Aug 1, 2012
Executives
Colleen Henderson – Investor Relation Gale Klappa – Chairman of the Board, President and Chief Executive Officer Rick Kuester – Chief Financial Officer Allen Leverett – President and Chief Executive, WE Generation Susan Martin – General Counsel Pat Keyes – Treasurer Steve Dickson – Controller
Analysts
Jim Von Riesemann – UBS Paul Patterson – Glenrock Associates Michael Lapides – Goldman Sachs Jay Dobson – Wunderlich Securities Andy Bischof – Morningstar Andy Levy – Avon Capital Advisors
Colleen Henderson – Investor Relation
Good afternoon, ladies and gentlemen. Thank you for waiting and welcome to Wisconsin Energy’s Conference Call to review 2012 Second Quarter Results.
This conference 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 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 two 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 Klappa – Chairman of the Board, President and Chief Executive Officer
Colleen, thank you very much. Good afternoon, everyone and thank you for joining us as we review the company’s 2012 second 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 and Chief Executive of WE Generation; Susan Martin, our General Counsel; Pat Keyes, Treasurer; Steve Dickson, Controller; and Rick Kuester, our Chief Financial Officer.
You may have seen the announcement on Monday afternoon that Rick has decided to retire early next year. Rick and I have known each other for nearly three decades.
He is one of the most knowledgeable and effective leaders in our industry and he has made countless contributions to our progress here at Wisconsin Energy. We wish Rick and his wife Joyce all the very best as they begin the transition to retired life on the Gulf Coast.
Rick Kuester – Chief Financial Officer
Thanks Gale. I appreciate it.
Gale Klappa – Chairman of the Board, President and Chief Executive Officer
Thank you, Rick. Well, first things first though, Rick 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 $0.51 a share for the second quarter of 2012.
This compares with earnings from continuing operations of $0.41 a share for the second quarter of 2011. Weather, of course, continued to be the big story in the second quarter following the warmest winter in the 122 years here, we experienced an old-fashioned Midwestern heat wave in June with seven days reaching 90 degrees or higher across the region.
It was hot town summer in the city, the third warmest June in the past 80 years. And I am pleased to report that our generating fleet performed well.
We were able to meet the energy needs of our customers, thanks to the $3 billion we invested over the past decade in new efficient generating units through our Power the Future plan. Turning now to the economy, Wisconsin’s unemployment rate at 7% in June remains well below the national average.
Energy sales to our large commercial and industrial customers excluding the iron ore mines rose by 0.6% in the second quarter. Sectors showing strength in the quarter included chemicals, metal fabrication and heavy equipment manufacturing.
We also continued to see an up-tick in new customer connections. New services installed for electric customers were up 15% as compared to the first six months of last year.
And connections of new natural gas customers rose by nearly 19% compared with the same period a year ago. On the construction front, we have two major projects underway.
The 50 megawatt biomass plant in Northern Wisconsin and the air quality control upgrade at the original Oak Creek units. We are making solid progress on our biomass fuel generating plant at the site of the Domtar Paper Mill in Rothschild in Northern Wisconsin.
As of the end of July construction is approximately 39% complete. We are currently on schedule and on budget to meet a completion date by the end of 2013.
The main boiler at Rothschild is now being erected, the cooling tower is complete and the circulating of water pump house is under construction. The main condensers, the aerator and combustion fans have been set in place and equipment is being installed in the switch yard and the fuel storage building.
As I have noted before the biomass plant will help us to diversify our portfolio of renewable energy. Being 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 between $245 million and $255 million excluding allowance for funds used during construction. Of course the biomass project and Glacier Hills Wind Park that we completed late last year, our key components that will help us meet Wisconsin's renewable portfolio standard for the year 2015.
To refresh your memory the standard calls for an increase in the amount of electricity delivered from renewable sources from 5% in 2010 to 10% in 2015 at a statewide level. This standard sets targets for each Wisconsin utility using an historical baseline.
Using that baseline approximately 8.25% of our retail electricity sales must come from renewable sources in the year 2015. When we complete the biomass project we will be well-positioned to meet the 2015 standard.
Also, we recently signed agreements for additional renewable energy credits which should allow us to be in compliance through the year 2018. And because of favorable market conditions, we expect to purchase more renewable credits further extending the timeframe that we expect to be in compliance.
Turning now to our Oak Creek site, we're nearing the finish line on the air quality control upgrade for the older coal-fired units. The four older units that operate have been among the most efficient base load units in the Midwest.
Though the economic solution for our customers was to invest approximately $900 million, including allowance for funds used during construction for the installation of wet scrubbers and selective catalytic reduction facilities, I would remind you that this is the second largest construction project in our Company's history. The air quality control equipment for units 5 and 6 at Oak Creek went into commercial service in March and is operating well meeting all emission standards.
We've now completed the physical tie in of the units 7 and 8 equipment and testing is well underway. We expect to achieve commercial operation of the new controls for units 7 and 8 during August and that will close out this $900 million project on time and we believe better than budget.
Turning now to other items of interest; last quarter, we discussed the impact we were seeing from conditions in the coal and natural gas markets. Natural gas prices have continued at historically low levels during the second quarter influencing the dispatch order and locational marginal pricing in the Midwest power market.
Over the years, of course, the key to serving customers at competitive prices has been fuel diversity. And fuel diversity was a core principle of our Power the Future plan.
You may remember that our plan called for the addition of 2,200 megawatts of new efficient capacity, capacity that is almost equally balanced between natural gas and coal. And now with our efficient new capacity in place and natural gas prices at low levels, our natural gas burn is expected to about double from 24 billion cubic feet last year to 50 billion cubic feet in 2012.
In fact, our natural gas units at Port Washington operated at a 59% capacity factor in the first half of this year. This compares with a 20% capacity factor during the same period in 2011.
Our Port Washington units are essentially being dispatched now as baseload units. And as our natural gas burn has gone up, our coal burn is naturally gone down.
We are projecting to burn approximately 9 million tons of coal this year versus 10.7 million tons in 2011. We will achieve this reduction by maximizing the use of storage, working with our coal suppliers to amend existing contracts and carrying out small planned burns.
We are also hard it work on a new initiative, a new initiative that would allow us to blend western and eastern coals at our new Oak Creek expansion units. As you may recall, the new units are currently permitted to burn eastern bituminous coal.
However, moving to a blend with Powder River Basin sub-bituminous coal could substantially lower fuel cost for our customers. We have filed for a revised air permit and we expect to receive approval by year-end.
Our plan calls for us to begin testing the blended coal burns that our Oak Creek expansion units during 2013. Overall, our diverse fleet and our long-term power purchase agreement for nuclear energy position us well as the power markets continue to evolve.
Now, I’ll briefly review where we stand on the regulatory fronts in Wisconsin and Michigan. As you may recall, base rates for our electric customers in Wisconsin are frozen for 2012.
We proposed and the Wisconsin Commission accepted a creative approach to delay a base rate increase as the economy here continues to improve. Looking forward, the 2013 and 2014, we filed a rate request with the Wisconsin commission seeking an increase for our electric and steam customers and a decrease for our natural gas customers for 2013.
On the electric side of our business, just to refresh the memory, the base rate adjustments were seeking in the next two years are driven by approximately $1.6 billion of new capital investment. These are investments of the commission previously approved to strength the reliability and with environmental requirements and to comply with Wisconsin’s renewable energy mandate.
Projects previously approved by the commission include the air quality control system for the older units at Oak Creek, at Glacier Hills Wind Park, the biomass facility and the Oak Creek expansion units. Our proposal includes using a federal energy grants that we expect to receive for our biomass facility.
After applying this cash grant, the result would be a net customer bill impact of 3.6% in both 2013 and 2014. Our filing also includes an estimate the fuel cost for 2013.
Our fuel cost projections will be updated and finalized as for our normal procedure later this year. On the natural gas front, we proposed a decrease in base rates for customers of our two natural gas distribution utilities in 2013.
We are seeking a 2.3% decrease for Wisconsin gas customers and a two-tenths of 1% decrease for Wisconsin Electric gas customers. For 2014, we are also proposing the base rates for our natural gas customers remain flat.
For our steam utility, we filed for an increase in 2013 of approximately 6% for our downtown Milwaukee customers and approximately 7% for our Milwaukee County customers. In 2014, our proposal calls for an increase in steam rates of 6% for both customer groups.
At a pre-hearing conference on May 21, the staff of the Wisconsin Commission stated that it does not intend to pursue capital structure or return on equity as issues in this proceeding. Recently, the staff completed its field audit and technical and public hearings have been scheduled for the fall.
We expect to receive rate orders by the end of 2012. We’ve asked with the new electric and steam rates go into effect at the start of 2013 and 2014 and the new gas rates be effective the start of 2013.
Turning now to our Michigan rate case, the Michigan Commission issued a final order to increase retail of electric rates by $9.2 million annually effective on June 27 of this year. The new electric rates of the Michigan reflect the substantial investments we’ve made in reliability, renewable energy, and environmental upgrades.
Switching gears now, you will recall that our board has approved a share repurchase plan scheduled to run through the end of 2013. A plan authorizes us to buyback up to $300 million of Wisconsin Energy common stock through open market purchases or privately negotiated transactions.
No purchases were made in the first or second quarter of this year. Previously, we repurchased approximately 3.2 million shares at a cost of $100 million that equates to an average purchase price of $30.79 per share.
And as we previously announced, our Board has adopted a dividend policy that targets a 60% payout ratio in the year 2014. This policy should support double-digit growth in our dividend in both 2013 and 2014 as we move toward a payout ratio that is more competitive with our peers across the regulated utility sector.
Finally, I’d like to discuss the investment opportunities that we see going forward in our core business. As we’ve mentioned our capital budget calls for spending $3.5 billion over the five year period 2012 through 2016.
And with this five 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 large air quality controls. Instead our capital plan is comprised now of many smaller projects that will upgrade our aging distribution infrastructure, the building blocks of our delivery business pipes, polls, wires, transformers, and substation components.
The primary risks associated with these projects developmental, legal, regulatory, construction are naturally more manageable given the smaller scale and the scope of the distribution work. But this work is no less valuable or important than the mega projects we’ve just completed.
Our focus on renewing our distribution facilities is essential for maintaining our status as the most reliable utility in the Midwest. As you know, we’ve also been reviewing additional investments that meet our return criteria and our risk profile.
And I’m pleased to announce that on July 27, just last week we signed an agreement with NextEra Energy Resources to buy the Montfort Wind Energy Center, an existing 30 megawatt wind farm located in Ohio County, Wisconsin. The purchase price is $27 million.
We currently have a power purchase agreement for 85% of the output from the site. The remaining 15% is under our power purchase agreement with another Wisconsin utility.
We believe this acquisition will deliver positive economic benefits for our customers and our shareholders. After approval the wind farm would be added to our retail rate base.
This acquisition of course is subject to FERC and Wisconsin Commission approval and we're targeting a financial close by the end of 2012. We will be retaining NextEra to operate the site under an operations and maintenance agreement.
Also as you may recall the future of the Presque Isle Power Plant in the Upper Peninsula of Michigan is under review now because of expected changes in National Ambient Air Quality Standards by the U.S. Environmental Protection Agency.
So, we've been working to identify a life extension option for the Presque Isle plant that is economically beneficial for our customers. We’re studying the possibility as we’ve reported to you of a joint venture with Wolverine Power Cooperative for environmental upgrades to the Presque Isle units and potential joint ownership of the plant.
Wolverine under-accounts that would pay for the environmental upgrades and receive an ownership interest in the facility. The parties are discussing the terms and we've initiated now the second phase of engineering to assess a more detailed scope of work for the air quality controls.
If the joint venture moves forward, we would not expect to have any reduction in our rate base. As always, we’ll keep you posted on this potential transaction as it evolves.
And in closing I’d like to mention that with the recall elections in Wisconsin now completes, we have continuity in state government and a renewed focus on improving the business climate across the state and progress is being made. In a recent survey reported by Chief Executive Magazine, Wisconsin jumped four more spots to 20th best state in the nation in which to do business.
One spot better than Alabama and are right behind South Dakota. Overall, Wisconsin has climbed 23 places in the survey since 2008.
And now with more details on our second quarter and our outlook for the remainder of 2012 here is Rick.
Rick Kuester – Chief Financial Officer
Thank you, Gale. As Gale mentioned earlier our 2012 second quarter earnings from continuing operations were $0.51 a share as compared to $0.41 a share in 2011.
The results were better than planned because of hotter than normal weather in June, lower operation and maintenance costs and positive impact of the company's share repurchase program. Taking a closer look at the numbers, I will focus on earnings drivers at the operating income level by business segment and then touch on other income statement items.
I will also discuss cash flows for the first six months of the year. Our consolidated operating income in the second quarter of 2012 was $223 million as compared to $174 million in the last year’s second quarter, an increase of $49 million.
Starting with utility energy segment, you will see that operating income totaled $134 million, an increase of $46 million versus 2011. A significant factor in the quarter was the hot weather.
We estimate that our electric and gas margins increased by $20 million as compared to last year and $17.3 million as compared to normal weather. In addition to the impact of weather, our collections on fuel improved by $11 million and our O&M costs were reduced by $30 million when compared to 2011.
These positive factors were offset by a $10 million increase in depreciation expense at the utility level. The reduction in O&M cost is directly related to the one year amortization holiday of certain regulatory assets.
As previously mentioned, last year we’ve reached an agreement with the Wisconsin Commission that allowed us to freeze base electric rates in 2012. One of the provisions in the agreement was the ability to stop the amortization of certain regulatory asset.
This action will reduce O&M by $148 million during 2012, which flows evenly through the year. This agreement was designed to help our customers avoid 2012 price increases and allow shareholders to earn return on the capital projects that Gale discussed earlier.
The increase in depreciation expense over last year is related to the first units of the air quality control system at our older Oak Creek plant, which went into service earlier this year, and to the Glacier Hills Wind Park, which went into service in late 2011. Operating income in the non-utility energy segment, which consists primarily of the Power the Future units, was up by $2 million.
We finalized the depreciable lives of the new Oak Creek units, which had a slight positive impact on earnings. Taking the changes for these two segments together, along with corporate charges and other miscellaneous items, you’ll arrive at the $49 million increase in operating income for the second quarter of 2012.
During the second quarter of 2012 earnings from our investment in the American Transmission Company increased just slightly over 2011. Our other income was reduced by $6 million because of lower AFUDC, now that the air quality control project for units 5 and 6 at Oak Creek is complete.
Net interest expense increased by $5 million primarily because of lower capitalized interest associated with lower construction work in progress. Consolidated income tax rose by approximately $18 million because of higher pre-tax earnings and higher effective tax rate.
Our effective tax rate for 2012 is expected to be between 35.5% and 36.5%. Combining all of these items brings you to $119 million of net income from continuing operations with the second quarter of 2012 or earnings of $0.51 per share.
During the first six months of 2012, our adjusted operating cash flows totaled $636 million, which is a $25 million increase from the same period in 2011. Our adjusted operating cash flows include the impact of changes in restricted cash.
The largest favorable factor relates to our benefit plans. In 2011, we contributed $122 million to our plans in the first six months of the year.
No such contributions were made during the first half of this year. On the negative side, we saw a $74 million reduction in non-cash charges because of the regulatory amortization holiday in 2012.
Our total capital expenditures decreased by approximately $33 million in the first six months of 2012 as compared to 2011. We saw lower expenditures as projects were completed.
We also paid $138 million in common dividends in the first six months of 2012, which was $17 million greater than the same period last year. Dividends in the first six months equate to an annual dividend of $1.20 per share, which is a 15% increase over the prior year’s annual dividend of $1.04 per share.
Our adjusted debt-to-capital ratio was 53.1% as of June 30, 2012. Our adjusted calculations treat half of our hybrid securities as common equity, which is consistent with past presentation.
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.
As shown in the earnings package on our website, our first half 2012 retail sales of electricity increased by 0.8% as compared to the first half of 2011. Our weather normalized sales were down by 0.6%.
Excluding the mines normalized sales decreased by 0.3%. As you recall we have two customers that began utilizing their own self generation in 2012.
Adjusting for these customers and the mines on a normalized basis, we saw our retail sales grow by 0.2% during the first half of 2012 as compared to 2011. Overall, these results are in line with our 2012 sales forecast.
As we look at our natural gas sales with the significantly warmer than normal winter, we saw our retail sales decline in the first half the year by almost 24% as compared to 2011. However, on a weather normalized basis, our natural gas sales are in line with our forecast.
As a result of the warmer weather, we will increase our earnings guidance for the year. We expect our earnings for 2012 to be in the range of $2.28 to $2.32 per share.
Before I turn things back over to Gale, I would like to provide quarterly guidance. Factoring in the hot weather in July, we estimate that third quarter earnings will be in the range $0.56 to $0.59 per share.
Recall that last year’s third quarter was hot which improved earnings by ($0.10) per share versus normal weather. With that, I’ll turn the things back over to Gale.
Gale Klappa – Chairman of the Board, President and Chief Executive Officer
Rick, thank you very much. Overall, we are on track and focused on delivering value for our customers and our stockholders.
Operator
Your first question comes from the line of Kit Konolige with (indiscernible). Please state your question.
Gale Klappa
Hi, Kit. How are you?
Unidentified Analyst
Good. Good afternoon, Gale.
And I just have to say that Rick you’ve got to be kidding me, I mean, you are too young to retire. Well, it is what it is, right.
So, as long as you are still here, I just want to be clear as I heard you, the increase in guidance, did you say that’s purely related to weather, and so wouldn’t have any other implications about otherwise running ahead of plan on fundamentals etcetera?
Rick Kuester
No, it’s really a weather driven change, Kit.
Unidentified Analyst
Alright, that is good. And maybe can you review with us a little bit, the details of sales growth say by customer class what you are seeing out there residential, commercial, industrial?
Rick Kuester
Okay. I’ll let Steve Dickson, our Controller walk through that for you.
Steve Dickson
Yes.
Gale Klappa
While Steve is turning to the right page, I can give you a couple of fun facts. May and June which were warm months here, our residential customers used more electricity in May and June than any other May and June in history.
The industrial side really very much as Rick said, very much unfolding like our projections indicated they would, pretty flat overall on the industrial demand side but some pockets of strength. Steve?
Steve Dickson
Yeah, I think, Gale you nailed that, on the earnings package on page 10, we show six months electric sales, and again, residential is up 1.7% it was weather. When you normalize the weather, we think it’s right on track.
And as we’ve said in the script, we are down a little bit in large commercial, but it’s because of an expected outage there are largest customers and two customers switching. So, things are right on track.
Gale Klappa
All of which were in the original plan?
Unidentified Analyst
Okay, very good. Thanks a lot.
Gale Klappa
Thank you, Kit. Hang in there.
Operator
So, our next question comes from line of Jim Von Riesemann with UBS.
Gale Klappa
Hi, Jim.
Jim Von Riesemann – UBS
Hi, everyone.
Gale Klappa
How are you doing today, Jim?
Jim Von Riesemann – UBS
I’m doing well. How the packers going to do this year?
Gale Klappa
Packers are just rated number one. I hope the pre-season ratings hold up.
Jim Von Riesemann – UBS
Okay, we’ll talk about in the January.
Gale Klappa
Yeah.
Jim Von Riesemann – UBS
Rick, congratulations on your retirement pack, congratulations or good luck in your new role, but Gale this question is for you?
Gale Klappa
This buds for you.
Jim Von Riesemann – UBS
Every quarter we talk about your dividend, dividend growth, previously and today the discussion is centered on this double-digit dividend growth and the mathematical 10% to get you to this 60% targeted payout by 2014. So, the question is this, as you look into your crystal ball, what factors would get you to amend that thinking say, excuse me, raise the target to a higher level, perhaps 65% or a 70% payout?
And the second part of that question is how has your thinking been formed with respect to the buybacks, especially with the shares trading at better than two times book versus reallocating that money more towards dividend growth?
Gale Klappa
Okay, good questions Jim. I appreciate it.
On the first thing related to our dividend pay-out ratio targets, we’ve mentioned we are targeting to move to a 60% payout ratio by 2014. That of course would support based on our projections double-digit earnings or a double-digit dividend growth for 2013 and 2014.
And my direct answer to your question is one step at a time. When we get to 2014 we have a stated policy of having a competitive dividend payout ratio and we'll look around, come 2014 and see where we are against industry norms and see what it takes to maintain a competitive payout ratio.
We’ll also look at the fundamental underlying strengths of the company. We'll look at our cash flows.
We'll look at all the standard things that you would normally expect us to look at, but it will be in the context of what does it take to maintain a competitive payout ratio against other regulated companies in our sector.
Jim Von Riesemann – UBS
Okay
Gale Klappa
And then on the share buyback the concept remains very much intact that we announced. We basically completed a third of the buyback already and as I mentioned at a very, very attractive repurchase price of $30.79 a share I mentioned in the script we did not repurchase any shares in Q1 or Q2.
And as we moved forward we can be very patient and our criteria is very simple, we will look at what is the best after-tax return that we can deliver for our shareholders from our free cash flow. The effects of an additional investment for example like the Montfort Wind Energy Center that we mentioned, well that's what we do.
At the end of the day our commitment is not to hoard cash, but to return value to shareholders and obviously our preference would be to do so with additional investment projects that meet our return criteria and our risk profile. But if we don't find those additional projects, then again we'll use that cash in a way that most benefits our shareholders from an after tax standpoint.
Jim Von Riesemann – UBS
Got it. Thank you.
Gale Klappa
Terrific. Thank you, Jim.
Operator
You next question comes from the line Paul Patterson with Glenrock Associates.
Gale Klappa
Hi Paul.
Paul Patterson – Glenrock Associates
Good morning – good afternoon sorry. I wanted to ask you about the field audit.
Do you hear me?
Gale Klappa
Yes we can hear you.
Paul Patterson – Glenrock Associates
I’m sorry. The field audit, you mentioned that the staff had recently...?
Gale Klappa
I’m sorry that’s field audit.
Paul Patterson – Glenrock Associates
Right.
Gale Klappa
In every rate case, because we project expenses two years going forward. If you recall, Wisconsin has a two year forward-looking test year.
So, what we do when we file a normal rate case during our normal cycle is we file our projected O&M and capital expenses in this case for 2013 and 2014 and then the staff does what we call a field audit. They come, look at all of our projections.
They look at our past spending. They do trends, and they recommend how much O&M should be included in our future rates.
Paul Patterson – Glenrock Associates
And what did they say?
Gale Klappa
What did they say? Well, I think, I'm not sure they're completely through with their recommendations yet.
Paul Patterson – Glenrock Associates
Okay. I though you said they have been completed recently.
Gale Klappa
The physical field work has been done and now they are cranking.
Paul Patterson – Glenrock Associates
Okay. I got you.
Okay, I'm sorry. I misunderstood you.
Gale Klappa
No problem.
Paul Patterson – Glenrock Associates
And then on the weather normalized numbers, I apologize but I missed them. I’ve got the regular numbers here, I didn’t – I wasn’t able to locate the weather adjusted ones for residential and small commercial, what were they?
Gale Klappa
Steve, you’ve got those?
Steve Dickson
Yeah. We don’t do it by customer class.
As far as, are you talking about the impact on the margin or the growth between units?
Paul Patterson – Glenrock Associates
I'm talking about the kilowatt hour sales for the quarter that you had, I mean, outside this large industrial – large commercial industrial just sort of get a flavor for how weather adjusted sales performed?
Steve Dickson
Compared to our original forecast, we’re right on track.
Paul Patterson – Glenrock Associates
Okay. I’m sorry, what was the original – I mean, what is the number, I’m sorry?
Steve Dickson
I’m sorry, what’s the question again?
Paul Patterson – Glenrock Associates
The question is on a kilowatt hour sales growth, Q2 2012 versus Q1 2012, taking out the impact obviously you had a very warm weather, what would the sales growth have been?
Steve Dickson
What we did as we projected a flat sales growth basically because there’s a little growth in customers, but then we see conservation efforts going out there. And so we just basically had flat residential and a slight up-tick about 0.6% in the small commercial industrial.
Paul Patterson – Glenrock Associates
Year-to-date, is that pretty much what you’re…?
Steve Dickson
Yeah, we’re seeing the actual weather normalized results come in pretty close.
Rick Kuester
Paul our analyst – latest analyst book that we filed has on page seven basically our forecast for 2012 versus 2011 normalized.
Paul Patterson – Glenrock Associates
Okay, great. And then finally, you mentioned this after-tax return of cash or after-tax use of cash, the best return for your investors.
Are you having – I mean, you mentioned that you want to have a competitive payout ratio, but I mean is there – do you guys have any thoughts with respect to what the impact of the fiscal cliff were, an abrupt change in tax – just any change in tax policy regarding dividends which we may see I guess, is that into any other thinking in terms of how you’re going to be approaching it?
Gale Klappa
Well, I can say to you that the fiscal cliff is not in our thinking related to dividend policy, because we have to look at dividend policy on a long-term basis. So, I mean, we wouldn’t necessarily take a very short-term kind of an event into account when we’re trying to set dividend policy for multi-years.
In terms of taxes, we would certainly take that into account. But in talking with our investors around the country and in Europe, many of them have given me the advice about don’t worry about our tax rates, I mean just try to have a competitive dividend policy and a superior risk-adjusted total returns.
So, unless there was there was to be a punitive dividend tax rate increase which I would hope that we would avoid as a nation. I don’t think it would have – certainly we would look at it, but I don’t think it would be a huge factor in our overall dividend policy and setting that policy going forward.
Paul Patterson – Glenrock Associates
Okay, so I mean when you say punitive, are we talking about perhaps I mean as you know historically there has been a difference between dividends being taxed as opposed to capital gains, but given your discussions if I understand you correctly, given your discussions in how you guys are sort of looking at it and obviously I guess nothing’s firm, but it would be that – your inclination would be that outside of some major I guess discrepancy between capital gains and dividend taxes that you wouldn't really plan on that having an impact, is the that right?
Gale Klappa
That is correct. But I will say this, I am very hopeful and as you know our industry and others have a very I think an hope effective program underway to inform Congress and the (staffs) in Congress about how important it is not to favor one type of investment over another in terms of either capital gains or dividends.
And I did notice that the Democratic proposal that came through just a couple of weeks ago, while it raised slightly taxes on dividends for upper income individuals it also maintained the link between capital gains, tax rates and dividend tax rates. I think, we-re making and hope we’re making some economic sense to Congress that you really don’t want tax policy to skew investment decisions.
And so I’m very hopeful that regardless of what the final rate ends up being next year that there will be a linkage.
Paul Patterson – Glenrock Associates
Well, you’re economically informing Congress, this is something I wish you had laid down, no, but I – thank you very much for your comments. I appreciate it.
Gale Klappa
You’re more than welcome.
Operator
Your next question comes from the line of Michael Lapides with Goldman Sachs.
Michael Lapides – Goldman Sachs
Hey guys, Rick, congratulations on your retirement announcement. We’ll obviously miss working with you.
You’re one of the best in this business. Couple of just financing and capital structure questions, first of all, what are your plans to get financing for the year both in terms of raw totals and where meaning at the holding company at the operating companies, etcetera.
And second, cash taxes, can you talk a little bit about expectations for the difference between GAAP and cash taxes for the next few years?
Gale Klappa
In terms of the – Michael, in terms of the financing plans for the remainder of the year, we’ll let Pat speak to that, but we really only have one bond offering for the second half of the year. Pat?
Pat Keyes
Right, Michael I mean our debt as it looks at the end of last year, it was very comfortable how it looked at the end of Q2. As Gale mentioned, we’ve got one bond offering planned for roughly $250 million at Wisconsin Electric that will happen in latter half of the year.
And I think, the last part of your question was, are we looking at other debt retirements like at the holding company. The answer is yes, we continue to look – evaluate options.
However, there is nothing in this year’s plan that says we’re going to take any of that debt out.
Michael Lapides – Goldman Sachs
Okay. And cash taxes versus GAAP taxes?
Gale Klappa
Well, in terms of our cash taxes, we’re benefiting certainly from accelerated depreciation. And so our GAAP taxes, as we mentioned, our effective tax rate will probably be between 35.5% this year, but the cash taxes will be absolutely minimal because of the impact of the Obama accelerated depreciation.
Rick Kuester
And of course that's a timing issue.
Gale Klappa
Very much a timing issue.
Michael Lapides – Goldman Sachs
Got it, okay. And last thing just curious when you think about your rates on a cents per KWH basis, given what you’ve requested in the rate case how would your rates look relative to, what you say, about some of your Wisconsin peers?
Gale Klappa
Well, as you know, we proposed and received an order allowing us to freeze our base rates for 2012.
Michael Lapides – Goldman Sachs
Right.
Gale Klappa
The other Wisconsin utilities actually received rate increases effective January 1, 2012. Virtually, every Wisconsin utility is in for a rate case that will be decided between now and the end of the year.
So, my sense is that our relative positioning in Wisconsin will be unchanged. In fact, maybe a hair better, because some of the other Wisconsin utilities are seeking higher base rate increases than we are, but I am glad you asked that question, Michael, because there is an important underlying trend going on here that I think will be very evident over the course of the next three, four, five years, particularly in the greater Midwest and the nation as a whole.
We have invested, as you know, well actually since 2003 $7.8 billion in infrastructure upgrades. Much of that capital not only has gone to efficient new generation, but it’s gone to modern air quality controls.
So, our customers are now paying in their current rates for the air quality controls and the improvement in the environment that the EPA is actually trying to mandate now nationwide. So, as the EPA rules continue to be enforced, by 2015 or 2016 as other companies either have to invest significant capital and probably capital per unit of capacity at a higher cost than ours or retire capacity, their costs are going to go up and up at a much faster rate than ours.
So, I believe if you think about Wayne Gretzky and his comment was always I want to know where the puck is going, instead of where the puck is today. Where the puck is going is that we will look increasingly competitive over the course of the next five years and we are very pleased about that.
Michael Lapides – Goldman Sachs
Got it. Last question O&M flexibility, when you look out at your O&M budget for the next 12 to 24 months, you guys have been among the best in the industry at managing O&M costs over the last few years.
Just curious about your ability to continue implementing O&M cost cutting or cost management going forward?
Gale Klappa
Well, I am very positive on our ability to continue to control our O&M cost. Actually, the two biggest drivers right now of our cost pressure really are putting into rates the $1.6 billion of capital investment for the project that I mentioned during the early part of the conference call.
And so our single biggest pressure really is recovering the cost of that capital that we have invested for our customers. We are also seeing higher healthcare costs as every company is seeing, but 7% to 10% inflation on healthcare costs is not atypical for us.
Those two items obviously are significant, but overall our managers are very focused on productivity. We are a far more productive company than we were eight or nine years ago and I think we can and will continue to be.
Michael Lapides – Goldman Sachs
Got it. Okay, thank you guys.
Much appreciated, and Rick once again congratulations.
Rick Kuester
Thanks a lot Michael.
Operator
Your next question comes from the line of Jay Dobson with Wunderlich Securities.
Gale Klappa
Rock and roll Jay, how are you?
Jay Dobson – Wunderlich Securities
Very well, Gale, and Rick congratulations.
Rick Kuester
Thanks Jay.
Jay Dobson – Wunderlich Securities
Hey, Gale. I was hoping you could put a little context around some of your prepared remarks regarding new service connections, you’ve put them in somewhat stark numbers versus year ago new service connections, but I thought maybe you could help us understand what they mean versus sort of current customer count, so we might sort of drive to what that’s exactly doing on customer account and hence it’s run through sales?
Gale Klappa
Now, I’d be happy to. And let me back up and maybe give you in a little more context.
Before the recession hit in late 2008 and 2009, we were historically seeing here maybe 1% somewhere between 0.75% and 1.25% customer growth. During the recession that growth slowed to a crawl.
We never went negative on customer growth as some utilities did, but obviously that growth slowed to a crawl. Now, we’re beginning to see a slight acceleration, and so the numbers I gave you the percentage increases, we’re really seeing about a 0.3% to 0.35% increase in customer growth.
Again, compared to normal, that’s fairly anemic. But compared to where we were during the years of the recession, it’s a nice rebound.
And the other thing I think that’s important here is that Wisconsin has really come through the recession in better shape than many states. Our unemployment rate here never got anywhere near double digits.
As I mentioned in the earlier part of the call, the current unemployment rate is around 6.8% to 7% depending upon which month in the second quarter you look at. And we’re seeing some commercial growth beginning again, particularly in the Milwaukee region, which I’m encouraged about.
We’re seeing new shopping centers, there is a new proposal for a major downtown skyscraper, that is just being vetted here in Milwaukee County. So, underlying we’re starting to see a nascent pickup in terms of customer growth and economic activity, does that help, Jay?
Jay Dobson – Wunderlich Securities
That helps a lot. Thanks Gale.
And maybe Rick, then on the revised guidance, I just sort of wanted to maybe really understand what’s in the number. So, I guess, by the old guidance you’re raising by $0.03 to $0.04 and citing that is weather.
If I look at the first six months of 2012, we’re down about $0.08. But I think that’s versus a year ago, so maybe put that in context versus normal, so we can sort of understand what you’re assuming in the second half of the year for weather?
Rick Kuester
We’re assuming normal weather in the second half of the year except for – have factored in a warm July. So, from a weather standpoint, normal weather from August on.
Jay Dobson – Wunderlich Securities
Normal weather from August on, okay. Perfect.
Gale Klappa
As Rick said, I mean, it's clearly been a very warm July and we have a fairly good sense that we will have a strong July earnings growth. So, we decided to factor it in.
Jay Dobson – Wunderlich Securities
No. That’s perfect.
And then last one, on the wind farm acquisition, Gale, are there opportunities like that, maybe just sort of walk through how that came together and what the sort of magic sauce is that makes that work from both a customer and investor standpoint. And then are there other opportunities in the state to do something similar?
Gale Klappa
Well, let’s see Rick and I can both answer that, Rick was our lead negotiator with NextEra on the purchase of the Montfort Wind Energy Center. I think essentially for us and looking at that acquisition from our standpoint.
We had a long-term power purchase agreement I think it expires in 2026, Rick…
Rick Kuester
That’s correct.
Gale Klappa
With NextEra taking 85% of the output from that wind farm, the other 15% is already covered under PPA with another Wisconsin utility. And our view was at the right price we could approach the Wisconsin Commission seeking approval to in essence purchase the site, purchase the wind farm, put the $27 million in rate base.
And the key was could we show definitively a customer benefit. At $27 million in rate base compared to a power purchase agreement, we can definitely show our customer benefit.
Rick?
Rick Kuester
We’ve been taking power out of that wind farm for about 10 years Jay and PTCs basically run out and as we looked at it in our cost of capital and the benefits to customers not only between now and 2026 but beyond 2026, because we will continue to have renewable Rec needs just we were able to get to an agreement with NextEra that made sense for both parties, makes sense for customers, make sense for our shareholders too.
Gale Klappa
As far as any other opportunities, we do have one other major power purchase agreement and that’s energy coming from a combined cycle plant a natural gas, combined cycle plant called Whitewater. That one is a little bit more difficult in terms of thinking about a purchase and inserting that into rate base, more difficult simply because of the ownership structure a private equity firm owns a significant interest I think a Japanese utility owns another interest.
There are some complexities related to the debt financing on that particular plant, so we don't see a near-term opportunity there, I think Rick and I both feel like long-term we are probably the natural owner of the Whitewater plant, but I would see that as long-term. In the course of the other potential opportunity, which we will know a lot more about in 2013 is whether or not there will be a piece of legislation that would authorize the privatization of power plants owned by the state of Wisconsin.
There is obviously an election in November. The outcome of that election in terms of who and which party controls the assembly and the state Senate will obviously have an impact on whether that legislation will proceed, but we think that’s a 2013 issue and a 2013 potential in terms of legislation.
Jay Dobson – Wunderlich Securities
That’s great. Thanks for the insight, Gale.
Gale Klappa
You’re more than welcome.
Operator
Your next question comes from the line of Andy Bischof with Morningstar.
Andy Bischof – Morningstar
Good afternoon.
Gale Klappa
Hi Andy, how are you?
Andy Bischof – Morningstar
Good. Gale, you just spoke to the political environment that is kind of settling down, you spoke to the state divestitures, could you speak to any change in renewable mandates you see going forward?
Gale Klappa
I’ll be happy to give you my view. And I think the short answer is we really don’t see any changes in the renewable mandates going forward.
There is no momentum and no one has proposed really to rollback the standards. There is also, I don’t believe any momentum to increase the standards.
So, our sense is that for a number of years to come, the renewable mandate will stay in place as is. Recall one thing though, the mandate sets this baseline and we need to get statewide to a 10% renewable sources by 2015 10% of retail sales, but that 10% threshold stays in place for each year going forward after 2015.
So, if sales grow, if customer demand grows, then there is also growth in the component that would have to come from renewables.
Rick Kuester
And also the – we are meeting that by a combination of investments, which is in wind farms like Glacier Hills, and also short-term purchases of typically five years or so which roll off. So, in addition to sales growth, we’ll have some short-term purchases rollout over the next few years?
Gale Klappa
It’s very good point, Rick.
Andy Bischof – Morningstar
That helps tremendously, and one quick question regarding month or own, you expect that be in rate base?
Gale Klappa
Well, we are asking the commission for approval during the second half of 2012. We would hope to close the transaction right at the end of 2012, and if that’s the case it would be in rate base for 2013.
Andy Bischof – Morningstar
Great, thanks so very much.
Operator
Your next question comes from the line of Andy Levy with Avon Capital Advisors.
Gale Klappa
Andy, how are you today?
Andy Levy – Avon Capital Advisors
Good, thank you. Actually, I’m all said.
Rick, good luck as only known you two plus decades, but enjoying that?
Gale Klappa
You can be that…
Andy Levy – Avon Capital Advisors
Yeah, unfortunately, we are all getting up there. I’ll get up there, but enjoy Rick.
Rick Kuester
Thanks.
Gale Klappa
Andy, I don’t know if you heard Rick, but you said it’s not the age of the miles.
Andy Levy – Avon Capital Advisors
Yes, yes.
Gale Klappa
Take care, Andy.
Andy Levy – Avon Capital Advisors
Yeah, take care.
Operator
At this time, there are no further questions. Presenters, do you have any closing remarks?
Gale Klappa – Chairman of the Board, President and Chief Executive Officer
Well, just one, we appreciate everyone being available and participating in the call today. If you have any other questions, Colleen Henderson will be available on the Investor Relations’ hotline at 414-221-2592.
Thanks everybody. Have a good day.