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Earnings Conference Call - July 19, 2001

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

Good afternoon. Welcome to the second quarter earnings conference call for WPS Resources Corporation. I'm Larry Weyers, Chairman, President, and Chief Executive Officer for WPS Resources Corporation. With me today are Ralph Baeten our Senior Vice President - Finance and Treasurer and Diane Ford our Vice President - Controller and Chief Accounting Officer. Also with me today is our new Senior Vice President and Chief Financial Officer, Joe O'Leary. Joe has a wealth of experience in regulated and nonregulated businesses, so I am pleased he has accepted the CFO role at our company.

We are here today to discuss our earnings for the second quarter of 2001 and to take a look at what the future has in store for us.

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 Financial Information, select Financial News, select Earnings, and finally select the release from today, July 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' consolidated net income increased by 300,000 dollars during the second quarter of 2001 when compared with the same period in 2000. This resulted in earnings per share of 41 cents for the quarter compared with 43 cents in 2000. Although the Street's earnings per share consensus was higher than our actual results for the quarter, we believe our second quarter's earnings are consistent with past second quarter trends.

Impacting our earnings this quarter is the issuance of 1.8 million additional shares of common stock in April as the result of Wisconsin Public Service's successful acquisition of Wisconsin Fuel and Light, a regulated gas utility. This dilution resulted in about 4 cents per share difference. Another factor in the lower earnings is the marked-to-market 2.4 million dollar expense, which is 1.4 million dollars after taxes, for the electric energy contract we entered into as a hedge against potential price spikes this summer.

We are pleased with the progress at WPS Energy Services, our energy supply and services company. Revenue increased by more than 183 million dollars. Although gas prices were a big factor in the increased revenue, gas volumes also continued to grow. In addition, we realized an increase in electric revenues of 29 million dollars due to expansion into new markets in Maine and Ohio. Total margins also increased by 4.4 million dollars, delivering increased earnings of 1.3 million dollars.

Although WPS Power Development's net income was small, it was positive for the quarter. Strong production levels at its synthetic fuel facility generated tax credits to more than offset the purchased power, maintenance, and fuel costs incurred while our power plants were being prepared for the summer.

Net income at our utility operations increased by one million dollars. Wisconsin Public Service achieved higher electric and gas margins as a result of a 5.4 percent increase in Wisconsin retail electric rates and a 1.5 percent increase in retail gas rates that were effective on January 1, 2001. Higher sales volumes at our utilities also increased our electric utility margin. At Wisconsin Public Service, sales for resale volumes are up 15 thousand megawatt-hours for the quarter and sales for large commercial and industrial volumes are down 26 thousand megawatt-hours. Our margins on sales for resale are lower than our margins for sales to large commercial and industrial customers.

Operating expenses increased across the board this quarter when compared to 2000. Examples include higher transmission costs resulting from establishment of the American Transmission Company and higher employee benefit costs, especially in health care.

For the six months ended June 30, earnings per share were $1.28 compared with $1.53 in 2000. Net income at WPS Energy Services and WPS Power Development increased by 1.3 million dollars, but our utility operations had a 4.2 million dollar decrease in net income.

WPS Energy Services' revenue for the 6 months of 2001 of 973 million dollars surpassed all of its revenue for last year, which had amounted to 956 million dollars. Energy Services' margins increased for the 6 months of 2001 to 13.5 million dollars compared with 9 million dollars for the first six months of last year.

WPS Power Development's tax credits increased by 4.9 million dollars during the first six months of 2001 over the same period in 2000, offsetting the 4.2 million dollar decrease in margin at Power Development as a result of higher fuel costs as well as higher purchased power costs while its Sunbury plant was down for extended maintenance in preparation for the hot summer months. High market prices also reduced margins on market opportunity purchases as well as when the plant was not generating.

Higher energy conservation, employee benefits, and transmission costs amounted to 17.6 million dollars of increased operating expenses at our utilities.

So, what does our year look like? We believe 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. But, we are facing both opportunities and challenges in achieving the targeted earnings.

We expect the third quarter to be key for our electric segment. The 50-megawatt electric energy contract we purchased to give us price protection during July and August was marked to market at the end of June at an expense of 3.3 million dollars. The expense could be reduced as we sell down our long position.

We are also anticipating that the Michigan Public Service Commission will approve a rate increase for Upper Peninsula Power's customers in the third quarter.

We're expecting WPS Energy Services and WPS Power Development together to contribute more than 15 percent to our earnings in 2001.

WPS Power Development has been delivering an increase in earnings primarily associated with its synthetic fuel facility. But that is not the only vehicle for earnings growth from this subsidiary. Increased maintenance at our generating plants during the past 12 months should result in improved availability and profitability.

Our merger with Wisconsin Fuel and Light Company closed in the second quarter of 2001. Wisconsin Fuel and Light was a gas utility that typically earned about 45 percent of its earnings in the first quarter. Missing that quarter's normal income reduces our annual earnings but still adds to our operating expenses for the rest of the year. This will cause an estimated earnings dilution of about 3 to 5 cents per share this year.

All of our generating units-utility and nonregulated-are available for dispatch this summer. This also appears to be true for other generating units in the areas of the country that we serve. Even though Wisconsin Public Service hit a new peak on July 9, there was sufficient market supply available so that we did not need to run our higher-cost generating units.

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. In fact, Wisconsin has slowed the pace of deregulation as a result of watching the unfortunate situation in California. Governor McCallum has recently published an energy policy for Wisconsin covering the next 15 years. Highlights of the policy include:

We announced an electric generation plan in May that will provide adequate electric generation for our customers through 2007. The plan consists of:

  1. Increasing our ownership of the Kewaunee Nuclear Power Plant from 41 percent to 59 percent later this year. This will give us 90 additional megawatts of base load nuclear electric capacity.
  2. On June 19, we announced an agreement to purchase 150 megawatts of electric capacity from SkyGen Energy's proposed Arpin Energy Center. SkyGen, a subsidiary of Calpine Corporation, expects the pant to begin generating electricity by the summer of 2003.
  3. We are working with SkyGen Energy to convert the De Pere Energy Center to a combined-cycle operation by 2004, which will increase the capacity of that plant by 56 megawatts.
  4. We are currently building a 50-megawatt cogeneration unit in northeastern Wisconsin through our nonregulated subsidiary, WPS Power Development.
  5. We plan to repower our Stoneman Power Plant, located in southeastern Wisconsin, with coal or natural gas. This will increase the plant's capacity from 53 megawatts to perhaps 500 megawatts by 2004.
  6. Finally, we plan to develop up to 500 megawatts of additional coal-fired capacity at the site of one of our existing power plants by 2007.

Our plan includes a mix of fuels and sources for electricity and will ensure a reliable power supply for our customers in the near term. By using a combination of purchased power, expanded ownership in power plants, and increased coal and natural gas fired electricity generation, we are ensuring the continuation of reliable, reasonably priced electric supplies for our customers.

Providing reliable power is extremely important to us because for the sixth consecutive year, we've reached a new peak for summer electricity use. On July 9, the electricity demand on our utility system increased to 2,074 megawatts-exceeding last year's summer peak by 25 megawatts-and doing so without requiring the implementation of our load reduction programs.

As a result of contributing the transmission assets of Wisconsin Public Service and Upper Peninsula Power to American Transmission Company, we are approximately a 15 percent owner in the company. When we complete the construction of the proposed Weston to Arrowhead transmission line, our ownership is expected to increase to about 25 percent.

Our utilities are projecting capital expenditures of nearly 500 million dollars over the next three years. Steam generator replacement at the Kewaunee Nuclear Plant is expected to cost 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 65 million dollars. The equity commitment for construction of the Weston to Arrowhead transmission line will require about 60 million dollars. Software upgrades at our utilities could be as much as 150 million dollars. This demonstrates our desire to make significant investments in the continued growth of our utilities. Recognizing this, we have filed for rate relief for 2002 that amounts to a 16 percent increase in our electric rates and a 5.4 percent increase in our gas rates. In spite of these rate increases, our rates will remain competitive with rates in the upper Midwest.

WPS Power Development will also require capital for expenditures associated with the cogeneration development at Appleton Coated Papers in Wisconsin. Additional acquisition and development projects continue to be evaluated. Sierra Pacific has submitted our proposal for upgrading certain generating units at Tracy to the Nevada Commission.

In regard to our financing plans, Wisconsin Public Service, our utility, will issue 150 million dollars in fading lien bonds in the third quarter and plans to call its 8.8 percent first mortgage bonds on September 1.

In the fourth quarter, we will be issuing between 50 and 100 million dollars of common stock to provide the equity commitment for the capital expenditure projects at all of our subsidiaries.

Now I would like to address the expected operations of our two nonregulated companies.

WPS Energy Services has enjoyed tremendous revenue growth over the last 6 years, and we expect it to continue expanding in the northeastern portion of the United States.

Energy Services is growing its electric sales that have greater margins than gas, so we're expecting to see continually improving margins from Energy Services overall as a result of expanding our sales programs to customers in Maine and Cleveland, Ohio.

WPS Energy Services' participates in the electric markets where our 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.

An example of this is our 3-year contract in northern Maine's electric market to provide the Standard Offer to retail customers. The retail marketing efforts of our office in Maine are generating electric revenues for WPS Energy Services while securing a market for the output of WPS Power Development's generation assets. Energy Services' sales to our customers in Maine now exceed our own generation capacity in that region by a factor of three.

WPS Energy Services also has a 5-year electric contract to serve the municipal aggregation group for the City of Cleveland, Ohio. In February, we began serving the City, in May we picked up the commercial load, and in July we are beginning to pick up the residential load.

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

Our synthetic fuel operation in Kentucky seems to draw extensive questions. The mines in the area have an abundant supply of feed stock, including significant quantities of waste coal. 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 significant 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 looking for a partner. We now have a signed letter of intent, subject to due diligence, the terms of which cannot be disclosed at this time.

We cannot discuss more specific 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 and Westwood in September of 2000. During 2000 and the first few months of this year, we accelerated maintenance at these plants. We believe this will result in greater reliability of the facilities this summer, which is very important in the liquid Pennsylvania, New Jersey, Maryland energy marketplace. Most of the output from these facilities is under off-take contracts for the next two years.

WPS Power Development is an important part of our earnings growth projections. In addition to expecting continuing profitable operations from its existing diversified asset portfolio, we're expecting to make new investments of about 150 to 200 million dollars per year. With a 3 to 4 percent after-tax 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.

The opportunities and challenges I just discussed lead us to believe that we can achieve the $2.55 to $2.65 earnings per share this year and annualized growth of 8 to 10 percent as we have previously suggested.

Thank you for being a part of our second quarter 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 August 2 by dialing 800-239-4561.