Integrys Energy Group

Knowing the Competition - September 02, 1999

FutureState of the Energy Industry and WPS Resources Corporation

by Larry L. Weyers - Chairman, President, and Chief Executive Officer

Welcome to Green Bay and the corporate offices of WPS Resources. I am Larry Weyers, Chairman, President, and Chief Executive Officer of WPS Resources Corporation. Before getting started, I would like to introduce to you the company representatives who are with us today.

Now back to business. Our purpose today is to provide you with a better understanding of the changes that we see taking place, how they will impact us, our strategy to deal with these changes, the management team in place, and how we intend to create shareholder value. I will begin by giving you a brief introduction to our corporate structure.

The holding company, WPS Resources Corporation, was formed in 1994 to enable us to compete in different ways in the changing marketplace. Today the holding company has four major operating subsidiaries.

The primary subsidiary is Wisconsin Public Service Corporation, an electric and gas utility serving northeast Wisconsin and portions of the Upper Peninsula of Michigan. Pat Schrickel is the President of this subsidiary and is also an Executive Vice President of the holding company.

WPS Energy Services, Inc. is a marketing and energy management subsidiary with offices in Wisconsin, Illinois, Michigan, and Ohio. Phil Mikulsky is President of this subsidiary and also Senior Vice President-Development for the holding company. Mark Radtke is Vice President of WPS Energy Services and acts as the Chief Operating Officer of this subsidiary.

WPS Power Development, Inc. competes for the development and operation of energy projects throughout the United States. This subsidiary currently has projects in Wisconsin, Oregon, Alabama, Arkansas, Maine, and Pennsylvania. Jerry Mroczkowski is Vice President of this subsidiary and also acts as the Chief Operating Officer. Jerry reports to Phil Mikulsky.

Last year we added an additional utility subsidiary to our corporate family when we closed on the acquisition of the Upper Peninsula Power Company. This subsidiary serves customers in the Upper Peninsula of Michigan. It remains a separate legal entity, but the operations have been integrated into our utility operations under the direction of Pat Schrickel. Clarence Fisher remains the President and Chief Executive Officer of this subsidiary.

Last year we also created an interim holding company for financing purposes. This subsidiary, known as WPS Resources Capital Corporation, is used to raise funds for unregulated activities and to segregate the fundraising for those subsidiaries from that undertaken for the utilities.

That's the way the corporate structure looks today, but the real questions are: How are we going to use this structure and where are we going? Our management team will answer these questions and provide insights into the strategy of each subsidiary, but first let's consider a number of developments in the energy industry.

A number of developments are occurring in the regulatory and legislative arenas. On the state level, legislation was passed last year in Wisconsin to address the reliability concerns that have occurred in the past two summers. Another bill is currently pending before the state legislature that will put in place the infrastructure necessary for the state to consider restructuring of the energy industry. We expect a restructuring bill to be developed in the near future and progress toward restructuring following the elections in 2000.

Since our subsidiaries operate in several states, we have involved ourselves in the restructuring initiatives in those states being championed both by the legislators and regulators. Restructuring is occurring differently in each of these states and we have been successful in understanding and impacting the restructuring plans of the states in which we operate. We continue to be very active in this arena and our Vice President of Public Affairs, Tom Meinz, will provide more insights for you regarding these activities a little later.

There is a great deal of consolidation taking place in the energy industry. We are very aware that our competitors are becoming larger and they will put new pressures on us as the marketplace opens to customer choice. We hope to show you today that we have developed strategies enabling us to create significant shareholder value as customer choice arrives and consolidation continues.

Technology will also play a major role in shaping the new marketplace and determining who will be successful. We have embraced new technology and strategically deployed it throughout our subsidiaries in a manner that provides us with the ability to compete against much larger firms and position ourselves for growth in the changing markets. We believe that developing and understanding the marketplace and applying technology to serve it will enable us to compete effectively. Examples of the technology that you will hear about as representatives of our subsidiaries speak today include automated meter reading and DENet, which is a proprietary data acquisition and communication device currently being sold to our larger industrial and commercial customers.

The pace of technological advancement is bound to increase and will very likely be one of the major drivers of change.

All of these developments in the marketplace will combine to create a marketplace very different from what we know today. Our Strategic Planning group has spent considerable time trying to understand how the new marketplace will act and I would like to share our analysis with you now.

We conducted our analysis and came to these conclusions by viewing the marketplace through the eyes of the customers. We believe the customer will ultimately determine how the marketplace develops and who is or isn't successful. The customer of tomorrow will be very different from those customers we serve today and the marketplace will serve these customers through firms known as retailers/aggregators. Participants in the retailer/aggregator segment of the marketplace include those entities listed. WPS will have two entries into this portion of the marketplace include WPS Energy Services and our utility subsidiaries which will be pipe and wire companies engaged in retail activity.

Existing utilities will continue to be pipe and wire companies which will construct, operate, and maintain pipe and wire infrastructure necessary to serve the end users. WPS will continue to act in this portion of the marketplace with our infrastructure in northeast Wisconsin and the Upper Peninsula. Our pipe and wire companies will also continue to act as retailers unless we are forced to exit that portion of the marketplace.

The transportation portion of this energy marketplace will include transmission companies and gas pipelines. WPS will participate in this portion of the marketplace but only through ownership of a portion of a larger transmission entity. We are required by state law to join an Independent System Operator by July 1 of 2000. We will also be joining the Wisconsin Transmission Company provided the legislation currently pending is passed.

The generation portion of this market will include a number of different players. WPS will participate in this portion of the marketplace with both regulated generation and generation owned by our unregulated subsidiary, WPS Power Development.

We believe the marketplace will also be served by a Power Exchange. The existence of a Power Exchange solves many of the problems that might develop in the marketplace.

That's how we see the energy marketplace developing. WPS has been active in understanding and developing this marketplace for the past four or five years. We have participated in retail gas pilots in several states, established a trading floor for gas and electric, and grown our subsidiaries through acquisitions of smaller firms such as the Fuel Services Group in Ohio or through acquisition of employees with a record of accomplishment at other firms such as our Michigan and Illinois offices. We have gained valuable experience and knowledge with these activities. That benefit has not come without cost, but we have accomplished significant growth without incurring the huge losses reported by many other firms. We believe this knowledge and experience will enable us to continue to grow in the near future and create shareholder value. We have strategic plans to accomplish that, and I am going to ask several of our officers to provide you more insights into those strategies now.

Let's begin with Tom Meinz, Vice President of Public Affairs, who can share with us some ideas regarding the changing rules in the legislative and regulatory arenas. Tom….