Integrys Energy Group

Remarks by Daniel P. Bittner - April 26, 2000

Senior Vice President and Chief Financial Officer of WPS Resources Corporation and Wisconsin Public Service Corporation

[Slide 15] Many of you probably already have a lot of the financial data on our company, or you can review the printed material we have available for you today. So, what I want to do before we open it up for questions is to cover our financial strategy and highlight some of the areas that demonstrate our healthy financial condition, our competitive position, and our growth expectations.

[Slide 16] One of our major corporate strategies is to maintain a strong financial condition in order to have maximum flexibility for future business initiatives. This is why we continue to maintain a conservative capital structure and an aggressive expense versus capitalization policy. These policies contribute to our strong cash flows, excellent credit ratings, and overall healthy financial condition. Our benefit plans and our nuclear plant decommissioning trusts are also well funded.

[Slide 17] Our credit ratings at both the regulated utility, Wisconsin Public Service, and at the holding company level, WPS Resources, reflect our financial condition and strength. Wisconsin Public Service is the only electric utility in the nation that has long-term debt rated Aa1 by Moody's. Standard & Poors also rates the utility AA+.

[Slide 18] 1999 was a good year as our annual earnings of $2.24 per share returned to a more normal level which put us back on track to build shareholder value. Our first quarter earnings as released last week were $1.10 per share. This is right in line with our expectations, although a little stronger than analysts' estimates. This was accomplished in spite of the weather being 11% warmer than normal for the 3-month period.

As you know, there is significant variation in our quarterly earnings during the year and even in the same quarter from one year to the next, especially in the utility operations. Our gas heating business contributes to this variation, but it is also impacted by the timing of generating plant overhauls and refueling outages at our Kewaunee Nuclear Plant. For these reasons, it is more important to consider the earnings forecast for the year rather than normal variation in quarterly earnings that do not affect long-term trends. The analysts' estimate of year 2000 earnings for our company is around $2.40 per share, and we are comfortable with that area and feel it is a conservative estimate.

[Slide 19] Our 1999 common stock dividend was $2.00 per share, which puts the payout at 89% based on our 1999 earnings of $2.24 per share. This payout is high compared to our target of 65% to 70%. We expect to move closer to our target through growth in our business and increased earnings. Based on the $2.40 earnings estimate for 2000 and our normal dividend increase, the payout would be 85%. We expect to increase earnings between 8% and 10% per year in the next several years. About 2 percent to 3% of this will come from the utility portion of the business with the balance coming from our nonregulated subsidiaries. For a company our size and because we have some room to add more leverage to our capital structure, it doesn't take large new project investments to realize significant earnings growth. Under this scenario, we expect to be within our target payout range in three to four years.

We believe that our dividend is very important to a large portion of our shareholders. As a result, in 1999, we increased our dividend for the 41st consecutive year. We view the continued moderate growth of our dividends as a necessity to attract and retain the type of investors that a company of our size, our profile, and our strategy needs.

Progress toward our nonregulated earnings goal has been slower than anticipated. It has been a difficult balance between emphasizing short-term profitability versus things like new customer growth, the development of infrastructure systems, and the acquisition of new projects that will provide long-term earnings. However, we do expect profitability from the nonregulated segment of our business this year. [Slide 20] In fact, our goal is to achieve 10% of our earnings from WPS Energy Services and WPS Power Development in 2000.

On April 1, Wisconsin Public Service filed a rate case application with the Public Service Commission of Wisconsin as required for the two-year period, 2001 through 2002 [Slide 21] . The application requests increases of 8.9% in electric rates and 2.1% for natural gas rates. If approved, the new rates would become effective in January of 2001. Major reasons for the electric request include rising costs for fuel and purchased power, electric system reliability, and increased funding of public benefits as required by recent legislation associated with Wisconsin Act 9, also known as Reliability 2000. Our plan as reflected in the rate filing includes significant capital expenditures which will increase our asset value and provide for earnings growth. Our filing includes a 12.1% Return on Equity, which is the amount we are currently authorized. Even if our proposed rate increase is approved, our electric rates would remain among the lowest of investor-owned utilities in the region.

[Slide 22] This data is taken from an Edison Electric Institute (EEI) industry survey that was updated as of January 2000. This table compares Wisconsin Public Service Corporation to the Wisconsin, Regional, and National averages. We compare very favorably, particularly in the commercial and industrial customer classes.

[Slide 23] There is actually a bigger concern about the competitiveness of the portion of the business that will eventually be deregulated--the electric generation component. This data is taken from a Fitch report with data for 1998, the most recent available. The embedded cost of electric service indicates the historical capital, fuel, and operational costs of generation as part of a regulated utility's overall cost of the bundled service.

[Slide 24] This second table reports the company's average production costs of fuel, and operations and maintenance per unit of output. This is assumed to be variable production cost. These variable costs need to clear the market in a competitive environment in order to recover fixed costs and earn a return on capital. We compare favorably in both cases.

This reinforces our internal evaluations of our electric generation assets and our belief that we would not have stranded investment in a deregulated environment. In fact, our electric generation assets probably have significant market value above their book value.

[Slide 25] Construction expenditures for Wisconsin Public Service are expected to be in the area of $500 million over the next three years. This includes expenditures for the replacement of the Kewaunee Nuclear Plant's steam generators, construction of the proposed transmission line that Pat mentioned, and installation of automated meter reading equipment for all customers.

This estimate does not include potential capital expenditures associated with NOx compliance at our coal-fired generating plants in Wisconsin. The Wisconsin DNR is preparing a plan to address the ozone non-attainment areas. Preliminarily, the plan's impact on Wisconsin Public Service is about $25 million for capital investments for NOx controls at several plants. We believe that the Public Service Commission will allow recovery in rates for all of the expenditures associated with NOx compliance.

Wisconsin Public Service's construction expenditures will be financed mainly with internally generated funds. We will access the debt capital markets to maintain our capitalization ratios. Any long-term financing will be done with fading lien bonds. However, we do not expect bond financings in 2000.

Investment expenditures for nonregulated projects will depend on the timing of either developing new generation projects or acquiring existing generation assets that are being sold by local utility companies. Last year the value of the generation assets purchased in Maine and Pennsylvania for our nonregulated subsidiary totaled close to $150 million.

[Slide 26] Financing for part of the nonregulated projects has been accomplished through non-recourse debt. For the Maine and Pennsylvania generation assets, we obtained between 65% and 70% of the funding from Bayerische Landesbank on a non-recourse basis for terms of 10 to 18 years. We are very pleased with the terms and conditions obtained on these non-recourse financings. It demonstrates the confidence we and the bank have with the economics of the purchases.

The equity for these projects and other WPS Resources' needs will mainly be obtained through a subsidiary called WPS Resources Capital Corporation or by WPS Resources directly. We intend to use the financial strength and high equity levels of WPS Resources to support planned growth at our regulated and nonregulated subsidiaries. And, we plan to do this without significant amounts of new common stock. At this time, based on our current growth plans, we do not anticipate issuing more common stock until sometime in 2001.

In the short-term, WPS Resources will use internally generated funds and short-term borrowings to satisfy most of our capital requirements. We will periodically issue medium-term notes to reduce short-term debt and to maintain desired capitalization ratios. Our current equity level at WPS Resources is 75% and our target equity level without non-recourse project debt and utility debt is around 65%. Based on discussions with the credit rating agencies, these levels should be sufficient for us to maintain a high credit quality for financial flexibility.

[Slide 27] I need to comment on one other item before closing-our current stock price. Our company's stock, as well as most others in the industry, is selling near its lowest level in several years. Our stock is still somewhat sensitive to interest rates. It obviously is also affected by other things such as deregulation and merger uncertainties, lack of interest for "value investing," and the emphasis on "new economy" companies. The market has been narrowly focused during the past few years with growth and new technology stocks dominating. Wisconsin utilities have been particularly affected by the slow pace of deregulation in the state, unfavorable weather, and state power reliability legislation.

As the economic and regulatory uncertainty is alleviated and given our financial strength, we expect our stock price to recover. Eventually, the market will begin to recognize the success of our growth strategies and the quality of our earnings stream. This is especially true of the earnings potential of our nonregulated operations.

[Slide 28] As stated in a financial article in the Business section of the Chicago Tribune last month with the title, Tech Lure Dims Utility Stocks, "The stocks are at all-time lows. Everyone is talking about the new wave of investing, but energy is what drives this world. At some point, basic industries do matter."

[Slide 29] In summary, we have the flexibility to take advantage of growth opportunities in both our regulated and nonregulated entities. We are a financially strong company in a position to add long-term value for the shareholder. [Slide 30]