威斯康辛能源 (WEC) 2005 Q1 法說會逐字稿

Good afternoon and welcome to the Wisconsin Energy 2005 first-quarter 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 discussions, reference to earnings per share will be based on diluted earnings per share unless otherwise noted.

This conference is being recorded for rebroadcast, and all participants are in a listen-only mode at this time. (OPERATOR INSTRUCTIONS)

In conjunction with this call, Wisconsin Energy has posted on its website a package of detailed financial information on its 2005 first-quarter results at www.wisconsinenergy.com.

A replay of our remarks will be available approximately two hours after the conclusion of this call.

Now I would like to introduce Gale Klappa, Chairman of the Board, President and Chief Executive Officer of Wisconsin Energy Corporation. Please go ahead.

Thank you. Good afternoon, everyone. Thank you for joining us on our conference call to review the Company's first-quarter results.

Let me begin by introducing, as always, the members of the Wisconsin Energy management team who are here with me today. We have Rick Kuester, President and CEO, We Generation; Allen Leverett, our Chief Financial Officer; Larry Salustro, our General Counsel, Jeff West, our Treasurer; and Steve Dickson, Controller. We will all be available to respond to your questions at the conclusion of our prepared remarks.

Well, to start off, I'm very pleased with our performance in the first quarter. 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 $0.76 a share from continuing operations in the first quarter of 2005. This compares to $0.69 a share from continuing operations in the first quarter last year.

We're also continuing to make good progress on our plan to divest non-core assets. On March 24 we announced an agreement to sell our interest in the Calumet Energy Center to Tenaska Power Fund. That sale will be for approximately $38 million. Calumet, as some of you may remember, is a 308 MW natural gas-fired peaking unit near Chicago. Subject to FERC approval we anticipate closing this transaction in the second quarter. In addition, we expect to receive $32 million of tax benefits from the sale, so we estimate that the total after-tax proceeds will be in the neighborhood of $70 million.

Now I would like to review the status of our Power the Future Plan. Let me begin with our Port Washington project.

In November of 2002 the Public Service Commission approved the construction of two 545 MW natural gas-fired units at our Port Washington site north of Milwaukee. All legal appeals against the gas plants were dismissed last year.

Construction of the first Port Washington combined cycle unit is now more than 95% complete. We achieved first fire in both gas turbines in early April, and the unit is expected to go into commercial service on time in July of this year.

Demolition work is also proceeding at the Port Washington site as we prepare to begin construction in early 2006 on the second gas-fired unit there. The second unit is expected to be operational in time for the peak summer season in 2008.

Now turning to the status of our construction plans at Oak Creek, as you know in November of 2003, the Public Service Commission approved the construction of two 615 MW coal-fired units at our Oak Creek site south of Milwaukee. However, on November 29 of last year a Dane County Circuit Court judge vacated the Commission's approval of the new generation plant for Oak Creek.

Of course there is a significant need for new base load generation in the state of Wisconsin, and the lower Court ruling has major implications for other infrastructure projects in the state as well. So for these reasons, the Public Service Commission, the Wisconsin Department of Natural Resources, and Wisconsin Energy filed with the Supreme Court of Wisconsin for a direct expedited appeal of the lower Court decision.

In January, the Supreme Court of Wisconsin agreed to take the case on an expedited review basis. All of the briefs have now been filed and the Court heard oral arguments on March 30th. We're encouraged that the Wisconsin Supreme Court has acted so quickly, and we're hopeful that the Court will render its opinion in May.

Our customers, as well as government leaders across the state, are aware of Wisconsin's need for new base load generation. We believe that our proposal to add two coal-fired units at Oak Creek will ensure that our customers will have access to clean, affordable energy for a long time to come.

In the meantime we were able to negotiate with Bechtel for a four-month extension from March 1st to July 1st for a full notice to proceed at Oak Creek. This has slowed the immediate spending, but does not stop the critical engineering needed to keep this project on track.

Now in order to start full construction on the 1st of July, Bechtel needs to mobilize equipment and establish a presence at the Oak Creek site. So under our revised agreement we're required to issue a mobilization notice no later than May 15. Otherwise our construction contract with Bechtel will need to be renegotiated.

Now let me bring you up-to-date on the status of our permits for the Oak Creek expansion. In addition to the judicial review we just discussed, several major environmental permits are needed for the coal units at Oak Creek. In essence we need three major state permits and one federal permit, and here's the status.

We received (technical difficulty) Wisconsin Department of Natural Resources in January of 2004. Now, in this case the permit was issued first and then it could be contested. The contested hearings concluded in October of 2004 and the Administrative Law Judge responsible for reviewing this case issued a decision affirming the issuance of our air permit that took place in February of this year.

Obviously we're pleased with the decision. The judge confirmed that the Wisconsin Department of Natural Resources has done a thorough job of assuring that the project will meet the state's stringent environmental requirements. The project proponents have requested a judicial review at the Circuit Court level. At this point no schedule has been set for that proceeding.

The second permit is a state water and wetlands permit from the Wisconsin Department of Natural Resources. This permit is referred to as a Chapter 30 Permit and is required to build facilities and a wetland area. The contested hearings concluded in the fall of 2004 and the Chapter 30 Permit was issued on November 22nd. The Dane County Circuit Court dismissed an appeal of the permit on procedural grounds in early March. The opponents had indicated they will appeal the Court's dismissal to the State Court of Appeals.

The final major state permit, which again is issued by the Wisconsin Department of Natural Resources, is known as the WPDEF permit. This permit is required for operation of the water intake and discharge systems and the like. The DNR determined that our proposed cooling water intake structure and water discharge meet all regulatory requirements and issued a permit on the 30th of March. The project opponents have requested judicial review at the Circuit Court level, and they may also seek an administrative hearing.

In summary, we now have in hand -- we have now received every state permit that is required to begin the construction of the new unit at Oak Creek.

Finally, the US Corp of Engineers must also issue a permit that is very similar to the Chapter 30 Permit whenever a project involves wetlands or a navigable waterways. A public hearing by the Corp of Engineers was held in September of 2004 and we hope to have a decision on this permit in the very near the future. We expect the project opponents will challenge any favorable decision we might receive from the Corp.

So in summary, subject to the status of the permits and a positive result from the appeal to the Supreme Court of Wisconsin, we hope to give mobilization notice in mid-May and a full notice to proceed on or about July 1st.

Turning now to our nuclear operations, we had a very good first quarter with the Point Beach units. The Point Beach units operated at capacity factors greater than 99% and were slightly below budget in operation and maintenance expenses.

On April 2 we began a regularly scheduled refueling outage at Point Beach unit two that includes the installation of a new reactor vessel head. This new head is expected to reduce significantly the inspection time during outages and represents a major investment to ensure the continued safe reliable operation of the Point Beach unit. A new reactor vessel head will also be installed on unit one during its refueling outage, which is scheduled for this fall.

We're also making very good progress on the commitments we made to the Nuclear Regulatory Commission coming out of their safety inspections in 2003 and 2004. At this point we have completed 131 of the 143 confirmatory action letter commitments that we made to the NRC.

Finally, before turning the call over to Allen, I'd like to update you on three pending and expected retail rate proceedings in Wisconsin this year.

The first was a request made last year to increase electric rates by $84.8 million. This request was 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 amended our filing request to $52.4 million. This was done to reflect actual costs incurred at Oak Creek up to November 29. That was the day the Commission's order allowing construction was overturned by the Dane County Circuit Court Judge.

Just a few days ago, on the 21st of April, we received a verbal order from the Commission to approve our request as modified. Once we receive the Commission's written order, which will be very shortly, we will make a final calculation of the increase and then proceed with implementing the new rates.

The second proceeding is a request we filed this February to increase our fuel recovery rate in Wisconsin. Our fuel costs are being driven by 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 produced by natural gas units.

On March 17, in responding to our request, the Commission approved our interim rate increase requested to increase our Wisconsin retail electric rates by $115 million. This increase is of course subject to audit and to formal hearings. We expect the Commission to make its final decision on our fuel case sometime in the third quarter. If the final amount approved by the Commission is less than the interim amount we will of course refund the difference with interest.

Finally, the third action is a general rate case which we expect to file in the May to July timeframe for rates to go into effect in early 2006. We've not had a general rate case since the year 2000, but as part of a Commission order allowing this Company to acquire WICOR, the Company is required to file a general rate case this year. We expect to file rate cases for Wisconsin Electric, which has both electric and gas businesses, and for Wisconsin Gas, as I mentioned in the May to July time period.

Now I will turn the call over to Allen who will give you additional details on our financial performance for the first quarter. Allen?

Thank you Gale. As Gale mentioned, earnings from continuing operations (technical difficulty) a share in the first quarter of this year versus $0.69 a share for the same period in 2004. The results in the first quarter of last year included $0.03 per share for debt redemption costs. So if you add this back, earnings from continuing operations on an adjusted basis were $0.76 a share this year versus $0.72 a share in 2004. On a total basis, if you include discontinued operations, our earnings were $0.76 a share in both the first quarters of 2004 and in 2005.

Now I'm going to focus my remarks this afternoon on earnings from continuing operations, but information regarding earnings from discontinued operations is included in the earnings package. It may be helpful for you to refer to pages seven to eleven of the earnings package while I review the results.

On a consolidated basis, our operating income was $166 million versus $183 million in the first quarter of 2004, or a decrease of $17 million. Operating income for the utility energy segment, which includes Wisconsin Electric, as well as Wisconsin Gas, was $171 million compared to $187 million in the first quarter of 2004, for a decrease of $16 million.

As a we expected, the largest drag to earnings on a quarter-over-quarter basis was under-recovered fuel expense. This reduced operating earnings $22 million. As Gale mentioned, we did receive an interim rate order for fuel costs. However, we will not be able to recoup the fuel cost that we under-recovered in the first quarter.

Other negative drivers included higher depreciation costs of $6 million and higher benefit cost of $5 million. In total these items reduced operating income by $33 million in the first quarter.

On the positive side, gas margins increased $5 million this quarter, primarily due to a rate increase which was implemented at Wisconsin Gas in the first quarter of 2004. Bad debt expenses were $6 million lower in the first quarter of 2005, due to improved collections and the implementation of escrow accounting based upon an order from the Public Service Commission of Wisconsin. Lower employee costs also added $5 million to earnings. Together, these drivers, along with $1 million of other items, added 17 million to operating income as compared to the same period in 2004.

Netting the impact of the positive and negative drivers I just reviewed brings you to the $16 million decrease in the utilities segment's operating income for the first quarter of 2005.

Operating income in the non-utility energy segment was a loss of $1 million in the first quarter of 2005 compared to a loss of $2 million in the first quarter of 2004. Corporate and other income was a loss of $4 million of operating income in the first quarter versus a loss of $2 million in the same period last year. The results this quarter reflect slightly lower operating results at Minergy and Wispark, and that accounts for almost all of the difference between 2004 and 2005. Taking the changes for each of these segments together brings you back to the $17 million decrease in operating income for the first quarter of 2005.

Other income for the first quarter of 2005 was $18 million, which is up $13 million from the same period last year. The primary drivers of this increase were as follows -- first, debt redemption costs of approximately $6 million in the first quarter of 2004 which we did not occur again this quarter; earnings on our investments in the American Transmission Company and the Guardian Pipeline were up almost $2 million; and finally, AFUDC earnings primarily on environmental projects and carrying costs on transmission charges were up a total of $3 million.

Total financing costs decreased by $12 million compared to the first quarter of 2004. This decrease in financing costs was driven by the $650 million in debt reduction that we achieved last year. Our income taxes were up $2 million. Adding these items brings you to $90 million of net income from continuing operations for the first quarter of 2005 versus $84 million in net income from continuing operations last year. In EPS terms, this equates to $0.76 a share in the first quarter of 2005 versus $0.69 a share in the same period last year.

Now let me turn to cash flow. During the first quarter of 2005 we generated $377 million of cash from continuing operations. And this is down very slightly from the same period last year due in part to increases in regulatory deferrals.

In the first quarter we had capital expenditures of $169 million. $97 million of this was dedicated to our utility businesses and $69 million was for our Power the Future construction projects. In addition we paid $26 million in dividends.

At end of the first quarter of 2005, our debt-to-capital ratio was 57.5%. That compares to 62.8% at the end of the first quarter of 2004. Our goal is to maintain our debt-to-total-capital ratio at no more than 61.5% during the period we're constructing our new gas and coal-fired generation. This would exclude any environmental trust financing that we might complete since the bonds issued under this structure would not be an obligation of Wisconsin Electric.

We're using cash to satisfy any shares required for our 401(k) plan options and other programs. Going forward, given our currently planned capital program, we do not expect to issue any additional shares.

Now I would like to wrap up with earnings guidance.

Results in the first quarter were in line with our plan, so our earnings guidance range for 2005 remains at $2.30 to $2.40 per share. You will recall that I stated on our February 10 earning call that I expected our first-quarter earnings to come in below the $0.77 per share pro forma base of earnings for the first quarter of 2004 that we laid out for you. This pro forma base excluded all earnings from our pump business and included impact of the share buy back and debt reduction associated with the sale of the pump business as if it had occurred at the beginning of 2004. For reference the pro forma base of earnings for 2004 by quarter appears on page 11 of our earnings package.

We don't provide guidance on quarterly earnings, but similar to last quarter I do want to give you some sense of where I expect earnings to come in relative to last year. At this point we expect earnings in the second quarter of 2005 to come in slightly above the pro forma earnings base of $0.23 per share for the second quarter of 2004 that is shown on page 11 of our earnings package.

So with that I will turn things back over to Gale.

Allen, thank you very much. Overall we had a solid first quarter. We're on track and continue to be focused on delivering value for our customers and shareholders.

At this point we will be happy to take your questions, comments or thoughts.

(OPERATOR INSTRUCTIONS) David Reynolds, Tribeca Global Management.

I just wanted to follow up on a couple of your comments regarding the contract with Bechtel and the timing on the issues with permits. It sounds like most of that is in hand with the Court case. You mentioned final decision in May, but that you've got to give Bechtel a green light by May 15th. Could you just kind of lay out the timeline a little bit more on what we might have to watch for critical timing?

I'll be happy to do that, David. I think clearly, at least in our mind, the most critical timing element is the decision from the Supreme Court of Wisconsin. We have asked -- in our filings and in the oral arguments we have asked for the Court to render a decision by May 15. Now, there are certainly no guarantee that the Court would render a decision by May 15. We remain hopeful. We have not heard from the Court. We would not have expected to have heard from the Court this point. But I think the reasonable assumption for the latest point in which we might get a decision would be the end of June. Historically, this Supreme Court has traditionally rendered its opinion on cases that it accepts during his regular session by the end of its regular session.

And that's the end of June?

The Court's regular session end at the end of June. I hope that's helpful.

Yes. I guess the question I have is if the Court's decision doesn't come and/or you get some kind of injunction on any of your permits or anything what does that do to the Bechtel contract? I know you've got give them I guess some sort of basic mobilization order on the 15th. So if you don't have those in hand by the 15th are you going have to sit on your hands and tell Bechtel to wait?

Well, if we don't have all the necessary permits and Court opinion by May 15, then we will have to renegotiate our contract with Bechtel. That is correct.

Thank you very much.

Ashar Khan, SAC Capital.

Could you mention to us what equity ratio would you be filing in the upcoming Wisconsin distribution filings in the May to July; what equity ratio would be at the utility and gas company?

I would expect to file something in the upper 50s. The other utilities -- I believe Wisconsin Public Service and Madison Gas and Electric had regulatory equity ratios at about 57%. So I would expect to file something similar to that.

And then just going -- and as we look into the rest of the year, can we expect these -- on the other side where you had 5 million of carrying costs, can we expect that to continue on in each quarter going forward?

I expect that we will continue to book items on transmission carrying costs. But the $5 million, we didn't have 5 million of transmission carrying costs in the quarter. I want to make sure I understand where you're getting the 5 million.

How much was transmission carrying costs, can I ask?

About $1.5 million.

And what was the remaining 5 (ph) out of the remaining 3.5?

If we go back to other income breakdown, we had an overall variance I believe of $13 million. 6 of that $13 million was driven by the fact that we didn't have debt redemption caused reoccurring in the first quarter. Then another 2 million was for earnings in our investments in the American Transmission Company and the Guardian Pipeline. Those two together were about 2 million. And then finally, we had another 3 million that was composed of AFUDC earnings and this transmission carry items that you mentioned. Of that 3, half is AFUDC earnings and half is transmission carry. And I would expect the transmission carry to continue at a similar rate to what we saw in the first quarter.

Would you expect AFUDC and the ATC also to be higher '05 versus '04?

I would expect both of those to be higher 2005 versus 2004, yes.

Thank you very much.

Paul Patterson, Glenrock Associates.

The regulated earned ROE at the utilities, you mentioned that the equity ratio should be in the upper 50s. What is it that you guys earned for the last 12 months ended March?

If you look at it on a 12 month trailing basis, and you look at Wisconsin Electric Power Company, and adjust for the severance program because we had severance costs in the last year in the third and the fourth quarter. So adjust for that severance, on a 12 months trailing basis we earned right at 11.35% at WEPCO.

Now one other factor that I think is relevant, you asked me for that information on a 12 months trailing basis. Obviously in the first quarter of this year we had a pretty big fuel under-recovery. But on a 12 months trailing basis, if you adjust for the severance we're at 11.35.

At the gas utility on a trailing 12 month basis, on a regulated basis, we're at about 9.5%. Again, that adjusts for any severances costs that we had in the third and the fourth quarter of last year.

There is no fuel recovery issue there, is there?

No. There you have purchased gas clause that is basically trued up on a month-to-month basis.

More normal. Okay.

On the electric side, as Allen was saying, if you adjust out on both the items, for both the special items, the severance costs and the fuel under-recovery, the return was much, much -- almost dead on 12.

And then what would 57% equity, just a rough approximation as to what that would be for the electric total equity and for the gas utility? Just a rough approximation between the two of those.

I would say for WEPCO it's probably around $2 billion. And for the gas company, I would say it would probably be on the order of $220 million.

Okay. Then on Point Beach, you mentioned how the capacity factors are improving and stuff. Can you give an idea as to when the NRC and their sort of -- I don't know how to describe it. I guess it's a more heavy-duty kind of review situation that they have with you guys as opposed to some other plants. When do you think that we might get clarity on that; when we might get the NRC responding to this, if you follow me? I forget what it is. They don't call it watts (ph) or anything anymore. It something else.

They are scheduled to do a follow-up review. We will ask Rick to give you more specifics.

Obviously they are continuing to review where we are and we're interfacing with them. We've got two big outages this year where we're replacing reactor vessel heads, as Gale mentioned. And we're also completing our Cal (ph) commitments amendments, and Gale also mentioned that.

I would expect -- and one of the issues is while we've made improvement we've got to show that we can sustain that improvement. So I would expect that in the second half of this year and the first part of next year they will be looking very closely at that performance and beginning to make some longer-term judgments.

So is there a date -- there is no specific date, I guess, in terms of a report coming out or something on this that's just is sort -- it is sort of as we go along we might see something?

Yes, I think that there is no end date that some report is going to be issued. I think what we've got to do is continue to stay focused on the improvement that we've shown, and they will do their inspections. I think our performance during these outages is going to be looked at very closely too.

Also, just finally, there's been some legislation that's been talked about in terms of being introduced into the state Legislature on the part of different interests associated with electricity rates, etc. Could you guys give us any picture that you have in terms of any potential change in legislation or anything out there? Do you see anything likely to happen? It's hard for us to tell whether or not -- how significant some of these proposals that suddenly come up are and what have you. Do you guys have like a legislative or regulatory update in terms of any potential changes out there or anything?

I'll be happy to give you my view on the most significant proposal that I think has come before the Legislature so far, and that is the proposal backed by the Wisconsin Public Service Commission that would really provide a third option for long-term financing of new generation in the state.

Right now, without this additional piece of legislation there are two options. One is just traditional rate based financing, traditional rate based treatment of new generations. The second option is the option that we utilize with our Power the Future plan, and that is what is known as the lease generation law -- L-E-A-S-E -- here in Wisconsin. That allows us to build these units that we have described in a separate unregulated subsidiary of the parent. That subsidiary is essentially a sole, single purpose subsidiary and all it would do would be to construct the units. When the units are complete it then would lease the capacity of the units to the utility and would receive lease payments from the utility for a lease life that's predetermined by the Wisconsin Public Service Commission.

In the case of our Port Washington units, the Commission determined the initial lease life should be 25 years. And in the case of our coal units at Oak Creek, the Commission determined that the initial lease life should be 30 years.

Essentially, the Commission has come up with a bit of a hybrid. What they have suggested to the Legislature is that the Legislature allow the Commission to put -- instead of lease generation to put the generation into base rates, but to retain the characteristics of the lease; in other words, a set rate of return that would not change for the entire life of the lease. So what the Commission is trying to do is simply come up with a third alternative that they think would be helpful.

Does it make that big a difference?

Well, in all practicality both the proposal from the Commission that's in the Legislature and the lease generation have the same effect of providing certainty and security of return, once the -- for the initial length of the lease once the unit is built. So we see these as both very positive. Mechanically, it really is not hugely different, other than you avoid the lease if the units in rate base, but has these particular characteristics and a set rate of return for the life of the lease.

Larry, any other thoughts? No, Larry is saying we covered it.

And that is pretty much the most major item in legislation; there's nothing else going on that is significance that you might think might pass or anything?

Not to my knowledge. Larry?

This is Larry Salustro. There are two other things which are not at all at the stage of passing, and I will just mention them.

One has to do with -- on activity that the Governor sponsored over the last year addressing renewables and conservation. There isn't a bill yet. But we expect it sometime in 2005 there will be a legislative discussion about that.

The second thing is some discussions coming up on the subject of rates. As you know, the utilities in Wisconsin, not just us, are in various stages of building programs. And that has provoked some upward pressure on rates. We think there will be a discussion here, whether or not it's in legislative form or not, as to what are things utilities can do, and cost controls, and other legislation such as our environmental trust financing legislation from last year, which would have the effect of minimizing rate increases while maintaining reliable service.

Thanks a lot.

Rasa Heseffy (ph), Zimmer Lucas Partners.

Thanks for taking my question. I wanted to know what options you have if perchance the Supreme Court ruled against you guys.

Well, all that obviously would be very, very speculative. Let me just give you a view down one path of logic.

It really does very, very much depend on the specifics of what the Supreme Court might decide on any particular item that has been contested before the Court. A number of the items that the Court could decide might require just a remand to the Public Service Commission for further study. On the other hand, the Court might find something significant that needs clarification in the law.

So the course of action and the path we would take and the Commission would take heavily, heavily depends upon the specifics of the decision. Almost everything related to a Commission decision on a major project in this state is on the table and being discussed and being reviewed by the Supreme Court from the appropriateness of the Energy Priorities Law and how it was applied in this instance to whether or not an application was completed at a given point of time as the Commission deemed it to be. So the issues run the gamut. And further action really, really depends upon the specific manner in which the Commission must react to the Court's opinion.

So the upcoming rate cases, it's going to be on an '06 test year?

Actually, it's a 24 month forward-looking test year. So it would be -- you actually file '06 and '07 (multiple speakers) period.

That's great. Some numbers were mentioned earlier as far as equity ratios. And you gave out also some, I think it was the equity portion of rate base. Could you just -- I kind backed into what the rate base would be. Would you know the rate base of WEPCO and also Wisconsin Gas offhand?

If you look at WEPCO, it may be just easier to talk about it as of the end of last year. The rate base at WEPCO -- and now that would be electric and gas and a little bit of steam -- would be just over, just call it $3.5 billion is the regulatory rate base.

End of '04?

End of '04. And then if you look at Wisconsin Gas Corporation, again end of '04 it's about $675 million.

675. Okay great. Thank you.

Paul Debbas, Value Line.

I've got a couple of questions. First, do you have any interest in selling Point Beach?

We're kind of chuckling here at your question. Let me answer it this way -- we have an awful lot of work to do at Point Beach this year. Rick mentioned the two refueling outages, the replacement of the vessel heads, the continuing work to in a very quality way respond to our affirmatory (ph) action letter commitments that we have made to the NRC. And we talked together very seriously internally about this and really concluded that the time is not now to consider that option.

I must say, however, the Commission's decision on the sale of Kewaunee by Wisconsin Public Service to Dominion has opened an option that clearly we will assess the viability of the option for us down the road. But right now, with everything we have going on at Point Beach plus the effort to extend the license at Point Beach, which we hope to be able to concluded at year end, our focus is on getting the work done in a quality fashion, continuing to improve the efficiency of the operations and the safety of the operations there, and focusing on the job at hand.

You mentioned that you would expect higher AFUDC this year. How much do you expect to book for the full-year?

I would say on the order of 6 to 7 million for the calendar year.

If you added the capitalized interest onto that, how much would it be in total?

Probably another 10 of capitalized interest.

Thank you.

Doug Fischer, A.G. Edwards.

Thank you. Two questions. Number one, can you tell us whether there were any Wispark earnings this quarter and remind us what they were last quarter?

We will be happy to do that. Allen is going to his page here.

Wispark earnings, they were rather small. Steve, have you got that?

Yes. Wispark, their operating income, actually they had a slight loss for the first quarter, about 0.5 million loss at the income level. And last year they had about 500,000 of earnings. So there's about $1 million swing at the operating income level.

Wispark earnings are obviously lumpy depending upon property sales and other activities. I'm not at all concerned about Wispark being on track at this stage.

Right, I understand. And what would you expect for the year as a whole? Can you give us any guidance for Wispark for the year as a whole?

I would say it would be probably in the 2 to $3 million range on the operating level, so relatively small part of the overall earnings of the Company.

And then we're seeing a lot of noise in the press about customers complaining about rates no longer being low in the state. What's your strategy with dealing with this concern? It's certainly looks like there's a big campaign on to do something, and I'm not sure what that is here. Is there a rate design concern on the part of the industrials?

Clearly whenever you have a rate case year you're going to see a lot of comments in the media. And in the spring of this year, as in the spring of most years in Wisconsin, there are two large energy forums, one held here in Milwaukee, statewide energy policy forums, one held in Madison. I think a lot of what you have seen in terms of comments about the energy situation and rates in Wisconsin have come out of those two forums.

Let me be very specific about the answer to your question. Clearly in every rate case industrial customers want and commercial customers want a different cut or a different look at allocation across the classes of customers. That wouldn't surprise me. We will see that debate. We will see that discussion in the second half of this year, just as you see it in every other jurisdiction in every other state.

Relating to the prices itself, let me try to put this in perspective for you because I think that you have asked a very important question. In terms of that -- let's just take it easily for residential customers. Our prices for our -- We Energy's prices for residential customers are 10% below the average paid by customers in the 20 largest cities in the United States. Overall rates for Wisconsin are about -- as the Chairman of the Public Service Commission said publicly in one of those forums the other day, overall Wisconsin rates are about middle of the pack. And the thing that we haven't yet seen but we will see is rate freeze is coming off in other Midwestern states. I think you're seeing also in the press lots of talk about very significant percentage increases in the generation portion of customers' bills in Illinois when that rate freeze comes off. AEP has signaled that they're going to have a 20% increase in the generation portion of customers' bills in Ohio.

So these things move back and forth as rates come and go in terms of rate plans across the states, as you know. I'm not concerned about the long-term competitiveness of our pricing here in Wisconsin. But we are in a building phase. I think it's important to remember that Wisconsin never got over-built. Many states as they went through partial or full deregulation had a frenzy of building. And you see in some parts of the South, for example, 50% reserve margins. Wisconsin never had that kind of overbuilding. In fact, it is always a struggle to get to the 18% reserve margin.

So we have to look at this on a little longer term perspective, I believe. And when we do, I don't think there's any question Wisconsin will stay competitive. We're just in the early phase out an uptick right now because of the building program. But other states will move as well.

What kind of ideas might you have to address these concerns? Obviously the first sign (ph) of attack is to say what you just said. But what else can be done to hold down rates? Are there any other ideas that are percolating at this point?

I think there are a couple. The first -- and we've had a very, very strong focus on this from the day that our team came -- is improvement in customer satisfaction. At the end of the day price is a very important consideration. But at the end of the day how satisfied customers are with the overall value and overall service they're getting from our electric and gas businesses is a really key ingredient. And I'm pleased to tell you that our customer satisfaction numbers are materially higher than they were two years ago despite the higher prices. So I think we're making some real progress in terms of focusing on customers and providing real value for service, increasing the efficiency of our response to outages. You name it, we've got a real focus on improving customer satisfaction and it's beginning to show results. That at the end of the day will be a material difference maker.

I think the other thing, which I mentioned at the forum here in Milwaukee at the symposium, is that historically the Wisconsin Commission has set returns on equity at -- they have picked a point. In other words, they have said 12.2% or pick a number. They have set rates at a point return on equity, and that has become the feeling on the allowed rate of return.

Clearly you've got to pick a point to set rates, but what many states do to encourage utilities to become more efficient (technical difficulty) range of return. So they set rates at a given number, but you can earn above that or below that and not trigger a rate case. And that has been very effective in other states in encouraging utility managements to look for additional ways to save costs. So we have advanced that idea as one other way and one other venue for the Commission to look at. And we will have some pretty significant discussions in our filing and in the hearings about that as a tool.

And then the final thing we do, which we are very much focused on, is just cost control across the utility operations. And we're making good progress on that as well. If you look at our first-quarter O&M and you pull out special items like lease payments for which we're hitting a revenue stream, our first quarter O&M was significantly down on the controllable O&M compared to a year ago.

Thank you.

Stephen Rountis (ph), Talon Capital.

A couple of kind of clarification questions. On the ROE's that Allen cited before, were those all based on a 53% equity ratio, or were those some other equity ratio?

Based on our current equity ratio, which I believe is about probably -- WEPCO is probably 55%.

55%. So it was based on the latest quarter's equity percentages?

The latest 12 months -- you have to stake those ROE's on a 12 month trailing basis. So you look at the average equity over that period in the denominator and of course net income in the numerator.

And then the recap adjustments that are in the quarterly earnings reconciliation, those are basically lower interest charges, is that right?

That's right. What that does, in actual fact in 2004 we paid down some long-term debt in the first quarter; we paid down some more in September. And so you had varying levels of debt reduction over the course of the year. So what I've tried to do is say, well, just put it back as if it happened at the beginning of the year so you start from a clean base, so you have a comparable base in '04 to work from as compared to 2005 because obviously the benefit of that debt reduction will get for a full year in 2005, if I'm making sense.

Yes, no. I guess the question was we shouldn't add back any lower interest charges for the second quarter given that you've already done it here?

That's right. If you're on page 11 and you're looking at that $0.23 base for 2004, that already includes -- it is already pro forma for the (multiple speakers)

It's like Ragu -- it's in there.

Going back to the ROE's for a second, in the rate base in the equity, I think the numbers that were put out in two different answers were a rate base of a little over 3.5 billion at WEPCO and a $2 billion equity component, and then a 675 rate base for the gas utility and a $220 million equity component --

I should have said 320, about half obviously.

That make a lot more sense. I guess my last question was you did a good job breaking out the other income on a year-over-year basis but can you break out the other income this quarter just on a gross basis? So what portion of that was ATC; what portion was transmission, etc.?

Let me flip to that. If you look at it on a quarterly basis, ATC earnings in the quarter -- and ATC again is the American Transmission Company. I have that at about $8.5 million for the quarter. Again, that's on a pretax basis. AFUDC would be about 1.5 million. Transmission carry would be about 4.

Can you repeat the ATC number again?

8.6.

8.6. So what was the remainder?

8.6 million for ATC, 1.5 million for a AFUDC, 4 million for transmission carry. That brings you to what? 14 million or so. We had about $700,000 of interest income.

Okay, just missing that (multiple speakers)

It's just a long list of all items that are generally less than $1 million.

The numbers Allen is giving are pretax.

Yes. Great, thank you.

Vic Khaitan, Deutsche Asset Management.

Since everybody's eyes are on the Supreme Court, let me ask you how your lawyers and your assessment went on that March 30th hearing. And should they not give you timely or delay this whole thing, what's plan B?

Well, we pretty much covered in my prepared remarks our assessment as it stands today. We would not have expected to have heard anything from the Court this quickly. We're still hopeful that they will comply with our request for a decision by May 15. But historically they would certainly make a decision given their precedents by the end of June.

I thought we argued the case well. A number of us attended personally. All of the Public Service Commissioners attended. It's clearly a very significant public policy case in the state. The oral arguments were scheduled to go for 90 minutes; they ran almost 3 hours. The judges from the bench asked significant numbers of questions. They were very engaged in the case. And I thought they asked very, very good question, which reflected a strong understanding of the issues involved. So overall, I think we've done everything we can possibly do, and I think we presented a strong case.

Now plan B, we are looking at other options. But again, there are a couple of comments that I think are more significant than what the elements of plan B might look like.

I think the one thing that we need to remember is that the need for base load capacity in the state of Wisconsin is not going away. What we've proposed at Oak Creek is two base load units, the workhorse plants that run as much as you can run them 24/7. There hasn't been a major new base load plant built in the state of Wisconsin since 1984. So we essentially are out of base load capacity. We need base load capacity for later in this decade.

So if we needed to come back with a plan B, it probably would be to find a way to work our way through the capacity shortfall in '09 and 10, and then take the time to come back with a new base load proposal. Because at the end of the day for our electric system to stay competitive in the state of Wisconsin, for us to deliver reliability and cost competitive energy, we've got to have more base load capacity. I hope that is helpful.

Thank you. I agree with you that there aren't too many other choices and the customer bill will go up. This may be the least cost plan, but sometimes all it takes and other things can create problems for you (ph).

Sometimes they can, but I think we're as positioned as well as we can be. And we'll just have to see how the Court rules.

Thank you. Good luck.

Dan Jenkins, The State of Wisconsin Investment Board.

Dan, do you have any insight into the Supreme Court?

No, I don't get over there. I wanted to explore on the higher gas costs -- I mean the higher fuel costs, you mentioned that you had a higher gas usage, and I was wondering how much of that higher fuel cost was driven by the higher gas usage and how much was like higher coal prices, etc.

I've got a thought, but Rick will give you his.

The primary driver is the combination of gas price and gas volume. This year we have two outages. One outage is at Point Beach, as we mentioned. The outages are longer than normal because they're reactor vessel head replacements. So we have less nuclear generation this year.

Gale mentioned that our base load units are fully subscribed, so all of our new load is being supplied by basically gas on the margin. So it's a combination of the fact that gas prices have gone up significantly, as we're all aware, in the marketplace, and the fact that we're seeing a higher volume.

Also what happens is that when we have to buy purchased power on the market typically that is fueled, or at least priced off of, natural gas. So not only is your -- any native generation that you have on the margins typically going to be gas right now, but when you buy from the market, that's typically priced like natural gas energy as well.

I think both Rick and Allen are making a really important point that I want to make sure we don't miss. And that is this -- that for the next four or five years the price of electricity in Wisconsin is increasingly held hostage to the price of natural gas. And we cannot -- because of past policy decisions we cannot change that until we can bring on more base load capacity that's fueled by something other than natural gas.

So earlier someone asked about the industrial customers being concerned about rising electric rates. We are all concerned about rising electric rates. But the driver is exactly what Rick said. It's the price of natural gas and it's the volume of natural gas that we're having to burn. To build the Port Washington gas units we have had to dismantle some 70 year old coal units. So in essence, not only is everything on the margin being supplied by natural gas until we can get new base load, but some of the coal units we have no longer exist because we had to tear them down to make room for the new intermediate units at Port Washington. Rick?

The coal piece -- and I don't have the exact number in front me, but I would say it's probably less than 20% of the total increase was related to coal.

Okay. Kind of related that then, in your case that you filed with the Commission then have the increased gas proportion that you're including to come up with what the recovery for fuel cost would be?

Yes. In our fuel filing in February we projected both the volume and price of gas for the remainder of the year. Again, this is a particularly difficult year in terms of fuel, as Rick said, because of two refueling outages at Point Beach. And those refueling outages will be longer than traditional because we're replacing the vessel heads. But yes, we have put those projected costs into our fuel filing.

Okay. Moving on to Point Beach, I think you said that for the refueling outage at units two began on April 2nd. I was wondering how many days are you scheduled for that outage?

We don't normally put that out simply because we're in the power markets looking for replacement power. We are roughly half way through that outage right now.

When is the unit one outage scheduled to begin?

In the fall. Again, we don't give specific dates for the very reason that Rick mentioned. But generally after the summer peak when the leaves are turning.

On the unit two one, have you completed the replacement of the reactor head yet or have you began that?

What we do is we take the oil head off and we defuel the vessel. We're doing a split end (ph) replacement, and we're in that process now. The new head won't be put on until later on in the outages. We're getting ready to button up the reactor vessel head into containment. But it's -- we're staging the new reactor vessel head to come into containment, so it's a process that takes place over the whole timeframe of the outage.

Obviously one of the last things you do in the outage, as Rick said, is put on the brand new head as you button it up. You have got to get the fuel in first.

Then I just had a clarification on just looking at the amount of the depreciation, fee (ph) Commission and amortization you're showing to come up with your EBITDA and then on the cash-flow statement. And I noticed it is a little bit different than what's on the income statement on page three. The difference (indiscernible) in O&M somehow, or what's going on?

On income statement -- excuse me, on the cash-flow statement that's all depreciation. Some of the depreciation goes to clearing accounts which gets cleared to O&M. So that is the difference. That's a primary difference between depreciation on the cash flow and depreciation on the income statement.

My last question is on industrial sales were down a little bit, and I was wondering what you're seeing as far as your industrial customers. Is that weather related in anyway, or --?

Part of it, and I'll ask Allen to give you a more detailed answer as well. But part of it is the fact that we had one less day in calendar 2005 than calendar 2004. When you look at our -- and we have all taken and a hard look at our industrial consumption in our service area in the first quarter. When you look at it, the smaller commercial and industrial customers actually showed very, very reasonable growth. But in overall we're down just 0.5%.

Our numbers get swung considerably by our largest customer, which is the iron ore mines up in the upper peninsula of Michigan. Oftentimes it's useful to pull that out because they're very variable month to month. Having talked to the management there, I don't think we're going to see lower demand from the mines this year than we did last year.

Allen, anything to add?

Maybe just to add on the industrial side, it's kind of a mixed bag. There were some industries that were up quite nicely in terms of volume. The example of that would be the primary metal segment, chemical segment, printing and publishing segment. All of those, if you look at kWh sales, all of those were up 3 to 4%. So very strong in some parts of industrial.

On some of the manufacturing side, say food products, nonelectrical machinery -- that would be sit code 35 (ph) -- fabricated metal products -- sit code 34 (ph) -- you saw decreases of about 2%. You had a very mixed bag on the industrial side.

The other thing we've not seen yet -- I wouldn't have expected to see it yet; I think later in the cycle we will -- is the material rebound from our paper manufacturers. That's much more of a late cycle economic pickup. We haven't seen that yet. But again, I would not have expected to see it yet. Overall, about where we thought we would be on industrial sales.

And our customer growth continues to be strong. We added -- in the last 12 months our customer base on the gas side is up about 1.6%; our customer base on the electric side is up about 1.2% over the last 12 months. So the economy here is continuing to grow, particularly the corridor between Milwaukee and Madison.

Thank you.

Michael Lepides, Hibernia Capital.

Got a question for you on ATC; would love if you could outline for me, just to make sure I've got it correct, your ownership stake in terms of percent and over the next few years what the capital spending for ATC looks like, and what the current rate base of ATC is right now.

Let me start with your first question and the we will let Allen and Steve give you the specifics on the capital spending over the next few years.

Right now, our ownership base in ATC is just under 40%; it's about 39.4%. Allen is saying it's lower (multiple speakers) 37.8.

There is a major transmission project that ATC has underway that will be fully owned by Wisconsin Public Service. (multiple speakers) so we would expect that 37.8 -- as spending accelerates, or at least we hope it accelerates, because they haven't been able to break ground yet on that project the given Court issues and opposition to the line. But as that line gets built and is completely paid for by Wisconsin Public Service, but put into ATC's asset of transmission basket, we would expect the power pro rata ownership to decline down to the low 30s.

Yes, that's right. Go from about 37.8 at the end of last year to, say, 32 to 33% at the end of the decade.

I think the other part of your question, though, was related to rate base. I believe at the end of 2003 the FERC rate base was about 8 to 900 million. They added probably another 200 million last year. So FERC rate base is probably right at 1 billion right now.

If you look at their spending plan, as Gale mentioned, they have a pretty aggressive spending plan for the next 10 years. They have talked upwards of 2 to $2.5 billion. How much of that capital they're actually able to deploy is uncertain. But they're talking about some pretty significant capital investment over the next decade. And that would be very much back-end loaded over the next 10 years. But some pretty big increases in FERC rate base over that period.

Do you know what percent, what's been approved for the next two to three years?

I think the current capital spending, probably 8 to 900 million at most.

Consolidated, not meaning --?

Yes, consolidated (multiple speakers) at most.

That's their plan, but whether or not they can actually spend at that pace during that period is still in question.

That's 8 to 900 million through the end of the decade or just over the next few years?

You asked me over the next few years. So over the next three to four years I would see may be roughly another 800 million added to the rate base. So take that roughly 1 billion that they were at at the end of last year, and another 800 million over the next three to four years.

They have a 10 year plan that is north of 2 billion.

Thank you.

Gentlemen, that concludes today's conference call. Mr. Klappa, I will turn the conference back to you for any additional remarks.

Thank you so much. We appreciate you taking part today. If you have any other questions that you would like to ask over the course of today, tomorrow or the next day, Colleen Henderson will be available in our investor relations office, and her direct line is 414-221-2592. Thank you very much. Have a good day.

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