Integrys Energy Group

Earnings Conference Call - First Quarter 2001

by Pat Schrickel
Executive Vice President

Good afternoon. Welcome to the first earnings conference call for WPS Resources Corporation. I'm Pat Schrickel, Executive Vice President for WPS Resources Corporation and also President and Chief Operating Officer for Wisconsin Public Service Corporation. With me today are Ralph Baeten who is Vice President - Treasurer and Chief Financial Officer and Diane Ford who is Vice President - Controller and Chief Accounting Officer. We are here today to discuss our earnings for the first quarter of 2001 and to take a look at what the future has in store for us.

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. From there select Financial Information, select Financial News, select Earnings, and finally select the release from today, April 19.

Before we begin, I need to point out that this presentation contains forward-looking statements within the definition of the Security and Exchange Commission's safe harbor rules regarding the realization of projected results for 2001 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.

WPS Resources' common stock is traded on the New York Stock Exchange under the ticker symbol of WPS.

We experienced a normal first quarter this year with earnings per share of 89 cents. After a few years of warmer than normal winters, we enjoyed a winter that was closer to normal-which for us means colder weather-that in turn brought the earnings we expected. Last year's first quarter yielded higher earnings per share of $1.10 which were exceptional because of high utility revenues and lower fuel costs than we experienced this year.

Although the Street's earnings per share consensus of $1.10 was higher than our actual results for the quarter, we believe our first quarter's earnings are consistent with past trends, other than 2000 where we had exceptional first quarter earnings.

We are on target to achieve our previously disclosed estimated earnings per share for the year 2001 in the range of $2.55 to $2.65 per share. This estimate assumes normal weather, the recently approved Wisconsin rate case in effect, and the closing of the Wisconsin Fuel and Light purchase in the second quarter. We also anticipate a rate increase for Upper Peninsula Power to be approved by the Michigan Public Service Commission near the end of the second quarter. We're expecting WPS Energy Services and WPS Power Development together to contribute between 10 and 15 percent to our earnings in 2001.

We continue to expect earnings growth of 8 to 10 percent on an "annualized" basis. But, we expect that there will be lumpy spots in that growth.

Consolidated net income was 23.6 million dollars for the first quarter this year compared with 29.2 million dollars for the same period in 2000.

Our overall earnings are on target to meet our projections for 2001 even though electric utility earnings were down 5.6 million dollars from last year. Earnings from our nonregulated operations were up $400,000 compared with the first quarter of 2000, and we expect continuing earnings growth from these subsidiaries throughout the year.

WPS Power Development delivered an increase in earnings primarily associated with its synthetic fuel facility. I'll discuss this in more detail in a few minutes.

Utility margins at Wisconsin Public Service were affected by a Public Service Commission of Wisconsin rate order authorizing a 5.4 percent increase in Wisconsin retail electric rates and a 1.5 percent increase in Wisconsin retail gas rates effective January 1, 2001. Additionally, the Wisconsin Commission granted Wisconsin Public Service a continuation of 12.1 percent return on equity. With 2001 as a test year in that rate case, our utility is less likely to exceed the allowed return this year.

In 2000, we experienced a 4.1 percent increase in electric sales to small commercial and industrial customers, which yielded a higher margin for us. Our rate case applicable to this year took these higher sales to C&I customers into consideration in establishing revenue requirements. The problem is that this year's sales during the first quarter were no better than expected for our firm load customers. Instead, we had 15 percent higher sales to our non?firm customers who are lower margin customers. This meant that not only was our margin lower even though our sales increased, but our fuel costs for serving these customers were also higher.

The delay in closing our merger with Wisconsin Fuel and Light Company until the second quarter of 2001, as a result of waiting for approval by Wisconsin's Commission, causes earnings dilution of 5 to 6 cents per share. Wisconsin Fuel and Light is a gas utility that earns about 45 percent of its earnings in the first quarter. Missing that quarter's income reduces our earnings but still adds to our operating expenses for the rest of the year.

About 1.8 million shares were required to complete our merger with Wisconsin Fuel and Light in April.

We expect energy supplies in Wisconsin to be tight this summer, but we also expect to meet the energy needs of our customers without shortages. Wisconsin requires 18 percent energy reserves by its utilities. We believe all suppliers in the state to be in compliance with this requirement.

To ensure that we have power in reserve for aggregate exposure or unanticipated events, we've purchased a 50-megawatt hedge for the summer months. We will be managing the hedge to take advantage of price spikes or avoid dips. We expect this transaction to break even unless there is unusual weather and/or regional generation sources have unexpected outages.

Wisconsin's regulatory environment is an important factor in our strategic direction. Wisconsin is studying deregulation, but has not yet moved to a deregulated environment. It has established a biannual planning process and both improved and expedited its project review and approval process. Wisconsin has required utilities to join an independent system operator and an independent transmission organization. The Commission is addressing renewable energy by requiring a percentage of each utility's generation to be in the form of renewable energy. It has also addressed the public benefits issue and provided relief from the 25 percent nonregulated asset limitation placed on holding companies. The Commission has completed a market power study for electric generation and forwarded it to Wisconsin's legislature. In a separate action, as part of our recent rate case, the Commission has authorized expansion of gas retail access.

The change in commissioners-John Farrow leaving and Bert Garvin taking his place-and the new governor, Scott McCallum, should not bring significant change in regulatory direction.

In regard to the generation proposal now before the Commission, our position is that the Public Service Commission of Wisconsin should conduct a generic process. The long-term impact on customers needs to be addressed.

Wisconsin is a transmission-constrained state as a result of being bordered on two sides by the Great Lakes. There's been limited development of new generation facilities in Wisconsin since the 1980s. As a result, Wisconsin Public Service and Minnesota Power Company are proposing the construction of a 250-mile transmission line extending from central Wisconsin to the northwestern border of the state. Minnesota's utility regulators approved the construction of their portion of the line this month, but a judge ordered a 120-day briefing schedule in the Wisconsin jurisidictional hearings. This means we won't receive an order from the Wisconsin Commission until the third or fourth quarter.

As a result of contributing our transmission assets to American Transmission Company, we're currently a 12 percent owner in the company. When we complete the construction of the proposed Weston to Arrowhead transmission line, our ownership will increase to about 25 percent. We likely will contribute Upper Peninsula Power's transmission assets as well some time this year.

Our utilities are projecting capital expenditures of nearly 500 million dollars over the next three years. Steam generator replacement is expected to be about 66 million dollars. The replacement of Upper Peninsula Power's hydro facilities and substations will account for 30 million dollars. Completion of our automated meter reading project will be in the range of 50 million dollars. The construction of the Weston to Arrowhead transmission line will require at least 150 million dollars. Software upgrades could be as much as 150 million dollars.

WPS Power Development will also require capital expenditures. Potential cogeneration development and acquisition opportunities will require capital.

In the second or third quarter, we will be issuing between 50 and 100 million dollars of common stock to cover the capital expenditure projects at all of our subsidiaries.

Wisconsin Public Service plans to issue 150 million dollars in fading lien bonds in the third quarter. The utility also plans to call its 8.8 percent first mortgage bonds on September 1.

The specific forms of financing that we use, the amounts, and the timing of the financing may change depending on the availability of projects, market conditions, and other factors.

Now let's move on to one of our nonregulated companies, WPS Energy Services. This company has enjoyed tremendous revenue growth over the last 6 years, and we expect to continue expanding in the mid-western and northeastern United States.

Energy Services is moving more and more into electric sales which have greater margins than gas, so we're expecting to see improved margins from Energy Services overall as a result of contracts like those it has in Maine and Cleveland, Ohio.

WPS Energy Services' participation in the electric market is primarily limited to markets where sales commitments are backed by physical assets that we either own or that we control through contract. This enables us to effectively manage risk.

We were recently awarded a 3-year electric Standard Offer Provider contract for the northern Maine market. The retail marketing efforts of our office in Maine are continuing to generate electric revenue for WPS Energy Services while securing a market for the output of WPS Power Development's generation assets. The Maine market's electric sales now exceed our own generation capacity in that region by a factor of three.

WPS Energy Services also recently won a 5-year electric contract to serve the municipal aggregation group for the City of Cleveland, Ohio. We are currently developing a supply strategy that will profitably meet the City's objectives. In February, we began serving the City. Beginning on May 1st, we will initiate service for the commercial load.

One of the challenges facing Energy Services is controlling the cost of infrastructure changes while staying abreast with the growth.

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

Our synthetic fuel operation in Kentucky seems to draw extensive questions. The mines in the area have an abundant supply of feed stock. The equipment has plenty of operational capacity-in fact, significantly greater than what has been produced to date. Its output capability is not a limiting factor in achieving a significant amount of tax credits.

We became involved in this project as a way of maximizing our cash flows through the use of tax credits. What we've discovered is that the operation has tax credit potential that exceeds our needs. Because our appetite for tax credits is limited, we are actively looking for a partner which would allow us to gain on a sell down of our interest in the project and increase production to its maximum.

We cannot discuss any potential confidential information such as cost of production, specific quantities of production, the market price of the syn fuel, and the company's appetite for tax credits.

We own 490 megawatts of generation capacity in Pennsylvania, which is made up of our Sunbury and Westwood facilities. We purchased Sunbury in November of 1999. During 2000 and the first few months of this year, we accelerated maintenance at the plant. We believe this will result in greater reliability of the facility this summer, which is very important in the liquid Pennsylvania, New Jersey, Maryland energy marketplace. More than 50 percent of the output from these facilities is under off-take contracts for the next two years. We acquired the Westwood plant in September of 2000 and are completing maintenance so that it operates as we expect it to.

WPS Power Development is an important part of our earnings growth projections. In addition to expecting continuing profitable operations from its existing diversified generation asset portfolio, we're expecting to make new investments of about 150 to 200 million dollars per year. With a 3 to 4 percent return on those assets, it can contribute to corporate earnings growth that is projected to be in the range of 8 to 10 percent per year on an annualized basis.

We are proposing innovative ways to address the Tracy/Pinon situation. We are also considering other projects in the pipeline as well.

Thank you for being a part of our first earnings conference call. If you have additional questions, you may contact Ralph Baeten at 920-433-1449.

A replay of this conference call will be available through May 3 by dialing 800-925-0263.