Integrys Energy Group

Financial Analyst Meeting - August 28, 2003

WPS Energy Services, Inc. - Opportunities and Challenges
by Mark A. Radtke - President

Good afternoon. In my current position, I am responsible for the operations of our nonregulated energy services company, WPS Energy Services, Inc. While I'll be happy to take questions about the results we have previously disclosed, today I'd like to offer a little different look at Energy Services' operation. Given today's theme, I'll use football analogies. For those of you in attendance, I trust that will be okay. If you are not a football enthusiast reading this on the web, I apologize in advance for the recurring metaphor.

{SLIDE 2} With that, I'd like to welcome you to Green Bay for our financial analysts meeting. One of our city's landmarks, Lambeau Field, had undergone a transformation over the past few years. The venerable old stadium has been rebuilt on its same sturdy foundation; but has a new look, its facilities have been updated, and it has been thoroughly renovated. Its grand opening will coincide with next week's game and we think the results are spectacular. There are still improvements being made, like road repairs. But, the end result will be a stadium that is efficient, adds to the bottom line, and is built to last.

Like Lambeau field, my business unit also has been transformed. It has been built on the strong foundation of WPS Resources Corporation...and its vision, mission, values, and expectations. We, too, are still making improvements. Like the tenants of that shining new stadium on the hill, we are excited about the prospects of a new season. And like that stadium, we are designing an organization that is efficient, adds to the bottom line, and is built to last.

In keeping with today's theme, I'd like to take this opportunity to give you some insight into the game plan and winning team that has been driving the results of our organization.

{SLIDE 3} WPS Energy Services' game plan is 'To bring exceptional value to our customers as a fully integrated regional provider of structured energy products, and energy related solutions.' We have carefully and deliberately chosen to focus on the northeast quadrant of the United States and adjacent portions of Canada because of the region's energy intensity, market maturity, WPS Power Development's presence, and manageable regional size. We do not believe it would be appropriate at this time for us to tackle becoming a nation-wide energy services provider.

While global markets and events clearly impact our situation and that of our customers, when it comes to customer needs, energy markets require expert local knowledge. Because the best talent often physically resides within a market, we depend on the strength of our regional service centers for critical positions like sales, supply and energy logistics.

{SLIDE 4} To keep everyone working from the same playbook, we've implemented a matrix organizational structure. This structure aligns the organization from two different perspectives. First, from a customer and market perspective we have our Income Stream orientation. Income Streams are segmented by the way our customers see us—the way we go to market. Wholesale natural gas for instance, uses a much different market approach than does Retail Corporate Accounts. Our Income Stream focus ensures everyone working within a particular income stream understands the priorities and practices of that market segment, uses the same playbook, and is working toward a common goal line.

The second perspective is more internal. Even though we have people residing in 15 service centers, our 'vertical functions' keep our subject experts aligned by working together within their professional functional group. This alignment helps us deploy best practices in each of our locations, and increases our consistency of service—something customers tell us is very important to them.

Additionally, I like this structure from a talent development standpoint. Functional leaders are the traditional 'department' leaders, with people leadership and development responsibilities. Income Stream leaders on the other hand, develop general management and business leadership skills—both critical for our continued success.

{SLIDE 5} Now let's take a look at the equivalent of our offensive unit, and the accomplishments of the folks that move the ball down field. Our retail natural gas business concentrates primarily on industrial and large commercial customers. The American Gas Association indicates that approximately 91 percent of all gas volumes consumed by industrial customers in the United States is delivered by competitive energy suppliers, like WPS Energy Services. Consumers, particularly our industrial customers, clearly need the increased control and additional flexibility that the financial and commodities markets afford. We are meeting that need.

Our principle gas markets include Illinois, Michigan, Ohio, Ontario, Quebec, and Wisconsin. Since Illinois and Ohio are the fourth and fifth largest natural gas markets in the United States, we have plenty of room to grow our business within markets where we are already established.

We offer customers a choice in retail pricing strategies, including:

A customized approach where customers can contract for a fixed volume at a fixed price.
Our STEPS, or Statistical Energy Procurement Strategy, establishes a predefined strategy that meets the individual customer's needs. WPS Energy then executes that strategy as the market moves on a daily or weekly basis.
We offer a full requirements Managed product that is designed to reduce the price volatility and volume forecasting challenges of customers.
Finally, we offer a Market based supply that is intended to pass through to customers all of the ups and downs of the natural gas market.

{SLIDE 6} Our wholesale natural gas business generally mirrors our retail footprint, with the exception of Canada where our wholesale activity is centered in Alberta—western Canada's critical supply basin—and New York, where our current activity is aimed at fueling our generating facilities there.

We deliver strong producer services capability to Michigan and Appalachian region producers. We offer negotiated structured products that provide unique physical delivery and risk management characteristics important to utilities, pipelines, storage holders and other marketing companies.

{SLIDE 7} Our retail electric team has been active since early 2000. Primary activities in electricity include standard offer service to all classes of customers in northern Maine (which is under contract through February 2004), municipal aggregation service to communities in northern Ohio, and direct marketing to industrial and large commercial customers in Maine and Michigan. The majority of our retail electric contracts are fixed price and full requirements. Customers that have hourly requirements which are difficult to predict, have contractual limitations to manage the volume risk. A great deal of emphasis goes into creating accurate demand projections and ensuring we have supply and optionality to cover our peak obligations.

Our wholesale electric activity has historically been limited to the sale of generation output from WPS Power Development's assets, managing the supply requirements of our retail customer portfolios, and a limited number of structured power transactions. For the past few months, we have had a concerted effort to enhance our wholesale market capability by adding individuals experienced with the markets and analytics of trading around assets. Our objective is to reduce the net value-at-risk associated with assets we own or control—including our customer supply portfolios, while improving the predictability and probability of desired cash flows from those assets.

{SLIDE 8} As important as it is to put points on the board, in the competitive energy business especially, it is critical to have a defense that can keep the offense on the field. In our case that defense includes our own fearsome foursome: systems, people, processes and customer focus.

{SLIDE 9} In the systems area, portfolio risk management is at the core.

For natural gas we have long used our Pinnacle gas management system. We acquired source code with this product in 1996, and have evolved the system along with our needs to the point that it barely resembles the original product. It does a great job in handling our evolving risk management and transaction tracking needs—even in this period of changing accounting and disclosure requirements.
On the electric side we have implemented a state-of-the-art risk management and scheduling system. We recently purchased source code for that system so that we can make the same type of rapid enhancements that we have made to our gas system. The system delivers a critical capability for managing our business, and at today's pace of industry change, we believe it is essential to have this rapid response capability.
Rounding out financial risk management is our credit risk system. We use this system to track our gross and net exposure with counterparts, and manage their authorized credit level as circumstances change. We also use this data as the foundation for liquidity stress testing to ensure we are sufficiently capitalized in varying market conditions.
We continue to enhance our proprietary Genesis system to track information for our electric customers and customers participating in our electric and natural gas aggregation and consumer choice programs. The system also serves as our billing engine for the nearly 200,000 active customer accounts it manages.
Just this month, we implemented Microsoft SharePoint as a portal and document management system. All our customer agreements have been imaged, making the documents available to all our employees, regardless of location. We are deploying this system to eliminate redundant record keeping and enhance consistency in serving our customers.

{SLIDE 10} Also in the defensive category are the people that make sure the business operates flawlessly day in and day out.

Our risk administration team keeps our risk books and reporting up-to-date on a daily basis. They work closely with our business originators to ensure our transactions are reported correctly so that company leadership and corporate financial risk management get a clear picture of our risk position on a nightly basis.
Our dedicated credit group is focused on finding ways to enable commercial activity, while limiting our credit risk exposure. They have been doing a great job with actual bad debt write-offs running about one-tenth of one percent of revenue—and approximately 90 percent of that loss is related to the Ohio aggregation payment process problems we have been noting in the last few quarter's disclosures.
In a thin margin business, operational errors can destroy value like holding penalties stall a good drive. For that reason, we've dedicated about 25 individuals to our gas and electric logistics activities. These people ensure that the correct amount of natural gas and electricity move across the pipes and wires we utilize to meet our customer needs on a daily and hourly basis. There is little room for error, so these people rely on tested tools and processes to get the job done precisely.

{SLIDE 11} Rounding out the defense is a fanatical focus on customer service and value.

Our secure Energy Manager^sm Web site provides a wealth of customer specific and general industry information to our customers. This site provides the most recent market and account information, when and where customers need and ultimately reduces all of our costs. A true win - win.
Our focus on continually improving service to our customers is paying off in the form of strong satisfaction rankings. WPS Energy Services has consistently rated as one of North America's top gas marketers in Mastio & Company's industry-wide customer satisfaction, benchmarking and image report. Satisfied customers have meant low customer turnover rates, which allow us to focus on further improving our offerings instead of replacing fleeing customers.
Our empowered staff of 40 Account Executives and Account Managers establish a close working relationship with our customers. They are our 'front line' in meeting the needs of our customers. They proactively search for our customer's next energy related problem—and work to develop the technologies and strategies to solve those customer problems. Our approach is being recognized. According to customer satisfaction surveys, our industrial customers have rated our personnel in the top of the industry for knowledge, experience, and integrity.

{SLIDE 12} In the category of special teams, we have our energy related products, including the Utility Director^sm energy information management and DENet® energy information gathering and processing technology.

Utility Director^sm is designed to help customers with multiple facilities—normally 20 or more—get their arms around the potentially hundreds of diverse energy bills they receive over the course of a month. We verify and organize the invoices into a consistent single bill. We assign accounting, identify discrepancies and resolve billing disputes with the provider. Customers have 24/7 access to all their organized data and customized reports via a secure internet connection. With the help of our Utility Director^sm service, our customers are finally in control of their energy costs.
And when utility-metered data is simply not enough, customers deploy our patented DENet® technology to monitor in real-time, utility billing meters and process sub-meters. This real-time information can help customers make more precise business decisions related to energy cost and utilization. As an energy supplier, DENet® can help WPS Energy gain a better view of our customers' portfolio requirements in real-time, improving our supply effectiveness and lowering our overall cost of service.

{SLIDE 13} As we look to our next season—calendar 2004—we see the promise of continued success. From the ashes of an industry that nearly disintegrated over the last two years, is emerging a more responsible and well-run league of teams. The teams are better capitalized, have sound operating practices, and understand the difference between good and bad business. The loss of market participants that built their business on a weak foundation is good for the remaining players—customers and suppliers alike.

Certainly, the pace of electric deregulation has slowed, but not to the point of eliminating opportunities for us. We are currently evaluating a few eastern states and Canada for retail market viability.

And in most of our existing markets we have a tremendous amount of room for growth without the expense of entering a new market. That will be a key objective of ours in 2004—to profitably grow our existing markets. And when we do identify a new market opportunity, we'll weigh that opportunity with our ability to take on the new responsibility. We have understood for quite some time the need to not outgrow our ability to handle new business.

{SLIDE 14} We've established a strong team of talented players. There is no smoke and mirrors—our focus is clear—we have real people, creating real energy products for real customers. We will continue to improve the value proposition of our products so that customers reward us for that value. I look forward to continuing to share that reward with our investors.

{SLIDE 15} Now, I will invite Joe O'Leary, our Senior Vice President and Chief Financial Officer to tell you about securing the resources to stay in the league. Joe...