Integrys Energy Group

Financial Analyst Meeting - October 11, 2004

Energy Delivery from a Utility Perspective - Opportunities and Challenges
by Lawrence T. Borgard President and COO - Energy Delivery, Wisconsin Public Service Corporation and Chief Executive Officer, Upper Peninsula Power Company

{Slide 1} Good afternoon everyone. As Charlie mentioned, my name is Larry Borgard. I am President and COO of Energy Delivery for Wisconsin Public Service Corporation and CEO of our Upper Peninsula Power Company subsidiary. I want to give you some insight into what energy delivery at the regulated utility level means for WPS Resources and what we're doing to create value in energy delivery.

{Slide 2} When we speak about energy delivery, we typically break it into three components. The first piece is customer service. This is where we have our retail customer relations folks, including account executives as well as our customer value or what some utilities call marketing and support services. The second area is our pipes and wires business. This is where we have central engineering functions as well as our field operations. The final piece is energy sales and procurement. Within this area we have our energy supply and control functions as well as our wholesale marketing activity.

{Slide 3} We have more than 1,400 employees involved in energy delivery at Wisconsin Public Service and Upper Peninsula Power. Our customer service employees are predominantly located in Green Bay. Pipes and wires is where the bulk of our employees represented by International Union of Operating Engineers, AFL-CIO Local 310 reside. In energy sales and procurement, we again have mostly professionals located in Green Bay. You'll notice that I've included Upper Peninsula Power on the right-hand side of this slide and they are mostly pipes and wires employees.

{Slide 4} Like many other utilities, we segment our customers by market sector. We've actually taken it a step or two further and looked deeper into those sectors to understand the differences between customers' value drivers within each sector. But for this presentation we'll stay at the higher level, which includes the wholesale, large commercial and industrial, residential, agricultural, and small business sectors.

{Slide 5} This slide gives you a feel for revenue by market sector. Obviously, as the graph shows, residential is the largest single sector. New residential business has been relatively strong over the last several years. Our large industrial and commercial business was a little soft in 2002 and 2003, but we've seen it picking up in 2004. We have been targeting the wholesale market lately and have announced several successful customer acquisitions over the last year.

{Slide 6} This is a chart showing the number of customers in each market sector. Like most utilities, it is dominated by the residential sector.

{Slide 7} Customer service includes a variety of functions. I want to draw your attention to a couple functions that may be different within Wisconsin Public Service and Upper Peninsula Power than in other utilities. The first is our Business Information Center. This is a specialized call center for small commercial and industrial customers that is staffed with folks who are dedicated to that specific market sector. Our Business Information Center is open for extended hours based on our customers' requests. The second function that is different from other utilities is our Customer Communication Center. We operate a call center that has about 70 to 75 agents who are available for customers 24 hours a day, 365 days a year.

{Slide 8} I'd like to review a couple of the strategies that we are pursuing in the customer service area. First and foremost, our customer service strategy aims to understand what drives value for our customers. We've done a significant amount of research in this area, and have discovered three drivers of value for our customers. They are price, service quality, and-this may be a little surprising—our corporate character. Clearly, the largest driver for us today is price, as we've filed rate increases with the Public Service Commission of Wisconsin for the past six years. As a result, year after year we see price becoming a bigger and bigger driver of customer value.

The second strategy is being available to meet our customers' needs when they want us and how they want us. For example, as I mentioned, we have a 24/7-call center so our customers can call whenever they want to talk to us—not just when our local offices are open. In addition, we have an Internet presence that is growing—again, under the idea of providing customers with service when they want it and how they want it. A growing number of our customers are interested in communicating with us and obtaining information from us over the Internet. We've taken great strides the last several years to standardize our processes as well as to centralize them. Obviously, standardizing allows us to deliver consistent quality of service throughout our service territory. By centralizing, we've been able to gain some fairly significant operational efficiencies.

{Slide 9} Wisconsin Public Service's electric rates compare well within our region and across the United States as indicated on this graph as of May 31, 2004, the latest data available from the Edison Electric Institute. Wisconsin Public Service's electric rates are the lowest of the five utilities in the state and lower than the average of the three regions we compare ourselves with—Wisconsin, the Midwest, and the United States. We anticipate that Wisconsin Public Service will retain its competitive position through 2004 and beyond.

{Slide 10} For large commercial and industrial customers, our natural gas distribution rates are significantly lower than other utilities in the state. Our rate case activity has allowed us to remove most of the industrial to residential rate subsidies. We strive to maintain a low cost competitive position. Wisconsin Public Service's residential natural gas rates are also very competitive with other utilities in the state.

{Slide 11} I can stand up here and tell you how great we are at serving our customers, but that wouldn't mean much. The ultimate test is what our customers say. Over a six-year period, we're proud of the fact that our customers have ranked us as one of the very best in the country.

{Slide 12} Now we'll take a look at the pipes and wires side of the business. This slide gives you a geographical look at our service territories and significant operating locations throughout Wisconsin Public Service territory, which is in maroon, and Upper Peninsula Power territory, which is in dark green.

{Slide 13} The pipes and wires area also has a number of functions. We have central engineering staffs that provide services to Wisconsin Public Service as well as to Upper Peninsula Power. Those staffs include Electric Distribution Engineering, Gas Engineering, and Substation Engineering. Wisconsin Public Service has 19 operating locations, and Upper Peninsula Power has 5 primary operating centers spread throughout the Upper Peninsula of Michigan. This area is responsible for all of the construction, operation, and maintenance of our pipes and wires in both companies. In addition, these folks are responsible for emergency response, whether that's for a power outage or for a gas pipeline dig-in. And, in fact, we've spent significant time and effort over the last several years to improve our disaster recovery and enhance reliability for our customers. We have mirrored our systems and have provided backup capabilities in case of a natural or manmade disaster. Lastly, we operate a Distribution Operations Center in pipes and wires. The 24/7 center responds to emergencies and directs field crews.

{Slide 14} We're pretty proud of our electric distribution and natural gas systems. We spend, on average, 100 million dollars in capital on our energy delivery business each year. In the electric distribution area, 90 percent of our circuits are operated at an elevated distribution voltage, which is 24.9kV. If you compare this with other utilities, you will find this is a significantly higher percentage of feeders operated at this voltage. Similarly, in the gas distribution area, 70 percent of our mains are plastic. Those that are steel are under cathodic protection. This is evidence of the fact that we continually refurbish and rebuild our systems. We inspect our pipes and climb our poles on a routine basis. This ensures that our systems are in good operating condition, which directly contributes to the reliability of our system and lower costs for our customers.

One of the areas where we've spent significant effort recently is what I call our back office system. This includes a new automated meter reading system that will be completed by the end of the year, a new customer information system that will go live in the first half of next year, a new mapping system that we call EAGLE, a new work management system, and a customer relationship management system that all have gone live in the last year or so. We are significantly improving our back office system capability by embracing technologies that make sense for our business-providing better customer service at a lower cost to our customers.

{Slide 15} Our strategy in this part of our business is clear—safety is first. We take a very strong approach to safety. At WPS Resources, anytime we conduct an employee meeting we include a safety topic. That focus over the last couple of years has yielded dividends in improved safety performance throughout the pipes and wires area.

Another strategy for pipes and wires is to improve the efficiency of our local offices. We have centralized a number of functions from these local offices to the point where they are primarily operating centers. We've provided customers with a number of other more efficient ways to handle routine interactions with us.

With respect to workforce management, our focus is to get the right skills and the right number of people at the right place at the right time. What that means for us is consolidating specialized skills in hub locations and then having our people travel to satellite offices when those specialized skills are needed. In addition, we want to provide service to our customers when they want it, not just when it is convenient for us.

We do use contract labor and we try to do that efficiently. Predominantly, the contract labor we use is in the areas of tree trimming and underground pipes and wires construction. A small amount of overhead construction is also contracted to third parties.

The last strategy in the pipes and wires area is to have the people who are out in our customers' front yards and on the streets of the communities that we serve deliver the value to our customers. These are the thousands of moments of truth that create positive impressions of WPS Resources.

{Slide 16} I want to talk a little bit about our union philosophy. I think you will find that our relationship with our Local is an excellent one. It really is based on a business relationship that has worked successfully now for many years. We have taken a stronger stance in managing what we own. Some people call this management rights. We usually find it beneficial to both sides to negotiate significant changes, but management stands willing to implement changes allowed in the contract at its discretion. Both management and our unions have seen value in contract negotiations with what we call a shopping cart approach. That approach is really agreeing up-front on the size of the contract package. Once the size is agreed to, we can price out each negotiated issue. Both the union and management know at what point the shopping cart becomes full and can't handle any other costs. In the last two contract negotiations we've been able to settle three-year contracts in less than 30 days of negotiation and ahead of the expiration of the previous contract. Lastly, with respect to union philosophy, we are very up-front and honest with our unions. Our decisions are based on data, and we openly share that data with them.

{Slide 17} The last area I will cover is energy sales and procurement. These are the folks who operate the generation control functions and the control area functions for Wisconsin Public Service as well as Upper Peninsula Power. They do both the short-term and long-term electric supply buying and selling, and they acquire natural gas supply for the retail business as well as the fuel supply for our natural-gas-fired generating units. This area also negotiates supply and sales contracts. We've had a number of wins recently in this area—principally with the companies listed on this slide.

{Slide 18} This is a geographical look at our major wholesale customer and energy supply locations. You can see in both cases, our utilities stick pretty close to home. In orange, are Weston and Pulliam, coal-fired power plants; West Marinette, which has a series of natural gas units; Kewaunee, our nuclear facility; Calpine, which is two natural gas-fired units; and Columbia and Edgewater, which are jointly owned units with other Wisconsin utilities. And then in blue we have our significant wholesale customers that I mentioned on the previous slide.

{Slide 19} And, lastly, I'll describe the strategies in the energy sales and procurement area. First and foremost is to be ready for MISO Day 2. We believe this will result in a significant change in the way the market operates, with a new set of winners and losers. We are fully prepared at this point for MISO Day 2 to begin on March 30, 2005.

We have taken an aggressive stance in acquiring wholesale load, but it has been a very strategic strike in that we wanted to make sure that we acquired wholesale load in the right size and in the right geographic location meaning Wisconsin and the Upper Peninsula of Michigan. We also wanted to sell the wholesale customers the right product that minimizes risk to the corporation while rewarding our shareholders—and of the right duration too. By duration we mean a contract of a length that supports our generation expansion plan. So typically you will find these wholesale customers in 10-year or even 15-year contracts that provide significant support for the new generation that Charlie Schrock talked about. We utilize formula based rates that enable us to pass through certain costs to our wholesale customers and minimize risk to shareholders. And, lastly, we embrace diversity in our supply portfolio. Some utilities turn their backs on IPPs; some utilities don't purchase outside their own area. We will contract with IPPs, when it makes sense for our customers, for example our contracts with Calpine and Invenergy. We still purchase 15 to 20 percent of our energy from out of state to supplement our own generation.

Now Mark Radtke will discuss our nonregulated strategies. Mark…