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Executives

Michael W. Yackira – President and Chief Executive Officer-NV Energy, Inc.

Jonathan S. Halkyard – Executive Vice President and Chief Financial Officer-NV Energy, Inc.

Gale E. Klappa – Chairman, President and Chief Executive Officer

Analysts

Steve I. Fleishman – Bank of America/Merrill Lynch

Wisconsin Energy Corporation (WEC) Bank of America/Merrill Lynch Power and Gas Leaders Conference Call September 19, 2012 9:15 AM ET

Steve I. Fleishman – Bank of America/Merrill Lynch

Start with our next panel titled Utilities with Free Cash Flow, which for most sectors wouldn't be maybe such a small panel, but for our sector, it's actually kind of rare. And so we pretty much got among the only ones that fit the mold. And very happy to have with us speaking first, Michael Yackira, who's the Chief Executive Officer of NV Energy. And with Michael is Jonathan Halkyard, who is the new recent Chief Financial Officer at NV Energy. And then we'll have Gale Klappa speak, who's the Chief Executive Officer of Wisconsin Energy. So let me turn it over to Michael to kick us off. Thank you.

Michael W. Yackira

Thanks Steve. Thanks everybody for coming on this better day than yesterday. It was pretty dreary coming in yesterday. I am more pleased Steve about being in this panel because this is brand new territory for NV Energy. The company has never been in a position of having positive cash flow and is becoming rich, as you said, it’s truly better than being on the restructuring panel. So I agree with that hardly.

For those of you who are following along on our webcast, I am going to skip over the Safe Harbor statement assuming that you have already read it, and go straight to the presentation.

General overview on Slide 4 of NV Energy, NV Energy covers most of the state of Nevada. We serve about 95% of the electric load in the state. We have 1.4 million electric customers, about 150,000 natural gas customers in North Nevada that accounts for about 2.5 million customers in total as far as people are concerned in our state. And we serve obviously about 40 million tourists that come into our state as well. It's a vast territory. Interestingly Southern Nevada which is about twice the number of customers of Northern Nevada is about 10% of the geography of the state in comparison to the rest of the state.

On this slide, we show that we own about 5,900 megawatts of generation, a different position from where we were just five years ago and we are producing about 80% of our peak demand. About five years ago, we were producing about 35% of our peak demand. So it's a very different story in terms of our ability to assure reliability, keep cost steady and provide good bottom-line for our investors, and our peak demand was about 7,400 megawatts this past summer time.

Page 5, we start on this slide describing where we have come from and where we are today and we call it NV energy 1.0, 2.0 and 3.0., 1.0 started with the merger of Sierra Pacific Resources with Nevada Power 13 years ago. And soon after that we suffered from the Western Energy Crisis, where we were so short in generation and counting on those market delivered for us, that we had a lot of movement in our price product to our customer, and wound up in a situation where our Public Utilities Commission found some actions that we took were not appropriate and disallowed about $700 million of equity over two and half year period of time. So we lost our investment grade status, we stopped paying dividend and we had a lot of financial difficulties.

During the period from 2002 until last year, we were on a path of recovery and reinstated the dividend 2007. We became investment grade in 2007 as well, and we completed a major generation expansion which I'll describe in a minute, finishing last year with the completion of natural gas plant in Southern Nevada, the Harry Allen plant that in now in rates.

Our 3.0 iteration is transitioning from a company that's dependent upon the Public Utilities Commission to grant us rate increases and having a lumpy profile of both investment and earnings to one that is producing free cash flow and allowing us to deploy free cash flow in a way that will help our investors and our customers.

Page 6, I mentioned on the part that is highlight there, that is, there is less need for rate increases because of the fact that all of our generating assets that have been either acquired or built over the past several years are now in rates. Our ROE is improving. One of the things we suffered from for several years is very significant regulatory lag. We’re closing the gap dramatically and expect to continue to close it. And we are well-positioned strategically if indeed there are opportunities to invest in renewable energy projects that could serve other areas around our state, such as California or the transmission to move that generation.

Page 7 shows in detail the change in the company with respect to our position and ownership of generating assets. Starting in ’03, we owned about 2,800 megawatts and at the end of ’05, we actually owned less than that, because Mohave Generating Station went out of service. So we started ’05 – excuse me ‘06 with about 2,000 megawatts of ownership and that has grown to as I said about 5,900 MW. You can see the assets that we’ve either purchased or constructed in this chart and the net additions of about 3,000 megawatts are all in rates now. We have a very efficient fleet of plant which has kept our price stable and in some cases lowered our price and we have a chart on that I believe in a little bit as well.

Page 6, we had significant growth. We were the fastest growing electric utility for about 20 years. That growth disappeared in 2007 when we all had the effects in ’07, ’08 of the recession and we see over the next several years having rather flat load growth, compounded load growth about 1.2% over that period of time. There is some additional load growth expected in 2014 assuming that the price of gold stays high, and if it does, there are some mines in Northern Nevada that are expected to either be expanded or drilled. So that is the reason for the little higher increase in ’14 than in the other two years on this chart.

But the key to us, our continued growth is going to be keeping a lid on costs which we’ve done very successfully over several years and restructuring the balance sheet, so that we can get our interest cost down. We’ve done pretty well about that going about that over the past several years too.

Page 9, I mentioned the fact that we’ve had for several years a fairly large difference between our regulatory ROE and our earned ROE. You can see from this chart that that has been closed. In northern Nevada quite significantly and Southern Nevada somewhat in ’11, but in ’12 we expect it to be closed even more significantly because of the rate decision made at the end of 2011 by our Public Utilities Commission. And we will continue to see an improvement in that over the next several years we expect.

Page 10, this shows a chart of what our renewable energy portfolio looks like and a quick review of what’s happening in Nevada. We have a requirement to be at 15% our energy coming from a combination of renewables and conservation in 2012 that grows to 18% in 2013. And by ’25, we have to have 25% coming from this combination of renewables and conservation.

We in 2011, we are in an excess position for the first time about 17% against the 15% requirement. We expect it will be closer to 20% this year and expect to have excess renewable credits versus the requirement of the statute over the next several years.

So we are in a position to meet the portfolio of standard cost effectively, a lot of geothermal, but Northern Nevada is making that happen. And we also have the potential of exporting into the areas that surround us as I mentioned before as long as the politics are in the right position for the state meaning that there is a desire for exporting from our state importing and to their state, I think we’re as well positioned as anybody.

Page 11, and the focus of this chart in our review of NV Energy 3.0 is building shareholder value. We have a very customer focused strategy, it starts with our smart grids, smart meter deployments that I’ll talk about in a second. We have employees that are through quality improvement programs, working for ways to reduce cost and improve service. Our constructive regulators are continuing to look at what we file and come up with balance decisions for the benefit of customers and investors, but we don’t have a need for going to our regulators for rate release for the next several years in a material way.

And I think we have a very sound corporate governance that I’ll conclude within a second.

Page 12, every company looks for safe, reliable, affordable energy and I believe that we do a very good job in that, coupled with customers that are more engaged today than they ever have been before because of the information we provide to them through our smart meter program that we call NV Energize. When you combine the customer focus with a constructive regulatory compact, we have the ability to continue to build shareholder value in a meaningful way.

Page 13, this is the result of the generation bills, lower natural gas prices and the affect that they have had on our customers rates. This is looking at residential rates for Northern Nevada and Southern Nevada. You can see in Northern Nevada our rate is actually about $0.02 lower per kilowatt hour for residential customers than it were five years ago. About flat over the past five years in Southern Nevada, but you can see the make up of the rates is clearly speared more towards to the investor today than it has been on the past. That is as a result of the investments we made in generating assets that have proved to be beneficial to both our investors and our customers.

I mentioned on page 14, what we have been doing in continuous improvement. I also mentioned briefly NV Energize and through the NV Energize program the Smart Meter program, we expect to deliver annualized savings in about $13 million a year. We have achieved about half of that in 2012, full year of that in 2013, and that will help in stabilizing and controlling O&M, keeping a lid on O&M.

I mentioned the highly efficient operating fleet that we have now. And with the completion of a transmission line that we expect to finish by 2013, the end of ’13, we’ll have the first time, the ability to jointly dispatch our generating units throughout the state which will also save money for our customers.

Page 15, refers to constructive regulation. We had a very fair decision from our Public Utilities Commission in a very difficult time in the economy. The decision was made in at the end of the year, and produced annualized revenue of upwards about $150 million incrementally.

We have an IRP process in our state that reduces our risk because before we build generating plant or build new transmission both power transmission we have to get the approval of our Public Utilities Commission to do so. And we have gotten good results from that as far as rate recovery is concerned. We now have the ability of a third bullet to change our fuel and purchase power prices quarterly. And that makes the pricing of the product more current and when there is an over and under as there always is in these situations, we true that up quarterly as well. So there isn’t much in terms of over collection or under collection, and that’s stabilizes cash flow, but also again gives the right price signal to our customers.

We also have the ability to recover so called loss revenues from our conservation programs, which have been quite robust in the past several years, but have been reducing in total amount of capital deployed. And we have the potential for higher equity ratio by continuing to strengthen the balance sheet.

My final slide is one on corporate governance. We have been very successful in the past two years in having a resounding approval of our “Say and Pay”. We have significant share ownership guidelines for our officers as well as our Board, and five years ago we separated the Chairman from the CEO, that’s worked very well. We have declassified our board. So several things we have done, I think ahead of the curve in terms of corporate governance, which should be very beneficial to our investors over time.

Let me introduce Jonathan, now Jonathan came to us in July. He spent 12 years with Caesars Entertainment. He spend the past six years at Caesars as the Executive Vice President and Chief Financial Officer, when we went through a reorganization, where we moved Dilek Samil our CFO to the Chief Operating Officer position which we created. Jonathan was a great hire for the company, I’m very pleased to have him as part of the company. So let me introduce to you Jonathan Halkyard.

Jonathan S. Halkyard

Thank you, Michael. And thanks everybody for being here this morning. It’s certainly been a pleasure to join NV Energy and meet many of you and I look forward to meeting the rest of you over the coming months. So I’ll just spend our remaining time talking about what this means for the Company’s earnings and free cash flow going into the future. And I’ll do that by describing our circumstances right now, first against the backdrop of being in Nevada economy.

When most people consider the economy in Nevada, they think about our tourism base and gaming revenues, and certainly that’s a reality I’ve lived over the past several years. But this slide on 19 is intended to demonstrate that really our business is unrelated to gaming revenue, which in the end is really a pricing dynamic as opposed to a volume dynamic in Nevada. And this gaming revenues have declined and now has started to come back a bit, our load in Nevada has been generally flat through that time period.

So what drives our business in Nevada is not so much the tourism business but instead housing formation, business formation and to a certain extent unemployment, and those factors have now been improving steadily for about two years with a number of homes per sale declining, average prices increasing, unemployment levels while still high compared to national averages coming down as well.

So a general improvement in the Nevada economy, slow and steady and consistent with our low growth in our 1% low growth forecast into the future. And while it’s true there’s much of our investments and generation are now included in rates, we do have two material investments ongoing right now. One, NV Energize and the second, our online transmission project, which will both be complete by the end of 2013, and can come into rates after that as Michael mentioned, NV Energize contributing $12 million in annualized savings.

So the drivers of free cash flow in addition to these projects now, being in rate. Our first that our CapEx is going to be decreasing over the next several years, we have an advantage of our NOL carry-forward, which will enable these revenues and earnings to come to the bottom line, and the uses of the free cash flow will be of course, dividend, de-levering the company, and then potentially investing in new high returning investments.

This is a closer look at our capital expenditure forecast over the next several years. You can see that it is first of all, declining compared with the investment phase that we’ve been through, very small amount that’s required for environmental investments and really a small level of growth investment over our roughly $300 million base of capital investment.

Our dividend has been increasing nicely over the past several years, and of course, with capital was 31% increase after the first quarter of this year. We signaled that we intend to grow this dividend by 10% a year for the next several years. And in terms of our priorities for free cash flow, this is our top priority to deliver that free cash flow to our investors in the form of a growing dividend.

We’ll also strengthen our balance sheet. We currently have approximately 45% equity ratios at both ourselves and northern utilities, it’s our ambition to grow that to approximately 50% equity over the next several rate cases doing so principally through retained earnings and retirement of debt. We have fairly modest debt maturities in the next several years, we have a $250 million issue that’s maturing next September, and then primarily a holding company notes that’s maturing in 2014.

We look at these not as obstacles, but rather as opportunities to reduce our cost of debt, that’s a 5.45% cost of debt or interest rate on this maturing bond next September, which we’ll be able to refinance, we would expect a significantly lower rate.

Our capacity needs are fairly modest over the five-year time period. They’re really created by of course, low growth, but as well, the maturing or rolling off of some PPAs, the most notable one being the Griffith PPA in 2017. So I’ll just revisit our earnings guidance for 2012 quickly. Our earnings guidance right now is $1.15 to $1.25 per share.

This is the guidance we introduced back in the first quarter, and we confirmed it on our second quarter earnings call, although the weather has been favorable through the first two quarters, that were comfortable at higher end of this range. And that assumes normal weather for the third and the fourth quarter. It includes flat O&M expense and of course, depreciation increase from the Harry Allen plant, but also of course, the Harry Allen plant now in rates.

So concluding, the main reasons we see that for you to invest in NV Energy and for investors to be interested in NV Energy, that we have an improving Nevada economy, which is of course material to our business. Our dividends have been increasing and we’ve committed to a 10% dividend increase. We’re de-levering the balance sheet over time, growing our equity ratio up to that 50% target, narrowing the spread between our allowed and earned ROE, not depending on new assets coming into rates, and of course, initiating and confirming guidance going forward.

So, thank you for your attention. And with that I will turn it over to Gale.

Gale E. Klappa

All right. Good morning everyone. First, I want to congratulate Michael and Jonathan for the great job they’re doing with NV Energy, but remind you it is not true that Michael is going to add Prince Harry area to the board. I don’t think that. Not in the plan all right, terrific. All right, well we can get to Wisconsin Energy slides, I’m Gale Klappa from Wisconsin Energy, and if we can get the Wisconsin Energy slides up that will be terrific.

What I will be saying today does contain a number of forward-looking statements and estimates, and your results may vary, and that will take care of our disclosure slide. As Michael did, a very brief overview of who we are and what we do at General Motors, we are the largest electric and gas company in Wisconsin. We serve about 1.1 million electric customers and more than a 1 million natural gas customers throughout the State and into The Upper Peninsula of Michigan. We touch about one out of every two customers in the great state of Wisconsin.

A little bit of reminiscing down the memory lane, we have been able over the last decade to establish a reasonably solid track record of performance for our stockholders. We are in fact the only company in any of the major utility indices, the S&P Electric Index, the S&P Utilities Index, the Philadelphia Index, the Dow Utilities Average, the only company in any one of the major utility indices that has been able to grow earnings per share and dividends per share every year since 2003.

Then if you look at our total shareholder returns over the last three years, you can see that we’ve handedly beaten not only the utility indices, but all of the major market indices as well with an 83.3% total shareholder return over the past three years. Past five years, a very similar story, of course those five-year period included the very depth of the Great Recession, but our total return over the past five years is approaching 70%. And then over the last 10 years, we’ve delivered a 308% total shareholder return compared to the numbers that you see on the screen.

So again, we think we’ve established a very solid track record of performance for our stockholders.

The fundamental job of the company, I think we have continued to improve and we’re doing very, very well. We have been named the most reliable utility in the Midwest for the seventh time in the past 10 years, and I’m hopeful that when the all the data is in, that we will now be awarded the most reliable utility in the region for the eighth time in the last 11 years. And that decision will be made over the course of the next couple of months as all the data is analyzed. But reliability is the core of what we do and our folks do it very, very well.

We’ve also focused very, very like a laser on customer satisfaction, because I think all of you know at the heart of the regulated utilities overall strong performance is the heart of the enterprise is reliability and customer satisfaction. And I’m very pleased to report to you that for the second quarter, we recorded the highest customer satisfaction that the company has ever recorded since it began measuring. And to put specifics on that, 88.9% of those who had some kind of interaction with the company over that period of time were very satisfied with their transaction and almost 80% were satisfied, very satisfied with We Energies. Again, the highest customer satisfaction that we’ve ever recorded.

Most of you are aware that the major growth of the company and there has been significant growth in the asset base of the company over the past decade has been driven by a very similar situation to what Mike referred to and that is a very significant need for new generating capacity.

As Wisconsin entered the year 2000, there were constant threats of run outs and black outs, from a standpoint of electric or energy infrastructure the state frankly was in strong catch up mode. We didn’t have enough power plant capacity. We didn’t have enough transmission capacity. The state really needed a major investment and a major upgrade in its energy infrastructure.

We were allowed the step-up to that need and over the course of the last nine years we have completed four mega projects, two major new natural gas fire plants that were brought into service in 2005 and 2008. And I call your attention to the bottom statistic on the slide.

We were able to bring our new natural gas fire units in the service for just under $610 per unit of capacity. If one were to try to replicate these units today they would cost at least a $1,000 per unit of capacity that we’re very pleased that this is by the way, these two new natural gas units north of Milwaukee are the most efficient natural gas units in terms of peak rate and efficiency in the Midwestern market.

Then our most recent completion and this is what $2.3 billion looks like, is two new coal-fired power plants, south of Milwaukee in the suburb called Oak Creek along the shores of Lake Michigan. First unit was brought into service in February of 2010, the second unit a year later in January of 2011.

And again I will call your attention to the bottom statistics on the screen. We completed these two new supercritical coal fired unit with all the most modern state-of-the-art emission controls or $1,950 per unit of capacity.

Today, coal fired units that are being completed in other parts of the country and Duke Energy for example is bringing on an identical unit in terms technology called Cliff Side at the Cliff Side site in North Carolina and that plant is costing $3,000 per unit of capacity. So we believe not only were these good investments for our shareholders but these plants with the kind of efficiency that they are demonstrating will serve our customers extraordinarily well for decades to come.

And the overall impact on our environmental performance is absolutely phenomenal. From 2000 to next year, we will have increased Wisconsin Energy's power plant capacity by 50%, but we will have reduced our emissions of nitrogen oxides, sulfur dioxide and mercury by more than 70%. So a very strong environmental track record with the efficiency and cleanliness of the new units that we have built.

We have just completed, in fact the last two units of the state-of-the-art emission controls at our older power plant at the Oak Creek site. We were just put into commercial operation just a couple of weeks ago. You can see here on this screen, the picture of the emission controls that are now being deployed on the older Oak Creek units. Again we just completed the emission controls for units five and six and units seven and eight at Oak Creek, within the last few weeks.

This was the second largest construction project in the history of the company at a cost of just under $900 million. The project was brought in on time and slightly better than budget.

We're also, as Michael mentioned, we also have a renewal mandate in both Wisconsin and Michigan. The state mandates call for a certain percentage of all of our retail sales of electricity that come from renewals by the year 2015. So we have been adding significant amounts of renewables to our fleet, we’ve invested almost $1 billion in renewable technology for our customers.

Our current project after we've completed the two largest wind farms of the State of Wisconsin, our current addition to our renewable portfolio is a biomass plant that we're building on the edge of the Northern Wisconsin forest, deep in the Northern Wisconsin. It'll be a 50-megawatt power plant, it will be fueled by wood waste from the Northern Wisconsin forest. Construction is under way, we are now today as we speak about 44% complete with the construction.

The plant actually will function in many ways as a cogeneration plant and we will get greater efficiency from this plant because of it. The plant is being built on the site of an existing paper mill in Northern Wisconsin. The plant will provide steam for the operations of the existing paper mill, but it will mostly provide electricity for the grid.

The project cost, we're estimating at $255 million and we expect to have this unit completed and in service by the end of 2013. With this construction being completed and when this plant, when our biomass plant is operational, we will be in a great position to meet the renewable mandate standard through the year 2018 in Wisconsin.

Our focus now as the company is shifting from the mega projects to renewal of our aging delivery infrastructure. And we have a plan to spend up to $3.5 billion on new construction between now and the end of 2015. Much of that as I mentioned to you is, focusing on renewing our aging electric distribution and natural gas distribution infrastructure. Our plan between now and 2016 is to rebuild more than 2,500 miles of electric distribution lines that today, ladies and gentlemen are more than 50 years old.

We're also planning to replace about 28,000 power poles. We actually have some power poles in the grounds that are 100 years old. We’re going to replace more than 28,000 transformers and 100's of additional substation components. And on the natural gas distribution side of our business, our plan would be to replace between now and 2016 about 1,250 miles of aging natural gas mains, the fiber glass, plastic and steel gas mains. About 83,000 individual gas distribution lines, those would be the lines that come off the main feeds and off the streets into your home. And then we are also planning to replace over 0.25 million meter sets. So we move from mega projects to really making sure that we can deliver the future in a very reliable way. While these projects are much simpler to do and they are smaller in scale, they are no less important to the reliability of our network.

We’ve also just announced our plan to convert the last operating power plant inside the city of Milwaukee from coal to natural gas, it’s called the Valley Power Plant and it is a critical piece of energy infrastructure for the downtown Milwaukee area, because it provides steam for over 450 of the downtown buildings in the central area of the business district of Milwaukee, ranging from the Marquette University campus to Northwestern Mutual Life corporate headquarters. So it provides steam for much of downtown Milwaukee for heating purposes and also provides electricity and very importantly on many days, voltage support for the downtown grid.

And on August 17 as I mentioned, we announced our plans to convert that plant from coal to natural gas. All told the work that needs to be done to make that happen will cost about $100 million. The conversion of the plant itself we’re estimating at a $60 million to $65 million capital expenditure, but in order for the plant to be able to have enough natural gas to be fuelled by natural gas, we have to upgrade an existing natural gas pipeline that runs near the Valley Plant.

We just received about a month and half ago approval from the Wisconsin Commission for the pipeline upgrade and that’s about $26 million project. So we will be completing, our plan would be to finish by 2014 the upgrade of the natural gas pipeline that will allow enough fuel to flow to the Valley Plant. And then to complete the conversion of the Valley Plant unit by unit from coal to natural gas and we expect to have that done in late 2015 or early 2016.

So if we summarize, in essence, our plan as I mentioned is to invest up to $3.5 billion in needed infrastructure, that will renew the grid and modernize much of the equipment that we have that is now passing 50 years of age, meet new environmental standards and add clean renewable energy to our fleet. We also with our free cash flow are looking for additional investment opportunities that do not change our risk profile.

As Steve mentioned, it is a rare luxury for utility systems to be positive free cash flow and our definition of course of positive free cash flow is after capital spending on the core business and after our dividends are paid out.

So we are looking for other investment opportunities. We’ve listed several on this slide and I’ll just quickly mention a couple of them. One, we are 26% owner of American Transmission Company, which is a major transmission company that provides transmission service and construction and new transmission line largely within our footprint in Wisconsin and the Upper Peninsula of Michigan.

However, after successfully building many, many additional transmission lines over the course of the last decade, American Transmission Company is looking to use that expertise to add transmission in other parts of the Midwestern United States.

American Transmission Company formed about a year ago, a joint venture partnership with Duke Energy Midwest and the Duke Energy, ATC partnership has proposed over $4 billion of new transmission projects for the Midwestern part of the United States. Those projects are going through the wedding process. I do not believe that all of the projects are likely to get approved, but many of them may well.

And very recently the Federal Energy Regulatory Commission said that whatever of these projects that are approved by the Midwest Independent System Operator, FERC will support a 12.38% return on equity. And again that’s $4 billion of potential projects of which we would be in essence a 13% owner, because of the joint venture with Duke and we own 26% of ATC.

Any of the projects, any of those $4 billion of projects outside of our footprint are not in our number. So that is the potential investment opportunity that we think would be rewarding for our shareholders, would certainly serve our reliability need and not in any way change our risk profile. So that’s just an example of the types of additional investments that we are seeking out.

We also announced recently that we plan with Public Service Commission approval to purchase the Montfort wind farm which is now owned by NextEra in the State of Wisconsin. We are now the major off taker of the energy from that wind farm and we would turn that into an earning asset in our rate base. Again an another example, that's a smaller investment about $27 million, but another example of the types of projects that we are looking for to bring additional value to our shareholders through the use, the productive use of our free cash flow.

As I've mentioned we expect to have $600 million of free cash flow after capital spending and after implementing our dividend policy over the five-year period 2012 through 2016. Many of you are familiar with our dividend policy, but I will repeat it again, because I think it's worth repeating, if you like dividends and particularly if you like dividend growth.

We have had because we’ve had such a very, very positive use of our cash over the course of the building that we’ve done for the last nine years. We've had among the lowest payout ratios of any company in our industry that actually pays the dividend. Our goal now adopted by our board would be to move to a 60% payout ratio by the year 2014. That of course is a level that will get us far more competitive with our peers than the regulated energy industry.

The policy should support double-digit growth in our dividend over the course of 2012 through 2014 and we started out in 2012 by announcing a 15% dividend increase and that was on top of a 30% dividend increase for 2011. So again for 2012 through 2014, we have the strong potential to raise our dividend by double-digits at least 10% annually.

And I might add that, when we get to 2014, we will step back and take another look at our policy. The policy is really to get to the efficient frontier for dividend payout ratio for a company like ours. So in 2014, we will take a look and we will say it is 60%, the efficient frontier is at 62%, is at 65%, but the goal is not necessarily just to get the 60, the goal is to get to the efficient frontier.

We've also de-levered at the holding company. We last spring retired $450 million long-term debt at the holding company, so one way to look at this is that we had over a $1 billion of free cash flow. We've already used $450 million of that to retire long-term debt. And we have implemented a portion of a share repurchase plan that our board has authorized. We have bought back 100 million of the $300 million share buyback authorization from our board and I am very pleased at the results from the first 100 million of share buyback. We were able to buy that stock back at an average price of $30.79 a share, well, well below our current trading area.

So key takeaways and final thoughts about Wisconsin Energy and our future, I believe we’ve been consistently one of the nation's top performing energy companies over the past decade. We have positioned now, ladies and gentlemen, I think to deliver among the best risk-adjusted returns of our industry, positive free cash flow, greater financial flexibility than the company has ever had in it’s history, best in class dividend growth and our goal, to quote that great American philosopher, Tina Turner, is to be simply the best. Thank you.

Steve I. Fleishman – Bank of America/Merrill Lynch

Okay, thanks Gale. I'm happy he remembered who sang that song. Gale, Michael, Jonathan thanks for those discussions. We’ll open up our Q&A session, maybe I'll just kick this off a little bit. If you go back over time with the sector we had a period particularly I think in the 90s, been a lot of excess cash and the like in, one could make the argument that the utility sector often becomes more dangerous when the companies have free cash because and then they get tempted to do all sorts of new and wonderful thing. So I'd like to get your perspectives on that and how are the companies kind of making sure that the cash is used widely, and doesn’t become kind of a temptation to get into all sorts of new areas. So Michael you want to kick this off?

Michael W. Yackira

Sure. Steve, you aptly point out that the industry had been prone to do things that don't necessarily pan out. When I got into FPL in 1989, we are an insurance company, we had the largest position in Orange growth, we owned the cable TV business, we owned real estate, none of which had anything to do with the core competency of the company and my job was to rationalize, in other words divest those things, and performance of the company improved substantially after that.

People went into international businesses that was the next foray which was completely unsuccessful. I wouldn't say totally unsuccessful but buy and large it was. I guess the good news for our investors is that the management team that’s at the company has been through these trials and tribulations and we have no intention of investing in anything that our investors would not see a clear path for constant returns that they would expect. So our focus is going to be on traditional generation, on renewable generation and on transmission, to move either one of those to either for the benefit of our customers or for the benefit of customers in adjacent states with a clear path profitability if we do so and nothing more than that.

Gale E. Klappa

I think Michael is right. The key is focus and discipline. And I remember as well being in Southern Company in the 90s and we bought a lot of stuff, some of which turned out exceptionally well, the distribution company in England. But then I had the privilege of being the CEO of the Independent Power Production in Hong Kong based in Hong Kong, Rick Kuester, our former CFO had responsibility for, but at the end of the day I think the lesson learned from that is simply that you have to stay focused and you have to stay disciplined. And that's why we talk so much about our commitment to not changing our underlying risk profile. The worst you will get from us if any of the projects we talked about on the slide or others that we’re looking at don't materialize, the worst you’ll get from us is the share buyback. And that's a commitment we will materially change the risk profile of the company.

Steve I. Fleishman – Bank of America/Merrill Lynch

One other question and we’ll open up to the audience. So I guess along those lines, we do most of your peer group companies have a lot of capital needs, and funding needs et cetera. So sure it might be tempting at times to look at what if could matchup, companies with free cash, or the companies with lot of cash need that might be a good strategic fit. How much is M&A something that your companies are interested in from that standpoint?

Gale E. Klappa

You want to answer that one first?

Michael W. Yackira

You never say never, but it's not on our top 10 list. And it’s not on our top 10 list and part because as all of you know in our industry it really takes a willing buyer and a willing seller. And at the end of the day in the regulated side of our business which we’re both focused on, we are still regulated at book value. And we have to remember that. Our job is not necessarily just to get bigger, our job is to provide shareholder returns but neither exceed the hurdle rates. And unless you can find a unique situation, where there are enormous synergies in a regulated environment, but you can keep a substantial portion off, it’s very difficult to make one of these work, particularly in a low premium environment.

Gale E. Klappa

The one thing I would add to that is keeping most if not all the synergies to me is part of the equation, but another part of the equation is, if you're going to make any of these transactions work and by the way it’s not on our radar screen either, this is just a general comment. I think keeping the cost to the customer, the price to the customer is low as possible is an imperative because a lot of regulatory matters and issues can be – can wind up being bettered by keeping that price low. So I think the struggle that a lot of these mergers have is jurisdictional issues and which jurisdiction is going to keep the bigger piece of the pie. I think it's more as to do with partly retention and partly what is the ultimate outcome for the customers.

The one other thing, I’ll add is that I think the reason ruminations of the M&A activity, and even main names, will cost a lot of people to step back and think very hard and long about what these ultimately turn out to be for the benefit of investors, if they are going to happen.

Question-and-Answer Session

Steve I. Fleishman – Bank of America/Merrill Lynch

Questions from the audience, over here, just one there and just one there?

Unidentified Analyst

Hi, for NV Energy, slide 13 you were talking about just the rates and how you’re comparing to five years ago. I was just wondering sort of with the reason that fuel tax in parts, how sensitive that might be to natural gas. So I mean, obviously 2012 we’ve had exceptionally low gas prices and so if we develop a dollar, would that really move the needle very much or is the it’s going to be really hard to make a significant move above kind of the historical level and kind of – will you be able to stay at this even if there is a spike in gas price?

Michael W. Yackira

Rob, you asked a very good question because it something that we are addressing before our commission today. For the past several years we haven't had a hedging strategy approved by our commission. We filed something called an energy supply plan every year. And for a variety of reasons we haven't had a hedging strategy that's been approved by our commission. We are putting that before our commission again today with the hope that we would be able to once again reinstitute a hedging strategy that would protect our customers from the potential of a higher, significantly higher natural gas price.

I don't know and maybe Jonathan does, I don't think we necessarily have the statistic on what would happen to the price of our product, but we have to spend up to a dollar for 1 million cubic feet. I do know that we’re about 80% gas, so we are very gas sensitive. While it is a pass through and we make no more money or less money depending upon natural gas prices, whatever you put upward pressure on rates that's not good for customers, that's not good for regulators, so it’s certainly on our minds that we are hoping that commission will see that as a potential negative toward the customer and therefore allows to put hedges on again.

Jonathan S. Halkyard

I would just add one comment to that which is that, while we do think it makes sense at this point to begin hedging with natural gas, we also have a hedge in our portfolio with our coal resources and right now because of the price of natural gas, we’re cycling our coal plants in a way that we have not done in our past and to the extend that natural gas prices increase. We would of course reverse that strategy and we could run the coal plants more than we are right now. So we do have a bit of a hedge built into the business with coal.

Steve I. Fleishman – Bank of America/Merrill Lynch

Next question there, yeah.

Unidentified Analyst

For NV, excuse me for NV Energy you have a slide that show the gap between authorized and realized equity returns. How did that gap get so large initially? To go over again, how you’ve managed to close the gap somewhat and could it be completely eliminated. And then for Wisconsin, do you have the same kind of situation in your regulations?

Steve I. Fleishman – Bank of America/Merrill Lynch

Did you raise you hand?

Unidentified Analyst

Yeah.

Jonathan S. Halkyard

The gap was, the gap is narrowing and it's driven by two things of course, the significant regulatory lag that we experienced in the past two or three years with the investments we’re making and generation principally in the south. And in 2012 those allowed versus the actual ROE is narrowed or will narrow substantially. At the end of the second quarter our northern utility ROE was right at the allowed ROE. In the southern utility, I believe it was about 150 basis points difference there, that persistent difference is caused by a number of assets that are not earning a return, they relate to goodwill from the merger as well as from disallowances going back a number of years to the Western Energy crises. So that is a, that's the difference, I think there was a second part of the question that maybe I…

Gale E. Klappa

Well, let me answer the question about how they would come about. It came about mainly because we were historic test year state and that for so many years we were adding so quickly to our rate base that we couldn't get enough kilowatt-hour sales and growth to make up for the incremental cash and as well as we had the growing cost base too. So keeping a lid on our costs, having a slowdown on our capital and having a recent rate case with a reasonable return has allowed us to narrow that gap. But those legacy assets that Jonathan mentioned, the assets that we’re getting a return off, but not a return on will continue for several years. So there will be a difference between GAAP ROE and Regulatory ROE, but it’s certainly better to be collecting that cash than to be writing that off. So I think that will be ongoing, but the GAAP will be narrowing.

Jonathan S. Halkyard

Yeah. For Wisconsin, we have a bit of a contrast. Wisconsin has a two-year forward-looking test year. And I think we’re the only state in the country that actually has a two-year forward-looking test year. So as opposed to regulatory lag, if we manage the company well, we are much, much more able to get close to or earn exactly our allowed rate of return. And if you look back over the last nine or 10 years, we have either come extremely close to or been dead on our allowed rate of return every year. And again, that’s because of a positive regulatory climate where we go in and project our expenses for example in the rate case, we have pending now. We have filed our projected expenses and capital expenditures for 2013 and 2014, and when rates go into effect, January 1 new rates, January 1, 2013, they will reflect our forward-looking expense. That’s a very positive aspect of the regulatory climate of the balanced regulatory arrangement we have in Wisconsin.

Unidentified Analyst

Yes. Two questions for Gale, first is the – is there any risk that the commission in Wisconsin will look at your two business the power and fuel, say, you’re earning this 11 or something good return on the assets. So if we add it altogether, that means you should only earn a 9% on the regulated, what is the reach that they will start to put it into one head and see the use of blended for the whole of Wisconsin system?

Gale E. Klappa

So a very good question, I would say the risk is in centesimal, and there are two reasons for that. Number one by law, we power the future generating units that we built, are in a separate subsidiary and once the rate of return is set for those plants under Wisconsin law, the return stays in place for the coal-fired units for 30 years and for the natural gas-fired units for 25 years. So by law, now that the commission has set those rates of returns, they really can’t be touched for that long period of time.

And then the second reason why the risk is incentesimal is that the Wisconsin commission has decided for this year and this round of rate reviews to take off the table, and not examine return on equity or capital structure. They’ve announced that our current rate case for example, which is preceding on schedule that there won’t be any testimony related to return on equity or capital structure for any of the Wisconsin utilities. There was a lot of work done by the Wisconsin Commission late last year on return on equity and capital structure and really not much has changed since that time.

So those of us who are in for Wisconsin rate cases this year whereas to file our rate cases based on the current allowed rate of return for the basic utilities, which in our case is 10.4% for the electric utility and 10.5% for our natural gas distribution utilities. So both from a legal standpoint and a practical standpoint, I really don’t see any material risk to the 10.4% return for this round of rate cases. And of course, this rate case will separate for 2013 and 2014. So the next time, we would be in for a rate review would be late 2014.

Unidentified Analyst

Okay. And now my second is that you’re very happy that you have done the buybacks way below the current share price. But if I’m not mistaken, you haven’t done any buyback so far this year. Is that correct? Can we reaffirm that you think that the stock maybe a little bit too high from your take to buyback?

Gale E. Klappa

No, we have. You’re correct. For the first two quarters of 2012, we have not repurchased any additional shares. As I mentioned we completed $100 million worth of the share buyback, and I think a very attractive price in 2011. What I would read into that is that the profile of our free cash flow is such that the majority of our free cash flow is going to come in 2013, the $600 million that I mentioned is going to come in 2013 and 2014. So we’re kind of matching what we do as we look at our alternatives to the profile of our free cash flow.

Now I will say this, we have continued to do better than our internal projections on cash flow. So and I’m not projecting, we’ll do this, but if you see us buying back some modest amounts of shares as the market chokes, it doesn’t mean that we’re giving up on any of the investment opportunities, it just means we’re taking advantage of a market opportunity

Unidentified Analyst

Okay. Gale can you give us a up to figure that goes with the $3.5 million related to the aging plant or the old plant, the 50 year old plant which I assume had been fully depreciated or you have been renewing it as you go along and therefore it’s not fully depreciated.

Gale E. Klappa

You’re correct. We have been renewing as we go along to some extent. So much of it is not fully depreciated. But certainly the stuff that is 50 years and has not had any renewable is fully depreciated. I would say in our capital plan obviously we have a $255 million biomass project, we’ve got several other thinks that we were wrapping up this year like the major year quality controls that I showed you at the older Oak Creek plants. But going forward, more than half of our capital spending, the up to $3.5 billion that I mentioned is for the network renewal.

Unidentified Analyst

So that will all be new rate base?

Gale E. Klappa

That will all be new rate base. That is correct.

Steve I. Fleishman – Bank of America/Merrill Lynch

I’m going to if you don’t mind, steal one my final question before we end up and I think given Gale and Michael, your two service territories, Gale you’ve got a pretty good view potentially on where the industrial economy is heading and Michael you might have an interesting view on where the housing market is heading. May be you could kind of give us your latest data point and any thoughts into next year on both of those topics, Michael you want to start?

Michael W. Yackira

Sure. We’re certainly seeing stabilizing the economy, we have seen some housing starts most of those are what I would call in-fills and that they are in developments, that have land, that was ready to be built-on and developers who are now putting houses on those pieces of property to get some return on those investments. We’re seeing a decline in the number on the housing inventory. We’re seeing some decline in unemployment, but it’s still rather high.

So for us well, one other comment, we’re seeing a lot of growth in the Northern, Eastern portion of the State because of mining, unemployment is virtually zero up there, everybody who wants to work can work. We’re seeing some pretty nice growth up there. But I think by and large, what we’re going to have to see to see growth come back is to see housing starts be more robust and employment is going to drive that. So that’s what our indicator is, and we’re seeing some of that, but we’re hoping to see more.

Gale E. Klappa

On the industrial side, and about 38% of our total retail sales of electricity do go to manufacturing customers in Wisconsin, in fact Wisconsin has more manufacturing jobs per capita than any other state in the country. But these are high end sophisticated manufacturing jobs, the type of highly engineered products that really are not outsourced in terms of their production to China.

We serve industrial customers in 17 different sectors of the economy, ranging from metal fabrication, to iron ore mining. But I do think we have a pretty good view of contemporaneous view of what’s going on with the economy.

A long story short, if you look at the last 13 weeks, compared to the 13 week period of a year ago, the comparable 13 week period have those 17 sectors ten are growing, the remainder are flat or down less than 2%. So we are seeing some modest growth in industrial demand for electricity. The unemployment rate in Wisconsin, 7.3% still materially better than the national average, nothing they’re right home about kind of study issue goes, but we’re not seeing any material declines.

Steve I. Fleishman – Bank of America/Merrill Lynch

Great, well, I think we have used up our time. Michael, Gale, Jonathan thank you so much for your presentation today.

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