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Financial Analyst Meeting - August 28, 2003

Generation from a Utility Perspective - Opportunities and Challenges
by David W. Harpole - Vice President - Energy Supply

{SLIDE 2} My focus today is on generation. The energy supply business unit, or GenCo as we call it, is responsible for the supply of all electric energy distributed to over 400,000 customers of Wisconsin Public Service Corporation and more than 50,000 customers of Upper Peninsula Power Company.

Today I will provide you with some perspectives about the electric generation and supply function at Wisconsin Public Service, our largest utility, and highlight some of the challenges and opportunities we see in the electric supply business.

{SLIDE 3} At Wisconsin Public Service, energy supply is focused on efficient, economic, and reliable energy conversion and electric supply to our customers. To accomplish these objectives, we utilize a portfolio of electric supply resources and fuels. Our portfolio includes Wisconsin Public Service's generating assets, generating plants owned jointly with other state utilities, purchase power agreements, market purchases and demand-side management options.

{SLIDE 4} The electricity we generate ourselves comes from fossil, nuclear, natural gas, and renewable sources including wind, and hydroelectric generating facilities.

{SLIDE 5} All of Wisconsin Public Services' coal-fired plants are located in Wisconsin. Our Pulliam plant in Green Bay has six operating units while the Weston plant located near Wausau has three units. Additional coal-fired capacity is supplied from three jointly owned plants, Edgewater 4 in Sheboygan, and Columbia Units 1 and 2 in Portage, Wisconsin.

Our total coal-fired capacity is about 1,330 megawatts of electric power, which represents about 62 percent of the electricity produced by Wisconsin Public Service.

{SLIDE 6} Another major source of economical power for Wisconsin Public Service is nuclear power from the Kewaunee Nuclear Plant. Nuclear power from Kewaunee represents about 18 percent of the electric energy we produce.

Wisconsin Public Service owns 59 percent of the plant with Wisconsin Power and Light Company owning 41 percent. In a normal year, Kewaunee generates four billion kilowatt-hours of electricity. That is enough energy to serve nearly half a million people.

In a move designed to sustain long-term safety, optimize reliability, and improve operational performance, the Nuclear Management Company began operating the plant in August 2000.

{SLIDE 7} In addition to fossil and nuclear, Wisconsin Public Service also has peaking plants, which are fueled by natural gas or fuel oil and provide power only at times when our customers' needs for electrical energy reach a peak that cannot be supplied by lower cost generating facilities. These plants can be started and stopped by remote control in a matter of minutes. We have peaking plants in Weston, Eagle River, West Marinette, Oneida, and De Pere, Wisconsin.

{SLIDE 8} Our newest peaking unit is an 83-megawatt gas turbine located at the Pulliam Power Plant. This unit became operational on May 30, 2003.

{SLIDE 9} Hydro power is one of our renewable energy sources and Wisconsin Public Service owns and operates 15 hydroelectric plants, representing up to 4 percent of the total electricity produced by Wisconsin Public Service.

{SLIDE 10} Wind power is another renewable source of electrical generation. We have 16 wind turbines that can produce about 10 megawatts of energy.

About 15 percent of our generation supply comes from other renewable energy resources as well as purchased power from neighboring utilities or independent power producers. These power purchases are generally made to avoid running some of our more expensive generating units, such as combustion turbines, thereby keeping our costs, and rates, as low as possible. Many of our purchased power contracts have both a capacity and energy component making them an important part of our electric capacity plan for serving our customer load.

{SLIDE 11} A key component of the customer's low price of electricity is the cost of production. Wisconsin Public Service's electric production cost is less than the average production costs of the MAIN and MAPP areas based on the most recent study provided by Platts Powerdat as of 2002. MAIN is the NERC electric reliability region for our utilities, which includes eastern Wisconsin, Illinois, Missouri, and the Upper Peninsula of Michigan. MAPP is the neighboring reliability region immediately to the west of MAIN, which includes western Wisconsin, Minnesota, North and South Dakota, Nebraska, Iowa, and a small portion of Montana.

{SLIDE 12} For the seventh time in the past eight years, Wisconsin Public Service's customers increased electric demand, reaching another all-time high on August 21, 2003, at 2,185 megawatts—exceeding our previous record of 2,173 megawatts on July 31, 2001.

{SLIDE 13} As we look toward the future, customer load in our service territory is expected to grow an average of 2 to 3 percent per year. Significant new wholesale load opportunities are also developing and we need to address the impact of our aging fleet and new environmental regulations. All of these factors are being addressed as we structure a robust capacity supply portfolio including an 18 percent reserve capability.

{SLIDE 14} To address these challenges, Wisconsin Public Service has been strategically implementing elements of our generation plan, which we introduced in May 2001. Some specific initiatives to date under the plan include:

{SLIDE 15} One of the next major steps in implementing the generation plan is the proposed Weston 4 Power Plant. This coal-fired, 750 million dollar, 500-megawatt plant will be on existing property adjacent to the existing Weston Power Plant near Wausau, Wisconsin.

The proposed Weston 4 plant is a base load unit, using clean coal technology, and is expected to generate enough power for about 200,000 homes. The clean coal technology includes operation at supercritical conditions, which allows for increased efficiency and lower emissions, on the order of 4 to 5 percent. It also includes state-of-the-art control technologies for sulfur dioxide, nitrous oxide, and particulate emissions. It will be designed to be one of the most economic and efficient plants on our electric system.

{SLIDE 16} Currently, we are in the licensing and permit phase of the Weston 4 project. In July 2003, we submitted our engineering plan to the Wisconsin Department of Natural Resources to allow them to finalize their list of required permits for the project. Details of the project design and equipment are being finalized at this time. Our formal application for project approval will be submitted to the Public Service Commission of Wisconsin before the end of 2003. Regulatory approvals are anticipated to be received by late 2004.

Subsequent to regulatory approvals, we plan to begin the construction phase in late 2004 and have the plant operational by the summer of 2008.

{SLIDE 17} Additional purchased power agreements are also being pursued as an integral component of our electrical supply portfolio.

{SLIDE 18} Like most aspects of the energy business, operating and maintaining generation facilities has its issues and challenges.

One significant challenge we faced recently was the flood on the Dead River in the Upper Peninsula of Michigan. On May 14, 2003, an earthen dike at the Silver Lake reservoir owned by Upper Peninsula Power Company, our wholly owned subsidiary, was breached. There were three other dams downstream that held and were able to handle the increased flowage.

A dam owned by Marquette Board of Light and Power, which is located downstream from all of these dams, near the mouth of the Dead River, also was breached during this event. In addition, high water conditions resulted in damage at the Presque Isle Power Plant owned by Wisconsin Electric Power Company. Presque Isle, which is located downstream from the Marquette Board of Light and Power dam, was forced into a shutdown on May 15, 2003.

The extent of damage to Upper Peninsula Power's facilities and other property in the area is not yet known and Upper Peninsula Power has not yet determined if we will replace the dike at Silver Lake.

Upper Peninsula Power has also hired an environmental consulting firm to assess the situation and determine a course of action. We are now working with other agencies on environmental recovery of the Dead River.

{SLIDE 19} A developing challenge for the nuclear power industry is the reactor vessel head issue. Visual inspections of the Kewaunee plant reactor vessel head were conducted this past spring and no problems with the vessel head were identified. However, after evaluating the cost of ongoing required inspections and the cost to replace the reactor vessel head, the plant owners requested Public Service Commission of Wisconsin authorization for replacement of the vessel head. Approval was received earlier this year and the replacement is scheduled for fall of 2004. Wisconsin Public Service will be responsible for approximately 12 million dollars of the expenditure.

{SLIDE 20} On the environmental front, several challenges face Wisconsin Public Service and electric generators industry-wide.

In June 2003, the Wisconsin Department of Natural Resources recommended to the Wisconsin legislature that Wisconsin's four largest utilities be required to reduce mercury emissions caused by the burning of coal. Wisconsin Public Service would be subject to these requirements, if the DNR proposal is approved by the legislature. Applicable utilities would be required to reduce mercury emissions by 40 percent by the year 2010 and by 80 percent by the year 2015. Wisconsin Public Service estimates that it could cost approximately 50 million dollars per year to achieve the proposed 80 percent reductions.

In addition to the pending mercury legislation, there are a number of issues facing Wisconsin Public Service and other utilities with respect to air pollutants. These include:

As to the latter point, Wisconsin Public Service, along with other utilities in the state, has received EPA inquiries and requests for detailed information relating to historic work performed on its boilers, primarily at the Pulliam Plant in Green Bay.

These air emission issues raise uncertainty with respect to future compliance requirements. It makes Wisconsin Public Service's planning for the new Weston unit and other generation more difficult.

Wisconsin Public Service is currently developing and evaluating cost effective alternatives for compliance with these proposed rules at all of our existing coal-fired facilities.

{SLIDE 21} Implementation of Wisconsin Public Service's generation plan is critical to the future success of the utility business. Acquisition of the De Pere Energy Center and the additional ownership of the Kewaunee Nuclear Plant, as well as the addition of the P31 peaking plant are significant successes that we have achieved. Pending the approval of regulatory authorities, the addition of the world class Weston 4 Plant will be another milestone when it goes on-line in 2008. All of these are examples of the kinds of initiatives Wisconsin Public Service is making to meet the energy needs of our customers and proactively address the energy supply challenges we see on the horizon.

{SLIDE 22} Now, Phil Mikulsky will give you with some insights our nonregulated strategies and synergies. Phil is the Senior Vice President - Development for WPS Resources Corporation. Phil...