Apr 30, 2013
Executives
Gale E. Klappa - Chairman, Chief Executive Officer, President, Chairman of Executive Committee, Chairman of Wisconsin Electric Power Company, Chairman of Wisconsin Gas LLC, Chief Executive Officer of Wisconsin Electric Power Company, Chief Executive Officer of Wisconsin Gas LLC, President of Wisconsin Electric Power Company and President of Wisconsin Gas LLC James Patrick Keyes - Chief Financial Officer and Executive Vice President Allen L.
Leverett - Executive Vice President, Chief Executive Officer of WE Generation Operations, President of WE Generation Operations and Executive Vice President of Wisconsin Electric Power Company Stephen P. Dickson - Principal Accounting Officer, Vice President and Controller
Analysts
Michael J. Lapides - Goldman Sachs Group Inc., Research Division Greg Gordon - ISI Group Inc., Research Division Julien Dumoulin-Smith - UBS Investment Bank, Research Division Andrew Bischof - Morningstar Inc., Research Division Paul T.
Ridzon - KeyBanc Capital Markets Inc., Research Division Paul Patterson - Glenrock Associates LLC
Operator
Good afternoon, ladies and gentlemen. Thank you for waiting and welcome to Wisconsin Energy's Conference Call to review 2013 first quarter results.
This conference call is being recorded for rebroadcast. [Operator Instructions] Before the conference call begins, I will read the forward-looking language.
All statements in this presentation other than historical facts are forward-looking statements that involve risks and uncertainties, which are subject to change at any time. Such statements are based on management's expectations at the time they are made.
In addition to the assumptions and other factors referred to in connection with the statements, factors described in the company's latest Form 10-K and subsequent reports filed with the Securities and Exchange Commission could cause actual results to differ materially from those contemplated. During the discussions, referenced earnings per share will be based on diluted earnings per share unless otherwise noted.
After the presentation, the conference will be open to analysts for questions and answers. In conjunction with this call, Wisconsin Energy has posted on its website a package of detailed financial information at www.wisconsinenergy.com.
A replay of our remarks will be available approximately 2 hours after the conclusion of this call. And now, it's my pleasure to introduce Mr.
Gale Klappa, Chairman of the Board, President and Chief Executive Officer of Wisconsin Energy Corporation.
Gale E. Klappa
Colleen, thank you. On this beautiful spring day, good afternoon, everyone.
Thanks for joining us as we review the company's 2013 first quarter results. I'll begin, as always, by introducing the members of the Wisconsin Energy management team who are here with me today.
We have Allen Leverett, President and Chief Executive of WE Generation; Pat Keyes, our Chief Financial Officer; Susan Martin, General Counsel; Steve Dixon, Controller; and Scott Lauber, Treasurer. Pat will review our financial results in detail in just a moment.
But as you saw from our news release this morning, we reported earnings from continuing operations of $0.76 a share for the first quarter of 2013. This compares with earnings of $0.74 a share for the first quarter last year.
The results were stronger than last year, primarily because of favorable weather, the positive impact of our share repurchases and slightly higher earnings at WE Power. You may recall that we experienced the warmest winter in 122 years last year.
By contrast, this winter was colder than normal. And March was a particularly strong month.
We actually delivered 71% more natural gas to our customers in March of this year than March a year ago. Our earnings also rose by $0.01 a share at WE Power in light of the final approval during our last Wisconsin rate case of the investment in our new Oak Creek units.
In addition, the impact of our share repurchase program added $0.01 a share to our earnings for the quarter. We also continued to achieve milestones in the operational areas.
In fact, J.D. Power & Associates has ranked our company the #1 large utility in the midwest for customer satisfaction among business customers.
Turning now to the economy in our region. Wisconsin's unemployment rate climbed to 7.1% in March.
That's up from 6.7% in December, but still well below the national average. Given that the economy was just treading water during the winter months, it's not surprising that Energy sales to our large commercial and industrial customers declined by about 3.9% compared to the first quarter a year ago.
The main drivers of this reduction were lower Energy sales to our largest customer, the iron ore mines in Michigan's upper Peninsula and the impact of leap year in 2012, obviously not recurring in 2013. Factoring out the impact of the mines, leap year and weather, sales to our large commercial and industrial customers declined just slightly by 0.5%.
Overall, sales to our large customers were in line with our expectations for the first quarter. We did however, see growth in several sectors particularly printing and publishing and the production of plastics.
An uptick in new customer connections also continued in the first quarter. New electric service installations were up 5% compared to the first quarter of 2012 and connections of new natural gas customers rose by 3.9%, again, compared to the same period last year.
Now, as many of you know, we have 1 major construction project underway. Our biomass fueled power plant and Rothchild, Wisconsin.
Construction is now nearly 80% complete and we're on schedule for commercial operation by the end of 2013. Erection of the main boiler was finished earlier this year.
The switch yard has now been energized and connected to the distribution system. And piping and electrical installation continue throughout the project.
We successfully completed a hydro test of the boiler in February, ensuring that all boiler pipes are welded properly and can function under the required operating pressures. We began conducting steam blows earlier this month, pushing steam through the pipes to clear dirt and debris that accumulate during construction.
Work on the fuel handling system, which includes the truck dumper and the conveyor network, continues, and we expect the fuel handling system to be completed, powered and ready for testing during the second quarter of this year. And then just 2 days from now, we'll be hosting our annual stockholders meeting in Rothchild.
We're offering our shareholders an opportunity to tour the construction site and see the progress firsthand. Now, as I've noted before, the biomass plant will help us diversify our portfolio of renewable energy.
We'll be able to dispatch the unit and the efficient technology that will produce electricity for the grid and steam for the operating paper mill will clearly enhance the economics of the project. Our investment in the biomass plant is expected to total some $255 million and that's excluding allowance for funds used during construction.
Turning now to Wisconsin Regulatory matters. As you may recall, the rate request we filed in 2012 with the Wisconsin Commission for electric, natural gas and steam rates covered our revenue requirements for the years 2013 and 2014.
The commission completed its review, and issued a final order last December for rates that went into effect on January 1. Our request, of course, was driven primarily by the investment of approximately $1.6 billion in previously approved capital projects, including the air-quality controls at our older Oak Creek units, the Glacier Hills Wind Park and the Rothchild biomass plant.
Switching gears now, you'll recall that in 2011, our board authorized this buyback up to $300 million of Wisconsin Energy common stock. That authorization runs through the end of 2013.
During the first quarter, we purchased approximately 279,000 shares at a cost of $11.1 million. Since the program began, we repurchased approximately $4,930,000 shares at a cost of just under $163 million.
That equates to an average purchase price of $33.03 a share. And as we previously announced, our board has adopted a dividend policy that targets a 60% payout ratio in 2014 trending to a 65% to 70% ratio in 2017.
This policy should support double-digit dividend growth next year and 7% to 8% increases from 2015 to 2017 as we move toward a payout ratio that is more competitive with our peers across the regulated utility sector. Of course, in January the board raised the quarterly dividend to $0.34 a share, an increase of 13.3%.
The new quarterly dividend is equivalent to an annual rate of $1.36 a share. Now, I'd like to turn to another topic and discuss the investment opportunities that we see in our core business as we focus on delivering the future.
Our capital budget calls for spending $3.2 billion to $3.5 billion over the 5-year period 2013 through 2017. And with this 5-year budget, the nature of our capital investments are shifting away from high-profile projects such as our Power The Future units, renewable generation and larger quality controls.
Instead, our capital plan is comprised of many smaller projects that will upgrade our aging distribution infrastructure. Over the next 5 years, we will focus on the building blocks, if you will, of our delivery business: Pipes, poles, wires, transformers and substations.
Starting this year and continuing through 2017, we plan to rebuild 2,000 miles of electric distribution lines that are, today, more than 50 years old. We also intend to replace 18,500 power poles, 20,000 transformers and literally hundreds of substation components.
On the natural gas side of our business, we plan to replace 1,250 miles of gas mains, as well as 83,000 individual gas distribution lines and approximately 233,000-meter sets. The primary risks associated with these projects, developmental, legal, regulatory and construction, are naturally more manageable given the smaller scale and scope of the distribution work.
But this work is no less valuable or important than the megaprojects that we've completed in recent years. Our focus on renewing our distribution network is essential to maintaining our status as the most reliable utility in the Midwest.
We'll of course keep you up-to-date as these needed infrastructure upgrades move forward. And along those lines, we have identified the need for additional capacity on our natural gas distribution system in the western part of Wisconsin to address reliability and to meet growing demand.
This demand is driven in part by customers converting from propane to natural gas and by the growth of the sand mining industry in that region. We've evaluated routes and submitted our application to the Wisconsin Commission on March 28.
We're asking for authority to build a natural gas lateral that would stretch for approximately 85 miles from Eau Claire County in the far western part of the state to the city of Tomah in Monroe County, in West Central Wisconsin. If approved, construction could start in early 2015 with a projected in-service date during the fourth quarter of 2015.
Our projected investment in the initial phase of this project is expected to range between $150 million and $170 million, excluding allowance for funds used during construction. Moving now from distribution to generation, as you recall, we signed a definitive agreement with Wolverine Power Cooperative in late November of last year that calls for Wolverine to acquire a minority interest in the Presque Power Plant in Marquette Michigan by funding new state-of-the-art emission controls for the facility.
The new controls are necessary to meet expected changes in air-quality rules while maintaining system reliability in Michigan's upper Peninsula. We began seeking regulatory approval of the joint venture in February of this year.
We've already received orders from the Federal Energy Regulatory Commission and the Michigan Public Service Commission and proceedings in Wisconsin are moving along well. We're targeting receipt of all necessary approvals by early fourth quarter of this year and we hope to begin construction in 2014.
As a reminder, the joint venture will not reduce our rate base, but we expect that it will reduce our operating costs. And you'll remember that we also announced plans to convert the fuel source for our Valley Power Plant from coal to natural gas.
As a reminder, the Valley Plant is a cogeneration facility located on the Menomonee River here in Milwaukee that generates electricity for the grid, provides voltage support for the grid, and produces reliable steam to heat more than 450 downtown Milwaukee buildings. Our analysis shows that converting the fuel source for the plant will reduce our operating costs and enhance the environmental performance of the units.
The electric capacity of the plant is expected to remain at 280 megawatts. We filed an application with the Wisconsin Commission just last week on April 26.
If approved, our target for completing the conversion at Valley will be late 2015 or early 2016. The current cost estimate?
$65 million to $70 million. Now, this project will follow the $26 million upgrade of the existing natural gas pipeline that runs near the facility.
We believe the plan we put in place will secure Valley's role in meeting the energy needs of a vibrant downtown Milwaukee for many years to come. Turning now to our Oak Creek expansion units, we continue to make progress on our fuel flexibility initiative at the plant.
We received a revised air permit from the Wisconsin Department of Natural Resources that will allow us to make changes at the Oak Creek expansion units. Changes that are necessary for the blending of Eastern bituminous and Western sub-bituminous coal.
The units were initially permitted to burn bituminous coal, but given the current cost differential between bituminous and sub-bituminous coal, our customers could see annual fuel savings of $25 million to $50 million depending on the amount of sub-bituminous coal that could be used in blending. We expect to begin testing now in May and to continue our testing into 2014.
We would then apply for authority from the Wisconsin Commission to invest in the plant upgrades that would be needed. Another possible investment opportunity that we continue to follow is the potential sale of the electric and steam generating plants that are owned by the state of Wisconsin.
The governor has proposed a new 2-year state budget that includes a provision to expand the state's authority to sell or lease certain state-owned properties including these plants. We expect the Wisconsin Legislature to complete its action on the state budget by mid-summer.
Finally, I'd like to give you an update in our plan to build a new powerhouse at the Twin Falls hydroelectric site. Twin Falls is located on the border of Wisconsin and the Upper Peninsula of Michigan.
Twin Falls is one of 13 hydroelectric plants on our system. It was built back in 1912.
And while the plant is licensed to operate until 2040, the existing powerhouse is badly in need of repair. We considered several alternatives, but the most prudent course is to build a new powerhouse.
The project also calls for adding spillway capacity to meet current federal standards. We filed an application with the Wisconsin Commission for a certificate of authority for the project, as well as a license amendment application with the Federal Energy Regulatory Commission.
We have also been securing other necessary permits and licenses along the way. Assuming the project is approved, we expect to begin construction in the fall of 2013 with completion in 2016.
We estimate the cost of the project to be between $60 million and $65 million, excluding allowance for funds used during construction. Now, before wrapping our update up, I have a quick update for you on American Transmission Company.
We're the second largest owner of ATC with an ownership stake of 26.2%. Of course, ATC is investing in its traditional service area, but the company is also reviewing transmission investments in other parts of the country.
ATC is pursuing these investments through a joint venture with Duke Energy known as DATC. As many of you may already know, DATC recently acquired a 72% interest in California's Path 15 transmission line for an investment of $56 million.
Path 15 is an 84-mile, 500 kv line in Central California. The Wisconsin Energy equity investment in this project is expected to be approximately $7.4 million.
In conclusion, our company continues to perform at a high level and we're off to a strong start in 2013. And now, for the details on our first quarter, here's our Chief Financial Officer, Pat Keyes.
Pat?
James Patrick Keyes
Thank you, Gale. As Gale mentioned, our 2013 first quarter earnings from continuing operations were $0.76 a share compared with $0.74 a share for the same quarter in 2012.
The results were better than last year primarily because of favorable weather, the positive impact of our share repurchases and increased earnings at WE Power. Our consolidated operating income for the first quarter was $321 million as compared to $295.7 million in 2012, an increase of $25.3 million.
Starting with the utility energy segment, you will see that operating income in the first quarter totaled $230.6 million for 2013, an increase of $22 million over the first quarter of 2012. As Gale mentioned earlier, we experienced a colder than normal winter, which was a significant contrast from 2012 when we experienced record warmth.
On a quarter-over-quarter basis, we estimate that our electric and gas margins improved by $50.4 million because of the weather. This year, we estimate that we were helped by $16.2 million as compared to normal weather.
And last year, we estimate that we were hurt by $34.2 million because of the abnormally warm weather. As we turn to the other factors impacting utility operating income, recall that we implemented new rates for our electric and gas customers in Wisconsin effective January 1 of this year.
These new rates reflect our investments in environmental controls and renewable energy. These rates also reflect changes in our O&M costs, including the reinstatement of the amortization of certain regulatory assets.
If you recall, last year, as part of our base rate freeze, we had a regulatory amortization holiday. With that as background, you will notice that our depreciation expense is up $7.9 million, primarily because of the investment in environmental controls.
We also estimate that the impact of leap year in 2012, not repeating of course in 2013, reduced our electric and gas margins by $6.7 million. Our fuel recoveries are $5.1 million behind last year's first quarter and our O&M costs are $4.2 million higher this year.
As I mentioned, last year we had an amortization holiday that reduced our annual O&M by $148 million or $37.5 million per quarter. This year, we reinstated the amortization.
However, our bad debt expense was down by $17.2 million this quarter and we lengthened the lives of certain other amortizations, which reduced expenses by approximately $3 million. In addition, the business units reduced operating costs by approximately $13.1 million as compared to last year.
Combining all of these items brings you to the $4.2 million increase in O&M costs. Our O&M cost will vary each quarter.
However, as a reminder, we expect our annual O&M cost to be flat to 2% higher than 2012. Finally, we had an additional $4.5 million of other net costs, which when combined with the above items, resulted in a $22 million net increase in utility operating income.
I would also like to mention 1 item briefly that is affecting our quarterly earnings. As you may recall, we expect to receive a federal tax grant when we complete our new biomass facility later this year.
Our customers are currently receiving the benefits of this grant through bill credits. However, accounting rules do not allow us to recognize a grant income until the plant is placed into service.
We estimate that our first quarter earnings would have been $0.03 [ph] higher if we have recorded the grant income to match the bill credits. Now, turning to our non-utility segment, operating income in this segment was up $3.2 million this quarter because of the final approval of our Power The Future plant costs in the last Wisconsin rate case.
We expect this increase to continue each quarter throughout 2013. Taking the changes for these 2 segments together, and a slight improvement a corporate and other, you arrive at the $25.3 million increase in operating income.
Earnings from our investment in the American Transmission Company totaled $16.6 million in the first quarter, which is a $1 million improvement over the same period in 2012. Our other income net, declined by $11.6 million, primarily because of lower AFUDC.
AFUDC decreased as a result of the completion of the air quality control system for the older Oak Creek units last year. In addition, our net interest expense increased by $6.1 million, primarily because of the completion of the air quality control system for the older Oak Creek units.
Once the construction was completed, we stopped capitalizing interests. Consolidated income tax expense rose by $4.1 million because of higher pretax earnings and a higher effective tax rate.
Our effective tax rate for 2013 is expected to be between 37% and 38%. Combining all of these items brings you to $176.6 million of net income from continuing operations for the first quarter of 2013, or earnings of $0.76 per share.
During the first quarter of 2013, we generated $330.3 million of cash from operations, a $10.2 million decrease from the first quarter of 2012. This decrease is a result of higher working capital requirements driven by higher accounts receivable and accrued revenue, given the colder weather, compared to last year.
Partially offsetting this is higher net income and higher depreciation and amortization. Our total capital expenditures decreased by $8.7 million in the first quarter of 2013 as compared to the opening quarter of 2012.
We saw lower expenditures because construction is complete on the air quality control system for the older Oak Creek units. This was partially offset by additional capital expenditures related to the biomass project.
We also paid $77.8 million in common dividends in 2013, an increase of $8.7 million over 2012. Dividends for the year equate to an annual rate of $1.36 per share which is a 13.3% increase over the prior year's annual dividend of $1.20 per share.
Our adjusted debt-to-capital ratio was 52.3% at the end of March. Our calculation treats half of our hybrid securities as common equity, which is consistent with past presentation.
The projected year end debt-to-total capital is expected to be relatively flat with 2012 year end. We are using cash to satisfy any shares required for our 401(k) plan, options and other programs.
Going forward, we do not expect to issue any additional shares. And as shown in the earnings package on our website, retail sales of electricity increased by 0.5% in the first quarter of 2013 as compared to the first quarter of 2012.
Our normalized first quarter sales were down by 0.6%. All normalized sales are adjusted for the effects of leap year and weather.
Leap year alone caused the decline of approximately 1.1% in 2013 relative to 2012. Looking at the individual customer segments, with the return of colder weather, we saw actual residential sales up 5.2% and on a normalized basis, the sales were up 0.4%.
Across our small commercial and industrial group, we actually saw -- we saw actual quarterly sales up 1.3%. On a normalized basis, sales of small, commercial and industrial customers were down 0.7%.
In the large commercial & industrial segment, on a normalized basis, sales for the first quarter of 2013 were down by 1.4%. And if you exclude the iron ore mines, sales were down 0.5%.
Overall, these results are in line with our expectations. Turning now to our earnings forecast.
First, we're reaffirming our 2013 guidance of $2.38 a share to $2.48 a share. While we were helped by the first quarter weather, we still have 9 more months of weather variability ahead of us.
Before I turn things back to Gale, I would also like to provide guidance on our second quarter earnings. As background, we earned $0.51 per share in the second quarter of 2012.
However, the weather boosted our second quarter earnings last year by $0.03 per share. In addition, our 2012 earnings were frontloaded because of the allowance for funds used during construction that we booked on the air quality control project at older Oak Creek units.
Also, as mentioned earlier, we cannot record the income from the federal tax grant for our biomass plant until the plant is placed into service. The customer bill credits will continue in the second quarter and this is expected to reduce our quarterly earnings by $0.03 per share.
Taking these factors into consideration, and assuming normal weather, we estimate our 2013 second quarter earnings to be in the range of $0.42 to $0.46 per share. And with that, I will turn things back to Gale.
Gale E. Klappa
Pat, thank you very much. Overall, we're on track and focused on delivering value for our customers and our stockholders.
Operator
[Operator Instructions] Your first question comes from the line of Michael Lapides with Goldman Sachs.
Michael J. Lapides - Goldman Sachs Group Inc., Research Division
Real quick question. And by the way, congrats guys on a good quarter.
Just curious in terms of how you're thinking -- and this may be an Allen question, how you're thinking about the capital expansion process? I know it's kind of in the budget for ATC, but in terms of the execution part of that, meaning getting permits, getting siting, getting it done on time, on trajectory?
Gale E. Klappa
That's definitely an Allen question.
Allen L. Leverett
I guess you'd have to take that in sort of in 2 parts, Michael. Within the state of Wisconsin, within [indiscernible] and within the upper Peninsula of Michigan, they certainly had a very, now long-standing, over a decade, process that's pretty well understood and they have a good process at ATC to go through that.
And really, the only uncertainty there is when you bring a project forward, the primary uncertainty is the time frame that are going to be required to get regulatory approvals. But typically, for a CA, the way a CA works now, once your CA is deemed complete, it's no more than 360 days to get approval.
There's a 180-day initial period and then the Commission can extend that for another 180 days. So I think within the footprints, that would be the primary question, just the length of time that it would take to get a regulatory approval.
Outside the footprints, I mean we're still pretty early days, Michael, on doing projects outside the footprint. Gale mentioned the Path 15 investment, but that was an existing transmission line.
So outside of the footprint, not a lot that I can say about that. But candidly, if you look at our forecast for this year, '14, '15, we're not assuming any projects outside the footprint in any case.
Hopefully, that helps.
Gale E. Klappa
And Michael, I think Allen made an important point. If you look at the capital expenditures that we've broken down in our Investor Day that we talked about, the $3.2 billion to $3.5 billion over the 5-year period, Allen is correct.
We do not include any outside the footprint investment in ATC in those numbers. So that would be investment upside.
Michael J. Lapides - Goldman Sachs Group Inc., Research Division
Got it. And how about on the gas side?
I mean, lots of what I'm asking about is very nuts and bolts stuff. But you've got a lot of gas distribution infrastructure investment in your plan over the next couple of years.
Just curious whether siting -- how does siting and permitting process of that works in the state of Wisconsin? Do you have to go to local siding boards?
Do you go straight to PSC and it serves as kind of centralized siding board, et cetera?
Gale E. Klappa
Both are good questions, Michael. The answer is really in 2 parts.
For much of the gas distribution work that we've described, there really is not -- the individual projects did not rise to the level where we need to seek construction authority from the Wisconsin Commission. For example, we mentioned 83,000 individual gas lines.
Those would be the lines that come off the street and hook directly to your home. Those projects are much smaller in nature and do not require a construction authority permitting from the Wisconsin commission.
Certainly, the largest project that we have in front of us on the gas the distribution side that will require construction authority from the Wisconsin Commission is the one that we've mentioned and that's the Western Wisconsin Gas expansion. That is a very significant project, $150 million to $170 million in the initial phase.
And so we've begun the process there of seeking approval. We filed our initial request in late March.
Then we will have a -- Allen, a supplemental construction authority request in late summer.
Allen L. Leverett
Yes, there's some additional environmental information that we have to file in August.
Operator
Greg Gordon with ISI Group.
Greg Gordon - ISI Group Inc., Research Division
My question goes to what happened in the quarter vis-a-vis sales and what you're hearing from your customers for the balance of the year. Because clearly, you had a pullback in sales from industrial, but it was driven by natural resources.
Obviously, we've had a big deflation in commodity prices because of what's going over in China and that had a big impact on your 1 particular customer. But in the manufacturing segment and other segments of the industrial mosaic and your service territory, can you give us some more color on what you're seeing there?
Gale E. Klappa
I'd be happy to, Greg. And let me back up.
As you know, when we put our sales forecasts together for a new coming year, we interview our 120 largest industrial customers and get their direct feedback on their expectation in terms of demand for the following calendar year. When we did those interviews late last fall, I don't think there's any question that we were hearing a good bit of conservatism and a good bit of caution from our large industrial customer base.
And if you recall, those interviews were being done at a time when the whole issue about sequester, the whole issue about federal debt ceiling and everything we went through at the end of the year was very much on people's minds. And our customers are proving -- I mean to have given us really good input.
I mean, they were expecting a soft first quarter in terms of what they were seeing for orders and demand. And that has turned out to be the case.
When you basically take out leap year and weather normalize, our industrial sales were about dead on to where we thought they would be in Q1. Now, we're projecting a little bit of uptick, not much, in the remaining quarters.
So in essence, what we're seeing is an economy treading water. The only 2 sectors that showed any material growth at all -- we serve 17 different industrial sectors of the economy.
The only 2 sectors that showed any growth at all were, believe it or not, printing and publishing and production of plastics. Everything else pretty much just right where it was.
Not a lot of big upside, not a lot of downside. Just treading water.
We're a bit cautiously optimistic over the course of the remainder of the year, but no, we were not deviating from the sales forecast. There's no indication yet that things are really turning around.
Greg Gordon - ISI Group Inc., Research Division
Great. And then second and last question.
In terms of the buyback. Obviously, the average price at which you have already bought back stock is pretty good relative to -- where the stock is trading now, what can you tell us about how you think about the potential for completing a buyback relative to other opportunities and deployed capital with your stock trading at such a big P/E [ph] and price to book multiple?
Gale E. Klappa
Well, it's a good question, Greg, and we continue to look everyday at whether or not we want to be in the market buying stock. Over the long-term, I can tell you, it would not be the intention of the management here to build up a big cash reserve.
I don't think that's what we're being paid for from our stockholders. But obviously, we're going to be opportunistic as we have been in the past on share buyback.
Operator
Julien Dumoulin-Smith from UBS.
Julien Dumoulin-Smith - UBS Investment Bank, Research Division
First question here, sort of on the structure of these asset sales, if you will. Could you guys talk to what is being currently contemplated in the state or on how they would -- what this would look like?
Obviously, it doesn't seem to be more rate-based, but some sort of contract of sorts, and when this all would hash out? Obviously you mentioned end of summer now.
What does that translate to in terms of actually putting down dollars and getting returns on those investments?
Gale E. Klappa
Okay. We'll handle kind of each question one at a time.
In terms of the process itself, as we mentioned in the prepared remarks, the governor has put a provision in the state budget that would authorize the State Department of Administration to conduct a process, if you will, to sell a number of state-owned properties including power plants and steam-generating plants that the state owns. The budget itself needs to be passed because a state is on a fiscal year ending June.
The budget itself, in all likelihood, will be passed end of June sometime early July. Assuming the provision holds in the state budget, then the state Department of Administration would set up a process.
We're not certain how the State Department of Administration would actually design the process. But we are quite certain this would not become part of our traditional rate base.
This would not be subject to Public Service Commission review and approval as it's currently constituted, anyway. And so it would not become part of the rate base although Allen and I would expect, given the fact that the process would unfold assuming the law passed in the second half of this year, then we really would be looking at 2014.
Julien Dumoulin-Smith - UBS Investment Bank, Research Division
Yes. I would assume that if the bill is passed of course and the DOA moves expeditiously to ask for proposals, you could easily see financial closing in the first half of 2014.
Gale E. Klappa
And then one other point. We would obviously, in any bid that we would make, we would obviously require a very transparent and firm power sales, or steam sales agreement.
So these would not become -- while they would not be rate base per se, they would not become merchant units either.
Julien Dumoulin-Smith - UBS Investment Bank, Research Division
Would it be fair to say that the return profile of this would be somewhat akin to a traditionally regulated asset? Is that a fair statement?
Gale E. Klappa
That would certainly be our current thinking, yes.
Operator
Andy Bischof with MorningStar.
Andrew Bischof - Morningstar Inc., Research Division
I was wondering if you could just comment on the levels switching from gas back to coal in your generation portfolio? A couple of your peers have kind of posted dramatic shifts in generation mix given the recent rebound, and was just curious to what you're seeing.
Gale E. Klappa
We'll be to. Allen actually has some specifics statistics for you and I think the frame that we're basically seeing -- remember that song by Maxine Nightingale, "Gonna get right back where you started from?"
Those are Allen's statistics in a nutshell. Allen?
Allen L. Leverett
Well with that as a lead in, let me talk about that in 2 different ways. One way to sort of think about it in terms of energy mix.
So in other words, what percentage of our electricity is produced by coal as opposed to natural gas. If you look pre-2012, so if you look at sort of the average of 2008, '09, '10, '11, 3 or 4 years before 2012, we were at about 59% of our electricity was produced with coal.
Last year we're about 45%. So in 2012, we're at 45%.
However, this year we see that bouncing back to 57%. So at this point at least, 2012 looks to be a bit of an anomaly because, as Gale pointed out, with his vocal analogy, the 57% is pretty close to the 59% that we saw before 2012.
That was driven not only by lower natural gas prices or low natural gas prices in 2012, but we did take a very long outage at our South Oak Creek power plant when we did the tie-ins of the AQCS equipment, so we had both of those things going on. In terms of fuel burn, we burned about 8 million -- just over 8 million tons of coal last year.
I expect we'll be close to 11 million tons this year. So we see coal bouncing back.
Natural gas last year, we're at 45.5 BCF. My current forecast is about 33.
So, at this point at least, it doesn't look like a secular trend. But obviously if we saw low natural gas prices again, you could have somewhat of a replay of 2012.
Gale E. Klappa
And do have one other advantage, and that is, when you look at the efficiency and the heat rates of our new Power The Future units, I believe our new Port Washington natural gas fire combined cycle units have the best heat rate in the Midwest market in our new expansion units at Oak Creek and our older units at Oak Creek are in the top decile in the Midwest in terms of efficiency. So they will be dispatched depending upon the comparative costs of coal and natural gas.
But we have very efficient units that are serving our customers well.
Operator
Paul Ridzon with KeyBanc Capital Markets.
Paul T. Ridzon - KeyBanc Capital Markets Inc., Research Division
Just to follow-up on that question. What natural gas price range would you kind of start to see some season meaningful switching back to gas?
Allen L. Leverett
Well if you -- in order to answer that question, you have to talk about what type of coal are you using? At Sub-bituminous coal, if your unit -- and remember our Pleasant Prairie Plant and our South Oak Creek, they are already 100% sub-bituminous coal.
So to actually see them being out of the market as compared to natural gas, you'd have to see natural gas down and say maybe at the $2.75 to $2.50 range. So you'd have to see pretty low gas prices to actually see those units displaced.
Now, the current -- the Oak Creek expansion units are currently on bituminous coal. So we really want to, as Gale mentioned in the script, we want to be able to burn blends of sub debt and bituminous coal.
But with those units on bituminous coal, you can see those displaced in gas prices in the $3.50 to $3.75 range on bituminous coal. But if we can eventually get to high blends of sub-bituminous coal at those Oak Creek plants, I wouldn't see the displacement occurring until those much lower natural gas prices that I talked about, that $2.50 to $2.75.
Paul T. Ridzon - KeyBanc Capital Markets Inc., Research Division
And secondly, just a point of clarification, you expect O&M to be flat to up 2%, is that what you said?
Allen L. Leverett
For the year, that's our plan. Flat to plus 2%.
Paul T. Ridzon - KeyBanc Capital Markets Inc., Research Division
And then lastly, how is April weather?
Gale E. Klappa
April weather, up until today, has been a bit chilly. But we're having 81 degrees and sunshine today.
But we have had a chilly April.
Paul T. Ridzon - KeyBanc Capital Markets Inc., Research Division
Does your second quarter guidance bake that in and assume normal?
Gale E. Klappa
At the moment, because June also has a fair amount of air conditioning demand in our forecast, we've decided to simply stick with normal weather for our second quarter guidance.
Operator
Paul Patterson with Glenrock Associates.
Paul Patterson - Glenrock Associates LLC
Just a few quick questions. First of all, I guess when we look at the Page 7 of the factors affecting earnings for the quarter, I wasn't really clear what the rate impact was.
I mean it sounds like you guys had a rate increase beginning of the year. And just -- I don't see where that showed up.
Gale E. Klappa
All right. We'll let Pat or Steve give you the line time where it shows up we did have a rate increase.
But we had a rate decrease for our natural gas distribution businesses. But a rate increase for our retail electric business.
Steve?
Stephen P. Dickson
Yes, that's correct. And the rate increases were offset on electric side by costs.
So that's how come it didn't fall through there. And on the gas side you said the decrease of the gas was offset by reduced O&M.
Paul Patterson - Glenrock Associates LLC
I'm sorry. Could you repeat that again?
Stephen P. Dickson
As Gale said, our rate increases were offset by cost increases and the decreases on the gas side were offset by cost decreases in O&M.
Paul Patterson - Glenrock Associates LLC
So -- but I mean just -- when I look at this, it looks like weather was a big driver obviously and if we take weather and the impact of leap year out, I mean -- I know there was depreciation, and what have you, but just on that operating level, it just seemed that the quarter -- that there was obviously something dragging it. I was just wondering what that might be.
Gale E. Klappa
Well, when you look at -- when say dragging it, I mean there were a number of things that entered back in to our O&M expenses. For example, last year as Pat mentioned, while we had a base rate freeze, we also had a regulatory amortization holiday.
So we began -- although in some cases with a bit longer amortizing lives, we began flowing amortization back through our income statements. We obviously had just a touch of other costs.
Basically, we're exactly on plan. I mean we're projecting 0% to 2% increase in O&M.
That's where we are. The higher revenues are somewhat offset by various factors and yes, the weather, the share repurchases and the uptick at WE Power were the positive items that carried the day.
Paul Patterson - Glenrock Associates LLC
Okay. I mean, I was still taking that into account.
I'll follow-up offline, just maybe just my own math here. And then, when it comes to the depreciation lines, you guys said you did some study that helps out by $3 million in the quarter.
Gale E. Klappa
No.
Paul Patterson - Glenrock Associates LLC
I'm sorry. What was that then?
Gale E. Klappa
Steve can explain that.
Stephen P. Dickson
The depreciation, that's fairly simple. The depreciation as Pat mentioned in the remarks, the big driver there is the depreciation this year on the air quality-control project.
That was over $800 million project and the depreciation, that was pretty significant on that. But I want to go back your question because it was a good question on where is the pricing in the factors.
And this factors sheet just had the high-level items. On the electric side of the business, we had rate increase.
On the gas side of the business as we said, it's a decrease. So those 2 basically wash.
It's not that big. We're filing our 10Q Thursday afternoon and we'll have much more detail in that.
But the short answer is, the rate increase on the electric was offset by the decline on the gas. Does that make sense?
Paul Patterson - Glenrock Associates LLC
Sure. And we'll check out the 10-Q.
But I did think that you guys were lengthening the life -- the depreciable life of some assets. Did I get that wrong?
Gale E. Klappa
No. What we have -- no, you probably mistook something that was said.
There's no significant difference in the depreciable lives of our assets.
Stephen P. Dickson
In 2012, we did a study on the new WE Power asset and in 2012 we made that change. But that's consistent '12 and '13.
So that was something that happened in 2012.
Gale E. Klappa
We did a final study on the asset lives -- the depreciable lives of our new Power The Future units in 2012, but that should be, as Steve said, that should be -- what you're seeing in '13 should be completely comparable.
Paul Patterson - Glenrock Associates LLC
And that would be with synced up with rates, I would assume, right?
Gale E. Klappa
No. Because, WE Power being...
Paul Patterson - Glenrock Associates LLC
Okay. Got you.
Okay, that makes sense. Okay, got you.
And then in terms of the sales forecast and what have you, I don't want to always ask this question, but it does seem that -- it seems sort of weaker than expected. I mean, has there been any change in your outlook at all in terms of usage?
I mean -- I know Greg know asked you a little bit about this on the industrial side, but I'm just wondering on the sort of the nonindustrial side? Any change in that at all?
Gale E. Klappa
No. And it's a good question and you're right to ask question.
We sit back at look at the numbers and ask ourselves the same question. But if you kind of take a look at setting industrial side is you're asking us to do.
Actually on a weather normal basis, we were better than we thought on residential. On a weather normal basis, we were a little bit worse than we thought on small commercial and industrial.
But it's a 3-month period, and weather normalization is not that quite precise. So when we sit back and look at the mix of residential and small commercial and industrial, actually I think we're as well off, if not right on target to where we thought we would be after the first quarter.
Gale E. Klappa
All right. Well, ladies and gentlemen, I believe that concludes our conference call for today.
Thank you again for participating. If you have any other questions Colleen Henderson will be available in our Investor Relations office.
That number is (414)221-2592. However, if an Italian opera singer answers.
Please hang up. Thanks everybody.