威斯康辛能源 (WEC) 2008 Q4 法說會逐字稿

Welcome to Wisconsin Energy's conference call to review 2008, year end results. (Operator Instructions) 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 that are subject to change at any time. Such statements are based on management's expectation 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 by the Securities and Exchange Commission could cause actual results to differ materially from those contemplated. During the discussion, referenced earnings per share will be based on diluted earnings per share unless otherwise noted.

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 2008 year end result 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. We appreciate you joining us on our conference call to review our company's 2008 year-end results. Before we proceed with our normal format, let me just mention one very quick thing that some of you may have heard on the news within the last two hours. Apparently at about 11:00am this morning we had an explosion in the coal handling area of the Oak Creek power plant. Now this area is where the coal trains are unloaded. The facilities are new, but the facilities are operational so not under construction. We had contract workers in making repairs in that area and apparently this is an area where coal dust can build up and apparently we had an explosion. From what we have learned so far from the site, there are approximately five injuries. We believe that four may be critical. The situation at the site is stabilized. The plants are continuing to operate-- the existing Oak Creek units are continuing to operate. This area is relatively far away from the power block of the new construction for the two new units, but we wanted to make you aware of the incident that occurred at about 11:00am this morning.

Well, let me begin our call, as always, by introducing 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, General Counsel, Jeff West, our Treasurer and Steve Dickson, our Controller. Allen, of course, will review our financial results in detail in just a moment, but as you saw from our news release this morning, we reported earnings per share from continuing operations of $3.03 for 2008. This compares with $2.84 a share for 2007. While we did see a decline in sales of electricity to our commercial and industrial customers because of the slowdown in the economy, our 2008 earnings were boosted by our Power the Future investment in the newest generating unit at Port Washington, by strong customer demand for natural gas during the cold winter months of 2008 and by effective cost controls across our business. Overall, I am very pleased with our performance.

From customer satisfaction and network reliability to progress on our Power the Future plan, the company made great strides during the year, and in a tough economy, we posted solid financial results.

Now I would like to touch briefly on the impact that the economic climate is having on our service area. Generally, our region has a well diversified industrial and commercial base, which tends to help mitigate the impact of economic downturns; however, in this economy, we are seeing three sectors that have been dramatically affected, primary metals, such as foundries and specialty steel companies, automotive and automotive part production and paper production. Led by declines in these three sectors, our electricity sales to large commercial and industrial customers declined by 9% in the fourth quarter as compared to the fourth quarter of 2007. At this point, though, based on what we have seen in January, we don't see a need to modify our 2009 sales forecast that we provided you in December.

As you would expect, we are also seeing a slight increase in past due receivables. You may remember that we currently have some protection in Wisconsin because we use escrow accounting for any residential bad debt above the level currently collected in rates. We are actively monitoring also our past-due accounts and we're working with customers on payment plans. On a more positive note, we expect to see at least a 10% increase in State and Federal energy assistance dollars for our residential customers this year.

Now I will 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 super critical pulverized coal units at Oak Creek which is south of the city and building a significant amount of renewable generation. As we discussed on previous calls, both units at Port Washington are complete and in service. Construction was finished on time and on budget. The units are among the most efficient in the Midwest market that are operating well and our customers are now benefiting from the low price of natural gas that fuels these units.

Let me turn now to the status of two new coal-fired units at Oak Creek. As you may recall last summer we and the two other owners of the expansion units at Oak Creek reached an agreement with Clean Wisconsin and Sierra Club, the groups that have been actively opposing the water intake permit for the plant. Under the settlement agreement, the environmental groups withdrew their opposition. This brought to a close the ongoing litigation and administrative challenges to the permit. A few months later the deadline passed for any appeals of the water intake permit so all litigation matters regarding the permits for the Oak Creek expansion are resolved.

On the construction front, based on Bechtel's revised schedule, Unit One and the common facilities were 85% complete at the end of December. And Unit Two was approximately 37% complete. Bechtel continues to target commercial operation of Unit One by the end of this year, by the end of 2009, and Unit Two by end of August of 2010.

Progress this winter has improved versus last winter in part because many of the critical buildings are enclosed and largely protected from the weather. Progress on Unit One is gradually shifting now from construction to commissioning. In fact a number of the systems are already in start-up phase. And I am really pleased to report that the cooling water intake system was placed into commercial service just a few days ago on January 18. This means we are drawing water through the tunnel and supplying it to the four existing units at the Oak Creek site. Of course the tunnel will also supply cooling water to the new units when they go operational. Since our last call, we have also successfully unloaded limestone at the site using the newly built dock equipment and storage facilities. They have also taken delivery of our first train load of the bituminous coal which will be used to commission the new units. The most time critical activities remain in the power block at the Oak Creek expansion.

Bechtel is also focused on completing the air quality control equipment and the ductwork to allow first fire on gas to occur this summer. They are also working on the air, water, chemical and lubrication systems that are essential to the operation of the plant. Despite the schedule delay, we are pleased with the progress being made at the site.

Of course, as we told you in December, Bechtel filed a formal claim seeking relief under the contract. Bechtel is citing a number of factors that they believe have caused a change in the schedule. The factors include weather conditions in the two most recent winters, heavy rains this past spring, and what Bechtel believes to be changes in local labor conditions. The claims for schedule and cost relief related to these factors total $413 million.

Bechtel also stated its belief that the weather events constitute a force majeure. Now we don't believe there is a contractual basis for some of the claims that Bechtel has submitted. For example, we disagree that Bechtel is entitled to either cost or schedule relief as a result of the alleged changes in the local labor market. Bechtel also filed a $72 million claim for the alleged effect of changes and delays prior to the issuance of the full notice to proceed with construction in July of 2005. We believe this claim is without merit, and that Bechtel was fully compensated for any and all impacts of the delayed start.

Finally, Bechtel has asked for six months of relief from liquidated damages beyond the September 29, 2009, guarantee date for Unit One and three months of relief from liquidated damages beyond the September 29, 2010 date for Unit Two. Reviewing the claims, we've asked Bechtel for additional information. We expect the claims to be resolved through the contract's formal dispute resolution process. If we are not able to reach agreement in nonbinding mediation, we will move to binding arbitration which is called for under the contract.

Now as we assess these developments, I believe there are several key points to keep in mind. First, we are still recovering carrying costs associated with the construction of these units.

So under the term of the lease agreements between Wisconsin Electric and WE Power, we are recovering, based on a mix of debt and equity, our capital carrying costs as construction continues on the Oak Creek project. We are allowed to recover our carrying cost up to the total budget for the project that has been approved by the Wisconsin Commission. So we believe our ability to recover cash carrying costs should be largely unaffected by the slight change in the construction schedule. I would also like to repeat the point I made last fall about the ultimate recovery of any potential cost increases. We believe that we have several important layers of protection for recovery of our costs. For example, to conclude that an additional cost is not ultimately recoverable, you would have to believe that the cost will not qualify for recovery under at least four opportunities.

First, that the remaining contingency in the project is not sufficient to offset the cost. Second, that the cost would fall outside the 5% band that the commission has deemed reasonable for prudent costs above the approved amount for the project. Third, that the cost was not caused by a force majeure event as defined by the lease agreements. And finally, after an opportunity to demonstrate prudency that the cost will be ultimately deemed to be approved. One more important point. Liquidated damage payments will be due from Bechtel on Unit One unless it is determined that any days that may be granted for weather relief equal or exceed the delay in the schedule. Now as we move forward, we will continue to provide updates to you on any major developments with the claims through our SEC filings and on our regularly scheduled calls.

I will turn now to the subject of renewables. The State of Wisconsin, as you recall, has enacted a renewal portfolio standard that increases from 5% in 2010, to 10% in 2015 at a statewide level. The standard sets targets for each of the utilities using an historical baseline. Using that baseline, approximately 8.5% of our retail electricity sales must come from renewable sources in the year 2015. Meeting the aggressive 2015 targets will require several additional projects. Of course with the completion of our Blue Sky Green Field Wind Farm in 2008, we took a major step toward meeting Wisconsin's goal to reduce its carbon footprint, with a total of 88 turbines, each with a capacity of 1.65 megawatts, Blue Sky Green Field is the largest wind farm to date in Wisconsin. It was completed last year under budget and ahead of schedule.

To continue on the path of carbon reduction, we exercised an option with FPL energy and acquired an excellent wind site in east central Wisconsin in Columbia County. In October of last year, we filed for approval to build our newest wind project which is called the Glacier Hills Wind Park. The Public Service Commission deemed our application to be complete just a few days ago on January 27. So the commission's 180-day review period has now begun. The site can accommodate between roughly 130 and 200 megawatts of new capacity, depending on the final layout and the turbine equipment that we select. The first full year of operation for Glacier Hills is expected to be 2012. And just a reminder that construction is also under way on a major upgrade of the air quality controls at the existing coal fired units at Oak Creek. We expect the cost of this facility will be roughly $885 million, including allowance for funds used during construction for the installation of wet flue gas desulfurization and selective catalytic reduction facilities. These controls should be completed in 2012.

As we look ahead we expect to file a general rate case on our normal cycle for our Wisconsin Electric and Wisconsin Gas utilities in the first half of this year. The rate cases, as you will recall, in Wisconsin are based on forward-looking test periods. Hearings should take place this fall, and we would expect that new retail rates would go into effect in January of 2010.

Finally, last December, our board of directors approved a new dividend policy for Wisconsin Energy's common stock. Our new policy, as you recall, provides for an annual dividend of $1.35 a share in 2009 which is a 25% increase over the dividend in 2008. Our policy also targets a dividend payout ratio of 40 to 45% of earnings in each year from 2009 through 2011 and 45 to 50% after 2011. The first quarterly dividend for 2009 which was declared by our board a few days ago will be payable on March 2 at a rate of $0.33.75 a share. Now we will turn the call over to Allen who will give you more details on our financial performance for 2008. Allen?

Thank you, Gale. As Gale mentioned earlier our 2008 year-end earnings from continuing operations were $3.03 per share. I will focus on operating income by segment and then touch on other income statement items. I will also discuss cash flows for the year and discuss our earnings guidance for 2009. Now you may want to refer to page seven of the earnings package as I make my remarks. Our consolidated operating income in 2008 was $661 million as compared to $629 million in 2007, an increase of $32 million. Operating income in our utility energy segment totaled $582 million, a decrease of $4 million versus last year.

Before I discuss the primary drivers, I would like to remind you of a couple of developments that caused significant changes in individual items in the income statement. First, in September of 2007, we sold our Point Beach nuclear plant and entered into a long-term power purchase agreement with a new owner. Since we no longer own Point Beach, our results in 2008 did not include operating or maintenance costs related to the facility nor did we incur any depreciation or decommissioning costs associated with the plant. Of course our fuel and purchased power costs increased as a result of the power purchase agreement we now have. Our income statement in 2008 reflected $488 million related to the amortization of the gain on the Point Beach sale. The amortization included a one-time refund of $62.5 million to our wholesale customers, a one-time amortization of $85 million to offset certain regulatory assets and the balance related to bill credits that will provide to our Wisconsin Electric retail customers in Wisconsin and Michigan.

I would like to briefly expand on this item. The January 2008 Wisconsin rate order resulted in about a 17% increase in electric rates. This increase was needed to recover higher costs associated with transmission expense and environmental expenditures as well as the lease payments and O&M costs associated with our new power plants and our continued investment in renewables; however, our customers as a group saw only about a 3% rate increase in 2008 from the rate order as the balance is being funded through bill credits through the gain on the sale from Point Beach. In 2009 we expect the bill credits to total approximately $242 million. While we look at the bill credits as a form of revenue, GAAP requires us to record the bill credits as part of the amortization of the gain because we are collecting the cash from the restricted cash account and not from customers. As we had previously discussed, once all the Point Beach gain has been returned to customers, the full 17% increase will be paid by customers and at that point reflected in operating revenues.

With this as background, I would like to address the primary drivers in our utility operating income for 2008. First, price increases to retail and wholesale customers resulted in $165 million increase in revenues. The conversion of the Point Beach nuclear plant from being an asset owned by Wisconsin Electric to one owned by FPL Energy with an associated power purchase agreement reduced operating income $116 million. Additional planned operations and maintenance expenses at our power plants decreased operating income $37 million. All other factors in this segment reduced operating income net of $16 million.

Operating income in the non-utility energy segment which primarily includes WE Power was up $41 million. The key drivers of this increase were a full year's earnings contribution from new coal handling facility at the Oak Creek expansion which was placed into service in October 2007, at a cost of approximately $175 million and a partial year of earnings contributions from Unit Two at Port Washington which was placed into service in May of 2008. Corporate and other affiliates had an operating loss of $10 million in 2008 compared to an operating loss of $5 million in 2007. This decrease was primarily related to reduced real estate sales during 2008.

In the future, we project to have only slight operating losses in this area as we expect to have minimal business operations in this segment. Taking the changes for each of these segments together brings you back to the $32 million increase in operating income for 2009. During 2008, earnings from our investment in the American Tranmission Company increased $9 million. Other income declined $33 million because of lower carrying costs on regulatory assets. These regulatory assets are now a component of rate base so the carrying costs are included in revenues rather than other income. Total interest expense was down $14 million. Although we do have higher gross interest expense because of increased debt levels associated with our construction programs, our gross interest expense was reduced by lower short-term interest rates and higher capitalized interest.

Consolidated income tax expense increased by approximately $1 million because of higher pretax earnings. Our effective tax rate for 2008 was $37.7% compared to 39.1% last year. I expect that our effective tax rate in 2009 will be between 35 and 37%. Combining all of these items brings you to $358.6 million of net income from continuing operations for 2008 or earnings of $3.03 per share.

During 2008, we generated $737 million of cash from operations on a GAAP basis which is up $205 million from the same period in 2007. This increase was primarily driven by higher cash earnings as a result of better recovery of regulatory assets and reduced cash taxes. On an adjusted basis, our cash from operations totaled $1.082 billion. The adjusted number includes the $345 million of cash impact from the bill credits and a one-time amortization of the gain. Under GAAP, the cash from the bill credits is reflected in the change of restricted cash which GAAP defines as an investing activity. But from a management standpoint, we consider this as a source of cash as it directly relates to the bill credits and the one-time amortization. We plan to provide both GAAP and adjusted measures of cash flow as long as the bill credits continue.

We believe the adjusted measure is more representative of the company's ability to generate cash from operations for two reasons. First the customer credits remain funded for the proceeds from the Point Beach sale that are set aside in a restricted cash account. Second once the Point Beach proceeds have been returned to customers, our prices and hence customer bills will reflect the full cost of electricity without any credits.

During 2008, we completed nearly $1 billion in long-term debt financings. The proceeds were used to provide long-term financing for Port Washington Unit Number Two as well as to reduce short-term debt balances at both Wisconsin Energy and the operating companies. These offerings largely mitigate the need for long-term debt offerings in 2009 and allowed us to fund a $289 million contribution for the pension plan and other post employment benefit trusts in January of this year. Looking to 2010, we expect to complete nearly $900 million of long-term financing at WE Power in connection with the completion of the new units at Oak Creek. On a consolidated basis we have approximately $1.6 billion of available undrawn credit facilities that expire in March and April of 2011. Our commercial paper balances at the end of 2008 were approximately $600 million on a consolidated basis. This balance is well within the limits of our credit facilities. The commercial paper at the Wisconsin Energy level is primarily being used to provide construction financing for the Oak Creek units while the commercial paper at the operating utility is used to provide working capital.

Now I would like to move on to a discussion of capital expenditures in 2008. Our total capital expenditures were approximately $1.1 billion in 2008. About $607 million of this was dedicated to our utility businesses and $529 million was for the generating units being constructed as part of our Power the Future plan. In 2009, we expect to spend between $825 million and $875 million of capital to support our Power the Future construction program, additional wind generation and ongoing utility infrastructure improvements. At the $825 million level, we would be about $10 million below our previous forecast of 2009 capital spending. We also paid $126 million in common dividends in 2008.

On a GAAP basis, our debt-to-capital ratio was 58.5% as of December 31, and we were at 55.4% on an adjusted basis. This is essentially flat compared to our December 31, 2007 levels of 58.6% and 55.3% adjusted. The adjusted amounts treat half of our $500 million in hybrid securities as common equity which is the approach used by the majority of the rating agencies. I would expect our debt-to-capital ratio to increase slightly as of December 31, 2009, as compared to December 31, 2008. Our goal remains to maintain our adjusted debt-to-capital ratio at no more than 60% during the period we are constructing our new coal fired generation.

We are using cash to satisfy any shares required for our 401(k) plans, options and other programs. Going forward, we do not expect to issue any additional shares. As we discussed in our last conference call, given market returns in 2008, we expected to make significant contributions to the trust that fund our pension and other post-employment benefits. I expect that our FAS 87 pension expense will be about $22 million, which is roughly level as compared to last year.

Now I would like to wrap things up with a discussion of earnings guidance for 2009 as well as the first quarter. Our 2009 earnings guidance remains in the range of $3.05 to $3.15 per share that was provided in our press release last December. We expect the primary earnings drivers in 2009 to be as follows: a negative impact of the downturn in the economy, continued implementation of our Power the Future plan including a full year earnings contribution of the second unit at Port Washington and the water system at Oak Creek, and an increased earnings contribution from our investment in ATC.

The full-year earnings contribution for the second unit at Port Washington and water system at Oak Creek should add $0.11 per share. I estimate that the downturn in the economy will reduce earnings about $0.15 per share net of the O&M action we had taken in response. An increase in the earnings contribution from ATC and other small items should add a total of $0.06 per share. Combining these factors brings to you a year-over-year increase of $0.02 per share. So, starting at $3.03 per share in 2008 plus $0.02 brings you to the low end of our $3.05 to $3.15 guidance range for 2009.

You will note that I did not mention electric fuel cost recovery as a variable driving our estimated range of earnings this year. At this point, our expectation is that we will be in a fully recovered position in 2009 which is where we ended up in 2008. Essentially the increase in the cost of coal is expected to be offset by the substantial drop in natural gas and diesel fuel prices that have occurred in the past few months.

We expect a total earnings contribution of $0.39 per share from our Power the Future program in 2009. This includes a full calendar year contribution from the two units at Port Washington, as well as the water and coal handling systems at Oak Creek.

We will not be giving specific quarterly earnings guidance but consistent with our past practice, I will provide you some input on what to expect in terms of the distribution of earnings within the year.

As we discussed in the past, our fuel recoveries have had a significant impact on our quarterly earnings. Last year we were in an under collected position in the first quarter and in July we received relief for higher rates to cover the increased fuel costs, During 2009, we expect to be in an overcollected position for the first quarter because of the significant decline in natural gas prices. In addition, in 2008, we did not receive the benefits of earnings on our Port Washington unit until it went into service in May of 2008. This year we will benefit from earning in all four quarters. So with that, I will turn things back over to Gale.

Allen, thank you very much. As you can tell from the report, we had a very solid year both operationally and financially. We are on track and focused on delivering value for our customers and our stockholders.

And now we would like to take your questions. (Operator Instructions) Greg Gordon from Citigroup Investment research please state your question.

Thanks, good afternoon, guys.

Hi Greg, how are you.

Can't complain, still here.

Well, that's a good thing.

When I look at -- when I try to think about the rate filing that you are going to make in the first half this year, you use a forward test year, correct?

It will be a two-year forward-looking test year.

So we will be looking at 2010 average rate base?

Well, again, two-year forward-looking test year. We will look at 2010 and 2011 expenses and 2010 and 2011 rate base.

Right. And rate base includes CapEx minus depreciation obviously but plus doesn't it also include any -- any dollars that you put into the pension including the $289 million you put in January.

It is meant to include the total capitalization of the company, Greg. So to the extent that you invest in working capital, new inventories, all that, the whole range of things that drive capitalization get included in the rate-making formula.

The point being it is seen as a -- as a funds on which you ought to be allowed to recoup your investment.

That's right.

It is seen as part of the capital base of the company, that's right.

I just wanted to make sure. Looking at where -- where interest rates and equity risk premiums have gone over the last year, would it be your expectation that you would be requesting a higher return on equity in the case, same, lower? How are you thinking about positioning for the case?

Greg, candidly, I don't think we would be asking for a higher return on equity than -- then we are currently allowed. In part, I think -- I think we have to be and the commission would expect to us to be sensitive to the economic climate, so my sense is that at this stage of the game, again, we haven't put all the final pieces together yet for -- for the filing because that won't take place for a number of months yet.

So my sense is we would stay at a request of a 10.75% return on equity. And the big driver actually -- and if you look at where we're at, about 83% of all the Power the Future costs are already reflected in rate decisions that the commission has already made. So one of the drivers for this upcoming case, as we now bring these units into service will be the remaining carrying costs on our Power the Future investment. But I think you will see based on all of the things we are doing in the company, I think you will see a pretty modest rate increase request.

Great. And when do the bill credits associated with the nuclear asset sale roll off?

Theoretically they would roll off in 2011.

So, there's another year of them --

Another full year of them. No question about that.

Thank you very much, and I hope all your employees are okay.

Thanks, Greg, very much, we appreciate it.

[Steve Fleishman with Catapult.] Please state your question.

How are you, Steve?

It's actually

Hi, Ted.

How are you guys doing.

A better looking version of Steve Fleishman

Don't tell him that. One, I just had a question, just on-- I think Allen mentioned the fuel recovery but also just on weather. Can you give us a feeling-- a sense of where you stand at the end of '08 on actual benefits or hurt from weather and also on fuel recoveries?

Weather, Ted, was almost a neutral. If you combine gas and electric together, cooling degree days were down in 2008 versus 2007. So we had a cooler than normal summer, but then, of course, also a cooler than normal January and December of 2008. When you combine the two factors at a consolidated level, almost a neutral impact of weather.

My wife says we had no summer.

But --

He is right and just to break that down for Q4, we had a very cold December of 2008. Very cold. The fact -- based on the -- on the heating degree days, it was the second coldest December in about 19 years. And our customers in December used 13% more natural gas than they did in December of 2007. So Allen is absolutely right. Our -- basically our earnings were hurt by the cool summer but it got cold in a hurry but never warmed up-- but it got cold in a hurry. And really we had very, very strong consumer demand for natural gas in the fourth quarter and in particular in December.

Okay.

In terms of fuel recovery, Ted, I think you also were asking that question. For the year as a whole, at least as viewed by the shareholders were neutral on the fuel recovery, and then we filed -- we made a filing with the commission actually to refund approximately $8.5 million to customers associated with fuel recovery in 2008. So shareholder fully recovered, and I would say that customers will receive somewhere in the order of $8.5 million in -- in refunds.

And that would be a one-time bill credit we would expect. The commission would act pretty quickly. Probably have a one-time bill credit to customers in the range Allen talked about, in February or early March.

One last question on the fuel recovery. What was the actual under recovery when we are looking at the first quarter trying to do our earnings estimates for that. What was the actual under recovery in the first quarter of last year?

It was about $15 million under recovery in the first quarter of '08.

Okay. Great. Appreciate it, guys.

Take care, Ted. Say hi to Steve

Will do.

Michael Lapides from Goldman Sachs. Please state your question.

Hey guys. Really two questions a little bit separate from each other. First of all, when you think of major construction projects post Power the Future, you've got the South Oak Creek environmental retrofits and you've got the second wind plant construction, can you talk a little bit about how much of the materials, the labor, the EPC contract, how much that is already locked down versus how much is kind of open to price change?

First of all, on the -- on the Oak Creek -- what we call our South Oak Creek air quality control project.

Yes.

The commission has already approved. That is under construction, engineering is almost complete, and we have locked down virtually all of the costs -- all of the major equipment has been -- has been procured and as Rick is pointing out. The steel is locked down in terms of the price and procurement. Not much variability that we would expect other than we need to get appropriate labor productivity. But we are pretty well fixed in terms of the procurement and the costs related to the air quality controls at Oak Creek. Now on the other hand, Michael, the -- the Glacier Hills Wind Project is in the earliest stages of review by the commission so we have not locked in any pricing as of yet.

Okay. So if the cost of wind turbines is kind of moving your way a little bit, you will be able to capture -- your customers will capture the benefit of the lower facility. It might have a slight impact on your forward rate base though.

That is absolutely correct.

Okay.

Given the potential size of this wind farm, you could see the cost of the -- the investment cost of that wind farm being easily $500 million.

Right. Understood -- oh by -- what is the in service date needed.

We -- well, we would want to bring Glacier Hills in during 2012.

All 500 megawatts.

Preferably, actually at the end of 2011. But we'd have a full year of service in 2012.

I am sorry I missed that. So if it is 500 megawatts breaking ground late this year.

The upper end about 200 megawatts.

Right.

Yeah projecting a rounded cost of -- of that size wind farm.

Okay.

Roughly half a billion dollars and we would -- we would assuming the commission gives us a go ahead in a timely fashion, we would strive to bring it in right at the end of 2011 for a full year of service at 2012.

Right. Does that get you though to the -- what is it, the 8% required renewable portfolio standard?

No, Michael, it doesn't. It will get us with the other things we have in mind about 65% of the way there. We are also going to propose not in the next few months, but as we move forward and actually as the renewable portfolio standards become clear, we are going to propose adding some modest amount of solar and perhaps a 50 megawatt bio mass plant and then we will look and see where we are, but this -- no, the Glacier Hills does not get us to where we need to be by 2015. I think with what we have on the table, we can see how to get 65% of the way there.

Got it. Last item. Just on the -- on the pension contribution, can you -- Allen, can you state what the pension contribution was you made January and more importantly what you expect to make over the next one to two years?

Yeah, the total contribution, Michael, was $290 million. $270 million of that $290 million was for the pension trust to fund the qualified pension benefits and then the remaining $20 million was for other post employment benefits not relating to pension, things like retiree medical. Sitting here today I can't predict today, Michael, what market returns, if any will look like in 2009, but at this point I wouldn't expect to be making contributions in -- in 2010 or '11. We will see what market returns are like this year.

Understood. Thanks, guys. Much appreciated.

Hey, Michael, I was looking forward to the Hard Rock in Vegas but I see it's going to be a conference room in New York.

You know third year in a row for the conference room in New York-- I think-- Tell you what I will meet you for golf in Vegas one day.

Way to go, Thank you Michael.

Reza Hetafi with Decade . Please state your

How are you doing.

How are you guys.

We're doing fine, how about you, Reza?

Good, good, thank you. Allen, you were mentioning some of the economic issues being offset by O&M cuts. Can you quantify O&M increase or decrease year-over-year from 2008 to '09.

I would expect in terms of overall O&M to just take regulatory amortization (inaudible) and set it aside you just look at what I would view as control of O&M in the business. We see that being essentially flat, in fact it might actually be down slightly in 2009 as compared to 2008. So when I talked about the net $0.15 per share negative impact, I am already netting out of that originally what we might have expected to be some O&M increases which now we are not going to see those increases.

Reza, two things we have done which we haven't discussed on the call, but we have talked about elsewhere. We have frozen officer salaries for 2009, and we have also put in place a limited hiring policy. We will not be replacing any non-critical positions and not hiring additional people other than what are needed for the Power the Future investments. We obviously need to train operations people and maintenance folks for the new Power the Future assets that are coming online.

So, clearly we will be hiring in that area, but only operations critical positions will be replaced. So pretty much a limited hiring freeze and a freeze in officer salaries and a lot of other very intelligent cost reductions that we don't believe will affect operational performance. But we are taking a very hard look, as are all companies, at what we absolutely must spend in '09.

Okay. And pension -- I am sorry I missed that number. What is it? How much higher is it in '09 versus 2008?

The FAS 87 expense is actually about level I would expect at about $22 million. So $22 million in '08, and I would say about $22 million in 2009. Again, Reza, that's the FAS 87 expense.

Okay. And -- is the expected online time of the Oak Creek plant still the same as your previous guidance?

At the moment, Bechtel is still focusing and targeting on year-end 2009 for Unit One and the end of August 2010 for Unit Two. They are making good progress. We will know a lot more though, in terms of the specific in service dates as we come out of the spring and get into early summer. There are a number of milestones that they are targeting to meet, and we will have a much better feel probably by the end of June as to the -- as to the -- the real likelihood of making the end of '09. But I will say this. In fact, Rick and I were talking about this just a few minutes ago. Enough progress has been made now where the bookends are reasonably clear as to when we can expect the unit to come on line. So far that is Bechtel's continuing target and they are working toward it.

Okay. And Allen, you mentioned, I think, $0.39 guidance for Power the Future for 2009. How much debt is associated with that $0.39?

Well, that is an after-tax consolidated contribution, Reza, from the four factors that I mentioned, full year earnings from Port Washington one, full year from Port two, as well as the earnings on the water handling system and the coal handling system. So that's all after tax, consolidated basis, after bottom line.

Off the top of your head though, I know you guys -- you had the optionality of issuing debt as per the debt ratio and the agreement, but then you could also issue some back leverage so to speak. I am just wondering within that $0.39 calculation, what the total debt is.

Well, I think as a reasonable working assumption is that you look at our consolidated capital structure which at this point at least is roughly 45% equity if you treat half of the hybrids as equity and half as debt, 45% equity, 55% debt on a consolidated basis. So, to your point, Reza, the differential in the debt between the subsidiary and the holding company, in fact that back leverage brings you to the 45% -55% capital structure and so when I quote $0.39 a share, it is levered on that basis, 55% debt.

Do you recall what the Power the Future earnings were in '07 and '08?

Well, in 2007 we only had one of the units at Port Washington, so each unit is on the order of $0.14 a share. So we probably have on the order of $0.14 a share, Reza, in 2007. In 2008, we would have had, say a half a year's earnings from Port Two, so add $0.07 to $0.14 gets you to $0.21. I believe we had about, let's see, $0.21, I think about a nickel, probably from the coal handling system, so total would be $0.26, or $0.26, $0.27, somewhere in that range for 2008 and add $0.11 to get to the $0.39 in 2009.

Okay, great. That helps. Thank you very much.

Take care, Reza

Paul Ridzon from KeyBanc. Please state your question.

Good afternoon, Paul.

Good afternoon. You had a 4-Q guidance of $0.72. I'm just wondering what the big drivers were that allowed a $0.13 beat.

Let me mention one thing, we didn't give fourth-quarter guidance per se although you could have certainly backed into it. We gave guidance for the year at $2.90. One way to look at it is essentially there were -- there were three positives that helped to overcome the impact of the economy and lower electric sales. And the positives are pretty simply, one, weather, two, weather, three, weather -- no, I am kidding. But weather was a big factor.

As I mentioned earlier consumer demand for natural gas in December was off the charts. We had 13% increase in natural gas send out in December compared to December of a year ago. Weather was a big driver. Obviously we have the earnings that Allen mentioned in the Q4 of '08 from the operation of the second unit at Port Washington that was not in Q4 '07. We had good fuel recoveries and good O&M control and those things together offset the decline in energy sales, particularly to our large commercial and industrial customers.

Yes, and Paul, the guidance that we gave in early December, with our press release when we reaffirmed the $2.90, that was based on -- I didn't yet have November results, and as it actually turned out, we had a pickup also in November from weather.

From weather.

So just to reiterate what Gale is saying, not only December weather but we got a help from November weather, better performance on O&M and then fuel also broke our way relative to the forecast that I had when we -- when we gave the -- when we reaffirmed the guidance for the year early in December.

What happened to fuel in the fourth quarter?

Well, in terms of fuel in the fourth quarter, the figure that I have, we were essentially neutral. You can take cumulative for the three quarters, Q1, 2 and 3 together for -- for 2008. We were essentially in a neutral position going into the fourth quarter. And we -- at least from a shareholders' standpoint remained in a neutral position and in fact built up that roughly $8.5 million over recovery balance which we expect to return to customers as Gale mentioned earlier, in-- hopefully in February.

But you didn't book that?

No, no. We didn't book that, but again I took your question to be what is the differential between where you finally came in on the fourth quarter versus your financial plan or your forecast that you based your guidance on in December. And honestly, when did I my guidance in December, I was still thinking that there was a chance to end up with an under recovery.

You were still thinking $0 - $20 million underrecovery then?

No. I would say looking -- going into the fourth quarter it could have been a couple million dollars on the recovery. I certainly wouldn't have expected a big one, but we didn't see that. In fact we were -- we were neutral from a shareholders standpoint if I understand your question.

And for Q '07, you were under recovered, correct?

Let's see. Let me go back here in the archives. That was my recollection. My under recovery that I see in '07 is about $36 million under recovery in the fourth quarter of '07.

Kind of gave an earnings walk, but you got us to $3.05, reiterating $3.05 to $3.15. Where do you see the upside opportunities.

Well, the reason I would stick, and am sticking to the $3.05 and $3.15. If you look at the differential between the $2.90 and $3.03. Well, as we discussed that's driven-- the big factor is weather. At this point at least, although January was cold, there are a lot of months to go in the year so I wouldn't want to step out there and say weather for the year is going to be -- is going to be, a net adder versus the financial plan.

Paul, There are a lot of moving parts, and we are working on all of them. So -- we feel we can -- we can get somewhere in the range, and as Allen said, we have a pretty good feel of how to get to the $3.05 and we are working on the moving parts to see what we can do beyond that.

And on sales, as Gale mentioned in the script, sitting here today we don't see a need to change the sales forecast outlook that we put out there in December. But being very candid, results were kind of mixed in January. So we are not changing our sales forecast, but the results were somewhat mixed in January. I think that still may potentially be a downside for us. We'll see.

Was there pending fuel legislation in Wisconsin? Has that been resolved?

No, that has not yet been resolved. The Wisconsin Commission basically came to a conclusion that a change in how the fuel recovery mechanism works in Wisconsin, that any change in that mechanism would require legislative approval, and our latest understanding is that the commission and the -- and the governor will propose a legislative change some time during 2009. Given the time it takes to get a bill through the legislature, my guess is we will not see any change in the fuel rules for 2009. If there were to be a change passed by the legislature, probably would take effect in 2010.

But whatever they do, I am sure they are going to make it harder for us to figure out what is going on with your fuel as investors.

Well, the whole idea, if there is a change, would be to make it more transparent and easy to administer. So let's hope you are wrong on that one.

Thanks a lot. Take care.

Take care.

Steve Gambuzza with Longbow Capital.

How are you doing Steve.

Good, thanks. Sorry if you went over this already, but would you mind repeating what the annual expiration of the Point Beach credits are and over the next three years-- 2010, '11, '12 so I can get a sense for what kind of a built-in rate increase is there.

Allen is looking for the specifics. We will not have -- there is no plan for the Point Beach credits to go into 2012.

Okay. So it is a roll off in -- there a roll off in 2009 at all?

There is a step down.

Step down. Meaning rates actually -- the customer sees a small rate increase in 2009?

That's correct. And has seen a small rate increase. I think our typical industrial customer probably saw in January about a 1.3 to 1.5% rate increase.

Steve.

But to make a long story short, and we will get you the numbers, the bill credits would step down in '09, step down again in 2010. There may be some modest amount left in 2011, we will have to see.

If you look at retail. We are talking about Wisconsin and Michigan retail. We provided approximately $316 million in credits in 2008. In 2009 my expectation would be to provide roughly $240 million worth of credits, again to Wisconsin and Michigan retail. I do want to clarify one thing. Gale is exactly right. We would expect Wisconsin credits, unless the commission decides to do it differently, we would expect Wisconsin credits to run through 2010 and '11. Now the Michigan commission decided to give credits over 18 months. So I believe those started in November of '07.

So they will run off before 2011.

They will roll out in early 2010.

For -- do you have for Wisconsin what the -- kind of the 2009 and '10 -- I am trying to get a sense of what the impact in 2010 will be relative to 2009 in Wisconsin from the roll off of credits.

I am sorry, Steve, the impact on rates?

The impact on Wisconsin retail customers in-- how much credit roll off in 2010 versus 2009.

That's easy. Essentially for the retail customers as a whole, it would be about a 3% increase from the stepdown of the bill credits in 2009..

And then, Steve, on wholesale, those guys got their one-time credit in 2008, so they don't -- there are no more credits to come for wholesale.

Gale, your comments were on 2009. Can you comment on 2010.

Starting the price increase?

Yes.

It will be roughly again based on the data I have seen roughly another three -- 3ish percent rate increase.

Okay. Is it possible given the decline in power prices and coal prices and gas prices that -- that -- that rate increase can be offset by just the decline in the curve?

Well, look, we see -- if we see $4.50 gas and weak coal markets, it is entirely possible that there could be another fuel price decrease coming our way in '09. And, yes, it could be a major offset to that 3% increase that took effect in January of this year. So very good question and the answer is yes.

Okay. When will you file your fuel clause for -- are you making a filing for 2009 on your fuel and purchased power rates?

No, Steve, the way it works is the fuel recovery rate is set, and unless we trip the bandwidth if you will of plus or minus 2% recovery on an annual basis. Unless you are going to over recover your projected fuel cost by more than 2% or under recover by more than 2%, basically the rate stays in effect with one exception. and that is, we had a special agreement with our commission last year that if we over recovered last year, we would refund, and that's what Allen had mentioned about an $8.5 million refund that we filed to be able to provide to customers and hope to do so very shortly here.

Okay. And then moving on to the sales forecast. I take it you guys are in conversation with some of your large industrial customers. And given the trend you saw in the fourth quarter versus what you have guided to in terms of, I think it is like a 6% or so decline in 2009. I guess it certainly implies some improvement or stabilization in the outlook during the year in 2009. Is that -- is that the case -- is that what your customers are telling that you -- that we are in the worst part of the decline right now and they expect to be using more power in the third or fourth quarter?

Well based upon the interviews and just to be more specific, we have done interviews-- I would say fairly structured interviews with roughly our top 100 customers, and listening to what they are saying, obviously they all have their own view and they are in different sectors, but it would indicate that we would start to see a turn around in electric sales in the third quarter of 2009. But, of course that's -- who knows if they are right or not, but if you -- if you look at what they are telling us, that certainly is what it would imply. And, Steve, what we are doing-- right now I am getting weekly reports. Since we have pretty much automated meters on all large customers, we can poll the meters on a weekly basis at least -- and it is a blunt instrument, but we try at least to get a snapshot of what's going on with key customers.

So, that's not to say we won't get surprised. I mean we still may get surprised, but we are trying to get as much real time data as we can to ascertain what what is going on and that's certainly something that we will keep you all apprised of on our earnings calls. One other, Steve, just to clarify what Gale was saying on fuel. Obviously we are filing a general rate case as he said and within the context of that general rate case, you will also file fuel information. You are filing all the work papers in the first half of this year. Included in the work papers will be a forecast of fuel.

Great. I guess on that point, Allen, if we continue to have kind of a weak gas and power price outlook, it seems like your -- your O&M is relatively stable. You are not really increasing the CapEx that much versus the current run rate. The real moving pieces are fuel and these bill credits. And so it seems like -- if we get a nice tai wind from fuel it could actually result in a headline amount that shouldn't be that bad for customers? Is that a fair way to think about it?

I think that is a very fair way to think about it. And one other point that Allen was alluding to. I really think the visibility that our customers have about their future markets and future orders is very limited right now. It is interesting to see-- we've tracked as Allen said, a lot of our large customers. I've looked at four or five virtually every other day and in one instance, one of our largest customers who gave us their input on what they thought their usage and production would be in late November ran 12% above what they thought they were going to do in January.

In another instance, another large Wisconsin customer was dead on, but is now saying they are not sure about February. I think that the visibility, Steve, is just not great given where the economy is and the uncertainty. I think the good news is that-- the mixed results, some better, some worse, but it came out in terms of what we were seeing for January for our largest customers on a composite basis about exactly where we thought it would.

Finally, when will you file the rate increase -- file for the rate case?

Some time in the first half of this year.

Thank you very much.

Thanks, Steve

Nathan Judge from Atlantic Equities. Please state your question.

Greetings, Nathan.

Greetings.

How are you.

I wanted to just ask a question on the recovery of fuel. You mentioned that in 2008 you agreed to give all over recovery back to customers. Is that the case in 2009? And if we have $4.50 gas will there potentially be some to shareholders? How does that work?

We have a special stipulation as you mentioned with the consumer groups and with the commission for 2008. The normal fuel rules will apply for 2009. And as I mentioned earlier, the normal fuel rules work off of bandwidth plus or minus your projected fuel recovery amount so depending upon how the fuel markets work and what our actual fuel costs are, and actually also what our actual MISO costs are in terms of purchased power we will operate within that 2% bandwidth for 2009.

Great. Thank you. Just as far as going back to your EPC contractor Bechtel in the negotiations going on there. Can you just give us an update on timing as you see it currently. I think you mentioned some comments on the call, but could you be a little more specific and give us more color on that. It would be appreciated. Thank you.

Sure, Nathan, we will be happy to. We covered in the early remarks obviously the fact that Bechtel filed basically two major claims in late December. And there is a very specific process laid out in the contract to resolve any disputes. And essentially if mediation and management discussions don't work, then the contract calls to move to binding arbitration. We are in the discussion mediation stage right now. I expect that will take a fair amount of time just because of the amount of data involved and the amount of data interchange that is needed, and if that doesn't work and we go to binding arbitration, we have estimated that the whole process could take 12 to 18 months. I am looking at our crack legal counsel and he is agreeing.

That's our best judgment.

That's his best shot, 12 to 18 months.

Thank you.

If we go to binding arbitration. Is that helpful, Nathan?

Dan Jenkins with the State of Wisconsin. Please state your question.

Dan, was that you next to the groundhog I saw yesterday?

Yes, I was trying to stay warm down there. ( Laughter ) I can confirm your statements about December and January being cold so (laughter]

Sort of Into snuggling with rodents.

I think there is a law against that, Dan. What can we do for you today, Dan?

First I just wanted to verify -- I think you said you have no plans to issue any debt in '09, is that right?

Dan, I have no plans to issue any long-term debt. Obviously we will be an issuer of commercial paper and we will look at market conditions. If market conditions are good for utility long-term debt say in the latter part of the year, say late third into the fourth quarter, we may consider doing something at Wisconsin Electric Power Company, but the point that I was trying to make with my comments, we don't -- we don't have to do that. We've got the flexibility with the right conditions to do it this year. It we don't like the conditions we can wait until 2010.

Okay. On the Bechtel claims. I think you said it was $413 million, is that right?

Well, they are essentially two large claims. The first one is for $413 million and the second one for $72 million -- if memory serves me right.

The combined is $485 million then.

Yes, now that is on a total project basis. And, of course, we have two co-owners that own roughly 15% of the facility. So to -- to judge any impact on Wisconsin Energy, you basically take $485 million and subtract 15%.

Which works out to be about $412 million.

How much is related to the labor market charges that you mentioned, you said you -- you are currently disputing that part.

Bechtel has not really broken out. Frankly we have asked repeatedly for a -- a -- a detailed explanation of their belief of the cost they have incurred because of weather they could not have reasonably expected. But, they have not in their claim broken out weather versus labor. So I cannot give you a straight answer, a definitive answer on how much is labor and how much is weather. We would like to have that information, and we are pressing for that as well.

Okay. So they haven't itemized kind of the different areas of dispute.

No, they haven't, and we think that is something we definitely want to see.

Okay. Now if I could just get a little more color on some of your large customers in the economy. Have you had any that have actually shut down? I know in Janesville they had a big auto plant. I know that is not in your service territory, but have you had any big customers that have actually shut down that probably wouldn't come back when the economy comes back?

The only one that really comes to mind -- and this was announced actually about 18 months ago, there is a Delphi -- a major Delphi auto parts operations near Oak Creek that announced when Delphi went into bankruptcy some time in the past 18 months that they would be, as part of the reorganization, closing the Delphi plant, but that has really been close to idle now for six to eight months. Beyond that, we have seen production cutbacks virtually across the board. As I mentioned most dramatically with primary metal companies like foundries and specialty steel operations, automotive and automotive parts and paper, but beyond that, and, of course, the loss of two large paper mills in the second half of last year that permanently closed, the Niagara and the Kimberly Mills that were formally owned by Stora Enzo in eastern and northern Wisconsin, those two mills have closed. But Delphi and those two mills is about it. Everything else is kind of reduced production levels.

Okay. And then I was wondering on your O&M. It was up quite a bit, both in the fourth quarter and year to date, the other O&M. Is that related to maybe some reclarification due to Point Beach? Or are there other things going on there or what?

Allen will explain because there are a lot of moving parts because of the commission order and the recovery of regulatory assets and the amortization of the gains. So you really have to work your way through the pieces to get a clear picture.

Yes, in the rate case, Dan, and when I say the rate case, this would have been the case we filed in '07. New rates that were in effect the beginning of '08. We had increases in the ATC tariff, PTF lease costs, and amortization and recovery of other deferred costs. If you take all those three -- those three together, that was about $263 million which you will see in the O&M account. The other impact if you are looking at '08 versus '07. We had in effect a one-time recovery, if you will, of bad debt costs, which were $44 million in the -- in the first quarter of '08 that also runs through the O&M account.

So if you look at transmission PTF, recovery of deferred cost essentially that was $307 million. Then we had increase in O&M at the power plants and delivery area. That was $62 million. All that together $369 million. The nuclear that comes out so that's $120 million the other way and gets you roughly $250 million increase in O&M. Steve, you had one other factor.

Your question I thought also focused on fourth quarter. And if you remember, last year we sold the Point Beach plant in the fourth quarter. So on an annual basis, if you were comparing O&M as Allen said, we have these large increases for the regulatory items but offsetting that was reduction in the O&M for Point Beach. That lasted through the third quarter, but in the fourth quarter it's comparable on Point Beach. We didn't have that positive benefit as compared to the first three quarters so that's one of the key factors on why the fourth-quarter O&M looked even higher. Does that make sense?

That makes sense. Thank you. That's all I have.

You are welcome. Dan, we are going to send you some stuff to protect you from the groundhog bites. Not a good thing.

Oh, okay. Can't wait.

I bet you can't. Thanks, Dan.

Maury May with Power Insights, please state your question.

Actually Paul Ridzon asked both of my questions exactly, so thank you, Paul.

Well, you are welcome, Paul. You are welcome, Maury, thank you. That concludes our conference call for today, ladies and gentlemen. We appreciate you taking part. If you have any other questions, Colleen Henderson is available in the Investor Relations office, her direct line 414-221-2592. Thank you again and good afternoon.