Feb 5, 2008
Executives
Gale Klappa - Chairman President and CEO Rick Kuester - President and CEO of WE Generation Allen Leverett - CFO Jim Fleming - General Counsel Jeff West - Treasurer Steve Dickson - Controller
Analysts
Greg Gordon - Citi Investment Research Doug Fisher - Wachovia Michael Lapides - Goldman Sachs Reza Hatefi - Polygon Investment Paul Ridzon - Keybanc Dan Jenkins - State of Wisconsin Investment Edward Heyn - Catapult Capital Management
Operator
Good afternoon, and welcome to Wisconsin Energy's, 2007 year-endconference call. Before the conference call begins, I will read the forward-lookinglanguage.
All statements in this presentation other than historical facts areforward-looking statements that involve risks and uncertainties, which aresubject to change at any time. Such statements are based on management'sexpectations at the time they are made.
In addition to the assumptions andother factors referred to in connection with the statements, factors describedin the company's latest Form 10-K and subsequent reports filed with theSecurities and Exchange Commission could cause actual results to differmaterially from those contemplated. During the discussions, referenced earningsper share will be based on diluted earnings per share unless otherwise noted.
This conference is being recorded for rebroadcast, and allparticipants are in a listen-only mode at this time. After the presentation,the conference will be open to analysts for questions and answers.
Inconjunction with this call, Wisconsin Energy has posted on its website apackage of detailed financial information on its 2007 yearend results atwww.wisconsinenergy.com. A replay of our remarks will be availableapproximately two hours after the conclusion of this call.
Now I would like to introduce Mr. Gale Klappa, Chairman ofthe Board, President and Chief Executive Officer of Wisconsin EnergyCorporation.
Gale Klappa
Colleen, thank you. Goodafternoon, everyone, and thank you for joining us on our conference call toreview the company's 2007 yearend results.
Let me begin as always byintroducing the members of the Wisconsin Energy management team who are herewith me today. We have Rick Kuester, President and CEO of WE generation; AllenLeverett, our Chief Financial Officer; Jim Fleming, General Counsel; Jeff West,our Treasurer, and Steve Dickson, our Controller.
Overall, I'm very pleased withwhat we accomplished in 2007. We made significant progress on our strategicplan including the sale of our Point Beach's nuclear unit andmeeting the construction schedule for our new natural gas and coal units thatare part of our Power of the Future initiative.
We also set new company recordsfor financial and operational performance. Allen will review our results indetail in just a moment.
But as you saw from our news release this morning, weearned $2.84, a share from continuing operations in the 2007. Earnings were$2.64 a share from continuing operations in 2006.
A few weeks ago on January 17, weannounced an 8% increase in the dividend on our common stock. The new quarterlydividend is $0.27 a share, which brings the annual rate to $1.08 per share.
Theincrease will be effective with the first quarter dividend payable on March 1. This action by our board affirmsthe company's underlying strength and the continued confidence we have on ourlong-term business plan.
We have now raised the dividend in each of the pastfive years for a total increase in the quarterly dividend of 35% since thebeginning of 2004. Given the projected completion ofUnit II at Port Washington this year, and UnitI at Old Creek next year, I expect that we will reevaluate our dividend policyduring 2009 with the potential to be providing for more significant increasesin the dividend.
Now, I'd like to spend just a moment or two on ourcontinuing effort to upgrade the energy infrastructure in Wisconsin. Our Power of the Future plan, asyou know, is fundamental with the principle of energy self-sufficiency.
Thecomponents of our focus on self sufficiency include investing in two combinedcycle natural gas fired units at Port Washington, north of Milwaukee, and theconstruction of two super critical, pulverized coal units at Oak Creek, whichitself is south of the city, and our plans to build a significant amount of newwind generation. As you recall back in November of 2002, the public servicecommission approved the construction of two natural gas fired units on our Port Washington site.
The first unit at Port Washington went into commercial service in the summer of 2005.Engineering and construction for the second unit are now essentially complete,and commissioning work is underway. At year-end, the second unit at Port Washington was more than 90% finished.
The unit isexpected to begin commercial service in the second quarter of this year. Now, let's turn to the status of the two new coal fired unitsat Oak Creek.At the end of December, we passed an important milestone.
The project closedthe year at a little more than 50% complete with unit one and common facilitiesat 60% complete and unit two at 24% complete. The project can be broadly dividedinto three major systems, the power island, the bulk material handling systemsand the cooling water intake system.
I would like to brief you on the status nowof each of these three major systems. The power island comprises the two units, each with its ownboiler, turban, generator and air quality control equipment.
While progress isbeing made across the side, our contractor Bechtel Power Corporation isfocusing their efforts on the time critical activities including the erectionand welding of pressure parts in the boiler. In addition, Bechtel is making progress on the unit onesteam turban generator including the setting of the upper casings on the lowpressure turban.
The first of six cooling water pumps has also been placed intothe pump station. Turning now to Bulk Material Handling, which consists of thecoal handling system and the limestone gypsum system, I am pleased to reportthat the new coal handling equipment was completed and placed in service in thefourth quarter last year.
The new system is up and running unloading railcarsand delivering coal to the existing Oak Creek units. This has allowed us to decommission theold coal delivery system located on the dock area and transfer that area overto Bechtel.
Bechtel has now begun work in the dock area to build the materialhandling structures for the limestone and gypsum and the equipment for use for theair quality controls. Now, I'll discuss the status of the cooling water system anda little bit later I'll address the permitting issue.
We had completed alloffshore construction of the tunnel and the water intake. This tunnel willprovide cooling water to both the existing units and to the two new units at Oak Creek.
Our contractoris now completing the onshore civil works associated with the new coolingsystem and is installing mechanical equipments in these and the new Oak Creekpump station. I should point out, as we look at progress as a whole, thatNovember and December were very difficult months for construction in Wisconsin with anunusual amount of snow in December that impeded Bechtel's progress.
However,Bechtel continues to forecast that the units will be completed on or before theguaranteed schedule, which calls for the first unit at Oak Creek to begin commercial service at theend of September 2009 with the second unit following one year later inSeptember 2010. We're tracking within the approved construction budget for Oak Creek and progress ofthe site continues.
Now, as you know, there are four major permits needed tobuild the facilities at Oak Creek.These include an air permit, a wetlands permit, a permit from the US Army Corpsof Engineers, and finally, a water pollution discharge elimination permit. Wehave received all of these permits and each of them remains in effect unless itis overturned by a court or an Administrative Law Judge.
In September of 2005, we resolved all legal challenges tothe air permit. Also in February of '06, we resolved the outstanding legalchallenge to the wetlands permit.
Our permit from the US Army Corps ofEngineers was received in May of 2005. To date, no appeals have been lodgedagainst this permit.
On the last permit, the Wisconsin Pollution DischargeElimination System Permit, a contested case hearing was held during March of'06 and in July of that year. A Wisconsin Administrative Law Judge upheld thedecision by the State Department of Natural Resources to issue the permit.
Theparties opposing the permit then filed for judicial review in Dane CountyCircuit Court. On March 5 of 2007 the Dane CountyCircuit Court issued its ruling.
The court affirmed, in important respects, thedecision by the DNR to issue the permit but also remanded certain aspects ofthe permit in light of a federal court case called River Keeper II that couldaffect power plants nationwide. Following that decision in March of '07, two thresholdquestions had to be answered.
The first is whether the new units at Oak Creek qualifytechnically as an expansion of an existing plant and then secondly, whether thewater intake system we’ve chosen is still the best available technology. We believed that the additions at Oak Creek qualified as an expansion of anexisting plant, and the Wisconsin Department of Natural Resources also agreedwith this conclusion.
However in a decision on November 29 2007, the AdministrativeLaw Judge in the case ruled that the units must be treated as a new facilityfor purposes of this permit. So we have submitted to the Department of NaturalResources here a request to modify the permit, and we expect to submitadditional information in.
We expect that the Wisconsin Department of Natural Resourceswill issue a draft modified permit for public comment in the first half of thisyear. We have also on a separate track appealed the Administrative Law Judge'sruling to state circuit court here in Milwaukee.We took this action even though we don't believe that the ALJ's decision is afinal order, simply to ensure that we protect our right to appeal.
TheDepartment of Natural Resources and the City of Oak Creek have also appealed this AdministrativeLaw Judge ruling and the parties have now requested that all of these appealsto be consolidated into a single case. We're convinced that the water intake structure we'rebuilding is the best environmental solution.
It minimizes the impact on thelake, results in lower air emissions, less use of coal, and less use of Lake Michigan water than other types of cooling systems.Our plan is to have the first unit at Oak Creek in service as we set earlier by the end of September2009 on the guaranteed schedule. The second unit would follow one year later in2010.
Now I'd like to update you on our Blue Sky Green Field windproject that we've been working for a number of months. In February '07, the PublicService Commission approved the project as a traditional utility rate basedinvestment.
In late March last year, we signed an agreement with Vestas WindSystems for 88 turbines. Each of the 88 turbines has a capacity of 1.65megawatts.
The cost of this project is expected to be approximately$300 million, excluding capitalized carrying costs. Construction began inearnest of the site in June of '07.
To date all of the foundations andelectrical cabling have been completed, and the turbine components beganarriving at the site in the fourth quarter of last year. 32 Towers are nowerected and are in various stages of mechanical completion.
We expect to achieve commercial operation of the entirewinds farm by mid year this year. The project continues to be on schedule andon budget.
Our new wind farm, by the way, will double the amount of windcapacity operating in Wisconsinand will help us meet the renewable portfolio standard in the state for theyear 2010. Now, as you may know, the Wisconsinrenewable portfolio standard increases from 5% in 2010 to 10% in 2015 at thestate wide level.
The standard sets targets for each of the utilities using anhistorical base line. Using that base line, approximately 8.5% of our retailelectricity sales must come from renewable sources in 2015.
Meeting the moreaggressive 2015 targets will require several additional projects. So, to keep moving forward, we have exercised an option thatwe negotiated with FPL Energy to purchase all rights to a new wind site in Central Wisconsin.
FPL will turn the site over to us, andwe expect to install approximately 100 megawatts of new wind capacity there.The projected in-service date for this capacity would be late 2010 or 2011. Finally, before turning it over to Allen, I would like toreview the results of our retail rate proceedings in Wisconsin.
In May of '07 as you recall, wefiled retail rate cases for our electric gas and steam operations across thestate. On January 17, we received an order from the commission that resolvesall of the cases.
Let me briefly walk you through the results. The commission authorized $389 million or 17% increase inelectric rates, to recover costs associated with the building of our Power ofthe Future units, costs associated with transmissions, investments in renewablesand efficiency programs and costs related to compliance with environmentalregulations.
The commission also authorized a $4 million rate increase forWisconsin Electrics Gas operations, a $3.6 million total increase for our steamoperations and a $20 million increase for Wisconsin Gas. The commission reduced the allowed return on equity forWisconsin Electric from 11.2% to 10.75% and left unchanged the financial equityratio range at between 48.5% and 53.5%.
For Wisconsin Gas, the return on equitywas also set at 10.75%, but the financial equity ratio was moved down to arange of 45% to 50%. Now, I'd like to explain how the 17% electric rate increaserented to the company actually translates into a rate increase of a little morethan 3% for our customers.
As you may recall, in our sale of our Point Beachunits, we received more than $900 million of cash proceeds. That's from thegain on the sale and the liquidation of the decommissioning proceeds.
We committed to use this cash for the benefit of our customers.So on the rate order, the Wisconsin Commission determined that a total of $670million of the Point Beach proceeds would be used as bill credits for Wisconsin retail customers over a three year period.Approximately $316 million of the Point Beach proceeds will beused as bill credits during 2008, $240 million in 2009 and approximately $114million in the year 2010. Therefore, by using the PointBeach proceeds as bill credits, our Wisconsin customers will experience a small 3.2% increasein 2008 and 2009.
And now, I'll turn the call over to Allen who will give youmore details on our financial performance for the past year. Allen.
Allen Leverett
Thank you, Gale. I'm going to focus my remarks thisafternoon on earnings from continuing operations.
Information regardingearnings from discontinued operations is included in the earnings package. AsGale mentioned earlier, our earnings from continuing operations were $2.84 pershare in 2007 versus $2.64 per share in 2006.
On a consolidated basis, our operatingincome was $629 million versus $569 million in 2006 with an increase of $60million. Operating income for the Utility Energy segment, which iscomprised of Wisconsin Electric, Wisconsin Gas and Edison Sault, was $586million compared to $533 million in 2006, for an increase of $53 million.
Positive earnings drivers for this segment in 2007 includedweather at $41 million, volume growth in our electric business at $15 million, thesettlement of a billing dispute with our largest customer at $9 million and thefull year impact of a rate increase implemented in January of 2006 at $8million. The primary negative driver in 2007 was unfavorable electricfuel recovery.
This reduced operating income $15 million as compared to 2006. Otheritems in total reduced operating income $5 million.
Netting the impact of thepositive and negative factors I just reviewed brings you to the $53 millionincrease in the utility segments operating income for 2007. Operating income in the non-utility energy and corporate andother income segments, which primarily includes We Power, was up $7 million.The key drivers of this increase were the placing and service of the new coalhandling facility at the Oak Creekexpansion.
This increased operating income $3 million. Other items in totalincreased operating $4 million in this segment.
Taking the changes for each ofthese segments together brings you back to the $60 million increase inoperating income for 2007. Other income including our earnings from the AmericanTransmission Company was up $1 million in 2007.
Total interest expense was down $5 million. This decrease islargely driven by our ability to capitalize interest related to constructionactivity.
Consolidated income tax expense increased $41 million as compared to2006. This increase was driven by higher earnings and a higher effective taxrate.
In 2006 we recognized approximately $6 million in state tax operating losses;we did not have a similar item in 2007. Excluding the benefit of the state item I mentioned for2006, our effective rate was 39.2% in 2007 versus 37% in 2006.
Adding theseitems brings you to $337 million of net income from continuing operations for2007 versus $312 million of net income from continuing operations last year. Inearnings per share terms, this equates to $2.84 per share versus $2.64 pershare in 2006.
Now, turning to cash flow. During 2007, we generated $533million of cash from operations.
This compares to $730 million in 2006.However, you should keep two things in mind when interpreting our cash fromoperations on a GAAP basis. First, in 2007, we paid approximately $108 millionin cash taxes in connection with the sale of Point Beachand the liquidation of the nuclear decommissioning trust.
Although these taxeswere funded by the proceeds from the sale and the liquidation of the trust,GAAP prescribes that we reduce operating cash flows for these payments. In 2007 and going forward, the investing section of the cashflow statement will show an increase in cash as the unrestricted cash isreleased.
Back in 2007, we also issued approximately $7 million of bill creditsto retail customers in Michigan.These bill credits were funded by the restricted cash from the Point Beachproceeds. But again, GAAP calls for the same treatment of the cash as describedabove.
Adding both of these items back to cash from operationsbrings you to an adjusted cash from operations value at $648 million for 2007.In 2008, we will provide both GAAP and adjusted measures of cash flow. Webelieve the adjusted measure is more representative of the company's ability togenerate cash from operations for two reasons.
First, the customer credits arebeing funded from the proceeds of the Point Beachsale that are set aside in a restricted cash account as opposed to cash fromoperations. And second, once all of the Point Beachproceeds have been returned to customers, our prices and hence customer billswill reflect the full cost of electricity without any credits.
So, to summarize, as Gale mentioned, the company willbenefit from the 17% increase in electric rates in the Wisconsinrate order. This increase is expected to have a significant positive impact onoperating cash flows as adjusted.
We had capital expenditures of approximately$1.2 billion in 2007. About $540 million of this was dedicated to our utilitybusinesses and $667 million was for the generating units being constructed as apart of our Power of the Future plan.
In addition, we paid $117 million individends. On a GAAP basis, our debt to capital ratio was 58.6% at theend of 2007.
Our adjusted debt to capital ratio was 55.3%. These values are ascompared to a 59.5% debt to capital ratio on a GAAP basis at the end of 2006.The adjusted ratio treats 50% of our $500 million of Wisconsin Energy hybridsecurities as common equity.
This is the approach used by the majority of therating agencies. Capital spending in 2008 is expected to be just under $1.2billion.
Given the continued high level of capital spending in 2008 and thefact that no significant assets sales are planned this year, I would expect ourdebt-to-capital ratio to increase slightly in 2008. Our goal now is to maintain our debt-to-capital ratio at nomore than 60% during the period we're constructing our new gas and coal-firedgeneration.
This is a bit lower than our previous goal of 61.5% and wouldexclude the portion of the hybrid securities that are treated as an equityequivalent by the credit rating agencies. We are using cash to satisfy anyshares required for our 401-K plan, options, and other programs, but goingforward we do not expect to issue any additional shares.
Now, before I touch on 2008 earning guidance, I want toexpand a bit more on the outcome of the rate case in Wisconsin Retail Jurisdiction.Now as Gale mentioned earlier, we received total price increases of $470million on an annual basis across all of our utility operations. Of thisamount, a total of $284 million is going to cover lease payments being made byWisconsin Electric, WE Power, to recover costs that were previously deferredand to cover the projected increase in American Transmission Company's tariffs.
As such, this component of the increase will not have adirect impact on book income at the utilities, but the balance of the rateincrease will go to cover expected O&M increases and provide a return of andon new investments that are being made at the utilities. To the extent a priceincrease goes to cover an O&M increase, it has no impact on book income.
Also the reduced rate base from the sale of the Point Beachnuclear plant, essentially offsets the other investments we are making in 2008.This coupled with the reduction in allowed ROE from 11.2% to 10.75% in the WisconsinRetail Jurisdiction means that earnings at the utilities are expected to bedown somewhat in 2008 as compared to 2007. Now, there is one other item related to Wisconsin rate case that I believe is ofnote.
At the end of 2007, we had nearly $400 million in regulatory assets onour balance sheet related to the deferred fuel and transmission costs as wellas bad debt costs. As a result of this rate case, we have now been grantedimmediate recovery of approximately $85 million of these assets, and almost allof the remainder is expected to be recovered over the next six years throughthe rates that were just set by the Wisconsincommission.
Now, I'd like to wrap things up with the discussion ofearnings guidance for 2008 as well as the first quarter. Our 2008 earningsguidance remains in the range of $2.80 to $2.90 per share that was provided inour Form 8-K dated January 17th.
At a high level, the expected earnings driversfor 2008 are as follows: a partial year earnings from the second unit at PortWashington, a full year earnings contribution from the coal handling and watersystems at Oak Creek and an increased earnings contribution from our investmentat ATC offset by reduced earnings at the utilities that I had mentioned before. Now my expectation is that the earnings reduction at theutility will be between $0.13 and $0.23 per share.
The biggest variable drivingthis range is electric fuel costs recovery. Our expectation today is that fuelrecoveries for the year will be between fully recovered and $15 million underrecovered.
The additional Port Washington unit and the Oak Creek facility should add $0.14 per share,and ATC should add another $0.05 per share. Combining these with the expectedchange of the utility brings you to a year-over-year change between a reductionof $0.04 per share and an increase of $0.06 per share.
We're starting at $2.84per share in 2007. Plus this range brings you to the $280 to $290 guidance for2008.
We will now be giving specific quarterly earnings guidance,but I did want to provide some input to you on what to expect in terms of thedistribution of earnings within the year. This will be the first full year thatwe will be operating with the power purchase agreement from Point Beach.As a result, the quarterly distribution of earnings will be somewhat differentin 2008 as compared to 2007.
Because the power purchase agreement is designedto resemble the change in market prices through the year, and those marketprices are usually highest during the summer months, we expect the cost of the purchasepower agreement will be highest in the third quarter. In addition, because we no longer own Point Beach,we will not incur the higher operating cost during the quarters when thenuclear units were shutdown for refueling outages.
As a result of these factorsalone, I would expect our quarterly earnings to increase by approximately $0.08per share in the second quarter relative to 2007 and decrease by approximately$0.20 per share in the third quarter. Also, keep in mind, when you're making projections of ourearnings for the second quarter of 2008 in the second quarter of 2007 we bookeda combined $0.08 per share in earnings from the settlement of the billingdispute with our largest customers and the sale of land in Northern Wisconsinand Upper Michigan.
So with that I'll turn things back over to Gale.
Gale Klappa
Allen, thank you very much. Overall, we are on track andfocused on continuing to deliver value for our customers and our stockholders.And I believe it's time for Q&A.
Our operator will come back on line.
Greg Gordon - CitiInvestment Research
Thanks, two questions Gale.
Gale Klappa
Hey Greg, how are you?
Greg Gordon - CitiInvestment Research
I am good. I apologize if you'd answered this in the contextof the call because I hopped off for a minute.
But looking at the renewableportfolio standard in Wisconsin,and looking at your minimum requirements post 2010, beyond the project that youare currently pursuing?
Gale Klappa
Right.
Greg Gordon - CitiInvestment Research
How much renewable resource will you have to acquire orpotentially have to acquire and if we are all lets say when turbines given thecurrent cost of building them, how much in incremental capital investment mightthat be?
Gale Klappa
Well, as you know, we will have to ramp up to the 2015standard. And as I recall, we were probably needing to add roughly 800 to 900megawatts of additional renewables.
Greg, you are right, right now, much ofthat looks like wind. But probably we won't be able to do all wind.
My guess isthe lion share of it will wind, there may be a biomass project or some otheralternative form of renewable. But by and large the most economic way toapproach it today is wind.
And I would say roughly 800 to 900 megawatts ofadditional wind. From a capital standpoint, that’s significant amount of money.My guess is you can look at Allen.
Allen Leverett
Today's price, Greg it will be about $2,000 a kw. I would expectit will be somewhat higher than that in the future, but I think it's a workingassumption, assume $2 million a megawatt or $2000 a kw ton scales range so youcan easily get into the $1.6 billion to $1.8 billion range potentially again ifit all comes from one project.
Greg Gordon - CitiInvestment Research
So just rough math, because it looks like given your currentcash flow profile you could fund that internally, that's another potential $800million of equity that could add $0.70 a share to earnings over the 10 to 15period, if that were earning what is roughly your current return on equity?
Allen Leverett
That's a pretty reasonable assumption, Greg, yes.
Greg Gordon - CitiInvestment Research
Okay. Second question is, I know you believe that the waterintake tunnel is going to wind up being the best available technology, or ifnot the best development technology, is still going to wind up being theprimary cooling technology for the plant.
Can you tell us what, if any, yourparallel path is to make sure that the plant comes on, and comes on in a waywhere its heat rate and the performance are in line with the contract terms if,in fact, it discloses against you?
Gale Klappa
Sure. And I think it's a very good question, Greg.
And Ithink to try to simplify it, we have three parallel paths, and I'll ask Rick tohelp out with anything else, if you would like to add. The first path isclearly to work with the regulatory agencies, the Wisconsin Department ofNatural Resources and the Federal Environmental Protection Agency on a newmodified permit, and that work is well underway.
The second, as I mentioned earlier, is the court appeal ofthe administrative law judge’s decision. A number of us are joined together toappeal the administrative law judge’s decision, not just our company, but theCity of Oak Creek, and the state Department of Natural Resources, which is theagency that issues the permit.
So, we have filed and expect the cases will allbe consolidated into a single case. So we have a filed a legal appeal incircuit court here in Milwaukee.
And the third is really a look that we've had at precedenthere. And I think it's very important to point out that we were permitted tobuild this water intake system.
The decision at the time the permit was grantedwas that this water intake system was indeed the best technology availableunder the rules for expansion of an existing plant. Well, now the rules have changed in midstream.
So we builtthis system in good faith. We still believe it's the best available technology,and we think there is precedent that's clearly evident for when the ruleschange.
Once you have been granted a permit and there is, in essence, acompliance schedule or an implementation schedule, it could be put in place.That, if indeed it ends up being cooling towers, then we could open the plantson schedule, operate the plants, and be given time to build the cooling towers,and ultimately comply, if indeed the technology decision turns to coolingtowers instead of the water intake system we've built.
Greg Gordon - CitiInvestment Research
You're saying that you think the legal precedent would allowyou to operate the plant with the tunnel as the primary cooling source volumeretrofit at the plant?
Gale Klappa
If indeed the decision moves to cooling towers as opposed toour water intake system, we believe the water intake system will ultimatelyrule the day here, and will ultimately be viewed as best technology even for anew plant at this site. But if it doesn't, your conclusion is correct.
We thinkthere is precedent here that would allow us to open the plant on time, andoperate until we could come into compliance with a different coolingtechnology. Rick, anything to add?
Rick Kuester
No, I think you've covered it Gale.
Greg Gordon - CitiInvestment Research
Thank you, gentlemen.
Gale Klappa
Thank you, Greg.
Operator
And we'll take our next question from Doug Fisher ofWachovia.
Gale Klappa
Hi, Doug.
Doug Fisher -Wachovia
Hi there.
Gale Klappa
That's your new T-Shirt with the big W on it?
Doug Fisher -Wachovia
Just in terms of ATC investments in '08, '09, '10, can youshare anything with us about the amount of money? I guess ATC might beconsidered a little bit overcapitalized, at least this one, as someone else whowas another investor in it was telling me.
What is the budget going forwardthere?
Allen Leverett
Well I guess overcapitalization is in the eyes of beholder,Doug. Something is different, different people will have different views onthat.
But in any case, let me talk some about our investment in 2008 in ATC. Ifyou look at our equity investment as of the end of '07, it was just under $240million.
I think precisely it was $238 million as what we show on the balancesheet. I would expect that we'll make a capital contribution to ATCin the neighborhood of $21 million in 2008.
We'll have just over $50 million ofearnings; they'll pay just over $40 million of dividend. So I would say on anet basis, our investment in ATC will go up about $31 million in 2008 if youroll forward from that $238 million number.
So pretty healthy growth in our equity investment at ATC.Their allowed rate of return course is 12.02%. So I would expect that we'd beable to earn that on an incremental amount of investment at ATC.
I'd rather notput specific numbers out there for ‘09 and ‘10 and beyond, but I would say 2009is a pretty similar looking year to 2008 in terms of the capital that we wouldbe putting into ATC. Is that helpful?
Doug Fisher -Wachovia
Yes, it's very helpful. I appreciate that, and byovercapitalized, that’s obviously referring to the regulatory on that.
And thencould you walk us through on point, how you are going to be handling thatamortization of that gain on the income statement, on the cash flow statement,on the balance sheet as we go through the next three years?
Allen Leverett
Yeah, I would be happy to do that. And I think before I dothat, let me just sort of make sure, always when I try to understand theaccounting, to always keep guiding principal in my head and it helps me, Doug,and it might help you as well.
From the company standpoint, in terms of the waythe income statement at the bottom line, in terms of bottom line on net cash,it's as if we got the 17% increase that Gale talked about. From a customer’s point of view, it's 3% in '08 and asimilar amount in 2009 and the thing that bridges the gap between the twoobviously is the use of these proceeds that's been put in restricted cash.
Butagain, always have in your mind, when you look at the company segment, bottomline, we received a 17% increase. So, with that background maybe, Doug, turn topage 4, in the earnings package and let's look for a second at the incomestatement.
Doug Fisher -Wachovia
Right, it shows up.
Allen Leverett
Right, so in 2007, and I am looking now at the 12 monthsended December 31, 2007, operating revenues will always be reported on a net ofcredits basis. So, whatever the customer pays, net of credits, is what will bereported, shown on the operating revenue line.
So, obviously to come back to a position where we got therate increase that I talked about, come back to that position on the incomestatement, there has to be an offsetting entry. But scan your eye down theincome statement, to that line item called amortization of gain and it's acontra expense of $6.5 million that offsets, in effect, that net of creditrevenue presentation, and you come back to a net number when you come down onthat operating income, as if we'd see the rate increase that Gale talked about,because that is true from the company's perspective of what we received.
So just to review, as we provide the credits to show therevenues top line net of the credits, there will be an offsetting entry callamortization of gain on the income statement. Okay, so that's the incomestatement.
If you will flip then --
Doug Fisher -Wachovia
Then, Allen, the amortization is exactly equal to the threenumbers that Gale shared with us, the interest?
Allen Leverett
Yeah, remember Doug the numbers that Gale talked about werefor the Wisconsin jurisdiction alone. Theywill also be providing credits in FERC and Michigan.
For the FERC and Michigan, credits will be on top of thecredits that Gale talked about. And in addition to the credits that Gale talkedabout, remember these funds are unrestricted accounts, so we expect that theyall are in interest, I mean they will in interest.
So what will happen in 2010,we would expect you give back that interest, but the numbers that Gale talkedabout were just a principal balances.
Doug Fisher -Wachovia
And what's the scheme in FERC and Michigan,is it similar to Wisconsin,or is it different?
Allen Leverett
Well, each of the three jurisdictions, believe it or not,are different, Doug. Michigan,what they are doing there is they are giving the credits.
We are giving thecredits back over 18 months, and so that began in December of last year andwill go for the next 17 months, so that will be over an 18 month period, asopposed to the three-plus year period in Wisconsin. The FERC amount, I expect,will ultimately be a lump sum but there is an outstanding case at the FERC onthe amount of credits that goes back to the FERC jurisdiction.
But I expectwhatever the final amount is, it will be given back as lump sum at some point,and I'm still hopeful that will happen in calendar '08.
Gale Klappa
And three years in Wisconsinfor retail customers, and there will be a true up in 2010. I mean, essentiallythe numbers in '09 and '08 that I described to you are in our rate order, andthen as the account or as interest as this restricted cash account or aninterest, we'll see what is there for 2010 and that'll true up.
We wereestimating the $114 million in 2010 but that will be trued up, and then asAllen said, 18 months in Michiganand high probability of lump sum for the FERC wholesale customers.
Allen Leverett
The lump sum yet to be determined, but the accountingtreatment, Doug, is the same accounting treatment across all the jurisdictions.It’s just varying timeframe over which the credits are given and the amount ofthe credits, okay.
Doug Fisher -Wachovia
Thank you.
Gale Klappa
Well, I thoroughly confused you, Doug
Allen Leverett
So that's the income statement, would you like me to move onto the balance sheet treatment?
Doug Fisher -Wachovia
Yes, please.
Allen Leverett
Yes, okay, if you'll turn to page 5 on the balance sheet,basically what will happen as we provide the credits, we will bring down firston the asset side, the restricted cash balances. So if you look on the balancesheet that's presented on page 5, those are actually broken into two pieces.There is a $323.5 million of restricted cash under investments, and there is$408.1 million of restricted cash under current assets.
So, in effect, as you give the credits, that cash getsbrought down. As that cash is brought down, you discharge the regulatoryliabilities that are shown down in the regulatory liability section.
And thoseare embedded, and if you look at the current liability section, the regulatoryliability line, and if you look at the deferred credits and other liabilitysection, there is another regulatory liability line. Embedded within those twolines are the regulatory liabilities related to this point of each transaction.
So as we give the credit, you bring down the cash and at thesame time you would lose the regulatory liabilities. So, a couple more movingparts, if you will, on the balance sheet.
Okay. And then, finally, on the cash flow statement.
What happenson the cash flow statement, again, since you report revenue on a net of creditbasis, in effect, cash provided from operations is reduced for the credits onan after-tax basis that you've given to customers. Okay.
The offsetting entrythere is in investing. So you'll actually have a positive flow from investingthat comes out of the restricted account.
But again, regardless of whichstatement you're looking at, we'll come back to the guiding principle, which isget 17% rate increase as you buy the company and the thing that reduces theGAAP is the unwinded credit. So hopefully, that's all clear as mud.
Doug Fisher -Wachovia
No, that was very helpful, and that was good. Just one lastquestion on the jurisdictional breakdown of the proceeds, percentage wise?
Allen Leveret
It's roughly at again, these are rough percentages, 87% in Wisconsin retail.
Gale Klappa
It's a little more than 8%, I believe, in Michigan.
Allen Leveret
And the remainder would differ?
Gale Klappa
And the remainder would differ. And also remember, Doug, ofthe proceeds from Point Beach, $85 million was immediately used forregulatory asset recovery at Wisconsin.
Doug Fisher -Wachovia
All right. Thank you.
Sorry to torture you with thatquestion.
Gale Klappa
It's all right.
Allen Leveret
Okay, no problem.
Gale Klappa
Thank you, Doug.
Operator
And we will take our next question from Michael Lapides ofGoldman Sachs.
Michael Lapides -Goldman Sachs
Hey guys, congratulations on a good quarter and a good year.
Gale Klappa
Thank you, Michael. Michael, were you out there with Eli,this morning?
Michael Lapides -Goldman Sachs
I was not out there with Eli, I was actually e-mailing lastweek with oldest brother, and sent along congratulations.
Gale Klappa
Good for you.
Michael Lapides -Goldman Sachs
Couple of real quick questions on environmental CapEx.You’ve still got some decisions and the commission still has some decisionsregarding some pretty significant environmental CapEx scrubbers, et cetera, forsome of your older coal plants. We would love your thoughts on when you willgain clarity on that, when the CapEx for that would likely be determined, whenyou would kind of make a go or no-go decision, in terms of going forward withit?
Gale Klappa
Good question, Michael. The principal decision that isbefore the Public Service Commission Wisconsin right now is for air qualitycontrols, principally scrubbers, at our four existing coal fire units at Oak Creek.
Under ourconsent decree, we would need to either scrub those units by 2012, or retirethem. And SCR is also, as Rich is saying.
So, we have applied tothe Wisconsin Commission with a formal request to receive approval for movingforward, and basically investing in the environmental upgrades of the existing Oak Creek units, andexpected capital expenditure there would be roughly $750 million. The case iswell underway, in fact public hearings were held last night, and myunderstanding is that in the two public hearing sessions from the public, therewas overwhelming support among those who showed up to testify on behalf ofmoving forward and installing the environmental upgrades.
I would expect that the commission, if it stays on itspublic schedule, would make a decision certainly in the first half of thisyear, probably by middle of the second quarter. But, that's the biggest one.
Michael Lapides -Goldman Sachs
And when would you start construction for that?
Gale Klappa
Rick, immediately?
Rick Kuester
Yeah. Very, very soon.
Michael Lapides -Goldman Sachs
A follow-up question. When we think about the bulk of thepower of the future related, especially, to Oak Creek plant when you filed your2009 rate case, how much will be left?
Meaning how much of the capital investedare you already recovering earning on, and earning a return on enough capitalright now in your '08 and '09 rates? And how much will you likely file for inthe '09 case?
Am I right that we are at a point where you are alreadyrecovering earning on, and earning a return on enough capital, the bulk of theexpenditures?
Allen Leverett
We are essentially earning a return on all of theinvestments.
Michael Lapides -Goldman Sachs
Yeah.
Allen Leverett
Okay. The return off doesn't start until the unit goescommercial, with those final lease payments.
So, in answer to your question,Michael, in this '07 case that separates '08 and '09, essentially all of theinvestments for the coal unit, you got a provision to have a return on thatinvestments.
Michael Lapides -Goldman Sachs
Right.
Allen Leverett
So, when you get to 2010, there is little that would be leftthat you have to get an additional increase in rates, at least for return on.Now the return off component or depreciation, if you will, that would have tocome in that 2010, in that 2009 case for 2010, rate making.
Michael Lapides -Goldman Sachs
And I assume it's the same for O&M as well, meaningDO&M on the plant. Once it goes live, you wouldn't start recovering thatO&M.
Allen Leverett
Some of that goes as you – it’s almost pay as you go,because we are of course starting the staffing efforts for the coal plant. Andso, a certain amount of expenses were included in this last case, for that.
So,some of that O&M is paid as you go. In fact, lots of people have to hirewell before the plant goes on line, because they have to do training and thelike.
Gale Klappa
Michael, I'd like to add to what Allen is saying. This year,2008, Rick's (inaudible) wind group will have about 35 million of additionalO&M, compared to 2007.
The lion's share of that is being driven by staffingthat Allen mentioned, of the staffing and training in anticipation of Oak Creek opening, the brand new second unit at Port Washington, and the operation of the Wind Farm. So,much of what you are referring to, Allen, is absolutely correct, is alreadycovered in the rate case that we just completed.
Allen Leverett
And just to be, and I'm sure you are clear on this, Michael,but I want to make sure the other people on the call are clear. Your questionto me was about the rate making and how we're covering this caring cost in ratemaking.
Michael Lapides - Goldman Sachs
Yeah.
Allen Leverett
But obviously the rate making, and what's in rates in thecurrent period, is different from the income that's recognized.
Michael Lapides - Goldman Sachs
Understood.
Allen Leverett
Okay.
Michael Lapides - Goldman Sachs
Understood. Lastquestion and this one may be on the easy side, are settlement discussion talkspossible in the litigation related to Oak Creek in the cooling water towers?
Gale Klappa
Well the answer is, yes, they are possible.
Michael Lapides - Goldman Sachs
Are they under way?
Gale Klappa
We've had some discussions back and forth. Nothing to reportat this point in time.
Michael Lapides -Goldman Sachs
Okay, thank you guys, you'll all have good path, too, then.Thank you.
Gale Klappa
Thank you. You take care.
Operator
And we'll take our next question from Reza Hetafi withPolygon Investments.
Reza Hatefi - PolygonInvestment
Hello, Raza. How're you doing?
Reza Hetafi - PolygonInvestments
Good, how are yourselves?
Gale Klappa
We're doing well.
Reza Hetafi - PolygonInvestments
Allen, I'm sorry if you mentionedthis earlier, but could you give us CapEx breakdown for the next three years,between your existing operations, as well as the Power Of The Future?
Allen Leverett
I'll be happy to do that, Reza.And this detail will also be in the 10-K, that we'll file before too long, butI'll go ahead and give you a preview, so to speak of that. If you look at 2008,so the current year, I would expect to spend right at $1.2 billion on a totalbasis, as I mentioned.
$660 million of that I would expect to be at the utilityand the balance would be fully powered for the PPF units. Moving to 2009, I expect to spendjust over $800 million in capital, call it $816 million in capital.
$592million of that at the utility, the balance at WE power. Then moving to 2010, Iwould expect about $753 of capital at the utility, still a total of $800million for the consolidated group.
So, the balance would be WE power. So just to review, $1.2 billionin 2008, essentially $800 million in 2009 and $800 million again in 2010.
Andthen like I've said, the detailed breakdown and the numbers down to the firstdecimal place will be in the 10-K, but that gives you at least a broad sensefor what we're looking at the next three years, including 2008.
Reza Hetafi - PolygonInvestments
So, that seems like a nice rampon the utility level going to $753 in 2010 from the $500 to $600 ballpark, youguys have been at.
Allen Leverett
Yeah, and the big, big driver in that as you go from really7 to 8, 8 to 9, 9 to 10, as you look at the utility, is the assumedenvironmental spending. So, as Gale was talking about, you get $750 million forenvironmental, that's sort of sprinkled throughout those years and a bit ofthat $750 is in 2011 and 2012.
But that’s what largely contributing to that runup if you will.
Reza Hetafi - PolygonInvestments
Great, and then, I am sorry if you mentioned this. Butcouple of other drivers for the year were weather, for both electric and gas$20 million and $21 million pre-tax versus '06.
Where were they versus normalweather?
Allen Leverett
Actually, it was a pretty modest impact versus normal. As yousaid right there, you just talked on '07 actual versus '06 actual, that’s the$41 million pre-tax.
But if you look '07 versus normal it's only a $9 millionswing. So really, I would say that '06 was a bit more anomalous from a weatherstandpoint than '07.
'07 was pretty darn close to normal.
Reza Hetafi - PolygonInvestments
And, could you refresh us again, I guess you were runningthrough bunch of numbers earlier, but this 284 of continuing operationsearnings. Nice finish to the year versus original guidance.
What were the majorcouple of drivers against that.
Allen Leverett
Well, as you look at the guidance in October versus where wecame out ultimately. Is that your question?
Reza Hetafi - PolygonInvestments
Right.
Allen Leverett
Yes, well there are really three things. When we gave thatguidance, I believe our conference call was on October 31, so we're justgetting into the heating season in Wisconsin.So, I was a bit conservative on my underlying projection for weather, we didbetter than I expected on weather, we did better than I expected on O&M.
And then finally, I had to make pretty conservativeassumptions about where we would end up on recovery of transaction cost relatedto Point Beach. So, when we made that guidanceassumption for 2007, we assume little, if any, of those transaction costs,would be recovered.
So, it was one of these sort of happy circumstance, whereall three of those key areas sort of broke our way, did better on the revenues,better on O&M, and we were treated fairly, I think on the transaction costrelated to Point Beach.
Reza Hetafi - PolygonInvestments
And so the transaction cost is a detriment going to '08 asone of the negative drivers I guess?
Gale Klappa
No. The transaction cost would not, that's completely behindus.
The negative would be the fact that the sale of Point Beach,actually reduces, I mean comes out of it. It's not an earning asset, onceyou've sold it, obviously.
So, essentially compared to '07, where the asset wasearning for nine months of the year, there is about $0.12 differential, becauseit's not in our rate base in '08. Now that…
Reza Hetafi - PolygonInvestments
Yes, sorry, yes. Great, great year, appreciate you guys.
Gale Klappa
Thank you, take care Reza.
Operator
And we'll take our next question from Paul Ridzon ofKeybanc.
Paul Ridzon - Keybanc
Reza just asked my question actually.
Gale Klappa
Alright, well, we appreciate you hanging in there, Paul.
Paul Ridzon - Keybanc
Alright.
Paul Ridzon - Keybanc
Take care.
Operator
We'll move next to Dan Jenkins of State of Wisconsin Investments.
Gale Klappa
Dan, Happy New Year.
Dan Jenkins - Stateof WisconsinInvestment
Hi, how are you?
Gale Klappa
I wouldn't stand out on this one street too long tonight, itwill be up to you, you know what a snow down, Dan?
Dan Jenkins - Stateof WisconsinInvestment
Yeah, I'm waiting for that to stop, myself.
Gale Klappa
What can we do for you, Dan.
Dan Jenkins - Stateof WisconsinInvestment
I have a few things, just first on permitting litigation orwhatever you want to call it. What's the timetable for that process to getfinalized?
Do you have any idea how long it's going to take to get a finaldecision, or is it just really up to the courts and you don't really have aclue or could you give us some insight on that?
Gale Klappa
Sure, I think we have a bit of a clue. As I mentionedearlier in the call, we believe the Wisconsin Department of Natural Resourceswill issue a modified water intake permit in the first half of this year.
Ithink we're very much on track for, would be a draft permit for public comment,but I think we're very much on track with that. Then obviously, once the DNRgets public comment, they will issue a final permit.
The public comment periodis something less than 60 days. I believe for the public its 30, and EPA mayhave 45 days.
So that’s something less than 60 days, and then after that,obviously an environmental group or someone else could contest it, but again Ibelieve that the draft modified permit we believe and hope, it will give ussome ability to continue to move forward with construction and with testing aswe have been able to do so far. So almost impossible to tell when there mightbe an absolute final court resolution as it goes on through several judicialprocesses.
Alright, the key question is do we expect to be able to continue tomake progress and stay on track at Oak Creek, and our solid hope is yes.
Dan Jenkins - Stateof WisconsinInvestment
So, do you expect then a final permit, probably sometime inthe third quarter that would be reasonable?
Gale Klappa
I’m going to ask Jim Fleming, we go through the draft permitstage public comment, and then the final permit. This is our legal counsel Jimfor --.
Jim Fleming
I think we're hopeful we'll get a draft permit around May 1,and then a final permit around July 1.
Dan Jenkins - Stateof WisconsinInvestment
Okay, how about you mentioned that you are also involved inappealing the court decision. Is there any dockets out for that yet or --
Gale Klappa
That one is a little… there is no timeframe set yet. Well, Ibelieve the first administrative hearing on this is next week?
Jim Fleming
Because there were actually three judicial review filings,the three courts that are involved, three judges are involved, need toconsolidate those into one and there is a hearing on that next week, but thatshould not be controversial.
Gale Klappa
So we're in a bit of a interesting situation there with thelegal challenge though. Under Wisconsin law,an appellate is not allowed to challenge an order until it is literally a finalorder.
And our reading of the Administrative Law Judge's opinion here is thatit is not a final order. So the first, after assuming there is a consolidationof these cases, our appeal, WDNR's appeal and the City Oak Creeks into a singlecase.
So the next decision that would have to be made is whether or not we'rein an appealable stage, whether or not this is a final order. Jim?
Jim Fleming
Yeah, we actually, probably just we're not in an appealablestage and the AOJ's order is not a final order. We're asking the court for aclarification of that and as you can tell, this really is a protective measureat this point in time.
Is to make sure we don't lose our appeal rights. In casewe were wrong and there is a final order and we just sat back and didn't doanything.
Gale Klappa
Dan, over time, when one clearly looks at the facts in thiscase, I believe the environmental groups that have appealed this, frankly, arenow in a very difficult position. What they are advocating for is anenvironmental solution that would cost an awful lot more money, it would costcustomers more money and would result in poor environmental performance.
But atthe end of the day, this is a very practical state and I believe the facts willcarry the day and the facts are this is the best environmental solution.
Dan Jenkins - Stateof WisconsinInvestment
So, I think you've mentioned before, what would be theadditional cost you did have to build the cooling towers?
Gale Klappa
Well, certainly north of $300 million.
Allen Leverett
Yes, we've said $300 million before Dan. We did not finalizethat cost, we're doing some more detailed work, but it would be in the range of$300 million to $400 million.
Dan Jenkins - Stateof WisconsinInvestment
Okay.
Gale Klappa
And that would be for more CO2, more sulfur dioxide, morenitrogen oxide, more use of lake water, and making an awful lot of nuisance.
Dan Jenkins - Stateof WisconsinInvestment
Alright, but sometimes since it's the price of being some ofthese procedures. So, we will see how it works out, I guess, looking at yourworking capital on the cash flow statements.
You mentioned that part of thatwas, I think, the $108 million for the tax payments related to the Point Beach,but year-over-year difference it’s about $300 million. So, I was curious, whatelse is in there that's causing that difference?
Allen Leverett
Well, you add two things really. We talked about the highertaxes and higher affective rates.
So, that's certainly affected the cashpayments. And but also it was more about '06 than it was about '07.
We had somevery significant improvements in working capital in 2006, if you couldn'trepeat again in 2007 and those were largely Dan the ones in 2006, were relatedto really getting much more optimal about gas and storage, for the gasutilities.
Dan Jenkins - Stateof WisconsinInvestment
Okay. So, basically '07 is too low and '06 is probably toohigh?
Allen Leverett
Yes. That’s why we're looking at it.
In terms of the wayworking capital is affecting the years.
Dan Jenkins - Stateof WisconsinInvestment
Right. Okay.
Then you mentioned, the items that affected theearnings, and you already talked a little bit about the weather impact, but youalso mentioned the mine settlement and then you had the '06 rate increase. Thatmine settlement I guess that would -- we should look at that as one-time item,is that correct?
Allen Leverett
I don’t expect another settlement with them in 2008, ifthat's your questions. That's for sure.
Dan Jenkins - Stateof WisconsinInvestment
So what kind of net impact should we think of for the mostrecent rate increase going from '07 to '08?
Allen Leverett
Yeah, let me talk to that, and maybe another way to kind ofthink about the guidance, if you will, and also can get at your question. It'shard to look at year-over-year changes when you are going from a year where,essentially, all your jurisdiction were in for rate cases, and as we thinkabout it, we had Michigan, FERC and Wisconsin cases across all of our products.So it's kind of hard to look at weather impacts and so on when you get so manyrates resets.
So maybe a simple way to think about it is, start with theloss of earnings from the Point Beach sale and that'sabout $0.12 a share, because we have that for three quarters in 2007, of coursewe won't have it at all in 2008. Essentially that negative $0.12 is offset byrate base growth.
If you take the two of those, match them together, and it's azero. And now, I will talk about a couple of other factors.
Wetalked about the reduction in the rate of return. So, Dan, if you take what isessentially a static equity base of the utility between '07 and '08 factor inthat we expect to earn less on that static equity base.
Add to that, theincreased earnings though from PTF and ATC and assume for a moment that we werefully recovered on fuel, okay. You make all those assumptions that brings youto something close to not at, but something close to the high end of ourguidance range, and then you move within the guidance range based on not solelybut a big driver where you move within that range its based on where we end upon fuel.
Gale Klappa
So actual fuel recovery.
Allen Leverett
Right, so again its little hard for me to talk aboutyear-over-year when you have so many rate resets, but maybe it’s easier tothink of it in terms of those drivers.
Dan Jenkins - Stateof WisconsinInvestment
Okay, and I was wondering on if you're seen any economic impactfrom the economy yet, as far as either maybe slower residential growth ashousing has slowed down or on the industrial side. I know a number of utilitieswho have said they are starting to see some impacts in a sore economy?
Gale Klappa
Yeah, good question Dan. I think, a couple of point.
We haveseen customer growth slow a little bit. I think for the year our electriccustomer base grew by about 7/10 of 1% we have been seeing slightly north of1%.
So I think from the standpoint of sheer customer growth, we're seeing a bitof a slowdown. On the commercial and industrial side, though, we have not seenit yet.
The fourth quarter was actually a very strong quarter for us on largeindustrial electricity usage and commercial usage. Healthcare was up 5% in thequarter, hotels and logging up 4%, chemical production among our large chemicalproducing customers up 7% mining equipment say Joy Global and SirusInternational up very strongly.
So many of our manufacturing customers arestill operating at very high levels of capacity specialty steel we has aanother strong quarter and of course we're continuing to see very good, verysolid commercial growth around Milwaukee.So at the moment, knock on wood, we really haven't seen any other than customergrowth, we haven't seen any material impact from the nationwide economicslowdown.
Dan Jenkins - Stateof WisconsinInvestment
Okay. And I was curious, on interest expense, you mentionedthat's net of the AFUDC given the amount of construction you have gone on.
Ijust wondered if you could just give me what the gross is versus the net. Howmuch of an impact does the AFUDC have in?
Gale Klappa
So in effect, what’s the cash interest cost incurred by year? If you look at 2006, our cashor gross interest cost, if you will, was $213 million.
If you look at our cashor growth interest cost in 2007, it was $241 million. So that gives you a feelfor cash, interest comps, and in our 10-K of course that will be coming outthat will all be laid out and you can see the chart for three years bycomponent.
Dan Jenkins - Stateof WisconsinInvestment
Okay. And then the last thing I was wondering is, just whythe financing plans are vary?
And then also given the fact you also have quitea bit of short-term debt, are you going to maintain that or you're going toterminate that out as well?
Gale Klappa
Well in terms of financing that I would expect for 2008 inthree pieces, I would expect the permanent financing for the second gas unitprobably in the April-May timeframe that will be around $158 million. I wouldexpect to do term financing at the utility, so specifically, Wisconsin ElectricPower Company I'd expect to do term financing at that level in this calendaryear up to $500 million.
And then we're looking at doing up to $250 million of termfinancing at Wisconsin Energy this year as well. As you roll the 2009, at thispoint I don't expect any more term financing at the holding company, wouldexpect to do some term financing at the utility and then we would do the firstpermanent financing expected the first permanent financing for a coal unit in2009.
Dan Jenkins - Stateof WisconsinInvestment
Okay. Thank you.
Gale Klappa
Great. Thank you for your questions.
Operator
And we'll take our next question from Edward Heyn withCatapult Capital Management.
Gale Klappa
Good afternoon, how are you?
Edward Heyn -Catapult Capital Management
Good, how are you doing?
Gale Klappa
Yes, fine.
Edward Heyn -Catapult Capital Management
Good. Just wanted to ask you a quick question on the newpermit that the DNR is looking at.
I know that you guys sent some comments tothem after the ALJ decision stating your case. Can you kind of walk through howthey are going to judge this new permit?
Gale Klappa
Pretty simply, I think we can capitalize it for you, Ed.There are set of rules under the Federal Clean Water Act which set out thecriteria by which a permitting agency like the State Department of NaturalResources here in Wisconsin, the set of criteria that they must look at to maketheir decision. The set of criteria, there are three tracks under these sets ofcriteria that they can walk down and apply the criteria against the technologyand the criteria by the way allow a decision that is very site specific.
So, that's what the DNR will be looking at. Their frameworkis the Federal Clean Water Act rules as promulgated by the EnvironmentalProtection Agency and then specifically, the tracks under which they aresupposed to examine with specific criteria of how to make this decision.
Andagain the permitting agency in this case the Wisconsin Department of NaturalResources has not only the leeway but the ability to make a very site specificdecision for the individual plant site. Jim, anything to add?
Jim Fleming
No, thanks.
Edward Heyn -Catapult Capital Management
Okay. And then you mentioned that you would expect anappeal, in the best case scenario you get this permit and it's a new permit, sothe appeal clock starts over?
Gale Klappa
I didn't say I expect an appeal. I said an appeal will bepossible as a rule, but we have no way of knowing whether there would be appealor not.
Edward Heyn -Catapult Capital Management
Okay. If the environmental agencies were to issues anappeal, could that process stretch on into your kind of in-service and doesthat cause any problems if it gets to that point?
Gale Klappa
I wouldn't expect the environmental agencies to lodge anyappeal because after the comment period, basically both the WisconsinDepartment of Natural Resources and the Environmental Protection Agency at thefederal level would have had their opportunity to comment. So assuming the draft permit goes final, then it would onlybe an environmental group that might want to appeal.
And certainly given thelack of speed in the court system, appeals could go on literally for years ifthey were taken to several different levels of judicial review. But again Ithink the important point is we believe there is President or basically acompliance or implementation schedule that would allow the plant to open whenconstruction is finished and then use the current system we have in place, thewater in-take system in place, until a final decision through the courts wouldbe made if there is a court appeal related to what is, at the end of the day,the best available technology.
Unidentified CompanyRepresentative
We certainly believe the regulatory agencies have thatdiscretion, and we'll certainly ask them to exercise that discretion.
Edward Heyn -Catapult Capital Management
Got you. And then just one last quick question, youmentioned that the current rate deal is 3% increase for the credits over thefirst two years.
Gale Klappa
3.2% a year Ed.
Edward Heyn -Catapult Capital Management
And what does that equate to on the last, in 2010?
Gale Klappa
Well, in 2010 we can't really you give you affirm answerbecause we will be filing another case in '09 for rates that would go intoeffect in January of 2010. There will be some bill credits still remaining tohelp offset whatever increase we apply for in 2010 until we really but we'relong way away from filing a case for 2010 rates.
Edward Heyn -Catapult Capital Management
I guess that was kind of to my question because if you justlook at it without another rate increase, isn’t the rate increased from '09 to'10 just on this decision going to be almost a double-digit increase? And thendoes that cause problems when you are in front of the commission again for your'09 rate cases because I was kind of getting out?
Gale Klappa
Well, I’m not sure you get the double-digit numbers quite,because it's really going to depend upon what amount of bill credits are stillremaining in this restricted cash account in 2010, and we believe there shouldbe at least $140 million of bill credits remaining in 2010. So I really don'tthink it's my current belief, again a lot is going to turn on what happens tofuel prices going forward, that's going to be a very big variable for allutilities, but for a moment I don't see it has been draconian rate case, Ireally don't.
Edward Heyn -Catapult Capital Management
Okay, great. Well I appreciate the color.
Thanks a lot.
Gale Klappa
You're more than welcome Ed. Thank you very much.
And thatconcludes our conference call for today ladies and gentlemen. Thank you so muchfor participating.
If you have any other questions, Colleen Henderson is readyat the phones in our Investor Relations office, her number is 414-221-2592.Again thanks for participating. Have a good day.