Integrys Energy Group

"A Powerful Equation"

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

The past twelve months have been interesting, to say the least, for our industry and our company. Spencer Abraham, U.S. Secretary of the Department of Energy, described 2001 in these words, "In 2001 the nation's largest power trader, Enron, declared bankruptcy. The largest electricity distribution company, PG&E, went bankrupt. The largest independent power producer, Calpine, lost 2 billion dollars in market capitalization in the space of a month. And the nation's largest state, California, went through a series of rolling blackouts."

Secretary Abraham went on to say that in spite of all those problems in the energy industry, we must, "Consider what did not happen in 2001. Gasoline prices did not surge; they dropped. Electricity prices did not continue climbing; they dropped. Natural gas prices did not increase; they dropped. In the face of Enron's collapse, the largest bankruptcy in U.S. history, there were no price spikes, no trading panics, no electricity outages, and no gas shortages. On the contrary, we've added some 51,000 megawatts of electricity this year and some 99,000 are scheduled to come on line in 2002. That's more power added to our economy than at any time in history."

To put that in perspective, that is 9 times more than the existing capacity in the state of Wisconsin.

Secretary Abraham was right—the energy market did function well. But that is not the entire picture because one very negative result did occur. Investors across the country have been harmed by these events.

All of you are investors in our company, and I am pleased to report that your investment in us is growing as we execute our sound, understandable business model. WPS Resources Corporation had one of its best years, if not its best year ever, in 2001, in spite of a drop in earnings at our electric and gas utility segments. We had record earnings of 77 million dollars or $2.75 per share. Our market capitalization increased by over 16 percent to 1.1 billion dollars.

But, financial performance is not the only measure of our success. We continue our 118-year tradition of providing safe, reliable, economical energy and related services. We also continue to take care of customers as evidenced by the J. D. Powers survey, which ranked Wisconsin Public Service Corporation the third best utility in the United States for service to residential customers. Wisconsin Public Service was also ranked third in the nation in customer satisfaction for the large customer class in a study done by TQS Research, Inc. Another survey firm, Mastio & Company, ranked WPS Energy Services number one in the nation among gas marketing firms for overall customer satisfaction. In addition, we still have the lowest number of customer complaints filed at the Public Service Commission of Wisconsin of any utility in the state. Taking care of customers effectively is most important because customers are the source of returns to investors and jobs for employees. They are the reason for our existence.

Other measures of our success include the fact that we remain the low-cost producer of electric energy in the Upper Midwest and something important to you, as investors, we continue to pay dividends and increase them. In fact, we've increased dividends for 43 consecutive years.

So, you might be wondering how we accomplished that in the face of all the turmoil last year. Well, I would like to attribute it all to superior management, but I know you would not accept that as the total truth. Being trained as a mathematician, I know we have a very powerful equation with many factors that helped us to reach success last year and will continue to do so in the years ahead:

We have a solid utility business with constructive regulation.
We have focused energy and energy-related businesses, which are profitable and growing.
We are a conservative company with conservative accounting policies and conservative decision-making. In the aftermath of Enron's failure, the value of this approach is even more evident. Yet, we are not so conservative that we don't seek out new opportunities to enhance shareholder value.
We have positioned the company to be flexible since we cannot always predict where market forces, legislation, or regulation will take us. Last year that flexibility helped because our utility financial performance was lower than the year before. But our nonregulated subsidiaries picked up their performance.
Another reason for our success is the high quality and integrity of our employees. They really do make a difference. They are the most important resource we have, and they are the major reason your investment is growing as we execute our sound, understandable business model.
We have prepared the company for the new risks we face. We are continuing to develop the skills and knowledge of our existing workforce. For example, two of our young executives have completed the Advanced Management Program at Harvard. By year end, another two will have accomplished that. We have brought in talent from outside when advantageous. Talent embodied in people like Joe O'Leary, our new Chief Financial Officer; Boris Brevnov, our Vice President of Business Development and Implementation at WPS Energy Services-Boris has also completed the Advanced Managerial Program at Harvard; Elyse Stackhouse, our in-house Attorney; Mike Machesney, our Audit Services Manager; Greg Lower, our Controller at WPS Energy Services; Gil Niesen, our Director of Total Compensation; and Roger Trudeau, our Manager - Real Estate. This talent, combined with our existing talent, strengthens our equation and keeps us reaching for the next star.
We have projected annualized earnings per share growth of 8 to 10 percent—a stretch for us. But, it will keep us reaching. We have accomplished that goal for the past 3 years.
Our outstanding dividend record is continuing to attract attention and gives us access to equity when needed.
Our stock was added to the Standard & Poor's MidCap 400 Index giving us greater liquidity and higher value.
Since the events on September 11 last year, we have added to our security to ensure the protection of our employees and assets.

But in spite of our past performance, the preparations we have made, and our powerful equation, I know our investors have concerns about what is happening in the energy industry because of uncertain factors. I would like to address a few of those now.

Enron

The collapse of Enron has caused investors world wide to become concerned, and rightly so, about the level of risk in the energy industry and the safety of their investments.

Pat Wood III, Chairman of the Federal Energy Regulatory Commission, responded to these concerns as follows: "The facts available to date indicated that Enron's failure had little or nothing to do with whether energy commodities and their delivery to customers are monopoly regulated or competitive. Rather, Enron appears to have failed because of … the manner in which it reported on its financial position to its owner-investors and to the broader business community. Based on the facts as they appear now, Enron's actions would have led to the same result whether its core business focused on energy, grains, metals, or books."

Spencer Abraham also states, "...There is no indication that the energy side of Enron's business was the cause of its collapse."

There is no question; the level of risk and the type of risk in the energy industry has changed. But that change did not cause the collapse of Enron.

Our Company has learned to deal with the new risks—sometimes the hard way—by making mistakes. But, we have learned from these mistakes, and we have also had more than our share of successes.

Our nonregulated energy services subsidiary did substantial business with Enron in the past. But, our employees recognized and responded to the early warning signals, and they took action to protect us before Enron's announced bankruptcy.

In addition, our management has high integrity. Our accounting policies are ethical, honest, and evidently much more conservative than those used by Enron. Our business is sound and easily understood. We provide open and full disclosure so that investors can make investment decisions with the facts available.

Arthur Andersen

One of the fallouts from Enron is its impact on the accounting profession and Arthur Andersen in particular. A few of you have expressed concern because Arthur Andersen was Enron's auditor and is also ours.

Arthur Andersen has been our auditor for many decades. The individuals assigned to our account have always conducted their audits with the utmost integrity and professionalism. They have not compromised the standards of their profession and we have not asked them to vary from their conservative policies. We have also limited our involvement with them to auditing, accounting advice, and very limited consulting work.

I discussed our relationship with them at length both with my senior staff and our Board of Directors. We are prepared to take the actions necessary to maintain the high credibility of our financial reports so that we continue to protect our Company and your investment.

Our management team, along with our Board of Directors, will be closely assessing our options in the next few weeks.

Executive Pay

A number of you are usually interested in the level of executive compensation, so I want to address that issue. Our policy is very simple, "Every employee at WPS should have the opportunity to earn market-based compensation." If we pay less than market, we will lose valuable talent. If we pay more than market, we risk becoming uncompetitive and losing our position as the low-cost supplier. Our pay practices are conservative in the marketplace in that our market target rates are in the 50th percentile. We also follow one other guideline related to compensation, "Employees should have pay-at-risk." If the company does well, then employees should be rewarded. If the company does not do well, then employees should lose the pay that is at risk.

The Energy Industry in Wisconsin

A final topic of concern is the fact that Wisconsin is at a crossroads in electric planning. The State must decide which path it will follow to provide the infrastructure needed to ensure abundant supplies of low-cost energy for Wisconsin residents and businesses.

There are several possibilities, and the path chosen will impact our Company. We will use the flexibility we have developed in our Company to respond to the path that will be chosen by regulators and legislators. We have positioned ourselves well, but we may need your help as investors to prevail on critical issues. You can help by participating in Wisconsin Utility Investors, contacting elected officials, writing letters to regulators, or visiting legislators and regulators in Madison or Washington, D.C. We welcome your involvement and you can express your willingness to help through Wisconsin Utility Investors or by contacting our Senior Vice President of Public Affairs, Tom Meinz, or our Investor Relations Supervisor, Donna Sheedy.

Before concluding, I want to acknowledge several changes on my management team and our Board of Directors.

Ralph Baeten, our former Senior Vice President - Finance and Treasurer, retired on February 28 after 31 years of service. Ralph worked his way up through the company from Cadet Accountant to Senior Vice President. Ralph was also Treasurer of all our subsidiaries.

With Ralph's pending retirement in mind, we hired Joe O'Leary to the position of Senior Vice President and Chief Financial Officer. Joe took on his role in June. He brought with him extensive experience in both regulated and nonregulated industries. He has a record of increasing the profitability of the organizations he has served, so we are expecting more of the same from him.

Pat Schrickel, our former Executive Vice President (and also our former President and Chief Operating Officer of Wisconsin Public Service Corporation and our former Chairman, President, and Chief Executive Officer of Upper Peninsula Power Company), retired on March 31 after 35 years of service. Pat was an example of an investment that really paid dividends for the company. In 1962, Pat was awarded the first Public Service sponsored four-year college scholarship to the Illinois Institute of Technology. Pat spent his summers working for the company, and he was hired as a gas engineer in 1966. From there, he rose through the ranks to become President of the company that had paid for his education.

There is nothing like working your way up from the bottom to earn the respect and support of your fellow employees. Both of these men were excellent leaders and mentors for their fellow employees.

These men are prime examples of our belief in our employees. Their dedication and continual learning and the opportunities that we offered allowed them to advance within the company. But it also gives us an opportunity to take advantage of the knowledge they gained and the loyalty they showed us. Our belief and support of our employees pays dividends in more ways than one.

Today, Dean Arganbright is retiring from our Board of Directors after keeping a watchful eye on our shareholders' investments for almost 30 years. Dean was first elected Director for Wisconsin Public Service on May 23, 1972. When WPS Resources was formed in 1993, he became a Director for that company, too. He has shared his wisdom, advice, and counsel with his fellow Directors and our company's management through changing times. We thank him for serving us well.

Today, you have also elected Dean's replacement on the Board. Al Budney has a Bachelor of Science Degree in Engineering from Princeton University and a Master's Degree in Business Administration from Harvard Business School. He has extensive experience in the regulated and nonregulated energy industry having been employed by several engineering, consulting, and energy companies. He was most recently with Niagara Mohawk Holdings, Inc. As a native of Pennsylvania and hailing from New York, Al will have new insights for the Board on the nonregulated energy industry that is a part of the northeastern United States—where we have chosen to focus our nonregulated efforts.

In conclusion, let me say that the obstacles in our industry are greater than ever. But, there is also tremendous opportunity. Our management team, our employees, and our Board of Directors are up to the challenge. Their combined efforts, with the support of our shareholders, create a powerful equation for success.

We thank you for your investment in our Company and for your continuing confidence in us. You are an important part of our powerful equation. WPS Resources is committed to building upon our powerful equation and multiplying the results for you, our shareholders, our customers, and our employees. We will not let you down!