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Financial Analyst Meeting - August 28, 2003

Nonregulated Strategies and Synergies
by Phillip M. Mikulsky - Senior Vice President - Development

Good afternoon. As Dave indicated, I'm Phil Mikulsky, but the title he provided doesn't really give you any insights into my role. I am responsible for WPS Resources' nonregulated energy operations, so I will share with you an overview of our nonregulated strategy and synergies.

{SLIDE 2} All members of the WPS Resources family of companies are united in pursuit of a common mission, to "Provide Customers with the Best Value in Energy and Related Services."

{SLIDE 3} At the highest level, WPS Resources Corporation has two primary businesses. One, we operate regulated natural gas and electric utilities. Two, we operate nonregulated energy companies, which include: WPS Energy Services, Inc. and WPS Power Development, Inc. WPS Resources' goal is to achieve a balanced portfolio between regulated and nonregulated companies. As a refresher:

WPS Energy Services was established in 1994. WPS Energy Services is our nonregulated energy supply and services subsidiary. We currently serve about 200,000 customers in our market area and have 173 employees. Our Web site is www.wpsenergy.com.

WPS Power Development was established in 1995. WPS Power Development owns and operates energy assets in the United States and adjacent portions of Canada. We currently own and operate 915-megawatts of electric generation assets and have 200 employees. Our Web site is www.wpspower.com.

{SLIDE 4} WPS Energy Services is a diversified, nonregulated energy supply and services company. We serve both retail and wholesale customers in the energy marketplace. Our emphasis is on serving aggregated residential, commercial, industrial, and wholesale customers.

WPS Energy Services provides energy supply options and strategies that allow customers to manage their energy needs while capitalizing on opportunities resulting from deregulation. It provides natural gas, electric and alternate fuel products, real-time energy management services, energy utilization consulting, and project management.

We are not speculative traders, rather we work directly with our customers to manage their energy risks. At the point of sale with customers, we hedge the supply and enter into a sales agreement with customers. We provide a variety of systems, billing and payment services that help customers manage their energy supply.

{SLIDE 5} WPS Energy Services currently provides physical energy supplies to customers in 17 states within the United States and three Canadian provinces. Our target market is the northeast quadrant of the United States and adjacent portions of Canada. In the United States, we maintain service centers in Illinois, Maine, Michigan, Ohio, Virginia, and Wisconsin. Our Canadian service centers are located in Alberta, New Brunswick, Ontario, and Quebec.

Each of our service centers is staffed with experienced personnel that are knowledgeable of the rules that govern the operations of both local and regional pipelines, transmission grids, and utilities. We maintain the state and federal licenses required to serve our customers as an integrated natural gas and electric provider. On the natural gas side, we currently serve over 1,500 large commercial and industrial customers. On the electric side:

  1. Our Michigan retail electric business serves 700 megawatts of power to large commercial and industrial customers.
     
  2. We serve aggregated buying groups in Maine and Ohio with over 150,000 residential and commercial electric consumers.
     
  3. We serve an aggregated customer load of nearly 900 megawatts in the state of New Jersey.

We continue to see our sales volumes increase. In the first six months of 2003, we recorded sales of about 1.6 billion dollars, 284.1 billion cubic feet of natural gas and 4,000 gigawatt-hours of electricity. We attribute our growth to a customer-focused approach in meeting our customers' needs and tolerances for price, reliability and risk. We have learned that any new business unit (especially in the energy field) must attain a certain level of business activity to succeed. We have attained, or are close to attaining, that level at WPS Energy Services.

{SLIDE 6} WPS Power Development develops, owns, and operates various forms of nonregulated energy generation facilities. It also owns a portion of a synthetic fuel operation and provides electric power generation services.

WPS Power Development's market area currently has a significant focus on the northeast United States, but we are open to opportunities in the United States and Canada.

WPS Power Development's products and services include acquisition and investment analysis, project development, engineering and management services, and operations and maintenance services. Its areas of expertise include cogeneration, distributed generation, generation from renewables, and generation plant repowering projects.

{SLIDE 7} WPS Energy Services is our marketing and sales organization; they aggregate customer loads and balance customer demand with system supply. WPS Power Development is our concrete and steel organization; they own and operate power plants that help meet system demand.

Collectively, we are reforming both organizations into nonregulated energy operations that are integrated to the point that they will only exclude the transmission and distribution portion of the way we used to view the energy industry. We are working to realize the significant potential from the synergies of these two business units, and we are working hard to further optimize the operational efficiencies between these organizations.

Our holding company is working to further develop our corporate asset management program. The nonregulated portion of this program consists of buying and selling assets to accommodate WPS Resources' strategies. It also includes the optimization of assets, other than concrete and steel, such as contracts or conditions that surround our transactions.

{SLIDE 8} The energy industry in the United States continues to experience significant volatility. This was spawned by some major events:

  1. "California,"
  2. Natural gas price swings,
  3. An economic downturn in the United States,
  4. The default of Enron and others,
  5. Legislative and regulatory changes (Standard Market Design, Federal Energy bill, etc.), and
  6. Most recently, the largest cascading blackout in North American history.

All of these events have affected the development of the competitive energy market in the United States. But volatility is likely to effectuate change! Increasingly, we have heard high natural gas prices referred to as a crisis by senior government leaders. And when 50 million households go black, we all know that changes need to be made. We expect to see changes in the energy market. Likely outcomes are:

  1. The House and the Senate will reconcile a long overdue National Energy Bill, and
     
  2. The Federal Energy Regulatory Commission's proposed Standard Market Design rules will be adopted in some form.

For us, a positive impact of energy companies going under is that there has been a pool of talented people in the energy industry looking for work. Within the last 12 months we have significantly bolstered our company talent. We are a flexible organization that is well positioned for changes that are sure to occur in the future.

{SLIDE 9} WPS Energy Services and WPS Power Development do both commodity and structured transactions. We do not compare with the past "giants" in the electric commodity product line. But, the giants do not compare with us in the structured transaction arena.

As needed, we can synergistically offer a "system operating" (or balancing) function on a real-time basis.

{SLIDE 10} Risk management is a critical part of the "landscape" for both WPS Energy Services and WPS Power Development. There are many elements of risk management. Often we like to talk about the "trading" element of risk management. This trading component can be broken down into two categories:

  1. Back-to-Back: This is a critical part of the WPS Energy Service's gas business, but also a critical piece of Energy Service's electric portfolio where assets are not owned, but might be owned, by WPS Power Development.
     
  2. Trading Around Assets: This is another important part of WPS Energy Service's and WPS Power Development's synergy picture.

Every other element of risk is evaluated. Again, trading is one major component that is clearly understood and managed by our nonregulated entities. One important conclusion that you should draw from this discussion is that—by design—WPS Energy Services and WPS Power Development avoid speculative trading.

{SLIDE 11} But, we know that risk management also extends to our customers. WPS Energy Services has trading and risk management staffs, who focus exclusively on supply, transportation, and risk management for our retail and wholesale customers. Customers are able to draw upon this staff of experts to utilize financial tools in the marketplace. Our personnel have expertise in moving energy through the United States and Canada to help optimize the value of bundling and unbundling transportation components.

Risk management is a valuable tool as has been demonstrated over the last 30 months of very volatile energy markets. Our risk management team has extensive training and a working knowledge of financial markets and associated financial tools.

{SLIDE 12} WPS Energy Services and WPS Power Development have "kept pace" with technological developments in the ever-changing energy environment. Our nonregulated companies have worked diligently to expand our technological capabilities, which we feel is important in real-time energy markets. We have invested in the internal systems, the infrastructure, to track company business activity.

But we have also developed a series of innovative technologies that share critical energy data with our customers. Our proprietary systems are designed to seamlessly aggregate customer loads across utility market areas. During certain critical days, we link these systems to a variety of communications systems like faxes, pagers, emails and Web-based applications. The goal is to provide customers with the information they need, when they need it. Customers increasingly use these systems to develop and execute an enterprise risk-management energy strategy for their organizations.

The tagline of our nonregulated companies is "Putting Power in your Hands." We are empowering customers with more choices, better information, and greater control over their energy decisions. We are focused on delivering what customers tell us they value the most: reliable energy supplies, competitive prices, top-notch service and innovative technologies.

{SLIDE 13} We are proud that our customers have consistently rated WPS Energy Services as one of North America's top gas marketers in Mastio & Company's industry-wide customer satisfaction, benchmarking and image report.

{SLIDE 14} We continue to improve our energy management systems and communications processes to further enhance service to our customers.

{SLIDE 15} Now I'd like to have Charlie Schrock who is President of WPS Power Development, Inc. give you a closer look at WPS Power Development. Charlie...