Gale E. Klappa - Chairman, Chief Executive Officer, President, Chairman of Executive Committee, Chairman of Wisconsin Electric Power Company, Chairman of Wisconsin Gas LLC, Chief Executive Officer of Wisconsin Electric Power Company, Chief Executive Officer of Wisconsin Gas LLC, President of Wisconsin Electric Power Company and President of Wisconsin Gas LLC James Patrick Keyes - Chief Financial Officer and Executive Vice President Allen L. Leverett - Executive Vice President, Chief Executive Officer of WE Generation Operations, President of WE Generation Operations and Executive Vice President of Wisconsin Electric Power Company Stephen P. Dickson - Principal Accounting Officer, Vice President and Controller

Michael J. Lapides - Goldman Sachs Group Inc., Research Division Greg Gordon - ISI Group Inc., Research Division Julien Dumoulin-Smith - UBS Investment Bank, Research Division Andrew Bischof - Morningstar Inc., Research Division Paul T. Ridzon - KeyBanc Capital Markets Inc., Research Division Paul Patterson - Glenrock Associates LLC

Good afternoon, ladies and gentlemen. Thank you for waiting and welcome to Wisconsin Energy's Conference Call to review 2013 first quarter results. This conference call is being recorded for rebroadcast. [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 discussions, referenced earnings per share will be based on diluted earnings per share unless otherwise noted. After the presentation, the conference will be open to analysts for questions and answers. In conjunction with this call, Wisconsin Energy has posted on its website a package of detailed financial information at www.wisconsinenergy.com. A replay of our remarks will be available approximately 2 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. On this beautiful spring day, good afternoon, everyone. Thanks for joining us as we review the company's 2013 first quarter results. I'll 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 Chief Executive of WE Generation; Pat Keyes, our Chief Financial Officer; Susan Martin, General Counsel; Steve Dixon, Controller; and Scott Lauber, 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 from continuing operations of $0.76 a share for the first quarter of 2013. This compares with earnings of $0.74 a share for the first quarter last year. The results were stronger than last year, primarily because of favorable weather, the positive impact of our share repurchases and slightly higher earnings at WE Power. You may recall that we experienced the warmest winter in 122 years last year. By contrast, this winter was colder than normal. And March was a particularly strong month. We actually delivered 71% more natural gas to our customers in March of this year than March a year ago. Our earnings also rose by $0.01 a share at WE Power in light of the final approval during our last Wisconsin rate case of the investment in our new Oak Creek units. In addition, the impact of our share repurchase program added $0.01 a share to our earnings for the quarter. We also continued to achieve milestones in the operational areas. In fact, J.D. Power & Associates has ranked our company the #1 large utility in the midwest for customer satisfaction among business customers. Turning now to the economy in our region. Wisconsin's unemployment rate climbed to 7.1% in March. That's…

Thank you, Gale. As Gale mentioned, our 2013 first quarter earnings from continuing operations were $0.76 a share compared with $0.74 a share for the same quarter in 2012. The results were better than last year primarily because of favorable weather, the positive impact of our share repurchases and increased earnings at WE Power. Our consolidated operating income for the first quarter was $321 million as compared to $295.7 million in 2012, an increase of $25.3 million. Starting with the utility energy segment, you will see that operating income in the first quarter totaled $230.6 million for 2013, an increase of $22 million over the first quarter of 2012. As Gale mentioned earlier, we experienced a colder than normal winter, which was a significant contrast from 2012 when we experienced record warmth. On a quarter-over-quarter basis, we estimate that our electric and gas margins improved by $50.4 million because of the weather. This year, we estimate that we were helped by $16.2 million as compared to normal weather. And last year, we estimate that we were hurt by $34.2 million because of the abnormally warm weather. As we turn to the other factors impacting utility operating income, recall that we implemented new rates for our electric and gas customers in Wisconsin effective January 1 of this year. These new rates reflect our investments in environmental controls and renewable energy. These rates also reflect changes in our O&M costs, including the reinstatement of the amortization of certain regulatory assets. If you recall, last year, as part of our base rate freeze, we had a regulatory amortization holiday. With that as background, you will notice that our depreciation expense is up $7.9 million, primarily because of the investment in environmental controls. We also estimate that the impact of leap year in 2012,…

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

[Operator Instructions] Your first question comes from the line of Michael Lapides with Goldman Sachs.

Real quick question. And by the way, congrats guys on a good quarter. Just curious in terms of how you're thinking -- and this may be an Allen question, how you're thinking about the capital expansion process? I know it's kind of in the budget for ATC, but in terms of the execution part of that, meaning getting permits, getting siting, getting it done on time, on trajectory?

That's definitely an Allen question.

I guess you'd have to take that in sort of in 2 parts, Michael. Within the state of Wisconsin, within [indiscernible] and within the upper Peninsula of Michigan, they certainly had a very, now long-standing, over a decade, process that's pretty well understood and they have a good process at ATC to go through that. And really, the only uncertainty there is when you bring a project forward, the primary uncertainty is the time frame that are going to be required to get regulatory approvals. But typically, for a CA, the way a CA works now, once your CA is deemed complete, it's no more than 360 days to get approval. There's a 180-day initial period and then the Commission can extend that for another 180 days. So I think within the footprints, that would be the primary question, just the length of time that it would take to get a regulatory approval. Outside the footprints, I mean we're still pretty early days, Michael, on doing projects outside the footprint. Gale mentioned the Path 15 investment, but that was an existing transmission line. So outside of the footprint, not a lot that I can say about that. But candidly, if you look at our forecast for this year, '14, '15, we're not assuming any projects outside the footprint in any case. Hopefully, that helps.

And Michael, I think Allen made an important point. If you look at the capital expenditures that we've broken down in our Investor Day that we talked about, the $3.2 billion to $3.5 billion over the 5-year period, Allen is correct. We do not include any outside the footprint investment in ATC in those numbers. So that would be investment upside.

Got it. And how about on the gas side? I mean, lots of what I'm asking about is very nuts and bolts stuff. But you've got a lot of gas distribution infrastructure investment in your plan over the next couple of years. Just curious whether siting -- how does siting and permitting process of that works in the state of Wisconsin? Do you have to go to local siding boards? Do you go straight to PSC and it serves as kind of centralized siding board, et cetera?

Both are good questions, Michael. The answer is really in 2 parts. For much of the gas distribution work that we've described, there really is not -- the individual projects did not rise to the level where we need to seek construction authority from the Wisconsin Commission. For example, we mentioned 83,000 individual gas lines. Those would be the lines that come off the street and hook directly to your home. Those projects are much smaller in nature and do not require a construction authority permitting from the Wisconsin commission. Certainly, the largest project that we have in front of us on the gas the distribution side that will require construction authority from the Wisconsin Commission is the one that we've mentioned and that's the Western Wisconsin Gas expansion. That is a very significant project, $150 million to $170 million in the initial phase. And so we've begun the process there of seeking approval. We filed our initial request in late March. Then we will have a -- Allen, a supplemental construction authority request in late summer.

Yes, there's some additional environmental information that we have to file in August.

Greg Gordon with ISI Group.

My question goes to what happened in the quarter vis-a-vis sales and what you're hearing from your customers for the balance of the year. Because clearly, you had a pullback in sales from industrial, but it was driven by natural resources. Obviously, we've had a big deflation in commodity prices because of what's going over in China and that had a big impact on your 1 particular customer. But in the manufacturing segment and other segments of the industrial mosaic and your service territory, can you give us some more color on what you're seeing there?

I'd be happy to, Greg. And let me back up. As you know, when we put our sales forecasts together for a new coming year, we interview our 120 largest industrial customers and get their direct feedback on their expectation in terms of demand for the following calendar year. When we did those interviews late last fall, I don't think there's any question that we were hearing a good bit of conservatism and a good bit of caution from our large industrial customer base. And if you recall, those interviews were being done at a time when the whole issue about sequester, the whole issue about federal debt ceiling and everything we went through at the end of the year was very much on people's minds. And our customers are proving -- I mean to have given us really good input. I mean, they were expecting a soft first quarter in terms of what they were seeing for orders and demand. And that has turned out to be the case. When you basically take out leap year and weather normalize, our industrial sales were about dead on to where we thought they would be in Q1. Now, we're projecting a little bit of uptick, not much, in the remaining quarters. So in essence, what we're seeing is an economy treading water. The only 2 sectors that showed any material growth at all -- we serve 17 different industrial sectors of the economy. The only 2 sectors that showed any growth at all were, believe it or not, printing and publishing and production of plastics. Everything else pretty much just right where it was. Not a lot of big upside, not a lot of downside. Just treading water. We're a bit cautiously optimistic over the course of the remainder of the year, but no, we were not deviating from the sales forecast. There's no indication yet that things are really turning around.

Great. And then second and last question. In terms of the buyback. Obviously, the average price at which you have already bought back stock is pretty good relative to -- where the stock is trading now, what can you tell us about how you think about the potential for completing a buyback relative to other opportunities and deployed capital with your stock trading at such a big P/E [ph] and price to book multiple?

Well, it's a good question, Greg, and we continue to look everyday at whether or not we want to be in the market buying stock. Over the long-term, I can tell you, it would not be the intention of the management here to build up a big cash reserve. I don't think that's what we're being paid for from our stockholders. But obviously, we're going to be opportunistic as we have been in the past on share buyback.

Julien Dumoulin-Smith from UBS.

First question here, sort of on the structure of these asset sales, if you will. Could you guys talk to what is being currently contemplated in the state or on how they would -- what this would look like? Obviously, it doesn't seem to be more rate-based, but some sort of contract of sorts, and when this all would hash out? Obviously you mentioned end of summer now. What does that translate to in terms of actually putting down dollars and getting returns on those investments?

Okay. We'll handle kind of each question one at a time. In terms of the process itself, as we mentioned in the prepared remarks, the governor has put a provision in the state budget that would authorize the State Department of Administration to conduct a process, if you will, to sell a number of state-owned properties including power plants and steam-generating plants that the state owns. The budget itself needs to be passed because a state is on a fiscal year ending June. The budget itself, in all likelihood, will be passed end of June sometime early July. Assuming the provision holds in the state budget, then the state Department of Administration would set up a process. We're not certain how the State Department of Administration would actually design the process. But we are quite certain this would not become part of our traditional rate base. This would not be subject to Public Service Commission review and approval as it's currently constituted, anyway. And so it would not become part of the rate base although Allen and I would expect, given the fact that the process would unfold assuming the law passed in the second half of this year, then we really would be looking at 2014.

Yes. I would assume that if the bill is passed of course and the DOA moves expeditiously to ask for proposals, you could easily see financial closing in the first half of 2014.

And then one other point. We would obviously, in any bid that we would make, we would obviously require a very transparent and firm power sales, or steam sales agreement. So these would not become -- while they would not be rate base per se, they would not become merchant units either.

Would it be fair to say that the return profile of this would be somewhat akin to a traditionally regulated asset? Is that a fair statement?

That would certainly be our current thinking, yes.

Andy Bischof with MorningStar.

I was wondering if you could just comment on the levels switching from gas back to coal in your generation portfolio? A couple of your peers have kind of posted dramatic shifts in generation mix given the recent rebound, and was just curious to what you're seeing.

We'll be to. Allen actually has some specifics statistics for you and I think the frame that we're basically seeing -- remember that song by Maxine Nightingale, "Gonna get right back where you started from?" Those are Allen's statistics in a nutshell. Allen?

Well with that as a lead in, let me talk about that in 2 different ways. One way to sort of think about it in terms of energy mix. So in other words, what percentage of our electricity is produced by coal as opposed to natural gas. If you look pre-2012, so if you look at sort of the average of 2008, '09, '10, '11, 3 or 4 years before 2012, we were at about 59% of our electricity was produced with coal. Last year we're about 45%. So in 2012, we're at 45%. However, this year we see that bouncing back to 57%. So at this point at least, 2012 looks to be a bit of an anomaly because, as Gale pointed out, with his vocal analogy, the 57% is pretty close to the 59% that we saw before 2012. That was driven not only by lower natural gas prices or low natural gas prices in 2012, but we did take a very long outage at our South Oak Creek power plant when we did the tie-ins of the AQCS equipment, so we had both of those things going on. In terms of fuel burn, we burned about 8 million -- just over 8 million tons of coal last year. I expect we'll be close to 11 million tons this year. So we see coal bouncing back. Natural gas last year, we're at 45.5 BCF. My current forecast is about 33. So, at this point at least, it doesn't look like a secular trend. But obviously if we saw low natural gas prices again, you could have somewhat of a replay of 2012.

And do have one other advantage, and that is, when you look at the efficiency and the heat rates of our new Power The Future units, I believe our new Port Washington natural gas fire combined cycle units have the best heat rate in the Midwest market in our new expansion units at Oak Creek and our older units at Oak Creek are in the top decile in the Midwest in terms of efficiency. So they will be dispatched depending upon the comparative costs of coal and natural gas. But we have very efficient units that are serving our customers well.

Paul Ridzon with KeyBanc Capital Markets.

Just to follow-up on that question. What natural gas price range would you kind of start to see some season meaningful switching back to gas?

Well if you -- in order to answer that question, you have to talk about what type of coal are you using? At Sub-bituminous coal, if your unit -- and remember our Pleasant Prairie Plant and our South Oak Creek, they are already 100% sub-bituminous coal. So to actually see them being out of the market as compared to natural gas, you'd have to see natural gas down and say maybe at the $2.75 to $2.50 range. So you'd have to see pretty low gas prices to actually see those units displaced. Now, the current -- the Oak Creek expansion units are currently on bituminous coal. So we really want to, as Gale mentioned in the script, we want to be able to burn blends of sub debt and bituminous coal. But with those units on bituminous coal, you can see those displaced in gas prices in the $3.50 to $3.75 range on bituminous coal. But if we can eventually get to high blends of sub-bituminous coal at those Oak Creek plants, I wouldn't see the displacement occurring until those much lower natural gas prices that I talked about, that $2.50 to $2.75.

And secondly, just a point of clarification, you expect O&M to be flat to up 2%, is that what you said?

For the year, that's our plan. Flat to plus 2%.

And then lastly, how is April weather?

April weather, up until today, has been a bit chilly. But we're having 81 degrees and sunshine today. But we have had a chilly April.

Does your second quarter guidance bake that in and assume normal?

At the moment, because June also has a fair amount of air conditioning demand in our forecast, we've decided to simply stick with normal weather for our second quarter guidance.

Paul Patterson with Glenrock Associates.

Just a few quick questions. First of all, I guess when we look at the Page 7 of the factors affecting earnings for the quarter, I wasn't really clear what the rate impact was. I mean it sounds like you guys had a rate increase beginning of the year. And just -- I don't see where that showed up.

All right. We'll let Pat or Steve give you the line time where it shows up we did have a rate increase. But we had a rate decrease for our natural gas distribution businesses. But a rate increase for our retail electric business. Steve?

Yes, that's correct. And the rate increases were offset on electric side by costs. So that's how come it didn't fall through there. And on the gas side you said the decrease of the gas was offset by reduced O&M.

I'm sorry. Could you repeat that again?

As Gale said, our rate increases were offset by cost increases and the decreases on the gas side were offset by cost decreases in O&M.

So -- but I mean just -- when I look at this, it looks like weather was a big driver obviously and if we take weather and the impact of leap year out, I mean -- I know there was depreciation, and what have you, but just on that operating level, it just seemed that the quarter -- that there was obviously something dragging it. I was just wondering what that might be.

Well, when you look at -- when say dragging it, I mean there were a number of things that entered back in to our O&M expenses. For example, last year as Pat mentioned, while we had a base rate freeze, we also had a regulatory amortization holiday. So we began -- although in some cases with a bit longer amortizing lives, we began flowing amortization back through our income statements. We obviously had just a touch of other costs. Basically, we're exactly on plan. I mean we're projecting 0% to 2% increase in O&M. That's where we are. The higher revenues are somewhat offset by various factors and yes, the weather, the share repurchases and the uptick at WE Power were the positive items that carried the day.

Okay. I mean, I was still taking that into account. I'll follow-up offline, just maybe just my own math here. And then, when it comes to the depreciation lines, you guys said you did some study that helps out by $3 million in the quarter.

No.

I'm sorry. What was that then?

Steve can explain that.

The depreciation, that's fairly simple. The depreciation as Pat mentioned in the remarks, the big driver there is the depreciation this year on the air quality-control project. That was over $800 million project and the depreciation, that was pretty significant on that. But I want to go back your question because it was a good question on where is the pricing in the factors. And this factors sheet just had the high-level items. On the electric side of the business, we had rate increase. On the gas side of the business as we said, it's a decrease. So those 2 basically wash. It's not that big. We're filing our 10Q Thursday afternoon and we'll have much more detail in that. But the short answer is, the rate increase on the electric was offset by the decline on the gas. Does that make sense?

Sure. And we'll check out the 10-Q. But I did think that you guys were lengthening the life -- the depreciable life of some assets. Did I get that wrong?

No. What we have -- no, you probably mistook something that was said. There's no significant difference in the depreciable lives of our assets.

In 2012, we did a study on the new WE Power asset and in 2012 we made that change. But that's consistent '12 and '13. So that was something that happened in 2012.

We did a final study on the asset lives -- the depreciable lives of our new Power The Future units in 2012, but that should be, as Steve said, that should be -- what you're seeing in '13 should be completely comparable.

And that would be with synced up with rates, I would assume, right?

No. Because, WE Power being...

Okay. Got you. Okay, that makes sense. Okay, got you. And then in terms of the sales forecast and what have you, I don't want to always ask this question, but it does seem that -- it seems sort of weaker than expected. I mean, has there been any change in your outlook at all in terms of usage? I mean -- I know Greg know asked you a little bit about this on the industrial side, but I'm just wondering on the sort of the nonindustrial side? Any change in that at all?

No. And it's a good question and you're right to ask question. We sit back at look at the numbers and ask ourselves the same question. But if you kind of take a look at setting industrial side is you're asking us to do. Actually on a weather normal basis, we were better than we thought on residential. On a weather normal basis, we were a little bit worse than we thought on small commercial and industrial. But it's a 3-month period, and weather normalization is not that quite precise. So when we sit back and look at the mix of residential and small commercial and industrial, actually I think we're as well off, if not right on target to where we thought we would be after the first quarter.

All right. Well, ladies and gentlemen, I believe that concludes our conference call for today. Thank you again for participating. If you have any other questions Colleen Henderson will be available in our Investor Relations office. That number is (414)221-2592. However, if an Italian opera singer answers. Please hang up. Thanks everybody.