Integrys Energy Group

Earnings Conference Call - April 24, 2003

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

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

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.

We are here today to discuss our earnings for the first quarter of 2003 and what you can expect to see 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 also available on our Internet site. Once you are at the site, select Investor Information, select Financial News, select Earnings, and finally select the release from today, April 24.

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 the realization of projected results for 2003 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’ consolidated net income increased by 17 percent during the first quarter of 2003 when compared with 2002. This resulted in basic earnings per share of $1.03 for the quarter compared with 89 cents during the same period in 2002. Our 2003 results include the positive cumulative effect of required changes in accounting principles at January 1, 2003, which added 10 cents in basic earnings per share. Absent the positive cumulative effect of the accounting changes, basic earnings per share for the first quarter of 2003 were 93 cents.

Consolidated net income increased by almost 5 million dollars this quarter and was driven by WPS Energy Services’ activities. Net income at WPS Energy Services increased by 7.5 million dollars. This resulted from increased margins and the positive cumulative effect of a required change in accounting principle. Total utility earnings were negatively impacted by our electric utility experiencing the effect of higher operating expenses without anticipated rate relief. Although total utility earnings were down by 900,000 dollars for the quarter when compared with the same period in 2002, our gas utility increased its net income by 1.4 million dollars as a result of 16 percent colder weather this quarter compared with the first quarter of 2002. The first quarter 2003 heating season was 7 percent colder than normal.

Now Joe O’Leary will discuss the details behind these financial results.

The Senior Vice President and Chief Financial Officer speaks.

Thanks, Larry.

WPS Energy Services reported a 791.5 million dollar increase in revenues this quarter compared with the same period in 2002. A number of things transpired to result in this significant jump in revenues.

The most significant of the events occurred when WPS Energy Services, as required by new accounting standards, adopted Emerging Issues Task Force Issue No. 02-03 this quarter. Adoption of EITF 02-03 requires revenues related to derivative instruments classified as trading to be reported net of related cost of sales for all periods presented. Prior to January 1, 2003, WPS Energy Services had defined all its activities as trading in accordance with accounting standards in effect at that time. With the adoption of EITF 02-03, on January 1, 2003, Energy Services began to classify as trading activities only those transactions that at inception are intended to be settled in the near term. As a result of the change in the definition of trading, a larger portion of WPS Energy Services’ business activities were classified as trading in 2002 than in 2003. Previously reported trading revenues related to derivatives for 2002 have been reclassified using net reporting, while the majority of 2003 revenues continue to be reported on a gross basis. As a result, the revenues and cost of sales for more activities are reported on a gross basis, rather than a net basis, in 2003 than in 2002, as reclassified. The retroactive reclassification to net revenues and cost of sales for 2002 trading activities resulted in a 274.2 million dollar decrease in WPS Resources' previously reported first quarter 2002 consolidated nonregulated revenues and a corresponding 274.2 million dollar decrease to previously reported first quarter 2002 nonregulated cost of fuel, gas, and purchased power. However, neither margins nor net income for 2002 were impacted by the reclassification of revenue upon adoption of EITF 02-03.

In addition to the accounting change, WPS Energy Services’ gas revenues increased as the result of higher natural gas prices in the first quarter of 2003 compared with the same period in 2002. Sales volume growth, including WPS Energy Services’ acquisition of a retail natural gas business in Canada in the fourth quarter of 2002 and sales from Quest Energy, which was consolidated with Energy Services beginning in December 2002, also contributed to higher gas and electric revenues this quarter.

Utility segment revenues increased by 90 million dollars, or almost 32 percent, in the first quarter of 2003. Our gas utility segment generated almost 66 million dollars of additional revenue over the first quarter of 2002. This was largely the result of a 14 percent increase in gas throughput volumes and higher natural gas prices. Our electric utility revenues were more than 24 million dollars greater during the first quarter of 2003 than the same period in 2002. This was largely due to 5 percent higher sales volumes in 2003 and an additional 0.6 percent rate increase that also took effect in June of 2002 for Wisconsin Public Service, which had operated under an interim rate increase of 10.3 percent during the first quarter of 2002 through June 22, 2002, when the final order became effective with a 10.9 percent rate increase.

WPS Power Development’s revenues increased by more than 18 million dollars in the first quarter of 2003 largely due to its new generating assets in New York that were acquired in June of 2002 and higher revenues at our Sunbury and Combined Locks facilities.

Most of our margins improved during the first quarter of 2003 when compared with 2002. Our consolidated utility margins increased by 11 million dollars in 2003, or by almost 8 million dollars for our consolidated electric utility and more than 3 million dollars at our gas utility. WPS Energy Services increased its gas margin by nearly 8 million dollars and its electric margin by almost 5 million dollars. Meanwhile, WPS Power Development saw a decrease in its margin of just over 1 million dollars.

Utility margins received a boost from higher sales volumes. These increases were the result of growth and colder weather so far this year compared with last year. In fact, Wisconsin Public Service’s natural gas sales volumes to residential customers increased by 19 percent while sales to small commercial and industrial customers increased by 30 percent and large commercial and industrial customer sales volumes increased by 12 percent. Meanwhile, Wisconsin Public Service’s electric sales volumes to residential customers increased by almost 9 percent with sales volumes to commercial and industrial customers increasing by 4 percent. Our consolidated electric utility margin also increased as a result of Upper Peninsula Power’s 8.95 percent retail electric rate increase that was effective in December and a 5 percent increase in electric sales volumes.

Although our consolidated electric utility margin increased, electric utility segment net income decreased by 2.3 million dollars, or 16 percent. Public Service saw a more than 11 million dollar increase in purchased power and fuel expense due to planned and unplanned outages at its coal-fired generation plants. Because of transmission constraints that kept us from importing less expensive electricity, we ran our gas-fired combustion turbines to generate the needed electricity. The high cost of natural gas added to the increased costs for the company.

WPS Energy Services’ 7.9 million dollar higher gas margin in 2003 was due to vendor settlements, strong wholesale margins, and the acquisition of a Canadian retail gas business in November of 2002. Energy Services’ electric margin increased by 4.7 million dollars due to the acquisition of Quest in January of 2003 and improved market conditions in Maine.

WPS Power Development’s margin decreased by 1.1 million dollars in the first quarter of 2003 primarily as the result of decreased generation at its Sunbury plant due to wet fuel and mechanical difficulties relating to fuel delivery systems. This was partially offset by increased margins from the New York plants that were acquired in June of 2002.

Operating expenses increased by about 16 million dollars in the first quarter of 2003 compared with the same period in 2002. Increased utility operating expenses accounted for about 11 million dollars of that amount due to higher pension and medical benefit costs and higher payroll costs. Operating expenses at WPS Energy Services increased by almost 5 million dollars as a result of business expansion and increased bad debt expenses.

Miscellaneous income decreased by more than 4 million dollars primarily as the result of lower earnings on Wisconsin Public Service’s nuclear decommissioning trust.

WPS Power Development also recognized 1.9 million dollars in pretax income in 2003 related to the 2002 sale of a portion of its synthetic fuel operation compared with 1.2 million dollars in pretax income recognized in 2002 related to the 2001 sale of a portion of its synthetic fuel operation. However, increased equity losses from the synthetic fuel operation as a result of increased production in the first quarter of 2003 partially offset the additional income.

From the first quarter of 2000 through the end of 2002, WPS Energy Services applied the accounting standards of Emerging Issues Task Force Issue 98-10, “Accounting for Contracts Involved in Energy Trading and Risk Management Activities.” We had defined WPS Energy Services as a trading company under Issue 98-10 and, as such, Energy Services was required to mark all of its contracts to market. On October 25, 2002, Issue 98-10 was rescinded, which precluded mark-to-market accounting for energy trading contracts entered into after that date that were not derivatives and required a cumulative change in accounting principle be recorded effective January 1, 2003, for all nonderivative contracts entered into on or prior to October 25, 2002. WPS Energy Services evaluated all of its contracts and on January 1, 2003, recorded a positive after-tax cumulative effect of a change in accounting principle of about 3 million dollars to net income to remove from its balance sheet the mark-to-market effect of those contracts entered into on or prior to October 25, 2002 that did not meet the definition of a derivative under Financial Accounting Standards Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended. The cumulative effect of adopting Statement 133 was partially offset in net income by associated changes in WPS Energy Services’ margins, for a positive net after-tax impact of approximately one million dollars in the first quarter of 2003.

Finally, the weighted average number of common stock shares outstanding increased by about 700,000 shares in the first quarter of 2003 compared with the same period in 2002 primarily as a result of issuing additional shares under the Stock Investment Plan and employee stock purchase plans.

Now I’ll turn the conference call over to Larry Weyers.

The Chairman, President, and Chief Executive Officer speaks.

Thanks, Joe. That gives you background information on our earnings story for the quarter. Now I’ll discuss how our operating segments fared and what you can expect in the future. I’ll begin with our regulated utilities.

The Public Service Commission of Wisconsin issued a rate order for Wisconsin Public Service that was effective on March 21, 2003. The order increased our electric rates by 21.4 million dollars while at the same time authorizing a 1.2 million dollar decrease in our natural gas rates. We had filed for increased rates for our Wisconsin customers in March of 2002 and had hoped to receive the order to be effective by January 1 of this year. The Commission also lowered our authorized return on equity from 12.3 percent that was granted in June of 2002 to 12 percent with the effective date of the order. The delay in receipt of this rate order affected our earnings this quarter and is expected to negatively affect earnings for the year. The order did allow the deferral of costs associated with construction of the Weston 4 plant and automated meter reading costs.

Wisconsin Public Service also filed a Michigan rate request on February 6, 2003 to increase its electric base rates by 1.4 million dollars, or about 9 percent, and has requested a 5.8 percent overall interim increase in base rates in the event an order is delayed. This would be the first rate increase for Wisconsin Public Service’s 10,000 Michigan customers in 17 years. Even with this increase, the rates for Wisconsin Public Service’s customers in Michigan will be among the lowest of investor-owned utilities in the State of Michigan. Public Service’s residential rates are 25 percent less than the Michigan state average for residential customers and 29 percent less than the national average.

On March 11, 2003, Wisconsin Public Service filed with the Federal Energy Regulatory Commission to increase its wholesale electric rates by 4.1 million dollars, or about 21 percent. Under FERC procedures, the new rates could be effective, subject to refund, as early as May 11 or as late as October 10 of this year. We’ve been able to hold the line on our wholesale electric rates since 1986 — that’s 17 years — but the increase is needed to offset increased costs for generation and security at our plants. The rate increase will affect eight of our customers who are generally municipal electric utilities or rural electric cooperatives.

On April 1, Wisconsin Public Service filed in its Wisconsin jurisdiction for authorization to increase its electric rates by 88.9 million dollars, or 14.1 percent, and its natural gas rates by 15.4 million dollars, or 4.1 percent. We’ve requested a 12 percent return on equity on a 55 percent equity structure. We hope to receive the final order in this case during the fourth quarter, which would allow the rates to be effective January 1, 2004. Major drivers of this rate case are increased costs for fuel, power generation, transmission, security, maintenance at our jointly-owned Kewaunee Nuclear Power Plant, automated meter reading, and benefits.

Joe reported earlier that Wisconsin Public Service experienced high costs for natural gas as was the case on a nation-wide basis. We expect to recover all of our gas costs incurred during the winter of 2002-2003 because Wisconsin Public Service operates under one-for-one recovery for all prudently incurred gas costs in both its Wisconsin and Michigan jurisdictions. Public Service’s prudence is judged against published indices for gas costs. So, even with the high gas costs, Public Service expects full recovery of these costs through rates. Since we experience higher natural gas prices in both Wisconsin Public Service’s revenues and cost of sales, there is little impact on margin.

The Public Service Commission of Wisconsin also recently issued an order approving Wisconsin Public Service’s expenditure of 52.4 million dollars on the gas portion of our automated meter reading project. The electric portion did not require approval.

On March 21, we broke ground for a 50,000 square-foot addition to our service center in Green Bay. The additional space is needed to house our expanding call center and customer reliability functions.

Work is also continuing on startup and testing of the new 83-megawatt natural gas-fired combustion turbine at our Pulliam Power Plant in Green Bay. The 40 million dollar project is expected to be complete and the unit placed in commercial operation in June.

Work is also continuing on our plans to build a 500-megawatt coal-fired electric generator at our Weston Power Plant site near Wausau, Wisconsin. We will be requesting a declaratory ruling from the Public Service Commission of Wisconsin in early May, which would authorize recovery of capital expenditures, which could range to approximately 60 million dollars prior to project approval, which is expected in the fall of 2004. We expect the plant to be operational in 2008.

Our jointly-owned Kewaunee Nuclear Power Plant was shut down for refueling on April 5 and is expected to return to full power in mid-May.

Now let me bring you up-to-date on the operations of our two nonregulated subsidiaries. I’ll begin with WPS Power Development.

We initiated a work force reduction in January 2003 at our Sunbury facility in Pennsylvania to reduce our ongoing costs and are considering other alternatives to further optimize the contribution to future earnings from this plant.

Water flows at our facilities in Maine and New Brunswick, Canada, were well below normal for the first quarter of 2003. We expect flows to continue to be below normal through the summer. River flows in the fall will depend greatly on precipitation conditions seen at that time. We have done a good job of managing our operating expenses related to our Maine and New Brunswick assets. By the way, all of the generation from these facilities is under contract to WPS Energy Services and another non-affiliated group.

We own three power plants in upstate New York that we purchased in June of last year for 59 million dollars. The plants have a combined capacity of 257 megawatts. The Syracuse and Beaver Falls plants were not operated much during the first quarter due to insufficient spark spread — given the cost of gas in comparison to the energy markets, it was not economical for these plants to run. We did, however, make good use of the down time by performing maintenance and doing some performance testing. Both plants are ready to run, and we are expecting good performance from them this summer. Our Niagara Falls plant has been undergoing additional maintenance and suffered some damage in an ice storm on April 3. It will be down for three or four weeks. The generation from our three New York plants is not under contract, but is instead sold in the open market. Power prices in New York have been lower than previous years, similar to other areas of the country but have shown recent strength. Consequently, the financial performance of the plants has dropped a little below expectations. As the market returns to normal values, we expect these facilities to perform well.

WPS Power Development is continuing to work on its plan to construct a 250-megawatt, coal-fired electric generating power facility in western Wisconsin. The facility will be constructed as a redevelopment project of the existing 53-megawatt Stoneman Power Plant that was purchased in 1996. We will not proceed with the unit without having a substantial portion of the off take under contract. The earliest we would expect to begin commercial operation is 2008. We own two-thirds of the Stoneman Power Plant.

WPS Power Development owns a 50-megawatt combustion turbine cogeneration facility in Combined Locks, Wisconsin, and has all of its capacity under contract. This facility ran well during the first quarter with about 95 percent availability. We are expecting good performance from the unit through the summer.

Our investment in a synthetic fuel project has been performing well. The output capacity of this project generates tax credits currently beyond our capacity to use them. Therefore, as part of our overall asset management strategy, we entered into an agreement in December 2002 with a subsidiary of an unaffiliated public company to monetize a portion of this excess capacity through the sale of a 30 percent interest in ECO Coal Pelletization, the company we own which holds our interest in this project. This new agreement with this party gives them a preferential allocation of qualifying synfuel from the project. The agreement also gives this party an option, but not the obligation, to be allocated additional synfuel from the project if we make it available to them. This agreement runs through December 2007. We expect our December 2002 monetization to deliver on average, annual pre-tax earnings of approximately 7 million dollars from 2003 to 2007, pending satisfaction of certain contingencies relating to the production of the synthetic fuel project. On April 7, we began the process of moving the facility to a new site, which will provide a sufficient supply of feedstock for the facility. The move was completed in less than the 17 days scheduled. The facility is again producing synfuel and should be at 100 percent production by the end of the week.

Market conditions continue to have a detrimental impact on our financial results for WPS Power Development. In particular, the capacity market continues to be very weak as very low values have been placed on generation capacity. We revised our operating strategy for Sunbury. However, based on current market projections, we expect Sunbury to be a drag on earnings in 2003.

Now, let’s take a closer look at WPS Energy Services’ operations.

We have enjoyed tremendous growth and margin improvement at Energy Services over the last 6 years, and we expect to continue expanding in the northeast quadrant of the United States and adjacent portions of Canada. We are continuing to maintain a balance of retail and wholesale natural gas and electric business, utilizing WPS Power Development’s assets where applicable. Our nonregulated electric and natural gas sales commitments are generally back-to-back transactions that allow us to effectively manage risk.

The changing market conditions, as a result of many industry participants pulling back from the marketplace, continues to benefit us. Though there are fewer participants, the quality of the participants is higher which reduces our counterparty credit risk. During the last quarter, we have seen more of the traditional large energy marketers reduce their market presence, but remaining market participants are exhibiting greater discipline in their transactions. The fact that there are fewer market participants has created growth opportunities for us; however, our primary focus has been to improve the quality of our business with more selective profitable growth.

We’ve been able to leverage our retail core competency by increasing involvement in Canadian markets through the acquisition in late 2002 of a natural gas retail business operating in Ontario and Quebec under a low-risk, earn-out structure. This enabled us to expand our geographical scope and capability without deviating from our core competencies. Our Canadian book of business has been fully integrated into our normal processes and so far has been performing better than expected.

Since May 2000, WPS Resources provided financial support to Quest Energy LLC, an independent Michigan limited liability company, in the form of an interest-bearing note with an initial maturity date of May 2005, secured by the assets of Quest. The note also provided an option to convert the debt to equity. WPS Resources assigned this option to WPS Energy Services and effective January 29, 2003, WPS Energy Services exercised the option, making Quest Energy LLC a wholly-owned subsidiary of WPS Energy Services. Since January, significant operational improvements have been made at Quest. The next step is implementation of an integration plan to improve overall effectiveness. Quest has performed well during the first quarter, contributing to net income. As we make continued operational improvements, Quest will improve the balance between our natural gas and electric businesses.

WPS Energy Services has recently come to agreement with the City of Cleveland on new electric rates, which will go into effect in May 2003 for two years. Under the rules of the State of Ohio’s aggregation program, customers must have the opportunity to opt out of the program every two years. Energy Services has been providing electric supply to customers in the City of Cleveland who would otherwise take service from Cleveland Electric Illuminating, an operating company of First Energy, since May 2001.

Energy Services’ strategy going forward is not changing. We will continue to provide value added energy and energy-related services to our customers in the northeast quadrant of the United States and adjacent portions of Canada. We will continue growing our retail business with a balance between electric and gas. WPS Energy Services is a strong player in the energy marketplace and is continuing its managed growth in all of its business.

Finally, I’ll turn to WPS Resources.

Our asset management strategy calls for the disposition of assets that are no longer required for operations in a manner that allows recognition of profits over the next 4 to 6 years. Land, buildings, and other facilities at our subsidiaries are a part of this strategy. Going forward, we are expecting an average annualized impact of 15 to 25 cents per share through 2007 from our asset management strategy relating to property sales. We also continue to seek other ways to optimize the value of our assets, such as the sales of interest in our synthetic fuel project in 2001 and 2002.

In March 2003, Moody’s announced that our ratings for WPS Resources and Wisconsin Public Service are under review for possible downgrade. We will be working with Moody’s as they conduct their review to help them further understand our business.

Our financial strength and quality credit ratings — among the best in the industry — generate great market demand and enable us to issue debt on very favorable terms. We will continue to work hard to maintain our credit ratings that give us access to the capital markets at reasonable rates.

In April 2003, Wisconsin Public Service filed with the Public Service Commission of Wisconsin seeking approval to issue up to 172 million dollars in debt. We expect to issue debt in the second half of 2003 under Wisconsin Public Service’s existing shelf registration, with the size and timing dependent upon business needs and refinancing opportunities. Wisconsin Public Service is reviewing the potential for refinancing existing debt in 2003 and has already issued a call notice to retire 9.1 million dollars of 6.125 percent tax exempt bonds on May 1, 2003.

WPS Resources expects to file a shelf registration with the Securities and Exchange Commission soon for 350 million dollars, which will allow us to issue a combination of debt or equity. We expect to issue common stock under this shelf registration in the fourth quarter. The size of the common stock issue is contingent on business needs and our plan to increase capital with equity.

In 2003, we are continuing to seek balanced utility and nonregulated growth. However, we are placing more emphasis on regulated growth, thereby reducing our exposure to the risks of the nonregulated markets. 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 will reduce the overall risk to investors and, combined with our growing dividend, provide very good returns to our shareholders. Our target for 2003 earnings per share is between $2.75 and $2.95, but we may be at the lower end of the range given our delayed rate case order. Achieving our targeted range for 2003 earnings per share is dependent upon, among other things, the timely successful completion of our pending FERC rate case, normal weather, availability of our generating units, a pick-up in the recovery of the economy, continued execution of our asset management strategy, improvement in the market price for energy, and successful execution of cost control initiatives.

Although investors have had a tough time in attempting to identify quality companies during the last few years, they are recognizing that WPS Resources’ conservative nature has served it well throughout the years and they are taking notice and investing in our company. Our core competencies are in energy and energy related businesses. We intend to stay in those businesses within the United States and Canada. Our electric and gas utility has served northeastern Wisconsin for over 119 years. We understand the energy business and have developed a business plan that capitalizes on that knowledge. Our utility base is solid and our nonregulated energy businesses are focused. We’ve rewarded our shareholders with increased dividends for 44 consecutive years. We effectively mitigate and minimize risk in the operation of our business. We work hard to maintain quality credit ratings. Finally, we deliver value to our customers and our shareholders.

We plan to continue delivering shareholder value through our strong utility foundation, focused nonregulated energy and energy-related businesses, achieving our projected average annualized earnings per share growth of 6 to 8 percent, and maintaining our outstanding dividend record. We plan to continue delivering value for many years to come!

Now, I’d like to take time to answer some of your questions about our financial picture and plans for the future.

Thank you for being a part of our first quarter earnings conference call. A replay of this conference call will be available through May 8 by dialing 888-568-0874.

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.