威斯康辛能源 (WEC) 2014 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for waiting and welcome to Wisconsin Energy's conference call to review 2014 first-quarter results. (Operator Instructions). Before the conference call begins, I will read the forward-looking language.

All statements in this presentation other than historical facts are forward-looking statements that involve risks and uncertainties, 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 discussion, reference 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 wisconsinenergy.com. A replay of our remarks will be available approximately 2 hours after the conclusion of this call.

And now it is my pleasure to introduce Mr. Gale Klappa, Chairman of the Board and Chief Executive Officer of Wisconsin Energy Corporation.

Colleen, thank you very much. Good afternoon, everyone, and thanks for joining us as we review our 2014 first-quarter results.

Let me begin as always by introducing the members of the Wisconsin Energy management team who are here with me today. We have Allen Leverett, President of Wisconsin Energy and CEO of our Generation Group; Pat Keyes, our Chief Financial Officer; Susan Martin, General Counsel; Steve Dickson, Controller; and Scott Lauber, our Treasurer.

Pat will review our financial results in detail in just a moment. But as you saw from our news release this morning, we reported earnings of $0.91 per share for the first quarter of 2014. This compares with earnings of $0.76 a share for last year's first quarter. The results were much stronger during the first three months of this year, primarily because of the extreme winter weather that gripped our service area.

In fact, we delivered more natural gas to our customers during the first quarter of 2014 than during any other quarter in history. We exceeded the previous record for gas deliveries set in the first quarter of 2008 by more than 11%.

On the generation side of our business, our newest coal units, the expansion units at our Oak Creek site, performed exceptionally well. And total sales of power from our generating fleet over and above the demand from our retail and wholesale customers were up more than 157% in the first quarter.

The margin on these sales helps our customers by reducing our fuel costs. And the capacity helps to keep the lights on and energy flowing throughout the region.

Now, as all of you know, the price of natural gas in the Midwest spiked pretty significantly during the first quarter. We estimate that our new generating units saved our customers more than $42 million in fuel costs this quarter because the units ran on coal as compared to natural gas. And, ladies and gentlemen, this is another compelling example of the value of fuel diversity.

Our distribution network also performed very well during the harshest winter conditions that we have seen in more than 30 years. And as we saw, our Deliver the Future program provides some early dividends for our customers.

As part of Deliver the Future, we accelerated the replacement of older natural gas distribution lines in our network. These are the very lines that are the most susceptible to problems and leaks, given severe cold weather.

Turning now to the state of the economy, Wisconsin's unemployment rate declined to 5.9% in March and remains well below the national average. The unemployment rate in Wisconsin is now the lowest it has been since 2008.

With a bit brighter economic backdrop, deliveries of electricity to our large commercial and industrial customers rose by 1.6% in the first quarter. We saw strength in several sectors including paper manufacturing, food processing, rubber and plastics, and chemical production.

In addition, we continue to see stronger customer growth across our system. New electric service connections are currently up 4.4% and new natural gas installations are up by more than 7%. This reflects a rebound in homebuilding in our region and the volume of customers who are switching from propane to natural gas.

Next I would like to update you on two of our larger construction projects that we have underway. First, you will recall that we are planning to convert the fuel source for our Valley power plant from coal to natural gas. The Valley plant is a cogeneration facility located along the Menominee River near downtown Milwaukee. Valley, of course, generates electricity for the grid, produces steam for more than 400 customers in the downtown business center and provides voltage support for our electric distribution network.

I am pleased to report that we received final approval from the Wisconsin Commission in March and we have issued a full notice to proceed to our general contractor. We plan to complete the conversion of two boilers at the Valley plant in 2014 and the remaining two boilers in 2015. We are projecting the cost to be in the range of $65 million to $70 million excluding allowance for funds used during construction.

You may recall that in March of last year, we also began a major upgrade of the existing natural gas pipeline that runs near the facility. This pipeline replacement project has an estimated cost of $26 million and is on time and on budget.

Converting Valley to natural gas will reduce our operating costs and enhance the environmental performance of the units. We expect the electric capacity of the plant to remain at 280 megawatts and we believe our plan will help support a vibrant downtown Milwaukee for many years to come.

Next, I would like to touch on the work we have underway to upgrade our Twin Falls hydroelectric plant. In October of last year, we began building a new powerhouse at the Twin Falls site on the border of Wisconsin and Michigan's Upper Peninsula.

Twin Falls is one of 13 hydroelectric plants on our system. It was built back in 1912. It is licensed to operate until the year 2040, but the existing powerhouse badly needs repair.

We considered several alternatives, but the most prudent for us is to build a new powerhouse and add spillway capacity that meets current Federal standards.

Since our last update, engineering and preconstruction activities have begun and major construction activity will begin in the next few weeks. Work to excavate rock and build copper dams is scheduled for completion this year. We expect the new powerhouse will then be operational in 2015 and the existing powerhouse to be removed in 2016. The total investment is budgeted at $60 million to $65 million, again, excluding allowance for funds used during construction.

Switching gears now, our Board, as you may recall, has authorized us to repurchase up to $300 million of Wisconsin Energy common stock from 2014 through 2017. This is the second phase of our repurchase program. You may recall that our Board had previously authorized the purchase of up to $300 million of common stock from 2011 through 2013.

So in the first quarter of this year, we purchased approximately 426,000 shares in total. Since our buyback program began we have repurchase 8,103,000 shares at a cost of $296.4 million. This equates to an average purchase price of $36.58 a share.

And as we'd previously announced, our Board has adopted a dividend policy that trends to a 65% to 70% payout ratio in 2017. This policy should support annual dividend increases of 7% to 8% from 2015 to 2017 as we move to a payout ratio that is more competitive with our peers across the regulated utility sector.

In January, our Board raised the quarterly dividend to $0.39 a share, an increase of 30% over the dividend that was paid during 2012. The new quarterly dividend is equivalent to an annual rate of $1.56 a share.

Next, I would like to discuss the investment opportunities that we see in our core business as we focus on delivering the future. As we previously reported, our capital budget calls for spending $3.2 billion to $3.5 billion over the five-year period 2014 through 2018.

In this five-year budget, the nature of our capital investments is shifting away from the higher profile projects such as our Power the Future units, renewable generation and large air quality controls. Instead, our capital plan is comprised of many smaller projects that will upgrade our aging distribution infrastructure.

For the next five years we will focus on pipes, poles, wires, transformers and substations, the building blocks of our delivery business. Between now and the end of 2018, we plan to rebuild 2,000 miles of electric distribution lines that are today more than 50 years old. We also intend to replace 18,500 power poles, 20,000 transformers and literally hundreds of substation components.

On the natural gas side of our business, we plan to replace 1,100 miles of vintage plastic and steel gas mains as well as 83,000 individual gas distribution lines and approximately 233,000 meter sets. Of course the primary risks associated with these projects -- developmental, legal, regulatory and construction -- are naturally more manageable given the smaller scale and scope of the distribution work.

But this work is no less valuable or important than the megaprojects we have completed in recent years. Our focus on renewing our distribution network is essential to maintaining our status as one of the most reliable utilities in America. So, we will keep you posted as these needed infrastructure upgrades move forward.

We are also making excellent progress, I am pleased to report, on our fuel flexibility initiative at the Oak Creek expansion units. These units were initially permitted, you may recall, to burn bituminous coal. However, given the current cost differential between bituminous and Powder River Basin coal, blending the two types of coal could save our customers $25 million to $50 million a year in fuel costs depending on the mix.

In May of last year, we received all the environmental approvals we need and began testing a blend of bituminous and Powder River Basin coal at the plant. Test results continue to be promising. Further testing is scheduled to identify equipment modifications that could be needed to permanently increase the percentage of Powder River Basin coal used at the Oak Creek expansion units.

If significant modifications are required, we expect to seek approval from the Wisconsin commission in late 2014.

On the natural gas side of our business, we are planning to build a new natural gas lateral in West Central Wisconsin. The Wisconsin Commission has scheduled technical and public hearings for mid-May on this project and we anticipate a Commission decision in the third quarter of this year.

The 85-mile line would run from Eau Claire County in the far western part of the state to the city of Tomah in Monroe County. The project will address reliability concerns in western Wisconsin and meet growing demand. Demand is being driven by customers converting from propane to natural gas and by the growth of the sand mining industry in the region.

I might add that all 10 communities along our preferred route have now passed resolutions authorizing us to begin operating natural gas distribution systems within their borders. If we receive timely approval, we expect to complete the project in the fourth quarter of 2015. The project is expected to cost between $150 million and $170 million, again excluding allowance for funds used during construction.

This winter's bitter cold simply underscores the need to expand our natural gas distribution network in the western part of the state. You may have read there were serious propane shortages across the region. As I mentioned we delivered more natural gas to customers during the first quarter of this year than during any other quarter in history.

We are also pursuing and watching another potential investment opportunity, the potential sale of the state of Wisconsin electric and steam-generating plants. Last year, Governor Walker signed into law a new state budget. That budget includes a provision expanding the state's authority to sell or lease certain state-owned properties.

This means that the administration has the authority to pursue the sale of the state's electric, steam and chilled water production and distribution facilities. The state is moving forward and is now in the final stages of selecting a financial advisor and a broker for the potential sale of a number of assets, including the plants.

No formal timetable has been announced, but if the sale does take place, we expect it would occur in 2015.

Turning now to Wisconsin regulatory matters. In May, we plan to file a request with the Wisconsin Commission that will cover our investment and our projected expenses for the 2015 and 2016 test years.

And finally, before closing my remarks, I would like to provide an update on our operations in Michigan.

Under Michigan law, retail customers may choose an alternative energy supplier. The law limits customer choice to 10% of Michigan's retail sales. But, the law excludes from this cap the iron ore mines in Michigan's Upper Peninsula. The two iron ore mines that we were serving in a low margin interruptible tariff switched to an alternative supplier in September 2013. Several smaller retail customers have switched as well.

Of course we continue to provide distribution and customer service functions, regardless of the power supplier. We have taken and will continue to take multiple steps to address this situation.

We filed a request with MISO, the midcontinent grid operator to suspend the operation of all five of our units at the Presque Isle power plant. Last fall however, MISO determined that all the units are necessary to maintain reliability in northern Michigan.

As a result, we are eligible for system support resource payments from MISO to recover our cost for operating the units. Under our agreement, MISO will pay us an availability fee to ensure that the units are maintained and available to run and a fee to cover our costs when the units are actually operating.

On April 1, the Federal Energy Regulatory Commission accepted our one-year agreement with MISO. Payments will be retroactive to February 1 of this year.

It is also important to note that we will need to invest in environmental upgrades at the Presque Isle plant to meet the EPA's mercury and air toxics standards by 2016. Since we expect the units will still be needed for reliability at that time, we anticipate the cost of these upgrades will be reimbursed through an agreement with MISO.

So in conclusion, ladies and gentlemen, our Company is off to a strong start both financially and operationally in 2014. Now for more details on our first quarter, here is our Chief Financial Officer the famous Pat Keyes.

Thank you, Gale.

As Gale mentioned, our 2014 first-quarter earnings were $0.91 per share compared with $0.76 per share for the corresponding quarter in 2013. Consistent with past practice, I will discuss operating income for our two business segments and then discuss other income, interest expense, and income taxes.

Our consolidated operating income for the first quarter was $381.8 million as compared to $321 million in 2013. That is an increase of $60.8 million. Starting with the utility energy segment, you will see that operating income in the first quarter totaled $292.7 million for 2014, an increase of $62.1 million over the first quarter 2013.

On a quarter over quarter basis, we estimate that our electric and gas margins improved by $32.6 million because of the weather. We experienced temperatures that were 24% colder than normal and 16% colder than last year. Our earnings were also helped by $14.2 million related to the accounting on the treasury grant for our new biomass plant. Last year we could not recognize the grant income until the plant was complete.

Finally, our utility nonfuel operations and maintenance costs are down by $13 million, driven in large part by lower pension and medical costs.

Now, turning to our non-utility segment, operating income in the segment was down $1.4 million when compared to 2013. Last year, we recorded one-time entries to reflect the final approval of our Power the Future plant costs in the last Wisconsin rate case. Making the changes for these two segments together, and a slight improvement in corporate and other, you arrived at the $60.8 million increase in operating income.

During the first quarter, earnings from our investment in the American Transmission Company totaled $17.3 million, an increase of $700,000 over the same period last year. These earnings are in line with our expectations. Our other income net declined by $3.3 million primarily because of lower AFUDC. AFUDC decreased as a result of the completion of the biomass plant last November.

Our net interest expense decreased by $2.7 million primarily because of lower debt levels. Our debt at the end of this quarter was $56.4 million lower than at the end of last year's first quarter. Consolidated income tax expense rose by $29.9 million because of higher pretax earnings and a higher effective tax rate. Our effective tax rate for 2014 is expected to be between 37.5% and 38.5%.

Combining all of these items brings you to $207.6 million of net income for the first quarter of 2014 or earnings of $0.91 per share. Our earnings per share also were helped by approximately $0.01 because of our share repurchases.

During the first quarter of 2014, our operating cash flows totaled $385.1 million which is a $54.8 million increase from 2013. The increase came primarily from higher net income and a better working capital position.

Our capital expenditures totaled $129.2 million in the first quarter, a $4.4 million decrease compared to 2013. We saw slightly lower expenditures because construction of the biomass project was completed in 2013. Our adjusted debt to capital ratio was 51.4% at the end of March. Our calculation treats half of our hybrid securities as common equity, which is consistent with past presentations.

The projected year-end debt to total capital is expected to be relatively flat with 2013 year end. We are using cash to satisfy any shares required for our 401(k) plan, options and other programs. Going forward, we do not expect to issue any additional shares.

We also paid $88.1 million in common dividends in the first quarter of 2014, an increase of $10.3 million over the first quarter last year. Dividends for 2014 equate to an annual rate of $1.56 per share.

And as shown in the earnings package on our website, retail deliveries of electricity rose by 3.6% in the first quarter of 2014 as compared to the first-quarter 2013. Our normalized first-quarter sales were up by 1.7%.

Looking at the individual customer segments with the extremely cold weather, we saw actual residential sales up 5.8%. And on a normalized basis, residential sales were up 1.7%. Across our small commercial and industrial group, we saw quarterly delivery sales up 3.8% and on a normalized basis, sales to small commercial industrial customers were up 1.8%.

In the large commercial industrial segment on a normalized basis, delivery sales for the first quarter of 2014 were up 1.6%. And if you exclude the iron ore mines, sales were up 1.8%.

Overall, these results are ahead of our expectations.

First-quarter retail natural gas sales were up nearly 19% compared to the first quarter of 2013. On a normalized basis, sales improved by 3.2%. These results are also ahead of our expectations for the year.

Turning now to our earnings forecast. First, we are raising our 2014 guidance. Our prior guidance was $2.53 a share to $2.63 a share. Our revised guidance is $2.58 a share to $2.64 a share.

While our first quarter clearly exceeded our expectations, we still have nine more months of weather ahead of us. So, again, our revised guidance for 2014 is $2.58 a share to $2.64 a share.

And for the second quarter, our guidance is $0.49 a share to $0.51 a share. This assumes normal weather. Our second-quarter guidance is slightly lower than the $0.52 we earned in the second quarter of 2013 due to the timing of operations and maintenance expense and fuel recoveries.

And with that I will turn things back to Gale.

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

(Operator Instructions). Julien Dumoulin-Smith, UBS.

This is actually Paul Zimbardo from Julien's team. A quick question on the plant and the environmental recovery. Can you provide a little background there and timeline if you could?

The plant and the environmental recovery (multiple speakers)

The SSR for Presque Isle.-- (inaudible).

Okay. Let me frame it for you and Allen can give you some of the details. As I mentioned in the prepared remarks, one way to look at this really is that MISO, the Midwest grid operator, has basically become the principal customer for that plant. So MISO, under our agreement and with approval from FERC, is basically paying us to operate the plant.

Now, the plant will become subject to the new mercury and air toxic standards by 2016. So environmental investments will be needed if the plant is going to continue to operate. Allen?

Right and that is of course the MATS -- the MATS rule that we have to be in compliance with by April of 2016. So our expectation would be that we would be able to do dry sorbent injection at the plant. Cost range for that -- we are doing some testing in June, but I would expect that the range of cost for that in terms of the capital investment is $6 million to $12 million, is a likely range if we had to do dry sorbent injection for all five units, if MISO wanted us to maintain all five of the units.

And then as Gale mentioned just now and in the script, our expectation would be that those dollars would be recovered in a system support resource agreement with MISO.

A total of $6 to $12 million for all of the units.

Yes so if we had to put DSI, if they wanted as to maintain all five, $6 million to $12 million for all five.

Okay, great. Thank you.

Greg Gordon, ISI Group.

My question is when we think about your long-term articulated earnings growth aspiration, Gale, should we still be thinking about it off of the original guidance? Or should we be basing our expectations off of the new guidance taking into account the weather and the accounting for the Treasury grant and those other items?

On the 4% to 6%. Okay. Well, really, Greg, as you know, the weather can move us in one direction or another pretty quickly. So I would suggest you maintain your look in terms of the longer-term growth rate off of our normal guidance of 4% to 6% -- off our guidance of 4% to 6% EPS growth based on normal weather.

Okay, thank you. That's all I had. You answered my other questions in your script.

Brian Russo, Ladenburg.

Good afternoon. Curious on the increased guidance. Is it all weather-related or is it also a piece -- a component of that is how that weather-normalized sales are tracking ahead of your expectations?

You are talking about our revised guidance for the remainder of 2014?

Correct.

Basically what we have done is taken into account some impact from the weather. On the other hand, we know we are going to see some additional operation and maintenance expenses. Gas leak inspections and other distribution network work that has got to be carried on is going to raise our O&M some going forward.

So in essence, what we have done is tempered our look at Q1 knowing that there is going to be some additional O&M coming down the pike and raised our guidance slightly as you saw. So basically, weather-driven, offset by what we know is going to be some higher O&M. Pat.

You nailed it. I think those are the main points, Brian.

I think your long-term normalized sales forecast is 0.7%. Should we bump that up to what we have seen in the first quarter or is it still too early for that?

Way too early for that, Brian. As you know the weather normalization techniques in our industry tend to fall apart or tend to be less accurate when you get into the tail, when you get beyond two standard deviations. And I think with this weather in the first quarter we were like eight standard deviations away from norm.

So I wouldn't read too much into weather normalization for Q1. And I think our roughly 1/2 of 1% projection of the normal growth is still pretty accurate.

Okay, great. And are you planning on issuing any debt at the utility in 2014?

We will ask Mr. -- we do have some maturities. In fact, one where we had a bond offering just mature. So we do have some plans.

Yes, Brian, we have a couple of things coming. At Wisconsin Electric, the WEPCO side, we had a bond mature last month. So I would say -- and that was about $300 million -- I would say sometime in the second quarter if we are optimistic it might go a little later, but let's say second quarter. We will probably do something around that size.

And then you may recall that last year we had a bond mature at Wisconsin Gas. I think that was $45 million, $50 million in that ZIP Code. We have been able to manage that, but we anticipate that sometime probably the third quarter in the neighborhood of $100 million we will probably do something at Wisconsin Gas this year as well.

Okay, great. And lastly, the fuel clause and the 2% dead band, where did you end up at the end of the quarter?

At the end of the quarter we are above the dead band. .

Okay, I would imagine the off system sales are helping to support that.

No question about that. Absolutely. In fact as you probably heard me say in the script, our off system sales were up 157%. Really, our units -- I am very pleased with how our units performed. And the value of our new Oak Creek units was absolutely, completely visible during Q1. And MISO asked those units to run at the top virtually every single day of Q1.

Okay, great. Thank you very much.

Kit Konolige, BGC.

Good afternoon. For -- remind me filing rate cases in Wisconsin, do you -- the test year, is it a forward or backward test year and does weather get adjusted out?

As you may recall, Kit, and then you look at 50 different states, so it is hard to recall specifically. We are one of the few states in the country with a two-year forward-looking test year. So what we are doing now and finalizing all of the data, we will be looking at and filing our projected investment and our projected expenses for the years 2015 and 2016.

So that is basically the standard approach in Wisconsin. I think it is a constructive approach because you are not actually looking back with a lot of lag. You are actually projecting your appropriate expenses for the following two years.

Yes. Absolutely. And what is your early -- last go-round the ROE was not a topic for discussion in the rate case. Is that likely to be repeated or should we have a fully litigated situation where ROE is in its traditional central place in a rate case?

Good question. Very good question. And let me just say this.

There are a lot of discussions going on. Alliant, one of our sister utilities here in Wisconsin, has just entered into a settlement. Now they are -- because of a particular situation they have, they are able to keep rates flat for a couple of years. But they are -- they and the intervenor groups and the commission staff -- appear to have agreed on in essence setting rates for the electric utility at a 10.2% return.

So, I think that may be indicative. We are having some discussions as well about ROE and capital structure. But I would not expect significant change particularly in light of the first step forward between Alliant and the intervener groups.

Very good. Thank you.

Michael Lapides, Goldman Sachs.

Congratulations on a good quarter.

Thank you, sir.

Two questions. One, pretty easy. Can you walk us through -- you mentioned a lot of different items, lot of different projects and the potential capital cost, including the environmental pollution control equipment at Presque Isle.

Is any of that not in your current CapEx guidance that you have given out over the last couple of months and put in your 10-K and other data?

Michael, good question. Virtually everything we discussed is in our -- it is like ragu. It is in there. But we should be very clear about the capital costs that Allen talked about related to Presque Isle. The potential capital costs related to Presque Isle.

Those would be costs that we would expect because of the need for those units for reliability to be reimbursed. So I really wouldn't look at that as part of our announced capital budget.

Got it. And I apologize, I missed Allen's comments about the level or extent of that capital spend on Presque Isle.

Allen, would you like to repeat?

Now, what we said before, Michael, was that it was likely to be $6 million to $12 million. We are doing some testing this summer. And so we will be able to nail down where we are going to be in the range. And that would be for dry sorbent injection.

And so that would assume we do all five units. If for some reason MISO didn't want all five units, that $6 million to $12 million range would go down somewhat. But that is for five units.

Okay and Allen as long as I have got you, can you give an update a little bit on the ATC's rate base growth expectation? And ATC growth opportunities outside of the state of Wisconsin.

Yes. Well, we talked a little bit on our year-end call about ATC capital budget and for the next three years, their capital budget inside the footprint would be for calendar years 2014, 2015, 2016 would be $1.3 billion. So that is unchanged from the estimates that we talked about on our last earnings call.

So, at that level of spending when you translate that into net income growth at ATC, Michael, that certainly fully supports the 4% to 6% target that Gale and I think Greg Gordon were talking about earlier.

In terms of opportunities outside the footprint, the $1.3 billion that I talked about the 2014, 2015, 2016 combined, that doesn't include anything outside the footprint at all. ATC is certainly pursuing things elsewhere in the MISO footprint, pursuing things in the western part of the country.

But at this point, Michael, I would not expect any of those investments to materialize or at least for us to actually employ capital for some of those investments until, say, the 2017, 2018, 2019 timeframe. So I wouldn't put any of those opportunities in the next 36 months or so. They are going to be out a bit.

But even without those they still have got a lot of good growth over the next three years even without those opportunities.

Got it. Last question, I will add one on here real quick. Gale, natural gas demand, do you think -- we are now several quarters for you guys. I mean if I go back it is really three or four, four or five quarters now. Do you think we are seeing a structural shift in what is weather normalized natural gas demand? And if so what do you think that new level is? I mean historically natural gas demand had been on a long-term downward slope for 15 to 20 years. And I wonder if something's happened that is not weather related but structural that is changing what weather normalized gas demand is.

Michael, I think and I'm not in any way trying to avoid the question, but trying to be absolutely brutally frank with you, the weather has been so abnormal in particular what we have seen in Q1 that I think we are going to need another year or two before we can really determine whether there is any structural change going on here.

On the one hand you see data that indicates that maybe there is a structural change. But then on the other hand, gas prices are now higher than they have been in a while. Natural gas prices are now higher than they have been in a while. Last time I looked at about $4.80 per million BTU. Furnaces, new furnaces are still much more efficient than let's say a 10- or 15-year-old furnace.

There are a lot of competing factors going on here. I think it is going to take a little bit longer before we can really understand if there is any kind of structural change that would reverse the pattern of the past 20 years.

Got it. Okay. Thanks, Gale. Much appreciated.

Jim von Riesemann, CRT Capital.

One follow-up to Greg Gordon's question. The 4% to 6% growth. I was a little unclear as to whether or not the base year had been shifted around a little bit.

No. The base year has not shifted. We will take a look as we enter 2015 about shifting the base year. But right now the base year stays in place.

So that is 2011, just to confirm.

You are absolutely correct.

Second question is my standard capital allocation question. But this time I have a twist.

So, you know I am not a fan of you guys buying back stock better than two times book. But it seems to me that if I did the math correctly, you both 426,000 shares in the first quarter. And if I just take a simple arithmetic average between year-end price and the March end price, you are buying back stock in the $44 a share range or $18 million worth of stock.

If you have got a new $300 million program in place annualized at $100 million a year, that should be $25 million a quarter. Am I reading anything into the fact that this is now down on what an annualized run rate would be and that you are starting to shy away from buying back stock at these levels? You follow me?

I have heard the rumor that you are not a fan of buying back stock at two times book. I am glad you admitted it.

First of all, one of the things, one of our guiding principles has been that as we have positive cash flow materialize, that if we don't have other investment opportunities on the near-term horizon, or the use of that cash, then one of our philosophies is we don't think our shareholders will reward us for just building up cash on the balance sheet.

So that is one of our other guiding principles here. And I would not read anything into our first-quarter activity other than we tend to look at it quarter by quarter as we have cash building up.

Okay. I am trying to think if I want to ask this next question, so I think I will pass.

Andy Bischof, Morningstar Research.

Good afternoon. Quick question. Any idea on the potential cost of the Oak Creek fuel blending program? Or are we still too early in the stages?

Too early. But we put a bookend around it that -- again, depending upon the specific equipment modifications that might be needed, our bookends and we will know a lot more later this year are at a low end, maybe $25 million, $30 million; at a high end, maybe $100 million.

Great. Trying to get a handle on the [propane] growth opportunity for propane customers switching to gas. Could you provide a little more color on the extent of the growth opportunity here and what are the penetration level of current customers so far?

Well, I will say this. In terms of propane consumption, just pure propane consumption, Wisconsin is one of the top five states in the country. So I think that gives you a sense of the potential conversion opportunity here.

And as I mentioned in our prepared remarks, even in Q1, which was a pretty brutal time to try to switch furnaces, we saw a 7% increase so far this year in new customer connections to our natural gas network compared to a year ago. So I honestly think the conversion opportunity, particularly in light of what happened to propane pricing but even more so the severe shortages of propane this past winter, I think the conversion opportunity is perhaps even greater than we thought.

Great. Thanks much.

Bill Appicelli, Nexus.

Had a follow-up on the Presque Isle issue. I believe you guys have an open docket at FERC related to this issue and I was just wondering if you could remind me of what your position is or what is trying to be accomplished there?

I will let Allen give you the details. The open docket at FERC is really about cost allocation. In other words, we have an agreement with MISO on payment, about $52 million for the next 12 months to compensate us for maintaining and operating those units. And then the open docket really relates as we understand it to who has to pay MISO for that $52 million. Allen?

No, that's right. I wouldn't add anything to that.

Okay and do you have any sense of the timing of that or how that would impact, I guess, some of these other decisions you were talking about earlier?

Well, the SSR agreement is for one year. So it goes from, I think, February 1 of this year to February 1 of the next year. And I think MISO has a three-month extension option. So if they want us to continue to operate the plant after that, and I expect they will, we will have to do another SSR agreement.

But I would expect given FERC, they went ahead and let us start -- MISO start charging and MISO start paying us. So I don't really think the fact that there is a review going on at FERC is going to affect any of that. It might take a number of months. We might be to the end of the year before they resolve the allocation question that Gale talked about, but it is not really going to impact our ability to collect dollars from MISO at all.

So it is really not an issue for us as we would see it.

Okay, but is it an allegation between Michigan and Wisconsin?

Well, it is an issue about interstate. So allocation between the states and to a certain degree you also get into some allocation issues within Wisconsin. So it is a fairly complicated question about how these costs are ultimately allocated.

In essence the issue is that in other parts of MISO these kinds of costs are allocated in a certain way. But within the ATC footprint, they are allocated in a separate way. And the Wisconsin Commission's view is that the allocation that affects the allocation in effect if you are inside the ATC footprint is punitive to Wisconsin. And that is really the issue.

Got it. Thank you very much.

Vedula Murti, CDP.

Actually I did see you guys here recently, so all my questions are actually asked and answered and hello to Allen, okay. Talk to you later.

Andy Levi, Avon Capital Advisors.

On Bill's question, did the state of Wisconsin intervene on this case?

In the FERC proceeding, Andy, yes they did.

And what is their issue?

When you say the state of Wisconsin, it is the Public Service Commission.

Right, right, right, right.

The issue is allocation. They don't believe that the MISO tariff as currently structured provides for a fair allocation between Wisconsin and Michigan. So that is really their issue. Their issue is not the total cost; it is the allocation of the cost.

In fact -- Allen is right, Andy. In fact in their intervention asking FERC to provide for a different allocation between Wisconsin and Michigan, they actually said that they believe we should be compensated in the way we are being compensated. It is just who has to make that compensation. How much to Michigan, how much to Wisconsin is the issue.

And what is the breakdown now?

Well, now it is close to 90/10. In other words 90% of these SSR payments will be billed to Wisconsin customers and about 10% to Michigan. And that is what has the Wisconsin Commission concerned. They think that is not a proper allocation, that much more of the cost should go to the Upper Peninsula of Michigan.

Okay. But it is not a situation where if FERC rules against them they don't -- they come after you or anything like that?

No, as Allen said earlier, we don't think this has any impact on the agreement itself and on our -- on the payments to us for operating the unit. It is just a matter of how is the pie sliced among parties that have to pay MISO for this benefit.

So it is really the PSC fighting FERC, not fighting you guys?

You could look at it that way. I think what the PSC of Wisconsin

Or MISO or however you want to look at it.

Exactly. Really trying to get the MISO tariff or this part of MISO to match up with the rest of MISO because it is different here. Just the way because allocation works if you are inside the American Transmission Company footprint, that cost allocation is different than all the rest of MISO and the Wisconsin Commission is saying it needs to be all the same.

Okay. Another question is the one I think Jim was going to ask, I'm just guessing, but I did want to ask. So I will ask the question. There was an article earlier in the year (multiple speakers). I'm just guessing I might be wrong, I shouldn't speak for Jim. But there was an article earlier in the year, Bloomberg article relating to you and M&A and you were named with a myriad of other companies relative to Berkshire Hathaway. And I was just wondering if you want to address that or not?

Andy, as you know that article in all likelihood was based on pure speculation and over the years we found it not very productive to comment on speculation.

Fair enough. Thank you.

All right, ladies and gentlemen, that concludes our conference call for today. Thank you so much for participating. If you have any other questions, Colleen Henderson will be available in our Investor Relations office and that direct line is 414-221-2592. Thanks again, everybody. Take care.