Integrys Energy Group

Opportunities and Challenges for WPS Power Development, Inc. - August 20, 2001

by Gerald L. Mroczkowski - President

Goals and Objectives

WPS Power Development, Inc. is an important part of our earnings growth projections. In addition to expecting continuing profitable operations from its existing diversified generation asset portfolio, we're expecting to make new investments of about 150 to 250 million dollars per year. With a 3 to 4 percent after-tax return on those assets, WPS Power Development can contribute to corporate earnings growth. We're expecting WPS Energy Services and WPS Power Development together to contribute more than 15 percent to our earnings in 2001.

Let me be more specific about WPS Power Development's progress to date.

Sunbury Generation Station

The Sunbury Generation Station, located in Shamokin Dam, Pennsylvania, consists of:

A four unit coal-fired generation station with a net demonstrated capacity of 389 megawatts. A unique common header system allows steam from 5 boilers to supply 3 of the turbines. This means that the loss of one of the boilers does not directly lead to a loss of a turbine and provides the station with a more efficient cycling capability. The design feature increases the facility's reliability and allows it to maintain a high availability rate. The station is a base load facility operating in the PJM Interconnection and is a low-cost producer, achieving its cost advantage primarily from its ability to burn a wide range of competitively priced solid fuels.
Two diesel generators which enable the facility to "black-start" and have a demonstrated capacity of 5.5 megawatts, and
Two oil-fired combustion turbine generators with a demonstrated capacity of 42.2 megawatts.

The assets are located on 216 acres in Snyder County, Pennsylvania. Adequate space, existing station infrastructure, and location are reasons for considering expansion at Sunbury.

When we took over the station in November of 1999, we understood that the generating units were not maintained to WPS Resources' standards. A significant planned maintenance program was put in place to upgrade the facility. We've accelerated some of that maintenance to coincide with other plant downtime and are seeing the benefits of increased reliability with all units being available this past month during the highest market price period of the year in PJM.

Sunbury's actual production costs are higher than projected for 2001 due primarily to an increased price of delivered coal. We had reached an agreement with a coal supplier to supply synthetic fuel to the Sunbury plant for the 13-month period beginning December 1, 2000. In March 2001, the supplier discontinued delivery of synthetic fuel under the agreement, so we filed a lawsuit seeking damages in excess of 3 million dollars representing anticipated additional costs incurred to acquire substitute fuel for the remaining term of the original agreement. A court decision is expected in 2002.

Westwood Generating Station

The 30-megawatt Westwood Generating Station is located in Joliett, Pennsylvania (about 20 miles from the Sunbury Generation Station). A Circulating Fluidized Bed boiler burns waste anthracite coal (also known as culm) in combination with crushed limestone (for sulfur capture). A sufficient stockpile of waste coal for the life of the project located at the plant site makes Westwood a low-cost energy producer in the PJM market.

When we took over the plant in September of 2000, a planned maintenance program-to WPS Resources' standard-was immediately put in place in order to improve reliability. The results from the maintenance program were demonstrated this past month when Westwood was available during the highest price period of the year in the PJM market.

Northern Maine / Canada

We acquired the electric generation assets in Maine and Canada on June 8, 1999. These assets provide the backup to transactions by WPS Energy Services, whose sales to our customers in Maine now exceed our own generation capacity in that region by a factor of three.

The 69 megawatts of generation assets located in northern Maine and Canada are made up of:

12 megawatts of diesel generation located at 3 sites,
21 megawatts from our 3.3 percent interest in the 619-megawatt oil-fired Wyman Plant located in Yarmouth, Maine, and
36 megawatts of hydro generation from 3 sites located on the Aroostook River, including the 34-megawatt Tinker Dam.

There are opportunities to increase the electric generation capacity and efficiency at the hydroelectric plants. The significant challenge is controlled by the weather. The hydroelectric production is directly affected by the amount of precipitation. We have had good, but less than normal rainfall this year.

E. J. Stoneman Power Station

Stoneman is a 53-megawatt coal-fired plant that had been mothballed prior to acquisition by Mid-American Power, LLC. WPS Power Development owns 66 and 2/3 percent and Burns and McDonnell owns 33 and 1/3 percent of Mid-American Power.

Stoneman is strategically located in southwestern Wisconsin with potential interconnection to multiple markets. Engineering is proceeding to increase the site's generation capacity to at least 250 megawatts. Advantages that the site offers for expansion over construction on a green field site include the repower of existing steam turbine generators, existing site infrastructures for operation and maintenance, and better projection of environmental impacts. The expansion is projected in service before the summer of 2005.

Combined Locks Energy Center

The Combined Locks Energy Center, located in Combined Locks, Wisconsin, includes a natural gas-fired General Electric LM6000 combustion turbine and a heat recovery steam generator. The plant is designed to cogenerate approximately 50 megawatts and 200,000 pounds per hour of process steam. The plant's high efficiency will result in competitive steam and electric rates.

Construction is proceeding in two phases. The first phase is to install the combustion turbine for commercial operation in the fall of 2001. The heat recovery steam generator will be installed during the second phase for commercial operation of the cogeneration plant in the spring of 2002.

ECO No. 12

ECO No. 12 produces synthetic fuel from coal fines. The sale of the synthetic fuel results in the generation of tax credits received for the operation. The facility is located in Hopkins County, Kentucky, where there is an abundant supply of feedstock. The facility has a production capacity that exceeds our needs for tax credits. Therefore, we are actively looking for a partner in order to achieve the full economic potential. We now have a signed Letter of Intent, subject to due diligence, the terms of which cannot be disclosed at this time.

New Investment Opportunities - Public Knowledge

There are a number of projects in various stages of development at any one time. Most of the work remains confidential until there is an agreement between the buyer and seller. At this time, there is one project which is known by the public. Last October, Sierra Pacific Power Company agreed to sell its Tracy/Pinon Power Station located near Reno, Nevada to WPS Power Development. Since that time, additional legislation has been passed and signed into law that prohibits the sale of the facility until July 1, 2003. However, a new law permits the co-development of additional generation facilities in the state.

WPS Power Development has submitted a proposal to Sierra Pacific for development of additional generation facilities at the Tracy/Pinon site. The proposal has been included in Sierra Pacific's required Least Cost Resource Plan filed with the Nevada Public Utility Commission related to future generation facilities. Hearings on the proposal are scheduled for later this month.

New Investment Opportunities - Confidential

The number of projects which WPS Power Development is working on behind-the-scenes, under confidentiality agreements, varies. At this time, there are about 6 projects with total generation capacity in the area of 1,500 to 2,000 megawatts that are active. The sources of the projects vary. Projects come from:

Utility divestiture programs
Third parties who have projects which no longer meet their business needs
Industrial companies, such as paper mills
WPS Energy Services and other marketers for development of green field sites

Conclusion

So you can see, WPS Power Development's path has both opportunities and challenges. We will continue to meet the challenges head on and build upon the opportunities to create greater return in the future.