威斯康辛能源 (WEC) 2007 Q2 法說會逐字稿

Good afternoon, and welcome to the Wisconsin Energy 2007 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 discussions, 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 Web site a package of detailed financial information on its 2007 second 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.

Colleen, thank you very much. Good afternoon, everyone, and thank you for joining us on our conference call to review the company's 2007 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 General Counsel, Jeff West, who serves as our Treasurer, and Steve Dickson, Controller.

I'm pleased with what we accomplished in the second quarter this year. Our earnings were better than planned, and we continue to make significant progress on all the components of our Power the Future expansion. Allen will review our results in detail in just a moment, but as you may have seen from our news release this morning, we achieved earnings from continuing operations of $0.49 a share in the second quarter of 2007. That compares to the second quarter of 2006, when earnings from continuing operations were $0.50 a share .

Now I would like to spend just a moment on our continuing effort to upgrade the energy infrastructure in Wisconsin. Our Power 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, the construction of two supercritical 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 construction 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 of 2005 on time and on budget.

Engineering for the second unit is now essentially finished, and construction is moving along very nicely. At the end of June, the second unit at Port was about 65% complete, tracking on schedule and on budget. The unit is expected to begin commercial service next year in time for the peak summer season of 2008.

Now let's turn to the status of the two new coal-fired units at Oak Creek. On June 29, we celebrated the second anniversary of the start of construction there. At the end of June, the overall project was approximately 38% complete, with unit one and common facilities now at 46% complete and unit two a little over 14% complete. We're very pleased with the progress being made by our primary contractor, Bechtel Power Corporation. The project remains on time and on budget.

During our last update, I mentioned that the boiler steel for unit one had reached its final elevation of 280 feet. Bechtel is now installing the boiler itself, which will hang from the roof trusses of the building. The first boiler water walls and superheater sections are now in place and the unit two boiler structural steel is making great progress and is approximately 50% complete. As previously reported, we 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.

You'll recall that the air quality control equipment for these units will make them among the cleanest in the world, in particular, we're installing selective catalytic reduction to remove nitrogen oxides, scrubbers to remove sulfur dioxide, and baghouse filters and wet electrostatic precipitators to remove the particulate matter from the flue gas prior to it exiting the chimney. This equipment is at various stages of installation now, and will occupy a large foot print in the main power block.

Construction of the water intake system is also progressing well. Drilling of the water intake tunnel under the bed of Lake Michigan started in September of 2006 and was completed ahead of schedule in February of this year. We're nearing completion of the offshore works, including the water intake shafts, manifolds and screens that will feed water from the bottom of Lake Michigan to the tunnel. The major upgrades we're making to the existing railyard and coal handling system are also on schedule. These facilities are in transition from construction to start-up and we expect them to be operational and handling coal literally within the next few weeks. The complete coal handling system is scheduled to be turned over to the utility once all commissioning tests are finalized in the next few months. We continue to be very satisfied with the progress at Oak Creek.

As you know, there are four major permits needed to build the facilities at Oak Creek. These include an air permit, a wetlands permit, a permit from the U.S. Army Corp of Engineers, and finally, a pollution discharge elimination permit. We've 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 legal challenges to the air permit. Also, in February of 2006, we resolved the outstanding legal challenges to the wetlands permit. Our permit from the Army Corp. of engineers was received in May of 2005, and to date, no appeals have been lodged against this permit.

On the last permit, the 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 to issue this permit. The parties opposing the permit then filed for judicial review in Dane County Circuit Court. On March 5 of this year, just a few months ago 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 federal case called River Keeper 2 that could affect power plants nationwide. As we move forward on the remand, two threshold questions must be answered, first, whether the new units at Oak Creek qualify technically as an expansion of an existing plant, and secondly, whether the water intake system we're building is still the best available technology.

We firmly believe that the additions at Oak Creek should be treated as 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 switchyard, and we're convinced that the water intake structure we're building is 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 type of cooling system that could be available.

The procedure for carrying out this review now is a bit complicated and I'll step you through it one step at a time. First, after the decision in the River Keeper 2 case, the U.S. Environmental Protection Agency formally suspended the Phase 2 rules of the Clean Water Act and then directed the state agencies to use their best professional judgment regarding the technology for cooling systems at existing plants. Second, in light of these developments, we asked the Wisconsin Department of Natural Resources to modify our current permit. We have now submitted to the DNR all the information needed to review the two questions at issue here. Also, as we requested, the administrative law judge in the case has stayed the proceedings until the Department of Natural Resources can complete its action on the permit modification. We believe that this permit review and modification process will continue through the remainder of this year.

One more development, our opponents have filed a motion with the Dane County Circuit Court requesting an order that would require the administrative law judge to redecide these issues without any further review by the DNR and to stop construction of the intake system. A hearing is now scheduled this week, in fact, for August 3. We do not believe nor does the state believe that there is any legal basis for this court to order us to stop construction of the intake system. 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 just one year later in 2010.

Now I would like to update you on our Blue Sky Green Field wind project that we've been working on for a number of months. On February 1 the Public Service Commission issued an order approving the project as a traditional utility rate-based investment. Since then we've completed our evaluation of turbines for the site and on March 28 we signed an agreement with Vestas Wind Systems for 88 turbines. Each of the 88 turbines has a capacity of 1.65 megawatts. The cost of this project is expected to be approximately $300 million, excluding capitalized carrying costs. Construction began at the site on June 11. We expect to achieve commercial operation of the entire wind farm by the middle of 2008. The project will more than double the amount of wind capacity currently operating in the state of Wisconsin and it will help us meet the renewable portfolio standard in the state for the year 2010.

Now a brief update on the sale of our Point Beach Nuclear Plant. As you remember in December of 2006, after an extensive review, we agreed to sell our Point Beach facilities to FPL Energy. FPL Energy owns and operates more than 30,000 megawatts of generating capacity in the United States, including six nuclear units. Subject to Commission approval, we will also 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.

On January 5, we filed an application with the Public Service Commission seeking approval to transfer ownership and operational control of Point Beach and enter into a long-term power purchase agreement. Hearings took place in June and all the briefs have been filed. We anticipate that the Commission will rule on the proposed sale in late August or September. Several other state and federal agencies must review or approve various aspects of this transaction. We've received approval now from the Federal Energy Regulatory Commission and the waiting period has expired following our Hart-Scott-Rodino filing. The Department of Justice did not ask for any additional information. We expect approval for the transfer of the operating license from the nuclear regulatory commission in August, and also, we expect approval from the Michigan Public Service Commission of the purchase power agreement in August as well. We believe we're on track for closing the sale during the third quarter of this year.

Finally, a word about our recent rate filing. In May we asked the Commission to approve a plan which would result in net price increases of 7.5% in 2008 and 7.5% in 2009 for our electric customers in Wisconsin and a 1.8% price increase for Wisconsin Electric gas customers in the state and also a 4.1% increase for our Wisconsin Gas customers. These increases are needed to fund previously approved initiatives for air quality control equipment, the new Power the Future generating units, transmission upgrades, and investments in renewables and efficiency programs as well as the recovery of regulatory assets. The net price increase we proposed for electric customers in Wisconsin reflects very significant bill credits, using proceeds from the pending sale of Point Beach.

If our sale of Point Beach is approved, we estimate that there will be more than $650 million of proceeds available for our Wisconsin customers. Our plan would provide monthly bill credits totaling $372 million in 2008 and an additional $188 million in 2009 and would also apply $107 million to recover existing regulatory assets during calendar 2008. The commission has now set a hearing schedule, in fact, that happened yesterday. The hearing schedule is for this fall and we expect that new rates would take effect in January of 2008. Now I'll turn the call over to Allen, who will give you more details on our financial performance for the second quarter of

Thank you, Gale. I'm going to focus my remarks this afternoon on earnings from continuing operations; however, information regarding earnings from continuing as well as discontinued operations is included in the earnings package. Earnings from continuing operations were $0.49 per share for the second quarter of 2007 versus $0.50 per share in the second quarter of 2006. On a consolidated basis, our operating income was $105 million versus $107 million in 2006, a decrease of $2 million. Operating income for the utility energy segment was $95 million compared to $99 million in the second quarter of 2006, a decrease of $4 million.

Positive earnings drivers in the second quarter of 2007 for the utility segment included warmer weather this year as compared to the same period in 2006 and the settlement of a billing dispute with our largest customer. These factors improved operating income by $7 million and $9 million, respectively. The primary negative earnings drivers in the second quarter were higher fuel and purchased power costs and the O&M costs associated with the planned refueling outage of one of the units at our Point Beach nuclear plant. These costs reduced operating income by $13 million and $15 million, respectively. Netting the impact of the positive and negative factors I just reviewed, along with the impact of a combination of other items that netted to an $8 million improvement, brings you to the $4 million decrease in the utility segment's operating income for the second quarter of 2007.

Operating income in the nonutility energy and corporate and other income segments, which primarily includes WE Power was up approximately $2 million in the second quarter of 2007 compared to the same period in 2006. Making the changes for these segments brings you back to the $2 million decrease in operating income for the second quarter. Other income was up $2 million in the quarter. This increase reflects several items, including a sale of land in northern Wisconsin and upper Michigan for approximately $7 million in May, compared with a pretax gain on the sale of our investment in the Guardian pipeline of $3 million during the same period in 2006. This increase was offset in part by a decrease in AFUDC of $3 million related to the new scrubber we put in service at our Pleasant Prairie Power Plant during the fourth quarter of 2006.

Interest expense was down $1 million in the quarter. This change reflects an increase in capitalized interest related to our Power the Future construction activity, offset in part by increased levels of debt needed to fund our planned construction. Consolidated income tax expense increased by $3 million as compared to the same period in 2006. Our effective tax rate was 38.2% for the second quarter of 2007 versus 35.2% in the second quarter of 2006. We expect our 2007 annual effective tax rate to be approximately 39%. Adding these items brings you to the $58 million of net income from continuing operations for the second quarter versus $60 million of net income from continuing operations for the same quarter last year.

Now let me turn to a review of cash flow. For the first six months of 2007, we generated $456 million of cash from operations, which is $125 million lower than the comparable period in 2006. This decline is due primarily to higher tax payments as a result of higher taxable income and the fact that we had an income tax prepayment in 2005 that benefited cash flow in 2006. In addition, although we continued to see improvements in working capital this year, the absolute amount of the improvement was less than we experienced last year. We had capital expenditures of $573 million in the first six months of 2007, $220 million of this was dedicated to our utility and other businesses and $353 million was for the generating units being constructed as a part of our Power the Future plan.

In addition, we paid $58 million in dividends. In mid-May, we issued $500 million of hybrid securities in the form of junior subordinated notes at the Wisconsin Energy level. Each of the rating agencies currently treats at least 50% of the outstanding amount of these securities as common equity for credit rating purposes. However, these hybrid securities will have no impact on our basic or diluted common share counts.

On a GAAP basis, our debt-to-capital ratio is 59.9% at the end of the second quarter of 2007. Treating 50% of the hybrid securities as common equity puts our adjusted debt-to-capital ratio at 56.6%. Capital spending is expected to be nearly $1.4 billion this year. Assuming that we go to financial closing on Point Beach this year, I expect our adjusted debt-to-capital ratio at year-end 2007 will be well below 59.5%. If the sale does not close in 2007, I expect our year-end adjusted debt-to-capital ratio will be just below 59.5%. However, as we have stated in the past, our goal is to maintain our adjusted debt to total capital ratio at no more than 61.5% during the period we are constructing our new gas and coal-fired generation. In each case, when I talk about an adjusted debt-to-capital ratio, I am excluding from debt the portion of the hybrid securities that is currently treated as a common equity equivalent by the majority of the rating agencies. Finally, we are using cash to satisfy any shares required for our 401K plan, options, and other programs. Going forward, we do not expect to issue any additional shares.

Now I would like to turn to our earnings guidance for 2007. We are raising our earnings guidance for 2007 to the upper end of our previous range. Our earnings guidance for 2007 is now $2.70 per share from continuing operations. Some of the key assumptions behind this estimate are as follows: first, a financial closing of the Point Beach sale in September; next, normal weather for the rest of the year; and finally, I've included the gains from the sale of land in Wisconsin and Michigan in the second quarter as well as the settlement of the billing dispute with our largest customer in this estimate. So again, our earnings guidance for 2007 is now $2.70 per share. So the first six months of 2007, our earnings were impacted by power plant maintenance, the timing of our fuel and purchased power costs, and our recoveries of these costs.

For the first six months this year, we had an unfavorable net fuel collection of approximately $37 million compared to favorable net fuel collections in 2006 of $20 million. As we look forward to the remainder of 2007, we do not have a planned outage at Point Beach in the fourth quarter as we did in 2006. And we have fewer planned maintenance outages at our fossil units. As a result, we expect to see fuel cost recovery for the year range from neutral to $10 million under-recovered in the Wisconsin retail jurisdiction.

Now as is our practice, I want to give you a feel for the earnings drivers for the upcoming third and fourth quarters. 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 this year, 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 were weighted to the first half of the year whereas in 2006 they were more clustered in the fall. The effect of this was 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. I expect that the comparative decrease in fuel costs will be much more pronounced in the fourth as opposed to the third quarter.

Last year, we earned $0.60 a share from continuing operations in the third quarter. If you build from this level to make your estimate for the third quarter of 2007, you should take into account that the timing of electric fuel cost recovery is expected to increase quarterly earnings about $0.03 per share. In the fourth quarter of 2006, we earned $0.60 a share from continuing operations on an adjusted basis. Similarly, building from this level to estimate the fourth quarter of 2007, you should take into account that the timing of electric fuel cost recovery is expected to increase quarterly earnings about $0.10 per share. So with that I'll 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 our stockholders.

Now we'd like to take your questions. (OPERATOR INSTRUCTIONS). We'll go first to Seth Tennant with JPMorgan.

Good afternoon, guys.

Hey, Seth. How's Pasadena?

Gale, we went through the whole call without a rock and roll reference.

We still have a half hour to go, Seth.

I'll be waiting.

Very good.

I was wondering, if you could give us, on the other net items there, I assume there's not any one material item there driving that?

The $8 million that I talked about for the utility?

Yes.

There's no item that is individually more than $3 million. In fact, the largest of the items of that $8 million was $3 million, and that's related to employee benefit cost. Everything else was less than $3 million, but all those other things in total added up to $8 million.

What's the outlook for employee benefits and those kind of costs for the rest of the year? In terms of year-over-year impacts?

I would expect it to be nearly flat year over year, if you looked at employee benefit costs in 2006, a very similar run rate versus 2007.

And then lastly, as far as outage and maintenance outages, are you guys done for the year in terms of taking those in the spring and nothing is expected in the fall?

No significant ones for the fall. We've really because of the way the schedules fell. Virtually all of the major fossil maintenance into the first half and of course the planned refueling outage of Point Beach was the second quarter.

We have a few short outages in the fall, but the bulk was in the spring this year.

So we raised guidance, I couldn't get any satisfaction, how's that?

There you go. Thank you very much.

Take care, Seth.

We'll go next to Greg Gordon with Citigroup.

A couple questions. First, I apologize if you mentioned this in your comments because I came on the call a little bit late. In the rate case filing, can you refresh our memories on what ROE and equity ratio you've asked for versus what you actually think you're earning right now on equity?

As Allen is looking at our statistics we have in the room with us, we filed for an 11.2% return on equity at the utilities. That's exactly what we were allowed in the prior rate case and really certainly for calendar 2006, we earned very, very close to that amount. And I haven't seen the 12 months ended for June. Allen, do you have that?

Yes. The 12 months ended June is kind of misleading because you would have the back half of last year where we under-recovered fuel and the front half of this year where we under-recovered fuel. So I think really the last calendar year is probably the most constructive. Gale's right. On a weighted average basis, if you take all the utilities together, we were right at an 11% return, that's weighting gas and electric operations together. In terms of what we filed, Greg, you're exactly -- the 11.2% is what we filed and the equity ratio would be approximately 53% because we didn't file for any change in either the return or the capital structure at the utility.

And my understanding, is the most recent case was for Wisconsin Power & Light and they got about a 10.8, is that right, or have there been any additional rulings?

There have been two this year. Wisconsin Power & Light and Wisconsin Public Service. One of them received a 10.9 and the other a 10.8.

One other question, a little esoteric, that relates indirectly to ATC. It's our understanding that an unnamed party has received a private letter ruling from the IRS indicating that in fact transmission line assets qualify for the REIT financial structure? Real estate investment trust financial structure.

Right, right.

And while no one's actually attempted to execute a transaction along those lines, wondering whether you've looked at that private letter ruling and whether it has any strategic impact to your transmission investments?

We've certainly had read the private letter ruling. You're right. My understanding, the reading it is that it would allow for possibly transmission and distribution to be treated as real property. If you meet the other requirements of being a REIT that you could actually put these in a REIT structure. We have read the ruling.

To answer your other question about whether it will have any impact on our ATC and hence our investment in ATC, it's hard to say, because the way ATC is set up, it's set up now as a Limited Liability Corporation, and so when FERC sets the provision for income taxes that are included in rates, they look through that Limited Liability Corporation to the taxability of the owners, so . what is not clear is if you put your transmission or REIT structure, how exactly would the FERC then set your provision for income taxes? That's what would have to be really resolved to figure out if there was any impact at all from using that kind of

Wasn't there a ruling with regard to interstate pipeline, gas pipelines that their tax status -- and this was related to MLPs, that they were able to retain their tax status?

I thought in the BP West case, again, what they were affirming was the FERC's current treatment which was that they look through to the owner, the ultimate owners of these member interests and if somehow the REIT is the owner of these member interests and the REIT doesn't pay a level of taxation, it's not clear as to how we would be treated at ATC. I can't see the ruling is a negative, Greg, but it's not clear whether it is actually a positive. That's something that the management at ATC can assess for us, but at this point I just can't say.

Okay, thank you.

Thanks, Greg.

We'll go next to Paul Ridzon with KeyBanc.

How are you today, Paul.

Am I the third caller? Did I win?

You won.

I want some clarification --

What are we playing for today, Paul?

A good answer, I guess.

There you go.

Clarification on what is included in guidance that brought you to the top end? I know you have the year-over-year deltas, but what are the absolute magnitudes?

Well, in terms of what -- the ones that I talked about in the guidance, the land sales would have been about $0.035 and the settlement the previous periods for 2005 and 6 would have been $0.04. So that's about 7.5 -- actually, when you do the rounding, it's about $0.08 a share. That really brings me to the top end. Going the other way, I suppose, is the sale of Point Beach where previously we were saying that we would adjust guidance down by $0.05 if we did a sale around circa August 31. So you'd have $0.08 going up, $0.05 going down for a net positive of $0.03 and remember my previous range was $2.60 to $2.70 and based on other factors in the business, we would go to the $2.70. Does that give you all the ups and downs?

Yes, thank you. Did you indicate that for the back half of the year you thought benefits would be consistent with the back half of '06?

I think what I said was for the entire calendar year, if you looked at 2007, I would expect benefits to be at a similar run rate as compared to 2006.

So the benefits you saw in the first half of '07 should reverse out in the back half?

Yes. So it will be about flat year over year. And I'm including all benefits in that, Paul. So that would be active medical, pension, retiree medical, the whole --

The whole gamut.

Okay. Thank you very much.

You're welcome.

We'll go next to Doug Fischer with A.G. Edwards.

Good afternoon, Doug.

Good afternoon.

How are you today?

Just fine, thank you. Talk a little bit about -- since many questions have already been resolved, just a little bit about weather in the second quarter versus normal and versus the year-ago quarter and maybe a little bit on the first half. Can you talk about that on a gross margin basis or an EPS basis?

We sure can. Just to frame it for you, weather in the second quarter was definitely more favorable to our business than the second quarter of 2006, but much closer to normal. Allen?

Yes. It was almost exactly normal when you look at it. So the swing sort of second quarter of '07 versus second quarter of '06 on an actual basis, the swing was about $8 million. That's what was in the earnings package. But what was really going on, Doug, you had basically no impact versus normal in '07, because it was almost exactly normal, as Gale said, and about a roughly $8 million negative versus normal in '06. So that gave you the $8 million swing.

$0.04 pickup.

Right. And if you look -- I think your question also went to the first half of the year as well as the second quarter. The first half of '07 was a little bit better than normal, so about $5 million better than normal. However, the first half of '06 was about $23 million below normal in terms of gross margin. So that gave you the $28 million swing. I believe that $28 million swing is shown on page 7.

Right.

of the earnings package.

Good. And so for the full year, your $2.70 number is based on normal weather for the full year?

Normal weather for the second half.

The same thing.

Not much difference?

Not much difference.

Okay. Then, asset sales, any other -- what was the land, I missed it even though you mentioned it, the land sales in the second quarter and the first half, I know it's 3.5 for the year.

Yes. There was actually about a $7 million pretax gain that we booked in the second quarter from the sale of some lands in the upper part of -- in the northern part of Wisconsin and the upper peninsula of Michigan. The book basis on this land was like in the tens of thousands of dollars. So it was basically all gain that we booked on that. So about $0.035 a share for that.

That's all -- the $0.035 is all in the second quarter there?

Yes. Doug, what this is, we have a number of very small hydroelectric dams up in the upper peninsula of Michigan and we owned approximately 40,000 acres of property surrounding those dams. About 30,000 acres will stay with us under our FERC licenses. But we determined as we reviewed our land holdings and land uses that really we would not be able to build anything additional on those 11,000 acres, we would not be able to expand our hydrodams -- the remaining land was really not suitable for utility use going forward. So we were able to realize a very good price for properties up in the upper peninsula of Michigan. Some of these properties are going to reside now in the hands of conservationists and preservation authorities. Some of them state agencies like the Department of Natural Resources.

Okay. And anything on the rate cases in Wisconsin? Do we have any substantial agreements between the company and the staff that have changed the numbers materially and/or when do you expect to get the decision matrix?

Well, it's way too early, Doug, in terms of any agreements with the staff or with the commission. Really, they've just begun to take a hard look at the case and to do their normal auditing process. So as I said, it's really just begun. The hearing examiner in the case set a schedule for the case to proceed yesterday and the technical hearings, which are the key hearings in any rate case in Wisconsin, the technical hearings are scheduled to take place on October 30 and the 31st. Normally, the commission has issued an order eight to ten weeks past the technical hearings. That's about as much information as we have at this stage of the game, very early in the process.

Thank you, Gale.

You're welcome, Doug. Take care.

Next to Michael Lapides with Goldman Sachs.

Michael, how are you today?

I'm fine, you guys?

We're going well.

Question for you on South Oak Creek. Where does the process stand on whether you will actually do the scrubbers, when you would do the scrubbers, and whether it would be rate base, or whether it would just be something where you get to recovery of the debt capital but don't actually get to earn on the assets.

Let me take a shot at that and if Rick has something to add, he will also chime in. In terms of the process going forward, we have submitted application to the commission for construction authority -- we call it a CA -- for construction authority to build scrubbers on the four existing older units at Oak Creek. We call that South Oak Creek. The scrubbers in our filing would cost approximately $750 million. Again, for that size of project, we need construction authority from the commission. At the moment, I would expect the commission to review our application for construction authority after the rate case is complete. And we would hope sometime in the first quarter of 2008. Then our goal would be to have the scrubbers operational, assuming we get the go-ahead to build them before the end of 2012, correct, Rick?

Yes. The only thing I would say, it's not just scrubbers, it's also selective catalytic production, sulfur removal and Nox removal as well.

That's exactly right. How we would finance it, we still have to work our way through the entire process. It's really too early to answer that one.

Okay. And would that be part of the 2009 rate case, or would it even go out to the 2011 rate case?

A small part of it, maybe part of the 2009 rate case, but the majority of that spending would be further out in 2011.

Thank you, guys. Y'all have a good one.

Thanks. You take care, Michael.

We'll go next to Nathan Judge with Atlantic Equities.

hey, Nathan.

Hello, how are you?

Is it still raining in western England?

We're having a Wisconsin summer, that's for sure. I just wanted to ask if you could remind me what your debt rating goals are and what would support that on a debt to equity, free cash flow, or FFO interest coverage levels?

As a matter of long-term financial policy, our goal would be to have our operating company, so that would be Wisconsin Electric Power Company, Wisconsin Gas at a single A and if you back up and say, well, all right, what's the implication then for the credit rating you need to target at the parent company, that would be low single A. So low single A at the parent, A flat at the operating entity. So that would be our, as a long run matter of financial policy, that would be our policy. And I think a debt-to-capital -- an adjusted debt-to-capital ratio of around 55% is probably what it would take as a matter of long run capital structure to have that sort of stance on ratings.

Is that a revised from -- I know you've talked in the past about 61.5%. Is that something new?

Well, that's why I said as a matter of long run financial policy. So obviously over time that's something that we would aspire to get down to, but while we're in this construction period, what I've said is that the house limit on adjusted debt-to-capital was 61.5 and over time we want to be at more what I feel like is a more sustainable level of debt consistent with the ratings categories that I talked about.

So two phases. While we're in the heavy construction spending period, which will last now through 2010, and then a second phase after that.

And if you could just remind me what the accounting impact of the sale of the facility will have on your income statement and balance sheet?

You said on the Point Beach sale?

Yes, please.

Well, for accounting purposes it's a true sale. So from a balance sheet, the asset's gone and then you'd use the proceeds to in effect reinvest in the business. And there would be no gain that I would expect to book for the shareholders, so it would in effect look like you sold the plant for book value because the gain over book as well as the decommissioning proceeds that are returned, I would expect all of those to ultimately go back to customers.

That's part, Nathan, of the bill credits we talked about earlier in the conversation, where we were proposing a net price increase that included really more than $650 million of bill credits for Wisconsin customers.

In your comments you talked about there being a debt to total capital well below your 59.5% by year end if the nuclear facility at Point Beach was sold. Can you reconcile that?

Reconcile it to what? I don't understand the question.

If I understood correctly, I think you said that if the Point Beach facility was sold before year end that you would be well ahead of the 59.5% target, and without the sale you would be around that 59.5%?

Yep.

Right.

And if you're selling it at book value, I'm not sure I understand what necessarily is -- I guess because the cash --

How do you get from the 59.5 to well below that is, what he's asking, Allen.

Well, on an adjusted basis, we're at 56.6 right now.

So in other words, we stay fairly flat between now and year end if we sell Point Beach. If not, as we reinvest money in the business, without proceeds from the sale of Point Beach --

I see.

-- total cap would go up slightly.

So you're at 56.6 now on an adjusted basis. If you don't sell the plant, if you don't go to financial closing for some reason, obviously the debt would go up. What we're saying is to just below 59.5%. If we actually do go to closing, as we would expect, we would be at well less than 59.5%. But remember we're at 56.6 right now on an adjusted basis anyway.

And of course the target, as Allen said, is not more than 61.5 during this heavy construction period. So we continue to perform well below that.

With regard to your guidance, just as I recall it was $2.65 to $2.75 without the sale and then potential $0.05 negative impact and you talked about a $0.04 positive after taking into consideration the settlement and other things, but yet you've guided us to $2.70. What would get us -- why didn't you raise the top end of your guidance?

Well -- go ahead, Allen.

The guidance before without a sale of Point Beach was $2.60 to $2.70. And so remember my $2.70 guidance now doesn't -- I'm not going to adjust that again for a sale of Point Beach.

So we really have, in essence, raised guidance.

So you've got $0.035 for the land sale and when you add in the periods from '05 and '06 related to the mine settlement, those two together are $0.08 positive, and then you have the $0.05 a share negative for a sale of Point Beach in the time period that I talked about for a net of $0.03. So that's positive. So what we're doing is taking that positive versus other factors in our business and going to the upper end of the range, which was $2.70 a share.

Does that help at all, Nathan?

It does, somewhat. I'll follow-up offline. I just wanted to kind of follow-up, and this is just kind of a somatic question here with regard to the rate case, and if you could just talk about customer service that your polls and some of the recent publications that have come out on that and just if you could kind of tie that into the risk and opportunity in this rate case?

Sure. I'll be happy to, Nathan. First of all, very pleased that our customer satisfaction statistics at the end of June were the highest they've ever been in terms of satisfied and very satisfied customers who had a transaction with the company of any kind, we've had the best customer satisfaction numbers we've ever had in terms of keeping data for more than a decade here. So we continue to make real progress in terms of how we interact with customers and operate our business. And historically, that has always been a very favorable piece of information as commissions take into account the many factors they take into account in deciding a rate case. It has not gone unnoticed by our regulator that customer satisfaction continues to improve here. Hope that's helpful.

Thank you very much.

You're welcome. Take care, Nathan.

We go next to Dan Jenkins, State of Wisconsin Investment Board.

Dan, you can't ask a question unless you're a customer.

Sorry, I'm not.

For you we'll make an exception.

It is hot here, if that helps.

There you go. How you doing, Dan?

Pretty good. First, I just want to clarify a little bit on the discussion about what the debt level would be based on the Point Beach sale or whether it's completed or not. Would that just be a temporary thing? Your short-term debt would go up and when the sale finally closes, you would use those proceeds to pay down short-term debt? So would it be more of a timing issue than anything?

I wouldn't view it as a timing issue. You use roughly half the book value to pay down debt at the operating company and roughly the other half to pay down short-term debt at the parent company. So from that standpoint, it is a benefit from a capital structure standpoint compared to a case where we hadn't sold the plant at all, if I'm understanding your question.

We still pretty much expect that the sale is going to close, it's just a matter of whether it closes by year end or not.

That's a fair observation. So, for instance, if it closed later in '08, you just get that benefit -- that capital structure benefit a little later.

Right.

Than not.

Dan, I would not expect, though, that the decision by the commission would delay into 2008. I would be very surprised.

Okay.

We still feel this will close in the third quarter, if approved.

Okay. Then on your sales by customer class, as you show on page 8 of your release, I noticed large commercial was up almost a percent versus year-to-date being down almost a percent. What are you seeing in that segment? Is that more of a --

We're actually --

-- one time?

That's a good question. We're really seeing solid commercial growth here in southeastern Wisconsin. The leading sector in terms of demand for electricity in the commercial sector of the economy, meaning the nonmanufacturing sector is health care. We were up in the first half of this year 5%, energy sales to the health care segment in southeastern Wisconsin was up 5% and we continue to see pretty significant growth in offices, stores, nonmanufacturing firms. In fact, there was an announcement today of another major new medical complex that will be built near Grafton in one of the northwestern suburbs. A huge new medical complex by Aurora.

So lots of very good commercial growth and I don't think this is a one-time phenomenon that we saw in the second quarter. The pickup that we saw in residential use of electricity in the second quarter was much more related to weather. We continue to see customer growth, residential customer growth, but the big swing, positive swing in the second quarter on residential was clearly weather compared to the second quarter of a year ago.

Okay. Then your retail sales are up pretty good, but the total sales are still negative, so obviously the wholesale is being impacted. Is that pricing, is it demand, is it just that you've had less capacity available to sell under the wholesale market or what's going on?

The availability of capacity. Remember, we had a very heavy fossil outage schedule first half of this year versus first half of last as well as having a planned outage in our nuclear facility, which we didn't have in the first half of last year. So it's spot sales in a wholesale market and it's driven by availability.

You should see a turnaround in that number in the second half.

Okay. And then I was curious about that mine settlement, is that reflected in the second quarter revenues?

Yes. Yes. The mine settlement, as Allen mentioned, in terms of revenues and cash that we received from prior periods, we booked that in the second quarter and amounted to about a pretax -- or an after-tax gain of $0.04 a share.

Do you know what the revenue impact was on that?

It was about $9 million.

Okay. I thought that was the operating income impact?

Well, in this instance, it's the same, really. Because all the costs of providing the power were booked in prior periods, but the revenue was not.

Okay. There wasn't a tax impact?

Yes, $9 million pretax and that's $0.04 a share after-tax.

Oh, okay. I see.

Actually, $0.045 if you want to get technical.

Okay. Well, that's all I had then. Thank you.

You're welcome. Hang in there, Dan.

We'll go next to Ashar Khan with SAC Capital.

Good afternoon. Good afternoon. Can I ask you, when we get to this rate case decision it gets you your revenues for 2008 and 2009, when can we start hearing what dividend policy would be after this CapEx program finishes? Is that something we can start hearing after this rate case decision, because it gives you a certainty for the next plans to come in '09 and '10?

Ashar, very good question. As Allen and I have thought about this, I really think you could be looking at late '09 for some additional guidance from us related to dividend policy. A couple reasons. First of all, we very much need to see our way through this construction plan, as you know, and it's going very, very well. But we need to see our way through the construction plan. And by late '09, we would hope to have the first unit in Oak Creek in service and the second unit, probably with test energy, being delivered. So we would have lots of certainty about the in service dates and the earnings flows from the new additions at Oak Creek.

And secondly, I would hope that we would have more clarity by the latter half of '09 on government tax policy. We've talked about if we have free cash flow to be able to dedicate to shareholders what is the most tax effective thing to do. Today, given the tax rates on dividends, a dividend from a tax effective standpoint, a dividend increase is as tax effective as a share buyback. That may or may not be the case depending upon who gets elected in the fall elections for President in '08. So we think the better part of valor is to assess the situation and make a decision and give you guidance when it's very clear what the most effective thing to do would be.

Okay. And if I could just follow up. Again, looking at that time frame, Gale, and as you look at long-term, you said an optimal capital structure would be around the 56, 57% at the parent. Is that what to shoot for?

No. What I said was on adjusted debt-to-capital ratio for the consolidated entity, it would be about 55%. I believe that would be consistent with the low single A at the parent and a flat A at the operating companies. Again, that's a -- we talked about this in the previous response a little bit, but that's a matter of long run financial policy, so we're not going to -- certainly not going to get there overnight.

Okay. I appreciate it. Thank you.

You're welcome.

Thank you, Ashar.

We'll go next to Andy Levi with Brencourt Advisors.

Rock and roll, Andy.

How are you?

We're all right. How are you?

Good. Raising the dividend before that and having to ask for the rate increases kind of would be silly too, wouldn't it? You've got, what, two big rate increases you got to ask for, what was it, 15% or something like that?

About 7.5 in '08 and 7.5 in '09.

So it would be kind of silly? Right in front of that to be on the planning horizon, politically, it would kind of be suicide, too?

We tend to look at things in terms of what makes the most financial and operational sense. Certainly, regulators understand that shareholders need to be rewarded, so we're really looking at this in terms of the pieces of the plan and how we roll those out, when we actually have the financial flexibility to do so.

And just -- I've asked Allen this question, so it's a little bit repetitive --

What did he say?

Not this question, another question. Just your view on politically having to go in for a 15% rate increase, obviously, you generally don't get everything, but it will probably be something close to that. How do you, politically, as a CEO, kind of deal with that and what are you doing to smooth the process?

Actually, a very good question. Actually, the answer is very straight forward. We said a number of years ago in several public forums that we would do our dead level best to hold base rate increases during this period in which we're having to have a major upgrade in the infrastructure, that we would try to hold base rate increases below 4% annually over the course of the construction period. Obviously, everybody understands that construction is lumpy and we're not bringing in a unit or partial unit every year. These units come in big chunks. When you look at what we've been able to accomplish, even with a 7.5% price increase in 2008 and a 7.5% in 2009, we will have held average annual base rate increases below our 4% promise. So that's essentially -- there are very good facts here to support the story and that is our basic comment publicly, that we all knew and that the infrastructure upgrade was going to be a costly process.

The other thing that I think is very, very helpful is that when you look at the construction costs for our Oak Creek units, they look like tremendous bargains today. You could not start today building two coal-fired units at Oak Creek and have the price be even 50% above what we believe we can bring them in for. So the infrastructure we're building, the contracts we were able to negotiate with Bechtel and the timing of our start of construction is going to give the state a very valuable cost-effective asset, and that's also very helpful.

Thank you very much, guys.

You're more than welcome. Thank you.

We'll go next to Alex Kania with Merrill Lynch.

Good afternoon. Just a little tie-up question. Do you guys have the year-to-date -- the deferred revenue that you've booked associated with the Power the Future construction costs?

Yes. Steve Dickson has got that. He'll run you through it.

Yes. The revenue we've deferred is about $71.9 million for the six months this year. Last year was about $30 million. And the increase is because of the increase in the construction and progress at the Power the Future plants.

Great. For the amounts that are included in your rate case filing, which I believe was 166, does that -- that applies to, what is that, 2008, or have the timing right on that?

'08 and '09.

'08 and '09 each year. Okay. Thanks very much.

Thank you for the question, Alex.

We'll take a follow-up from Michael Lapides with Goldman Sachs.

Hey, guys. I've been asked and answered. Thank you.

You're welcome, Michael.

We'll go next to Greg Gordon with Citigroup.

My question has been answered as well. Thanks.

Great. Terrific. All right. Well, I believe that concludes our conference call for today. We really appreciate your participating. If you have any other questions, don't hesitate to call Colleen Henderson in our Investor Relations Office, and her direct line, 414-221-2592. Thank you again, have a good day.

Once again, that does conclude today's call. We do appreciate your participation. You may disconnect at this time.