威斯康辛能源 (WEC) 2006 Q2 法說會逐字稿

Good afternoon and welcome to the Wisconsin Energy 2006 second-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 discussion, referenced 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. 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 2006 second-quarter results at www.wisconsinenergy.com. A replay of our remarks will be available approximately two hours after the conclusion of this call.

And now I would like to introduce Mr. Gale Klappa, Chairman of the Board, President and Chief Executive Officer of Wisconsin Energy Corporation.

Thank you and good afternoon, everyone. We appreciate you joining us on our conference call to review the Company's 2006 second-quarter results. Let me begin as always by introducing the members of the Wisconsin Energy management team who are here with me today. We have Rick Kuester, President and CEO of WE Generation. Allen Leverett, our Chief Financial Officer. Jim Fleming our famous General Council. Jeff West, Treasurer and Steve Dickson our Controller. Of course we'll be happy to answer any questions you might have after our prepared remarks.

Overall I'm very pleased with our second-quarter results. Allen will review our performance in detail in just a moment. But as you may have seen from our earnings package, we achieved adjusted earnings from continuing operations of $0.49 a share in the second quarter of 2006. This compares with $0.34 a share in the second quarter last year. Now, as we moved into July, high temperatures and humidity began blanketing the region resulting in record use of electricity by our customers. A new all-time peak demand of 6,393 megawatts was reached here on July 17. This record was set despite the fact that our largest industrial customer had significantly lower energy use that day because of scheduled maintenance of their facilities. Then yesterday we set another all-time record demand of approximately 6500 megawatts. And based on preliminary data, we delivered more electricity yesterday than during any other 24-hour period in our history. And today with the heat wave continuing, we are right now tracking even higher.

I'd like to spend just a moment on our continuing effort to upgrade the energy infrastructure in Wisconsin, and certainly the weather of the last few days has underscored the need for continuing to do so. Our Power of the Future plan is fundamental to the principle of energy self-sufficiency. Key components of our focus on self-sufficiency include investing in two combined cycle gas-fired units at Port Washington, north of Milwaukee, two super critical pulverized coal units at Oak Creek, which is south of the city, and our proposal to build approximately 200 megawatts of new wind generation.

First an update on Port Washington. As you will recall, in November of 2002, the Public Service Commission approved the construction of two 545-megawatt natural gas fired units at our Port Washington site. On July 16 of last year, the first Port Washington unit went into commercial service, on time and on budget. Now for the second unit, engineering is essentially complete and all major equipment has been procured. Construction of the second unit is currently about 12% complete, tracking on schedule and on budget. This unit is expected to begin commercial service in time for the peak summer season of 2008.

Now let's turn for a moment to the status of the two new coal fired units at Oak Creek. Activity at the site began in earnest last summer following the Wisconsin Supreme Court ruling that allowed us to move forward. Since that time, the major focus has been on engineering, procurement, site excavation, building foundations, structural steel and construction of the cooling water tunnel. Bechtel Power Corporation, our primary contractor, has finished moving approximately 6 million cubic yards of material to create the platform for the plant's main power block. During the second quarter, the boiler foundations for unit one were completed and we also began to erect the structural steel for the unit.

In addition, we finished the foundation base for the chimney and began the form work needed for the boiler foundations of unit 2. Construction of the water intake system is also progressing well and drilling of the tunnel is expected to begin later this summer. Three of the four downshafts in Lake Michigan that will feed cooling water to the tunnel have been drilled and Bechtel is on schedule to complete the fourth downshaft this summer.

We are also making substantial upgrades to our existing rail infrastructure and coal handling system at the Oak Creek site. This includes the addition of approximately 17 miles of new track and a new unloading facility. This work is progressing well, as is the addition of a new 345-KV substation being built by the American Transmission Company. Stepping back now and looking at the project as a whole, engineering for the Oak Creek expansion is about 65% complete, procurement of the engineered equipment and supplies is approximately 90% complete. And overall at the end of the June, the project stood at 12.6% complete. We continue to be very satisfied with the progress of the site.

And as you know, there are four major permits needed to build these facilities. These include an air permit, a wetlands permit, a pollution discharge and elimination permit, and finally a permit from the U.S. Army Corps of Engineers. We have received all of these permits and each remains in effect unless and until it is overturned by a court or an Administrative Law Judge. Last September, we resolved all legal challenges to the air permit. Also in February of this year, we resolved the outstanding legal challenge to the wetlands permit. On the third permit, the Wisconsin pollution discharge and elimination system permit, a contested case hearing was held in March of this year.

On July 10, in a recent development, a Wisconsin Administrative Law Judge upheld the decision by the Department of Natural Resources to issue the permit. The parties that challenged this permit can file for a court review if they wish but that filing must be made by August 9. The final permit, that one from the U.S. Army Corps of Engineers, was received in May of 2005 and to date no appeals have been launched against this permit. Our plan remains to have the first Oak Creek unit in service in the summer of 2009, the second unit is scheduled to follow one year later in 2010.

Now turning to the subject of renewable energy. In March of this year, the State of Wisconsin passed new legislation, and that legislation requires that 10% of our state's electricity be supplied by renewable sources by the year 2015 and 5% by the year 2010. To meet this mandate, we must obtain approximately 210 megawatts of additional renewables by 2010, and in addition another 610 megawatts of renewable energy by 2015. The new law does allow the Public Service Commission to delay implementation of the renewable portfolio standard if it becomes too expensive, lessens reliability or cannot be permitted on a timely basis. We have already, of course, started developing new sources of renewable energy to work toward complying with the 2010 requirement of 5%.

Last year, we purchased the development rights to two wind farm projects, and we plan to build wind turbines with the combined generating capacity of up to 200 megawatts. In May, we received updated equipment bids from the wind turbine generators. Based on these bids, we made revisions to the cost estimate -- the cost estimate and to the project schedule. Wind turbine equipment is apparently no longer available for 2007 delivery, so we expect the project to be placed in service now in either 2008 or 2009 depending on production slots and receipt of the necessary regulatory approvals and permits. The project is now estimated to cost up to $360 million, that excludes capitalized carrying costs during construction. Our estimate of course has been driven higher by the rising cost of materials, high market demand for the equipment, and a weakening of the U.S. dollar against foreign currencies. We filed for a certificate of public convenience of necessity with the Public Service Commission in March and if the project is approved by the Commission we expect that it will be a traditional utility rate base investment.

Turning now for a moment to our nuclear operations. In 2005 as you recall we completed refueling outages and replacement of the reactor vessel heads for both unit one and unit two at Point Beach. We also received approval at the end of the year from the Nuclear Regulatory Commission for 20-year license extensions for both units. The operating licenses for unit one and unit two are now extended to the years 2030 and 2033 respectively. As we announced in February, we are conducting this year a formal review of our options for the ownership and operation of Point Beach going forward.

The range of options that we're considering includes continued operation by Nuclear Management Company, a third-party operator other than NMC, a return to in-house operation of a plant by Wisconsin Electric and a sale of the Point Beach facility. In June, we began a market test of two of these options, third-party operator and the sale of the facility. We will evaluate the bids we receive against in-house operation or continued operation by NMC. And as I mentioned before, we will be thorough and deliberate in carrying out this review and we plan to complete our analysis before the end of the year.

I will turn the call over now to Allen, who will give you an update and give you more details on our financial performance in the second quarter. Allen?

Thank you, Gale. I'm going to focus my remarks this afternoon on earnings from continuing operations. Of course information regarding earnings from discontinued operations is included in the earnings package as well. As Gale mentioned, earnings from continuing operations were $0.50 per share for the second quarter versus $0.48 per share in the second quarter of 2005. Our results from continuing operations included a $0.01 per share gain on the sale of our one-third interest in the Guardian Pipeline. Excluding this gain, our adjusted earnings from continuing operations were $0.49 per share in the second quarter. Also, our results in the second quarter of 2005 included a $0.14 per share gain for the reversal evaluation allowances associated with the state tax operating losses at the Wisconsin Energy level. Excluding this item our adjusted earnings from continuing operations were $0.34 per share last year.

Now, on a consolidated basis, our operating income was $107 million versus $90 million in 2005 for an increase of $17 million. Operating income for the utility energy segment, which is comprised of Wisconsin Electric, Wisconsin Gas, and Edison Sault, was $99 million compared to $90 million in 2005 for an increase of $9 million. Positive earnings drivers in the second quarter included improved natural gas margins due in part to price increases, the absence of refueling outages at our nuclear units and the elimination of certain transmission charges. The higher gas margins added $11 million to operating income, lower nuclear O&M expenses contributed $10 million, and reductions in transmission charges added $4 million. Other items added $2 million on a net basis. The primary negative drivers in the quarter were cooler weather, relative to last year, and additional O&M expenses at our fossil units. These items reduced operating income a total of $11 million and $7 million respectively.

Netting the impact of the positive and negative factors I just reviewed brings you to the $9 million increase in the utility segment operating income for the first quarter. Operating income in the non-utility energy segment, which is primarily WE Power, was up $11 million. This amount was primarily related to operating income from the Newport Washington plant that was placed into service in July of 2005. Operating income in the corporate other segment was down $3 million relative to last year. The primary reason for this decrease was lower operating earnings at our real estate subsidiary. Taking the changes for each of these segments together brings you back to the $17 million increase in operating income for 2006.

Other income was up $11 million in the second quarter, increased capitalized carrying costs and construction work in progress and deferred costs represented $4 million of this, earnings and non-consolidated affiliates increased income another $4 million and finally the gain on the sale of our Guardian interest added $3 million. Total interest expense increased by $1 million in the second quarter. This was driven by both higher short-term interest rates and increased debt balances, including the $155 million of debt associated with Port Washington.

Income tax expense was $32 million in the second quarter. And this represents an increase of $24 million from the same period last year, 16 million of this increase was related to last year's reversal, evaluation allowances associated with state tax operating losses, the balance or $8 million was related to higher operating income. Now, I expect that our effective tax rate for 2006 will be 37.5%. Adding these items brings you to $60 million in net income from continuing operations for the second quarter of 2006 versus $57 million in net income from continuing operations last year. In EPS terms this equates to $0.50 per share in the second quarter of 2006, versus $0.48 per share in the same period last year. Adjusting for the Guardian gain this quarter and the tax item last year, brings you to the 49 versus $0.34 per share comparison for the quarters.

Now, turning to cash flow. During the first half of 2006, we generated $581 million of cash from continuing operations. In the same period last year, we generated $435 million of cash from continuing operations. This increase was driven by higher cash earnings, favorable working capital conditions, and improved recovery of fuel at purchase power costs. We had capital expenditures of $421 million in the first half of 2006, 213 million of this was dedicated to our utility and other businesses, and 208 million was for the generating units being constructed as a part of our Power of the Future plan. In addition, we paid $54 million in dividends.

At the end of June, our debt-to-capital ratio was 57.4% as compared to 57.9% at the same time last year. As I mentioned on our last earnings call, our capital spend this year is expected to be approximately $1 billion. As a result, we expect that our debt-to-capital ratio will increase somewhat over the course of the year. However, as we've stated in the past, our goal is to maintain our debt-to-capital ratio at no more than 61.5% during the period we are 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 our obligation. We are using cash to satisfy any shares required by our 401-K plan, options and other programs. Going forward we do not expect to issue any additional shares.

I would now like to turn to our earnings guidance for 2006. As we have discussed on our last two conference calls, the anticipated earnings drivers for the year fall into four groups. Price increases, changes in sales volume, non-fuel cost increases at our utilities, and finally increased earnings contribution from the first unit at Port Washington. Consistent with last quarter, the impact of price increases and the earnings contribution from Port Washington were in line with our financial plan. We were actually doing better than planned from the standpoint of cost management. However, volumes at our natural gas distribution business and usage of electricity by our industrial customers continue to be a challenge for us.

Now, looking to the rest of the year. We do have a nuclear refueling outage scheduled in the back half of the year. And in addition, we have a very heavy maintenance outage schedule for our fossil units in the fourth quarter as compared to last year where we had a lightning outage schedule. So our guidance range for 2006, excluding the $0.01 per share gain on the sale of our Guardian Pipeline interest that we booked in the second quarter, remains at 2.47 to 2.57 per share. The gain on the Guardian sale adds $0.01 per share to this range. Let me remind all of you that under the fuel recovery rules that apply to Wisconsin Electric in 2006, we will refund with interest any overcollection of fuel costs that occur over the calendar year as a whole.

Although we will not be giving guidance for the third quarter, I did want to give you a feel for the earnings drivers that I expect compared to the third quarter of 2005. Adjusted earnings from continuing operations were $0.56 per share in the third quarter of 2005. The third quarter of 2005 was warmer than normal, and Unit no.1 at Port Washington went into service on July 16th. As a result, we only expect a small incremental earnings pickup quarter over quarter from the unit. Given these factors, I expect the third quarter of 2006 to be nearly flat as compared to the third quarter of 2005.

With that, I'll turn things back over to Gale.

Allen, thank you very much. Overall we're on track for the year and focused on continuing to deliver value for our customers and our stockholders.

And I believe we're now ready for the Q & A session.

Thank you. And now we would like to take your questions. [OPERATOR INSTRUCTIONS] We'll take the first question today from Shalini Mahajan of UBS.

Good afternoon.

I -- just -- Allen, just to make sure, was there any fuel oil recovery in the second quarter overrunning?

No. Actually, if you compare to the second quarter of last year, we are almost even in terms of our fuel recovery position. So if you look at the second quarter of 2005, we were about $4 million underrecovered on fuel. In the second quarter of 2006, again now we're looking at it from an income statement standpoint, we were about the same amount, right at $4 million underrecovered on fuel in terms of what goes through the income statement.

Okay. And in the last earnings call, I remember you saying that you are expecting to be underrecovered in the fourth quarter, roughly equal end of what you overrecovered in the first quarter. Does that still hold, or has that changed?

I would still expect to be underrecovered on fuel for the fourth quarter itself of this year.

And for the full year, we would expect to be very close to a neutral position. But Allen's point about the fourth quarter, just to make sure that everyone understands. In the -- in the fall of this year we have a scheduled nuclear refueling outage at Point -- at one of the units at Point Beach, and then as Allen mentioned, we have a fairly heavy maintenance schedule again -- normally scheduled maintenance in our coal-fired plant. One of those outages -- one of those maintenance outages at Pleasant Prairie, which is one of our larger newer coal-fired units, will be longer than usual because we will be tying in a brand-new scrubber installation. So again, maintenance regularly scheduled maintenance, and the tying of the scrubber will basically cause us to buy more purchase power and rely more heavily on natural gas in the back half of the year, which obviously will drive some fuel underrecovery in the fourth quarter. But for the -- for the year as a whole, our position should be close to neutral.

Okay.

Hope that's helpful.

No, that's definitely helpful. Also, could you -- and since you touched upon this, could you talk about your underlying operations and maintenance expenses if you exclude the Port Washington plant, what's -- at what rate have they been trending? Would they grow with inflation, or how do you see that moving into the future?

Well, if you look at -- and Allen and Steve are going to the section of the book that will give us more detail. But obviously, your O&M will grow with the addition of a brand-new power plant. So you're correct to say, stripping out for comparison purposes and stripping out the O&M associated with the operation of the brand-new unit, and stripping out some other one-time factors related to accounting from the rate case, essentially our ongoing operation and maintenance expenses are trending very well. They are trending quite flat for this year compared to last.

And in fact if you like we can -- we can flip to page 3 of the -- of the earnings package itself, in terms of O&M and I think that supports what Gale is saying. The total change is about $21 million quarter over quarter.

Okay. And -- but if I look at page 7 of your release, which gives the year-to-date variance and the fourth in O&M is up 12 million over last year.

Uh-huh.

Does that include -- that won't include the Port Washington Plant, right?

That would include.

That would. That absolutely would.

Okay. All right. That was, I guess, part of my confusion. Okay. That helps. And, finally, the commercial industrial sales are down this quarter as they were first quarter.

Right.

If you could just give some bit of background there?

I'd be delighted to. We have seen a -- a fairly significant softening in industrial demand for electricity across the first half of this year. And when you look at industry sector by industry sector, that softening appears to be focused in three areas, paper production, food processing, and iron ore mining. Those are the three sectors of the economy that certainly in Wisconsin are not performing as well as they were last year. And clearly that's had an impact on our industrial demand for electricity. On the positive side, if you look at commercial demand for electricity, particularly our office segment, and our office segment was up 6% compared to the second quarter of 2005. So, I think we're seeing an ongoing transition of the economy here away from heavy industrial and much more toward a more diversified economy. But clearly, industrial demand is going to challenge for us in the first half.

Great. Thanks so much.

You're more than welcome. Thank you for your questions.

We'll take the next question today from David Grumhaus, Copia Capital.

Hi, David, how are you.

Good, Gale, how are you. Good afternoon.

Good afternoon. 95 degrees and sunny, my friend.

It's about that in Chicago. So I appreciate it. Weather versus norm, I know it was 11 million down quarter over quarter. Do you have it versus normal?

Yes. If you look at the second quarter of '05, that was about 3 million better than normal. Weather in the second quarter of '06 was about 8 million worse than normal. So that gives you a $11 million swing, actual to actual. And then an $8 million swing versus normal, meaning worse than normal.

Okay. Looking at some of the specific retail sales. It looks like -- residential was down 9.4%.

Very -- very weather driven.

Is that very weather driven?

Absolutely.

And pretty normal from a conservation of usage point of view?

On the electric side, very much so, yes. And I think -- I mean just what we've seen in the last couple of days here with the -- with the heat wave that's blanketed the mid-west, as I mentioned we had an all-time energy delivery record for a 24-hour period yesterday and we're tracking above that today. And we've had solid customer growth. So my -- my honest sense is that what you're seeing in terms of the weakness in the second quarter on residential is just very much weather driven. It was a very mild -- it's hard to remember today, but it was a very mild quarter.

And gas sales looked like they were up a little bit. I don't know what weather was from a heating degree day point of view, but was that in line -- it doesn't look like you're seeing much conservation there?

Well, I wouldn't put a whole lot of stock in the second-quarter gas sales. Allen's pointing out correctly. Those are shoulder months. And you may also be seeing some of the impact of the fact that we had Port Washington, our combined cycle unit at Port Washington in-service. If you're speaking about gas distribution?

Yes. Okay. That's helpful. Thanks for the time.

You're more than welcome. Appreciate your question.

Paul Ridzon of Keybanc has the next question.

Hi, Paul, how are you today?

Good. Yourself?

Doing great.

Earnings and non-consolidated affiliates. What drives that line?

Yes. There was a $4 million change in that line. And roughly I think 2.8 million of the 4 million was related to non-utility land sales. That's the majority of the -- of the non-consolidated affiliate. And those were --

What -- with the hot weather that you're having, if it continues, how should we think about fuel underrecovery and the implications?

Well, I think I would go back to what Gale was saying. At the beginning of the year, we -- we said that our calendar year position we thought it would be somewhere between 10 million underrecovered and neutral. And then by definition, the way the fuels work this year -- the fuels work this year, you can't be in an overrecovery position. So at best you're neutral in fuel. So it's somewhat asymmetric this year. I think sitting here today it's hard to predict the weather, but sitting here today, despite the fact that we've had a week or ten days of fairly hot weather, I would still expect us to be very, very close to neutral on fuel recovery. So, no -- certainly no overrecovery, as I mentioned before because of the -- the way the rules work, but pretty close to neutral.

I would agree with Allen. And one of the reasons why we feel that way is that our coal-fired and nuclear units have performed very well over the course of the last few months and particularly during this heat wave. We've got virtually every -- every unit at full rating today. And the units, knock on wood, have been doing very, very well. And obviously, when you have solid performance from your base-load units, it helps to hold down expensive purchase power costs.

Nuclear life extensions. Any change in the depreciation schedule, or will that just be a regulatory wash?

Yes, they made that change as a part of the last rate case. So they -- they extended -- or they reduced the depreciation rate.

To reflect the new lives.

And then just on the first-quarter call, one of the second-quarter drivers was -- was I think cited as fuel overrecovery. Kind of wondering what happened and if that didn't happen how -- how the year continues to be kind of neutralish?

Well, remember, quarter to quarter things are very -- pulled around quite a bit based on, remember, you recover an average rate, so in the summer months in particular, marginal cost of fuel is much higher than average cost. And then, also, remember what I was saying about the fourth-quarter outage schedule. So, relative to the fourth-quarter of last year where we had a very light outage schedule. So, we fully expect it going into the year that in the first two quarters we would build up a positive recovery position, and then as we got into the higher fuel cost months, so into the summer and into the higher maintenance schedule in the fourth quarter, we would bring that balance down. So the pattern that we've seen throughout the year has been very consistent with our -- with the expectation that we had at the beginning of the year and that we've talked about on the call.

Yes. I would say the way we thought the year was going to shape out in terms of fuel recovery following exactly the pattern we expected.

And then -- so basically the balance of the year you are looking for a flattish Q3 and then we have a headwind in the fourth quarter?

That is correct.

Right.

Thank you very much.

Thank you.

Next we'll hear from Michael Lapides of Goldman Sachs.

Hi, Michael.

How are you, Michael.

Fine. How are you, Gale?

Doing well.

Easy question for you --

When was the last time you asked an easy question, Mike?

We're on our guard, now, Michael, go ahead.

Now, now, be nice. [LAUGHTER] '07 rate cases around the corner. How do we think about the large tranche of both regulatory assets and liabilities on your books and how you're likely to ask for them to be treated in the rate case?

Well, Allen will have a thought on this. I'll dive in as well. We obviously -- in -- let me make it clear. The filing that you're referring to will probably come in May or June of '07 for rates to be effective in January of '08.

Rate case pay '07.

Right. And for the commission to make its deliberations in the second half of 2007.

Quarter In that late '07.

Yes. Late 2007 I would expect the Commission to make a decision on our filing. And, again, filing in May of June of '07, commission deliberation in the second half of '07 and new rates to be put into effect January of '08. That's essentially the schedule that the Commission has asked us to follow.

And clearly there are several factors at play here. You've mentioned a couple of them. Also, the continued need to fund our power plant expansion, our Power of the Future program. So all of those factors will play into a comprehensive rate proposal. And it's a little bit early for us to discuss the details of that comprehensive rate proposal. We certainly have been considering all the factors involved. But keep in mind there are a number of things to -- there are a number of things to balance here and we will -- we will have our plan together well before the end of the year. But clearly, the issues that you mentioned will have to be addressed discretely in the rate filing. But there are several factors here at play.

Yes. I think maybe Michael just to add, just kind of dimensionally what are we talking about here? If you look at the regulatory asset balances at the end of the second quarter, so at June 30 of this year. The three really significant regulatory assets that are included there, we'd have to start talking about kind of an unwind or a recovery schedule for -- the largest one would be escrow transmission costs. So these are monies that we are out of pocket for paying the ATC tariff that are not covered on current rates. At June 30, that was about $180 million.

We also have about $80 million worth of deferred fuel costs that were largely hung up last year. And then we have about $63 million worth of unrecovered bad debt costs. So right at $320 million worth of regulatory assets. And there's some other cats and dogs, so call it 350 just to round it off, that will have to start setting a recovery schedule for. And I think under Wisconsin rate making, there can be relatively a wide range of recovery in terms of the time period they set, anywhere from say two or three years out to five to seven years. Dimensionally, that's the kind of regulatory asset that we've got to start setting a recovery schedule for.

How do we think --

And that's very well understood by our Commission.

How do we think about the offsetting regulatory liability?

Well, from a cash standpoint, the most significant regulatory liability that we would have would be related to the sale of S02 allowances, and that's only about $46 million in terms of a -- a cash recovery that we received that would really be hung up as a regulatory liability. And when I talk about unwind schedules, the unwind schedules I talked about for reg assets, similar answer for regulatory liabilities.

Great. Thanks, guys.

Take care, Michael.

Same.

Take the next question today from Vedula Murti, Tribeca Global Management.

Vedula, you have reemerged. How are you doing?

I'm doing well, thank you very much.

We've been missing you.

Good to be back and nice to talk to you.

You're welcome. What's on your mind today, Vedula?

I missed a little bit of your opening discussion and I think you were talking about the -- the potential wind farm. In terms of the requirement to try to go ahead and do that, is this to respond to a renewable mandate that the state has established in terms of a certain amount of installed capacity and that's the motivation behind pursuing the wind farm?

Well, there are really two pieces of motivation. Very good question, Vedula. The first is -- and I did mention in the prepared remarks that the State of Wisconsin did pass a new renewable portfolio standard this spring. 5% of electricity sold coming from renewables by 2010 and then the much higher number by 2015. So clearly a part of the rationale for moving forward and proposing this new wind farm project is related to complying with a renewable portfolio standard. But a second piece of the rationale is, we think that for a small and dedicated portion of the portfolio, wind energy certainly makes sense. So it's really based on compliance and the fact that it does make some practical sense to have some amount of wind as part of our portfolio.

Okay. And I know we've just started building the coal units and it may be fairly diminimus for this year. But, Allen, do you have an estimate that for '06 how much the -- what would be the balance of the deferred equity return that you'll have set aside that will ultimately get recouped once the units go on-line now out in '09, '010?

Steve Dickson has got the details on those balances. Steve, if you can just take Vedula through that.

Sure. As you know, we are allowed to recover carrying costs on quash that we have spent and the rates about 14%. We disclosed last year that at the end of December we had about $100 million, $130 million, for the first six months we've deferred another 31 million. And as you can imagine, the balances will grow as the construction expenditures grow. So we should defer more in the second half of this year.

Okay.

Let me make sure before we move on that everyone understands what we're talking about. Essentially, in the State of Wisconsin on our Power of the Future plan, we do not book AFUDC on these Power of the Future units. We are, though, in a much better position, I think, on these units than AFUDC would allow us, because we -- we are allowed to basically earn a recurrent return, as Steve was saying, on the investment we make in the units as we go. That current return does not run through the P&L, though, until the units are in service. So basically it's put up on the balance sheet and the numbers Steve gave you represent what we have on the balance sheet. I hope that's helpful.

Yes. And one last question for Allen. Is there a -- in terms of -- I was looking around on your website and some of the financials. Is there a place where I can find the WE Power balance sheet and cash flows and its income statement, or is that still something that's going to be a work in progress?

They're not yet released on a stand-alone basis, Vedula, but that's something we'd certainly consider doing. Not so much in our Exchange Act filings but possibly on the website.

Okay. So it's something I can look forward to hopefully in the future?

Yes. And there is detail, though, in the 10-Q that we'll release tomorrow related to these deferred balances that Steve talked about, the capital spending on the -- on the Power of the Future units broken down by category. So there is detail, if you will, sprinkled throughout the 10-Q. But in terms of a set of stand-alone GAAP financial statements, that's not something that we've yet included in -- on the website for WE Power. Steve --

No. And we've -- we've tried to disclose for WE Power, as it relates to the first unit, the total plant and service costs for Port Washington 1, which was about $364 million and then we disclosed last year the debt associated with that. So for the first plant, it's quite simple. All you have is an asset and you have a debt. And then we also disclose that the earnings stream on that is about $48 million(ph) a year on Unit 1. And I think in the 10 K we have disclosed the quip(ph) balances at the end of the year, but I don't think that we have broken out capital expenditures for five years.

Right. And the 48 million is revenue.

48 million is revenue, correct.

Vedula, a good suggestion from Allen. If you look through the Q that we'll release in the next few days, I think you'll be able to piece together a good bit of what you're looking for.

Appreciate it. Nice to talk to you guys.

Good talking to you. Take care.

Andrew Levi of Bear Wagner has the next question.

Andy, what are you doing today?

Just try to make some money.

All right.

ATC. Can you give a little guidance on when or if you may do some type of -- whether it's spin-off or transaction or -- or sale or whatever it may be? And can you also give us an idea of some of the numbers towards book value? What your current earnings are for this and how you would -- what you may or may not do with the cash if you were to do a transaction? And also, one last question relating to that. How will the taxes work on that? Because I think you're, what, a 35% owner, there's no -- WPS owns a majority of these things. I'm just wondering on how the taxes would work?

We're actually about a 30% owner.

And maybe just to restate the question because everybody may not have heard you, Andy. I think you had a three-part question. You wanted an update on the status of ATC and then, second, just some sort of financial metrics or dimensions, if you will, in terms of our investment and then the tax treatment of our ownership on ATC.

And what type of transaction are you considering, if any?

And Gale why don't you --

And timing, I'm sorry, timing.

Okay.

Sorry.

Okay. So maybe four or five questions. Gale, why don't you start with just kind of the first one and then I'll handle the other four or five.

Be delighted to, Allen. First of all, Andy, we don't have a significant amount of update for -- for you on ATC. We've mentioned before -- and this continues to be our position, that we are open to a range of options regarding our ownership interest in ATC. There are 10 members of the board of directors of ATC. And the -- the amount of wait on terms of voting on the board does not translate to the amount of equity interest that you have in ATC. For example, even though we're about a 30% owner of ATC, we have one vote out of ten. It's a bit of a complicated governance structure to be candid with you. So were making and will make our input at the appropriate time to the ATC Board and essentially that's really about all that we can say at this stage of the game.

Yes, and in terms of just some dimensions around it, Andy in terms of -- of investment. And of course we use the equity method of accounting, we don't consolidate. So the only thing in our balance sheet that you would see related to ATC would be the investment. And that's right at $220 million at June 30 of this year. In terms of earnings, it's probably around 36, $37 million on a pre-tax basis from a -- from a tax standpoint it's structured as a partnership so there's just a passthrough, so we just pay the taxes just on a pass-through basis. I think that addresses your questions from an earnings -- like I said, about 36 million pre-tax.

And just to make clear also just one last question. It does answer all my questions. But there's really no opportunity with this type of structure for any type of tax-free spin or anything like that, it would -- basically -- you'd basically have to sell it, right, spin it to the shareholders, could you?

Well I'm not a tax attorney, but in order to do a tax-free spend, I think you have to be in control.

Right.

Is one of the things.

We're obviously not.

As Gale mentioned, we're not in control. So there's really not that opportunity to do a tax-free spin-off.

So the more likely scenario is, if there is a transaction is that the Company -- the corporation receives some type of cash and then you just redeploy that cash wherever?

Yes. Well, I think -- to answer your question. If you did something.

Right.

The nature of that would be taxable.

Right.

And -- for cash.

Right. And it would be basically go back to the corporation for any type of, as I said, a spin or something like that to the shareholders?

If there were transactions.

That's right. That is correct.

You were [inaudible].

Yes.

Thank you guys, have a great rest of your summer.

You, too. Take care.

We will now hear from Nathan Judge at Atlantic Equities.

Nathan, you're up late again in London.

It's enjoyable, I suppose.

How are you?

I'm well, thank you, Gale. How are you?

Doing fine.

Excellent. Allen, you ran through the explanation for gas rates quite quickly. I'm sorry, I missed it. Could you just repeat what drove that 11 million increase?

Yes. It was largely the price increases that we received in the gas case. Just maybe the -- just a quick refresh on that in terms of pricing. In total on the natural gas side we received a $60 million price increase, roughly 20 of that was for the electric operations at Wisconsin Electric and the balance of roughly 40 million was at Wisconsin Gas. So that really was the big driver for the $11 million margin increase that we saw in our natural gas business in the second quarter relative to the second quarter of '05.

And Nathan, those rates that Allen was referring to were put in place in late January of this year.

Right. I would -- just as far as seasonality of that, it looks to be a bit more flat lined than I expected or -- or is there just something that would suggest $11 million is -- because -- clearly that's the shoulder season, is there something that would have caused that to be a bit higher?

Or -- well, two things at play here. First of all, the -- we had a very, very mild winter. One of the mildest winters on record. And the new rates really were not put in -- were not put into effect until late January so we missed a big chunk of the January heating season with the new rates.

Got you.

That's one issue. And then clearly we have seen some customer conservation. As of -- as a normal reaction to higher commodity gas prices.

Going -- moving on to that topic, actually. As you've -- clearly there has been -- as you mentioned, very strong customer growth and demand for the commercial side of the business. When you look at your long-term power needs for the State of Wisconsin, how have they been tracking relative to your long-term expectations? I think there was something on the magnitude of 1.2% long-term growth, I believe.

Well, we're seeing about 1.2% customer growth. We're seeing in terms of demand growth roughly 2% a year, although after we get through today's peak demand it will be interesting to see just how far beyond projection we were in terms of the weather that is affecting the mid-west today. But essentially I think a reasonable yardstick is 1 to 1.2% annual customer growth and about 2%, 2.25% electric demand growth annually.

If we have hot weather and it pushes the peak demand up beyond expectations, could that change the dynamic as far as what type of capacity -- or what capacity's needed by when?

It -- it could but essentially we will -- we will weather normalize these peak demands and see what kind of trendline we're on. I mean obviously one of the reasons why we maintain with agreement from our -- from our regulator an 18% reserve margin is to handle the weather of abnormalities like we're seeing right now. But once we -- once we get through this season we will obviously weather normalize the peak demand. My guess is, though, it will be pretty much right on that 2% demand growth track that we've discussed.

Great. Just with regard to the environmental lend build that you're doing. Is that new capacity a requirement above and beyond the State of Wisconsin's needs, or is that going to be replacing some type of -- of generation need?

Well, let me answer that two ways. First of all, the new mandate, the renewable portfolio standard that was put in place, essentially just looks at what percent of your electricity sales must come from renewable sources by a given year. We will work that into our capacity plan, obviously. So, on a rule of thumb, in Wisconsin in particular, it is not one of the better wind states in the United States. I mean the winds don't below consistently here and at a high level. If we put in say up to 200 megawatts of new capacity, that would count roughly, Rick, about a third, about 30% in terms of -- in terms of -- in terms of the capacity credit that we could count on. So pick a number, about 70 -- it would be about 70 megawatts of capacity that we would not -- that we would not need from a fossil standpoint. If I'm making any sense to you.

Okay. I see. So -- essentially --

Rick is saying like replacing maybe a small peaking unit.

I see, okay. Because -- that makes -- I see what you're saying. Okay. So with regard to transmission and -- obviously, as ATC puts more transmission to the ground, is there an opportunity to import some of the -- the environmental wind credits into the state, or is it -- does it have to be self-generated, or how does -- how can you get a hold of those credits?

Well, certainly in the long run you can -- a stronger transmission backbone could allow us to import more renewable energy or more energy of any kind into the state. But I think we have to be very careful about that. In going back to my earlier remarks about building on the principle of self-sufficiency one of the things we've seen is that there is a danger in relying too heavily on imported power. Because of two things. One, you have economic growth in other states. And you don't want to be at the mercy of the high -- of the highest cost generation in the other states. So we're very grateful for MISO and for the ability to -- to import greater amounts of energy. But it doesn't in any way dissuade us on a 98-degree day from having the generation resources cost effective that we need in this state.

Thank you. And just to change to one last question, if I may. With regard to your land sales, I know you -- you mentioned that there were some gains in the earnings and non-consolidated affiliates of 2.4 million.

Right.

I think you had committed to selling approximately 100, $120 million of land over a period of time. Can you just kind of give us an update on where you are -- where you stand with that product -- that expectations, and given that real estate market has somewhat changed in the last -- six months, is there any change to that expectation?

WISPARK at the end of the second quarter, I believe we were at about 90.2 million. So we've continued to make progress on the -- on the sale of the real estate at WISPARK itself. And as I mentioned when I responded to the question about the earnings and consolidated affiliates. We had land outside of WISPARK, even outside of utilities, with non-utility land outside of WISPARK, and as we have opportunities to sell that down we will. And, in fact, the parcels that were sold that generated these gains in the second quarter were these low income housing projects that had been entered into by the Company, gosh, probably 10 years ago outside of WISPARK. So we're making very good progress on our land sales.

I agree with Allen. The other -- the other piece of the gain that I believe was reported in the second quarter was a parcel of land that's going to be joined with other property to build a -- a corporate headquarters for a Fortune 500 company that's moving from the suburbs into downtown Milwaukee. So these particular land sales really were outside of our normal real estate subsidiary. But we're making good progress and -- and we're really actually ahead of plan at the moment on -- in terms of real estate sales. We feel pretty good about where we are. Thank you very much. Great. Thanks, Nathan. See you in September.

The next question will come from Paul Patterson, Glenrock Associates.

Good afternoon. Can you hear me?

We can. How are you, Paul?

All right. I want to follow up on a few things. First of all, I wasn't completely clear on the O&M, the fossil O&M. Was -- because I -- I couldn't hear completely and I apologize. Was that -- there was some mention that that was associated with Port Washington, is that correct, this -- this fossil O&M of 7 million for the quarter, 12 million for the year to date?

Yes. We -- remember now, we brought the second -- sorry, the first unit in Port Washington into service on the 16th of July. So it would not have had any O&M in terms of -- in terms of our P&L statement in the second quarter of last year. So the change you see in that instance is because we have a new unit operating now that we did not in the second quarter of last year.

Well, I guess it's a little bit surprising about it is that when we look at this breakdown that you guys have on page 6, it looks like non-utility operating income, Port Washington unit, is broken out as separate from the utility operating income where you have the 7 million.

Yes. But remember, the -- the unit is operated by the utility. So any of the O&M expenses for operating this unit are expended by the utility and they show up on the utility's income statement.

And rates.

And are covered in rates.

Okay. I got you. That explains it. The second question that I have is a follow-up on -- the last question I guess, Paul Ridzon's question as well on this real estate thing. If you could just remind us, what is the earnings contribution that you guys are budgeting for 2006 from real estate, whether it's WISPARK or -- or these other I don't know sort of unusual kind of sales? How much has been the contribution, I guess, and what do we expect? I see what the decrease is and how much the -- they seem to be actually offsetting each other to a certain degree. But what is it that you guys have expected? And I guess as time goes on, is that supposed to go down or -- how should we think about that?

Just to give you a feel in -- for WISPARK, which is the real estate subsidiary itself, if you looked at the earnings in the second quarter and we're talking about operating income now. We actually had a $2.5 million reduction in operating income at WISPARK relative to last year and then we had an increase of the right at 2.5 million from this other sale. So we're almost flat relative to last year. And relative to last year, we booked about a million and a half dollars of operating income. So the contribution from any land sales, gains or losses, is extraordinarily small. And over time, I would expect that, to your point, to be even smaller as we sell the -- the remainder of the portfolio.

Okay. So, in other words, if I understand you correctly, it's only about a -- I mean on an annual basis we're not talking about a large amount. I mean I guess a million dollars a quarter so to speak, that kind of thing? Is that what we're looking at?

If that.

If that much.

Okay.

That would be -- yes, I would agree. If that much.

That's very helpful. And then also on the -- the industrial sales, you mentioned iron ore, paper and food processing were all -- they are all down and that's just because I guess those businesses are down, is that what's going on? I just want to clarify that. I mean, iron ore mining is decreasing, is that right?

Well, in the case that we had one very large iron ore customer. And they've been doing some maintenance on a number of their facilities that has clearly reduced their energy consumption in the second quarter. The bigger one that's very clear, where the trend is very clear, is in paper production.

Okay.

Where we continue to see the closing -- the closing of large paper mills.

I got you.

So that -- that's the one that I would say there's a clear trend in terms of -- in terms of reduced consumption going forward.

Okay. I got you. And then -- okay. That explains it. And then as far as Andy's question, that $220 million investment that you have, is that the same on a tax basis roughly speaking?

No. The tax basis would be less.

Is a lot less because of accelerated depreciation on the Energy [inaudible] Act or something?

Yes.

So can you tell us what that is or --

Not something we disclose.

Okay. And then -- and then I guess the final question, weather impact has decreased nuclear plant -- plant output in other parts of the Mid-west we're reading about with these high temperatures. I was wondering if there's any potential impact on Point Beach? And just in general what you're seeing in terms of the market or any of your plants by the way? And then I guess also just in general with the market what you're seeing with respect to this. I mean it seems somewhat unusual if you have any comment or insight on that?

I think to clarify the nuclear question. You're talking about the -- the curtailments or the reduction in capacity for example, at DC Cook and at the Fermi Plant, Detroit Edison because of the cooling water, because they couldn't -- they couldn't cool as much because of the high light temperatures.

You got it. Exceline, I think, has also said some stuff about this as well.

Remember now, one of the great advantages we have with Point Beach is that it is sitting on the shores of Lake Michigan. And so there may come a day if we have 98-degree days for a month in a row, but we haven't seen any depreciable decrease in output whatsoever at Point Beach. And again in part that's because of the cool waters of Lake Michigan where you don't -- where you -- where you have continuing cool water supply to keep the unit at full -- at full power. Is that responding to your question?

Yes. That does respond to it. And I guess is there any opportunity that you guys have as a result of that? I mean I guess it all gets lost [inaudible]any offsystem sales opportunities or does it all just sort of go back into the fuel clause and what have you?

It all goes back to fuel.

I appreciate it. Thank you very much.

More than welcome. Good questions. And I think we have our final question.

And our final question will come from Riza Hatecke(ph) of Polygon Investment Partners.

Just under the wire, Riza. How are you?

How are you, good afternoon. I had a quick question, could you refresh us on CapEx for Power of the Future over the next two or three years. Is '07 going to be the bulky year and then the kind of tail off '08, '09, '010?

Sure. As Allen goes to the specific numbers and we -- we have made this public. So this is not a new piece of information but helpful, I think. Our three highest spending years under our Power of the Future program will be this year 2006, 2007, and 2008. And we will average over the course of those three years about $1 billion worth of spending a year.

Yes. And just to review. And these numbers are also disclosed in our Form 10-K in terms of the total amounts that we expect for '06, '07, '08 as well as the breakdown between utility and PTF. So, we'll spend right at $1 billion this year, as Gale mentioned, about half of that is with the utility, the other half is PTF. '07 I would expect spending to be about 1 billion 125 million, roughly 700 million of that billion 125 million would be PTF. And the balance would be at our utility. And then in 2008, I would expect about 975 million of capital spending, about 500 of that is at the utility. And about 475 million would be PTF, would be in the new units.

Great. And also did you say that for the wind farm, that [inaudible] debt recovery as you file your next rate case and so in 2008 you'll get recovery on that?

Yes. I would expect that when we do the -- when we file our case in 2007, as we always would have, we would have a forward-looking test period. That test period would cover 2008 as well as 2009. So included in the property plant and equipment balance, effectively would be the -- whatever the in service amount ends up being for the wind mills.

And could you talk about -- I guess it's a little -- probably a little early to maybe talk about specifics, but I was wondering about potential for dividend increases as you approached the end of the decade and with -- how the future getting mostly billed -- I guess what years could you see you increasing the dividend and the material -- materially, I guess?

Well, let me handle that for -- for a couple of pieces of perspective. First, we have said and I would repeat that during this period of heavy construction spending on Power of the Future, our goal would be to raise the dividend on a consistent annual predictable basis at about half the rate of our earnings growth. And we have been able to accomplish that as we've gone down the road here over the -- over the past two or three years. If you look at when does our construction spending peak and when will the Power of the Future units be completed and in service, well, clearly we hope by the summer of 2010 to have the second and final unit at Oak Creek in service and both Port Washington units will also be in service by that time. And so will the wind farm. But I think as you look toward the end of this decade, what we have said and what we will do is step back and take a look at our capital structure, our dividend policies, even the potential for share buybacks, but we will clearly relook all of those elements as we get toward the end of the decade.

Great. Thank you very much.

Thank you. Well, that concludes our conference call for today, ladies and gentlemen. Thank you for participating. If you have any other questions, 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.

A replay of today's call will be available in approximately two hours. To access the replay, dial area code 719-457-0820 or 888-203-1112. The passcode for the replay will be 2104429. Once again, those numbers are 719-457-0820 and 888-203-1112 with a passcode of 2104429. Again, that does conclude our conference for today. We would like to thank you for your participation.