operating costs when the plant is completed in 2008.

Construction of the 220-mile, 345-kilovolt Duluth, Minnesota, to Wausau, Wisconsin, transmission line began in the first quarter of 2004 in Minnesota. The Minnesota portion was completed in 2005. Construction in Wisconsin began in August 2005, after all the necessary permits were received, and is progressing on schedule. Thirteen miles of line in Marathon County is in the air with energized conductors. We expect the line will be completed in the second quarter of 2008.

Wisconsin Public Service is managing construction of the project on behalf of the American Transmission Company and is responsible for obtaining private property rights in Wisconsin necessary for construction.

We have been managing our coal inventory in light of the reduced deliveries of coal due to railroad track maintenance in Wyoming's Powder River Basin. We managed the dispatch of our units and purchased additional supplies from eastern sources. These actions have allowed us to maintain normal inventories for the winter, and we don't anticipate any generation reliability problems. We continue to keep a close eye on our inventory situation and will take actions as necessary to ensure we maintain appropriate inventories. The Public Service Commission of Wisconsin staff authorized deferral of costs associated with reduced coal deliveries. The Commission will decide the recoverability of these costs in a future rate proceeding.

On September 21, 2005, WPS Resources announced that we plan to acquire Aquila's natural gas distribution operations in Michigan and Minnesota for approximately 558 million dollars, subject to post-closing adjustments including working capital. The addition of regulated assets in complementary vicinities to WPS Resources' existing regulated electric and natural gas operations in Wisconsin and Michigan will transition WPS Resources to a larger, stronger, regional energy company. On November 10, 2005, we received approval from the Michigan Public Service Commission for the Michigan transaction. The regulatory process required for approval of the Minnesota transaction is progressing on schedule and we expect to complete both transactions in the first half of 2006.

Now, let's take a closer look at our nonregulated operations. Here to discuss this is Mark Radtke, President of WPS Energy Services. Mark…

The President of WPS Energy Services speaks.

Thanks, Larry.

I'll start with a comment about our nonregulated reporting segments. Prior to the fourth quarter of 2005, WPS Resources reported two nonregulated segments, WPS Energy Services and WPS Power Development. However, over the past two years we have been working to better integrate these two businesses. First we implemented tolling agreements to move the market management of our plants to our portfolio management group, reducing our merchant generation market risk. Then we restructured the management teams of WPS Energy Services and WPS Power Development so that one team oversees all the operations of both of these nonregulated businesses. And, in 2005 we restructured WPS Power Development as a wholly owned subsidiary of WPS Energy Services, and we will now be reporting on these companies as one nonregulated segment - WPS Energy Services.

With that, let's take a look at our plants. First of all, our Syracuse, New York, plant returned to service in early December from its turbine blade failure. The Beaver Falls plant repair is still waiting for determination of insurance coverage. As you may recall, the unit came offline on June 26, 2005, with a first stage turbine blade failure. We are in discussions with our insurance carrier and evaluating the future direction of the facility.

Capacity factors at our solid fuel plants improved significantly in the fourth quarter of 2005 compared with the fourth quarter of 2004. The capacity factor at Sunbury improved 24 percentage points. That production increase combined with higher market prices contributed to an 18.5 million dollar increase in margin at the plant. Niagara improved its capacity factor by 29 percentage points, while Westwood's capacity factor declined 12 percentage points coming off the perfect 100 percent capacity factor it experienced in the fourth quarter of 2004.

Our portfolio management and optimization capability is developing well. We have benefited from increased originated deal flow, market volatility, and our ability to capture value with a low risk option-based portfolio. While the increased volatility has contributed to an overall increase in our value at risk, the daily return on that value at risk during the fourth quarter was three times the return we recognized during the third quarter of 2005. This performance level is above our current expectations. However, it is an example of what can be achieved through solid fundamental system knowledge coupled with disciplined risk management. Our 2006 projections do not include a repeat of the rate of growth we experienced in the fourth quarter.

On August 29, 2005, WPS Energy Services announced that it would not extend an offer to provide service to electric aggregation programs for the Ohio cities of Cleveland and Euclid when the contracts expired in December 2005. As the contracts expired, we completed the orderly return of these customers and direct sign-up customers in the Toledo Edison service area to FirstEnergy regulated utility operating companies for future electric generation service. Our decision to not renew these contracts is driven by the regulatory changes approved in Ohio.

Given high wholesale market prices and rate structures in Michigan, we continue to have many customers return to utility service at the end of their contract period with us. That has caused our Michigan retail electric business as of the beginning of 2006 to decline to one-third the peak megawatts it was at the start of 2005.

We have initiatives underway in a number of markets to replace that declining electric business. The emphasis we have been putting on developing our originated wholesale customer electric business is producing encouraging results. In the fourth quarter we added contracts to provide 7.3 million megawatt-hours to customers in the future. This wholesale customer activity has been building momentum with 75 percent of the contract volume put on in 2005 occurring in the fourth quarter. We expect to build on this favorable customer response and continue to grow this business line in 2006 and beyond. We are also putting significant effort into launching a product offering in the Texas retail market. In keeping with our philosophy of pacing our growth with the capabilities of the organization, we were presented with what we believe is a good opportunity and approach to enter that market. We have hired experienced personnel in the region, and expect to be an approved competitive supplier before the end of the second quarter. Given that timing, we do not expect a positive earnings contribution this year. We made the decision to enter the Texas market because of its thriving market structure, unencumbered by a regulated offering that is not market based. We already had a Houston presence with our natural gas producer services originators. While we have historically limited our retail activities to the northeastern quadrant of the United States and adjacent portion of Canada, we believe our entry into the Texas market offers a great opportunity to leverage the infrastructure and capability we have developed to provide exceptional products and services that our customers value.

We continue to manage our Section 29 tax credit phase-out risk. While no phase-out occurred in 2005, we were fully hedged at no net cost. We have spent about 12 million dollars to minimize essentially all of our 2006 risk, and 3.3 million dollars to minimize 40 percent of our 2007 risk.

Now, I'll turn the call back to Larry.

The Chairman, President, and Chief Executive Officer speaks.

Thanks, Mark.

We are pleased to report that during 2005 and 2006 WPS Resources and Wisconsin Public Service were recognized with many awards. A few of them that should be of interest to investors are:

Several activities completed in 2005 have lowered the risk profile of our company.

Our portfolio of businesses and asset management strategies are expected to support delivery of our predicted earnings per share return and help maintain our outstanding dividend record. On October 13, 2005, we declared a dividend of 56-1/2 cents per share on common stock, payable on December 20, 2005, to shareholders of record November 30, 2005. This is the 47th consecutive year we have increased our dividend and is the 65th consecutive year we have paid dividends. We plan to continue delivering value to our investors for many years to come.

In 2006 we will continue to manage our portfolio of businesses to achieve utility and nonregulated growth. However, we are placing an emphasis on regulated growth, which mitigates our exposure to the risks of nonregulated markets. Our long-term basic earnings per share growth rate target remains at 6 to 8 percent on an average annualized basis, with fluctuations that may be above or below that target.

Please remember our 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, 2006, by dialing 800-216-3057.

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.