威斯康辛能源 (WEC) 2007 Q1 法說會逐字稿

Good Afternoon, and welcome to the Wisconsin Energy 2007 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 it 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 EPS 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 2007 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 Mr. Gale Klappa, Chairman of the Board, President and Chief Executive Officer of Wisconsin Energy Corporation.

Thank you, Colleen. Good afternoon everyone. We appreciate you joining us on our conference call to review the company's 2007 first 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 generous general counsel, Jeff West, Treasurer and Steve Dickson, Controller.

Overall I'm pleased with what we accomplished during the first quarter. Our earnings came in as we expected and we continue to make significant progress on all components of our power of the future plan. Allen will review our results in detail in just a moment. As you may have seen from our news release this morning we achieved earnings from continuing operations of $0.85 a share in the first quarter of 2007, this compares to first quarter 2006 when earnings from continuing operations were $0.88 a share.

As we discussed on our previous calls the timing of scheduled maintenance at our power plants is more weighted to the first half of this year as compared to the schedule for 2006. We anticipated the additional fuel and purchase power costs that were associated with these planned outages and the impact they would have on our quarterly results. Now I'd like to spend just a moment on our continuing effort to upgrade the energy infrastructure in Wisconsin. Our power of the future plan is if fundamental to the principle of self sufficiency. Key components of our focus on self sufficiency include in investing in two combined cycle gas fired units at Port Washington, north of Milwaukee, the construction of two super critical pulverized coal units at Oak Creek, which is south of the city and our plan to build 145 megawatts of new wind generation.

As you recall back in November of 2002, the Public Service Commission approved the building of two 545 megawatt natural gas fired units at our Port Washington site. The first unit at Port Washington went into commercial service in July, 2005, on time and on budget. Engineering for the second unit is now essentially finished and all major equipment has been delivered to the site. Construction of the second unit is currently about 50% complete, tracking on schedule and on budget. The unit is expected to begin commercial service in time for the peak summer season of 2008.

Now let's turn to the status of our two new coal fired units at Oak Creek. Activity at the site as you recall began on June 29, 2005, following a ruling by the Wisconsin Supreme Court that allowed us to move forward. Since that time we have made significant progress on engineering, procurement, site excavation, foundations, structural steel, air quality control equipment, the coal handling facilities and the cooling water tunnel. During our last update in February I mentioned our unit one boiler steel had had reached an elevation of 242 feet. I'm delighted to report that we held a topping out ceremony in March when the structural steel for unit one reached its final elevation of 280 feet. Bechtel is now focusing on installing the boiler, will hang from the roof trusses of the building. As previously reported we have completed the chimney shell and we're now in the process of fabricating the chimney liners that are scheduled to be installed later this year.

Construction of the water intake system, which I know many of you have been interested in is also progressing very well. Drilling of the water intake tunnel under the bed of Lake Michigan started in September, 2006, and was completed in February, 2007. This clearly is a major milestone in our progress at the site. In addition, all four down shafts in the lake have been drilled and sleeved with 12 foot steel casings. The contractor is dredging around the casings now to make way for the manifolds that will be connected to the casings. 24 wedge wire intake screens are then scheduled to be connected to the manifolds later this year.

The major upgrades we're making to the existing rail yard and the coal handling system are also on schedule. We expect these facilities to be turned over to the utility in fact this summer to support coal deliveries to the existing units at the site. Engineering for the Oak Creek expansion is now more than 86% complete, procurement of the engineered equipment and supplies is 99% complete, and at the end of March the overall project stood at almost 30% complete tracking on time and again on budget. We continue to be very satisfied with the progress at Oak Creek.

Now as you know there are four major permits that are needed to build these Oak Creek facilities. These include an air permit, a wet lands permit, a permit from the U.S. Army Corps of Engineers and finally a pollution discharge elimination permit. We have received all of these permits and each of them remains in effect unless it is overturned by a court or an administrative law judge. In September of 2005, we resolved all the legal challenges to the air permit. Also in February of 2006 we resolved the outstanding legal challenges to the wet lands permit. Our permit from the U.S. Army Corps of Engineers was received in May of 2005 and to date no appeals have been lodged against that permit.

On the last permit, Wisconsin Pollution Discharge Elimination System Permit, a contested case hearing was held during March of 2006 and in July of last year a Wisconsin administrative law judge upheld the decision by the department of natural resources or the DNR as we call it to issue the permit. The parties opposing the permit then filed for judicial review in Dane County Circuit Court. On March 5 of this year, as many of you know, the Dane County Circuit Court issued its ruling. The court affirmed in important respects the decision by the DNR to issue the permit, but also remanded certain aspects of the permit in light of a new federal case that could affect power plants nationwide. In the meantime construction work at Oak Creek can and is continuing. Now, the two aspects of the permit that require further review are whether the expansion qualifies as a new or an existing facility, and our choice of cooling technology.

Under the phase one rules of the clean water act we believe that the additions at Oak Creek should clearly be treated as an expansion of an existing facility. Supporting this conclusion is the fact that all of the units at the site will share a coal handling system, a water intake structure and a common transmission switch yard. The second question relates to the use of the best available technology for the cooling water system at the site. We believe that the water intake structure we're building clearly offers the best environmental solution. Because it minimizes the impact on the lake and results in lower air emissions, less use of coal and less use of Lake Michigan water than any other available type of cooling system. The next step is a status conference, that will take place this week with the administrative law judge. The entire review process is expected to take perhaps until the end of the year to complete. Our plan remains to have the first unit at Oak Creek in service in the summer of 2009, the second unit is scheduled to follow one year later in 2010.

And now I'd like to update you on our blue sky green field wind project that we have been working on for a number of months. On February 1st, the public service commission of Wisconsin issued an order approving the project as a traditional utility rate based investment. Since then we have completed our evaluation of turbines for the wind site. On March 28 we signed an agreement with Vestas Wind Systems for 88 turbines. Each of these 88 turbines has a capacity of 1.65 megawatts. The cost of the project is expected to be approximately $300 million and that figure excludes capitalized carrying costs during construction. The agreement we signed with Vestas calls for construction to begin this summer. We anticipate the first turbines at the site entering service in the first quarter of 2008 and we expect to achieve commercial operation for the entire wind farm by the end of 2008. The project will by the way more than double the amount of wind capacity currently operating in the state of Wisconsin. And now an update on our sale of Point Beach Nuclear Plant. In December last year as you recall after an extensive review we agreed to sell our Point Beach Facility to FPL energy. FPL owns and operates more than 30,000 megawatts of generating capacity in the United States, including six nuclear units. Now, subject to commission approval we also expect to enter into a long-term power purchase agreement with FPL energy. This agreement would allow us to purchase all of the output from the two units at the site until the operating licenses expire in the years 2030 and 2033 respectively.

So here's where we stand. On January 5, we filed an application with the Wisconsin public service commission seeking approval to transfer ownership and operational control of ach and enter into a long-term power purchase agreement. Company testimony was filed on January 22, a prehearing conference was held on February 14 and we're now responding to data requests. Testimony from all other parties in the case is due May 4 and technical here's are now scheduled for early June. Several other state and federal agencies must approve various aspects of the transaction as well. They include the Federal Energy Regulatory Commission, the Nuclear Regulatory Commission and the Michigan Public Service Commission. The waiting period is now expired following our Hart-Scott-Rodino filing, the Department of Justice asked for no additional information. We're hopeful that we're on schedule and that we can receive all necessary approvals and close the transaction by the end of August. One last item that I know will be of interest to you, we plan to file general rate cases for Wisconsin Electric and Wisconsin Gas utilities later this month. These cases will cover the electric, natural gas and steam operations of these utilities of the we expect hearings to take place in early fall here in Wisconsin and new rates to take effect in January of 2008. And now I'll turn the call over to Allen who will give you more details on our financial performance for the first quarter of 2007. Allen?

Thanks Gale. I'm going to focus my remarks this afternoon on earnings from continuing operations. The information regarding earnings from discontinued operations is included in the earnings package. It may be helpful for you to refer to pages 7 to 11 of the earnings package as I review our results. Earnings from continuing operations were $0.85 per share for the first quarter of 2007, versus $0.88 per share in the first quarter of 2006. On a consolidated basis our operating income was $185 million versus $192 million in 2006 or a decrease of $7 million. Operating income for the utility energy segment was $178 million compared to $186 million in the first quarter of 2006 or a decrease of $8 million. Positive earnings drivers in the first quarter for the utility segment included a return to more normal weather, improvement in natural gas margins due to full quarter impact of price increase implemented in January of 2006, and lower employee benefit cost. These factors improved operating income by $21 million, $7 million and $5 million respectively. Other items in total improved utility operating income by $3 million.

The primary negative earnings driver in the first quarter was related to higher fuel and purchase power costs. These costs reduce operating income by $44 million relative to last year. This was largely caused by three factors. First, reduced availability of coal generation due to maintenance outage, increase cost to purchase power driven by colder winter weather and higher outages across the MISO region, and finally a 20% increase in the cost of coal as compared to last year. We received approval from the Wisconsin Commission to defer approximately $13 million of the incremental replacement power cost associated with a forced outage at our Pleasant Prairie Power Plant. Without this deferral we would have seen an even larger swing in fuel and purchase power expenses in the first quarter. Netting the impact of a positive and negative factors I just reviewed brings you to the $8 million decrease in the utility segment operating income for the first quarter of 2007.

Operating income in the non-utility energy and corporate and other income segments which primarily includes WE power was up approximately $1 million in the first quarter of 2007 compared to the same period in the 2006. Making the changes for these segments brings you back to the $7 million decrease in operating income for the 2007 first quarter. Our earnings from the American Transition Company were up $1 million over the first quarter of 2006. Other income was up $2 million in the quarter and this was primarily driven by increased carry on deferred cost. Total interest expense was down $2 million in the quarter.

This decrease reflects an increase in capitalized interest related to our Power of the Future construction activity offset in part by the higher levels of short-term debt needed to fund planned construction. Consolidated income tax expense increased by $2 million as compared to the same period in 2006. Our effective tax rate was 39% for the first quarter of 2007 versus 37.6% in the first quarter of 2006. We expect our 2007 annual effective tax rate to be between 38% and 39%. Adding these items brings you to $101 million of net income from continuing operations for the first quarter versus $105 million in net income from continuing operations for the same quarter last year. Turning now to cash flow, during the first quarter of 2007 we generated $363 million of cash from operations. This compares to $340 million for the same period in 2006. The improvement in first quarter cash flow is related to increase collections of natural gas cost. We had capital expenditures of $290 million in the first quarter 2007. $117 million of this was dedicated to our utility and other businesses and $173 million was for the generating units being constructed as part of our Power of the Future plan. And in addition we paid $29 million in dividends.

Our debt to capital ratio was 58.8% at the end of the first quarter of 2007. This compares to 58% at the end of the same period last year. Short-term debt outstanding at March 31 was approximately $720 million at the parent company level. And we intend to manage our short-term debt levels down for the issuance of long-term debt and/or hybrid securities. As I mentioned on our conference call in February, we plan to issue between $500 and $600 million long-term financing between 2007 and 2008 at the holding company, which may consist of a combination of long-term senior debt and hybrid securities. Due to certain features of the hybrid securities the rating agency treat a portion of them as an equity equivalent. However I want to stress the hybrids we are considering are designed to leave our basic and diluted share counts unchanged.

Capital spending is expected to be nearly 1.4 billion for the year. If we go to financial closing on Point Beach this year I expect that our debt to capital ratio at year-end 2007 will be at or below 59.5%. If the sale does not close in 2007 I expect our year-end debt to capital ratio will increase from the 59.5% level. However, as we have stated in the past our goal is to maintain our debt to total capital ratio at no more than 61.5% during the period we are constructing our new gas and coal fire generation. All of these forecasted debt to capital ratios exclude the portion of any hybrid securities that would be treated as an equity equivalent by the credit rating agencies.

Finally we are going to use cash to satisfy any shares required for 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 earnings guidance for 2007. Our 2007 earnings guidance range remains in the range of $2.60 to $2.70 a share. This assumes full ownership of Point Beach for all of 2007. Once the actual closing of the sale occurs we will update our earnings guidance. But for example, if we close the sale on August 31st, I expect we would reduce our guidance range for 2007 by $0.05 per share. Now as a reminder the earnings drivers we expect for the full year fall into four groups. Price increases, changes in sales volume, including the effects of weather, cost increases at our utilities, and an increase in our expected tax rate. As we look at the first quarter the impact of price increases and our effective tax rate were in line with our financial plan. For the the the quarter as a whole, weatherer was marginally better than normal. However fuel cost recovery in the electric portion of our business in Wisconsin, was a challenge for the reasons I mentioned earlier. As a result we could see fuel costs recovery for the year range from neutral to as much as $10 million under recovered in the Wisconsin retail jurisdiction.

Now, as is our practice we want to give you a feel for the earnings drivers for the upcoming second quarter as compared to the second quarter of 2006. Let me remind you that the quarterly pattern of earnings this year is expected to be somewhat different than what occurred in 2006. As we saw in the first quarter our earnings are affected by the timing of maintenance outages at our power plants, which in turn drives electric fuel cost recovery. This year the planned outages are weighted to the first half of the year whereas in 2006 they were more clustered in the fall. The effect of this is to increase fuel expense in the first half of the year and decrease fuel expense in the second half of the year relative to 2006. And in the second quarter of 2007 we expect to see a continuation of this effect due to the planned refueling out annual of unit number one at Point Beach. You will recall last year we had a planned refueling outage at unit number 2 at Point Beach in the fourth quarter. Last year we earned $0.49 a share in the second quarter. If you bill from this level to make your estimate for the second quarter of 2007, you should take into account that outage expenses at Point Beach are expected to reduce quarterly earnings about $0.05 per share and the timing of fuel recovery is expected to reduce earnings another $0.10 to $0.12 cents per share.

However, as discussed above, we expect positive fuel recoveries in the fourth quarter of this year. In summary, the schedule plant outages are expected to reduce earnings in the second quarter of 2007 as compared to the prior year, but we are projecting to have improved earnings in the fourth quarter of 2007 as compared to 2006. Our annual earnings estimate for 2007 continues to be in the $2.60 to $2.70 range. Now with that, I will turn things back over to Gale.

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

And now we would like to take your questions. (OPERATOR INSTRUCTIONS) Your question will be answered in the order it was received. I'll pause for a moment to assemble our roster. We will take our first question from Doug Fischer with AG Edwards.

Good afternoon.

Hi Doug, how are you.

Hello Gale. Question for you about the fuel recovery, maybe you can cite the factors that made the underrecovery in the first quarter less recovery than you had expected, is that fuel cost and is it such that you don't think you're going to hit the window to be able to address that at the commission.

Well, let me start out with the first part of your question and that's the factors, I'll ask Allen to chime in as well. I think you can look at it one very simple way. As we have had major base load plants down for normal maintenance this spring, we have seen a couple of things happen. And the first is MISO costs have been higher than projected. There was a lot of maintenance outages going on across the Midwest with base load plants it this spring. Particularly in the first quarter. That had clearly had an effect on MISO prices. So one of the reasons why our fuel and power purchase power cost underrecovery a little greater than we thought was really the spot prices on the MISO market were higher than we expected. And then as Allen mentioned, our underlying coal prices are about 20% percent higher than a year ago. Allen?

Yes, I think Doug the second part of your question was more related to regulatory recovery. Certainly if you're in the band that I talked about in the prepared remarks between neutral and 10 million under you would still be within the dead band, under the Wisconsin fuel rules.

Right. Could you give us an update on efforts to improve those rules and then maybe you can just comment on the rate case as to what the primary drivers will be and what you might propose in terms of treating the Point Beach proceeds.

Sure. In terms of the fuel rules, there is an open docket that the Wisconsin Commission opened last year. As a matter of fact, the commissioners here in Wisconsin have become very frustrated themselves with the current fuel rules and fuel cost recovery rules in the state. Just last week given the nature in which these fuel rules work, the commission found itself in a position not with our company, but with another utility in the state of having to approve a one time fuel cost refund to customers and at the same time approve a fuel cost rate recovery increase, all in the same day.

And I noticed in the transcript that one of the commissioners expressed extreme frustration over this and urged the Wisconsin commission staff to move the docket forward in terms of reforming the fuel rules here in the state. The docket has been open for a number of months now, all parties have submitted testimony and we're hopeful that there will be some change in the Wisconsin fuel rules, an improvement in the Wisconsin fuel rules by the end of the year.

In in terms of the rate case, as I mentioned in the script, we will be filing a little later this month our traditional rate case filing for all of our utilities. Remember in Wisconsin the Public Service Commission here wants each of the utilities on two year rate cycle. So this is the time of our cycle when we would be filing traditionally for a rate case. The drivers, you will see the details a little later this month, but the drivers are very clear. Of there are four very significant drivers, the first is our ongoing investments in our Power of the Future Plan. The second is the significant amount of investment we have made in environmental upgrades. We have just brought on line over the last few months two new scrubbers at our Pleasant Prairie Power Plant. Those are very expensive investments. Very important investments, but very expensive investments. So our Power of the Future initiative, clearly the environmental upgrades, we have made a significant number of environmental upgrades, are two very significant drivers. The third is recovery of the transmission cost that we're being billed currently by the American Transmission company. Then a 4th driver is all of the other programs that the commission is authorized us to carry out including building the wind farm that we talked about, our Blue Sky Greenfield Wind project and also our demand reduction program that we have underway with customers of a goal of reducing peak demand over time by 55 megawatts. Allen anything to add?

Yes,I think Doug, maybe one other part of your question was related to the use of proceeds from Point Beach within the context of the rate case. We certainly wouldn't be prepared today to layout some specific allocation, but just to give you a sense for the magnitude, if you assume that we don't receive a favorable PLR from the IRS, we have approximately $825 million worth of proceeds that could be used to cross all three of our jurisdictions for the benefit of customers. So the $825 million in total, Wisconsin retail, Michigan retail and our Burke Wholesale Jurisdiction, roughly say 87% of that 825 would be Wisconsin Retail. So say roughly 720 of the 825 million. And you will see us as a part of the rate case make a proposal on how you allocate that between immediate regulatory asset recovery and bill credits. We will propose something, but obviously, you know, the ultimate decision on how that gets allocated will be decided by the Public Service Commission in Wisconsin.

As you can see this is a very significant and positive transaction for our customers, because sizable amount of bill credits that will be available.

Thank you.

Thank you Doug.

We will take our next question from Paul Ridzon with Keybanc.

Hi Paul, how are you today.

Good, yourself Gale.

Doing well.

Question on what if you do get the private letter ruling. I guess I didn't get the converse of that.

Yes, the private letter ruling relates to the qualified nuclear decommissioning trust. So when we talk about getting a private letter ruling it relates to be able to technically do what's called a partial disqualification of the qualified trust or in other words being able to split the trust up and send a part of it to FPL and retain a portion of it for customers. So if we were able to get a favorable private letter ruling or to get that ability to do a partial disqualification, the proceeds that would be available for customers would increase from the 825 million that I mentioned in response to Doug's question to approximately $971 million. So it's a pretty big swing on the net proceeds that would be available if we were able to get that private letter ruling. But candidly right now it's still uncertain as to whether we would be able to get that.

We don't believe the IRS has issued an affirmative in any of the requests that have gone before, but we think it's certainly worth making the case and we have done so.

I'm only aware of one partial disqualification the IRS ever granted and that was for a tax exempt entity. There wouldn't be any precedent for them granting it.

But if they did, as Allen is indicating to you, the bill credits would even be larger.

And just switching gears, do you have kind of a weather norm fuel neutral trailing 12 ROE at the utilities.

Well, the trailing 12 month ROE at WEPCO -- or Wisconsin Electric rather, was 10.1%. And the trailing at Wisconsin Gas was 10.7%. I would say on a trailing 12 month basis we're probably pretty close to normal on weather. I think the WEPCO number is pretty close to a weather normal number. Let me just refer to my notes here on the Wisconsin Gas. Just actual basis, yes, same thing. Wisconsin Gas pretty close to weather normal on a 12 month trailing. So the 10.7% that I talked about is pretty close to weather normal as well. So 10.1 % at Wisconsin Electric, 10.7% at Wisconsin Gas, and the allowed rates of return at both of those utilities are 11.2%.

And you have some under recovery in that WEPCO number?

Well, it would reflect the first quarter results, we did have fuel underrecovery in the fourth quarter. I mean, I'm sorry, in the first quarter, it would reflect that. But as I recall when you look at fuel recoveries in 2006, I believe we were in positive recovery position in both the second and the third quarter of 2006. And then a slight fuel underrecovery in the fourth quarter.

So pretty neutral.

Pretty neutral, yes.

Okay, thank you very much.

You're welcome.

We will take our next question from Michael Lapides with Goldman Sachs.

Hi Michael, you gearing up for next week.

Getting ready for it. Getting ready for it. Got just kind of a real quick question on the upcoming rate case, actually two questions. One, just want to make sure that one of the four drivers you were talking about relates to Power of the Future program. So when you file this case and when we read the testimony embedded in the rate request will be recovery of and the ability to earn on capital that you're going to spend in '08 and '09, necessary to build the first and second units of Oak Creek and obviously to wrap up the second one at Port Washington, so then when you file the '09 case all you're really dealing with in terms of PTF is just remaining CapEx related to Oak Creek.

You're exactly right. By the time we file the '09 case we would hope to have, we would hope to be very close to commercial operation in the first unit of Oak Creek. So the remaining amount that we would file in terms of our Power of the Future Plan in that next case, the '09 case would really relate to finishing up the second unit of Oak Creek. Of course we will have both Port Washington units, we hope in service and running by the peak summer season of '08. So you're exactly right Michael.

Okay. At the end of first quarter '07 how should we, what is kind of the level of rate base at WEPCO and Wisconsin Gas, and for WEPCO can you divide electric and gas.

At Wisconsin Electric the electric piece would be about 3.2 billion. The gas piece of Wisconsin Electric would be about 375 million. And then 46 million for steam. So if I've done my math right total would be about 3.6, -- 3.7 billion. If you look at WEPCO as a whole. And then Michael, if you look at Wisconsin Gas, it's about $660 million worth of rate base.

Does this include or exclude the scrubber investment?

Well, the scrubber investment, the scrubbers were close to plant in service, these are 12 months ended rate base numbers, so it includes the scrubbers at Prairie.

Great. What is excluded when we think about this number besides the wind which hasn't been billed yet.

Well, I think of the things Gale was mentioning with the exception of the wind, all the big CapEx that we have been talking about, they're already -- they're already close to plan. These projects are already in service. So you have on the margin you would have a decrease for Point Beach, if that's approved, and then an increase for wind.

Got it. Thanks guys, much appreciated, look forward to seeing you next week.

Same here Michael, thank you.

We will take our next question from Paul Patterson with Glenrock Associates.

How are you today Paul.

All right. How are you?

We're doing well.

Good. Just a really brief question, I'm sorry if I missed it, the benefit reduction, the benefit from reduction of benefits.

Employee benefit costs like health care.

Right. What drove that?

Yes, it's really, it's a combination of three things Paul. On the, on the pension side we had higher investment balances in the pension trust. If you have higher investment balances that gives you in dollar terms more return to offset pension expense. That's the first thing. Second thing, there is, you amortize, you have -- in an over or under situation on returns in the plant, over your target return or below your target return, you amortize that over a five year period. So our amortization cost for that was lower because we're dropping off some bad years, in the calculation. So that helped. And then finally we had better experience in our active medical plan. There weren't really any significant plan changes. There was a little more sharing, a little more sharing by employees in the cost this quarter as compared to the first quarter of '06. Probably the biggest change we made in the plans is we changed the vendor.We went to United Health Care. So I think they have probably done a better job of administering the plans that we had in place. So it was across all those three things that really caused a reduction in benefit costs.

And those should continue for the rest --

I would think on the pension side, that sort of benefit you would expect throughout the year. Honestly on active medical, I don't know yet how to, how to handicap that in terms of whether that will be something you will see the rest of the year. And I think better than half of the benefit that we have the $5 million change was related to active medical. So

It's just too early to tell on the active medical. But we're pleased with the experience so far and a lot of focus on wellness programs at the company and as Allen said United Health Care is doing a very good job we feel in administering the health care program.

Not to belabor it much, but you need decrease in medical expenses kind of significant, the reason why this is happening is because you're seeing more employee sharing it sounds like, so that would sound like a change in the plan, is that right?

Not really, I mean we have had, as we have progressed through our union negotiations, obviously we have asked for slightly more sharing in terms of the total amount that employees pay toward their coverage. But while that is helpful it was not hugely material. Really it was the plan experience in terms of usage of the plan and costs incurred for medical care in the quarter that really helped.

Okay, I see. I really appreciate it, thanks a lot.

You're more than welcome.

We will take our next question from [Riva Hotizi] with Polygon Investments.

Hello. Riva

Good afternoon, how are you?

We're doing well, how about you?

Very good, thank you. Just I'm curious I missed this, but Allen did you update the three year CapEx numbers at all?

No. They stand at the levels that we talked about before, so we're at a billion four for this year, I think right at a billion in 2008, and roughly 900 million in 2009, let me just double-check. There is been no change in the outlook.

Okay.

Let me just correct what I said for 2009, it's 800 million rather than 900 million. So just to restate a billion four in '07, a billion in '08 and 800 million in '09.

Okay. And I just wanted to confirm again that the Point Beach sale once it's complete your net proceeds will be ballpark around 400 million, 450 million, something like that, which is sort of what your rate base is in it.

Well, it depends on -- let me, when you say net proceeds, in effect the net proceeds that would end up going to shareholders, is that what you're saying?

Correct, yes.

Would approximate our book value.

That's right. So from a shareholder standpoint because of the way we're handling -- proposing to handle the gain on the nuclear decommissioning, it's effectively as if you sold the plant for book value, you're right.

Great, thank you very much.

You're welcome.

We will take our next question from Stephen Gambuzza with Longbow Capital.

Good afternoon. How are you doing today Steve?

Great. Thanks. I just had a question about WEPCO, when you think about the earnings power there, are the rate based figures that you quoted Allen, do they include the kind of Burke Wholesale Jurisdictional piece as well as the Michigan piece? Or were you just quoting Wisconsin Jurisdictional rate case?

Entire thing. Yes, that's the whole company.

So it's roughly 3.6 billion across the entire system.

That's right. Better than 90% of that or thereabouts would be Wisconsin Retail Jurisdictional.

Okay, great, thanks very much.

We will take our next question from Ted Heyn with Catapult Partners

Good afternoon.

Ted, you changed addresses on us.

I did.

Congratulations.

Thank you. I just had a quick question on the fuel underrecovery again, it sounds like you now are thinking it's going to be 0 to 10 million potentially for the full year. Has that changed relative to when you first gave out guidance.

It's neutral to minus ten and that's really basically the same range we had to begin with.

Okay. In regards to weather, are you guys ahead of the game compared to normal or your expectations?

Actually even though the first quarter had some very cold weeks in it, if you just look at overall Q1 was only slightly colder than normal. And not really enough to make a huge difference. So I would say Q1 was, it was much colder than Q1 of '06, but much closer to normal as we would have expected.

Understood. And then just the last question, you made a comment on the rail facilities, some of the common facilities being transferred to the utility this summer, is that correct?

That is correct.

How does that work, does that get placed into service or will you guys start recognizing earnings from that piece of the investment before the actual Oak Creek plant is up?

Honestly Ted at this point we're still reviewing it. My expectation right now is we probably wouldn't recognize earnings until the first unit goes into service, but we're reviewing that.

Okay. But you will still recover the cash through the PTF structure.

Absolutely, yes.

But probably not the earnings until the whole thing goes into service.

That's right. But again candidly it's under review.

How much is that portion of the investment?

About I would say in the neighborhood of about $150 million.

150, 160, in that range.

Okay, understood, great, thanks a lot guys.

You're more than welcome.

(OPERATOR INSTRUCTIONS) We will take a follow-up question from Michael Lapides with Goldman Sachs.

All right, Michael.

Hey guys, real quick, just thinking a little bit beyond 2009 and 2010, when PTF is done what do you view as kind of normalized maintenance CapEx at the utilities?

Well, we have, if you look at kind of our ongoing run rate for CapEx for the utilities, absent the power plant construction, power of the future and absent the wind generation my guess is we will be in the neighborhood of, 300 million'ish.

And that's including any contributions from 4 ATC CapEx.

Well, Allen, why don't you take that one.

Yes, let me step through that. When I really think of a utility, you've got sort of three groups of capital expenditures at the utility, Michael. One of course are these wind projects, okay. So put that to the side, but that's one category of capital at the utility. The second category is for environmental, sort of put that to the side. I take your question to be, if you adjust out for those two what's the run rate of capital expenditures, is that --

That's correct.

So I would so he that ranging, I would say it averaging Michael about $350 million a year. There will be years where it could be high, as high as four, there would be years where it could drop down to three, but I would see, you know, as a matter of planning outside of environmental , outside of wind projects $300 to $400 million a year. The other part of your question relates to capital contributions at ATC. ATC, American Transmission Company, and as you know they have built up a very significant rate base. So there's a lot of cash that they're throwing off of those assets, so there is a very modest if any amount of net equity that we would have to put into ATC. So in effect you're growing retained earnings very significantly down there and I just wouldn't expect on a net basis to really be putting any significant amount of equity capital into ATC over the next four, five

Michael, to Allen's point, that $300 to $400 million number range we're giving you, I just want to make sure we make it very clear. That does exclude all things we talked about including what we consider to be a very substantial upcoming investment in additional air quality projects. So the environmental rules under the clean air interstate and clean air Mercury rules are going to drive a significant amount of additional capital investment that is not in that $300 to $400 million range.

Have you disclosed A, how much total CapEx above and beyond the scrubber installations you have done recently that could be or at least how many facilities could add scrubbers and we could kind of back into what the CapEx would be.

In the 10 K there is some detail that's disclosed on environmental spending.

Okay.

Take a look at that. I think that, I think that will help. It's not by year, but it's certainly over, a ten year block of time.

Got it, thank you, much appreciated guys.

You're welcome Michael.

Take our next question from Vic Khaitan from Deutsche Bank.

Vic, how are you today?

Gale and Allen, how are you?

We're fine.

Just a couple of minor question update, did you give us a time line as to when the court might rule on this water issue

On our water permit for Oak Creek?

Yes.

Yes, we did and I'll be happy to go through that again

Sorry

No not a problem. Actually it won't be a court per se, the Dane County circuit court remanded the permit for further review on a couple items as I mentioned and they remanded it back to an administrative law judge here, a state administrative law judge that originally upheld the issuance of the permit. This administrative law judge has scheduled a conference of the parties to set a schedule and discuss a schedule for moving forward. That meeting will be later this week. Our expectation is it may take to the end of the year before all of this new review process will be complete. But in the meantime work can and is continuing. The permit I think is very important for everyone to understand, the permit was not vacated. Work can and is continuing in Oak Creek.

So the cost is still on budget and time.

Yes, absolutely. We're tracking on time and on budget, very satisfied with our construction progress at Oak Creek.

Okay. And then on this ATC, do you have any plans to either separate it or to further improve the visibility of that part of the business because that's getting a lot more attention these days.

It is getting a lot more attention and we try to make it as visible as we can by breaking out our -- as you may have heard us describe earlier, we broke out the increase in our net income related to ATC for the quarter. In terms of any structural change or ownership change at ATC, as I mentioned in the past that the in the purview of the ATC Board of Directors, we have one vote even though we own just under 30% of ATC. We only have one vote on that board of directors. And I know of nothing that would be imminent in terms of a structural change.

Okay.

By the way Allen is on the board of ATC in case you --

Yes, you can just call me directly.

All right. Thank you very much.

Yes, thank you Vic, take care.

We will take our next question from Nathan Judge with Atlantic Equity.

Getting late in London Nathan.

It is. It's beautiful here, so its not too bad. It's still light.

I understand you have had global warming over there this spring.

Just a follow up question to Michael's question on the additional scrubbers and investment in environmental. In the 10-K if I recall you put a number out to 2013, the tone of your response to the question was there might be some incremental investment in environmental above and beyond that number or does that basically bring you up to full standards through what you see in perpetuity.

Well, what the 10-K disclosed was that through the end of last year we had spent right at $355 million associated with our consent decree with the EPA. And then we estimated that the ultimate capital cost of implementing this agreement would be $1 billion through the year 2013. So I do think, you know, based on what we're seeing with additional rules it's not out of the question that you might see some capital expenditures above that level.

Okay.

We're still reviewing obviously all the impact of the new clean air interstate rule and clean air Mercury rule. And what specifics -- In fact, some of the state implementation plans, Nathan, are still being developed. So at this point we can not unfortunately tell you exactly which units will have to receive which kind of air quality control treatment. But I think Allen is right, we could conceivably go, I mean it's not, it is not inconceivable at all that our capital expenditures for environmental controls could exceed the numbers that Allen mentioned in the K.

On a separate question, just wanted to confirm that carbon cost would be indeed included in any fuel cost or some type of regulatory recovery as you would see it.

Well, I would definitely see it that way. If you think about, if you think about the way rates are structured or prices are structured here in states like Wisconsin, you have basically a fuel cost recovery rate that becomes part of the overall price of electricity. And I would expect any, I mean if there were carbon taxes associated with the purchase or use of coal I would expect that would flow through the fuel cost recovery clause. If there are trading, in other words, if there's a cap in trade system that goes into effect, then clearly I would expect the cost of the cap in trade system to flow through the fuel recovery clause, just as sulfur dioxide allowances do today. There's very strong precedent for that kind of recovery through the fuel clause, very good question.

Just as a follow on to that question. Obviously there is a real focus on this issue in the US and one of the things that many companies are looking at is some of the older generation that they have that is less efficient, perhaps some of the coal fleet that is lets say 40 years or older. Can you just give us an idea how much of the generation in your fleet perhaps in all of Wisconsin is of that age and is fairly high cost coal?

Well let me take a shot at that, Clearly -- When you say fairly high cost coal -- I really divide your question into two parts. The older units, of which there are many in the state of Wisconsin, but not all of those units are high cost coal. For example our existing units at Oak Creek, are really quite low cost units. They really have a very significant cost advantage. And dispatch a tremendous amount of the time in the MISO market. Which I think is another example of our cost advantage at Oak Creek.But I would say that if you look at our base load power plants, and I am looking at Rick here, we have already retired the oldest units at Port Washington. We have been generating electricity from coal at Port Washington for 70 years and those units were retired and replaced by the first Port Washington natural gas unit and then in '08 the second natural gas unit.. So we have already retired two coal fired units at Port Washington. And Rick we just retired two units -- two older units up at Presque Isle in the upper peninsula of Michigan.

That's correct and we also got -- That's our intent to retire two additional units up at Presque Isle, I think they are about 200 megawatts, by the end of 2012. So as Gale said part of our overall PTF program was to take some old coal out of the mix. And there was a number of units at Port where we basically -- we powered that site with natural gas. We have already retired two units at Presque Isle, that is the UP, upper peninsula of Michigan and we intend to do two more.

And Nathan if you look at, I hope we aren't boring you to death, but if you look at our environmental performance and just baseline at the year 2000, And then fast forward to 2012, when we would hope to have all of our power the future unit in place. Our --our CO2 intensity is going down significantly. We expect to have about a 65% improvement in sulfur dioxide emissions, about 65% improvement in nitrogen oxide emissions, about a 60% reduction in Mercury and significant reduction in particulate matter as well. If you look at the whole effect of the Power the Future Plan, it's a very strong environmental story

Thanks you very much, I wasn't bored at all. And then finally, I hope I don't bore you with ,my questions, but the last question i would have with regard to when, there are new renewable rules being put in place. There seems to be perhaps a second wave of PTF, perhaps to come through. In kind of 2013, maybe perhaps a bit earlier than that. Can you just give us your insight as you are building this new wind generation facility and -- or facilities I guess, I you can just give us an idea on how you think it will all play out. What the cost perhaps will be in that period of time and what your potential investment could be over an extended -- let's say to 2015, 2020.

We will be happy to give it a shot. Although I don't know how precise we can be out in 2020. First of all, to back up, the renewable portfolio standard that is now become law in the state of Wisconsin, calls for approximately, in our case, just under 5% of our retail sales of electricity, to be from renewables by the year 2010 and then ramps up to 10% by the year 2015. Again for us there is a particular formula for all utilities that will be just under 10%. Now , the Blue Sky Green Field Wind Project, that we have discussed at length, will get us to pretty close to where we need to be for the 2010 requirement. Then after that between 2010 and 2015 we will have to add additional renewables. We think that provides a really significant --- positive investment opportunity for us. On the scale we need, and I am going to ask Rick to give his view, but on the scale we need it still looks like additional wind generation is the most cost effective renewable and Rick can give you a sense of how much additional wind we belive we will need to put in to meet the 2015 standard.

To meet the 2015 standard we would probably start adding additional generation in 2011 on the range of about 80 megawatts per year. For about 3 years and then we would have to jump up to about 400 megawatts as we got closer to 2015. Probably a total of around 800 to 900 megawatts, that is somewhat dependent on capacity factors. All of that is obviously subject to commission approval. There are off ramps depending on cost in the --- in the --- rules. Now, we might decide to blend this in differently if we felt like it was economic and depending on the size of the wind farms that we'd be putting in. Those are kind of our preliminary numbers in terms of looking at what it would take to meet the 2015 numbers for the state.

And then remember, Nathan, the megawatt figure that Rick quoted included the amount for this first Blue Sky Green Field wind farm. So when he talks in terms of approximately, 800 to 900 megawatts he is including the roughly 145 that we are doing at Blue Sky Green Field. Another way to think of it is on top of the Blue Sky Green Field, maybe you're talking 650 to 750 of additional megawatts and I think the current drive away price for these windmills is about $2 million a megawatt.

And that's probably a cost that's not going down, Nathan.

Well that's the -- just to follow on, I apologize, the follow on to that is are you needing to lock those kind of contracts in now? Or how far out really are you needing to -- there is quite a bit of demand for wind generation.

The good news is we have obviously have locked in now, this first major wind farm. The Blue Sky Green Field project, but as Rick said we really wont need an additional amount from wind probably until starting around 2011 and the lead times, once you are able to sign a contract. The construction lead times are not incredibly long. So we have a window here.

Okay, thank you very much.

You're welcome, thank you for staying up late Nathan.

And appears we have no further questions. I would like to turn the conference back over to Mr. Klappa with closing remarks.

Thank you very much. This concludes our conference call for today. We appreciate you taking part. If you have any other questions, Colleen Henderson will be available and operators are standing by in our Investor Relations office at 414-221-2592. Thank you very much, have a good day.