Integrys Energy Group

Wall Street Utility Group - May 20, 2002

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

Supporting Slides [PDF: 32 pages / 1,427KB]

{SLIDE 1} Thank you for the invitation to share the story of WPS Resources Corporation.

{SLIDE 2} 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 2002 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 in our filed Securities and Exchange Commission disclosure documents for further information.

Now, back to the business at hand.

{SLIDE 3} WPS Resources is a holding company based in Green Bay, Wisconsin. Our subsidiaries provide energy and energy-related products and services in both regulated and nonregulated energy markets.

We have two regulated utilities. Wisconsin Public Service Corporation is an electric and natural gas utility operating in northeastern Wisconsin and an adjacent portion of Upper Michigan. Upper Peninsula Power Company is our electric company operating in Upper Michigan. We acquired Upper Peninsula Power in 1998. We also acquired Wisconsin Fuel and Light Company, a natural gas utility, in April of 2001 and merged it into Wisconsin Public Service. Fuel and Light's gas territory almost directly matched portions or Wisconsin Public Service's territory. Each of these acquisitions brought us about 50,000 new customers.

{SLIDE 4} We also have two major nonregulated subsidiaries. WPS Power Development, Inc. develops, owns, and operates nonregulated energy facilities and owns a portion of a synthetic fuel facility. It provides electric power generation services nationwide, but has a significant focus on the northeastern quadrant of the United States. WPS Energy Services, Inc. is a diversified nonregulated energy supply and services company with principal operations in Illinois, Maine, Michigan, Ohio, and Wisconsin. It provides retail and wholesale products primarily in the northeast quadrant of the United States and an adjacent portion of Canada.

{SLIDE 5} There are four factors that set us apart from other energy companies and should be considered in investment decisions.

We have an understandable business plan based upon a solid utility foundation, and we operate under constructive regulation. Wisconsin regulation has an admirable reputation of being deliberate, conservative, and fair. Our authorized return is currently 12.1 percent on 55 percent equity and will increase to 12.3 percent in June.
We have focused our nonregulated businesses on energy and energy-related services. Success here depends on the same key competencies we use in our regulated operations. We expect 15 percent to 20 percent of our net income to come from these businesses in the next few years.
We have an outstanding dividend record that has served our investors well. We have had 43 years of consecutive dividend increases without any plans to change. The payout ratio was 76 percent in 2001. A payout ratio of 70 percent or less should be attainable in 2003 with expected earnings growth.
We have projected annualized earnings per share growth of 8 to 10 percent. As far as growth is concerned, we expect our regulated businesses to deliver 2 to 4 percent of our growth and our nonregulated businesses together to provide the rest of the earnings growth necessary to meet our 8 percent to 10 percent earnings target.

{SLIDE 6} Approximately 70 percent of our shareholders are individual investors who rely on their quarterly dividend. Our 10-year annualized return is attracting investor attention. Since we were added to the S&P MidCap 400 Index after market close on February 8 of this year, our stock price has continued to increase from $38.10 to $41.11 on May 17, a 7.9 percent increase.

{SLIDE 7} Our electric and natural gas utilities are still a significant part of our revenue picture, but revenues from our nonregulated energy services business have surpassed utility revenues. These revenues are primarily from wholesale transactions.

{SLIDE 8} The bulk of our assets reside with our utilities. Our regulated electric and natural gas utilities are continuing to grow as we upgrade our facilities to continually provide quality service and meet the demands of a fertile economic service territory. Utility asset investment for each of the next 5 years should average about 175 million dollars per year.

The value of WPS Energy Services' assets includes its portfolio of contracts, which is based on mark-to-market accounting.

WPS Power Development will continue to grow as generating assets are acquired or developed. Our target is to invest 150 million dollars to 200 million dollars per year.

{SLIDE 9} Our utilities are the backbone of our earnings right now, but we expect WPS Energy Services and WPS Power Development to provide between 15 and 20 percent of our earnings in the future.

For the 12-month period ended December 31, our net income was 78 million dollars of which 59 million dollars or, 76 percent, came from our electric utility segment alone.

{SLIDE 10} WPS Resources' consolidated net income increased by 4.5 million dollars during the first quarter 2002 when compared with 2001. Although net income increased by 19 percent, basic earnings per share were 89 cents for the first quarter in both 2002 and 2001 since there were almost 5 million additional average shares outstanding in 2002 when compared with 2001.

Our nonregulated energy services subsidiary increased its net income by 4.4 million dollars, or 22 times, while our regulated utility segment increased its net income by 2.3 million dollars, or nearly 10 percent, due primarily to the acquisition of Wisconsin Fuel and Light in April of 2001. However, our nonregulated power development segment did not fare as well and experienced a net loss of 400,000 dollars. Accelerated maintenance at its Sunbury Plant and fewer tax credits returned through its synthetic fuel facility as a result of its ownership sell down last November were the primary drivers of the decline from 2001.

{SLIDE 11} For 2002, assuming anticipated rate increases at our utilities, a return to normal weather, availability of our generating units, and recovery of the economy, ongoing operations are expected to result in basic earnings per share of $2.75 to $3.00. A gain from the November 2001 sale of a portion of our synthetic fuel facility will add approximately 59 cents per share this year. That should provide total earnings per share for this year of between $3.34 and $3.59. Improved profitability is anticipated from our nonregulated subsidiaries and, as I said before, we expect them to contribute 15 to 20 percent of our income from ongoing operations.

We also initiated an asset management strategy in 2001 that is expected to contribute between 15 cents and 25 cents per share on an average annual basis through 2007.

{SLIDE 12} As I indicated earlier, we have two regulated businesses with very long heritages. Wisconsin Public Service was established in 1883 and provides us with a strong financial base. Upper Peninsula Power was established in 1884.

{SLIDE 13} Wisconsin Public Service operates primarily in northeastern Wisconsin where the economy has historically been stronger than the rest of the nation. In fact, Green Bay's seasonally adjusted unemployment rate was 4.3 percent in December of 2001, compared with 4.7 percent for Wisconsin and 5.8 percent for the nation. March reports indicated that Green Bay's seasonally adjusted unemployment rate was 4.8 percent compared with 5.7 percent for Wisconsin and the nation.

{SLIDE 14} Our utility strategy evolves around our strengths of energy conversion and energy delivery, and we capitalize on both.

We value quality credit ratings because they give us access to the financial markets and recognition even with our small size. We work very hard to maintain our quality credit ratings.

We are the low-cost provider in the Upper Midwest. One reason is that Public Service's coal facilities burn 100 percent Powder River Basin coal, which costs less and is low in sulfur, thus avoiding the need for expensive emission expenditures.

We believe in the importance of state-of-the-art facilities. As a result, over 90 percent of Wisconsin Public Service's distribution line is 24.9 kV line and 68 percent of its gas mains are plastic. Because of these standards, we have less maintenance expense and greater reliability for our customers.

Wisconsin Public Service is the first utility in Wisconsin and one of just a few in the country to install automated meter reading. Not only can we read meters more efficiently, but we also gain valuable information on how and when our customers use energy. We believe that energy information is a key to the future for our customers and us.

We have an interactive web site that allows our customers to efficiently make service requests and investors to learn more about us.

Wisconsin Public Service ranked third in the nation for customer service according to a J. D. Powers survey. This reinforces our continuing focus on outstanding customer service.

Our customer solutions strategy, which focuses on customer care, has positioned us well for a competitive environment.

We believe flexibility is important as our industry changes and that financial strength, quality service, diversity of generation resources, and a knowledgeable staff, with strong leadership, are important for future competitiveness.

{SLIDE 15} Wisconsin Public Service was recently granted increased electric and natural gas rates for the year 2002. Even with the rate increase, Public Service's electric rates compare well within our region and across the United States as of December 31, 2001. Wisconsin Public Service's electric rates are the lowest of the five utilities in the state and lower than the average of the three regions we compare ourselves with-Wisconsin, the Midwest, and the United States. We anticipate that Wisconsin Public Service will retain this competitive position through 2002 and beyond.

{SLIDE 16} WPS's increased natural gas rates have put us slightly higher than some utilities in the state for residential customers. We strive to maintain a low cost competitive position.

{SLIDE 17} For industrial customers, Wisconsin Public Service's natural gas rates are significantly lower than other utilities in the state. Our practice of frequent rate cases have allowed us to remove most of the industrial to residential rate subsidies which has not been the case for all Wisconsin utilities, some of which have had rate freezes.

{SLIDE 18} A key component of the customer's low price of electricity is the cost of production. Wisconsin Public Service's electric production cost is less than the average production costs of the MAIN and MAPP areas. MAIN is the electric reliability region for our utilities, which includes eastern Wisconsin, Illinois, Missouri, and the Upper Peninsula of Michigan. MAPP is the neighboring reliability region immediately to the west of MAIN, which includes western Wisconsin, Minnesota, North and South Dakota, Nebraska, Iowa, and a small portion of Montana.

{SLIDE 19} Wisconsin Public Service's generation resources are diverse with 64 percent coming from coal, almost 15 percent from nuclear, almost 3 percent from hydros, and more than 18 percent from natural gas and oil. In addition, Wisconsin Public Service purchases about 20 percent of its energy, which allows us to shop for the best value while meeting our system peaks. In fact, Wisconsin Public Service, which peaks in the summer, has reached new peaks for six consecutive summers with the latest on July 31, 2001 at 2,173 megawatts.

Upper Peninsula Power has 37.9 megawatts of hydro generation and purchases most of its generation needs from Wisconsin Public Service.

{SLIDE 20} Multiple sources of energy to meet our future needs continue our theme of maintaining flexibility. This slide shows our planned generating facilities. We are also pursuing a new transmission line that will run from Wausau, Wisconsin, to Duluth, Minnesota. This will help to further diversify our sources of energy. Construction of the line will be a joint effort with Minnesota Power. We will contribute the equity for our share of this transmission line and our interest in the line, when built, will be transferred to American Transmission Company. Our ownership in American Transmission Company will then be about 25 percent.

{SLIDE 21} A key factor in the success of a regulated utility is the regulatory environment in which it operates. Wisconsin Public Service has been effective in working with the Public Service Commission of Wisconsin, and the Commission's regulation has reasonably balanced ratepayers' and shareholders' interests. In April of 2001, Wisconsin Public Service filed a request for increased electric and natural gas rates for 2002. In December, the Commission granted WPS interim rate relief with a 12.1 percent return on equity based on 55 percent equity beginning January 1 of 2002. In May, the Commission granted WPS's rate request with an estimated 59 million dollar increase in electric rates and 10.2 million dollar increase in natural gas rates, while also granting a 12.3 percent return on equity based on 55 percent equity. The increases are anticipated to be effective on June 1, 2002.

{SLIDE 22} Now, I'll discuss our nonregulated businesses-the growth engines for our future. Our nonregulated businesses are more recent additions to our family.

WPS Power Development was established in 1995 to develop, own, and operate nonregulated electric generation facilities. WPS Energy Services was established in 1994 as a diversified energy supply and services company.

{SLIDE 23} I'll tell you first about WPS Power Development. Our strategy with Power Development is to grow by making energy-related investments in the United States and Canada. We look for niche markets that would add to our geographic and fuel diversified portfolio of assets. We expect to invest approximately 150 million to 200 million dollars on an annualized basis. This will ensure we are able to manage our investments. Because of our small size, our new projects don't have to be large for us to achieve our earnings per share growth targets. Other than Canada, we will not be venturing into foreign markets. We do, however, plan to maximize the benefits derived from WPS Power Development providing electric assets that can generate energy to be sold by WPS Energy Services.

{SLIDE 24} One of our goals is to achieve both geographic and fuel diversity. WPS Power Development is in a good position already with plants in Wisconsin, Maine, Canada, Pennsylvania, and soon New York. Power Development's fuel mix includes coal, hydro, diesel, oil, culm, and natural gas. WPS Power Development currently has 675 megawatts of capacity and will add 257 megawatts when they close on their purchase of plants in upstate New York. WPS Power Development currently provides some of the production assets behind WPS Energy Services' sales in northern Maine and Pennsylvania.

In the last five years, WPS Power Development has increased its capacity to about one-third the size of our regulated electric business.

{SLIDE 25} WPS Power Development also has a landfill gas facility and a wood gas facility in Wisconsin, a synthetic fuel facility in Kentucky, and steam supply facilities in Oregon and Arkansas. Although these facilities are small, they round out our broad-based expertise. Power Development's synthetic fuel project is the key project here as it is expected to provide tax credits with earnings per share impact of about 40 to 55 cents per year through 2007. Last November, WPS Power Development sold a portion of its interest in this synfuel project, which provided gain recognition of 6 cents per share last year and is expected to provide 59 cents in 2002 and 13 cents in 2003.

{SLIDE 26} WPS Power Development is currently pursuing completion of a number of projects. Its development record and the financial strength of WPS Resources give Power Development the recognition needed to be invited to participate in new developments and divestitures. WPS Power Development is now able to be more selective in its level of participation.

Projects currently in various stages of completion include conversion of the 53-megawatt Stoneman Power Plant in western Wisconsin to a 250-megawatt, coal-fired electric generating power facility. The conversion is expected to be complete by 2005.

WPS Power Development is also continuing discussion with Sierra Pacific Resources for joint development of a project in Nevada. In 2000, WPS Power Development was the winning bidder for the purchase of the Tracy/Pinon Power Station in Nevada and we had hoped to close on this facility during 2001. But with the problems in California, Nevada's legislature placed the sale of all power plants on hold until July of 2003.

Finally, as indicated earlier, Power Development expects to close on the purchase of power plants in upstate New York in the second quarter, which will add 257 megawatts to its generating capacity. These plants consist of two combustion turbine facilities and one fluidized bed facility. The facilities are expected to sell power into the New York bulk power market through bilateral agreements or into the wholesale and retail open markets using WPS Energy Services as the marketer for the power. The addition of these plants will bring the electric generating capacity of WPS Power Development to 932 megawatts.

In addition, WPS Power Development is analyzing a number of projects to determine whether they wish to participate.

{SLIDE 27} Now let's take a look at WPS Energy Services. Our strategy for WPS Energy Services includes providing nonregulated natural gas, electricity, and related services in the northeast quadrant of the United States, with a greater focus on commercial and industrial customers. We expect to expand WPS Energy Services' presence in the wholesale natural gas marketplace, while developing aggregated retail sales in deregulated jurisdictions. WPS Energy Services focuses on customers who need our energy services. We know we have what it takes to deliver quality service including a strategy with three basic components-first, customer care and a local presence; second, competency which includes knowing where the energy sources and delivery paths are; and finally, technology-employing patented technology for extracting customer energy information and an interactive web site.

{SLIDE 28} WPS Energy Services' principal operations are in Illinois, Maine, Michigan, Ohio, and Wisconsin.

Recognized as a leader in responsiveness to customers, WPS Energy Services was ranked the number 1 energy marketer in the nation by customers in a 2001 survey by Mastio & Company. Mastio has been surveying customers of nonregulated energy marketers on a nation-wide basis for the last three years. Previously, WPS Energy Services had been ranked in the top 10.

WPS Energy Services owns a 3 billion cubic foot gas storage field in Michigan, which became operational in February. The facility interconnects with the ANR Pipeline, which directly connects to the Michigan Consolidated Gas Company and the natural gas trading hub of Dawn in Ontario, Canada. The facility has access to both the Great Lakes Gas Transmission and Vector Pipeline gas transmission systems. The storage field allows for increased reliability and greater flexibility in meeting customers' peak day energy requirements.

WPS Energy Services' electric business is beginning to take shape. Margins are better in electric than natural gas, so Energy Services plans to emphasize electric sales growth as they go forward. Energy Services is attempting to improve its gas margins by eliminating product lines with the lowest margins, restructuring prices to maximize returns, and enhancing our effectiveness in buying the commodity and volume risk processes.

WPS Energy Services participates in the electric and gas markets where its sales commitments have back-to-back transactions that allow us to effectively manage risk. Where possible, the transactions are backed by WPS Power Development's generation assets or by assets that we control through contract.

WPS Energy Services has electric retail sales contracts for more than 600 megawatts annually. This includes a 3-year contract to serve northern Maine's electric market, a 5-year electric contract to serve the municipal aggregation program for the City of Cleveland, Ohio, a 4?year contract to serve six communities surrounding Toledo, Ohio, who participate in an aggregated buying group, and recently added an aggregated buying group around Euclid, Ohio.

We believe that energy information is critical in a competitive environment. As a result, we have developed and patented DENet® technology that gives us the capability to help our customers effectively manage their energy needs. Our DENet technology is also used by WPS Power Development to operate and manage all of its production facilities throughout the United States from its Green Bay offices.

{SLIDE 29} WPS Energy Services' electric sales volumes are continuing to grow. We really just started our focus on nonregulated electric sales in 2000, and sales to this segment are already about 30 percent of our regulated electric load.

{SLIDE 30} Growth in our nonregulated natural gas sales is continuing to occur. We are focusing mainly on wholesale and aggregated retail markets for our natural gas sales.

{SLIDE 31} Now, for a few comments about our credit ratings. We manage our financial position in order to maintain strong credit ratings. This gives us access to the financial resources we need as well as lower interest rates. As you can see, we have some of the best credit ratings in the industry.

{SLIDE 32} In summary, WPS Resources delivers shareholder value through an understandable business plan, which includes:

A solid regulated utility foundation,
A focused energy and energy-related services strategy,
A projected earnings per share annualized growth rate of 8 to 10 percent, and
An outstanding dividend record.

We are confident of our place in the evolving energy industry. You can feel confident that WPS Resources will work hard to continue enhancing shareholder value.