威斯康辛能源 (WEC) 2009 Q3 法說會逐字稿

Good afternoon. Thank you for holding, ladies and gentlemen, and welcome to Wisconsin Energy's conference call to review third quarter 2009 results. This conference is being recorded for rebroadcast and all participants are in a listen only mode at this time. 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. After the presentation, the conference will be open to analysts for questions and answers. In conjunction with this call, Wisconsin Energy has posted on its website a package of detailed financial information on its 2009 third quarter results at www.wisconsinenergy.com. A replay of our remarks will be available approximately two hours of the conclusion of this call. And now I would like to introduce Mr. Gale Klappa, Chairman of the Board, President, and Chief Executive Officer of Wisconsin Energy Corporation.

Thank you very much. Good afternoon, everyone. And thank you for joining us on our conference call to review the Company's third 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 of General Counsel, Jeff West Treasurer, and Steve Dickson, 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 from continuing operations of $0.50 for the third quarter 2009. This compares with $0.64 for the same period in 2008. Now I'd 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. The 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.

Let's turn now quickly to the status of the two new coal fired units at Oak Creek. Unit 1 and the common facilities are now more than 96% complete and I'm pleased to report that a number of major milestones have been achieved in the past three months. You may recall on July 23, the main unit 1 boiler was fired successfully for the first time using natural gas. Since then our contractor, Bechtel, completed the steam blows, that's the process necessary to clean the thousands of feet of piping in the unit. Bechtel then connected the boiler to the steam turbine and on October 1 we rolled the turbine up to its full operating speed. On October 3, Bechtel successfully fired the unit on coal for the first time. The unit was synchronized to the grid on October 6 and generated its first power for export on October 7. During the past two weeks Bechtel has been tuning and testing the unit up to 150 megawatts or about 25% of full capacity. Now Bechtel is preparing to increase the load to over 300 megawatts and that milestone is expected to occur in the next few days.

Looking forward, Bechtel will continue to increase the unit load up to its full design capacity of 615 megawatts. The schedule then calls for performance testing during the month of December. These tests will demonstrate the unit's ability to meet the guaranteed efficiency rate, capacity and reliability metrics as well as compliance with various environmental standards. As for Unit 2, I'm pleased to report that progress during the past three months has been significant. Unit 2 at Oak Creek is now approximately 74% complete. This represents an advancement of nearly 20 percentage points since my last report to you at the end of July. The Unit 2 boiler has also successfully passed its first pressure test and Bechtel's near-term goals for Unit 2 are to complete the remaining piping and exhaust gas path on through the air quality control equipment.

As the work continues, Bechtel is targeting commercial operation of Unit 1 by the end of December and Unit 2 by the end of August 2010. Bechtel is slightly behind these target dates, but they continue to optimize their work schedule and believe that the target dates are still achievable. Of course as we get closer to commercial operation, each day of the schedule becomes more critical.

As you know, Bechtel filed a formal claim last December seeking relief under the construction contract. Bechtel cited a number of factors including weather conditions in the winters of 2006 and 2007, heavy rains in the spring of 2008 and what Bechtel believes to be changes in local labor conditions. The claim for the schedule and cost relief related to these factors totaled $413 million. Bechtel also stated its belief that the weather events constitute a force majuere. Now, as I mentioned on our previous calls, we simply don't believe there's a contractual basis for some of the claims that Bechtel submitted. For example, we disagree that Bechtel is entitled to cost or schedule relief as a result of alleged changes in the labor market. Further, we do not believe that Bechtel complied with the contractual requirements for filing the claims, and we disagree with a number of Bechtel's factual assertions. Bechtel also filed a $72 million claim for the alleged effects of changes and delays prior to the issuance of the full notice to proceed back 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, guaranteed date for Unit 1 and three months of relief from liquidated damages beyond the September 29, 2010 guaranteed date for Unit 2. We have, as you know, been unable to resolve our differences with Bechtel in nonbinding mediation. As reported to you last quarter, we initiated binding arbitration which is the final stage of the dispute resolution process called for under the contract. The three member arbitration panel is now in place and the parties are engaged in discovery. The arbitration is likely to be concluded in 2010 or early 2011.

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. Under the terms of the lease agreements between Wisconsin Electric and We Power, we are recovering based on a mix of debt and equity capital carrying costs as construction continues on the Oak Creek project up to the total budget for the project that has been approved by the Wisconsin commissions. We are allowed to recover our carrying costs up to the total budget for the project that has been approved by the Wisconsin commission. We believe our ability to recover cash carrying costs should be largely unaffected by a slight change in the construction schedule.

I would also like to reiterate an important point about the ultimate recovery of cost increases. We believe we have several layers of protection for recovery of our costs. So to conclude that an additional cost is not ultimately recoverable you would have to believe that the cost will not qualify for recovery under several opportunities. First, that any 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. And even if the cost is above the 5% ban, the cost was not caused by a force majuere event as defined in the lease agreements. And one more important point, liquidated damage payments will be due from Bechtel on Unit 1 unless it's determined that any days granted to Bechtel for schedule relief are equal to or exceed a delay in the schedule. Of course as we move forward, we'll provide you with updates on major developments through our SEC filings and on our scheduled earnings calls.

Now, turning to renewables. The state of Wisconsin, as you have heard, has a renewable portfolio standard in place that increases from 5% in 2010 to 10% in 2015 at a statewide level. The standard sets targets for each of the utilities using a historical baseline. Using that baseline, approximately 8.27% of our retail electricity sales must come from renewable sources in the year 2015. Meeting the aggressive 2015 target will require a mix of additional projects and short-term purchase power agreements. Of course with the completion of our Blue Sky Green Field Wind Farm last year, we took a major step forward 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 farm to date in the state of Wisconsin. It was completed under budget and ahead of schedule.

Last summer we also completed the purchase from FPL Energy of a new wind farm development site in east central Wisconsin. This site is called the Glacier Hills Wind Park. In October of last year we filed for approval to build on the site and our application was deemed complete in January of this year. That started a 360 day review process by the Public Service Commission. In May we also announced a conditional agreement with Vestas Wind Systems at an attractive price for wind turbines capable of producing approximately 162 megawatts. Last month, the Wisconsin commission issued the final environmental impact statement for the project. Technical hearings are now set to be held next week, November 2 in Madison, and public hearings for November 4. A final decision by the commission on our request for a certificate of public convenience and necessity should be made in January 2010. Assuming commission approval, the first full year of operation for Glacier Hills is projected to be 2012.

Then in September we also announced our plans to build a biomass fueled power plant at a paper mill site in northern Wisconsin. The paper mill is owned and operated by Domtar Corporation. Wood, wood waste, and sawdust will be used to produce 50 megawatts of electricity. We're fortunate to be close to significant forest lands that can be harvested in a sustainable manner. These forests have large amounts of wood waste that we can purchase to fuel the plant. As compared to wind, the clear benefit from an operational standpoint is that we will be able to dispatch the biomass unit. Our gross investment in this project is projected to be $250 million with a targeted in service date of 2013.

We're also considering a second project with similar size and timing. As you may know, the tax law provides through 2013 a tax credit of 30% that would bring the net investment we would make for each plant to about $175 million. We also plan to invest approximately $85 million to $90 million in 12-1/2 megawatts of solar with a target in service date for the initial solar projects of 2013. Of course, the proposed biomass and solar projects are subject to Public Service Commission review and approval.

As you know, construction is also underway 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 $960 million, including allowance for funds used during construction for the installation of wet flue gas desulfurization and selected catalytic reduction facilities. These controls are scheduled to be completed in 2012.

Now I'd like to cover the status of our various rate filings. The Wisconsin review of our electric, gas and steam rates is nearing the deliberation phase for the Public Service Commission. At the time of our last conference call, our electric rate request stood at $126 million. However, during the staff audit, the projection of our fuel costs for next year dropped by approximately $30 million. We agree with these new fuel estimates and this reduced our updated request in July to approximately $96 million or a 3.7% increase as compared to the rates that were in effect at the beginning of this year.

The commission staff is now estimating a 2010 revenue deficiency for our electric company of $62 million, again using that same lower fuel forecast. Then for our Wisconsin Electric gas utility, the staff has recommending a $1.2 million increase or about 0.25% and for our Wisconsin Gas gas utility, the staff position calls for a $10.1 million increase or about 1.25%. The staff recommended a range for the return on equity of 10% to 10.75% and used 10.75% to determine the revenue requirement for all the utilities. The staff further recommended a financial common equity range for Wisconsin Electric that was unchanged, a range of 48.5% to 53.5% with a test year average of 51%. For Wisconsin Gas, the commission staff recommended that the financial common equity range remain again unchanged at 45% to 50% with a 47.5% used for determining the revenue requirement. In September and October public and technical hearings took place on these cases. Briefings were completed actually this week. The next step in the process is commission deliberations and an oral decision which will be followed by a final written order. We continue to expect a decision and a written order this year with new rates to be effective January 1, 2010.

Turning now to our Michigan case. In July we filed a request to increase electric rates in Michigan by approximately $42 million. This request was driven by the need to recover our investment and our operating costs associated with the new Oak Creek units. We're proposing to implement this request in three phases. The first phase is for approximately $22 million and primarily reflects the commercial operation of the first Oak Creek unit. This increase is expected to occur in conjunction with the commercial operations of Unit 1. The second phase would occur when the Michigan commission issues its decision for the 2010 test year which is expected to be in July of 2010, assuming our request is approved. This amounts to an additional $16 million. Finally, if our request is approved when the second Oak Creek unit enters commercial service, a final amount, approximately $4 million, would become effective. Any amounts we would self-implement are subject to refund with interest. Our filing which was submitted on July 3 was deemed complete on August 3. Under Michigan law, the Commission must then issue a final order within one year of a complete filing or the requested rates go into effect. This morning, a limited hearing took place to discuss our implementation plan.

And finally, I'd like to briefly review a development that we announced literally just a few hours ago. Wisconsin Energy has reached a definitive agreement to sell Edison Sault Electric Company, one of our regulated utility subsidiaries, to Cloverland Electric Cooperative of Dafter, Michigan, for approximately $61.5 million. Under the agreement, the ownership share of American Transmission Company currently held by Edison Sault will be retained by Wisconsin Energy. The purchase price of $61.5 million represents a premium of about $2 million as compared to the adjusted net book value of Edison Sault's assets excluding the ATC ownership share. Then to assure a continuing reliable source of energy for Edison Sault's customers the existing wholesale power arrangement between Wisconsin Electric and Edison Sault will be extended by another 12 years to the year 2030. I believe this is a positive step forward for the customers of Edison Sault as well as our stockholders. The service areas of Cloverland and Edison Sault are contiguous. Both organizations know each other well and work together in fact on a daily basis. As a result, they'll be able to gain efficiencies that will benefit customers across this region of northern Michigan.

Edison Sault, by the way, has not requested a base rate increase in almost 25 years. Without this transaction, Edison Sault would have needed to request higher retail rates in the not too distant future. The combination of these two utility operations should allow these increases to be mitigated. The sale, of course, is subject to approval by Cloverland's membership and is subject to normal regulatory approvals and customary closing conditions. Assuming timely reviews, the transaction could be completed by mid year 2010.

And now I'll turn the call over to Allen who is fresh from a personal appearance in Lansing for more details on our financial performance for the third quarter. Allen.

Thank you, Gale. As Gale mentioned earlier, our third quarter 2009 earnings from continuing operations were $0.50 per share. I'll focus on operating income by segment and then I will touch on other income statement items. We will -- I will also discuss cash flows for the first nine months and discuss our earnings guidance for the remainder of the year. Our consolidated operating income was $105 million as compared to $138 million in the third quarter of 2008 for a decrease of $33 million. Operating income in our utility energy segment totaled $75 million which is $37 million lower than the third quarter of 2008. The most significant factors reducing our utility operating income were an unseasonably cool summer which reduced electric margins by approximately $22 million. In addition, we estimate that the economic slowdown lowered electric margins by $14 million and the timing of fuel recoveries reduced electric margins by $19 million.

On the positive side, our utility O&M was $11 million lower. Other pricing items contributed $4 million and all other items totaled a net $3 million. When we net all other factors together, we come to operating income that was $37 million lower than the third quarter of 2008. Non-utility operating income was up $4 million. The key driver of this increase related to a full quarter's earnings from the water intake system at Oak Creek that was placed into service in January of this year. Corporate and other affiliates had an operating loss of $3 million in 2009 as well as in 2008. Taking the changes for each of these segments together brings you back to the $33 million decrease in operating income for this quarter.

During the third quarter of 2009 earnings from our investment in the American Transmission Company increased almost $1 million and all other income increased slightly because of higher AFUDC and interest income. Interest expense decreased $1 million. Consolidated income tax expense declined by approximately $12 million, primarily because of lower pretax earnings. I expect that our annual effective tax rate in 2009 will be in the range of 35% to 37%. Combining all of these items brings you to $59 million of net income from continuing operations for the third quarter of 2009 or earnings of $0.50 per share.

During the first nine months of 2009, we generated $437 million of cash from operations on a GAAP basis which is down from the $643 million generated during the same period in 2008. While our net income and depreciation expenses were up, our cash flows from operations were down primarily because of the $289 million contribution to our benefit plans in January of 2009 which was discussed in prior conference calls. On an adjusted basis, our cash from operations totaled $587 million as compared to $924 million in the first nine months of 2008. The adjusted number includes $150 million of cash impact from the bill credits in 2009 and $281 million in bill credits and refunds in 2008. Under GAAP, the cash from the bill credits is reflected in the change in restricted cash which GAAP defines as an investing activity. From a management standpoint, we consider this a source of cash as it directly relates to customer bill credits, refunds, and the one time amortization of costs in 2008. Our total capital expenditures were approximately $556 million in the first nine months of 2009 which is down from $889 million in the first nine months of 2008. On an annual basis, we expect our capital expenditures to be $250 million to $275 million lower than 2008 capital expenditures as we move closer to the completion of our Power the Future construction program.

On a GAAP basis our debt to capital ratio was 58.1% as of September 30, 2009, and we were at 55.1% on an adjusted basis. This is essentially flat compared to our December 31, 2008, levels, even when considering the contribution to our benefit plans in January of this year. I would expect our debt to capital ratio to increase slightly by the end of this year as compared to last year. 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.

In the third quarter we continued to see the economic recession impact our electric sales. However, we have seen some stabilization of the decline in the third quarter. Our service territory has a well diversified industrial and commercial mix that helped mitigate the impact of domestic downturns. However, in this economy we continue to see large impacts in four sectors, iron ore mining, paper production, primary metals, as well as the automotive parts sector.

As we look at our large commercial and industrial group, we see a 13.6% decline in third quarter sales compared to the third quarter of 2008. However, this decline is smaller than what we saw in the first and second quarters. In addition, when we look at large commercial and industrial sales on a quarter over quarter basis, we clearly see some positive news. In 2009 we saw a 12.9% increase in third quarter sales over the second quarter. In 2008 the comparable data for the third quarter showed an increase of 2.2%. So while our sales are still down significantly from historical levels, we do see some strong evidence of stabilization in our service area.

During our first and second quarter calls we provided guidance on our annual 2009 electric sales forecast. I would like to comment on where we see our annual sales in light of the third quarter results. On a weather normalized basis, our third quarter sales came in slightly better than forecast. Retail sales came in about 6.4% less than the third quarter of 2008. We had expected a 7.7% decline. We also saw a slight improvement in our third quarter electric sales to our large commercial and industrial classes excluding our largest customer, the iron ore mines. While these results are promising, they are not so significant to adjust our annual sales forecast. We are maintaining our prior outlook for electric sales that called for an 8.5% decline in kilowatt hour sales in 2009 as compared to 2008.

In light of our actual results through nine months, we are keeping our earnings guidance for 2009 in the range of $3.05 to $3.15 per share. As we look back over the first nine months, we are coming in within our targeted range. While the economy turned out worse than we originally forecast and we were hurt by the cool summer, we were helped by a strong first quarter heating system and our fuel recoveries are better than budget. We have implemented strong cost containment measures during the year including a hiring freeze and a re-prioritization of work projects. If you take our actual year to date earnings from continuing operations of $2.24 and look at our annual guidance, you will come up with a fourth quarter earnings range of $0.81 to $0.91 per share which compares with actual 2008 fourth quarter earnings of $0.85 per share. With that, I will turn things back over to Gale.

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

(Operator Instructions) First up we have Dan Jenkins, State of Wisconsin Investment Board. Please go ahead.

Good afternoon, Dan.

Good afternoon.

Dan, it's Halloween coming up and I heard this rumor that they already had an arrest warrant made out in your name on Miflin Street, so good luck with that.

I'm leaving town. So they can't pin that on me.

Probably a good move, Dan. How can we help you today?

Just a few things. First, I was curious, I missed a couple of the numbers when you were going through the effect of the various changes like the cool summer and the various cost savings and so forth. I was wondering if you could give me the breakdown again.

That's never happened to you before, Dan. We'll be happy to go over the numbers.

Dan, on page 8 of the earnings package, if you could refer to that, retail sales as they relate to weather was a negative effect 2008 versus 2009 so that was $22 million. Fuel recoveries was a negative swing of $19 million. And then our estimate of the economic change in the economy our estimate of that effect on the retail sales was a $14 million swing, again negative. The other single largest item that was going the other way positive item related to O&M reductions. Really the big three negative factors were weather, economy, fuel recoveries, and again that fuel recovery is more of a timing within the year, but a difference nonetheless, and then finally O&M reductions were an $11 million positive swing.

Okay. On the O&M part of that, how sustainable are those savings going forward? How much just like deferral-type items?

There's a combination, Dan. Obviously, we have taken, as Allen mentioned earlier, we've taken very seriously the downturn and re-prioritized the work projects. Some of those work projects will have to be done eventually, there's no question about that. I would say a large percentage of the O&M savings that we've achieved has really come from head count reduction. If you look at the end of the third quarter a year ago and compare that with the end of the third quarter this year, our full-time equivalent head count is down 2.4%. We've reduced our head count by 1,000 people over the past five years. We continue to get productivity gains. We continue to get O&M savings. Some of the deferral of maintenance work will have to be addressed later down the road. And the other thing that Rick is pointing out to me, and he's absolutely right, the decline in the wholesale power market prices has allowed us to do things like not work overtime at the plants if we have a scheduled outage. So some of the savings that we have intelligently reaped here in O&M have been taking advantage of lower market prices in MISO.

Okay. I was wondering if you could update us on the amortization on the gains on Point Beach -- is that -- is next year the final year of that? And is it -- you kind of look at the long term and short term restricted cash. Is that kind of the extent of what that amortization will be going forward?

Let me first and then Allen will give you number detail. Let me first mention to you our proposal that is in our current rate case before the Wisconsin Commission would have all the remaining Point Beach credits delivered to customers during 2010. The current situation if the commission does not adopt our proposal would be that the bulk of the credits would be delivered in 2010 with the remainder in 2011. My guess is the commission will agree with us that all the remaining credits should be delivered in 2010. Allen.

Yes. From a cash standpoint, restricted cash if you will, yet to go back to customers, roughly $240 million worth of credits or restricted cash if you will that we would expect to go back to customers. And, as Gale mentioned, some of that will be in the fourth quarter of this year obviously as we continue to give credits and we would expect the remainder of those credits at least if the commission in Wisconsin follows our proposal to go back in 2010. Now, all of the FERC credits are done. We provided all of those last year. There's about $2.16 million of credits that are remaining in Michigan that I would expect will go back in 2010. Does that help, Dan?

Yes, that does. And speaking of the rate case, given items that you've agreed with the staff on and like fuel and so forth, how far apart are you and the staff now going into the end of this case?

Basically, the staff is at about $62 million in terms of their recommendation to the Commission. Our ask is at $96 so about a $30 million difference.

What's the primary reason for that?

Well, there are a couple of things. One is clearly on O&M. The other is on -- in terms of O&M spending, how much does the Commission think we should be increasing our O&M spending next year compared to what we have proposed. That's the biggy. There's another one and that relates to the settlement that we reached, oh gosh, a year ago with the environmental groups over the water intake permit at Oak Creek. As you may recall, we agreed with the environmental groups that we would fund some Lake Michigan water quality improvement projects, if you will, such as working on reduction of invasive species in the lake in return for the environmental groups dropping all litigation against the water intake permit. That agreement would call for spending $4 million a year only if the Commission so approves. The staff has recommended zero, so there's a $4 million annual issue as well right there. But the big two or three would be on how many additional O&M should be spent, particularly on network projects and plant operation and maintenance and then another one would be the $4 million a year related to this environmental settlement.

Thank you. That's all I have.

You're welcome, Dan. Take care. Thanks for your questions.

Next up we have Leslie Rich, Columbia Management.

Leslie, how are you doing today?

I'm doing great. I wondered if you could review again the liquidated damages portion of the Bechtel claim and how that likely plays out? You went through that sort of quickly. Like the liquidated damage payments would be due on unit 1 under what set of circumstances and on unit 2 under what set of circumstances?

We'd be happy to do that and if I miss a detail, Rick Kuester will add in his thoughts as well. Essentially, Leslie, as you know we signed a fixed price turn key guarantee contract with Bechtel. And in that contract Bechtel guaranteed they would deliver both unit 1 and unit 2 to us by a given date. The date for unit 1 that was guaranteed in the contract was September 29, 2009. Under the contract, if they don't make September 29, 2009, which they've obviously have not done, they would owe us $250,000 a day in liquidated damages unless there was scheduled relief granted to them for any number of very specific reasons. So essentially, unless there is scheduled relief granted at the end of this entire process, then Bechtel would owe $250,000 a day. Now, as you know, they've made a case for relief because of severe weather. Frankly, we think there's some merit to -- I mean they clearly were up against, for example, almost 100 inches of snow two winters ago. And I think both Rick and I and all of our experts agree that there may be some scheduled relief and, therefore, relief from some specific number of days of liquidated damages due to them, but all of that will get worked out in the arbitration process. Rick, anything to add?

Just to remind you what Gale had mentioned earlier is that Bechtel has asked for six months of relief so that would put them at the end of the first quarter of next year, for Unit 1 and three months relief which would put them at the end of next year for Unit 2. And the final determination of what is granted will be part of what is being arbitrated right now.

Oh, I see. So that cash won't actually exchange hands if any until the whole issue is resolved.

That is our current belief. That is correct.

Thank you.

Thanks, Leslie. Good question.

Moving on now to Jay Dobson Wunderlich Securities.

Hi, Jay. How's it going?

Very well, thank you. How are you doing, Gale?

Doing well.

Outstanding, Allen, question for you. Tax rate. You indicated it was 35 to 37 for full year 2009. When I look back at my notes that was a hard 37 in the second quarter. Can you help me understand what's moving that around in the balance for second half of this year?

Sure, why don't I ask Steve Dickson, our controller, to give you a little more light on that.

Yes. As you know, the effective tax rate takes in to consideration the permanent differences and as pretax income may change that may change the effective rate. There's nothing significant. We've got many taxes that are outstanding and some may settle. It's a lot of small items, and we just thought 35% to 37% made more sense than a hard number.

Got it. Would you expect that to pop back? When I look back historically, you have been closer to 37%. Would you expect 2010 is more like a 37% year? It is sort of like a $0.10 benefit or so if we take you all the way to the 35%.

Keep in mind, Jay, one of the things that's impacting our ETR right now and will continue to impact the effective tax rate are the production tax credits associated with the wind projects. Now, what happens under regulation effectively we're given those credits back. So on a net impact, I wouldn't expect an impact on the company. If you look at the ETR, the ETR would be slightly less than maybe what you've seen historically if I'm making sense.

Got it. No, no. That makes a lot of sense. Fair enough. On O&M, I was wondering going back to Dan's question if you couldn't put a couple of numbers around that and that's really to say what were the O&M cuts you would be able to quantify that comes from hiring freeze and your activities to manage costs for the first nine months of the year. And then if you can, obviously, not dollar number, but a percentage of those that would be sustainable and those that might not. And I'm understanding the majority of them are sustainable.

Just to frame it for you a little bit. Our O&M for the third quarter 2009 was 5% below Q3 of 2008 and for the year to date for the first nine months of 2009 we reduced O&M by 7.5% compared to the comparable nine months in 2008. Those are very significant numbers. Much of that, as I mentioned to you, much of that is coming from basically head count savings. We are materially -- we have frozen our hiring except for absolutely critical positions. We are at a point where I have to personally approve of any head count addition. We have been very firm about controlling and reducing our O&M and gaining some productivity but as we look forward we -- 2010 is a very different year from an O&M standpoint than 2009 because we'll be bringing on two coal fired units. We're going to have $20 million or more ammonia costs to operate the scrubbers at Oak Creek that we do not experience today.

Total scrubbers.

We've added them at Pleasant Prairie, we're adding them at South Oak Creek and obviously will have them at (inaudible) at the Oak Creek expansion.

So 2010 will look a good bit different simply because we're bringing in a major addition of capacity and comes with that several hundred well paid highly trained technicians and operators to operate the new Oak Creek units. Then you have basically the commodities like ammonia that you have to have to operate another catalysts that you have to operate the air quality control equipment. And we're also starting to hire people now. We will in our plan for later next year to operate the air quality controls that will be coming in on the existing Oak Creek units. We have to make considerable adjustments in 2010. Having said that, I do think we will continue to be very, very judicious about head count additions other than the people that we absolutely need to operate the units and the new air quality controls. I hope that's helpful to some degree. It's just not an apples to apples comparison going forward.

Got it. In to 2010. That's fair. And then last question on the Edison Sault sale. Right at book after tax proceeds will be about $61.5 million?

There is a book tax basis difference so after tax proceeds on a cash basis probably closer to $45 million to $50 million.

Thank you very much.

Okay, take care. Thanks for your questions.

We'll move on to Michael Lapides Goldman Sachs.

I'm okay. How are you all?

We're doing fine. We're hanging in there.

If I take the midpoint between what you've requested in the Wepco and Wisconsin Gas rate cases and where staff testimony is right now, can you earn your ROE in 2010 with a number like that and then, furthermore, if you're not getting a second increase in 2011, can you earn your ROE just at the core utility, not at PTF in 2011?

Instinctively I would say no because of the normal disallowances that any commission will apply. For example, any bonuses, the cost of any stock options would always be disallowed in most every rate case anywhere in the country and that would certainly apply here. I would think it would be if indeed our sales forecast is correct, I think it would be somewhat difficult to get right on top of the allowed rates of returns at the utilities themselves. Allen--

That's exactly right.

Do you know does that become, assuming a slight uptick in 2011 from 2010 demand, does that problem exacerbate in 2011 due to lag?

I wouldn't say so.

I don't think so.

I would hope that we would start seeing an improvement in the top line in electric sales in 2011. And as you're always try to do, continue to improve your cost position. So I would hate -- hope to be in a better position all things being equal on our ability to earn our allowed return in 2011 as compared to 2010.

I absolutely agree with that.

Thank you, guys, much appreciated.

Question now from Greg Gordon at Morgan Stanley.

Rock and roll, Greg. How are you?

Greg, you may be muted.

Hi, it's actually Bill Appicelli. Just had a question.

The better looking side of Greg Gordon.

I had a question as to what you are assuming for sales outlook for next year, given that you've seen the stabilization in sales this past quarter. Do you expect to see more deterioration or more of a flattish outlook?

Bill, it's really the latter being a flattish outlook. And I really had that view very consistently. We're looking at what we believe is a flat outlook for electric sales in 2010.

Weather normalized of course.

Still flattish.

Okay. And then on the Michigan rate case, the three steps that you outlined for us. Does that reflect self implementation as well or would those numbers move around if you chose to self-implement?

The three phases, phase one would be basically a self-implementation in conjunction with the commercial operation of Unit 1 at Oak Creek. And then phase two, again because of the way the new Michigan rules work, the Michigan commission has a full year to decide appropriate test year expenses and make a decision on the rate case. The way we have chosen to propose a phasing in of our request would be self-implementation for the first phase which is, about as I recall, is $22 million in conjunction with operation of Unit 1 at Oak Creek. And then in approximately July of 2010 we would think the commission would decide on phase two as well as then the phase three which would be about $4 million when the second unit at Oak Creek would come into service in the second half of 2010. Only one phase of the three would clearly be self-implementation.

Okay, thank you very much.

You're welcome, Bill.

We have a question from Paul Ridzon at KeyBanc.

Afternoon, Paul. How are you?

Fine, yourself.

Doing well.

What was the absolute fuel recovery in the quarter as opposed to quarter over quarter?

Steve Dickson will give that to you.

Third quarter it's typically where we under-recover because the incremental cost of fuel is higher. So in the third quarter of this year we had about $22 million of under-recovery compared to last year about $3 million. That's where you get the $19 million variance third quarter year-over-year.

And what's your forecast now for full year fuel recovery?

Modest over recovery of $15 million to $20 million.

Over recovery?

Yes, positive recovery position.

Gale - Do you like, the night before calls, do you think of what you're going to say to Dan?

Actually, Paul, I can attest. He makes it up on the call.

I think Dan practices his response overnight though.

Thank you very much.

Take care, Paul.

And we'll move on to a question from Andrew Levi at Incremental Capital.

Hi, Andy. How is it going up there?

Hi, guys. Good, thank you. The question I had was asked. I didn't hear the answer. Could you real quickly on the over and under recovery of the fuel for the third quarter and for the fourth quarter what the expectations are and what it was?

Andy - you remind me of Carnac, you define the answer without knowing the question. We'll ask Steve to go over that again.

Hopefully I'll be consistent. Third quarter this year under-recovered by about $22 million. Third quarter last year we under-recovered by about three million, a $19 million variance. As you look at the fourth quarter it will probably be $5 million worse as compared to last year if we're looking at the fourth quarter stand alone.

So total under recovery for the two quarters is about $27 million.

And remember, Andy, what really happened. 2009 second and third quarters, actually third quarter was the mirror image reverse of last year. We had just come off of getting a fuel cost recovery increase in July of 2008. And we have just reduced fuel rates and those reduced rates were in effect for the third quarter of 2009.

You reduced them like March 31 or something like that. Just kind of a reverse in the timing of fuel recovery swung the numbers. Got it. That's great. Sorry to ask the same question.

All right, thank you. And that I believe -- is there one more. We have one more.

And that comes from Paul Patterson at Glenrock Associates.

I'm afraid I got on just a little bit late and I did hear the comments about how the economy was stabilizing. And I apologize what you see for 2010 when you speak to your customers, your larger customers what your expectations are?

We'll be happy to answer that. I think the fundamental bottom line is when we talk to customers, and we do every day, they are very cautious about the outlook for 2010. And that has led us to basically assume a flat compared to 2009 weather normalized sales year.

Okay, great. I appreciate it.

You're welcome, Paul.

With that, we will conclude the question and answer session, and I will turn things back over to you, Mr. Klappa.

Great. Thank you very much. That does conclude our conference call for today. Thank you so much for participating. If you have any other questions, Colleen Henderson is ready and willing in our investor relations office at (414)221-2592. Thank you again. Bye, bye.