WPS Resources And Peoples Energy To Combine To Create A Diversified Energy Company Serving The Midwest

Green Bay, WI, and Chicago - WPS Resources Corporation and Peoples Energy Corporation announced they have signed a definitive merger agreement that will create a leading, diversified energy company with regulated utilities serving four Midwest states and non-regulated businesses serving customers in the Northeast U.S. and Canada.

Under the definitive merger agreement, which was unanimously approved by both companies' boards of directors, each common share of Peoples Energy outstanding immediately prior to the merger will be converted into 0.825 shares of WPS Resources' common stock. As of Wednesday, July 5, 2006, closing prices (prior to the publication of an article in The Wall Street Journal), this would result in an approximate value of $41.39 per share for Peoples Energy stock. This represents a premium to Peoples Energy's shareholders of approximately 14.2 percent, based on the 20 trading day average closing prices for Peoples Energy ending July 5, 2006, and approximately 15.0 percent, based on the closing price for Peoples Energy on July 5, 2006.

Upon consummation of the merger, WPS Resources' shareholders will own approximately 57.6 percent of the combined company, and Peoples Energy shareholders will own approximately 42.4 percent. After closing, it is intended that the dividend of the combined company will be $0.66 per quarter.

The combined company will be led by Larry L. Weyers, 61, chairman, president, and CEO of WPS Resources, who will serve as its president and CEO. James R. Boris, 61, the current lead director for Peoples Energy, will serve as non-executive chairman of the board. Thomas M. Patrick, 60, chairman, president and CEO of Peoples Energy, announced his intention to retire earlier this year. The combined company's board will have 16 members, nine selected by WPS Resources and seven by Peoples Energy.

The combined holding company headquarters will be located in Chicago, and a new name for the combined company will be jointly selected by management from both companies. Each of the regulated utility businesses of the combined company will maintain its current name and headquarters. The non-regulated energy marketing businesses of the combined company will be headquartered in Green Bay, Wis.

"This combination creates a diversified regulated utility business that will be better positioned to compete in a consolidating industry in which size and scale matter. Our regulated businesses have good operational fit and will benefit from our constructive regulatory approach and greater market and regulatory diversity when they are combined," Weyers said.

"The combination will benefit the customers, employees and shareholders of both companies," Patrick said. "Both companies have outstanding utility franchises at the core and our complementary, non-regulated businesses that provide additional growth opportunities. In addition, we have a shared commitment to a lower-risk operating approach, financial strength, fiscal discipline, and a strong dividend."

The strategic focus for the combined company will be its core regulated electric and natural gas operations, which will serve about 1.6 million natural gas customers and 477,000 electric customers. When considered with WPS Resources' investment in American Transmission Company, a significant portion of the combined company's operations will continue to be regulated. This business profile should help ensure that the combined company maintains strong credit ratings, which is a key financial and strategic objective.

The combined company will also comprise the complementary energy marketing businesses of WPS Resources and Peoples Energy.

Weyers added, "By combining our non-regulated energy marketing businesses, we will create a stronger, more competitive, and better balanced growth platform. In addition, through sharing best practices and eliminating redundancies, we expect to generate operating improvements and capture efficiencies that will use our employees' creativity and benefit the combined company's shareholders."

The transaction is subject to receipt of all necessary regulatory and shareholder approvals. The companies will be requesting expedited regulatory approval, and if granted, the transaction is expected to be completed by the end of the first calendar quarter of 2007.

"We believe the merger will be financially attractive for both companies' shareholders. We expect the transaction to be earnings accretive to shareholders in calendar year 2008, excluding residual transition costs, once the companies have been integrated and regulatory plans have been executed. We already have $80 million in identified potential annual synergies, about $72 million in our regulated businesses and another $8 million in our non-regulated businesses. These synergies will be achieved over time and it is expected that the one-time costs to obtain these synergies will be approximately $200 million. In addition, the combined company will maintain its commitment to a strong balance sheet and credit ratings. It will also have a larger equity market capitalization with increased liquidity, financial flexibility, and ready access to capital markets," Weyers said.

After closing, it is intended that the dividend of the combined company will be $0.66 per quarter. This expected combined company dividend will represent a 16.8 percent increase to the current quarterly dividend rate for WPS Resources' current shareholders, and after taking into account the exchange ratio, effectively continuing the dividend at the current level for Peoples Energy's shareholders.

Stronger and Better-Diversified Regulated Businesses

"Regulated natural gas and electric utility operations will provide a majority of the earnings of the combined company. These regulated businesses in contiguous states will create market and regulatory diversity," Weyers said. The combined company will have substantial capital investment opportunities in its regulated operations. WPS Resources' Weston 4 low sulfur coal-fired base-load generation facility in Wisconsin is less than two years away from planned commercial operation. In Illinois, the combined company is prepared to accelerate Peoples Energy's infrastructure modernization capital expenditures in the City of Chicago. The combined company also has significant investment opportunities through WPS Resources' current 33 percent interest in the regulated American Transmission Company.

The companies have identified approximately $72 million in potential annual synergies across the spread of the combined company's regulated businesses through the efficiencies achieved by eliminating redundant and overlapping functions and systems, and may achieve additional benefits through sharing best practices.

Expansion Opportunities for Non-Regulated Energy Marketing Businesses

WPS Resources and Peoples Energy's complementary, non-regulated wholesale and retail energy marketing businesses share a strong customer service focus and will be combined to create a larger and geographically diverse business. The combined business will leverage the expertise, reputation, and assets of both companies. It will be well-positioned to compete when Illinois' electric market opens in 2007 and to expand WPS Resources' presence in the Northeast quadrant of the U.S., adjacent portions of Canada, and Texas. In addition to asset and market synergies, potential cost synergies of approximately $8 million per year have been identified in the combined energy marketing business. In addition to their energy marketing businesses, WPS Resources owns various unregulated power plants and Peoples Energy has a substantial oil and natural gas production business that has been a significant source of earnings growth for that company. Recently, WPS Resources has announced the divestiture of the Sunbury power generation facility and its interest in the Guardian pipeline, and Peoples Energy has announced the planned sale of its power generation interests. The combined company will continue the implementation of both companies' rigorous asset management strategy.

Prior to closing, a transition team consisting of members from both WPS Resources and Peoples Energy will carefully evaluate strategic options for the combined board to consider regarding these businesses to maximize shareholder value and maintain a strong credit profile for the combined company.

Combination Benefits Employees and Public Stakeholders

The combined company combines WPS Resources, which was named Fortune's "Most Admired Company" in the energy industry and Forbes' "Best Managed Utility Company in America" earlier this year, and Peoples Energy, which has a 150-year tradition of reliable customer service.

"The combined company will emphasize strong employee relations," Weyers said, pointing out that the larger company will offer more opportunity for employees across different industry segments in a broader service area. "Union agreements will be honored, and the combined company will be committed to working closely with its employees to grow the company."

"While we certainly anticipate gaining efficiencies will lead to some reductions in staff, in the past we've been able to accomplish that largely by normal attrition," Weyers added. "We expect to emphasize that same approach in this combination."

Weyers and Patrick affirmed that the combined company will continue each company's strong civic, community, and philanthropic presence in its respective markets.

Approvals and Timing

The combination is conditioned upon approval by the shareholders of both companies, expiration or early termination of the applicable Hart-Scott-Rodino waiting period, and the approval of various state and federal regulatory authorities, including Federal Energy Regulatory Commission and Illinois Commerce Commission. WPS Resources will also seek Public Service Commission of Wisconsin approval of an amendment to its affiliated interest agreement, and WPS Resources and Peoples Energy will seek a license change with the Federal Communications Commission. The merger agreement contains other customary closing conditions. The companies currently intend to seek shareholder approval in the fourth calendar quarter of 2006.

SOURCE: WPS Resources Corporation