Fuel costs, particularly the level and volatility of wholesale natural gas prices, cut into robust first quarter results for Milwaukee-based Wisconsin Energy, following record electricity and natural gas retail utility consumption in the winter quarter, the utility reported Tuesday.

Even with a $15 million hit to earnings, CEO Gale Klappa reported first quarter profits of $123 million, or $1.04/share, compared with $101 million, or 85 cents/share, for the same period in 2007. Klappa told financial analysts on a conference call that he was pleased with the results and that the utility’s natural gas and electric systems “held up well” in meeting record winter energy demands in the utility’s region covering Wisconsin and the Upper Peninsula of Michigan. The utility’s development of various new generation facilities, including natural gas, coal and wind-generated power, were proceeding on track, he said.

Nevertheless, the utility faces an underrecovery of its fuel costs of $20-40 million for the year, according to Klappa and CFO Allen Leverett, who noted that $15 million of that was already absorbed against first quarter earnings.

“Our original earnings projection [$2.80-2.90/share] was based on an underrecovery of fuel costs of zero to $15 million, but now given the way fuel prices have really skyrocketed and our experience in the first quarter, and with the emergency fuel cost increase we already were granted [by state regulators], we’re still looking to being undercollected by $20-40 million,” Klappa said.

Klappa and Leverett said the utility could not file for a second interim fuel cost rate adjustment because the state requires a utility to be more than 2% under or over a fuel cost “bandwidth” in order to file for an adjustment.

“It is pretty difficult to have two interim increases within the same calendar year, “Leverett said. “Given that and the run-up in the fuel prices, that is how we get to our estimate of up to $40 million in undercollections.”

The utility executives acknowledged that fuel and purchased power costs are a real “drag” on earnings for 2008. For the first quarter, those costs were $338 million for Wisconsin Energy, compared with $229 million for the same period last year — a nearly $110 million increase quarter over quarter.

Looking ahead, Klappa said the utility expects to invest nearly $1.2 billion this year to upgrade its energy infrastructure in the region, including the Blue Sky Green Field wind farm and the second natural gas-fired unit at its Port Washington facility, both of which are expected to begin commercial operations in the next two months.

With retail electric sales up 2% for the first quarter to the highest level ever and gas sales reaching the second highest quarterly total ever, Wisconsin Energy’s total revenues in the first quarter rose to$1.43 billion, compared with $1.30 billion for the same period in 2007.

©Copyright 2008Intelligence Press Inc. All rights reserved. The preceding news reportmay not be republished or redistributed, in whole or in part, in anyform, without prior written consent of Intelligence Press, Inc.