Gale Klappa - Chairman and Chief Executive Officer Allen Leverett - President Patrick Keyes - Chief Financial Officer and Executive Vice President Susan Martin - Executive Vice President, General Counsel and Corporate Secretary Stephen Dickson - Vice President, Controller Scott Lauber - Vice President and Treasurer.

Mike Weinstein - UBS Steven Fleishman - Wolfe Research Brian Russo - Ladenburg Thalmann Paul Patterson - Glenrock Associates Michael Lapides - Goldman Sachs Charles Fishman - Morningstar Paul Ridzon - KeyBanc.

Good afternoon, ladies and gentlemen. Thank you for waiting, and welcome to Wisconsin Energy's quarterly conference call. This call is being recorded for rebroadcast and all participants are in a listen-only mode at this time. Before the conference call begins, I will read the forward-looking language.

All statements in this presentation, other than historical facts, are forward-looking statements that involve risks and uncertainties, which are subject to change at any time. Such statements are based on management's expectations at the time they are made.

In addition to the assumptions and other factors referred to in connection with the statements, factors described in the company's latest Form 10-K and subsequent reports filed with the Securities and Exchange Commission could cause actual results to differ materially from those contemplated.

During the discussion, referenced earnings per share will be based on diluted earnings per share unless otherwise noted. After the presentation, the conference will be open to analysts for questions and answers. In conjunction with this call, Wisconsin Energy has posted on its website a package of detailed financial information at wisconsinenergy.com.

A replay of our remarks will be available later today. And now, it's my pleasure to introduce Mr. Gale Klappa, Chairman of the Board and Chief Executive Officer of Wisconsin Energy Corporation..

Colleen, thank you. Good afternoon, everyone, and thanks for joining us, as we review our 2014 third quarter results. Let me begin, as always, by introducing the members of the Wisconsin Energy management team who are here with me today.

We have Allen Leverett, President of Wisconsin Energy and CEO of our Generation Group; Pat Keyes, our Chief Financial Officer; Susan Martin, General Counsel; Steve Dickson, Controller; and Scott Lauber, our Treasurer. Pat will review our financial results in detail in just a moment.

But as you saw from our news release this morning, we reported adjusted earnings of $0.57 a share for the third quarter of 2014. This compares with earnings of $0.60 for last year's third quarter. Our adjusted earnings exclude expenses of $0.01 a share related to our acquisition of the Integrys Energy Group.

The headline for this quarter, of course, was our cool summer weather. So you maybe wondering how cool was it? Well, three numbers best describe the summer temperatures in our region, 19, 65, and zero. In the third quarter, we had 19 days, when the high temperature for the day never reached 70 degrees.

There were 65 days, when the high temperature never reached 80 degrees. And finally, we had zero 90 degree days in Milwaukee this summer. But even with the sharply lower customer demand for air conditioning, we continued to deliver solid results. Our focus on financial discipline and industry-leading reliability continued to serve us well.

Turning now to the state of the economy. Wisconsin's unemployment rate declined to 5.5% in September and remains well below the national average. In fact, the unemployment rate in Wisconsin is now the lowest it's been since 2008.

And as the economy has continued to improve over the course of the year, deliveries of electricity to our large commercial and industrial customers have also edged higher. For the first three quarters of the year, our large customers excluding the iron ore mines, consumed 1.3% more electricity than during the corresponding nine months a year ago.

And if you look at the data on a weather -normalized basis, total retail sales of electricity have grown by 2.1% during the first nine moths of 2014. We're seeing recent strength in four sectors of the economy; paper manufacturing, food products, rubber and plastics production, and metal fabricating.

In addition, we continue to see stronger customer growth across our system. New electric service connections are up by 4.8% and new natural gas installations are up by actually more than 20% compared with the same period last year.

Later in my remarks, I'll update you on several positive developments in our core business as well as the important construction projects we have underway. But first, I'd like to discuss our progress on obtaining regulatory approvals for the acquisition of Integrys.

To refresh your memory, on June 23, we announced plans to acquire Integrys in a cash and stock transaction. Combining the two companies to form the WEC Energy Group will create a strong electric and natural gas delivery company with deep operational expertise, scale, and the financial resources to meet the region's future energy needs.

We'll serve nearly 4.4 million customers in Wisconsin, Illinois, Michigan, and Minnesota. In fact, the combination will create the eighth largest natural gas distribution company in America, and the strong cash flow of the combined company will be invested prudently in new and upgraded energy infrastructure.

Now, as you're well aware, we have consistently used three criteria to evaluate any potential acquisition opportunity. First, we would have to believe that the acquisition would be accretive to earnings per share in the first full calendar year after closing. Second, it would need to be largely credit neutral.

And finally, we would have to believe that the long-term growth rate of any acquisition would be at least equal to Wisconsin Energy's standalone growth rate. I am pleased to report that we believe this combination meets or exceeds all three criteria.

We expect the combined company will be able to grow earnings per share at 5% to 7% per year, faster than either one of us projecting on a standalone basis. And importantly, more than 99% of these earnings would come from regulated businesses.

Our customers will benefit from the operational efficiency that comes with increased scale and geographic proximity. And over time, we'll enhance the operations of the seven utilities that will be part of our energy group by incorporating best practices systemwide.

In addition, as many of you know, Integrys today is one of the major owners of American Transmission Company, with a 34.1% interest. Wisconsin Energy is the second largest owner with a 26.2% interest. The combined entity will have a 60% stake in one of the largest transmission companies of the country.

ATC, if you haven't noticed, has a new 10-year capital investment plan that was just rolled out. In that 10-year plan, ATC plans to bolster electric reliability across our region. ATC's capital plan for the years 2014 to 2023 calls for investment of $3.3 billion to $3.9 billion.

We believe it's a solid plan, and we welcome the opportunity to increase our commitment to the transmission business. Moving on to our dividend policy. Just a reminder, in the period before closing, Wisconsin Energy plans to continue its current dividend policy, which calls for a 7% to 8% annual increase in the dividend.

At closing, we would expect a further dividend increase of 7% to 8% for Wisconsin Energy shareholders to reflect the dividend policy of the combined company. Then going forward, the projected payout target for the combined company will be 65% to 70% of earnings.

Now, as you know, the transaction is subject to approvals from the shareholders of both companies and from several regulatory agencies. These agencies include the Federal Energy Regulatory Commission, the Public Service Commissions of Wisconsin and Michigan, The Illinois Commerce Commission, and the Minnesota Public Utilities Commission.

The transaction also is subject to the requirements of the Hart-Scott-Rodino Act and other customary closing conditions. We filed with all four state utility commissions on August 6, and we're currently working through the respective proceedings.

In Wisconsin, the Commission has set a schedule for the case with a vote expected to take place no later than March 20, 2015. In Illinois, the Illinois Commerce Commission staff has proposed a schedule that calls for an ICC decision on July 6, 2015. In Michigan, a revised schedule calls for a decision by the Michigan Commission in June of 2015.

And in Minnesota, the State Attorney General has recommended that the Minnesota Commission open a docket to review the transaction, and the Minnesota's Department of Commerce has requested additional information before the end of this month. In addition, we filed our application with the Federal Energy Regulatory Commission on August 15.

The public comment period at FERC closed on October 17, and we filed our response to those comments yesterday. We also filed our Hart-Scott-Rodino application on September 24. I'm very pleased to report that the Department of Justice closed its review under the Hart-Scott-Rodino Act on October 24 with no further action required by the company.

This clears the way for the acquisition under federal antitrust rules. In other developments, the Securities and Exchange Commission has declared our registration statement effective. And as a result, we scheduled our special shareholder meeting for November 21. Integrys has also scheduled to hold its shareholder meeting the same day.

We're making really good progress on all the regulatory fronts, and we anticipate closing the transaction during the second half of 2015. And one more item related to Integrys, back in June, Integrys announced the sale of its unregulated power and natural gas marketing business to Exelon.

Exelon will pay $60 million for the Integrys’ retail operations, plus adjusted networking capital at the time of closing. On October 14, the Federal Trade Commission granted early termination of the waiting period under the Hart-Scott-Rodino Act, and Integrys expects now to complete the sale and have the closing by the end of this year.

To summarize, we believe our acquisition of Integrys will create the premiere regulated utility system in the Midwest, with superior service and competitive pricing for years to come.

The benefits to all of our stakeholders from the customers and communities we serve, to the people we employ to the shareholders who count on us to create value, are clear, compelling and achievable. And now turning back to recent developments in our core business.

As you may recall, in mid-July, we received the final written order from the Wisconsin Commission, approving our request to build and operate a new natural gas lateral in the west central Wisconsin.

The 85 miles of pipeline and connected facilities will run from northern Eau Claire County, in the far western part of the state, to the city of Tomah in west central Wisconsin. The project will address reliability concerns of that region and meet growing demand.

Demand of course has been driven by customers converting from propane to natural gas and by the growth of the sand mining industry in western Wisconsin. The Commission's approval also includes franchise awards for 10 communities along the route, and authorizes us to begin delivering natural gas within the borders of those communities.

In mid-August, we received a permit from the Wisconsin Department of Natural Resources, approving with minimal modification our mitigation plan for wetlands and waterways. And on October 7, we began work on portions of the downstream facilities, with construction of the larger diameter lateral scheduled to begin early next year.

We expect to complete this project in the fourth quarter of 2015, and our projected cost is between $175 million and $185 million, excluding allowance for funds used during construction. On the generation side of our business, you'll recall that we're converting the fuel source for our Valley power plant from coal to natural gas.

As a reminder, the two unit Valley plant is a cogeneration facility located along the Menomonee River near downtown Milwaukee. Valley generates electricity for the grid, produces steam for more than 400 customers in the downtown Milwaukee business center, and provides voltage support for our electric distribution network.

We're on time and on budget with this gas conversion project. And a major milestone for the project, we achieved first fire on natural gas in Unit 1 at Valley on October 2. However, tuning is now nearly complete and the unit will be available and fueled by natural gas for the first time for the winter heating season.

Unit 2 at Valley is now scheduled to be converted to natural gas next year. We expect the total conversion cost to be $65 million to $70 million, again excluding allowance for funds used during construction.

And you may also recall that in March of last year, we began a major upgrade of the existing natural gas pipeline that runs near the Valley facility. This $30 million pipeline replacement project was completed on time and on budget in August.

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

Next, I'd like to touch on the upgrade of our Twin Falls hydroelectric plant. Twin Falls was built back in 1912 and is one of 13 hydroelectric plants on our system. The plant is located on the boarder of Wisconsin and Michigan's Upper Peninsula.

Construction is underway now to build a new powerhouse and add spillway capacity that meets current federal standards. Since our last update, we've made really good progress on the major construction work at Twin Falls. The upstream cofferdam has been completed and rock excavation is well underway with completion expected later this year.

We plan to begin construction of the new powerhouse itself in the spring, and we're still slated to complete the project in the summer of 2016. The total investment is budgeted at $60 million to $65 million, excluding allowance for funds used during constructions.

We're also making excellent progress on our initiative to improve fuel flexibility at the new Oak Creek expansion units. As you'll recall, these units were initially permitted to burn bituminous coal.

However, given the current cost differential between bituminous coal and Powder River Basin coal, blending the two types of fuel could save our customers between $25 million and $50 million a year, depending on the fuel mix.

Last year we received environmental approvals, began making changes to the boilers and testing a blend of bituminous and PRB coal at the plant. This summer we took the next step, we filed a request with the Commission in Wisconsin to approve additional capital spending for modifications of the plant. Our share of that investment will be $21 million.

If approved, these modifications will support operations of up to 60% PRB blend and testing of up to a 100% PRB blend. So with the older coal units at Oak Creek already burning PRB and the newer units burning more PRB, we clearly need to have the space and equipment to handle additional coal inventory on-site.

As a result, we filed a request just a few days ago with the Wisconsin Commission for an expanded coal storage facility and additional handling equipment. Our estimated capital cost for this part of the project is $58 million.

In summary, we see significant investment opportunities in our core business, including our focus on delivering the future, as we also continue to work on our aging distribution networks. Our capital budget, as you may recall, estimates spending of $3.2 billion and $3.5 billion over the five-year period, 2014 through 2018.

And over the 10-year period, from 2014 through 2023, we expect to invest between $6.5 billion and $7.1 billion. We'll keep you posted, as our effort to upgrade the region's energy infrastructure moves on. And finally, turning to Wisconsin rate matters.

In May we reached a settlement facilitated by the Wisconsin Commission staff with three major customer groups. The settlement covers return on equity, capital structure and base rate changes for the forward looking test years 2015 and 2016.

If approved by the Commission, Wisconsin Electric will have a return on equity going forward of 10.2% with no change in its capital structure. And Wisconsin Gas will have a return on equity of 10.3% with a higher equity component in its capital structure. The equity component for Wisconsin Gas would increase from 47.5% to 49.5%.

Based on this settlement non-fuel electric rates would increase by 1.4%, beginning in 2015. The remainder of the rate case has been focused on rate design and fuel cost recovery for 2015.

Hearings were held by the Commission in September and October here in the state, and a decision from the Commission is expected before the end of the year with new rates to take effect on January 1. With that, I'll turn things over to our Chief Financial Officer, Pat Keyes, for more details on our third quarter results.

Pat?.

Thank you, Gale. As Gale mentioned, our 2014 adjusted third quarter earnings were $0.57 a share compared to $0.60 a share for the same quarter in 2013. Our GAAP earnings for the quarter were $0.56 a share, which includes cost associated with the acquisition of Integrys.

Our consolidated operating income for the third quarter was $246.1 million as compared to $258 million in 2013. That's a decline of $11.9 million. Starting with the Utility Energy segment, you will see that operating income in the third quarter of 2014 totaled $158.4 million, a decrease of $8.2 million from the third quarter of 2013.

As Gale mentioned, the cool wet summer reduced our cooling mode, and as a result our margins were $28.6 million lower than last year.

The cool weather also had an impact on our fuel recoveries, because hourly prices for opportunity sales in the Midcontinent Independent System Operator market were lower, we had fewer dollars to flow back through the fuel cost recovery role. Therefore on a quarter-over-quarter basis, our fuel recoveries were down by $16.5 million.

On the positive side, our utility operating and maintenance cost were $22 million lower than the same period last year, reflecting lower benefits cost and effective cost controls. Our earnings were also helped by $15.9 million related to the accounting on the treasury grant for our new biomass plant.

Combining these and other factors results in the $8.2 million decrease in utility operating income in the third quarter of 2014 as compared with the same quarter in the prior year. Operating income in our Non-Utility segment was essentially level on a quarter-over-quarter basis, which is in line with our expectations.

Our corporate and other segment had a $4.1 million reduction in income, virtually all of which related to the acquisition of Integrys. Taking the changes for these segments together, you arrive at the $11.9 million decrease in operating income.

Earnings from our investment in the American Transmission Company totaled $18 million in the third quarter, which is up about $900,000 for the same period in 2013. Our other income net declined by $2.2 million, primarily because of lower AFUDC. AFUDC decreased largely, because our biomass plant was placed in service in the fourth quarter of 2013.

In addition, our net interest expense declined by $1.6 million, primarily because of lower long-term interest rates and lower debt levels. When compared to the third quarter of 2013, our tax expense in down slightly. However, we have a slightly higher effective tax rate due in part to the inability to deduct certain cost related to the acquisition.

We expect our effective tax rate for 2014 will be between 37.5% and 38.5%. Combining all of these items brings you to $126.3 million of reported net income for the third quarter of 2014 or earnings of $0.56 per share. Adjusted earnings, which exclude $0.01 of acquisition cost, were $0.57 per share.

For the first nine months of 2014, our adjusted earning per share were $2.08 as compared to $1.88 for the first nine months of 2013. Year-to-date adjusted net income in 2014 was $474.2 million, up from $433.1 million in the corresponding period a year ago.

Our adjusted operating cash flows during the first nine months of 2014 totaled $1,035 million, which is a $16 million decrease from the same period in 2013. Consistent with prior quarters, we saw stronger operating cash flows, because of higher net income and larger non-cash charges related to depreciation and deferred income taxes.

On the other hand, we experienced an increase in cash needs for working capital, including natural gas and storage. Our total capital expenditures increased by $50 million in the first nine months of 2014 compared to 2013, primarily because of investments in our distribution infrastructure.

We paid $264 million in common dividends in the first nine months of 2014, an increase of $22 million or almost 9% compared to the first nine months of 2013. And I am pleased to report that our adjusted debt-to-capital ratio was 50.9% at the end of September. That's the lowest level we've seen since the year 2000.

With our announcement of the acquisition of Integrys, we suspended our share repurchase program, and thereby enhanced our cash position. A reminder, that our calculation treats half of our hybrid securities as common equity, which is consistent with past presentations.

We are using cash to satisfy any shares required for our 401k plan, options and other programs. Going forward, we do not expect to issue any additional shares for these plans. Year-to-date retail deliveries of electricity rose by 1.1% as compared to the same period in 2013. Our normalized year-to-date retail deliveries were up 2.1%.

Looking at the individual customer segments, we saw actual residential deliveries decline by 2.1%. But on a normalized basis, residential usage rose by 0.7%. Across our small commercial and industrial group, we saw year-to-date deliveries up 0.1%, and on a normalized basis they were also up 0.1%.

In the large commercial and industrial segment, on a normalized basis, year-to-date deliveries were up by 5.2%. And if you exclude the iron ore mines, we were up 1.7%. Overall, these results are in line with our expectations. Year-to-date retail natural gas sales were up 13.1% compared to the same period in 2013.

On a normalized basis, sales improved by 2.6%. The results from our natural gas delivery business are ahead of our expectations for the year. Finally, as we look ahead to the fourth quarter, we are tightening our annual earnings guidance. Our prior guidance was $2.58 to $2.64 a share. Our new guidance is $2.60 to $2.64 a share.

Again, our new guidance for 2014 is $2.60 to $2.64 a share. This guidance excludes an estimated $0.05 per share of legal, professional and banking fees associated with the acquisition of Integrys. And with that, I will turn things back to Gale..

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

(Operator Instructions) Your first question comes from the line of Mike Weinstein with UBS..

A quick question about the election coming up, and the sale of state assets that potentially might happen one day in the future, has this become an election issue at all? People have been using it as a hammer or a nail, any sense?.

No, not at all, Mike. Good question. Really the entire election has turned on jobs.

And on the Governor's track record in terms of job creation and elimination of budget deficits, et cetera, so there has been actually, I haven't heard a single word in any of the campaign material or any of the debates about the potential sale of state-owned power plants, nothing..

And in terms of the O&M savings this quarter, is a lot of that considered ongoing and will flow-through into the fourth quarter as well?.

Well, I'll let Pat give his view as well. When you look at the O&M savings quarter-on-quarter, there were two or three things that really stand out. First of all, we had some very positive results from pension expense and healthcare costs.

On healthcare costs, this is the first year, you may have heard us mention this before, this is the first year that all of our employees have moved to a high deductible healthcare plan. So we'll see, but we may see some rebound in healthcare expenses in Q4.

On pension cost, I think Pat's view is for 2014, that should be a pretty well a permanent-type savings.

Then the third piece in terms of the better performance on O&M, the strong performance on O&M in the quarter, is we did see some operating cost savings from our maintenance on our distribution network, simply because our networks really weren't stressed, given the cool summer..

Your next question comes from the line of Steven Fleishman with Wolfe Research..

So I might have missed it. But I just wanted to see if you have any color on the issues that you are getting from the Michigan Governor and political people related to the merger transaction? They are filing at FERC and delay in schedule. I mean it seems like it relates to the Upper Peninsula issues.

Could you just talk about potential solutions for that?.

I would be happy to, and thanks for asking, Steve. First of all, I think you've really nailed the principle concern.

The principle concern from the Governor's office and the State Attorney General's office at Michigan really relates to the power supply problems and the energy future for the Upper Peninsula, and that is first and foremost on their minds. Right, that's point number one.

Our point number two, it's becoming very, very clear, it's been clear for a while to us, but it's, I think becoming very clear to all the parties in Michigan that the customer choice law there is deeply flawed, particularly when it allows 90% customer choice in one area of the state and kept at 10% customer choice in the rest of the states.

And of course, 90% customer choice in the UP makes long-term capacity planning very, very difficult. So that I think is emerging as a very significant issue.

And then, thirdly, there has been a lot of very productive and positive discussion emerging with the lead of the Governor's office about what they call a global solution to the UP energy problems. Yesterday, as a matter of fact, there was a very well attempted Energy Summit hosted in Marquette, Michigan, about the UP issues.

And the Governor's senior aide mentioned that she was very encouraged about the positive discussions going on among the parties, and hopeful that a solution could emerge in the near timeframe of the next 60 to 90 days. So we're very actively involved in those discussions.

The only thing I really can add to that is that I think clearly the preference of the administration is building additional generation in the UP. And we have indicated we would be willing to be an investor, as part of that solution.

Is that helpful, Steve?.

And then on the Governor election, I mean, obviously don't know who's going to win.

But in the event there were to be a change in Governor in Wisconsin, how does that impact the Commission at all? Do they -- I mean their terms are still for a while, right?.

Absolutely. In fact, really for the near-term and even in the medium-term, I would see really no change at the Commission.

Chairman Montgomery, I believe has five years left on his six-year term; Commissioner Nowak has a very long period left on her six-year term; Commissioner Callisto, who is the prior Governor's appointee, his term expires in March of 2015. Of course, that seat would be appointed one way or another by the new Governor.

But in terms of the two Governor Walker appointees on the Commission, they have very long periods left in their term. So I would really see no change in philosophy or approach of the Commission, regardless of which candidate wins. I will say everybody has been waiting with bated breath here for the latest poll.

The polling firm that has been doing regular -- Marquette University, doing regular polling on the Governor's race and was actually the most accurate polling result from the Governor's recall race, a couple of years ago, literally just released the final poll before the election, about 15 minutes ago.

And I'm told it shows Governor Walker up 50 to 43 among likely voters. So that would be a very big swing. It showed a tie just two weeks ago..

Your next question comes from the line of Brian Russo with Ladenburg Thalmann..

Just curious, what were the drivers or what enabled you to beat your initial third quarter guidance of $0.48 to $0.52? Was it the lower O&M due to the less stressed network, or is there anything else going on?.

Probably three things going on. Certainly lower O&M due to less stress on the network was a factor.

Truth of the matter is even though it's not a big gas quarter -- or not a big quarter for gas sales, our natural gas distribution sales came in better than expected, that was a help; medical expenses better than expected; and then September weather, while it was still cooler than normal was much closer to normal than July and August, and all those factors combined together to bring in numbers that were better than our own expectations..

And then just remind us of where the state stands in their evaluation of the state-owned generation asset sale process?.

Really no significant update from what we provided to you in the past. Everybody has been focused on the election. And as I've mentioned before, if Governor Walker wins the election, I suspect there will be some movement by the state since they've already hired a financial advisor to advice them on state asset sales.

I would expect you would see some movement in 2015, if Mary Burke, the Democratic candidate wins. We are really uncertain as to whether she would pursue any sale of state assets..

Your next question comes from the line of Paul Patterson with Glenrock Associates..

I wanted to follow-up on a few things. First of all, on the Michigan stuff. There was a letter, as you know, that was sent to FERC. And they seemed to indicate among other things; this is from the Michigan Governor and what have you, that they saw some sort of conflict between ATC and generation.

And they seem to allude to the idea that if there was a generation solution there may not be as big a need for a transmission investment.

Can you address that at all? If you guys were to invest in generation would that, do you think impact the CapEx for ATC or something like that?.

Well, let me frame it a little bit, then I'm going to ask Allen to give you his view as well, since Allen has been deeply involved in all of this, as have I.

I think first, it's important to realize that the real concerns from the Michigan Governor's office and the Michigan Attorney General's office, the best we can tell and in our discussions with them, their real concerns are what I mentioned earlier. They are concerned about the future energy supply in the UP.

It's a difficult situation up there as you know given customer choice, given the fact that the Presque Isle units need environmental control upgrades. And then there are lot of moving pieces, but I think that it's becoming clear that a very significant part of the longer term solution is new generation.

And we have expressed a willingness to be an investor. Now clearly, if new generation is built that would mean less transmission will have be built; whether or not new generation alone would be sufficient to eliminate transmission upgrades, that's still to be decided. But clearly, an important part of the equation I think, Allen, is new generation..

Yes. I think, Paul, I guess your question also goes to, if I understand it, with the magnitude of transmission required would be less if you had additional generation in the UP. And I think our view would be that, yes, if you had generation up there, you'd certainly need less in the way of transmission upgrades.

But I would emphasize less as opposed to actually being able to eliminate the need for any transmission upgrades. So it's not something I could quantify for you today, but I would say you sort of have two options. One is a pure transmission solution, which we don't think is a good option.

The other is really a generation solution coupled with a greatly reduced amount of transmission, but I don't see an option, Paul, where there is no additional transmission investment at all..

And then just with respect to the potential investment in new generation up there, is that possible that that would be part of the Cliffs investigation they are doing with Invenergy for a combined heat plants or is that probably something separate?.

No. At the moment, there's lots of discussions going on and lot of ideas on the table, and a lot of cooperation among the parties and that's really about all I can tell you at this point..

You mentioned 60 to 90 days being mentioned as it is wrapping it up, but do you think we might hear anything in the near-term or nearer-term regarding progress on this issue?.

My guess is, and I'm simply guessing, because again a number of parties are at the table, lot of discussions going on. My guess is the most definitive statements will come either yearend or shortly thereafter..

And then finally, just a follow-up on Mike's question on the O&M and your answer about the high-deductible plan. You said that there might be a rebound in the fourth quarter.

And I was just wondering if you could elaborate a little bit on that? Is that because people have spent their deductible or is something else going on?.

No. That's exactly it. We suspect that many people would have met their deductible by Q4. And therefore we might see slightly higher medical cost expenses in Q4 than when we were under a more traditional healthcare plan..

Your next question comes from the line of Michael Lapides with Goldman Sachs..

One easy question for you.

When you talk about the need for capacity in the UP, roughly how much in terms of megawatt capacity are we talking about? And are we simply just talking about gas-fired capacity replacing coal or is it conceivable there is a little more diversity in the fuel mix there?.

Well, let me answer the second question first and then we'll get Allen's view on the capacity, because a number of different configurations could emerge. So I'm not sure we can give you a precise number on capacity.

I would think, based on all the discussions so far, that a principal solution will be natural gas fired capacity probably combined-cycle natural gas plant. However, there is also discussion about augmenting that with some renewables.

Again, lots of discussion on the table right now, but I would think the primary thrust would involve new natural gas combined-cycle capacity.

Allen?.

Yes. And I would say, Michael, in terms of amount of capacity, my view would be the amount of capacity required will be somewhere between 250 megawatts and 350 megawatts.

But given the nature of the situation there, you'd have to configure that in a way, I mean for example, if there were combined-cycle, you'd probably want more than two trains, you'd probably want three trains, so that multiple CTs, multiple heat recovery steam generators, so that should be able to maintain them in a fashion that allows you to maintain the reliability in the UP.

But my guess on range of capacity is in that 250 to 350 range..

And Allen, as long as I've got you, any update in terms of the multi-value project analysis that the Midwest ISO goes through in terms of evaluating all significant potential new transmission projects in that RTO, not just ones dealing with the UP?.

No, not really. MISO continues with their current process. They have all the different appendices. I think they go from A to B, in terms of the way that they look at the projects and they evaluate the projects. So there is really no update, Michael, I'm sorry, that I could offer..

Your next question comes from the line of Charles Fishman with Morningstar..

Can I burden you with one more question on Michigan's comments concerning the merger? They were also, the Governor and AG were a little concerned about the ownership percentage that you'll have in ATC.

And it made me think that are you also at risk by maintaining that higher a level of ownership or at least ATC at risk of losing their independence incentive ROE that they received from FERC? And could that be another potential driver that might, obviously, the simple solution is just to divest a small piece of ATC if you need to, but I'll leave it at that and let you comment..

The short answer on independence is no; no danger. And I'll let Allen give you the details..

Yes. But I guess on the independence point, Charles, at this point there is only one transmission company that FERC deems being capital I, independent, and that's ITC. So at this point they don't deem it to be independent anyway. So the fact that you have this merger is not going to change anything about that.

But I do think, Charles, and I'm glad you asked a follow-up question, because I think a distinction here is very, very important. ATC is a member of MISO. And as such, they transfer control over their transmission facilities to MISO.

So look, as a consequence, regardless of what entities are deemed to control ATC, ATC's transmission facilities are going to be under the control of MISO and nothing about the merger is going to change that fact.

And the FERC has held on a number of occasions, at least three, that I am aware of that mergers of utilities that even own directly transmission facilities that are under the control of an RTO, don't raise any vertical market power concerns..

:.

Well, that sounds like a good response, and I assume that will be in your rebuttal testimony..

It already is..

Was about already, the rebuttal on that?.

It's filed yesterday..

Yes. Our answer, it was filed yesterday, Charles..

I didn't read it yet..

Your next question comes from the line of Paul Ridzon with KeyBanc..

It sounds as though, even if you participate in the UP generation solution, it's not going to change your comments around equity needs..

No, it will not change our comments on our equity needs. You are absolutely correct..

And then one of the reasons you gave for your beat was that you had normal weather in September?.

We had closer to normal weather in September. July and August were 18 standard deviations off the norm, and I am only slightly exaggerating. But we had basically assumed in our guidance, we would have an abnormally cool summer for all three months of the quarter. July and August certainly met our expectations for coolness.

September, while below normal, was closer to normal..

So you extrapolated July across the entire quarter?.

Well, actually extrapolated June across the entire quarter..

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