威斯康辛能源 (WEC) 2011 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to Wisconsin Energy's conference call to review 2011 year-end results. This conference call 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 statement, factors described in the Company's latest Form 10-K and subsequent reports filed with the Securities and Exchange Commission could cause actual results to differ materially from those contemplated.

During the discussion, referenced earnings per share will be based on diluted earnings per share, unless otherwise noted. 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 at www.wisconsinenergy.com. A replay of our remarks will be available approximately two hours after the conclusion of this call. And now it's my pleasure to introduce Mr. Gale Klappa, Chairman of the Board, President, and Chief Executive Officer of Wisconsin Energy Corporation.

Colleen, thank you. Good afternoon, everyone. Happy Groundhog Day. I can tell you that the tundra is not frozen. But we appreciate you joining us for our review today of the Company's 2011 year-end results. Let me begin, as always, by introducing the members of the Wisconsin Energy Management team who are here with me today. We have -- Allen Leverett, President and CEO of We Generation; Rick Kuester, our Chief Financial Officer; Pat Keyes is serving as our Treasurer; Steve Dickson, Controller; and of course, Jim Fleming, our General Counsel.

On a personal note, this is the last time that Jim will be officially sitting in on our conference calls. After a long and productive career, Jim has decided to retire. He has done a truly outstanding job as our General Counsel over the past six years, and we will miss him. But we understand that his lake house and his classic Corvette are calling. Jim, our entire team wishes you and Kay godspeed as you open a new chapter of your life.

Thank you.

You're welcome. Thank you, Jim. Rick 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 $2.18 a share for 2011. This compares with earnings of $1.92 a share for 2010. A number of factors contributed to our strong performance in 2011, including earnings from our Power the Future assets. As you will recall, our second expansion unit at Oak Creek began commercial service in January of 2011. We also recorded equity AFUDC related to the air quality control upgrade at our older Oak Creek units and the Glacier Hills Wind Park. Overall, we are very pleased with our financial and operational performance in 2011. We exceeded our customer satisfaction goals, we achieved the best safety record in the history of the Company, and we were named the most reliable utility in the Midwest for the seventh time in the past 10 years.

Turning now to the economy of our business area, Wisconsin's unemployment rate, at 7.1%, remains well below the national average. And after a nearly double-digit rebound in 2010, electric sales to our large commercial and industrial customers rose by 0.3% in 2011. The demand destruction that we saw from five large plant closings during the recession is now being largely offset by modest growth and recovery in other sectors of the region's economy. For example, we continued to see strength in specialty steel and metal fabrication, paper and printing, and industrial machinery.

Now, I would like to update you on three of our significant construction projects -- the 50-megawatt biomass plant in Northern Wisconsin, the Glacier Hills Wind Project northeast of Madison, and the air quality control upgrade at the original Oak Creek units. We are making, I'm pleased to say, excellent progress on the biomass plant in Rothschild, Wisconsin. The foundations for the boiler and fuel storage buildings are now complete, and we are well underway on steel erection for the boiler and the fuel storage facility. As I've noted before, the biomass plant will help us diversify our renewable energy portfolio. We'll be able to dispatch the unit, and the efficient technology that will be used to produce steam for the paper mill will clearly enhance the economics of the project.

Our investment in the biomass plant is expected to total between $245 million and $255 million, excluding AFUDC. We are on schedule and on budget to meet a completion date by the end of 2013. I'm also pleased to report that on December 20, 2011, the Glacier Hills Wind Park was placed into commercial service. Glacier Hills is a 162-megawatt energy center located on more than 15,000 acres of rolling farmland, about 45 miles northeast of Madison. It is the largest wind farm in Wisconsin. The completion of Glacier Hills on time and actually better than budget was achieved largely through the talents of Wisconsin labor and Wisconsin companies. When all the costs are finalized, we expect the project to come in below the target of $363.7 million that was set by the Wisconsin Public Service Commission.

The $363 million target does not include allowance for funds used during construction or reimbursable transmission costs. Of course, the biomass project and the Glacier Hills Wind Park are key components that will help us meet Wisconsin's renewable portfolio standard for the year 2015. To refresh your memory, the standard calls for an increase in the amount of electricity produced by renewable sources, from 5% in 2010 to 10% in 2015 at a statewide level. The standard then sets targets for each Wisconsin utility using an historical baseline. Using that baseline, approximately 8.27% of our retail electricity sales must come from renewables in 2015. When we complete the biomass project, it will be well-positioned to meet that 2015 standard.

I should point out, however, that we expect to deplete our bank of renewable credits; and as a result, we project a need for additional credits or renewable generation by the year 2017. Finally, we are nearing completion of the air quality control upgrade for the original coal-fired units at Oak Creek. These four units are among the most efficient base load units anywhere in the Midwest. So, the economic solution for our customers was to invest approximately $900 million, including allowance for funds used during construction, for the installation of wet scrubbers and selective catalytic reduction facilities.

Overall, the project stands today at about 94% complete. The tie-in work for unit five has been finished, and tuning and testing of the equipment is well underway. The tie-in outage for unit six began in early January, and the tie-in work for units seven and unit eight are on schedule for this spring. We expect the new air quality controls to be fully operational this year, and we remain on budget. Again, at a cost of approximately $900 million, this is the second-largest construction project in our history.

Now, I would like to briefly review where we stand on the regulatory fronts in Wisconsin and Michigan. We are pleased that there will be no increase in rates for electric customers in Wisconsin in 2012, as a result of the actions taken by the Wisconsin Commission. As we reported to you on our last call, the commission in October approved our creative approach to keep base rates flat for customers as the economy here continues to recover. To recap, the rate plan approved by the commission authorizes us to suspend the amortization of $148 million of regulatory assets in 2012. Then the plan authorizes us to recover $148 million of carrying costs and depreciation for the air quality controls at Oak Creek and the Glacier Hills Wind Park.

And on January 5 of this year, the commission issued an order for our 2012 fuel plan, improving an increase in the fuel cost recovery rate for the year. However, that increase will be offset by a credit -- a credit of $26 million, representing proceeds that we received from the settlement of spent fuel litigation with the Department of Energy. As a result of these two decisions, there will be no base rate increase or no fuel increase for our retail electric customers in Wisconsin in 2012. It's also important to note that we have the authority to file a full rate case in 2012, for new rates to be effective in January of 2013. We are finalizing the details of the case now, and we expect to file with the commission in late March.

Turning now to our Michigan operations, you'll recall that in July of last year, we filed a request with the Michigan Public Service Commission for an annual rate increase of $17.5 million. We're seeking to recover from Michigan customers their pro rata share of renewable generation, environmental controls, and costs associated with the second expansion unit at Oak Creek. In late December, the commission directed the Company to self-implement a $5.7 million increase that took effect on January 5. The commission's directive also authorized the Company to implement a $2.7 million credit -- again, of proceeds we received from our settlement with the Department of Energy. Applying the credit, the net effect of the interim rate increase for customers in Michigan is $3 million, or 1.7%.

We expect the Michigan Commission to rule on our entire request by July 5 of this year. In addition, approximately $2 million of renewable costs were included in our Michigan fuel recovery rate that took effect on January 1 of this year. So, the total self-implementation comes to $7.7 million.

On another important matter, the Environmental Protection Agency, as you are aware, issued on August 8 its final cross-state air pollution rule, commonly known as CSAPR. Subsequently, a number of parties, including Wisconsin Electric, petitioned the federal court and the EPA to delay the rule to ensure that it would be implemented in a fair and reasonable manner.

In late December, the Circuit Court of Appeals in Washington DC stayed the CSAPR rules that were scheduled to take effect on January 1. The court noted that petitioners had raised significant questions about potential flaws in the new rules that govern emissions of sulfur dioxide and nitrogen oxide. The court indicated that the EPA should continue to administer the Clean Air Interstate Rule, better known as CAIR, pending the resolution of these issues that have been raised. Of course, in light of the major investments we have made over the past decade in efficient new generation, and air quality controls on our older base load units, we believe we are very well-positioned to comply with CAIR and with any revised CSAPR rules. We will keep you posted as developments occur in the case.

On a related note, in early January, we announced that we are exploring a potential joint venture opportunity at our Presque Isle power plant in Marquette County, Michigan. Our partner in this potential joint venture is Wolverine Power Cooperative, a large Michigan-based co-op. Now, given our current base load capacity position, we do not believe that it would be economic for our customers to fund the capital that would be necessary to meet likely new environmental regulations -- regulations that would impact the coal-fired units at Presque Isle. However, Wolverine needs base load capacity, and so we are jointly exploring the possibility of Wolverine investing in major new air quality controls at Presque Isle in exchange for an undivided interest in the plant.

Now, to be clear, if this joint venture moves forward, our ownership of the plant would be reduced, but we would not expect a reduction in rate base. We believe our customers would see lower operating costs from the plant, because Wolverine's customers would pick up their pro rata share of the cost of running the units. Based on our analysis to date, the joint venture would be beneficial to our customers and Wolverine's customers; but significant work, including a full engineering analysis, must be performed before we can proceed.

I would add that the proposed joint venture would not materially affect our capital spending budget for the years 2012 through 2016, because we were not planning to add significant air quality controls at Presque Isle. I also would like to emphasize that regardless of the decision about the future of Presque Isle, the electric transmission network that supports the Upper Peninsula of Michigan must be improved, both to maintain reliability and allow for economic growth.

Turning now to other material developments, as we reported in our third quarter 10-Q, the Company has been working through a legal issue regarding our cash balance pension plan. In November, we entered into a settlement agreement with the plaintiffs, and the court promptly issued a preliminary order approving the settlement. Our fourth-quarter results include a charge of less than $0.04 a share, to reflect our final costs for the settlement. We do not expect to occur any additional charges, other than minor process-related costs as the settlement is implemented.

Finally, I would like to update you on a recent development concerning accelerated depreciation of the investment in our Power the Future assets. In late December, the Internal Revenue Service confirmed that accelerated depreciation can be applied to our recently completed expansion units at the Oak Creek site. Now, as a result of this ruling, we expect to see a $285 million cash timing benefit by the end of 2014. In the financial forecast that we provided you and made public in November, we had assumed a $250 million benefit. Now, this timing item will not impact the deferred tax balance at our utilities, so this latest development will not affect the rate base of our utilities. The cash, though, from accelerated depreciation will help fund the higher level of investment we are projecting in our five-year capital spending plan.

As you know, we have identified several important projects -- projects that are necessary to upgrade the aging gas and electric distribution infrastructure across the region. Secondly, we plan to continue reducing our debt levels at the holding company, in order to maintain strong investment-grade credit ratings and keep our borrowing costs low. And as you may have seen from our news release a couple of weeks ago, our Board has now adopted a revised dividend policy that calls for us to reach a 60% payout ratio in 2014. That is one year earlier than previously expected. This new policy should support double-digit growth in the dividend in both 2013 and 2014, as we work to achieve a payout ratio that is more competitive with our peers across the electric utility industry.

Of course, our Board of Directors took a major step forward last month by approving for 2012 a dividend increase of 15%, bringing our annual dividend rate to $1.20 a share. I would also like to address the status of our share repurchase plan. Essentially, there is no change in our share buyback program. As we previously discussed, the Board has authorized a share repurchase plan, scheduled to run through the end of 2013, that calls for us to buy back up to $300 million of Wisconsin Energy common stock through open-market purchases or privately negotiated transactions. Through today, we have repurchased approximately 3.2 million shares, at an average purchase price of $30.79 a share.

So, in summary, we enter 2012 in excellent condition, financially and operationally. The Company continues to perform at a high level, and our Power the Future investments are providing tangible benefits for our customers and our stockholders. And now, with more details on our full-year financial performance for 2011 and our outlook for the year ahead, here is our Chief Financial Officer, Rick Kuester. Rick?

Okay. Thanks, Gale. As Gale mentioned earlier, in 2011, our full-year earnings from continuing operations were $2.18 a share. I will focus on operating income by segment for the year, and then touch on other income statement items. I will also discuss full-year cash flows and cover our earnings guidance for 2012. Our consolidated operating income for 2011 was $887 million, as compared to $810 million for 2010 -- an increase of $77 million. Operating income in our Utility Energy segment totaled $545 million, which is down $19 million from 2010.

Looking at our Utility segment, our electric margins were helped by approximately $14 million because of pricing increases at the wholesale level, and also in our Michigan jurisdiction, primarily to recover costs associated with our Power the Future plants. In addition, we saw growth in our Electric sales, which added approximately $10 million of operating income. When we look at weather, we estimate that our operating income was reduced by $13 million as compared to the prior year. During 2011, we experienced normal winter weather, which helped our gas business as compared to 2010. On the Electric side, we experienced a hotter than normal summer, but 2010 was even warmer, so, we actually saw a reduction in our earnings due to weather, compared to 2010.

We also saw increased non-fuel operating and maintenance costs totaling $26 million, as we released dollars in our Generation business for a turbine overhaul, in our Distribution business for forestry work, and higher Power the Future costs related to our wholesale and Michigan customers. These factors, combined with $4 million of other net items, resulted in the $19 million decline in Utility operating income. Our operating income in the Non-Utility Energy segment, which includes We Power, came in, as expected, and was significantly higher than the prior year, primarily because of earnings associated with the second expansion unit at Oak Creek. Unit Two achieved commercial operation in January of 2011 so there were no earnings associated with that unit in the prior year.

We also had a full year of earnings from the first unit, as compared to 11 months of earnings in 2010. The result was a favorable impact of approximately $97 million on our 2011 operating income.

Taking the changes for these two segments, together along with corporate charges and other miscellaneous items, brings you to the $77 million increase in operating income for the full year.

During 2011, earnings from our investment in American Transmission Company totaled nearly $63 million, or a $3 million increase over 2010. Other income increased by $23 million, primarily because of higher AFUDC on our Utility construction projects, including the air quality control system for the older Oak Creek units and the Glacier Hills Wind Park. AFUDC, of course, allows us to accrue a return on these approved Utility projects during construction.

Our net interest expense increased by $30 million because of two main factors -- first, when the second unit at Oak Creek achieved commercial operation, We Power issued $420 million of long-term debt, to replace short-term debt that was used to finance the construction of unit two; second, once unit two achieved commercial operation, we no longer capitalized interest on the construction work in progress. Our capitalized interest was almost $26 million lower in 2011, as compared to 2010. While we saw higher interest expense at the We Power level, our holding company interest expense declined, as we retired $450 million of 6.5% long-term debt on April 1 of 2011.

In addition, we were able to take advantage of the low interest rate environment in September of 2011, when our Wisconsin Electric subsidiary issued 10-year bonds with a coupon rate below 3%.

Consolidated income tax expense increased by approximately $14 million, because of higher pretax earnings offset by a slightly lower effective tax rate. The lower effective income tax rate was primarily driven by higher levels of equity AFUDC. For 2012, we expect our effective tax rate to be between 36% and 37%, which is consistent with the expectation of lower equity AFUDC. Our effective tax rate in 2011 was 34%. Combining all of these items brings you to $513 million of net income from continuing operations for full-year 2011, or earnings of $2.18 per share.

During 2011, we generated $993 million of cash from operations, which is up $183 million from the same period in 2010. Our strong cash flows were driven by higher net income and higher deferred income tax expense, primarily as a result of accelerated depreciation rules. We estimated that deferred income taxes had a positive cash impact of $430 million, and we created a deferred tax asset which we expect will reduce future cash taxes by $328 million. Our 2011 operating cash flows were reduced by $277 million because of contributions to our qualified benefit plans. No such contributions were made in 2010, and we do not plan to make contributions in 2012.

Our total capital expenditures were approximately $831 million in 2011. About $792 million of this was dedicated to our Utility businesses, which included the Glacier Hills Wind Project and the air quality control project at the old Oak Creek units. We also paid $242 million in common dividends in 2011, which was approximately a 30% increase over 2010. Consistent with our dividend announcement in January 2012, we expect to pay approximately $279 million of dividends in 2012. Also, as Gale mentioned, in January our Board approved a plan that calls for us to reach a 60% dividend payout ratio beginning in 2014.

On a GAAP basis, our debt-to-cap was 57.1% as of December 31, and we were at 54.4% on an adjusted basis. These ratios are slightly higher than our December 31, 2010 levels of 56.9% and 54.1%, respectively, but were better than planned. The adjusted amount treats half of our hybrid securities as common equity. We expect the 2012 ratios to be in line with the 2011 ratios.

Consistent with our past practice, 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.

As we discussed in the past, our Board of Directors authorized a share repurchase program that allows us to repurchase up to $300 million of common stock through 2013. As Gale noted, through today we have repurchased approximately $100 million of our common shares at an average price of $30.79 a share. As shown in our earnings package on our website, our actual 2011 retail sales of electricity decreased 0.5%, as compared to a hot 2010. On a weather-normalized basis, 2011 retail sales, excluding the mines, increased 0.4%. This is better than the 0.6% weather-normalized decline we had forecast for 2011.

Overall, for 2012, we are projecting to see a slight decline of 0.6% in weather-normalized electricity sales, excluding the mines, versus normalized 2011 sales. This includes the loss of sales due to two customers installing their own self-generation. Adjusting for this, we project that sales, excluding the mines, will grow by 0.4%. We also project flat residential sales, with low housing starts and continued conservation efforts. We expect to see continued moderate growth in the small commercial and industrial class; and we are forecasting the large commercial and industrial class, excluding the mines, to decline by 2.4% due to the installation of self-generation. Excluding those customers and the mines, the large commercial and industrial class is expected to grow by 0.5%.

I will now discuss our earnings guidance for 2012. We estimate our 2012 earnings from continuing operations will be in the range of $2.24 to $2.29 a share. As we look at our businesses, we expect to see growth from our Utilities, slight growth at We Power and lower costs at the corporate level, due to reduced interest expense and our share buyback program. As we look at our Utility business, you will remember that the Wisconsin Commission approved our proposal to avoid price increases in 2012 by ceasing the amortization of $148 million of costs associated with regulatory assets. So, we expect to see a reduction in our O&M cost with the one-year amortization holiday.

Also, we expect increased depreciation expense and lower AFUDC when the air quality control project at the older Oak Creek units is placed into service. Due to the rate case decision and the timing of fuel recoveries, we expect that first-quarter earnings in 2012 will be in the range of $0.75 to $0.78 a share. This includes the effect of warmer than normal weather in January. Finally, I would like to reiterate that we are targeting a long-term earnings per share growth rate of 4% to 6%. With that, I will turn things back over to Gale.

Rick, thank you very much. Overall, we are on track and focused on delivering value for our customers and our stockholders.

(Operator Instructions) Greg Gordon, ISI Group.

It's actually Bill. We had a question about your comments on the dividend.

Sure.

I guess you said you are pulling forward, you are targeting the payout ratio for 60% by 2014 now?

That is correct.

Right. And you are saying that that would imply a double -- so, the question is, you said that you were targeting a 60% payout ratio by 2014, and that that implied double-digit growth, percentage growth, in the dividend between now and then. Is that an accurate regurgitation of your comment?

You done return regurgitate well.

Okay. So, we can infer from that that there is sort of a minimum level of expected earnings growth over the course of the next two years, if we just do the algebra on what that means in terms of your earnings power?

Yes. We thought you might like to do your own math, but you are correct.

Thank you, Gale.

Jim von Riesemann, UBS.

Couple questions, if you don't mind. The first one is -- can you talk about what is happening in the state politically, with these Governor Walker recall efforts, and if there is any updated status on the generation buy from the state?

Sure, I would be happy to, Jim. By the way, were you out there with Punxsutawney Phil this morning?

No.

(laughter) Well, the state political situation -- it does certainly appear that we are headed for a recall election. Right now, the Government Accountability Board and the state is parsing through approximately 1 million signatures to determine how many of those signatures are valid signatures, petitioning a recall. That is going to take some time. In fact, the Government Accountability Board has asked for more time, and the court has provided them more time.

So, the best guesstimate now is that we would have a recall election sometime between April and June of this year. In the meantime, as you can about imagine, the airwaves are full of political commercials on both sides. We don't expect any significant legislation, and certainly nothing affecting energy policy, to be dealt with or debated over the course of the next few months. And if indeed there is going to be a piece of legislation that would authorize the sale of some of the state-owned power plants, that would not occur, certainly, until the fall.

Okay. Just a quick order of reference here -- what is the threshold for either he stays or he goes, in terms of the vote count? Simple majority?

Oh, no, it's simple -- 50% plus one vote.

Okay. Second question is more for Rick. On -- if I heard you correctly, you said 3.2 million share buyback, roughly at $31 a share or just under that, is that right?

$30.79.

Okay, so that is $100 million. But the cash flow statement that you released today says you had a decrease in repurchased stock of about $140 million. What is that $40 million delta?

I will let Steve Dickson, our Controller, go through that, Jim.

Yes, thanks, Jim. And that item is consistent with [item] that we have had in past years. When stock options are exercised, we take the proceeds of the stock options and then go to the open market and buy back stock. So, the delta between the $100 million and $140 million is cash that we used to buy back our own shares, to satisfy stock options and other stock awards.

Okay. Just double-checking. And then, the last question is on pension -- are you prepared to talk about your revised discount rate assumptions, your plant asset returns, at this point in time?

Well, we certainly made them public. Let me state first that we made, as Rick mentioned, a $277 million contribution to our benefit plans during 2011. And when you look at our funding position against our liabilities, we are very, very well-positioned. We are also quite conservative in terms of our -- at least in terms of our industry, in terms of future asset growth. Steve, do you want to give a shot there?

Also, I think we have a conservative asset mix.

Yes.

Overall, we have a very conservative program. But Steve, go through the details.

Yes, we worked with our actuaries to get the year-end discount rate, and it's just 5.05%. So, that is what we have the liabilities valued at. As Gale said, our expected return on assets remains the same, at 7.25%. And then, the actual returns were about 2.5% in 2011.

Okay. I will follow-up with you on some other questions after the call.

Okay.

Michael Lapides, Goldman Sachs.

Couple of questions -- first of all, can you walk us through, going forward -- so, let's say, what is embedded in your 2012 guidance, for cash flow -- for basically deferred tax-related cash flows, whether it's from Oak Creek, whether it's from PTCs, but those that accrue back to the holding company or the shareholder and don't necessarily go to a reduction in rate base. I'm probably more thinking about the PTF units than I am about the bonus [D&A] that Utility recognizes. But if there is a way to just quantify how much cash gets upstreamed, that is related to deferred taxation?

All right. We are all thinking about how to make that calculation quickly for you.

We can -- if that is a pain, we can follow up offline. My other one is CapEx. It seems a little unusual that your CapEx going up -- but it's not -- meaning from earlier 2011 guidance ranges --

That is correct.

But your load growth is pretty -- like a lot of parts of the Midwest, relatively anemic versus history.

Correct.

That strikes me as an unusual dichotomy, and could you walk through some of the drivers of that?

Oh, sure. In fact, I think it's a good question, but a very straightforward answer. The additional CapEx spending -- and let's kind of reset that. Our 2011 through 2015 plan called for about $3.4 billion of capital spending. Our 2012 through 2016 plan is about $100 million increase, at $3.5 billion. The difference between the two rolling five-year plans, Michael, is really replacement of aging infrastructure. We have, as I have mentioned in the past, we have aging underground lines, we have aging power poles, we have aging substation transformers. So, we have -- we really need to maintain the reliability that our customers have come to rely on and deserve. We need to spend more capital on replacement of aging electric and gas distribution infrastructure. That is the big difference.

Okay. And how are you guys thinking about O&M next year, relative to -- meaning in 2012, I guess that is this year, relative to 2011 levels?

Two answers to that, because the second answer is very important to make sure you can follow our financials as we go through the year. First answer is that, on an operating basis, we are projecting our O&M to be basically flat. However, you will see a reduction when we report earnings in the first quarter and subsequent quarters. You will actually see a reduction in O&M because of the amortization holiday in the rate case.

And can you quantify that?

$148 million.

Got it, okay. It's the full amount. So, it's -- we should look -- think about a $148 million, year-over-year reduction in O&M? No -- actually, that is not true, that's right. I got it. I will follow up. Colleen and I touched on that this morning.

Okay.

Paul Patterson, Glenrock Associates.

A couple questions have been asked and answered, but just wanted to touch base with you on the rate base growth. And just a question that Michael asked about the weak, anemic growth. How do you guys see customer rates? I know you guys are focused on keeping them as controlled as possible. Going forward, with this CapEx buildout and with this anemic growth, kind of considering that you have to do this CapEx adjustment, and there doesn't seem to be that much growth?

Paul, one more time. I'm not sure I actually followed --

Okay. You guys have a considerable amount of CapEx that you are going to have to -- in terms of replacing the aging infrastructure.

That is correct.

And it sounds like sales growth isn't all that robust.

That is correct.

And so, I'm wondering -- I know that you guys are very proactive in keeping rates as manageable as possible.

Right.

But how should we think about the rate trajectory, fuel excluded, going forward?

Well, that is a good question. I appreciate the clarification. First of all, for rates that would go into effect in 2013, if you recall, we basically have deferred a rate case for a year. And I mentioned our customers will see no increase, either in fuel costs or in base electric rates during 2012.

But that deferral for a year means that we have put off a rate increase request that is largely driven by capital we have already spent on important projects that either are coming into service now or are already in service. We have three major projects that will be the drivers of our 2012 rate request for 2013, and that is -- the air quality control, the $900 million that we are spending on the air quality control upgrade at the older Oak Creek units, the Glacier Hills Wind Park, and then the ongoing construction costs at the Rothschild biomass plant that would come into service in late 2013.

So, those three factors, those three major construction projects all approved by the commission, will be big drivers for our 2012 rate filing for 2013 rates. And that will be, obviously, a sizable rate increase with the filing that we will make in the spring. Beyond that, I would think we would be looking at 3% to 4%, 3% to 5%, something in that range. But we would hope 3% or 4% base rate increases, absent fuel, going forward, once we get this rate increase behind us.

Okay. And just the magnitude of the rate increase that we are looking at for 2013 potentially? Or is it too early to say, considering that you haven't -- are we too early in the process?

No, we are finalizing the details of that case now, and it would probably be in the neighborhood of 6% to 7%.

Okay.

And we said it was going to be in the same neighborhood as -- what we filed for last year was in that 6% to 7%.

Right. I think last year our filing was 6.6%, wasn't it?

Right.

Okay, if we had a traditional case, it would be that amount. But we will put this off for a year.

I got you. And then, also, you mentioned self-generation. And if you could just elaborate a little bit more on the customers and if that is a unique situation, or what is sort of driving that?

I don't see it being a widespread situation at all. One is a -- one of the organizations that is moving a bit towards self-generation is a sewage -- metropolitan sewage district, and the other is a paper mill.

One is using landfill gas, which is -- there is limited availability of that. And the other paper mill is just -- it's a biomass project. So, I think they are fairly unique, as Gale says.

Okay. Okay, great. Thanks a lot.

Paul Ridzon, KeyBanc.

A question -- to follow-up on Jim von Riesemann's question about the discrepancy on the buyback versus the $140 million on the cash flow statement. So, you get this $40 million in, and then you spend it on buybacks. Where does it show up coming in on the cash flow statement?

I'm not sure you are describing that quite accurately. We are -- remember that we are using cash -- forget about the buyback for a minute. We have historically here, ever since our Management team has been in place, we have used cash to satisfy Company obligations related to stock options exercises, 401k plans, other stock grants that might be made during the course of the year. So, you really have to look at two pieces -- the dollars spent on share buyback, and then, what was -- what the amounts were related to those plans. Steve?

Yes. Just to add on to that, we haven't released the 2011 K, but if you go back to the 2010 10-K on our cash flow statement, we break out these two items. On our cash flow statement for 2010, we received cash proceeds of $91 million from people exercising stock options. So, we got the $91 million, and that was cash flows coming in. And then, we repurchased the stock on the open market, and that was $156 million. So, last year, we were net out $66 million. Does that make sense?

Understood. Thank you very much.

Okay.

You're welcome.

And then, in your '12 guidance, what is your assumption with regards to over- or under-recovery of fuel?

I believe in our '12 guidance, we are still assuming some modest under-recovery of fuel.

Correct.

And then, lastly, relative to guidance at the end of the third quarter, I think weather was probably more mild than you expected. And then, you had this $0.04 pension settlement, yet you boosted the top end of the guidance.

Right. Is there a question there?

(laughter) It's a question and a statement.

Well, I will take your congratulations, and I appreciate that. Well, one of the things -- obviously, we had continued effective cost control across the Company. Weather did hurt us in the fourth quarter, by about $0.04 a share. But the big drivers for the fourth quarter were really the equity AFUDC that we continued to accrue related to the major projects, the fact that we had a full quarter of Oak Creek 2, where we did not -- Oak Creek 2 was not in service during fourth quarter of 2010. And then, weather was a negative factor.

But you would have known about the AFUDC and Oak Creek, correct?

That is correct. Yes. We knew about the AFUDC and Oak Creek and Glacier Hills. And as I say, we had very effective cost controls across the Company.

Okay. Thank you.

Jay Dobson, Wunderlich Securities.

I was hoping -- we went through a lot of this, but hoping we could drill down a little bit into some of the residential trends you are seeing, and appreciate that weather makes it a little difficult to look through this particularly in the quarter. But if we looked at the full year, is there more energy efficiency? Is this just austerity? I guess what I'm trying to get at, from your internal projections, is the economy -- well, if the economy accelerates, would you anticipate recovery in your residential segment?

It's very hard to tell. We don't have enough good data, in my mind, to be able to say concretely what really is driving the residential class. I have a theory that could be wrong, and that is -- the limitations of weather-normalization techniques. We had a very, very -- we had an unusually warm summer in 2010. We had another warm, but not as warm, summer in 2011. Both summers above normal.

So, the numbers we are reporting to you, in essence, are weather-normalized data. And I still have some concern about the limitations, just of the weather-normalization techniques and the impact that that is having on our reported data. If we have a normal summer this year -- I hope it's hot as all get out. But if we have a normal summer this year, I think we will be able to tell much better what is going on. There is no question -- and I have mentioned this to you before, there is no question that in the shoulder months, when it is easy to conserve, we are definitely seeing more conservation. We are not seeing more conservation when it's 95 degrees on the lakefront or when it's 20 below.

Got you. But so I understand -- your suggestion is the weather-normalization calculation is understating what is otherwise your weather-normalized growth?

That is my theory. And we will have to wait for more data to prove whether I'm right or wrong. Now, for what it's worth, another reason why I have some confidence in that theory, is that we are seeing better than expected growth in small commercial.

Got you. Okay. And then, Rick, on [holding company] interest, how should we think about the balancing act of retiring common stock and the growing dividend, and your desire to reduce holding company debt over time?

Yes, it's -- obviously, it's one of the key priorities we have, in terms of uses of cash, Jay. What we will look at is the economics of retiring holding company debt. We have some 2033s out there that right now would not be economic. We will continue to look at that. I would say we are probably a couple of years out from any big movement right now.

And Jay, Rick is absolutely right. Just to add on to that, our whole theory and practice here is -- invest in solid utility projects that are needed for the region; maintain our credit metrics, which means we continue to delever a bit; and then, if there is extra cash, use that cash in the way that best benefits shareholders from an after-tax return standpoint. So, that is our whole approach to the next several years.

Nope, that is perfect. I appreciate it. And then, the last question, Gale -- I know it's a little off in the future, but you indicated the need for some incremental renewable capacity by the 2017 time frame. And assuming that was a decision in 2015 and you had to make it today, is that biomass, is that wind, is that some other alternative? What would it be?

Well, given today's market, if the market today were the same when we faced the decision in 2015 or 2016, we would probably buy renewable credits.

Perfect.

For the short-term.

Absolutely. Great. Thanks so much. I appreciate the help.

Brian Russo, Ladenburg Thalmann.

All my questions have been asked and answered. Thank you.

Andy Bischoff, Morningstar.

Most of my questions have been answered, but just one follow-up clarification on your earnings guidance. You incorporate warmer than normal weather in your first quarter, $0.75 to $0.78 range. Is that incorporated into your full year, as well? Are you using normal, normalized growth from February to December, then?

The answer is yes.

Yes.

Okay. That is all I had. Thank you.

Dan Jenkins, State of Wisconsin.

First of all, I was just wondering if you could clarify again what the 2012 CapEx plan is going to be.

Sure. Rick has the breakdown for you, actually.

Yes, Dan, and this is on our website. But on page 12 of the analyst presentation, we break out our CapEx for 2012, of about $705 million is what is in the budget. Of that, about $70 million is tied to environmental, and that is finishing up the air quality controls, primarily finishing up the air quality controls at the older Oak Creek units. Renewable is $161 million, which is tied to the biomass project, and maybe a few dollars associated with Glacier Hills. And the rest, which is about $475 million, is just base capital spend -- pipe, poles, wires.

Okay. Given the CapEx and the dividend increase and share buybacks and no pension payments and all of those moving parts, what is the financing plan for 2012?

I think we have one offering sometime this year at the utility, of $250 million-ish roughly, Dan.

And do you have a date when that is likely to be set?

We haven't set a date yet.

Okay.

No equity issuances, obviously.

Right. And then, I was just curious a little bit, looking at the electric utility revenues, the wholesale, resale, and other revenues were up fairly big on a percentage basis. Just some color on what is going on there, and what to expect going forward?

Sure. We will let Allen Leverett, who heads our generation business, cover that with you.

And Dan, there are really two categories there -- there is wholesale, and then there is sales for resale. On the wholesale side, we had a 50-megawatt contract with a large co-op here in Wisconsin, that we began providing service under that contract. I think it began June 1 of last year. And then, we also made some additional sales to a co-op up in the UP of Michigan. So, those two together, Dan, increased wholesale sales about $17.5 million. So, those two contracts together. In addition, on the sales for resale, and you -- probably the easiest way to think about those, Dan, those are spot sales, so those are sales that you would make on the spot market and MISO, as opposed to the term market.

In 2010, we purchased about 0.3 million megawatt hours from the MISO market, whereas in 2011 we sold 1.3 million megawatt hours. So, we had a swing of 1.6 million megawatt hours. And the reason that we were able to make those sales is largely because we had the Oak Creek expansion, the second unit at Oak Creek expansion that was available in 2011; and of course, it was not available in 2010, because it hadn't been completed yet. So, hopefully that gives you a little bit of color about those line items.

So, what is the term of those wholesale contracts with the co-ops?

The contract to the Wisconsin co-op is a 10-year contract. The contract with the Michigan co-op was a contract we already had in place, but their take under that contract was a bit more. I think the original term on that contract, Dan, I think we are into the third year of the contract. The original term of that contract, I believe, was 25 years. It was a very long-term contract.

Okay. Thank you.

Andy Levi, Caris & Company.

Did you guys say there was a slide package on your website?

We do. We have a slide package on the website, at www.wisconsinenergy.com.

I can't find it. Okay. I will work on that. And then, the only other question I had -- weather-wise for the year, 2011, how much did that affect earnings?

Rick? We had -- it certainly hurt earnings overall.

Yes. It helped gas. Gas was up slightly, but it was offset by electric -- I want to say it was about $0.03 a share. Electric was down $0.06 a share, gas was up $0.03 a share.

So, net negative $0.03.

As compared to 2010.

On the -- I wanted versus normal. Anything --?

Steve has that on normalized, yes.

Yes. Basically, it was close to normal year. The heating degree days for gas were right near the 20-year average, so gas was basically a push. And it was a hot summer, but it got warm in the fourth quarter. So, on an operating income -- or, excuse me, on a margin basis, it was only $6 million. So, weather was basically a push this year.

Again, against normal.

Against normal.

And then, just looking at the O&M number, which was obviously down quite a bit -- is that sustainable going into '12?

Let's ask Steve. Because there are some accounting changes that affect the way you look at those numbers for 2011; and then, I will be happy to talk about 2012. Steve?

Andy, the reduction in O&M on a year-to-year basis -- we talked about this in the first and second quarters, has to do with the elimination of inter-company revenues and expenses related to the Power the Future leases. And so, the impact -- because unit 2 went into service, we eliminated more revenues; and that was about a $98 million year-to-year difference. So, our consolidated O&M is down $98 million because of the elimination entry. I will let Gale address the other issues.

And this is the last quarter we are going to see that, Andy.

Right. This all had to do with the Power the Future assets coming into service. Now, for 2012 -- and I may have mentioned this, but it's worth repeating, because it can be confusing if you don't follow this every day. For 2012, on a pure operating basis, our O&M is projected to be roughly flat. However, when you see our financial reports each quarter, you will actually see a decline in overall O&M because of the rate plan, which calls for us to cease amortization over the course of 2012 of $148.1 million of regulatory assets. So, everyone should keep that in mind. But in terms of just a trend of real O&M from real operations, 2012 we expect to be flat.

Thank you.

Ted Heyn, Point State Capital.

Had one quick question on 2011 -- what was your earned ROE at WEPCO and all the [utilities]?

If you remember, our allowed ROE at the electric side of the business is 10.4%. Our allowed ROE on the natural gas distribution side of the business is 10.5%. And if you look overall, we were very, very close to our allowed ROE.

And is that on the $6 billion of rate base that you guys have in your December slide deck?

We are looking here. Yes.

And the equity ratio is like 53%? It's a sliding scale, right?

Yes -- Pat, are we at 52.5%, 53% of the utilities?

53.5% is the high end. We were underneath that. The midpoint is 51%.

Yes, our range -- allowed range is 51% to 53.5%, as Pat said, we were just under the 53.5%.

Got you. And I'm assuming the guidance for '12 assumes the 10.4%, 10.5% blended, as well?

Well, it assumes we can come close.

Come close, okay. So, maybe a little bit of lag?

Yes.

Okay. Great. That was it. Thanks a lot.

Michael Lapides, Goldman Sachs.

I want to, if you don't mind, come back to the CapEx question. You talked about the 2011, the '15, and then the 2012, the 2016, the $3.4 billion of the $3.5 billion. I'm just a little confused, only because you spent a lot of money on South Oak Creek in '11, if I remember correctly. But South Oak Creek CapEx stops soon; you are mostly done with that, and have done well with getting that project wrapped up on time, on budget. So, it seems like if I look at the CapEx, you are replacing a large chunk of CapEx in 2011 tied to South Oak Creek, with a lot of reliability in infrastructure. That is not a small number. And I just wanted a sanity check to make sure I'm understanding that correctly, not making a mistake and thinking about the timeline of when you spent dollars on South Oak Creek.

Very good question. And let me break it down for you. Rick and I have a slide here which really, I think, details it quite well. You are correct, we are virtually complete with our spending on the South Oak Creek air quality control upgrade, and that is a very large project. When you look at our estimated 2011 spending on our rate base infrastructure, it was about $420 million. For 2012, it's about a $50 million increase. We are projecting to spend $473 million on basic infrastructure work at our utilities -- replacing aging gas distribution lines, replacing substation transformers, that kind of stuff. So, we are seeing, compared to 2011, about a $50 million increase in infrastructure spend. Then we are projecting, as we show on the slides here, that you can get on our website too -- we are projecting about $160 million of spending on renewables, which is largely, Rick, the Rothschild biomass plant.

That's correct.

And then, we have about another $70 million on top of that of environmental spend, environmental CapEx. So, that takes you to the number Rick mentioned about $705 million of projected capital spend in 2012, and kind of the categories of breakdown.

Okay. All right. I'm with you guys. One last question -- I just wanted to make sure I understood, on the debt side, besides what you do with the utility, is -- what is in plan, a reduction of holding company-level interest and holding company-level debt, or flat?

In 2012, we will be basically flat.

Okay. Okay. And beyond? How are you thinking about '13 and beyond?

Let me rephrase. We did, as I mentioned in the script, we retired $450 million at the holding company in April. So, there will be effect of that. But we won't be retiring any new debt in 2012. So, we will have the effect of retiring that debt back in last April, Michael.

Okay.

And Michael, let me go back, if I can, to maybe help clarify one additional point on the capital spend question you had. With our projection of about $705 million of capital spending in 2012, that is materially below the actual spend for 2011.

Got it. Okay. It strikes me, you're -- the way I'm reading it is, come '13 and '14, it's a big jump up in reliability -- a couple hundred million dollars a year in reliability spend -- in core spend, because you are rolling off some of the enviro and some of the renewable spend.

You are absolutely correct. And let me give you the projections. I mentioned $473 million in 2012 on the basic reliability -- the basic core business capital spend. That jumps in our projections to $611 million in 2013, and about $585 million in 2014. So, yes, you are in the right direction with your intuition.

Have you sanity checked this with the PSCW?

Oh, we -- well, let me put it this way. Every project of any kind of magnitude, any project that is of -- what is our threshold on the electric side, guys, that we take the commission? $7 million?

I would say $8 million.

$7 million or $8 million? We have a capital project that is above $7 million or $8 million of capital spend. We historically, and the way regulation has worked here, we take that project for approval, individual project approval, to the commission. And once that project is approved in the 110-year history of regulation in this state, cost recovery for an approved project that you bring in on time and on budget has never been denied.

Michael, if you look at actually what we are doing, the -- if you look at the installation history of the Company, and when a lot of this stuff we are replacing was installed, look at the age of what we are replacing, it's time to be doing this. We are talking 50-year-old transformers, we are talking poles that are in excess of 60 years old. We are talking upgrading of the gas pipelines, putting better material in -- so, this is infrastructure improvement that needs to be made, based on the material conditions out there.

We have equipment here older than Mr. Goldman or Mr. Sachs.

Understood. Okay. I appreciate it, guys.

All right. Well, ladies and gentlemen, that concludes our conference call for today. We certainly appreciate you taking part. If you have any other questions, don't hesitate to call Colleen Henderson. Colleen will be available in our Investor Relations office at 414-221-2592. Thanks, everybody. Have a good afternoon.