威斯康辛能源 (WEC) 2004 Q4 法說會逐字稿

Good afternoon. Welcome to the Wisconsin Energy 2004 year end earnings conference call. Before the conference call begins I will read the forward-looking language. All statements in this presentation other than historical facts are forward-looking statements that involve risks and uncertainties which are subject to change at any time. Such statements are based on management's expectations at the time they are made in addition to the assumptions and other factors referred to in connection with the statements, factors described in the Company's latest form 10-K and subsequent reports filed with the Securities and Exchange Commission could cause actual results to differ materially from those contemplated. During the discussion referenced earnings per share will be based on diluted earnings per share unless otherwise noted. The conference is being recorded for rebroadcast and all participants are in a listen-only mode at this time. After the presentation the conference will be open to analysts for questions and answers. In conjunction with this call Wisconsin Energy has posted on its website a package of detailed financial information on its 2004 year end and fourth quarter performance at www.wisconsinenergy.com. A replay of our remarks will be available approximately two hours after the conclusion of this call. And now like to introduce Gale Klappa, Chairman of the Board, President and Chief Executive Officer of Wisconsin Energy Corporation.

Thank you. Good afternoon, everyone and we appreciate you joining us on our conference call to review the Company's 2004 results. Let me begin as always by introducing the members of the Wisconsin Energy management team who are here with me today. Rick Kuester, President and CEO of We Generation. Allen Leverett our Chief Financial Officer; Larry Salustro our General Counsel; Jeff West, Treasurer; and Steve Dickson, Controller. All of us will be available to respond to your questions at the conclusion of our prepared remarks.

I'm very pleased with our progress across 2004. We moved forward on our strategic plan and we continued to improve our financial and operational performance. Allen will review our financial results in detail in just a moment, but as all of you saw from our news release this morning we earned $2.57 a share on a GAAP basis and $2.39 a share on an adjusted basis in 2004. From the standpoint of financial results, operational performance and customer satisfaction the Company clearly had the best year in its history. We also made major progress in strengthening our balance sheet. Allen will discuss our debt to total capital ratio a little later in the call, but I would like to point out that in 2004 we reduced our total debt outstanding by more than $650 million. On January 20th of this year we announced a dividend increase of 4.8 percent on our common stock. The new quarterly dividend is $0.22 a share which brings our annual rate to $0.88 a share. The new rate will be effective with the first quarter dividend, and that is payable on March 1. This increase reflects both the tremendous improvement in our balance sheet as well as our confidence in our long-term business plan. Going forward, as we told you before, our goal will be to raise the dividend on a consistent, predictable basis at approximately half the rate of growth in our earnings per share.

Now, let's turn to our progress on the Power of the Future plan. Let me begin with our Port Washington project. As you know, the Public Service Commission has approved the construction of two 545 megawatt natural gas fired units at our Port Washington site, and that is North of Milwaukee. All appeals against the gas plant were dismissed last year. Construction on the first Port Washington combined cycle unit is now more than 87 percent complete. We expect the unit to go into commercial service in July of this year. Construction of the second gas unit at Port Washington is scheduled to begin in 2006. And that second unit is expected to be in service in time for the peak summer season of 2008.

Now, turning to the status of our construction plans at Oak Creek. In November of 2003 you will recall the commission approved the construction of two 615 megawatt coal fired units at our Oak Creek site South of Milwaukee. As you know much has happened since our last conference call with the legal challenges to our plans at Oak Creek. Before we describe the current status in detail it might help to remind you of where we began with the Power the Future project. More than four years ago a group of utilities, business and labor leaders, legislators and public interest groups came together to consider Wisconsin's energy needs. As a result a series of plans were put in motion to address the state's critical need for new energy infrastructure. This need is largely driven by the fact that while existing facilities have continued to age, no new base load generation has been built in Wisconsin in 20 years. Electric use statewide continued to grow at an annual rate of 2 to 3 percent, and by 2016 the state is expected to require an additional 7,000 megawatts of capacity. The strong economic rebound we saw in Wisconsin last year clearly underscores the need. The Milwaukee area alone added 18,300 jobs in 2004. This is nearly 30 percent of the gains statewide and a larger increase in jobs than what 26 states and District of Columbia experienced during the same period. The coal units planned for the Oak Creek site are base load plants that will help to us to avoid a serious energy shortfall in Wisconsin and reverse the trend we have seen toward a much heavier reliance on natural gas for power generation and purchase power.

So here is where we stand. On November 29 right after Thanksgiving a Dane County circuit court judge vacated the commission's approval of the new generation plan for Oak Creek. The judge's order would essentially turn back the clock, leaving Wisconsin again facing a shortfall of capacity, but with much less time left to resolve the issue. For this reason we and the Public Service Commission filed with the Supreme Court of Wisconsin for a direct expedited appeal of the circuit court decision. I'm pleased to say the Supreme Court of Wisconsin has agreed to take the case on an expedited basis and is scheduled to hear oral arguments on March 30. We are encouraged that the Wisconsin Supreme Court acted so quickly. I believe the justices recognize that the public policy implications of the lower court ruling are, indeed, significant. In the meantime we were able to negotiate with Bechtel, that is our contractor at Oak Creek, for a four month extension from March 1 to July 1 for the full notice to proceed at Oak Creek. This slows the immediate spending, but does not stop the critical engineering needed to keep this project on track.

Now, as we have discussed, in addition to legal reviews, several major environmental permits are needed for the coal units at Oak Creek. Four basic permits are required. Three relate to construction and one to the operation of the units. First we received our air permit from the Wisconsin Department of Natural Resources in January of 2004. Now, in this instance the permit is issued first and then it can be contested if any one wishes to do so. The contested hearings on our air permit concluded in October of 2004 and all briefs were filed as required by year end. Last week with good news the administrative law judge responsible for reviewing the case issued a decision that affirmed the issuance of our air permit. We are very pleased, obviously, with the decision. The judge confirmed that the Wisconsin Department of Natural Resources had done a very thorough job of assuring that the project with meet the state's stringent environmental requirements. Although this judge's decision is subject to further appeal in state court, this is a significant step forward for our project.

The second permit is a state water and wet lands permit again from the Wisconsin department of natural resources. This permit is referred to as a Chapter 30 permit and is required to build facilities in a Wetland area. This type of permit is issued only after contested hearings have been held. The contested hearings concluded in the fall of 2004 and the Chapter 30 permit was issued on November 22nd. The opponents are challenging this now -- this agency's decision to issue this permit in court in Wisconsin.

The U.S. Army Corps of Engineers must also issue a permit that is similar to a Chapter 30 permit whenever a project involves a navigable waterway. A public hearing by the Corps of Engineers was held here in September of 2004, and we hope to have a decision in the near future.

Finally, there is another permit which is issued by the Wisconsin Department of Natural Resources. In short hand its known as the WPDES permit. That stands for Polution Discharge Elimination System Permit. This permit is required for operation of the water intake and discharge systems for the plant. The DNR has determined that the proposed cooling water intake structure and water discharge meet the regulatory requirements of the state. A draft WPDES permit was issued in January for public comment this month. Once those comments are received the DNR will make its final determination. So subject to issuance of necessary permits and, of course, a positive result from the appeal to the Supreme Court of Wisconsin we hope to issue a full notice to proceed to Bechtel and begin construction on or before July 1.

Before I turn things over to Allen, I would like to review our pending and potential rate filings. We have three separate and distinct retail rate actions which I expect will be in front of the Wisconsin Commission in 2005 and we would like to describe them for you. The first is a price increase request which we filed in May of last year for approximately $84 million. This request is primarily related to continuing construction of unit one at Port Washington and costs associated with the initial work on unit one at Oak Creek. We have now adjusted this request downward to approximately $52 million. The 52 million represents costs incurred up to November 29 at Oak Creek. That, of course, is the day when the Commissions order allowing construction there was overturned. The Commission will hold a hearing on our revised $52 million request next week.

The second item is the request we filed just this past Monday to increase our fuel recovery rate in Wisconsin by approximately $114 million. Our fuel costs are being driven by a greater reliance on natural gas to generate electricity. A great deal of the energy that we purchase and produce on the margin to satisfy the growing needs of our customers is now produced by natural gas units. We expect a higher fuel recovery rate to be put in place on an interim basis in March. These revenues will then be subject to refund until our costs are audited of course, and the Commission five gives its final approval.

Finally the third is a general rate case which we would expect to file in the May to July time frame for rates to go into effect in early 2006. Now, as part of the Commission order several years ago that allowed the acquisition of WICOR, this Company is required to file a general rate case this year. That wraps up the rate case action for the year that we expect and now I will turn the call over to Allen who will give you additional details on our financial performance for 2004 as well as our guidance for 2005. Allen?

Thank you, Gale. As Gale stated on a GAAP basis we earned $2.57 a share in 2004 versus $2.06 a share in 2003. If you adjust for one time items in both 2004 and in 2003, we earned $2.39 a share this year versus $2.31 a share last year. Because of the number of 1-time items in the results this year I'll first talk about 2004 results without the one time items. Then I will review the one time items so that you can reconcile for the GAAP results. Once I have reviewed the earnings for 2004 I will provide some details on our cash flow as well as the drivers of earnings growth and guidance for 2005. It may be helpful for you to refer to pages 9 and 12 of the earnings package that we posted on our website this morning as make my remarks.

Ona consolidated basis our adjusted operating income was $611 million versus $597 million last year for an increase of $14 million. Operating income for the utility energy segment which includes Wisconsin Electric as well as Wisconsin Gas was $557 million compared to $544 million last year for an increase of $13 million. On the negative side the largest drag to earnings was certainly the weather. The impact of the weather relative to the conditions in 2003 pulled operating income down $28 million. Other negative drivers were higher benefit costs at $15 million, lower litigation recoveries at $6 million, and other items for a net of $1 million. In total the negative drivers reduced operating income $50 million in 2004. On the positive side, electric growth in our service territory increased operating income $33 million, gas rate increases added $11 million, and a lower underrecovered fuel cost position added $7 million to our results. Bad debt expenses were $12 million, lower in 2004 due to improved collections and the timing of the deferral order from the Public Service Commission of Wisconsin. Together these items added $63 million to operating income as compared to 2003. Now if you net the impact of the positive and negative drivers that I just reviewed you will come to the $13 million increase in the utility segment operating income for 2004.

Operating income in the nonutility energy segment moved from a $13 million loss in 2003 to $4 million of of income in 2004 for an increase of $17 million. The largest factor was the operating income of W.E. Power. In 2004 W.E. Power was able to capitalize approximately $7 million of costs when the lease for the new Oak Creek coal units was executed. We expect that all of these costs will ultimately be recovered from customers through the lease. In addition cost reductions at our Wisvest nonregulated power operations added another $6 million. Corporate and other income brought in $2 million of operating income in 2004 versus a loss of $1 million last year for an increase of $3 million. The largest contributor to this was our real estate company Wispark, which had a $4 million increase in operating income in 2004. Operating income for the pump and water systems business was $48 million for the seven months that it was part of Wisconsin Energy. This compares to $67 million for a full year in 2003. As you know, this segment was sold effective July 31, 2004 and it is accounted for as a discontinued operation in our financial statements. Taking the changes for each of these segments together brings you back to the $14 million increase in operating income for the company excluding one time items for 2004.

Other income for 2004 was $39 million which is down $4 million from last year. The primary driver for this was the $5 million contribution we made to our charitable foundation in 2004. Total financing costs decreased by $20 million. This decrease was driven by the large reduction in our debt levels in 2004 that Gale mentioned. Our income tax expense from adjusted earnings was up $19 million which was driven by increased pretax earnings as well as a higher effective rate. Our effective income tax rate on adjusted earnings was 37.5 percent in 2004, as compared to 35.3 percent in 2003. The lower effective rate in 2003 reflected tax credits from rehabilitation projects. Now, I expect that the effective tax rate will be approximately 38 percent in 2005. Adding these items brings you to $285 million of net income excluding one time items for 2004 versus $274 million in 2003. Or in EPS terms $2.39 a share in 2004 versus $2.31 a share in 2003.

Now, let's review the one time items. Results this year included a gain of $1.28 a share on the sale of the pump and water systems business offset somewhat by valuation charges of $0.81 a share associated with our Calumet and Minergy Neenah facilities, debt redemption cost of $0.13 a share, and then finally severance cost of $0.16 a share. Adjusting the $2.39 a share for these items brings you to $2.57 a share on a GAAP basis.

Let me now turn to cash flow. During 2004 we generated $599 million of cash from continuing operations. This was $69 million better in 2003 and reflects strong cash earnings and improved working capital utilization. We also received cash proceeds of $900 million from asset sales during the same period which included $857 million related to the sale of the pump and water service business and 39 million of sales related to our real estate investments. In 2004 we repurchased approximately 1.6 million shares of our common stock at a total cost of $50.4 million to complete our share repurchase plan. In addition, we are using cash to satisfy any shares required for the 401(k) plan, options and other programs. Going forward, given our currently planned capital program, we do not expect to issue any additional shares. We had capital expenditures of $637 million in 2004 with $426 million of this dedicated to our utility businesses and $190 million for our Power of the Future construction expenditures. In addition we paid $98 million in dividends. At the end of 2004 our debt to capital ratio was 59.3 percent as compared to 64.4 percent at the end of 2003. Now, this is the lowest level of debt to capital for Wisconsin Energy since 1999. Our goal is to maintain our debt to capital ratio at no more than 61.5 percent during the period we are constructing our new gas and coal fired generation.

Let me now move to 2005 earnings guidance. Our 2005 earnings guidance range is $2.30 to $2.40 per share. Now, I would like to spend a moment building this range up for you. First, you should start with our adjusted earnings of $2.39 in 2004 which excludes one time items. Then you need to deduct about $0.27 which relates to the earnings from our pump and water systems business through July of 2004. Then you should add back about $0.11 which reflects the benefit of the debt reduction and share buyback associated with the sale of this business that was not already reflected in the actual results. These adjustments result in a pro forma 2004 earnings base of $2.23 per share.

Then we have a number of positive and negative drivers that brings us to our guidance range for 2005. Let's run through each of these. On the positive side we have the following drivers. Normal volume growth at our electric and gas utilities should add $0.04 to $0.06 per share to earnings, 6 months of earnings at Port Washington number one is expected to add $0.07 per share. Work force reductions that were achieved in 2004 through both attrition and our severance programs should add about $0.15 per share. Reduction of depreciation expense from our nonregulated assets is expected to add $0.03 per share. And finally, a return to normal weather for both the gas and electric businesses would add another $0.10 cents per share. Now, on the negative side we also have a number of drivers. One additional planned nuclear outage -- one additional planned nuclear outage. We will have two nuclear outages in 2005 as opposed to one in 2004 is expected to reduce earnings $0.08 per share. Higher benefit costs including pension, active and retiree medical expenses are expected to reduce earnings $0.07 to $0.08 per share. A lag in fuel cost recovery in the Wisconsin retail jurisdiction is expected to hurt earnings $0.07 to $0.09 per share and note that this impact already assumes a favorable outcome in the fuel case that we filed earlier this week. Higher interest rates are expected to be a $0.01 to $0.02 drag. The requirement to begin expensing stock options is expected to reduce earning $0.02 a share. And finally, lower unregulated earnings, primarily at our real estate subsidiary, and other items are expected to reduce earnings a net $0.03 per share. Taking all of these positive and negative factors together brings you back into the $2.30 to $2.40 per share range for 2005. So again, our earnings guidance range for 2005 is $2.30 to $2.40 per share.

Now now I will not be providing guidance on quarterly earnings, but I do want to spend some time on the base of earnings for each quarter of 2004 stated on a basis that excludes earnings from the pump business and includes the impact of the share buyback program and debt reduction. So, in other words, what were the quarterly earnings behind the $2.23 annual base of pro forma 2004 earnings that I mentioned earlier. These values are shown on page 16 of the earnings package. As you can see from the table on that page, the pro forma earnings by quarter for 2004 were $0.77, $0.23, $0.44, and $0.79. Which when added together bring you back to the $2.23 base in 2004. Now, you really need to start with these numbers when you make your 2005 estimates. In addition, fuel cost recovery is expected to introduce a sizeable variance in quarterly earnings in 2005 versus 2004. The lag in fuel recovery could reduce pretax earnings $18 million in the first quarter of 2005 compared to last year's first quarter. Although other positive factors will help to offset some of this anticipated swing, earnings in the first quarter of 2005 are likely to be below those in the first quarter of 2004. But again, for the entire year we project earnings in the $2.30 to $2.40 range. So with that I'll turn things back over to Gale.

Allen, thank you very much. I think in summary before we open up to your questions Wisconsin Energy is on track. I think we have got a very strong management team and we are focused on delivering value for customers and shareholders. And now we would like to take your questions. If you are using a speaker phone please pick up the handset before pressing any number and I will let the operator take over with further instructions.

[operator instructions] We will go first to Paul Paterson with Glenrock Associates.

Good afternoon, guys.

Hi, Paul, are you you?

All right. I wanted to clarify what happened with depreciation and decommissioning amortization. In the quarter it seems to have held flat where as property taxes and revenue taxes went up and I was just wondering if you could sort of walk us through that a little bit and for the year as well?

Probably the easiest thing to do is just turn to page 4 of the earnings package and as you see there for the entire year we had depreciation -- DD&A of 327 million in 2004 versus 330 million in 2003 and the difference really is the rebalance that we had to do in the Nuclear Decommissioning Trust in the second quarter of 2004. And in effect that shows up as a $7 million credit to depreciation. So if you adjusted for that item, you would be looking at more like $334 million for DD& A in 2004 versus 330 million. I think when you look at that and compare that to the trend in property and revenue taxes I think that probably squares up a little better for you.

It does, but I was wondering about the three months ended as well because it looks like depreciation sort of held flat and with all the -- all the building you guys are doing and with property taxes increasing by about 3 million over 19 -- yes from 19 to 22 million, it seemed like depreciation was sort of holding steady there. I was just wondering what might be happening --

Remember, it is not only property taxes on that property and revenue thing. It is property and revenue taxes so you have some gross receipts types of taxes that are in there and Steve if you want to provide some additional color.

Yes, Paul, in Wisconsin the majority of the property and other taxes is gross receipts taxes which are based on revenues. And so as we have had increased revenues with increased gas prices our gross receipts tax increases also and that follows on a one year lag basis. On depreciation in the fourth quarter we are adding a lot of property but its going into construction in progress so that is not being depreciated. The other thing that we are seeing -- two other things, one, as we told about in the third quarter, we took an impairment charge at Minergy and Calumet and therefore they had reduced depreciation in the fourth quarter and that was probably about a million and then we had a minor amount of capitalized software which is fully depreciated during the year but again that wasn't that significant.

Okay, and that is what leads me into the 52 million versus the $84 million revenue request that you guys now have. What is the impact of that? I mean clearly I mean how does that square with what we will see in terms of how does that impact earnings I guess, in the income and cash flow statement if you could walk us through a little bit on that.

Paul, let me handle the earnings side first and let Allen or Steve talk about the cash flow side. The voluntary reduction in the amount that we are requesting is really tied to the fact that there is not a certificate of public convenience and necessity available now since the Court vacated the commission's order for the work at Oak Creek. The request originally was to cover us for all of the spending we were doing over a particular period at Oak Creek, but essentially on November 29 when the certificate of public convenience and necessity was vacated we simply stopped the request. We went back and adjusted for dollars that had been spent but up to that point in time. So there really won't be any -- because all of this is a balance sheet item until the plant is actually constructed and the day it starts service. It is really a balance sheet item that does not affect reported earnings.

Okay. And cash flow?

Allen?

From a cash flow standpoint that price increase of 52 million that Gale mentioned would cover the carry on the dollars that we spent, you know, through November 29th. Then, as Gale mentioned, to the extent you spend dollars after that there is no income statement impact but we wouldn't -- we wouldn't get the cash carry on the dollars that we would spend from November 29th, you know, as long as the order is open. Just to kind of give you a feel for the cash flows associated with the coal project, through the end of the year we have spent about $80 million on the project and from the beginning of -- when I say end of the year, through the end of '04 and from January 1, '05 to July 1, '05 we would expect to spend about $22 million so from a cash standpoint I mean you would be out the cash carry on $22 million, which is, you know, relatively, you know, relatively small amount. Probably about -- on an annualized basis 2 to $3 million.

And that is baked into our numbers, Paul.

Appreciate it.

Thank you for your question.

We'll go next to Paul Ridzon with Key McDonald. Please go ahead.

What were the $0.06 of discontinued operations in the fourth quarter related to?

Well, what happened there -- there were a number of items, you know, contingencies that you had to resolve with Pentair. They are the ones that bought the -- the pump business. So what happened, we had to do the financial closing on July 31st based on preliminary balance sheet numbers and then between July 31st and December 31st we finalized those numbers and we had a favorable, you know, finalization, if you will, and we were able to release those contingencies. And if we had any more of that, I mean the numbers are done now, but I mean it would go through discontinued operations it would be highlighted like that.

Really a true up based on final balance sheets.

Why aren't you, kind of, including that as part of the gain on the sale?

Well effectively we are.

Right.

In the $1.28 that I talk about on the gain, that includes that fourth quarter item.

Okay I understand. Thank you.

Thank you, appreciate the question.

Next to Andy Levy with Bear Wagner.

Hey, Andy.

Hey guys, how are you doing?

Doing great, how about you Andy?

I am doing good. Just a quick question, I think I missed a little bit of part of it. When you were talking about the first quarter and missing a little bit was that based on fuel expenses? Is that, correct?

Yes, what we said was that the first quarter earnings of 2005 were likely to be below and if you -- Andy if you got the earnings package in front of you it might be best to flip to page 16.

Okay.

And so what we did there, if you look at the pro forma, the very last one, the $0.77 for 2004.

Yes.

We are likely to be below that Level in the first quarter of 2005 because of fuel recoveries.

Okay and then you made the filing for that, right, with the last couple of days.

On Monday.

On Monday.

Right. What is the timing on the recovery of that?

Interim -- we would hope interim fuel rate recovery increase would be put in place by the commission sometime in march. There is a legal deadline by which they have to make a determination and then those additional revenues -- again we have asked for $114 million -- would be billed to customers subject to refund pending a final commission audit. Very standard for the fuel process and fuel rules here in Wisconsin.

Right, what is the -- is March the statute as far as the time limit or what is the actual time limit?

Larry, does the commission have like 30 to 40 days under the rules? Do you remember the exact days it has?

Excuse me. This is Larry Salustro. The rule of thumb that the commission uses would have the rates going into effect from 4 to 6 weeks after the filing. It could be -- it could be sooner. We also have to notify customers so that they get notice that the rates are going up. But it is a pretty short period of time.

Okay. And so they come out with a preliminary number, I guess is what you are saying and then they have a final order later on in the year?

We put an interim fuel increase. The commission approves an interim increase and then the interim fuel recovery rate would stay into effect for a number of months, perhaps up to six months, while the commission does a final audit. It is basically a prudence audit on fuel purchasing and whether our estimates are reasonable.

And are you allowed to defer if there is a difference between what you asked and what the interim order is can you defer those costs?

Not under the Wisconsin rules, Andy. But again, we have a pretty straightforward case here.

Don't misunderstand, I just want to understand how it works, that's all.

I appreciate it, Andy.

Okay.

But again, the first quarter because of the swing in fuel recoveries will look weak, but again remember the range that we provided for the full year.

You have had this before. Okay. Thank you very much.

Gale Klappa: Thanks, Andy.

Next to Ashar Khan with SAC Capital .

Good afternoon.

Hi Ashar, how are you?

Pretty good. How are you? Could you share with us what ROE the electric company is expected to earn in '05 based on your earnings projections?

What I will share with you are the actuals in '04 and then give you a feel for what I would expect in '05. In 2004 if you look at Wisconsin Electric Power Company on an operations basis -- so you adjust for the severances that occurred at the utility and look at it on a regulatory basis, that Company earned just under 12 percent. If you look at Wisconsin Gas on the same basis, adjust for severance look at it on a regulatory basis right at 9.5 percent. So just under 12 for WEPCO and about 9.5 for Wisconsin Gas. And Ashar, I would expect to be at about those levels in 2005.

And what equity ratios would there be this year approximately?

Approximately 53 percent.

Both companies?

WEPCO is about 53. I think Wisconsin Gas is maybe just a little higher, but they are both in the mid 50s.

Okay. Can you share with us in percentage terms what this rate filing might be in May approximately?

No Asher, we are still putting all of that together. We don't have -- again there is a requirement, I want to make it very clear there is a requirement for this Company to file a general rate case and that requirement stems out of a merger order when the Company was allowed to acquire Wisconsin Gas several years ago. We have until the May to July time frame, we are still looking at all of the various aspects that one would put into a general rate case, have an update for you as soon as we file.

Then could I just check with you as to what are the timing of the two outages.

Sure. We will let Rick Kuester give you the specific timing on the two outages. One spring and one fall. Rick?

We don't really get too much into exact times because we got to be out buying purchase power in the market, but it will be in April time frame and again in the October time frame, Ashar.

And Rick, can you just mention -- I know one focus of yours was -- especially you coming on board -- was trying to improve the nuclear operations going forward. Could you just bring us up to date what changes have been made, what you have seen and where the focus is going forward?

Well, we continue to have safe event free operations, Ashar. We changed out the management team last year. About mid year we brought in a new site Vice President and we subsequently changed the plant manager. Unit two did set a new generation record last year. Our focus areas this year are continuing to work on the regulatory issues that were raised a couple of years ago in the 95-003 audit and we have a confirmatory action letter that we are trying to complete all of our items by the end of the second quarter and also get ready for the two refueling outages on both of the plants -- I mean units we will be replacing their active vessel heads. So I think we continue to make good progress. I think the new management team has come in and made significant progress.

And Allen if I can just end up, there is nothing significant change in the sources and uses forecast as in today's handout versus the previous one am I, correct?

That's right. Because the sources and uses already envision the sale of the pump business and they assume that we continued based on our original plan of the two coal units, so no change .

Thank you very much.

Ashar, good questions. Thank you for your time.

We will go next to Vick Cahatian [ph] with Deutsche Banc.

Yes Hi.

Vick, how are you?

All right, thank you.

Did you change your last name?

Not really. When you talk about this Supreme Court is going to take expedited hearing in March 30th the oral argument, what is the normal time for them to reach a decision?

Well, I will give you my view and we will also ask Larry Salustro our General Counsel to give you his. Essentially my understanding is the state Supreme Court really does not have any specific time frame that it must apply to any case. I think historically if they have agreed to take a case they have more often than not provided a decision before the end of their term. And in this instance the end of the term in which this case was filed and accepted the end of the term would be June 30th, Larry, if I'm correct?

Yes, that's correct.

But the Court does not have to adhere to any predetermined time frame, but it is very clear and we are very pleased based on the schedule they have -- they have published. And again we -- if you think about the speed with which this took place, we received the Dane County circuit court ruling on November 29. By the first week of January the Court had accepted the case and the Court had published a -- a calendar for how it expects to proceed through the case. That calendar includes all briefs, both initial briefs and reply briefs being filed by all parties before the end of February and then the Court would have 30 days to digest that material and they scheduled oral arguments for March 30th. And then after that we assume they will deliberate and make a quick decision. We are certainly making the case with the court that timing is of of the essence here. For normal Supreme Court time lines our view is this is very quick and clearly expedited. Larry?

Yes, the expedited part has a couple of components. The first is that they accepted an appeal directly from the lower level court and they skipped the usual process of going to the intermediate court, the court of appeals, and that was significant. And second it was expedited in the sense that the normal briefing and argument schedules were shorter than is typical. As Gale Klappa said, the process they typically use is that they will make their decisions on all of the cases that they hear by the end of their term, which is June 30. So it is June 30 or sooner.

So that fits with your Bechtel extension of four months?

Well, yes, except -- except to be very clear about this, we really need to begin construction there on or about July 1. In order to begin construction on or about July 1 we have to give Bechtel notice to mobilize prior to July 1. So you will be seeing us tell the court that we really need, if at all possible, a decision quickly so that we can give Bechtel the proper mobilization time to get ground broken by July 1.

And they are aware of the penalty et cetera, the court will know that?

You're absolutely right, Vick.

The second question ,Gale, was that on a long-term growth basis would the earnings be more lumpy based on how these plants come online or would they be geared to have steady earnings growth if I'm talking about 3 year, 5 year type growth.

Vick, you hit your finger on it and there is no way to avoid this. The earnings growth will be lumpy. Let me talk about that in two ways. First is under the manner in which the commission has approved the construction at Port Washington and then the construction at Oak Creek, assuming we get that plant back on track for construction, we do get cash carry for the expenditures so that is very positive. This is not, you know, construction work in progress some kind of entry on the balance sheet without cash behind it. We do get cash carry of the construction work in progress, but we are not allowed to count that cash carry as earnings until the plant actually goes into service. And because of the significant capital expenditures you are talking about over $2 billion at Oak Creek and, you know, roughly 650, 660 million in Port Washington. Clearly those size expenditures, in terms of recovery being allowed to count as earnings only when the plant goes into service, will make the earnings growth lumpy.

I see. So really we will have a back end loaded growth rate as these new plants come online?

That is, correct. Although we will begin to see the first growth from our Power the Future plan later this year. The first unit in Port Washington we still expect to be in service in July and then the next Power the Future earnings increase in earnings you would see would be basically 2008. You would see a full year in '06 from the first unit at Port Washington. Then 2008 a half year, and then 2009 a full year from Port Washington. And then going forward, we would hope to have, if we can break ground on time, a partial year of Oak Creek in 2009 as well. So you are really not talking about tremendous back loading. We are in 2005, that is only four years away.

Thank you, Gale and thank you everybody.

Thanks so much.

We'll go next to Kathleen Vuchetich with WH Reaves Please go ahead.

Good afternoon. I was wondering if you could tell me what the normalized growth was in consumption on electricity in '04 and what you guys are looking at for '05.

Kathleen, this is Gale. Hope you're doing well.

I am, thank you.

Let me give you the nonweather normalized growth while our folks see if we can get a weather normalized number here. We had total electricity sales in 2004 up about 1.5 percent. And that was -- that was despite literally one of the coolest summers on record.

Right.

We have absolute evidence of global cooling here in Milwaukee. [ LAUGHTER ] We did see, and particularly in the second half of the year Kathleen, pretty significant growth about 2.5 percent growth for the full year and a lot of it in the third and fourth quarters in our commercial and industrial sector.

Okay.

I mentioned earlier the Milwaukee area is really recovering well. We had more job growth here than 26 states and the District of Columbia. The economy here is well diversified, very solid. We are seeing good growth. Our best estimate on weather normalization is about 2.5 to 3 percent energy sales growth.

Okay. What are you looking at for '05, Gale?

Assuming normal weather, Kathleen, whatever that is, but assuming normal weather about 2.5 percent growth.

Okay great. And how are you doing on gas supply, both for the electric business and for the gas business? Are you hedged forward? Are you comfortable with your gas supply position? Going to ask Rick Kuester to give you a good answer that question.

On the generation side we are about 20 percent hedged for this year and most of that is in the near term months. Not as much toward the end of the year.

Great.

And we are not hedged beyond this year on the generation side to things.

But on the LDC side Kathleen, of course those costs are you get in effect escrow accounting for your gas costs there so you know a month in arrears, you know, within a month lag you perfectly true up to what your actual purchase gas costs are.

Yes, Allen, do you have any trouble with transportation, though, beyond just the price pass through on the gas? Is the guardian system sufficient? Are you guys getting the volumes you need?

Right now we are. Right now we are.

Great.

And Kathleen there is a commission approved hedging program, and we follow month by month the hedging rules that we and the commission for the gas side have agreed to.

Thank you so much.

You're welcome. You take care, Kathleen.

Thanks.

We'll go next to Carlotta Chin [ph] with Angelo Gordon. Please go ahead.

Hi. Quick question on the $114 million fuel adjustment request.

Right.

Does that reflect the additional refueling and reactor change, the reactor vessel head replacement that you will be doing this year? And if you have I guess a higher replacement power cost than is reflected in the 114, do you have a chance to true up in some kind of a final look back?

The first question is -- the answer to your first question is yes, it does. I mean we will have slightly longer than normal refueling outages at Point Beach both in the spring and fall. First of all, in a normal year we only have one refueling outage. It just so happens because of the 18 month cycle that there will be one year out of every three or four where you have two hit in the same calendar year. That is occurring in 2005. And so we have two nuclear refueling outages. One spring, one fall and both will be slightly longer because, as Rick mentioned, we are replacing the vessel heads at both units. And whether or not the longer refueling outages are in our projections for higher fuel costs, the answer is yes, they are in our projection for higher fuel costs, and again what is driving that is this state is becoming increasingly hostage to the price of natural gas in terms of the price of electricity. Because on the margin everything is gas. Rick, anything to add on that?

No, I think you have got it, Gale.

I'm sorry. I completely forgot your second question.

Carlotta was asking about is there kind of a look back, can you somehow true up. And Carlotta, the answer to that is no, you can't.

Okay.

So we have looked ahead very well.

Okay, thank you.

We will go next to Dan Jenkins with State of Wisconsin Investment.

Hi.

Hi, Dan, how are you today?

Good. I was wondering on your income statement just if you could refresh me on this asset valuation charges in [indiscernible]?

We will let Allen.

We took two charges in 2004. Both of them in the third quarter. One was for our Calumet generation facility. And the other was for our Minergy Neenah facility. And so that -- if you look on page 4 its probably the one you are looking at or maybe the next page, page 5, that is what is in the valuation charge.

And that is a nonrecurring type of thing, I would assume.

It is.

Okay. And then I was wondering on your cash I missed -- did you say what you are expecting CapEx to be for '05.

I did not but I can give you a feel for that. I would expect in 2005 total capital spending assuming that we go forward as expected on the two coal units that are being discussed to be about $825 million.

Okay. So that would probably mean you're going to need to finance some of that, I would assume, assuming your cash flow is probably -- from operations -- probably be more in like the 600.

That's right. And we kind of go back to what we are trying to do on capital structure though is that over this building phase, which really the buildout will take us easily into 2009 if we do both of the coal units, our target is to keep our debt to cap at no more than 61.5 percent, but since our payout ratio is relatively modest and we are building up detained earnings rather quickly, we can put some debt into the capital structure on the margin and still keep our overall debt to cap at less than 61.5 percent.

And still keep the number of shares outstanding the same.

Have a feel for what the timing meet be? That would probably second half, probably --?

The timing of debt offerings?

Right.

Well, I would expect that for We Power which is the entity that is actually financing the first gas unit probably would do a debt offering at their level in the spring or early summer once that unit is commercial.

Okay.

For We Power. And then, you know, on the utility side I expect we will do some offerings but I would rather not throw a date out there, but we certainly will do offerings at the utilities.

Okay, and then the last thing I was wondering, you know, you mentioned replacing the vessel heads. How much longer will those outages be because of that? Will they be significantly longer do you think and will the cost be significantly higher?

Rick?

The outage days we are planning for are something in the 50 day to 55 day range roughly, and so you are talking probably 15 days more than we have been seeing recently but they should save time going forward because we won't have to do the same type of inspections that we have been doing.

Okay. That's all I had. Thanks.

Thank you for your question, Dan.

We will go next to Doug Fischer with A.G. Edwards.

Hi, Doug.

Hello, Gale.

How are you?

Just fine, thank you. A few questions here. Most of them have been asked, but can you break down -- Allen, could you breakdown that 825 between Power the Future and sort of the core utility spending?

Sure I can. If you look at the 825 million I would expect roughly 500 million to be at the regulated utilities and the balance really to be for the -- for PTF.

Okay. And then the -- just to go back, I think Asher had asked about the ROEs that you achieved on a -- you were adjusting in '04 for the severance. Were you adjusting -- were you weather normalizing those numbers?

No, no.

No, those were actual returns, you know, adjusted for severance.

Okay. So the numbers at both of those units would be higher on a weather adjusted basis -- weather normalized basis?

On the electric side, yes.

All other things being equal, that's right, on the electric side, but normal weather really is what we saw on the gas side.

Gas was close to normal.

Yes, so the 9.5 percent return I kind of talked about on gas, in effect that is a weather normal return.

Doug the Company has needed to put a lot of capital into gas infrastructure since the merger with Wisconsin Gas and under the rate freeze we haven't been able to recognize the recovery of that capital yet, and that is why the returns are a little lower on gas.

And roughly how much would the return you earn on investment tax credit -- what kind of spread between the financial and the regulatory ROE would that create?

There is no spread related to investment tax credits at all at Wisconsin Gas. At the electric company it is about 20 basis points.

Okay. And then I think that -- that that covers it for now. Thank you.

Thanks.

Appreciate your time, Doug.

We go next to Risa Hatefi [ph] with Zimmer Lucas Partners.

Good afternoon. Thanks for taking --.

Risa, what have you done with Vedula?

Its been a transfer of duties, I guess.

Welcome aboard, Risa.

Thank you very much. One question I had was for We Power did you guys get bonus depreciation, deferred tax benefits in '04 for Port Washington one?

You can't depreciate the plant until in goes into service for tax purposes.

I thought for the bonus depreciation if you started by a certain date even if it goes into service in '05 you take that depreciation in '04.

Doesn't work way.

Okay. I thought it applied to that one new law. I'm sorry.

We -- I'm sorry, it does not.

And you -- for the $325 million that you mentioned for We Power CapEx how much of that is for Port Washington and how much for the Oak Creek -- the started Oak Creek project?

Roughly 100 million is for Port Washington. Just under 100 million for Port Washington and the balance would be for the coal units. So 225 million, say, for the coal units and just under 100 million for the gas units.

And how should we think of Cap Ex going forward for We Power?

Well, I mean that is obviously highly dependent on whether we go forward with the coal units, but if you go forward with the second gas unit as well as both of the coal units, you know, you would have another $320 million for the second gas unit and our ownership share of the two coal units would be about a billion 8.

I was just wondering on some sort of like timeline how we could model over the next few years.

In terms of the capital spending, again assuming we go forward as planned, I would expect the peak year to be 2007 so that peaks -- capital spending on a consolidated basis the '07, and then ramp down from there. I would expect, you know, utility spending to be in the 400 to $500 million range per year and then layered on top of that the Power the Future expenditures.

Out of the 500 that you mentioned for the regulated utilities, how much are you assuming for Wisconsin Gas?

I think Wisconsin Gas is closer to $20 million probably.

20-25.

Really. Kind of went down.

Mostly at Wisconsin Electric Power Company.

Okay. Thank you very much.

We'll take our next question from Michael Lapides with Hibernia. Please go ahead.

Hey guys, one quickie. What cash flow from operations do you currently forecast for '05? What is kind of a typical run rate for CFO?

Well I think now -- this year we were about -- if you go to the cash flow statement on page 12 we were about $600 million, say $599 million. I think we will be at a similar level in 2005.

Okay. Thank you.

Thanks, Michael.

At this time we would like to turn the conference back to Gale Klappa for any additional or closing remarks.

Thank you very much. We appreciate all of your questions. This concludes our conference call for today. Again, we appreciate you taking the time to participate. If you have any additional questions as you think over the materials Colleen Henderson will be available in our Investor Relations office at 414-221-2592. Again, thanks very much. Have a good day.