Integrys Energy Group

Building on the Basics - September 02, 1999

by Patrick D. Schrickel - President and Chief Operating Officer

I'll talk about the foundation of WPS Resources Corporation, our regulated utility operations. The Packers analogy might be the offensive and defensive lines - the anchor that allows us to open holes and execute the rest of our game plan. We have a very solid foundation. Wisconsin Public Service Corporation has the lowest electric and gas rates in Wisconsin and we rank very low in the Midwest.

We combine low rates with a reputation for excellent customer service. There are plenty of internal customer surveys that support our outstanding customer service record but I'll site two recent external studies that prove the point. A recent J D Powers residential customer survey found us tied for #2 in the nation in customer satisfaction with their utility service among approximately 100 utilities surveyed. And that's in spite of, or in part a result of, the great restoration efforts of our employees after major flooding and a couple tornadoes that hit our service area in recent years.

Also a recent Public Service Commission of Wisconsin report showed WPSC having the lowest customer complaint frequency of all major utilities in Wisconsin for the past several years.

A third leg of our utility foundation is a modern infrastructure system. A medium pressure plastic gas system with no cast iron or bare steel pipe and an upgraded and well maintained high voltage electric distribution system offer excellent reliability and low operation and maintenance costs.

Approximately three years ago, seeing the evolution of our business, customers, and regulatory environment, utility product centers or business units were formed. Today, we manage generation, transmission, distribution, service, and Upper Peninsula Power Company as distinct operating units.

In the limited time available today, I'll mention a couple key opportunities or issues for each utility business unit, starting with generation.

Generation

I'll cover three items in the generation arena. The first is the value of our generation assets. WPSC owns just under 1,800 MW of generation - 70% coal, 12% nuclear, and approximately 17% peaking and hydro. Detailed analysis suggests our generation is worth 1.5 - 5.0 times its current book value. Our current strategy is to retain existing generation in the utility, but the low book value and competitive position of our generation, especially considering transmission limitations in Wisconsin, offer both insurance against stranded investment and increased shareholder value potential as generation deregulation evolves in the Midwest.

In February of 1999, WPSR announced the formation of a nuclear management company with Northern States Power (NSP), Wisconsin Electric Power Company (WEPCO), and Alliant. The nuclear management company should be operational in the first quarter of the year 2000. It will operate about 3,800 MW of nuclear capacity. The short term goals of the nuclear management company are to focus on operational excellence and to reduce costs through synergies and economies of scale. WPSC expects to transfer the operating licenses of the five plants to the nuclear management company sometime in 2000. In the long run, we believe transfer of the assets to a nuclear generating company may offer the greatest shareholder value opportunity.

The third and last generation issue I will summarize is the potential impact of the EPA's nitrogen oxide emission rules as they relate to our plants. As you know, this proposed regulation, which affects 22 states in the eastern United States, would require compliance by 2003. The regulations are being challenged in the courts. Further clarification is expected later this fall on the status of the EPA regulations and Wisconsin's implementation of those regulations. Under a range of scenarios, the rules, if implemented, would require capital investment of $60 - $120 million, with a most likely cost of $85 million. This could increase electric rates about 3%. All signals from Madison are that these expenditures will be recoverable in our rates.

Transmission

Moving to the transmission area, I'll describe three issues here as well: Our plans to build the Arrowhead to Weston line, the anticipated Wisconsin transmission company, and a new technology application we're extremely proud of.

The Arrowhead to Weston 345 KV transmission line is, we believe, the largest transmission project being pursued in the country right now. Certainly, it's the largest one in Wisconsin in terms of dollars, distance, and voltage. WPSC and Minnesota Power will jointly build the line. There is strong support for the project from the Governor, other utilities, industrial customers, and consumer groups. It will be a big step in solving Wisconsin's transmission limitations. The line will improve reliability to WPSC's customers as well as the entire transmission system in the upper Midwest by relieving the existing constraint between Wisconsin and Minnesota. The investment opportunity is approximately $150 million. We are on a very aggressive schedule targeting completion for late 2002. Upon completion, the Arrowhead to Weston line will become part of the Wisconsin Transmission Company to benefit and be paid for by all customers of the Wisconsin Transmission Company.

The Wisconsin Transmission Company, as currently under consideration by the Wisconsin legislature, would create a single owner and operator of transmission facilities in Eastern Wisconsin. It would create a single entity to construct, operate, maintain, and own all transmission facilities. WPSC would have a share of ownership in the transmission company proportionate to the transmission assets WPSC would sell to the transmission company. WPSC would get a return on its transmission assets very similar to today based on FERC authorized return for transmission (of course appropriate return on transmission facilities is a debate at FERC today). An additional advantage to WPSC and our shareholders from formation of the Wisconsin transmission company will be the opportunity to invest in any new transmission built in the state, whether it resides in our service territory or not.

We're continually searching for innovative ideas to improve service and drive down costs. During the first quarter of next year, WPSC will be the first utility in the world to install distributed superconducting magnetic storage technology in a transmission application. These devices will improve reliability for our customers in northern Wisconsin. The technology solution is a much more cost effective and environmentally friendly way to improve reliability than additional transmission. And the superconducting magnets can be relocated to reinforce the transmission system in other areas as needed.

Distribution

I'll move on to discussion of our distribution business unit. We are continuing to aggressively expand our natural gas system, reaching out to capture new service territory and new customers. Since 1990, we have increased our gas customers by 28% and our miles of main by over 50% as we staked out new territory.

A significant new business and investment opportunity for the distribution business is automated meter reading. "Customer intimacy" is a marketing strategy for WPSC. The more we know about and understand our customers' needs and how they use our products, and the more intelligence we provide to them, the more successful we will be at retaining existing customers and attracting new customers. The Automated Meter Reading system WPSC is installing will utilize our electric distribution system to transmit data to and from the customer. It's called power line carrier technology. The system offers many benefits to customers - no estimated bills, improved meter reading accuracy, easier name changes, and on-offs. The system will also improve outage response by continuously monitoring service availability. The company benefits by eliminating meter reading jobs, acquiring significant energy consumption information on any desired interval, and having a platform for offering additional services to customers.

In Phase I, we are automating approximately 20% of our meters over the next year. We expect to receive approval for automating the remainder of our meters by the end of 2002. Total investment for this project-another growth opportunity for the utility-is estimated at $90 million.

The third element of our distribution operation that I'll cover is Upper Peninsula Power Company. The final approvals needed for the Upper Peninsula acquisition were received approximately a year ago. The combination and integration of the utilities is going very well. Processes are being combined and redundant jobs have been eliminated. We have what I believe is a rare success story for our small merger. We estimated $5 million in cost reductions by mid-2000. We are ahead of budget. Savings will be at least 10% greater than the $5 million forecasted, and we are ahead of the plan timeline - expecting to have all major processes converted and redundant positions eliminated 3 - 6 months ahead of schedule.

I'll close my discussion about utility product center operations with a couple comments concerning our Services product center.

We are benchmarking all of our services (accounting, finance, human resources, information technology, etc.) against best practice companies in the industry and outside the utility industry. We are entering into service agreement contracts between the Services business unit and each of the other product centers. These service level agreements define service level quantity and quality commitments and transfer charges. All the service level discussions are preparing us for the time when each product center will have a choice of in-house services versus outsourcing support service functions.

And, lastly, since I know you'll ask if I don't cover it, we are ready for Y2K. We began our Y2K efforts in 1996. We are ready with all our systems and equipment that directly affect our ability to provide energy to customers. During the remainder of the year, we'll be devoting our attention to lower priority systems, refining contingency plans, and continuing to test systems. WPSC and the rest of the industry will be participants in a national preparedness drill on September 8 and 9. We don't expect Y2K related problems on New Years Eve. However, we will have employees on duty at power plants, substations, gas gate stations, and other key areas as a precaution. By the end of the year, we will have spent approximately $5 million on Y2K. All of our subsidiaries are ready, and we've had an independent consultant, the Gartner group confirm our readiness.

So, in summary, the utility portion of WPS Resources has a strong track record, a well- recognized value package of price and customer service, and plans to take advantage of opportunities and technology in the changing energy marketplace. We've built upon the basics, created opportunities, and are driving toward that goal line.

Now I would like to introduce Phil Mikulsky, Senior Vice President-Development for WPS Resources, who will tell you about our new lineup at WPS Resources.