Energy Risk Management Strategies for Sustainable Growth

1. Managing Riskin Today’s Energy World Rick KuesterExecutive Vice PresidentWe Energies June 22, 2009

2. We Energies Overview • Electric Customers: 1.1 million • Gas Customers: 1 million • People Served: 2.4 million • Service Area: 18,410 square miles in Wisconsin and 5,055 square miles in Michigan’s Upper Peninsula • Steam Customers: 455 • Number of Employees: 4,800

3. The State’s Energy Needs • State’s generation need – no new base load in 20 years • Peak demand rising 2% - 3% per year • Do nothing: generation shortfall – 7,000 MW by 2016 • Most new capacity – natural gas. Increasing dependence on expensive PPA’s • Significant transmission constraints • California / ENRON / IPP issues – state focused on reliability

4. A Focus on Self-SufficiencyMeeting the State’s Energy Needs • The expansion of our energy infrastructure is well under way • A comprehensive plan called ‘Power the Future’ • The largest private construction program in state history • Four new generating units by 2010 • A major investment in wind energy • A demand reduction program – energy efficiency • Biomass projects • Solar investments

5. Power the Future Plan Natural Gas Status Approved by PSCW in 2002 Capacity 1,090 MW Investment $667 million In Service Dates Unit 1 – July 2005 Unit 2 – May 2008 Cost Per Unit of Capacity $614/kW

6. Power the Future Plan Coal Status Approved by PSCW in 2003 Capacity 1,030 MW1 Investment $1.9 billion1, 2 Targeted Unit 1 – 2009 In Service Dates Unit 2 – 2010 Cost Per Unit Approximately of Capacity $1,850/kW 1. Approximately $350 million will be invested in the coal units by MG&E and WPPI for 200 MW of capacity. 2. Does not include potential impact of Bechtel claim.

7. Power the Future Plan Wind Location: Fond du Lac County Capacity: 145 MW 88 turbines, across 10,600 acres Investment: Approximately $300 million Approval by the Wisconsin Public Service Commission: February 1, 2007 Completed: May 2008

8. Power the Future Plan Wind Location: Columbia County Capacity: - 162 MW - 90 turbines Projected Cost: $340 million to $413.5 million Application submitted: October 27, 2008 Review of application: A decision is expected from the Wisconsin Public Service Commission later this year

9. Current Capital Spending Forecast(Millions of Dollars) $1,137 $1,010 $875 $819

10. Develop a Strategy for Managing Risk • Establish a holistic view • Regulatory • Environmental • External stakeholders • Financial • Schedule • Project Management

11. Develop a Strategy for Managing Risk • Establish a holistic view • Identify the key success factors and risks upfront • Dedicated organization team • Clear and accurate budget/contractor agreement • Integrated project schedule • Collaborative quality and safety strategy • Pro-active communication with stakeholders

12. Develop a Strategy for Managing Risk • Establish a holistic view • Identify the key success factors and risks upfront • Find linkages and synergies to your enterprise, which provide additional leverage and reduce risk Oak Creek Expansion Project • Partnership with MG&E and WPPI • Project Labor Agreement

13. Develop a Strategy for Managing Risk • Establish a holistic view • Identify the key success factors and risks upfront • Find linkages and synergies to your enterprise, which provide additional leverage and reduce risk • Develop “optionality” into your strategy License Renewal and sale of Point Beach Nuclear Plant provided: • Enhanced long-term value of asset • Reduced operating risks • Returned proceeds to customers • Continue to receive full output along with long-term pricing certainty • Nuclear generation remains part of our portfolio mix • Provides future new nuclear development options • Provides wind development options

14. Develop a Strategy for Managing Risk • Establish a holistic view • Identify the key success factors and risks upfront • Find linkages and synergies to your enterprise, which provide additional leverage and reduce risk • Develop “optionality” into your strategy • Share the risks and rewards Pleasant Prairie AQCS Project • Shared cost, schedule, startup and performance risks as an incentive to reduce costs while meeting the target price • Developed a well-defined project scope • Tracked, recorded and agreed to savings and cost additions prior to being finalized • Ensured focus on the project goals while controlling costs

15. Align Internal Strategies • Cost Control • Management Involvement • Organizational • Quality & Safety • Schedule • Compliance

16. Cost Control Strategy • Uniform approach to precisely define and maintain consistency in all project budget commitments • Maintain stability in the budget commitments such that the budget strategy is abandoned when problems occur or tough decisions have to be made • For fixed-price contracts - aggressively manage change order process to avoid impact on overall project budget • For target-price contracts - align contractor/owner incentives as well as organizational/individual incentives to engender shared accountability for the overall project budget

17. Cost Control Strategy • Insure high degree of predictability in short-term and long-term financial results • Promote accuracy in budgeting and allocation of costs • Eliminate unnecessary contingencies and “fat” • Eliminate all “after the fact” budget reconciliations • Provide clear and precise communication to avoid downstream surprises

18. Management Involvement • Increase interaction in the field with vendors and with workers • Invest significant time in inter-departmental planning and communications • Increase anticipatory and decrease reactionary efforts • Apply time to long-term completion issues for each project • Push decision making to lower levels • Promote intelligent risk taking • Focus on employee performance management • Positively and promptly react to proposal for change • Challenge the status quo and minimize surprises

19. Internal Organizational Strategy • Implement project based organizations • Emphasize uniform approaches to cost, schedule controls and reporting • Promote accountability and shared responsibility for project goal achievement • Recruit a balanced mix of expertise • Match the right talent with project

20. Quality and Safety Strategy • Develop processes for oversight of contractor and vendor quality and safety programs • Work in collaborative manner with contractors to reduce rework on target-price jobs • Reduce problems through lesson-learned programs • Increase management involvement • Institute enhanced problem solving techniques to avoid ineffective expedient actions

21. Schedule Strategy • Rigorously implement an “integrated” project level schedule • Establish and reinforce that this is the “single sheet of music” to which everyone will “play” • Enhance the stability of the schedule by improving planning to reduce surprises and minimizing schedule changes • Establish both individual and shared schedule performance accountabilities

22. Compliance Strategy • Promote line-management responsibility • Establish compliance culture all the way down the line, include contractors and vendors • Establish common understanding of what compliance will entail • Develop relationships and communicate routinely with agencies

23. Summary • Establish a holistic view • Identify the key success factors and risks upfront • Find linkages and synergies to your enterprise, which provide additional leverage and reduce risk • Develop “optionality” into your strategy • Share the risks and rewards • Align your internal resources