Integrys Energy Group

Financial Analyst Meeting - October 11, 2004

Generation from a Utility Perspective - Opportunities and Challenges
by Charles A. Schrock President & COO - Generation, Wisconsin Public Service Corporation

Hi. I'm Charlie Schrock….and I approved this message.

{Slide 1} I'm President and Chief Operating Officer - Generation, for Wisconsin Public Service Corporation. I'm really pleased that you can be here today, and I'm happy to have the chance to talk about the generation side of our business. The title of this presentation is "Opportunities and Challenges." I can assure you we have many of each, and sometimes it's hard to tell one from the other.

We are living in interesting times. It wasn't so long ago that Wisconsin was on the leading edge of electric restructuring. Today we are on the leading edge of the next construction boom of building electric generation facilities to supply power for the next generation of our customers. So let me start there with this challenge AND opportunity. We call it "Weston 4."

{Slide 2} Our energy demand continues to grow about 2 to 3 percent per year. We looked into the future and saw the need for additional base load generating capacity around 2008. We began planning in earnest for Weston 4 about two years ago, and submitted our Certificate of Public Convenience and Necessity (CPCN) application to the Public Service Commission of Wisconsin in September of 2003. The Commission approved the project on September 23, 2004, and the order was approved on October 7, 2004. The air permit is expected in the next two weeks.

{Slide 3} Our objective is to build a world-class facility. That doesn't mean gold-plated. It does mean that Weston 4 will be one of the best-designed and operated facilities in the world, using state-of-the-art equipment and controls. For example, we've decided to use supercritical boiler technology. This means that Weston 4's boiler will be more efficient than our current fleet of subcritical boilers, thus producing more megawatts for each ton of coal and—importantly—producing fewer emissions for each megawatt generated. Based in large part on customer input, we've decided to make this a rate-based facility, unlike other projects that have been proposed in the state. A rate-based facility will provide customer value and allow us to minimize the impact on our rates. This will keep us, and our customers, more competitive in the long run, which will be good for our business.

We are also taking great care to ensure that the plant is well designed. Our operations folks are involved in the design reviews to an unprecedented extent. This is a great example of how we are distinguishing ourselves from others in our pragmatic approach to our work. We're also working with Dairyland Power Cooperative to have them become a partner in this project. This will help us manage some of the risks involved in owning a large power plant. I'll touch on that a little bit more, later.

I could go on for an hour on all the great things we're doing with the design and construction of Weston 4…but in the interest of time, I had better move on.

{Slide 4} Our load will continue to grow, and our planning studies show that we'll need even more generation capacity—probably base load—a few years after Weston 4 is built. We've announced that we're working with Alliant Energy to partner on another 500-megawatt base load plant in that time frame. We're already working on ways that we can learn from and leverage our Weston 4 project to create synergies for the next plant.

{Slide 5} Our next generation of power plants will help us with another challenge—environmental issues. It's no secret that the regulations in this country continue to evolve toward more stringent requirements. Society and our customers expect us to provide reliable electricity and continue to reduce our emissions. We have an aging fleet of plants, and we are constantly looking at the best way to meet the demands of our customers while reducing our emissions and making optimal use of our fleet. Our new generation projects will allow us to reduce emissions as we rely on more efficient base load generation, coupled with strategically placed environmental controls on our existing fleet. We are aggressively looking at other environmentally friendly options. For example, last July we announced that we've entered into a contract for 70 megawatts of wind generation. We'll continue to look for innovative and cost-effective ways to increase the renewable portion of our generation mix.

{Slide 6} We view risk management as a key area for our success. There are a number of risks that we must manage, and managing and reducing our risk is vital to our customers and shareholders. There are numerous examples of our efforts to manage risks. First of all, the regulatory compact—we don't take it lightly, and we are careful to nurture our relations with regulators. We ensure that our positions are well thought out and are consistent with regulatory requirements and policies. We prepare quality submittals, and we maintain frequent and open communications with our regulators to ensure that our issues are well understood. And, we use the tools that we are given. Recent examples include the fuel window filing we made in February and the deferral request that we made to the Commission on Weston 4. That deferral was approved for 72 million dollars, and allowed us to continue our engineering and design work on the project while we worked our way through the regulatory process. This results in benefits to the schedule and to cost management.

Another area of risk management is our practice regarding fuel supply. We maintain a portfolio of contracts, using different vendors, different transportation suppliers, and competitive bidding. Our portfolio is diverse in terms of contracts and expiration dates.

Our jointly owned plants provide us with another form of risk management. Being involved with jointly owned plants allows us to enjoy the economies of scale that a larger facility brings, while limiting the amount of megawatts that we have on any given turbine. We call this "shaft diversity." It allows us to better manage the reliability of our system. Last February, we announced that we are working with Dairyland Power Cooperative on Weston 4. Although we are prepared to manage and operate 100 percent of Weston 4, having Dairyland as a joint owner will allow us to better manage some of the risks associated with a large power project and will also help us better align our needs with our generation supply.

We look ahead and try to manage those things that could affect us in the future. "MISO Day 2" is a good example. We have been following the MISO Day 2 development closely, and are an active participant to ensure the rules are well crafted. In addition, we have been preparing ourselves for the MISO Day 2 environment. We have engaged our operations staff and our system dispatch staff to develop the systems and protocols needed to be ready when Day 2 is upon us.

{Slide 7} Our risk management activities go hand-in-hand with our corporate asset management strategy. The sale of our Kewaunee Nuclear Power Plant is a great example. Kewaunee is an aging plant in an aging fleet of nuclear plants. We've found that despite our efforts to control costs and risks, things still happen—often things beyond our control—that cause financial volatility and risk to our shareholders. The security requirements that were imposed on the plant after 9-11 are a perfect example. We'll be spending millions of dollars to comply with those requirements. And, no one could have predicted this prior to 9-11.

As a small company, we came to the realization that risks like these might be handled better by a larger company that has a core competency in nuclear operations and has a desire to operate a fleet of nuclear plants. When we were approached by one of those companies, we decided that we would sell the plant if we could do it in a way that would not harm our shareholders, our customers, or our employees, and if the new owner could continue to operate the plant in the safe manner and consistent with the standards of excellence that we have established over the years.

Dominion Energy Kewaunee, a subsidiary of Dominion Resources, stepped up to the plate and made an offer that met our objectives. We have an asset sale agreement and power purchase agreement that ensure that the output of Kewaunee will still be generated for the benefit of our customers. The total costs that we incur through our power purchase agreement will actually be slightly less than what we expect to incur if we still own it. And, all operating risk and virtually all economic risk is transferred to Dominion. Let me give a real-life example of what I mean. Last January, Kewaunee was out of service for an unplanned outage for about two weeks to address issues having to do with a heat exchanger on an emergency pump. We had to replace Kewaunee's output with higher-priced purchased power. That cost about 5.7 million dollars and this was the justification for our fuel window filing with the Public Service Commission of Wisconsin. Under the power purchase agreement, Dominion would have been completely liable for that extra cost associated with the unplanned outage.

I must admit that as a long-time member of our nuclear organization and former plant manager, I have mixed feelings about the sale of Kewaunee. Nevertheless, I've concluded that the sale is in the best interest of our shareholders, customers, and the employees at Kewaunee. Those employees are very excited about the transaction. Dominion is anxious to take the reins. This is truly a win-win transaction for all. And, importantly, it's a demonstration of our commitment to manage the risks that we confront to the benefit of our shareholders and customers.

In the meantime, the Nuclear Management Company (NMC) continues to operate the Kewaunee plant very well. Other than the January outage that I mentioned earlier, the plant has been running well. There have been no problems with the new steam generators that were installed in 2001. Over the past two years, the NMC has successfully increased the power output of the plant. The total plant output is now at about 575 megawatts (net), which represents about a 6 percent increase from its previous level. Our 59 percent interest in the plant entitles our customers to about 339 megawatts.

We continue to make improvements to the plant. During the outage that is currently underway, the NMC will replace the reactor vessel head. The total cost for this job is about 20 million dollars for Wisconsin Public Service and our joint owner, combined. But it will pay for itself with reduced maintenance costs. The NMC is ready for this work, and we expect no problems with the installation.

{Slide 8} It wouldn't be right for me to finish without talking about our operations. As you know, among Wisconsin Public Service, Upper Peninsula Power, and Wisconsin River Power, we own or operate about 2,275 megawatts of power plants, including about 1,270 megawatts of coal, 335 megawatts of nuclear, and 500 megawatts of natural gas. I'm proud of our operations. We focus on sound maintenance programs, knowing that it will result in sound operations. Our 2003 operating data bears this out. Our 9 coal-fired units at Weston and Pulliam had an average availability of nearly 91 percent in 2003.

{Slide 9} As shown by this chart, our variable costs compare quite well with the average in the region. Of course it is our intent to maintain this cost advantage. We know that we must control our operating and maintenance costs, too, especially as we work through the next few years of rate pressure from our construction program. So, we look to continuously improve our processes, focusing on taking costs permanently out of our operations.

{Slide 10} Of course, none of this is possible without the right people, in the right places, doing the right things. We are very fortunate to have a qualified and experienced workforce. We are a preferred employer in this region. This allows us to attract top talent. We have systems in place to ensure our employees are properly trained for their jobs. We have management systems that ensure we provide employees with mentoring and challenges to keep them engaged. We utilize job rotations and assignments that provide our employees with diverse experience to help prepare them for the future. For example, we have a growing number of employees in our utility operations that have had experience at multiple plants around the utility, as well as experience with our nonregulated generation facilities. I know that this will help us in the future. It is these employees who provide "The Energy Throughout" our operation that will make us successful in the future.

Now, Larry Borgard will discuss energy delivery from a utility perspective. Larry…