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Earnings Conference Call - Third Quarter 2005

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

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

and

Mark A. Radtke
President - WPS Energy Services and WPS Power Development

Good afternoon. Welcome to the quarterly earnings conference call for WPS Resources Corporation. I'm Larry Weyers, Chairman, President, and Chief Executive Officer of WPS Resources Corporation. With me today is Joe O'Leary, our Senior Vice President and Chief Financial Officer; Phil Mikulsky, our Executive Vice President - Development; and Mark Radtke, who is President of our nonregulated subsidiaries, WPS Energy Services and WPS Power Development.

We are here today to discuss our earnings for the third quarter of 2005 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 Web site. Once you are at the site, select Investor Information, select Financial News, select Earnings, and finally select the release from today, November 3, 2005.

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 projected results for 2005 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's begin with a few highlights.

Now Joe O'Leary will discuss some details relating to our financial results. Joe

The Senior Vice President and Chief Financial Officer speaks.

Thanks, Larry.

I'll begin by comparing our results for the third quarter of 2005 with the results for the third quarter of 2004.

WPS Resources' income available for common shareholders was 48.2 million dollars for the third quarter of 2005, compared with 34.8 million dollars for the third quarter of 2004.

Our electric utility margin decreased by 15.7 million dollars, or 9.6 percent. This decrease can be attributed to a 16.6 million dollar decrease in Wisconsin Public Service's electric margin, which was expected because we are now purchasing power from the Kewaunee plant, which we sold in July 2005. This change had the effect of reducing margin by 21 million dollars. Partially offsetting this was an increase in margin of about 5 million dollars, which was driven by increased sales volumes and a rate increase approved by the Public Service Commission of Wisconsin effective January 1, 2005.

Our natural gas utility margin increased 2.4 million dollars, or 14.3 percent. The higher natural gas utility margin was largely due to an annualized rate increase of 5.6 million dollars that was effective on January 1, 2005.

WPS Energy Services' natural gas margin increased 22.1 million dollars. The retail natural gas margin increased 12.1 million dollars, largely due to improved management of supply for Ohio customers. The wholesale natural gas margin increased 10 million dollars, primarily driven by the natural gas storage cycle. The natural gas storage cycle had a 10.4 million dollar favorable quarter-over-quarter impact on WPS Energy Services' natural gas margin.

The electric margin at WPS Energy Services decreased 6.9 million dollars, or 37.7 percent. The wholesale electric margin decreased 6.7 million dollars, driven mostly by a decrease in the margin contributed by portfolio optimization strategies. The retail electric margin decreased by 200 thousand dollars, primarily due to a 4.4 million dollar decrease in margin from retail electric operations in Michigan, which was substantially offset by a 3.4 million dollar increase in margin from operations in Maine and Ohio.

WPS Power Development's margin increased 19.6 million dollars, or 163.3 percent. Mark-to-market and realized gains on derivative instruments used to protect the value of a portion of WPS Power Development's Section 29 federal tax credits drove 10.9 million dollars of the margin increase. Sunbury's margin improved 8.7 million dollars, primarily due to improved opportunities to sell power into the market as a result of the expiration of a fixed price outtake contract on December 31, 2004, and higher energy prices. The favorable energy prices made it economical for Sunbury to operate all available solid fuel units during the third quarter of 2005.

WPS Resources' consolidated operating and maintenance expenses did not change significantly. Wisconsin Public Service's operating and maintenance expenses decreased 6.7 million dollars, driven by a 10 million dollar decrease in operating and maintenance expenses related to the Kewaunee nuclear plant, which was sold in July 2005.

Operating expenses at WPS Energy Services increased 5.7 million dollars, primarily due to higher payroll, benefits, and other costs related to business expansion. WPS Power Development's operating and maintenance expenses increased 2.8 million dollars, primarily related to costs incurred to repair damaged compressor blades at the Syracuse generation facility in New York.

WPS Resources' consolidated miscellaneous income decreased by 300 thousand dollars. The decrease was driven by a 1.4 million dollar increase in the loss recognized by WPS Power Development from its investment in a synthetic fuel producing facility and a decrease in realized gains on the nonqualified nuclear decommissioning trust assets due to liquidation of the trust assets in the second quarter of 2005 in anticipation of the Kewaunee sale. This was partially offset by a 2.6 million dollar increase in equity earnings from our investment in American Transmission Company.

That concludes my comparison of the results for the third quarter of 2005 with the results for the third quarter of 2004.

WPS Resources' income available for common stock shareholders was 138 million dollars for the first nine months of 2005, compared with 82 million dollars for the same period in 2004. This resulted in basic earnings per share of $3.63 for the first nine months of 2005, compared with $2.20 for the same period in 2004.

Please refer to our Form 10-Q filed today for a detailed discussion of our performance during the first nine months of 2005 as compared to the same period in 2004.

Now I would like to discuss a few other financial topics.

Natural gas prices are an issue that seem to be on everyone's mind right now. Natural gas prices have risen dramatically in the past few months due to Hurricanes Katrina and Rita. On April 1, 2005, Wisconsin Public Service submitted an application to the Public Service Commission of Wisconsin requesting an 11.4 percent increase in retail electric rates and a 2.09 percent increase in retail natural gas rates for 2006. However, on October 6 of this year, we asked for an additional 5.7 percent increase in electric rates because of significantly higher-than-expected fuel costs for natural gas-fired electric generators. We expect that the Commission will reflect this adjustment in rates in the final approved rate order, which we anticipate to be effective on January 1, 2006.

In April 2005, the PSCW served notice to Wisconsin Public Service that due to lower than expected fuel costs, the revenue of Wisconsin Public Service would be subject to refund under the fuel window rules. Since that time, as you know, fuel costs have increased. This increase has eliminated any potential refund. In fact, the increased natural gas costs have resulted in higher than expected fuel costs.

Relative to Wisconsin utility investment plans, Wisconsin Public Service expects to average about 145 million dollars per year of normal, customary capital expenditures between 2005 and 2007. Wisconsin Public Service's expected depreciation during this time frame is expected to range from about 95 million dollars to 115 million dollars per year and averages about 105 million dollars per year. In addition, capital expenditures for Weston 4, the 500-megawatt electric generation facility, currently under construction, are projected to total about 545 million dollars by 2008, including anticipated expenditures of 19 million dollars for unit trains, assuming Dairyland Power Cooperative closes on its purchase late this year. Under this assumption, the remaining Weston 4 expenditure pattern is:

The Public Service Commission of Wisconsin currently allows us to earn a return on construction work-in-progress for the Weston 4 plant and other projects. Other potential capital expenditures during this time frame include pollution control expenditures at existing generators.

WPS Resources expects capital calls from the American Transmission Company relating primarily to transmission line projects to total about 311 million dollars for the 2005 through 2009 time frame with about 176 million dollars relating to the Wausau, Wisconsin, to Duluth, Minnesota, transmission line assuming Allete does not exercise its option to fund a portion of the line. Allete has indicated they intend to fund 60 million dollars pursuant to this option by the end of 2006. This would reduce our total capital calls from about 311 million dollars to about 228 million dollars and the Wausau to Duluth portion from about 176 million dollars to about 116 million dollars.

WPS Resources' purchase of Aquila's natural gas distribution operations in Michigan and Minnesota was announced on September 21 of this year. We will pay a total cash consideration of approximately 558 million dollars, subject to post-closing adjustments including working capital. The acquisitions are expected to close in the first half of 2006, subject to regulatory approvals. At their currently allowed return levels, these properties would provide about 20 million dollars of net income at the operating company level, 43 million dollars of earnings before interest and taxes, and 63 million dollars of earnings before interest, taxes, and depreciation on an annualized basis. This excludes expected one-time costs of about 13 million dollars, which will be charged to expense between now and when these operations have been fully integrated into the company. Of this, we expect to incur between 2 and 3 million dollars in 2005, with the remainder in 2006.

Including the acquired Aquila assets, WPS Resources will serve roughly 666 thousand natural gas customers through its regulated utilities with annual natural gas throughput of 189 billion cubic feet. Our electric utilities already serve more than 473 thousand electric customers.

On September 22, just after the Aquila acquisitions were announced, Standard & Poor's placed WPS Resources and Wisconsin Public Service on credit watch with negative implications and Moody's changed its outlook for the WPS Resources and Wisconsin Public Service rating to negative from stable. Both agencies cited uncertainty surrounding the pending acquisitions and the potential that the acquisitions will result in increased leverage. Both agencies also cited the potential that the acquisitions could strengthen the company's business profile. We anticipate that we will be able to finance the acquisitions in a manner that should not impact our credit ratings.

Even though the sale of the Kewaunee nuclear power plant in July brings cash to the company that will be invested in projects like our Weston 4 plant, WPS Resources still expects to issue equity in the range of 100 million dollars to 130 million dollars before the end of this year. This assumes Dairyland Power Cooperative acquires a 30 percent undivided interest in Weston 4 by the end of this year by paying Wisconsin Public Service 30 percent of Weston 4's costs incurred to date in accordance with an agreement both companies entered into in 2004. The purchase of the 30 percent interest will provide our company with about 110 million dollars in 2005.

In addition, WPS Resources plans to issue equity and debt to fund the recently announced proposed acquisitions from Aquila over the next 12 months. The timing of these offerings is not yet certain.

Now I'll turn the call back to Larry Weyers.

The Chairman, President, and Chief Executive Officer speaks.

Thanks, Joe.

I'll begin with an update on the sale of Kewaunee. In July 2005, we transferred ownership of the Kewaunee nuclear power plant to Dominion Energy Kewaunee, a subsidiary of Dominion Resources. As a 59 percent owner of the plant, Wisconsin Public Service received about 113 million dollars from the sale. The sale was closed after the conclusion of an outage at the Kewaunee plant that began in February 2005.

In addition to the cash proceeds received from the sale of Kewaunee, we also retained ownership of the assets contained in our non-qualified decommissioning trust. Our customers will benefit from the refund of the nonqualified decommissioning trust assets of approximately 127 million dollars. We are proposing that this refund be adjusted for the loss on the sale of Kewaunee and costs related to the 2004 and 2005 Kewaunee outages. Any excess would be refunded to customers. The proposal is being considered as part of our rate case, which we anticipate the Public Service Commission will rule on by year end.

Now that the plant is sold to Dominion Energy Kewaunee, we are purchasing the same amount of output from the plant that we were receiving when we owned a portion of that plant. Our customers get this power at rates established under the power purchase agreement that results in costs that approximate the costs incurred when we owned a portion of the plant. Our customers are now shielded from financial risks — like the costs associated with unplanned outages — by this power purchase agreement.

I also have an update on a few projects we are currently working on. We began construction of Weston 4, located in Wausau, Wisconsin, in October 2004, and our progress has been good. We are still on track for a commercial operation date in June 2008. The Wisconsin Department of Natural Resources issued an air permit for the facility in October 2004. This permit was challenged and the technical hearing regarding this challenge took place in late September 2005. The hearing addressed issues related to the emission limits specified in the permit and the pollution controls to be used to achieve those limits. We expect the ruling on this to occur in early 2006.

In May 2004, we announced that we were planning to build a 500-megawatt base load electric plant with Alliant Energy Corporation. We are nearing the completion of preliminary siting studies and supporting feasibility studies. Based on the preliminary results of these studies, we now expect that this next generation addition will not be needed in 2011, as we originally projected. We are expecting the need to be two or three years later due to the effect of the Midwest Independent System Operator market.

Construction of the 220-mile, 345-kilovolt Duluth, Minnesota, to Wausau, Wisconsin, transmission line began in the first quarter of 2004 in Minnesota. The Minnesota portion was completed earlier this year. Construction in Wisconsin began in August 2005, after all necessary permits were received. Construction is proceeding with foundation work and pole erection, with wire stringing to follow. We expect that the line will be completed in the second quarter of 2008.

WPS Resources committed to fund 50 percent of total project costs incurred for the line, up to 198 million dollars. We have the option to terminate funding if the project extends beyond January 1, 2010. WPS Resources has the right, but not the obligation, to provide additional funding in excess of 198 million dollars. For the 2005 through 2008 time frame, we expect to fund up to approximately 116 million dollars for our portion of the line, assuming Allete funds 60 million dollars. Of this amount, we have already funded approximately 35 million dollars in 2005. We currently own about 28 percent of the American Transmission Company. If Allete exercises its option, we estimate our ownership share will increase to approximately 33 percent. If Allete does not exercise its option, we expect our ownership share to increase to approximately 41 percent. In either case, our share is increasing, and this continues to be a great energy related investment for us.

Wisconsin Public Service is managing construction of the project on behalf of the American Transmission Company and is responsible for obtaining private property rights in Wisconsin necessary for construction.

ATC reports that the capital cost of its construction plans over the next 10 years is estimated to be approximately 3.4 billion dollars, which includes the cost of the Duluth to Wausau transmission line. This plan is publicly available on the ATC Web site. In addition, ATC's forecasted capital calls excluding the Wausau to Duluth transmission line, forecasted earnings before taxes, and forecasted revenue requirements through 2010 information is available on their Web site. The American Transmission Company is authorized to earn a 12.2 percent return on equity through 2012 and is allowed to have 50 percent equity in its capital structure. Its rate structure includes a true-up mechanism that enables them to earn their authorized return. As a 28 percent owner of ATC, we share in this return.

Our regulated business's physical deliveries of contracted natural gas supplies have been unaffected by the hurricanes. The vast majority of the natural gas that we buy to serve our regulated retail customers is sourced from on-shore supply basins. We have seen, along with the rest of the market, the run up in the commodity price to unprecedented levels. Gas costs for our natural gas utility operations are recovered through a one-for-one pass-through mechanism.

We have also been managing our coal inventory in light of the reduced deliveries of coal due to railroad track maintenance in Wyoming's Powder River Basin. We have been managing the dispatch of our units and have purchased additional supplies from eastern sources. These actions have allowed us to maintain inventories at acceptable levels, and we don't anticipate any generation reliability problems. In September 2005, the Public Service Commission of Wisconsin approved the deferral of incremental costs due to the reduced coal deliveries. We expect that these costs will be recovered in a future rate case. For our wholesale customers and our Michigan customers, these costs will be recovered through one-for-one purchased power cost recovery mechanisms.

Now, let's take a closer look at our nonregulated operations. Here to discuss this is Mark Radtke, President of WPS Energy Services and WPS Power Development. Mark…

The President of WPS Energy Services and WPS Power Development speaks.

Thanks, Larry.

I'll start by discussing WPS Energy Services. The quarter began with what the industry believed to be high natural gas prices at $7.17, only to see them rise throughout the quarter, hitting $14.20, and settling on September 30 at $13.92 per million Btus.

These high prices, in many ways, created a "real-time stress test" of the integrity of our nonregulated energy supply portfolio. This doubling is well beyond the typical 20 to 30 percent price move to which we regularly stress our portfolio. As we would expect, given the risk metrics we operate within and our modest value-at-risk measure, our wholesale and retail portfolios performed as expected and turned in solid performance for the quarter.

Beyond price volatility, the Gulf of Mexico offshore natural gas producing region infrastructure was severely impacted by Hurricanes Katrina and Rita. There too, we performed very well, enduring a situation beyond our control when certain suppliers were unable to perform under firm delivery contracts. Even so, we were, and continue to be, able to procure alternative supplies to meet our customers' needs.

High energy prices and volatile markets require that we deploy more financial resources to support the business.

Our deployed parental guaranty level has risen from 856 million dollars at the start of the third quarter, to 1.1 billion dollars at the end. These guarantees provide assurance of our ability to perform on our commitments and typically increase with the rise in underlying energy prices.

Likewise, our enterprise value-at-risk has increased from 570 thousand dollars to 1.3 million dollars at the end of the quarter because of the increase in the notional value of transactions we engage in, and due to the increase in historical volatility. The fundamental structure of our energy supply portfolio has not changed, but the environment that we operate in has, and our value-at-risk metric reflects that change. One measure of our performance is a return on deployed risk capital, and while our value-at-risk has increased, we are comfortable with the return results on that value-at-risk.

The combination of sustained high wholesale prices and regulatory rulings has negatively impacted our ability to grow or even renew existing customer contracts in the Michigan retail electric markets. During this quarter, one-third of our Michigan forward contract volume moved back to utility supply. Customers can simply receive lower cost supply from the local regulated utility than the competitive market, and we advised customers to select that supply alternative until market conditions change. Because nearly the entire margin associated with servicing Michigan retail contracts in 2005 is offset by Seams Elimination Charge Adjustment, or SECA, charges, 2006 results will not be negatively impacted by the loss of Michigan business compared to 2005. At the same time, we have made progress in expanding our retail electric activity in other markets. We are offering products to customers in Illinois, and we are expanding the number of distribution utilities we can offer products behind in New York and Massachusetts.

Because we search for ways to enhance overall value that customers receive for their energy spend, we have been increasingly active in offering demand response products to retail customers in PJM and the New York ISO. This allows customers to receive value for not consuming energy, and we participate in that value stream.

On August 29, WPS Energy Services announced that it will not extend an offer to provide service to electric aggregation programs for the Ohio cities of Cleveland and Euclid when the current contracts expire in December of this year. We will also end service to direct sign-up electric customers in the Toledo Edison territory when the contracts expire in December. The decision to exit the First Energy territory is related to the regulatory changes proposed by First Energy and then adopted by the Public Utilities Commission of Ohio, which makes it more difficult to provide competitively priced power in that market area. Prior to the decision to not extend this business, we anticipated only 3.8 million dollars of gross margin from this program in 2006. We are redirecting our efforts to other markets with the expectation that we can make-up that lost opportunity.

Now looking at WPS Power Development, its solid fuel units generally performed well during the quarter. Sunbury performed extremely well, with solid availability and higher around-the-clock market prices contributing to a 19 percentage point improvement in capacity factor and a 41 percent increase in production volume. Westwood continued its excellent operating record, running at full capacity for the entire quarter. At Niagara we had three minor maintenance outages that caused our capacity factor to decline 8 percentage points, to 81 percent for the quarter.

The picture at our New York natural gas plants was much different for the quarter, as both Beaver Falls and Syracuse were out of service undergoing major overhauls related to the blade failures experienced earlier this year. Syracuse repairs are nearing completion, and we expect the unit to be available for service in December.

We continue to evaluate the repair situation at the Beaver Falls natural gas combined cycle generating station. You may recall the unit came offline on June 26 of this year, with a first stage turbine blade failure. We are in discussions with our insurance carrier, and evaluating the long-term value of the plant. Repair costs are currently estimated at about 6 million dollars, and depending on the amount of insurance proceeds received, repairs may not be justifiable under current market conditions. If we do repair the plant, it would be no sooner than the first quarter of 2006 before it is back in service. Choosing to not repair the plant could result in an impairment of the plant's carrying value. That value is 18.6 million dollars at the end of the quarter.

Managing our Section 29 tax credit phase-out risk is working out well. As you know, we had previously minimized our 2005 risk, and a portion of 2006 and 2007. As we adjusted our 2005 derivative contracts to reflect year-to-date market prices, we have been able to recover the entire option premium previously expended to put the 2005 options in place. This puts us in the position of fully minimizing our risk in 2005, at no net cost. We have added to our 2006 and 2007 derivatives, minimizing essentially all of our 2006 risk, and we are systematically adding to our 2007 position with the objective of fully minimizing that exposure as well. We spent about 11 million dollars to minimize essentially all of our 2006 risk, and 3.3 million dollars to minimize 40 percent of our 2007 risk. As of September 30, 2005, we have recognized a pre-tax mark-to-market gain on the 2006 and 2007 investments of 10.1 million dollars and 5.3 million dollars on the 2005 investment.

Now, I'll turn the call back to Larry.

The Chairman, President, and Chief Executive Officer speaks.

Thanks, Mark.

The Energy Policy Act of 2005, which was passed by Congress in July 2005 and signed into law by President Bush on August 8, is the first major energy legislation passed by Congress in 13 years. The new law deals with the supply, delivery, and use of fossil fuels, nuclear power, and renewable energy.

The new Act is not likely to have a major short-term impact on supply, consumption, pricing, or the associated energy-related environmental concerns that face the United States, rather it will likely have a positive impact over the long term.

In 2005, we will continue to manage our portfolio of businesses to achieve regulated and nonregulated growth, with an emphasis on regulated growth including the successful completion of the acquisition of Aquila's natural gas operations in Michigan and Minnesota. This strategy allows us to participate in, learn from, and be prepared to take advantage of nonregulated opportunities with an acceptable risk profile when those opportunities are available.

Our 2005 basic earnings per share guidance for income from continuing operations is between $4.02 and $4.13, assuming normal weather for the remainder of the year, availability of our generating units, and completion of our planned land sales. Our earnings per share guidance does not reflect potential future mark-to-market gains or losses on derivative instruments utilized to protect the value of a portion of Section 29 tax credits in 2006 and 2007. The guidance also does not reflect the cumulative effect adjustment that may be required upon our adoption of FASB Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations, which is effective December 31, 2005.

Our year-to-date financial results have been accomplished in addition to several activities, which have lowered the risk profile of our company.

Our portfolio of businesses and asset management strategies will support delivery of our predicted shareholder return and help maintain our outstanding dividend record. On October 13 we declared a dividend of 56-1/2 cents per share on common stock, payable on December 20, 2005, to shareholders of record November 30, 2005. This is the 47th consecutive year we have increased our dividend and is the 65th consecutive year we have paid dividends. We plan to continue delivering value to our investors for many years to come.

Please remember our key points for today:

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

Thank you for being a part of our third quarter earnings conference call. A replay of this conference call will be available through November 17, 2005, by dialing 800-873-2035.

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.