Integrys Energy Group

Earnings Conference Call - Second Quarter 2004

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

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

Phillip M. Mikulsky
Senior Vice President - Development

and

Mark A. Radtke
President - WPS Energy Services

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, and Phil Mikulsky, our Senior Vice President - Development. Phil is responsible for our nonregulated subsidiaries and is currently also President of WPS Power Development. Also with us is Mark Radtke who is President of WPS Energy Services.

We are here today to discuss our earnings for the second quarter of 2004 and what you can expect 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 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, July 21.

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 2004 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. Let me begin with a few highlights.

WPS Resources' income available for common shareholders for the second quarter ended June 30, 2004 was 4.6 million dollars compared with 2.7 million dollars for the same period in 2003. This resulted in basic earnings per share of 12 cents compared with 8 cents in the second quarter of 2004. Income from continuing operations was 10.7 million dollars, or 27 cents in basic earnings per share, for the second quarter of 2004 compared with 9.3 million dollars, or 26 cents in basic earnings per share, for the second quarter of 2003.

For the six months ended June 30, 2004, income available for common shareholders was 47.2 million dollars compared with 35.7 million dollars for the same period in 2003. This resulted in basic earnings per share of $1.27 for the first six months of 2004 compared with $1.10 for the same period in 2003. Income from continuing operations was 57.1 million dollars, or $1.49 in basic earnings per share, for the first six months of 2004 compared with 45 million dollars, or $1.34 in basic earnings per share, for the same period in 2003.

We are pleased with our strong consolidated operating results to date. Timely retail electric and natural gas rate relief in 2004 had a favorable impact on Wisconsin Public Service's earnings. Improved utility earnings also resulted from improved economic conditions that generated greater sales volumes to our commercial and industrial customers. However, unfavorable weather to date and high purchased power costs have limited our utility earnings. WPS Energy Services has continued its strong performance, particularly in the retail natural gas business and through portfolio optimization strategies.

Joe O'Leary will now discuss the details.

The Senior Vice President and Chief Financial Officer speaks.

Thanks, Larry.

I'll begin by looking at our performance during the second quarter.

Utility earnings increased by 6 million dollars during the second quarter of 2004 compared with the same period in 2003 due primarily to increased margins. Our utility margins increased by 15.6 million dollars primarily due to Wisconsin Public Service's retail and wholesale rate increases. Our electric utility margin increased by 14.2 million dollars as a result of rate increases and increased sales volumes, which came from growth within our service area and improvement in the economy. Although purchased power costs were 20.6 percent higher on a per-unit basis in the second quarter of 2004 than in the same period in 2003, there was no significant impact on the electric utility margin due to our ability to offset the higher purchased power costs with increased supply from our low-cost generation. Additionally, our weather during the quarter was warmer than the same period in 2003, but considerably cooler than normal, resulting in no significant impact on our electric utility margin. Gas utility margins increased 1.4 million dollars largely due to the retail natural gas rate increase.

WPS Energy Services' earnings decreased 1.2 million dollars for the second quarter of 2004 compared with the same period in 2003 due to increased operating expenses that were partially offset by increased margins. Energy Services' margins increased 2.2 million dollars in the second quarter of 2004 when compared with the same period in 2003. WPS Energy Services' electric margin decreased 1.7 million dollars for the quarter. The margin on wholesale electric operations increased slightly. A 2.2 million dollar decrease in our retail electric margin was primarily due to an increase in transmission costs throughout Michigan that was somewhat offset by better supply management in our Ohio operations. Our nonregulated natural gas margins increased 3.9 million dollars for the quarter. Our retail natural gas margin increased 8.5 million dollars largely due to higher natural gas throughput volumes due to new customers in Ohio, operational improvements, and better supply management for residential and small commercial customers. Our wholesale natural gas margin decreased 4.6 million dollars for the quarter primarily due to reduced opportunities related to less variability in the price of natural gas.

The 4.8 million dollar increased loss at WPS Power Development was primarily due to a decrease in synthetic fuel tax credits recognized during the period, increased operating and maintenance expenses resulting from repairs and maintenance costs associated with plant outages, and a decrease in margins. Excluding discontinued operations, Power Development's margin decreased by 900 thousand dollars for the second quarter of 2004 compared with the same period in 2003. The decrease was attributed to our hydroelectric plants in Maine and Canada and the cost of coal for our Niagara generation facility in New York.

WPS Resources' consolidated operating and maintenance expenses increased by 9.6 million dollars in the second quarter of 2004, primarily due to 4.6 million dollars of increased utility operating and maintenance expenses. Transmission expenses were 3.4 million dollars higher at the utilities due primarily to an increase in transmission rates. Amortization of costs relating to our automated meter reading system and the De Pere Energy Center accounted for 1.6 million dollars. Other increases included 1.3 million in pension and postretirement medical costs, and payroll expenses that were partially offset by decreases associated with lower operating and maintenance costs related to less extensive plant outages in 2004. Additionally, operating expenses increased by 3.6 million dollars at WPS Energy Services due to higher payroll, related benefits, and other costs associated with business expansion. WPS Power Development's operating and maintenance expenses increased 1.6 million dollars due to repair and maintenance expenses associated with planned outages at our Westwood, Syracuse, and Niagara generating facilities.

WPS Resources' consolidated miscellaneous income decreased by 1.4 million dollars in the second quarter of 2004. An increase in equity earnings from our investments in American Transmission Company and Guardian Pipeline was more than offset by a decrease in other income at WPS Energy Services related to foreign currency transactions which were recognized in 2003, a decrease in realized gains on decommissioning trust assets, and a decrease in equity earnings from Wisconsin River Power Company.

Our partial ownership of a synthetic fuel facility resulted in recognition of 1.8 million dollars of Section 29 federal tax credits, which reduced federal income tax expense in the second quarter of 2004, compared with 4.7 million dollars of these federal tax credits in the same period in 2003.

The change in basic earnings per share was impacted by an increase of approximately 4.9 million shares in the weighted average number of outstanding shares of WPS Resources' common stock for the quarter ended June 30, 2004 compared with the same period in 2003. The increase was due to issuing 4,025,000 additional shares of common stock through a public offering in November 2003 and additional shares issued under the Stock Investment Plan and certain stock-based employee benefit plans.

Now let's take a look at how we performed for the first six months of 2004.

Utility earnings increased by 12.8 million dollars due primarily to the increased margins. Our utility margins increased 36.3 million dollars largely due to Wisconsin Public Service's retail and wholesale rate increases. Our electric utility margin increased 32.3 million dollars due to the rate increases and an increase in sales volumes. Sales volumes for our large commercial and industrial customers increased 3.6 percent, reflecting growth within our service area and improvement in the economy that offset the impact of unfavorable weather conditions in the first quarter of 2004. The higher margins attributed to the authorized rate increases and increased sales volumes were partially offset by purchased power costs that were 20.6 percent higher on a per unit basis for the first six months of 2004. Wisconsin Public Service purchased additional power due to the unscheduled outage at the Kewaunee Nuclear Plant during January. We anticipate recovering a significant portion of these costs over the remainder of the year as a result of the interim fuel rate order allowed by the Public Service Commission of Wisconsin effective April 2, 2004, and an anticipated final rate order. Gas utility margins increased 4.0 million dollars during the first six months of this year compared with the same period in 2003 largely due to the retail natural gas rate increase.

Earnings at WPS Energy Services decreased 1.2 million dollars in the first six months of 2004 compared with last year. Higher margins were more than offset by increased operating expenses related to business expansion and the decrease attributed to a 3.3 million dollar after-tax cumulative effect of change in accounting principles that was recorded at WPS Energy Services in 2003. Energy Services' electric margins increased by 6.2 million dollars in the first six months of 2004 compared with the same period in 2003. The margin on wholesale electric operations increased 5.3 million dollars as a result of extracting additional value from WPS Power Development's merchant generation fleet, while reducing the fleet's exposure to market price risk through the use of combinations of forward contracts and financial options. Increased customer load in Michigan and Ohio, improved management of our retail electric operations, and improved supply procurement resulted in an additional 900 thousand dollars of the increased retail electric margin. Energy Services' gas margin increased 4.2 million dollars with the margin related to retail natural gas operations increasing by 17.5 million dollars largely due to higher throughput volumes in Ohio, operational improvements, and better management of supply for residential and small commercial customers. Meanwhile, the wholesale natural gas margin decreased by 13.3 million dollars due to favorable settlements with counterparties of 8.4 million dollars in the first six months of 2003 and reduced opportunities in 2004 resulting from less variability in the price of natural gas in 2004.

The 3.2 million dollar increased loss at WPS Power Development was mainly due to a decrease in margins, increased operating expenses relating to repairs and maintenance associated with plant outages, and a decrease in the amount of Section 29 tax credits recognized, partially offset by a decreased loss from discontinued operations. Excluding discontinued operations, Power Development's margin decreased by 2 million dollars for the first six months of 2004 compared with the same period in 2003. An increase in the cost of coal used at our Niagara generation facility in New York and the plant outage at our Beaver Falls generation facility caused the decrease in margin.

The after-tax loss from discontinued operations related to the Sunbury plant decreased to 8.3 million dollars in the first six months of 2004 compared with 10.9 million dollars in the same period in 2003. The lower loss is largely due to decreased depreciation expense and decreased repairs and maintenance costs. This was partially offset by lower margins. The lower margins from discontinued operations resulted from the higher cost of coal used to service a fixed price out-take contract and a decrease in the market price of power for the first six months of 2004 compared with the same period in 2003. Depreciation expense decreased because we discontinued depreciation on those assets when they were classified as held for sale in the fourth quarter of 2003, as required by current accounting standards. Repairs and maintenance expense decreased because of higher costs in 2003 relating to fuel delivery systems.

WPS Resources' consolidated operating and maintenance expenses increased by 21.2 million dollars in the first six months of 2004. Utility operating and maintenance expenses increased by 12 million dollars. Transmission costs were up 5.7 million dollars at the utilities primarily due to an increase in rates. Pension and medical costs incurred at the utilities accounted for approximately 5.3 million dollars of the increase. An additional 3.4 million dollars of the increase was largely caused by amortization of costs relating to the automated meter reading system and the De Pere Energy Center, and increased payroll costs. The impact of these increases was partially offset by lower operating and maintenance costs related to less extensive plant outages. Additionally, operating expenses increased by 6 million dollars at WPS Energy Services due to higher payroll, related benefits, and other costs associated with business expansion. WPS Power Development's operating and maintenance expenses increased by 2.8 million dollars due to repair and maintenance expenses associated with the unplanned outages at Beaver Falls and the Combined Locks Energy Center and the planned outage at Westwood.

WPS Resources' consolidated miscellaneous income increased by 2 million dollars during 2004, largely due to a 3.5 million dollar increase in equity earnings from our investments in American Transmission Company and Guardian Pipeline. The increase was partially offset by a loss resulting from the write-off of 1.5 million dollars of previously deferred financing costs associated with the redemption of WPS Resources' trust preferred securities in the first quarter of 2004.

Our partial ownership of a synthetic fuel facility resulted in recognition of 8.6 million dollars of Section 29 federal tax credits, which reduced federal income tax expense in the first six months of 2004, compared with 10.6 million dollars of these federal tax credits in the same period in 2003.

We have received numerous requests for information relating to the timing of certain capital expenditures of our subsidiary, Wisconsin Public Service Corporation, related to our plans to build a 500-megawatt coal-fired electric generating facility at our existing Weston Power Plant site near Wausau, Wisconsin, which will be known as Weston 4. Assuming we receive the required regulatory approvals, we anticipate spending the following amounts, by year. The amounts I provide are in millions of dollars.

2004	2005	2006	2007	2008	Total
$78	$259	$272	$122	$39	$770

If Dairyland Power Cooperative purchases an interest in this plant as announced last February, then the expenditures made by Wisconsin Public Service would be reduced by 30 percent.

In addition, we expect Wisconsin Public Service to spend between 150 and 170 million dollars annually on other projects that should affect future earnings. This excludes any expenditures relating to our Kewaunee plant.

Currently, we are allowed a 12 percent return on equity and 56 percent equity in our capital structure by the Public Service Commission of Wisconsin.

We have also received requests for the timing of additional equity investments anticipated to be made in American Transmission Company. Our anticipated annual incremental change in our equity investment is as follows, by year. The amounts I provide will again be in millions of dollars.

2004	2005	2006	2007	2008	Total
$53	$67	$68	$63	$58	$309

The Federal Energy Regulatory Commission currently allows American Transmission Company to earn a 12.2 percent return on equity. The annual incremental changes in our equity investment are driven primarily by investment in the new transmission line to be built between Wausau, Wisconsin, and Duluth, Minnesota, as well as other planned transmission projects.

We believe the combined investments in the projects and American Transmission Company will provide our shareholders with terrific future earnings opportunities.

Please refer to our press release issued this morning for further information relating to our financial results.

Our financial strength and quality credit ratings continue to be among the best in the industry.

Looking forward, assuming we complete the sale of the Sunbury and Kewaunee plants, and obtain requested regulatory actions in 2004, our issuance of equity will likely be at the typical historical levels experienced by our Stock Investment Plan and Dividend Reinvestment Plan during this year.

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

The Chairman, President, and Chief Executive Officer speaks.

Thanks, Joe. Now we will discuss how our operating segments fared and what you can expect in the future. I'll begin with our regulated utilities.

In the regulatory environment, Wisconsin Public Service reached a tentative settlement with interveners on March 4, 2004 in its 4.1 million dollar interim wholesale electric rate request before the Federal Energy Regulatory Commission. Key factors in the settlement include formula-based rates going forward, a return on equity of 11 percent, the ability to utilize the capital structure allowed by the Public Service Commission of Wisconsin, and a current return on construction work in progress. The settlement, which is consistent with our initial request, was filed with FERC on July 9, 2004. We expect FERC to approve the settlement before year-end and don't expect it to result in a refund.

On March 31, 2004, Upper Peninsula Power Company submitted an application to the Michigan Public Service Commission to collect 5.2 million dollars for increased power supply costs relating to 2003. We are requesting recovery of these costs in 2004 and 2005. We hope to reach a settlement as to collection and recovery before year-end. In addition, we are requesting to defer the decision regarding recovery of 1.8 million dollars of deferred power supply costs related to the Dead River flooding.

On April 1, 2004, Wisconsin Public Service filed a 2005 rate request that consists of increased retail electric rates amounting to 69.4 million dollars, or 9.8 percent, and increased retail natural gas rates amounting to 18.2 million dollars, or 4.5 percent. Key drivers in the rate request are the need to maintain reliability and build the infrastructure, like the new Weston 4 plant, necessary to meet our increased load, which has been growing at about 2 to 3 percent per year. Hearings on this rate case will be held on September 29 and 30. We expect a final order before year-end. This would allow the new rates to be effective January 1, 2005. Even with the higher rates, we expect our electric and natural gas rates to remain among the lowest in Wisconsin and the nation.

We are continuing to work on our plans to build Weston 4. In October 2003, the Public Service Commission of Wisconsin approved our request for a declaratory ruling for Weston 4. The ruling stated that it is prudent for Wisconsin Public Service to commit up to 71.2 million dollars to the construction of Weston 4 prior to obtaining final approval of the project in 2004. We submitted our application for a Certificate of Public Convenience and Necessity, or CPCN, to the Public Service Commission in September 2003 seeking project approval, and the application was deemed complete in early February. The Commission was granted a one-time extension beyond the allowed 180 days to rule on the CPCN. Technical hearings on the CPCN request will be held on August 3rd through 5th, with public hearings on August 10th, and a final order expected in early October. Assuming the project is approved under this schedule, we expect the plant to be operational in June 2008.

In February 2004, we announced a Letter of Intent with Dairyland Power Cooperative that includes electric supply alternatives for 30 percent of the energy and capacity from Weston 4. Under the agreement, Dairyland has elected to purchase an interest in the plant, subject to a number of conditions including successfully developing a joint plant ownership and operating agreement, Dairyland obtaining financing approval from Rural Utility Services, and Dairyland securing firm transmission service from the Midwest Independent System Operator on terms and conditions Dairyland deems acceptable. There are increased costs and risks associated with building and operating a large power plant as a sole owner. In providing Dairyland with electric supply alternatives, we can reduce some of those risks. The agreement is part of our continuing plan to provide least-cost, reliable energy for the increasing electric demand of our customers.

We currently own about 20 percent of American Transmission Company, which is, among other things, pursuing a new 220-mile transmission line that will run from Wausau, Wisconsin, to Duluth, Minnesota. The Public Service Commission of Wisconsin reapproved construction of the line at an expected cost of about 420 million dollars. On the Minnesota portion of the line, 35 of 101 concrete foundations are in the ground and complete. Additional construction on the Minnesota portion will pick up again in August. On the Wisconsin portion of the line, easements acquisitions have been obtained for 32 miles of the line. Construction on the Wisconsin portion of the line is expected to begin in January 2005. Current court challenges to the Public Service Commission of Wisconsin's re-approval of the project are not expected to delay construction. American Transmission Company anticipates completing construction of the line in 2008. We anticipate funding approximately 50 percent of total costs incurred, up to 198 million dollars, and receiving additional equity in American Transmission Company. The completion of this project will help to improve reliability for our customers, further diversify our sources of energy in Wisconsin, and enhance earnings for our shareholders.

In November 2003, we signed a definitive agreement to sell the Kewaunee Nuclear Power Plant to Dominion Energy for approximately 220 million dollars. Wisconsin Public Service owns 59 percent of the plant and an unaffiliated company owns 41 percent. At closing, we expect to receive approximately 130 million in cash and retain ownership of trust assets contained in one of two decommissioning funds we have established to cover the eventual decommissioning of the plant. The agreement calls for Dominion to assume responsibility for the eventual decommissioning. Cash proceeds from the sale are expected to slightly exceed our carrying value on the assets being sold. We expect that the retained decommissioning fund, as well as most of the gain from the plant sale, will be available for allocation to Wisconsin Public Service's customers in future rate proceedings. We don't expect a material net income impact at the time of the sale. The transaction is subject to approvals by various regulatory agencies, including the Public Service Commission of Wisconsin and the Nuclear Regulatory Commission. We have already received favorable approvals from the Federal Trade Commission, the Iowa Utilities Board, the Minnesota Public Utilities Commission, the Illinois Commerce Commission, and certain approvals from the Federal Energy Regulatory Commission. In addition, we have received a favorable private letter ruling from the Internal Revenue Service on transferring the decommissioning trust to Dominion. The Nuclear Regulatory Commission approved the transfer of the operating license to Dominion Kewaunee in June 2004. Approval from Michigan is expected in August. The Wisconsin regulatory proceeding is the most critical part of the process. Hearings have been completed and the briefing process is underway. Due to competing Commission priorities such as the approval of Weston 4, Wisconsin Commission approval is not expected until fall. At this time, we have n ot identified any regulatory issues that would preclude closing on the transaction in 2004.

At the closing of the sale, Wisconsin Public Service will enter into a power purchase agreement with Dominion Energy to buy energy and capacity generated at Kewaunee, equivalent to the amounts and at about the same cost that would have occurred if current ownership had continued. The power purchase agreement, which also requires regulatory approval, will extend through 2013 when the plant's current operating license will expire. The parties have also entered into an exclusivity agreement whereby Dominion agrees to only negotiate with Wisconsin Public Service and our current non-affiliated joint plant owner on power purchase agreements for the period after 2013 in the event Dominion obtains life extension for Kewaunee. This exclusivity period runs from the date of closing of the sale until December 21, 2011, which is two years prior to the end of the current operating license.

In May 2004, we announced that we were planning to build a 500-megawatt base load electric plant with Alliant Energy Corporation. Our planning process will include feasibility and siting studies that will determine the fuel type, technology, size, location, and operator. Based on current energy requirement studies completed by both companies, significant increases in energy demand will require that the new plant be operational as early as 2010. The addition of this joint plant to our fleet will allow us to ensure reliability for our customers, manage financial risk, and provide earnings opportunities for our shareholders.

You may also have seen that one of our Wisconsin Commissioners is resigning from the Commission on July 23. Ave Bie was appointed to the Commission by Governor Thompson in 1998 and served as its chairman for four years. Governor Doyle is expected to appoint a new Commissioner in the near term. Although the appointment will require Senate confirmation, the Commissioner will act and serve in the role upon appointment. The Governor has always supported the need to build generation and transmission infrastructure in the state, so we anticipate the new appointment to reflect that support.

Now, let's take a closer look at WPS Power Development's operations. Here to tell us about this is Phil Mikulsky, President of WPS Power Development.

The President of WPS Power Development speaks.

Thanks, Larry.

Operations were as expected during the second quarter. We performed planned maintenance outages on our fleet of plants during the quarter to enhance availability during the summer months.

Our Westwood plant in Pennsylvania was down for a major turbine overhaul that was extended by two weeks to do additional repair work. Unit performance has improved since the outage, both in efficient operations and availability of the plant.

The performance of our Niagara Falls facility has improved since its three-week outage that was used to prepare it for the summer months. On July 6, 2004, we were granted regulatory approval to burn up to 30 percent tire-derived fuel and have done so since that date without problems. This should enable us to attain lower over-all fuel costs.

Our Beaver Falls generating plant had been down since October 2003 to perform repairs on the combustion turbine generator and was returned to service on April 13. The plant has performed well since that time.

Our Syracuse generating plant was down for five weeks during the quarter to perform upgrades to the combustion turbine generator.

As a result of our planned maintenance schedule during the second quarter, our New York and Pennsylvania facilities are expected to have good availability and operational runs for the summer without any unit output restrictions.

Our Combined Locks facility located in Wisconsin was down for 11 weeks for repairs to the combustion turbine blade path and for unit overhaul. The facility was returned to service on May 27 and has operated satisfactorily since then with the same expectation for the rest of the summer.

On May 1, 2004, we signed a new contract for energy and capacity sales from our Stoneman generating facility located in Cassville, Wisconsin. Since entering the contract, we sold 4,300megawatt-hours and have not experienced any operational problems. We expect the unit to perform as well throughout the summer.

Our facilities in Arkansas and Oregon are operating satisfactorily and producing the revenue we expected for the year to date, which took into consideration our planned outage for our Oregon facility for maintenance.

The overall availability of our hydro units in Maine and Canada has been very good, although we did experience less water flow in the second quarter than normal, which reduced our energy production. The second quarter lower energy production was offset by the higher production for the first quarter, so year-to-date energy production from our nonregulated hydro facilities is on track.

In October 2003, we announced a definitive agreement to sell Sunbury to Duquesne Power, a subsidiary of Duquesne Light Holdings, for 120 million dollars. Substantial progress has been made on this transaction since the pending sale was announced. Late last year, Duquesne Power and Duquesne Light Holdings filed for various regulatory approvals required to close the deal. The Federal Energy Regulatory Commission has already approved the exempt wholesale generator status for Duquesne Power. The other required FERC approvals are expected in the near future. Duquesne Light filed for approval of its Provider of Last Resort plan (POLR) from the Pennsylvania Public Utilities Commission in December 2003. Approval of Duquesne's POLR plan is a condition for this sale. Hearings were held in the first part of April, and a final decision from the Pennsylvania Public Utilities Commission is expected in August. We have not identified any issues that we believe would preclude closing this transaction. We are working closely with Duquesne to ensure a smooth transition once all the required approvals are received. We believe this transaction is a "win-win" for WPS Resources and for Duquesne. We expect to close on the transaction later this summer—shortly after all required approvals are received.

The sale of Sunbury fits well into our balanced portfolio and asset management strategies. Included in the strategy is the desire to reduce risk associated with uncontracted merchant exposure.

WPS Power Development is focused on efficient operation and optimization of their assets. Given current market conditions, we don't expect to see significant growth in the form of acquired generation assets, but we are continuing to look for growth opportunities for our nonregulated companies that will enhance shareholder value.

Now, let's take a closer look at WPS Energy Services' operations. Here to tell us about this is Mark Radtke, President of WPS Energy Services.

The President of WPS Energy Services speaks.

Thanks, Phil.

I'll begin with some background information on our operations.

In northern Maine, we serve customer commitments totaling about 137 megawatts, which includes 97 megawatts of standard offer service and 40 megawatts of customer requirements under direct contracts with individual customers. Depending on river flows, we supply about 15 to 20 percent of this load with power generated by WPS Power Development's hydro facilities and the balance from unaffiliated generators in the region that we have under contract. As a standard offer service provider for customers receiving distribution service from Maine Public Service, our current contract runs through December 2006. In addition, we have full requirements contracts with three municipalities in northern Maine through 2007 or 2008. Our contracts directly with individual customers generally extend through 2005. The margins we have experienced in northern Maine are on target with our expectations for the quarter. In southern Maine, we do not serve a standard offer load, but we are a competitive electric provider contracting directly with customers. We serve between 90 and 95 megawatts of customer requirements in southern Maine. Contract lengths vary, with most contracts ending in 2005 but some not expiring until 2007. Capacity and energy are purchased from various credit worthy counterparties in the NEPOOL market. We are pleased with our volume and margin growth in southern Maine and continue to be enthusiastic about our prospects in that market.

WPS Energy Services ended its participation in the New Jersey Basic Generation Service or BGS program on May 31, 2004. We were not awarded any load in the 2004 auction as we exited the auction before completion. We place significant importance on having the discipline needed to exit auctions such as this when the risk and reward are deemed unacceptable. We expect to replace this income by continuing to build our wholesale electric business through originated structured transactions, proactive management of WPS Power Development's electric generation assets, and expansion of our retail electric business into new regions.

In Michigan, we continue to find opportunities to grow our electric and gas business. On the regulatory and legislative front, there is increased pressure to improve the financial situation of the regulated utilities. One of the utilities in Michigan has received an interim rate order that significantly reduces the savings competitive suppliers can offer customers compared to the regulated bundled product. On July 1, 2004, Senate bills were introduced in Michigan to amend the law enacted in June 2000, which initially established a competitive supply alternative for customers in the state's electricity market. The proposed legislation prescribes a number of changes that would deal a serious blow to retail competition in the state of Michigan. We are participating in both lobbying efforts and the regulatory process in these areas to advocate for our customers' interests. Our Michigan business represents about a third of our electric sales. If the interim order and the proposed legislation are not altered, it could diminish the benefits of competitive supply for Michigan business customers. The impact on WPS Energy Services could range from maintaining our Michigan business with little or no growth, to an inability to re-contract any business, leading to an exit of Michigan's electric market and redirecting our resources to more vibrant markets. It is not unreasonable to expect changes that will have some level of negative impact on WPS Energy Services, but it is difficult to imagine a scenario in which Michigan customers will lose all of the benefits of competition that they've enjoyed over the last few years. In fact, customers and marketers have banded together in coalitions, such as the Customer Choice Coalition, to fight what has been introduced in the Michigan state legislature. The Customer Choice Coalition has drawn broad-based support from business for their efforts.

We have long been active in the Ohio competitive energy market and continue to build on our modest market share in the state. Our residential natural gas and electric business has continued to expand, which has increased our retail margins significantly over 2003. Additionally, we are participating in a regulatory process to define the retail electric competitive landscape beyond the current market development period, which ends in December 2005.

Our Canadian retail natural gas business continues to grow in both volume and margin. Overall, our Canadian business continues to perform better than expected. Our sales volumes have increased nearly 50 percent compared with last year. Even though we no longer serve a few large customers that were a part of the original contracts we purchased, we have been able to add new customers with comparable margins. Canada has proven to be a viable market for us. We continue to have opportunities to grow our retail natural gas business in our existing markets of Ontario and Quebec, and we are looking into other Canadian regions to expand retail natural gas sales.

On July 1, 2004, we closed on our acquisition of Advantage Energy, a New York based energy-marketing company. The earnings impact is expected to be slightly accretive in 2004 and 2005 because of the earn-out based purchase structure over the first three years. We believe this is an effective method of entering the New York retail electric market and capturing the synergies with our existing facilities and wholesale market expertise. In fact, we are finding the New York state market to be a vibrant market where utilities are clearly focused on being excellent distribution companies and are not an impediment to competitive energy suppliers providing service to customers.

We do expect to see more margin pressure in the future. Competitive pressure is increasing in virtually all market areas in both natural gas and electricity. Some companies that were financially weakened have improved their balance sheets and stepped up their level of activity. We continue to evolve our product offerings, focusing on niche markets, to include higher value and, thus, higher margin products and offset some of the margin erosion through enhanced business operation and efficiency improvements.

Our volume growth is sustainable, although it will vary with acquisition activity. While we have exhibited significant sales growth in the past, we continue to have a relatively small market share in the markets in which we operate, and there continues to be many markets in our targeted area in which we do not yet have a presence. This provides us ample opportunity for continued growth of our business.

The focus changes we've made at WPS Power Development and WPS Energy Services are working well. We have entered into rolling three-year tolling agreements with WPS Power Development for their uncontracted merchant generation. As such, WPS Energy Services is able to concentrate on managing the risk that both companies have in the market, while WPS Power Development concentrates on operational excellence. Through this new arrangement, WPS Power Development enjoys the benefits of a more stable cash flow and the ability to focus on efficiently producing megawatts of energy and available capacity. WPS Energy Services in turn enjoys having a larger, more diverse portfolio to manage. Managing WPS Energy Services' retail business creates a natural short position, while managing WPS Power Development's generation creates a natural long position in the market. Our portfolio optimization and risk management activity enhances the value of our portfolio while reducing the overall risk for WPS Resources.

Now, I'll turn the call back to Larry to discuss WPS Resources, the holding company.

The Chairman, President, and Chief Executive Officer speaks.

Thanks, Mark.

Our asset management strategy calls for the continuing disposition and acquisition of assets in a manner that enhances our earnings capability. The acquisition portion of the strategy calls for the acquisition of assets that compliment our existing assets and strategy such as Advantage Energy and Guardian Pipeline. Another portion of our asset management strategy calls for the disposition of assets, including plants and entire business units, which are no longer required for operations. Excess land, buildings, and other related assets are a part of this strategy.

In February 2004, the Wisconsin DNR exercised its option to purchase an additional 179 acres of land near the Peshtigo River for 5 million dollars. This sale is part of a multi-phase agreement reached in 2001. Under terms of that agreement, the Wisconsin DNR bought more than 5,000 acres of land for 13.5 million dollars in 2001. In December 2003, we completed the sale of an additional 542 acres of land near the Peshtigo River to the Wisconsin DNR for 6.5 million dollars. The sale of the 179 acres will occur after the sale of 279 acres of development lands at an auction on October 5, 2004. Following the close of the third and final phase of the Wisconsin DNR agreement later in 2004, Wisconsin Public Service will donate an additional 5,176 acres to the state. At that point, the Wisconsin DNR will have acquired nearly 12,000 acres for 25 million dollars.

Going forward, we are expecting an average annualized impact of 15 to 25 cents per share through 2007 from sales of land and related assets as part of our asset management strategy.

Wisconsin Public Service filed a shelf registration with the Securities and Exchange Commission in May 2004 for 350 million dollars, which will allow us to issue debt based on business needs.

We recently announced a dividend increase on our common stock. We are proud to say that this is the 46th consecutive year we have increased our quarterly dividend. The 55 1/2 cent dividend is payable on September 20 to shareholders of record on August 31. We have paid quarterly dividends for 64 consecutive years.

In 2004, we are continuing to seek a balanced portfolio of utility and nonregulated growth but we are placing more emphasis on regulated growth. Our asset management strategy will also continue to increase shareholder return from certain asset transactions. 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, combined with our dividend, will provide very good returns to our shareholders. Our target for 2004 earnings per share is between $3.00 and $3.10, with expectations that we will be at the high end of this range. Earnings per share from on-going operations are anticipated to be between $3.46 and $3.54. This includes a gain from the 2002 sale of a portion of our synthetic fuel operation of about 4.6 million dollars after taxes. Losses per share from discontinued operations are expected to be between 44 cents and 46 cents per share. Achieving our targeted range for 2004 earnings per share is dependent upon, among other things, normal weather, the availability of our generating units, completion of our planned land sales, and completion of the sale of both the Sunbury and Kewaunee plants.

WPS Resources' conservative nature has served it well through the years. Our core competencies are in energy and energy related businesses. We intend to stay in those businesses within the United States and Canada. We have developed a business plan that capitalizes on our knowledge of the energy industry. Our utility base is solid and our nonregulated energy businesses are focused. We've rewarded our shareholders with increased dividends for 46 consecutive years. We effectively mitigate and minimize risk in the operation of our business. We strive 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 to our investors for many years to come!

Now, Joe, Phil, Mark, and I would like to answer your questions about our financial picture and plans for the future.

Thank you for being a part of our second quarter earnings conference call. A replay of this conference call will be available through August 4 by dialing toll free 888-562-0529.

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.