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Earnings Conference Call - Fourth Quarter 2006
January 31, 2007

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

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

Phillip M. Mikulsky
Executive Vice President – Development

Mark A. Radtke
President - WPS Energy Services

and

Donna M. Sheedy
Manager - Investor Relations

Good afternoon. Welcome to WPS Resources Corporation's 2006 fourth quarter and full year earnings conference call. With me today are Larry Weyers, Chairman, President, and Chief Executive Officer of WPS Resources Corporation; Joe O'Leary, our Senior Vice President and Chief Financial Officer; Phil Mikulsky, our Executive Vice President – Development; and Mark Radtke, President of our nonregulated subsidiary, WPS Energy Services.

Today we will discuss our preliminary fourth quarter and full year results, as well as what you can expect from us in the future. We will start with Larry Weyers, who will discuss the highlights of 2006 and the quarter. Then Joe O'Leary will review our financial results. Mark Radtke will then give us an operational update on WPS Energy Services. At the end of our prepared remarks you will have an opportunity to ask questions.

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 2007 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 news release and to our filed Securities and Exchange Commission disclosure documents for further information.

I will now turn the call over to Larry Weyers.

Larry Weyers - Chairman, President, and Chief Executive Officer

Thank you, Donna. Good afternoon, everyone, and thanks for joining us on the call today. At WPS Resources, 2006 was a year of moving forward and capitalizing on the financial strength that we have built over several years. And it culminated in the announcement of our merger with Peoples Energy Corporation.

With regard to the merger, we continue to move forward and remain on track to close during the first quarter. The Illinois Commerce Commission and the Public Service Commission of Wisconsin have yet to rule on the merger. Assuming we obtain the necessary approvals and the merger closes, we will hit the ground running. We have integration teams in place to ensure a successful transition and look forward to updating you on our integration progress in the coming months.

During 2006 we also completed the acquisition of natural gas distribution operations in Minnesota and Michigan, which added approximately 4.6 million dollars in after-tax income to our fourth quarter results.

We continued to execute on our asset management initiatives in 2006, which added about 23 million dollars in after-tax income to 2006's results and about 95 million dollars in cash. During 2006, we sold the Kimball natural gas storage field, our equity interest in Guardian Pipeline LLC, and the Sunbury generation facility. We also announced the sale of the WPS Niagara Generation plant, which is expected to close in the near future. We anticipate recognizing a pre-tax gain of about 25 million dollars on that transaction in our 2007 first quarter results.

Our large regulated capital investment projects are moving forward as planned. Construction of the Weston 4 power plant continues to remain on budget and on schedule to be completed in 2008. Upon completion of Weston 4, our free cash flow will benefit from the project's returns. We also would like to add that a major portion of the Arrowhead to Weston transmission line has been energized. Over 140 miles of the 210-mile project are complete and energized. There remains only 67 more miles to construct before the projected 2008 in-service date for the remainder of this line.

As we look toward 2007, our goals will be to:

  1. Close the Peoples merger and successfully integrate its operations.
  2. Continue to make progress on our regulated capital investment projects, especially Weston 4.
  3. Institute cost reductions by making Competitive Excellence a part of our culture.
  4. Continue to expand our nonregulated operations in regions where we can add value for our customers and our shareholders, as we are doing in Texas and Illinois.

Now on to our fourth quarter financial results:

Our reported results were solid, but not as strong as we had hoped. One of the forces negatively impacting our regulated utility operating results was weather. The weather was milder than normal, which took its toll on our results in the fourth quarter. We estimate that the milder weather cost us about five cents per diluted share of potential earnings in the fourth quarter of 2006 versus the same quarter in 2005. Remember that 2005's winter season was also fairly mild. If weather had been in line with historical averages, we estimate that it could have added approximately 9 cents to earnings per share.

During the fourth quarter of 2006, our net income was also impacted by a decline in energy prices that required us to recognize non-cash after-tax losses of approximately 15.9 million dollars from our nonregulated operations primarily due to the required mark-to-market accounting treatment of derivative instruments, which we use to protect the economic value of our electric and natural gas supply contracts initiated by our nonregulated operations. As we deliver on these contracts and unwind the associated derivative instruments, our financial results in future periods will reflect the positive economic value that was anticipated when the contracts were created.

Here are some of the other highlights of the fourth quarter:

Joe O'Leary will now discuss in more detail our financial results and earnings. Joe...

Joe O'Leary - Senior Vice President and Chief Financial Officer

Thanks, Larry.

Before I begin, let me refer everyone to our news release that we sent out earlier today for details of our fourth quarter financial results. I will review the major financial and segment highlights for the quarter.

As Larry said, we produced earnings of 21.3 million dollars during the fourth quarter. Our income from continuing operations was 22.4 million dollars or 50 cents per diluted share. In our news release we have included non-GAAP financial information related to adjusted diluted earnings per share from continuing operations. We believe that adjusted diluted EPS from continuing operations is a useful measure for providing investors with additional insight into our operating performance because it eliminates the effects of certain items that are not comparable from one period to the next. The items in the fourth quarter of 2006 that are not comparable with 2005's fourth quarter results include:

Taking into consideration the items I mentioned, our adjusted diluted earnings per share from continuing operations were 38 cents for the fourth quarter of 2006 compared to 36 cents last year.

For the year, our diluted earnings per share from continuing operations were 3 dollars and 50 cents in 2006, compared to 3 dollars and 81 cents in 2005. Again taking into account items that we have identified as non-comparable, our adjusted diluted earnings per share from continuing operations were 3 dollars and 17 cents in 2006, compared to 2 dollars and 98 cents in 2005, a 6.4 percent increase.

Turning to our segment results, our regulated electric utility margins increased 2.2 percent in the fourth quarter of 2006 to 122.6 million dollars. The main contributors to the improvement in the fourth quarter were rate increases at Wisconsin Public Service and Upper Peninsula Power. We also experienced improved sales volume. Our overall volumes were up 3.2 percent.

Overall, earnings at our electric utility rose to 15.6 million dollars for the fourth quarter of 2006, compared to a loss of 8.2 million dollars in 2005. Please keep in mind that 2005's results included a pre-tax write-off of 13.7 million dollars associated with the 2004 Kewaunee nuclear plant outage and a portion of the loss on the sale of that facility.

At our regulated natural gas utility operations, throughput more than doubled in the fourth quarter of 2006 compared with the same period in 2005, due to our newly acquired natural gas distribution operations in Michigan and Minnesota, which added about 309 million therms to the overall total of 531 therms.

Margins rose 102 percent, or 36.2 million dollars, in our natural gas utility operations to 71.7 million dollars. Our Minnesota and Michigan operations contributed 35.5 million dollars, or 98 percent, of the incremental increase in margin. After-tax external transition costs associated with the acquisition of natural gas distribution operations in Michigan and Minnesota were about 800 thousand dollars. Overall, our natural gas utility operations produced net income of 9.5 million dollars in the fourth quarter of 2006 compared with 4.6 million dollars in 2005.

Turning to our nonregulated operations, WPS Energy Services posted income of 700 thousand dollars, a 19.4 million dollar decrease versus 2005's fourth quarter results. Margins declined by 21.4 million dollars during the fourth quarter in 2006 compared to 2005's fourth quarter. Total net mark-to-market losses included in margin were 26.4 million dollars in the fourth quarter of 2006 as compared to net mark-to-market gains of 14.2 million dollars in 2005's fourth quarter. The change was driven largely by the timing of gain and loss recognition on retail supply transactions that do not qualify for hedge accounting treatment. These retail supply contracts protect the economic value of customer sales contracts and the offsetting impact of these gains and losses will be reflected in future periods as we deliver on these contracts and unwind the associated derivative instruments.

The results at our nonregulated operations included after-tax income of 1.3 million dollars from synthetic fuel activity, including the negative after-tax impact of 5.5 million dollars of losses on derivative instruments used to protect our Section 29 tax credits.

For comparative purposes, we would like to remind you that 2005's fourth quarter results for WPS Energy Services reflected the positive contribution of 7.3 million dollars in after-tax income from the Sunbury generation facility compared to a 300 thousand dollar net loss during the fourth quarter of 2006. Sunbury was sold earlier this year and the results are reported as discontinued operations for both 2005 and 2006. WPS Energy Services' results for the fourth quarter of 2005 also included an 8.2 million dollar pre-tax gain associated with the liquidation of a contract to buy power in 2006 and 2007 to supply customers in Maine.

Finally, in our Holding Company and Other operations, we reported a net loss of 4.5 million dollars for the fourth quarter of 2006 compared with income of 2.9 million dollars in 2005. The decrease in earnings was due in part to an increase in interest expense associated with higher borrowing levels that resulted from the acquisition of our natural gas distribution operations in Michigan and Minnesota. Our investment in the American Transmission Company continues to perform well. During the fourth quarter of 2006, the investment generated after-tax equity earnings of 6.1 million dollars, up from 4.5 million dollars in the fourth quarter of 2005.

Now, I would like to give you an update on our anticipated capital expenditures for 2007 and 2008, which have been slightly revised from the last time we spoke with you on our third quarter conference call. We also are providing our expectations for 2009.

We intend to invest about 765 million dollars in capital expenditures between 2007 and 2009 for Wisconsin Public Service, with about 255 million dollars being spent each year, which is down from our third quarter estimate of 280 million dollars, reflecting lower capital needs as we move into 2009. The majority of expenditures will be invested in our regulated utility operations with the largest projects being the completion of Weston 4, construction of a scrubber at Weston 3, and construction of natural gas distribution laterals to connect to the Guardian Pipeline that is being extended to Green Bay, Wisconsin.

Depreciation for Wisconsin Public Service is expected to be:

105 million dollars in 2007,
120 million dollars in 2008, and
135 million dollars in 2009.

Wisconsin Public Service is currently allowed almost 57.5 percent equity in its regulated capital structure and a return on equity of 10.9 percent. Therefore, incremental net income could be about 8 to 9 million dollars per year.

At Upper Peninsula Power, our total capital expenditures for 2007 through 2009 will be about 48 million dollars, consistent with our third quarter projections. Total depreciation is estimated to be about 18 million dollars for those years.

Total capital expenditures for Minnesota Energy Resources' utility operations are anticipated to be about 46 million dollars for 2007 to 2009 with estimated total depreciation to be about 32 million dollars for those years.

We anticipate total capital expenditures for Michigan Gas Utilities for 2007 through 2009 at about 25 million dollars, and total depreciation is estimated to be about 24 million dollars for those years.

Nonregulated capital expenditures for the same period are not anticipated to be significant.

WPS Resources expects equity contributions to the American Transmission Company relating primarily to transmission line projects to total about 132 million dollars for the years 2007 through 2009, with about 57 million dollars relating to the Wausau, Wisconsin, to Duluth, Minnesota, transmission line. ATC is currently allowed a return on equity of 12.2 percent through 2012. Our ownership in ATC currently stands at about 31 percent. We anticipate that our ownership will move up to about 34 percent by the end of 2007, as we resume our capital contributions relating to construction of the Wausau to Duluth transmission line and will stabilize at about 35 percent in 2008.

On the regulatory front, the Public Service Commission of Wisconsin granted approval for Wisconsin Public Service to increase its retail electric rates by 56.7 million dollars, or 6.61 percent, and its retail natural gas rates by 18.9 million dollars, or 3.8 percent, effective January 12, 2007.

Now we will move on to our financial guidance.

We expect our 2007 diluted earnings per share to be between $4.55 and $4.78 for WPS Resources as a stand alone company without the impact of the anticipated merger with Peoples Energy. After the merger is completed, we anticipate that Integrys Energy Group will provide information on future earnings guidance. The guidance we have provided includes the anticipated sale of our Niagara generating facility during the first quarter of 2007. Our guidance assumes normal weather for 2007, the continued availability of generating units, and asset management sales. Our diluted earnings per share guidance does not include the impact of mark-to-market activity except for certain mark-to-market activity related to business originating prior to 2007, which will be completed in 2007. This guidance is outlined in the news release we issued this morning.

Also included in the news release is the projected guidance range for 2007 diluted earnings per share from continuing operations - adjusted, which is anticipated to be between $3.45 and $3.62 compared with $3.17 actual diluted earnings per share from continuing operations – adjusted in 2006. The diluted earnings per share from continuing operations – adjusted guidance includes special items that are not comparable from one period to the next. See our news release for further details relating to the special items.

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

The Chairman, President, and Chief Executive Officer speaks.

Thanks, Joe.

Now I would like to ask Mark Radtke, President of WPS Energy Services to discuss our nonregulated operations. Mark...

Mark Radtke, the President of WPS Energy Services speaks.

Thanks, Larry.

At WPS Energy Services we continue to build our delivered volumes and produce solid operating results. Our same quarter retail natural gas volume increased 27 percent while our retail electric volume improved 18 percent. For the year, our retail natural gas volume grew 14 percent to 315 billion cubic feet. Having had lower volume in the prior quarters, our full year retail electric volume declined 18 percent to 6.6 million megawatt-hours. That decline is primarily driven by Michigan and Ohio markets. Our 2006 margin increased 14.4 million dollars compared to 2005. This included a 46.5 million dollar net negative impact of non-cash mark-to-market gains and losses on our year-over-year margin. Total net mark-to-market losses included in margin were 7.3 million dollars in 2006 as compared to net mark-to-market gains included in margin of 39.2 million dollars in 2005. When we exclude the impact of non-cash mark-to-market gains and losses, our adjusted 2006 margin increased about 61 million dollars, or about 47.4 percent, compared to 2005.

We are really beginning to see the benefit from our investment in the expansion of our sales organization and moves we made into various markets. Our Texas business continues to put up solid growth. We began delivering physical energy in July and are very pleased with the contracted quantity and quality of that business as it begins its first full calendar year. The Illinois electric market was very active in front of the January 1, 2007, expiration of their market transition period, and our team has had good success adding business that will contribute to 2007 results. Looking forward, we see continued opportunity in Texas and Illinois. We are also preparing retail expansion into the mid-Atlantic region, and expanding our wholesale electric business with the addition of a group in Denver, which is at the heart of an increasingly important Rocky Mountain region. We also continue to experience organic growth in existing markets, including the Midwest, New England, and Canada. And late in the year we re-contracted the northern Maine standard offer business for 26 months, beginning January 1, 2007.

Over the prior seven quarters you saw our delivered retail electric volumes decline compared to the same quarter in the prior year, largely driven by the regulatory retrenchment in the Michigan and Ohio retail electric markets. Clearly, this quarter's modest increase in deliveries coupled with more than tripling our forward contracted retail electric business marks the end of that slide.

Overall, we grew our forward contracted electric volumes 163 percent, from 23.0 million megawatt-hours at the end of 2005 to 60.6 million megawatt-hours at the end of this year. Eighteen million megawatt-hours were put on in the fourth quarter due largely to the continued expansion of our customer-focused wholesale electric business, our strong entry into the Texas and Illinois retail electric markets, and more moderate growth in New York and New England. As we head into 2007, we have 6.9 million megawatt-hours of retail electric business contracted for delivery during the year, a four and a half percent increase over 2006 deliveries even if we didn't add another customer throughout the year. Our forward contracted natural gas volumes grew 18 percent to 443 billion cubic feet at the end of 2006.

Looking at that in financial terms, we grew the economic value of our forward book of business by about 13 million dollars for the quarter and approximately 83 million dollars for the year. Variation in market prices coupled with required accounting treatment cause more or less of the economic value of the forward book to be recorded in current earnings. At year end, approximately 40 percent of the value of our contracted forward book had been recognized to income. That is down from 55 percent of the economic value of the forward book being recorded to income at December 31, 2005. As market price movement causes more or less of the forward book to be recognized, there will be future non-cash variation that we do not attempt to predict.

Our business growth has not been at the expense of business quality. Forward contracted sales margins for retail electric continue to hold in the lower 3 dollars per megawatt-hour range, while realized per unit margin has moved from over 4 dollars to the mid 3 dollars per megawatt-hour range. We expect our future realized margins to improve modestly as we gain critical mass in newly entered markets. Our realized per unit margin for natural gas is holding between 13 and 15 cents per million cubic feet and our forward contracted margin is consistent with past experience at about 8 cents. Through physical supply optimization, we expect to achieve about the same realized per unit margin upon delivery. Even as we grow, we have seen a dramatic reduction in our portfolio risk as measured by Value-at-Risk. Our VaR declined 19 percent from the end of the third quarter of 2006 and declined 44 percent compared to December 31, 2005, finishing 2006 with a VaR of 937 thousand dollars.

Now let's take a quick look at our plants.

At Westwood, the capacity factor dropped 4 percentage points to 85 percent. The unit has been de-rated a couple of megawatts as we lowered the boiler operating temperature. Engineering analysis is underway to determine modifications to avoid excessive boiler component wear while operating at full capacity.

Our Syracuse natural gas plant dispatched 1 percent of the time in a seasonally poor spark spread environment. It had similarly dispatched 2 percent in the fourth quarter of 2005.

The Beaver Falls natural gas generation plant, which has not been operational since June 2005, is undergoing repairs for its blade failure. We anticipate that the repairs will cost approximately 5.2 million dollars and will be completed by June 2007.

Lastly, during 2006, the synthetic fuel project contributed 19.8 million dollars to earnings. As we head into the final year of that project, our potential production volume has risen, due to the turn back of production rights from a monetizing partner. Seventy-five percent of the potential production volume is hedged. We are anticipating a contribution of about 14 million dollars from the project.

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

The Chairman, President, and Chief Executive Officer speaks.

Thanks, Mark.

As we have discussed on this call, we have tremendous opportunities ahead of us at WPS Resources including our merger with Peoples Energy, our construction projects, and the expansion of our nonregulated operations in Texas, Illinois, Colorado, and in the Mid-Atlantic.

Our targeted long-term earnings per share growth rate from continuing operations remains at between 6 percent and 8 percent on an average annualized basis, with annual fluctuations that may be above or below that target.

To recap key points of today's earnings conference call:

We are now 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, 2007, by dialing toll free 866 428-3803.

The text for today's presentation is available on our Web site at www.integrysgroup.com. 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.