Oct 26, 2010
Executives
Gale Klappa - Chairman of the Board, President & Chief Executive Officer Rick Kuester - President & Chief Executive Officer We Generation Allen Leverett - Chief Financial Officer Jim Fleming - General Counsel Jeff West - Treasurer Steve Dickson – Controller
Analysts
Greg Gordon – Morgan Stanley Michael Lapides – Goldman Sachs Brian Russo – Ladenburg Thalmann Vedula Murti - CDP Nathan Judge – Atlantic Equity Jim Von Riesemann – UBS Paul Ridzon – KeyBanc Capital Markets Dan Jenkins - State of Wisconsin Investment Board Steve Gambuzza – Longbow Capital Jay Dobson – Wunderlich Securities
Operator
Good afternoon ladies and gentlemen. Thank you for waiting and welcome to Wisconsin Energy Quarterly Conference Call.
This conference 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, I would like to introduce Mr.
Gale Klappa, Chairman of the Board, President and Chief Executive Officer of Wisconsin Energy Corporation.
Gale Klappa
Thank you, Colleen. Good afternoon, everyone.
And thank you for joining us as we review the company’s 2010 third quarter results. Let me begin as always by introducing the members of the Wisconsin Energy management team who are here with me today.
We have Rick Kuester, President and CEO of We Generation, Allen Leverett, our Chief Financial Officer, Jim Fleming, General Counsel, Jeff West, our Treasurer and Steve Dickson, Controller. Allen 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 $0.95 a share for the third quarter of 2010. This compares with $0.49 a share from continuing operations in the same period last year.
Our 2010 third quarter results were boosted by warm humid weather, continuing cost controls and a full quarter of earnings from our investment in the first new generating unit at Oak Creek. Overall, we’re pleased with our solid financial performance that we’ve recorded in the third quarter and for the first nine months of this year.
Our customers clearly responded to the return of summer temperatures in the Midwest. In fact in July, our residential customers used more electricity than during any other month in history.
And during the dark days of August, our small commercial and industrial customers used more electric energy than during any other single month in history. Now, I would like to spend just a moment on our continuing effort to upgrade the energy infrastructure in Wisconsin.
Our Power the Future plan is fundamental to the principal of energy self-sufficiency. Key components of our focus on self-sufficiency include investing in tow Combined Cycle Natural Gas Fired units at Port Washington, which is north of Milwaukee.
The construction of two super critical pauperized coal units at Oak Creek, which is south of the city, and building a significant amount of renewable generation. We’re now nearing completion of the new coal fired unit at Oak Creek.
As you recall, unit one passed all of its performance tests and was placed in the commercial service on February 2 of this year. Over the past several months, our general contractor at Oak Creek, Bechtel Power Corporation has focused on completing the commissioning and testing of Unit 2.
So, we fire on the coal on the Unit 2 boiler was achieved on July the 8. The Unit 2 generator was then synchronized with the grid for the first time on July 16 and since that time the unit is operated up to and exceeded 100% of its rated capacity.
Bechtel recently completed a timed outage and brought Unit 2 back online. The unit is now undergoing final performance testing.
However, Bechtel is experiencing some equipment issues that may delay completion of the testing. Depending on the revolution, the turnover date for Unit 2 could be delayed a few days or even a few weeks.
We still though expect commercial operation of Unit 2 to be a fourth quarter event. As a reminder, the guaranteed turnover date for Unit 2 at Oak Creek, which was set as part of our settlement agreement with Bechtel is November 28.
Turning now to other recent developments, on May 16, Wisconsin Act 403, was signed in the law by Governor Doyle. This law authorizes the Wisconsin public service commission to develop new rules for recovery of fuel and purchase power cost that are incurred by Wisconsin’s electric utilities.
The legislation was designed to streamline the current combustion process for fuel recovery in the States. In short, the law establishes a modified escrow accounting mechanism with an annual crew up for fuel cost.
On August 31, the commission forwarded a set of new proposed rules to the state legislature where standing committees and each house generally have up to 60 days for review. On October 20, the standing committee in the state ordered to send the new rule back to the commission for modifications.
The standing committee in the state assembly is also scheduled to review the rule at a hearing set for November 9. We do not expect any final action from the commission until they receive feedback from both legislative committees.
Once the commission responds, the standing committees will then have another 10 days for review. If no action is taken after 10 days, the rule would automatically go into effect.
So, as it stands today, we expect the new rules to be in place in 2011. Now, I’d like to update you on our progress toward meeting the renewable portfolio standard that the State of Wisconsin has in place for the year 2015.
To refresh your memory, the standard calls for an increase in the amount of electricity we supply with renewable resources from 5% in 2010 to 10% in 2015 at a statewide level. The standard sets targets for each Wisconsin utility using an historical baseline.
Using that baseline, about 8.25% of our retail electricity sales must come from renewable sources in 2015. With the completion of our Blue Sky Green Field Wind Farm in 2008, we took a major step towards meeting Wisconsin’s goal of reducing its carbon footprint.
Blue Sky Green Field has a total of 88 turbines, each with a capacity of 1.65 megawatts. It was completed under budget and ahead of schedule.
Also in 2008, we purchased a new wind farm development site, approximately 45 miles northeast of Madison. This site, which we call the Glacier Hills Wind Park, has a strong wind resource, close proximity to transmission and low population density making it one of the best locations for a major wind farm in the region.
On January 22 of this year, the Wisconsin Commission approved our request for a Certificate of Public Convenience and Necessity to build up to 90 wind turbines at the Glacier Hills site. In the second quarter, we finalized an agreement with Vestas Wind Systems for a supply of 90, 1.8 megawatt turbines and we began construction at Glacier Hills.
I’m pleased to report that construction is progressing very well, completed all the turbine foundations and all the access roads in preparation for delivery of the turbines themselves which should arrive in mid 2011. With 90 turbines, Glacier Hills will have a generating capacity of 162 megawatts.
This will make Glacier Hills the largest wind farm to-date in Wisconsin. The first full year of operation is projected to be 2012.
Our current estimate of the capital cost of Glacier Hills is approximately $367 million. This estimate does not include any allowance for funds used during construction or any reimbursable transmission costs.
Now as you may recall, last fall we also announced our plans to build a 50 megawatt cogeneration plant fueled with biomass at a paper mill site in Northern Wisconsin. The mill is owned and operated by Domtar Corporation.
We are fortunate to be close to significant forest lands that are being harvested in a sustainable manner. These forests have large amounts of wood waste that can be purchased to fuel the plant.
Now, diversification our renewable energy supply is one of our very important goals. As compared, for examples to wind the clear benefit from an operational standpoint is that we will be able to dispatch the biomass unit.
The unit will also supply steam to the Domtar paper mill and of course cogenerating electricity and steam improves the overall efficiency of the unit. Our investment in this project is projected to be approximately $255 million without allowance for funds used during construction.
On March 15, we filed an application for approval of this project with the Wisconsin Commission. We have now received all the local permits necessary to move forward and the commission is scheduled public and technical hearings for late November and early December.
Based on this schedule, we expect the commission to make their decision in the case in early 2011. Our targeted in-service date for the biomass project is late 2013.
Construction also continues to progress very well on a major upgrade of the air quality controls for the existing coal-fired units at Oak Creek. We are investing approximately $950 million, including allowance for funds used during construction for the installation of wet flue gas desulphurization and selective catalytic reduction facilities.
We expect these controls to be operational in 2012. The project now is about 56% complete, we remain on time and on budget.
Turning to our Michigan operations, on December 16 of last year, the Michigan Public Service Commission approved our self-implementation plan to raise electric rates by approximately $12 million effective with the commercial operation of Unit 1 at the Oak Creek expansion. Subsequently, the Michigan Commission authorized an additional increase of $11.5 million that was effective on July 2 of this year.
The total rate increase $23.5 million annually for our Michigan operations was appealed by one of our industrial customers. The Michigan Commission recently ruled on this appeal and accepted several mathematical corrections.
These corrections reduce the amount of the increase by $256,000 annually. The adjustment will take effect in just a few days on November 1.
Now, I’d like to touch briefly on the direction of the economy in our region. During the summer months, we continue to see a rebound in economic activity across our service area.
On previous calls, we mentioned recovery in three large sectors. Iron ore mining, specialty steel and paper production.
These sectors remain strong during the third quarter and several other sectors showed real signs of life as well. Most notably, primary metals and metal fabrication, rubber and plastic products, transportation equipment and health care.
Our third quarter electric sales to our largest customers actually grew by 11% as compared to the third quarter of 2009. But if you exclude the iron ore mines, sales to our largest customers grew by 4% during the quarter and if you normalized for weather, we saw a growth rate of about 1.5%.
However, we remain below 2008 levels in sales to our large commercial and industrial customers. And I should add that in September, signs of slowing began to emerge in the phase of the recovery in our region.
Finally, as Allen and I both mentioned during our public presentations in September, we expect that our board will review our dividend policy at its meeting this December. It’s important to note that the components of our financial goals related to credit ratings and the issuance of new equity will remain the same.
The credit rating objective for our utilities remains at the A category and as we said consistently, we do not want to raise our dividend payout to a level that would require us to issue new shares to finance our growth. In the course of our discussions with the board; however we will review the company’s earnings and cash flow projections and we’ll update our outlook for capital spending and other cash requirements such as pension funding.
As you know, our current policy calls for a 40% to 45% payout ratio next year and then a 45% to 50% payout in 2012 and thereafter. If there are any changes to the policy, I expect it will be announced soon after our board meeting on December 2.
And now with more details on our third quarter and the outlook for the remainder of 2010, here is Allen.
Allen Leverett
Thanks Gale. Now as Gale mentioned earlier, third quarter 2010 earnings from continuing operations were 95% per share.
I’ll focus on operating income by segment and then touch on other income statement items. I’ll also discuss clash flows for the first nine months and discuss our earnings guidance for the remainder of the year.
Our consolidated operating income was $203 million as compared to $104 million in the third quarter of 2009 or an increase of $99 million. Operating income in our utility energy segment totaled $134 million, which is $60 million higher than the third quarter of 2009.
The most significant factor helping our utility earnings was the weather. On a quarter-to-quarter basis, we estimate that weather increased our electric margins by $65 million.
This year, we experienced a hot and humid summer, which helped electric margins by approximately $30 million when compared to normal. Last summer, we experienced an unseasonably cool summer, which reduced electric margins by approximately $35million.
So, when you combine these two variances from normal weather conditions, you get the $65 million year-over-year benefit related to weather. As we mentioned earlier in the year, during 2010 we received price increases to cover increased cost.
We estimate that these price increases excluding fuel revenues helped operating income by $47 million. Also, our lower depreciation rates contributed to a $16 million reduction in utility depreciation expense.
On the negative side, our utility O&M expenses were $56 million higher because of increased amortization cost and cost involved to operate the new plant at Oak Creek. These costs were considered in our most recent rate cases.
Finally, our fuel recoveries were $12 million unfavorable compared to last year. When we net all of these factors together, we come to utility operating income that was $60 million higher than the third quarter of 2009.
Operating income in the non-utility energy segment, which primarily includes We Power was up $36 million because of the beginning of commercial operation of Unit 1 at Oak Creek on February 2nd. Taking the changes for these two segments and adding $3 million of other items brings you back to the $99 million increase in operating income for this quarter.
During the third quarter of 2010, earnings from our investment in the American Transmission Company totaled $15 million, which is a slight increase over 2009. All other income of $10 million was level with 2009.
Net interest expense increased from $38 million to $53 million for a total of a $15 million increase, primarily because of interest expenses associated with Unit 1 at Oak Creek. In February of this year, we issued $530 million in long-term debt to replace short-term debt used to finance the construction of Unit 1.
In addition, once Unit 1 achieved commercial operation, we stopped capitalizing interest on the construction in progress. The interest expense on the permanent debt for the Power to Future project is covered by the lease payments, and thus is included in customer rates.
Consolidated income tax expense increase from $33 million to $63 million for a total increase of $30 million primarily because of higher pre-tax earnings, I except that our annual effective tax rate in 2010 will be in the range of 35% to 36%. Combining all of these items brings you to $112 million of net income from continuing operations for the third quarter of 2010, our earnings of $0.95 per share.
During the first nine months of 2010, we generated $654 million of cash from operations on a GAAP basis, which is up $220 million from the same period in 2009. Last year, our cash flows from operations included a $289 million contribution to our benefit plans.
We did not make any contributions in the first nine months of this year. On an adjusted basis, our cash from operations totaled $786 million as compared to $583 million in the first nine months of 2009.
The adjusted number includes $132 million of cash impact from the bill credits in 2010 and $150 million in bill credits and refunds in 2009. These bill credits arose from the gain on the sale of our Point Beach Nuclear plant in 2007.
Under GAAP, cash from the bill credits is reflected in the change in restricted cash, which GAAP defines as an investing activity. From the management standpoint, we consider this a source of cash as it directly relates to customer bill credits.
The bill credits are scheduled to sunset at the end of this year. At that point, we will have returned the gain on the sale, as well as retained nuclear decommissioning trust assets to our customers.
Our total capital expenditures were approximately $546 million in the first nine months of 2010. Approximately $445 million of this was dedicated to our utility business and the balance was primarily related to our new coal units at Oak Creek.
We also paid $140 million in common dividends in the first nine months of 2010, which was an 18% increase over the same period last year. On a GAAP basis, our debt to capital ratio was 56.7% as of September 30, 2010 and we were at 53.9% on an adjusted basis.
This has improved slightly from our December 31, 2009 levels. I would expect our year end debt to capital ratios just to be somewhat below our December 31, 2009 ratios.
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 that was posted in our website this morning, our actual third quarter retail sale of electricity increased 13.8% as compared to 2009. On a weather normalized basis, third quarter retail electric sales increased 1.5%.
Excluding the sales to our largest customer, the iron ore mines, on a weather normalized basis, retail sales decreased 1.1%, which is slightly behind our third quarter projection that called for a decrease of 0.2%. The normalization process is at best and in perfects science and is less precise in times of extreme weather swings.
This year, we had significantly warmer weather and last year we had significantly cooler summer weather. Consumption by our residential customers increased in the third quarter by 26.4% and our small commercial and industrial class increased by 6%, both driven by the hot and humid summer weather.
We believe that conservation efforts by residential customers contributed to the decline in weather normalized usage in the residential class as compared with our original projections. However, weather-normalized sales to our small commercial and industrial class came in stronger than our projections.
Overall, our retail sales excluding the mines are tracking well against forecast. In February, we completed the permanent debt financing for the first unit at Oak Creek.
Net proceeds were used to repay debt incurred to finance the construction on Unit 1. As we have consistently stated in the past, we anticipate that the permanent debt financing for Unit 2 at Oak Creek will occur upon commercial operation of the unit.
Given the strong cash flows relative to our financial plan, we do not expect to need any long-term financing in our utilities this year. However, we do expect to complete long-term financing at the utilities in 2011.
Also on April 1 of next year, we will have a debt maturity at the Wisconsin Energy level. We expect to retire $450 million at 6.5% Notes using internally generated cash and short-term debt at the Wisconsin Energy level.
On a consolidated basis, we have approximately $1.6 billion of available undrawn credit facilities that expire in March and April of next year. We anticipate renewing and downsizing our credit facilities later this year before they expire in 2011.
I would now like to discuss our earnings guidance for this year. We are increasing the range for guidance for 2010 by a nickel, from $3.70 to $3.75 per share up to $3.75 to $3.80 per share.
Let me give you the background for how we arrived at this range. Through the first nine months of the year, we earn $2.78 per share.
Now this is $0.14 per share ahead of the plan that we presented to all of you in February. That plan called for $3.70 per share for the year, the midpoint of our original guidance range.
Now let me step back and give you my view of how I see the fourth quarter shaping up versus our original plan. At this point, I see three factors that are likely to drive us below the original plan earnings for the fourth quarter.
The first factor is the timing of the commercial operation at Oak Creek Unit 2. Our original plan called for in service date of October 1, which would have resulted in a full quarter earnings contribution from the unit this year.
Of course the commercial and service date for Unit 2 is not certain at this point. However, it is probably safe to say that we will be at least $0.03 to $0.04 per share below the original plan due to this item.
Next, electric fuel recovery has continued to be a disappointment this year. Assuming we had a $50 million under recovered balance for the year, we would come at about $0.03 per share below the original plan in the fourth quarter.
Finally, the plan called for normal weather in the fourth quarter. At this point, it appears that October this year will be warmer than normal resulting another $0.01 per share below plan earnings for the fourth quarter.
Taking these factors together, I would expect that our actual earnings in the fourth quarter will be $0.07 to $0.08 per share below our original plan. Backing this away from the $0.14 per share of favorable performance for the first nine months, we would arrive at an estimate of $0.06 to $0.07 per share of net over performance for the year.
When added to the original level of planned earnings for the year that brings you into our new guidance range of $3.75 to $3.80 for 2010. This translates into an earnings guidance range of $0.97 to $1.02 per share for the fourth quarter.
So with that, I’ll turn things back over to Gale.
Gale Klappa
Allen, thank you very much. Overall we’re on track and focused on delivering value for our customers and our stock holders.
Operator
(Operation Instructions) Your first question comes from the line of Greg Gordon with Morgan Stanley. Please go ahead with your question.
Greg Gordon – Morgan Stanley
Thanks, good afternoon.
Gale Klappa
Greg, we got to get one thing straight first as Jed Packer Sunday.
Greg Gordon – Morgan Stanley
Well, yes, but Jed’s first, Parker second.
Gale Klappa
How many points you have given me?
Greg Gordon – Morgan Stanley
May the best New York team win. So, I have two quick questions, one is as you look at the political landscape in the state, obviously you may see a shift or you may not in the political party that takes office here.
Can you comment on whether you think, there could be at the months full change in the appetite for the renewable energy spending that you’ve been targeting if the Republicans win the governor’s office.
Gale Klappa
Very good question, Greg. The race for governor, which I think would be the key race related to future strategy that the State might follow regarding renewable, the race for governor is tight, the last publicly available polls show the Republican slightly ahead, three to five points perhaps and I do think there is a difference of philosophy between the two candidates for governor as it relates to additional renewable portfolio standards beyond the year 2015.
So, let me start by saying, regardless of which candidate wins the elections, I don’t believe any of the plans that we have laid out here regarding Glacier Hills or regarding the Biomass project would see any material change. We have a state standard in place for 2015, I think everyone expects us to meet that State standard and regardless of which governor or which candidate is in the governor’s match and after January, I don’t see any change in that standard for 2015.
The change that might come if for example the Republican wins the race, because it is I think he would probably want us to step back and take our foot of the accelerator and not have a stronger standard for the year 2020 or 2025. On the other hand if the Democratic candidate is the Mayor of Milwaukee wins he would express the definite interest in having a renewable portfolio standard at a higher level for the year 2025.
So, in essence of the plans we had laid out and that our folks are working on in terms of construction and planning related to the new wind farm at Glacier Hills related to the new Biomass units, I see no impact from the election and we’ll just have to see how things play out regarding any standard for the State beyond 2015. I hope that answers your question, Greg.
Greg Gordon – Morgan Stanley
It does, my second question relates to the comment you made on the dividend policy, but really incorporates a bunch of things with regard to cash flow, so you guys have pointed out in PowerPoint presentations from different conference you have been at that is we move for the time and how the future begins to comes into cooperation of cash flow profile of the company improves and that should become more, more free cash flow positive. Can you tell us how you feel about whether or not it would be possible to accelerate the dividend payout ratio go over the company, with the back drop of having the deal with pension issues also and maybe the benefits of owner’s depreciation, when you look at the holistic cash flow profile of the company, how possible is that, that you might potentially be able to accelerate the payout ratio trajectory.
Gale Klappa
Greg, good question, and we will be basically laying out a base case and then sensitivities around the base case for our Board of Directors in December, Allen is now going through all of our model runs, updating all of our projections and we will actually cover that information with the board first and then if you would like, with you second.
Greg Gordon – Morgan Stanley
Fair enough, I can try, right?
Gale Klappa
You can give it a shot Greg. Thanks for trying Greg.
Operator
Your next question comes from the line of Michael Lapides with Goldman Sachs.
Gale Klappa
Hello Michael, how are you doing?
Michael Lapides – Goldman Sachs
I am, okay Gale, yourself?
Gale Klappa
We are doing fine. We got a wind storm going on here right now, lots of customers out.
Michael Lapides – Goldman Sachs
Couple of easy kind of questions for you, first of all, if you were to do incremental renewable projects besides Glacier Hills in the Biomass plant, when do have to make decision and get them in the service to me kind of 2016, 2017 targets?
Gale Klappa
That question Mike, I am going to ask for Kuester, as up our generation unit to answer that question for you.
Frederick Kuester
If we were going to do a self bill Michael, we first, we would look at probably acquiring sites in the 2011 timeframe. I would expect then in the 2012, 2013 timeframe, we would go through the process with the commission, probably sometimes for competitive RFP and then we would look for construction timeframe in the 2014 to 2015 timeframe to get the units aligned by, the beginning of 2016.
We would also evaluate going to the short-term market, we’ve signed several short-term deals, five years in duration, the last time we went to market, the market was over supplied and it was favorable, don’t know that would be -- that way the next time, there would be another option we would have.
Michael Lapides – Goldman Sachs
Got it, and couple of unrelated questions, how should we think about big drivers of cash flow, really cash from ops and cash from investing activities, besides net income D&A and CapEx, like what other significant drivers do you expect over the next year or so?
Frederick Kuester
I think the only two that I would add, Michael. Whereas this year, you know coming off with a very large pension contribution to the trust that we made in 2009.
Coming off of that, we didn’t make any contributions at all to either the [Inaudible] trust or the pension trust in 2010. I would expect that we would make a contribution to both of those, and candidly we are still finalizing those numbers and there will be somewhat impacted by what the final liability account rate turns out to be for the year.
So that’s certainly one thing that will be new in 2011 as opposed to 2010. I would expect the deferred tax liability balanced to continue to build up in 2011 and as we have both of these plants, the large coal plants online and generating tax depreciation I’d expect that to continued to be a source of cash if you will.
Other than capital spending and just earnings from the business, those would be the two that I’d point out. Do keep in mind that the capital spending forecast that we have currently for 2011 is about $1 billion.
So it’s pretty significant budget in 2011.
Michael Lapides – Goldman Sachs
Can you talk a little bit about just a little more granularity around the delta between GAAP versus cash tax levels?
Frederick Kuester
I can talk about it in terms of an increase in the deferred tax liabilities that’s helpful.
Michael Lapides – Goldman Sachs
Please.
Frederick Kuester
You know, I would expect kind of the current forecast that I have for the DTL balance in ‘10 versus the ’11, it’s about an increase of about $112 million in DTLs in ’11 as compared to 2010. Is that helpful?
Michael Lapides – Goldman Sachs
Helpful, thanks guys. Much appreciated.
Gale Klappa
You are welcome Michael. Take care.
Operator
Your next question comes from the line of Brian Russo with Ladenburg Thalmann.
Gale Klappa
Hi Brain, how are you doing today?
Brian Russo – Ladenburg Thalmann
Good, thanks, good afternoon.
Gale Klappa
Good afternoon.
Brian Russo – Ladenburg Thalmann
Just a quick clarification on the RPS standard for 2015. Will you meet the 8.25%, which was currently you discussed in terms of Glacier Hills or is there additional renewable needed to meet 2015?
Gale Klappa
If you look at where we are today, which is probably about 4.25% and then you add on Glacier Hills and then you add on the Biomass project. Depending upon our sales forecast we may have some small gap to close by 2015, which as Rick said, we might be able to close, in fact I think we’ve closed a bit already with some short-term PPAs for wind energy.
But basically we’re about there or close to there for 2015. However, with the projects we’ve mentioned and with the short-term small PPAs that Rick and his team have already signed.
However, very important distinction, we get there for 2015, but we’re getting there impart by using up a bank of credits that we’ve already been granted. So, we don’t stay there in 2016 and therefore we need to really get offence of what the state policy will be asking us to accomplish because we can achieve and then have the plan in place to achieve 2015, but if you have any growth in sales at all and then by using up the bank to get there in 2015, we immediately become short in 2016 and shorter each year going out.
So, that’s why it’s important to get clarification on the policy going forward at the State.
Brian Russo – Ladenburg Thalmann
Okay, understood. So I think previously discussed solar project and possibly they need for 500 additional megawatts of likely wind capacity, that’s sort of like a post 2015 type of timeframe?
Gale Klappa
Well, that’s not really. I understand exactly why you are asking the question, it’s a good question.
But for example, if it’s determined that we need to continue to stay at say 10% state wide post 2015, then Rick and his team would have to get moving as he mentioned earlier on some projects and looking around for what the additional projects we might put in the pipeline, then I could see as for example as we self build, beginning construction, if we had the need of the continuing standard in 2012.
Brian Russo – Ladenburg Thalmann
Okay, great and than just lastly, have the 2012 financial outlook drivers have, they remain consistent since your last update?
Allen Leverett
Yes, mainly the little earnings model paid by and that we include in our presentation.
Brian Russo – Ladenburg Thalmann
Correct.
Allen Leverett
That’s unchanged.
Brian Russo – Ladenburg Thalmann
Okay, thank you very much.
Gale Klappa
You are welcome. Thanks for the questions Brian.
Operator
Your next question comes from the line of Vedula Murti with CDP.
Gale Klappa
Vedula?
Vedula Murti - CDP
Hi, good afternoon.
Gale Klappa
Hi, how are you doing Vedula?
Vedula Murti - CDP
I am doing well, thank you. My question I think is just kind of follow-on, a clarification of your answer to Greg Gordon, just though I’ll think about, that we think right now kind of given them the general variables and kind of in your base plan and readjusting dividend if we look from 12 through like 13, 14 and 15 roughly, in aggregate would you be able to say that operating cash flows would cover both dividend and capital requirement over that period, your basically cash flow neutral cumulatively over that period?
Allen Leverett
Well Vedula what we have said about our cash flow picture based on the plan that we laid out to our Board in February of this year, is that we would expect funds from operations to reach across over point versus the sum of dividends and capital spending meaning FFO would be greater than the sum of common dividends and CapEx in either 2012 or 2013. And so part of what we’ll do in the exercise that we will go through with the Board later this fall in December is the update that, but based upon the plan we laid out in February that cross over point was in 2012 or 2013.
Vedula Murti - CDP
And besides from the variability of renewable standards post 2015 is that the biggest moving piece that can effect that or was there or what are the other major pieces you focused on?
Allen Leverett
Well, that’s certainly a big piece but yeah, the environmental spending. Anyhow, as we’ve said in our public presentations, they’re certainly.
Although, we are ahead of the curve versus other utilities on that spending, there would be some potential spending in front of us depending upon where those things, where those rules go. So, environmental is certainly one that I would put on the list, another that I put on the list is pension and I alluded to that in my response to Michael’s question.
And then the last would be and there would be others, but the other big one would be could there be some additional opportunities outside the footprint at ATC that would require investment. So that’s kind of a hand full of some of the bigger sensitivities that we would look at for the Board.
Vedula Murti – CDP
Alright, thank you very much.
Gale Klappa
Thank you, Vedula.
Operator
Your next question comes from the line of Nathan Judge with Atlantic Equity.
Gale Klappa
How are you doing Nathan?
Nathan Judge – Atlantic Equity
Doing well, thanks.
Gale Klappa
Good, busy week - -
Nathan Judge – Atlantic Equity
Just a quick question, sorry I think may be at a delay here but to ask my question, I realize weather normalized sales is more than art, than science, but the only company that I know because I can take a 25% or 26% increase in sales and volume and say actually it looks pretty negative another weather normalized negative 4% decline. Are you actually seeing evidence that people are closing up shop and going away for the summer or what is that we’re seeing that would give you any indication that’s a realistic number or it just statistic noise… ?
Gale Klappa
Well, and Allen will give you his view as well. One of the things that, I think we’ve all learned over the years is that weather normalization technique that virtually everyone in the industry uses has its limitations particularly at the extremes.
If you think about the summer we had last year, which is really no summer, there was almost no demand for air conditioning at all because of just extremely cool temperatures in the third quarter of ’09. And then you flip the third quarter of 2010 and we have literally the warmest summer on record in the Milwaukee region.
I think you begin to really see that the inherence difficulty with weather normalization at the extremes. So, I wouldn’t place too much emphasis on the third quarter number.
However, Allen can tell you what, our nine months weather normalization numbers look like and I would put a lot more credence in the first nine months just on the weather normalization technique for Q3. Allen?
Allen Leverett
But maybe before I mention that, maybe also put some numbers around the excursion on cooling-degree days, I mean, it was in third quarter 2010, was 115% warmer than the same period in 2009 and about 42% warmer than normal. So it was very significant in terms of the cooling-degree days.
Gale Klappa
And Nathan, we are seeing, what we call the shoulder marks where there is really not a very strong requirement for air conditioning or heating. We are definitely seeing a conservation where its easier to conserve.
We have not seen so far when it’s very sticky and very warm. We haven’t seen a significant amount of additional conservation and when it’s very cold, we haven’t seen a significant amount of additional conservation.
But in those shoulder months, like for example this month, where we have had warmer than normal temperatures, you can definitely see a fall off. So, I think that’s where we are beginning to see the most impact from customer conservation.
Nathan Judge – Atlantic Equity
So, thinking longer term, there is kind of two questions that follow on to that then, are you – as it pertains to the coupling and thinking of that as well as what kind of impacts are we talking about to rate the customers, also considering that rates for renewables have to start coming into the customers’ bills, probably in the 2011 plus period. What are we looking at if we continue to see this couple of percent decline annually?
Gale Klappa
Well, first of all, we have in our short, medium and longer term forecasting, we have factored in already an element of conservation. What we have seen so far, as Allen said in his remarks, in essence if you look overall across all of our retail customer groups, we are basically tracking pretty darn well against the forecast.
We haven’t seen anything alarming or anything that would say that there our forecasting is off base, in terms of the very modest decline that we are seeing on a per customer basis, particularly on the residential side. Now having said that, we also continue to see modest customer growth, we were serving several thousand more customers at the end of September this year than at the end of September last year.
We are actually seeing an up tick in gas distribution customers as well. So, you are going to see some conservation, you are going to see, I hope continued customer growth and then if we get any kind of economic rebound from here, remember our industrial sales are below 2008 level still, so if we get any kind of economic rebound from here that also will help in terms of kilowatt hour sales.
So, at the moment, I don’t think there is any cause for alarm or concern here related to any kind of real change against our forecast with what we are seeing in the real world. And then on your question about the coupling, I am still a bit of a skeptic as it relates to that dramatic change in the business model, particularly on the electric side.
I think frankly the Wisconsin Commission is a bit skeptical as well. One other utility in the state has a pilot program for the coupling underway, I think every one has agreed to step back and let see the results down the road of that small coupling experiment to see if that’s the right track to go down, but at the moment, I don’t see a need for any dramatic change in the business model.
Nathan Judge - Atlantic Equity
That’s very helpful. Thank you very much.
Gale Klappa
Thanks Nathan, good questions.
Operator
Your next question comes from the line for Jim Von Riesemann with UBS.
Gale Klappa
Hi Jim, how are you doing?
Jim Von Riesemann – UBS
I am doing well, how are you?
Gale Klappa
Good. I like your new last name.
Jim Von Riesemann – UBS
Yes, anything to confuse the IRS, get me out of jail. Two questions, one is could you provide some color on this comment you made in your prepared remarks regarding signs of a slowing economy in September and the second question is do you have any forecast, retail electric sale forecast for 2011?
Gale Klappa
Sure. I’ll take the first and then Allen can give you some specifics on the forecast for 2011.
Let me just say this, the forecast for 2011 based on what we have seen so far is unchanged from the forecast that we used in our rate case for 2011. But first a little bit of color on the slowdown, about the second to third week of September and we track, by the way Jim, we track 17 large sectors, large industrial sectors of the economy here every week.
So, I see, Allen sees, Rick sees, we all see a weekly report on industrial energies by sector across these 17 large customer segments. For the third quarter, 13 of the 17 segments were green, in other words 13 of the 17 segments showed growth over the third quarter of a year ago.
We are still seeing the majority of the segments have growth, but there is no question that about the second to third week of September, it’s almost like our industrial customers took a collective breath, it’s not one single segment, but a kind of across the board. The growth rate slowed down and we are really kind of seeing a pause.
Now, that pause has continued into October, I cannot tell you if it’s permanent, if it’s a blip or if we’re starting to see the early signs of a downturn, but I can tell you its pretty visible in terms of at least a pause in the phase of the recovery and it’s pretty much across the board.
Jim Fleming
Yes and then Jim, in terms of 2011 forecast for electric, if you look at things on a weather normalized basis, so in other words normalized ‘10 and then do a forecast for ‘11 based upon normal weather. My current outlook for total retail is essentially flat, maybe down about four-tenths of a percent in 2011 as compared to 2010, so still very modest in terms of our outlook on electric sales for 2011.
Gale Klappa
And again, that’s weather normalized, Jim.
Jim Fleming
Yeah, in both periods.
Jim Von Riesemann – UBS
Thank you.
Gale Klappa
You’re welcome.
Operator
Your next question comes from the line of Paul Ridzon with KeyBanc Capital Markets.
Gale Klappa
Good afternoon, Paul.
Paul Ridzon – KeyBanc Capital Markets
Good afternoon. A quick question, press release talks about ‘11, ‘10 benefit from Oak Creek, but then on the numeric walk-down, there is $36 million of operating income which translates and requires more than $0.11, what are we missing?
Jim Fleming
Interest.
Paul Ridzon – KeyBanc Capital Markets
Okay.
Jim Fleming
And taxes, yes. So there is a part of interest expense of course which is associated with the first unit and then of course you have to provide for the taxes.
So, when you put all those components together Paul, you get to the roughly $0.11 for the quarter.
Paul Ridzon – KeyBanc Capital Markets
And if you look forward to ‘11 and ’12, what’s a reasonable expectation for an effective tax rate?
Jim Fleming
Well, the range that we are at right now, which was the, for 2010 was the 35 to 36, I think that’s still a pretty good estimate for 2011. We wouldn’t be expecting to bring the windmills and service very early in 2011, so wouldn’t expect any PTCs, any production tax credits, in ‘11.
So right now, I would say ‘11 would be pretty similar to ‘10 in terms of the ETR.
Paul Ridzon – KeyBanc Capital Markets
I assume the benefits of the production tax credits go to repairs?
Jim Fleming
They do, and so what happens when you set the revenue requirement rate, they take into account what’s your effective tax rate will be. So, if say you saw decline in the effective tax rate in 2012 because of the production tax credits that you would expect to be able to generate, that would be reflected in rate making, so although the ETR may go down in ’12, that would all sort of get washed through the rate making process so that the customers will have the benefit of that.
Paul Ridzon – KeyBanc Capital Markets
Are we doing ITCs on any of these services?
Jim Fleming
We are not doing investment tax credit on it and we did a lot of analysis, it looks to us that the better option for the customers right now would be the PTCs the way things are currently structured.
Gale Klappa
And we did take a hard look at it, but clearly in our analysis for what we have in place, the better option was the production tax credit, Paul.
Paul Ridzon – KeyBanc Capital Markets
Is that a function of very strong capacity factor?
Gale Klappa
No, it’s a function really at the way regulation works here, but I mean the capacity factor really didn’t make much difference in the analysis.
Paul Ridzon – KeyBanc Capital Markets
And then just can you kind of give us a forecast for your share of ATC CapEx for the next couple years?
Jim Fleming
Well, our ownership share of ATC is 26.2%. In terms of their 10-year spending plan, they are talking about $3.4 billion over the next 10 years at the total ATC level, so we would be roughly a quarter of that, that $3.4 billion.
If you look at the next couple years in the annulus package that we used in September, we gave a three-year outlook for 2010, ‘11 and ‘12. I don’t have that here in front of me, but if you pull that out, it drills a balance to our share for each of the next three years.
Paul Ridzon – KeyBanc Capital Markets
Okay, thank you very much.
Gale Klappa
Okay, thank you Sir.
Operator
Your next question comes from the line of Ted Haine with Catapult Capital.
Gale Klappa
Good afternoon.
Ted Haine – Catapult Capital
Can you hear me?
Gale Klappa
I sure can. How are you doing Ted?
Ted Haine – Catapult Capital
Very well, thank you. Actually, most of my questions have been answered.
I just had one, just to double check where you guys were running on whether year-to-date versus normal and also for fuel under recovery?
Jim Fleming
Yes, in terms of weather versus normal, I mean if you look year-to-date and you sort of look at both the gas business as well as the electric business, we are about $20 million pre-tax ahead of normal and in terms of fuel recoveries, let’s see if you give me just a second Ted.
Gale Klappa
Year-to-date is about $63 million.
Jim Fleming
Yes, in terms of cumulative under recovery, it’s about $63.5 million and my current expectation is that we would end the year about $50 million under recovered, which would imply a positive recovery position for the fourth quarter alone of about $13.5 million.
Ted Haine – Catapult Capital
Got you, okay. And you said for the third quarter you were $30 million above on weather, right?
So, the first half of the year you were downturn?
Gale Klappa
Right and part of the reason for that is we had a warm winter. We did not have a very cold winter and so the gas, that was reflected in the gas distribution margins.
Ted Haine – Catapult Capital
That’s right, got you. Okay.
Thanks a lot.
Operator
Your next question comes from the line of Dan Jenkins with State of Wisconsin Investment Board.
Gale Klappa
Alright, Dan. Dan, we got to have a little discussion here.
I was with the governor the other day. And he mentioned, he is going to be retiring in January and he asked if he had done any good at all with managing his pension funds.
Dan Jenkins - State of Wisconsin Investment Board
Well, I work on fixed income, so you can tell him at least I’m doing my share, so.
Jim Fleming
So in other words, your stuff is doing just fine?
Gale Klappa
Yes, it was those other guys, never mind. Okay Dan, how you are doing on this Halloween Eve?
Dan Jenkins - State of Wisconsin Investment Board
Just trying to keep them blowing away.
Jim Fleming
Yes
Gale Klappa
What can we do for you Dan?
Dan Jenkins - State of Wisconsin Investment Board
Given the Oak Creek 2, eminently you are going to be in commercial operations. As we think of that going forward, should we use kind of the impact of Oak Creek 1, is that a good guide to go by or particularly like now and then where there is some shared cost that Oak Creek 2 will be significantly lower or what’s the plan there?
Gale Klappa
Are thinking about overall earnings from Oak Creek 2 versus Oak Creek 1 or -- just want to make sure we’re answering the right question?
Dan Jenkins - State of Wisconsin Investment Board
Right, when you kind of break down the changes from last year to this year, you kind of show where the Power the Future, the impact there and then also there is the impact up above in the utility in the O&M related to it, so kind of going into 2011, is that a good guide to measure what the impact Oak Creek 2 will have?
Jim Fleming
Well, in terms of earnings, I mean of course the absolute investment for Oak Creek 1 is larger than for Oak Creek 2, because there is the associated common and everything that’s loaded on that lease. So, I would be very careful about just extrapolating Oak Creek 1 to Oak Creek 2 in terms of earnings, but if you look it as a total package on a consolidated basis, most of the units together, about $100 million of consolidated after tax impact on net income and I guess from an O&M standpoint I would defer to Gale and Rick on that.
Gale Klappa
I think we’ll see less O&M build up from the personnel for Unit 2 and the operation of Unit 2 because of what Allen said and that is we got the common facilities for both units that came into service with Unit 1. But to put all that kind of in perspective related to Allen’s $100 million number, about two thirds of the capital investment in Oak Creek was in Unit 1 in the common facilities and the other remaining one third of the total investment will come from Unit 2.
Does that help at all, Dan?
Dan Jenkins - State of Wisconsin Investment Board
Yeah, that helps.
Gale Klappa
Okay.
Dan Jenkins - State of Wisconsin Investment Board
…
Gale Klappa
We can give you a number.
Jim Fleming
Well, when you think about it in terms total financing that we would expect to do for the Oak Creek complex, that’s about $950 million. And I believe we did $530 million or so back in February and so we would expect to do the balance Dan of about $420 million on or about commercial operation day for the second unit.
Dan Jenkins - State of Wisconsin Investment Board
Okay, and then I think you mentioned no utility debt for the rest of the year, but you do expect to have some issuance in 2011?
Gale Klappa
That is correct.
Dan Jenkins - State of Wisconsin Investment Board
If you can give us any color on size and timing of that?
Jim Fleming
Gale Klappa
Dan, you might want to see if the governor is interested in any of those bombs.
Dan Jenkins - State of Wisconsin Investment Board
Well, that’s a good retirement source for people, right?
Gale Klappa
Exactly.
Dan Jenkins - State of Wisconsin Investment Board
Okay, that’s all I have, thanks.
Gale Klappa
Okay, take care of yourself. Thanks.
Operator
Your next question comes from the line of Steve Gambuzza with Longbow Capital.
Gale Klappa
How you’re doing Steve?
Steve Gambuzza – Longbow Capital
I’m doing great, thanks.
Gale Klappa
Good.
Steve Gambuzza – Longbow Capital
Just wanted to ask about the outlook for flat weather normalized sales in 2011 in the context of your remarks on industrial activities, is it fair to assume that that outlook for flat weather normalized sales assumed that there is a slowdown that you see in September and October is really just a pause and that we’ll see positive industrial world growth in 2011?
Gale Klappa
It really almost shows no growth from what we expected in 2011, I am sorry in 2010. So basically if you just look at everything weather normalized across the board, particularly on the largest industrial side it’s really not any kind of up-tick from what we thought we were going to experience in 2010.
Allen Leverett
Then maybe just put in some numbers around it, I think that’s qualitatively it’s exactly what Gale talked about, but again overall slight reduction in retail about four times the percent.
Steven Gambuzza – Longbow Capital
For 2011.
Allen Leverett
That’s correct.
Gale Klappa
Over weather normalized 2010.
Steven Gambuzza – Longbow Capital
Okay, and then, but I guess the -- I am just curious that the sources of, if you are going to have a slightly reduction would that be driven by one particular customer class or is that a slightly reduction across commercial, industrial or it’s natural?
Allen Leverett
If we get down, Steve along the lines of small commercial and industrial, and large commercial and industrial. I would expect a very slight increase in small commercial and industrial probably about seven times of a percent and our current forecast is actually for decline in the large commercial and industrial right at 2% and one of the things that the impacting that we are going to see the final shutdown of the Chrysler plant in Kenosha and we’re also expecting that MMSD, which is the Milwaukee Metropolitan Sewerage District, they’re going to be doing some self generation.
So, we would expect somehow to come off our system.
Steven Gambuzza – Longbow Capital
That’s very helpful. Thank you very much.
Gale Klappa
Steve, in fact that the Chrysler engine plant saw it’s last production day this past Friday, so but we already add that crank into the forecast.
Steven Gambuzza – Longbow Capital
Excellent, thank you.
Gale Klappa
Your are welcome Steve.
Operator
Our last question comes from the line of Jay Dobson with Wunderlich Securities.
Gale Klappa
How is it going Jay?
Jay Dobson – Wunderlich Securities
Very well, thank you. How are you?
Gale Klappa
We’re doing fine.
Jay Dobson – Wunderlich Securities
Two questions actually, the first would be just a follow-up with the last question, if you normalized for Kenosha and then Chrysler plant in the Sewerage District Allen, what would that large industrial look like growth ’11 over ’10?
Allen Leverett
Jay, right of the path, I don’t have anything normalized for those two.
Jay Dobson – Wunderlich Securities
How bigger those two then maybe just the easier?
Gale Klappa
Chrysler is like our number 20 customer, it’s in the top 25.
Jay Dobson – Wunderlich Securities
Got you.
Gale Klappa
And I don’t, we just don’t have the MMSD numbers in front of us.
Jay Dobson – Wunderlich Securities
Okay, no problem, the second question which was my primary one, Gale you spoke of the Oak Creek Unit 2 some equipment issues during start up here and I was wondering, maybe I missed it, but if you could possibly give us a little more detail on that and then just remind us under the settlement you signed the impact of any delay beyond November 28 of this year.
Gale Klappa
Sure and I’ll ask Rick to join in and add, do whatever I provide you as well.
Jay Dobson – Wunderlich Securities
That’s great thanks.
Gale Klappa
In terms of the equipment issues, in essence of one of the things, I think they’re actually positive, Bechtel is saying, they are in their operability run right now, one of the stringent requirements that we have in place with Bechtel before we will except the unit being ready for commercial service, is that the unit must run for 15 consecutive days at a capacity factor at or above 90% and they’re in the final 48 hours or something like that wreck of the operability run. But one of the things Bechtel wants to do, if we think it’s really positive, just bring the unit down after operability run, simply to do some equipment checks and replacement of a couple of elements et cetera.
So, basically some equipment replacement and some equipment checks, and that will also give us an opportunity to do some additional inspection as well. So, nothing that we are seeing at the movement that is overly alarming, but just the matter of being through and completely walking through this, so that when we take the unit, the unit has been as demonstrated it’s ability and it’s passed every single performance test and it’s ready to rock.
Rick?
Rick Kuester
I think you pretty much did Gale, the original plan and the reason we talked about the delay was for Bechtel run this operability run and in concurrently also do the performance test and there is three performance test Jay, there is a capacity test, heat rate or efficiency test and admissions test and we are going to do that concurrently. What they’re going to do now is finish the operability test, come down do some work on the plant, we are going to do some inspections and then they got to run the performance test after that.
So, it’s push this out a little further than we first expected, but like we say, the delay could be a few days, it could be a few weeks, but we still expect it to be fourth quarter event. And as you recall these performance test, one passed with flying colors, the first go around Unit 2, is essentially and identical unit.
We don’t see any impediment if Bechtel being able to pass these performance test.
Gale Klappa
And Jay to you second question, if for some reason the unit were to go beyond November 28 without being commercial, our agreement with Bechtel has November 28 said as the guarantee date beyond November 28 unless we and Bechtel agree on a weaver there would a liquidated damages owed to the utility of $250,000 a day.
Jay Dobson – Wunderlich Securities
In the way, we will have to attached [ph] extension of time some type of on call delay or [Inaudible] advance.
Gale Klappa
Exactly. So no calls for alarm at this stage of the game and I must say Rick is right, I mean we really think based on what we’ve seen out at unit one and what we’ve seen so far and the testing our of unit two, that these are going to be very efficient, very good units for our customers for many years to come.
Jay Dobson - Wunderlich Securities
That’s great. Thanks for the detail.
Gale Klappa
You’re more than welcome, Jay. Well ladies and gentleman that concludes our conference call for today.
We really appreciate your participating. If you have any other questions Colleen Henderson will be alive and available on our Investor Relations office, her direct line 414-221-2590.
Thank you very much. Good afternoon everybody.
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