威斯康辛能源 (WEC) 2010 Q3 法說會逐字稿

Welcome to Wisconsin Energy's 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. Now I would like to introduce Mr. Gale Klappa, Chairman of the Board, President, and Chief Executive Officer of Wisconsin Energy Corporation.

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, our 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 a solid financial performance we 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 [dog] 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 principle of energy's self-sufficiency, key components of our focus on self-sufficiency include investing in two combined cycle natural gas-fired Units at Port Washington, which is north of Milwaukee, the construction of two supercritical pulverized 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 Units at Oak Creek. As you recall, Unit 1 passed all of its performance tests and was placed into 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.

First, fire-on coal on the Unit 2 boiler was achieved on July 8. The Unit 2 generator was then synchronized to the grid for the first time on July 16, and since that time the unit has operated up to and exceeded 100% of its rated capacity. Bechtel recently completed a planned outage and brought Unit 2 back online. The unit is now undergoing final performance testing. However, Bechtel is experiencing some equipment issue that is may delay completion of the testing. Depending on the resolution, 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 into law by Governor Doyle. This law authorizes that Wisconsin Public Service Commission to develop new rules for recovery of fuel and purchase power costs that are incurred by Wisconsin's electric utilities. The legislation was designed to streamline the current cumbersome process for fuel recovery in the state. In short, the law establishes a modified Escrow accounting mechanism with an annual true-up for fuel costs. On August 31, the Commission forwarded a set of new proposed rules to the State legislature where standing committees in each House generally have up to 60 days for review.

On October 20, the standing committee in the State Senate voted 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 ten days for review. If no action is taken after ten days, the rule would automatically go into effect. So as it stands today, we expect the new rule to be in place in 2011.

Now I would like to update you on our progress towards 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 sources from 5% in 2010 to 10% in 2015 at a statewide level. The standard sets targets for each Wisconsin utility using a 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 toward 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 a 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 90 1.8-megawatt turbines and we began construction at Glacier Hills.

I am pleased to report that construction is progressing very well. We 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 costs of Glacier Hills is approximately $367 million. This estimate does not include any allowance for funds used during construction or any reimbursable transmission costs.

As you may recall, last fall we also announced our plans to build a 50 megawatt cogeneration plant fueled with biomass at a paper mills site in northern Wisconsin. The mill is owned and operated by Domtar Corporation. We're 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, diversifying our renewable energy supply is one of our very important goals. As compared, for example, 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 has 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're investing approximately $950 million including allowance for funds used during construction for the installation of wet flue glass to sulfurization 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 reduced the amounted of the increase by $256,000 annually. The adjustment will take effect in just a few days on November 1.

Now, I would like to touch briefly on the direction of the economy in our region. During the summer months, we continued 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 remained strong during the third quarter and several other sectors showed real signs of life as well. Most notably, the primary metals and metal fabrication, rubber and plastic products, transportation equipment, and healthcare. 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 normalize 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. I should add that in September, signs of slowing began to emerge in the pace 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 is 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 single A category.

As we've 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 they will be announced soon after our Board meeting on December 2. Now with more details on our third quarter and the outlook for the remainder of 2010, here is Allen.

Thanks, Gale. Now as Gale mentioned earlier, third quarter 2010 earnings from continuing operations were $0.95 per share. I will focus on operating income by segment and then touch on other income statement items. I will also discuss cash 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 $35 million, 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 costs. 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 costs and costs 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 2. 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 expense 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 and progress.

The interest expense on the permanent debt for the Power the Future projects is covered by the lease payments and thus is included in customer rates. Consolidated income tax expense increased from $33 million to $63 million for a total increase of $30 million primarily because of higher pre-tax earnings. I expect that our annually effective tax rate in 2010 will be in the range of 35% to 36%. Combining all of these items brings to you $112 million of net income from continuing operations for the third quarter of 2010 or 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 a 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 the 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 is improved slightly from our December 31, 2009 levels. I would expect our year end debt-to-capital ratios 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 on our website this morning, our actual third quarter retail sales 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 an imperfect 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 new unit at Oak Creek. Net proceeds were used to repay debt incurred to finance the construction of 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 financings 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 of 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 our guidance from 2010 by a $0.05 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 earned $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 is are likely to drive us below the original plan earnings for the fourth quarter. The first factor is the timing of the commercial operation of Oak Creek Unit 2. Our original plan called for an 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 in-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 hit a $50 million under-recovered balance for the year, we would come in 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 in 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. With that, I will turn things back over to Gale.

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

Now we would like to take your questions. (Operator Instructions) Your first question comes from the line of Greg Gordan with Morgan Stanley. Please go ahead with your question.

Thanks. Good afternoon.

Greg, we got to get one thing straight first. It is Jets/Packers Sunday.

Yes, but Jets first, Packers second.

How many points are you giving me?

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 a demonstrable change in the appetite for the renewable energy spending that you've been targeting if the Republicans win the Governor's office?

Sure. 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 renewables, the race for Governor is tight. The last publicly available polls show the Republican slightly ahead, three points 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 election, I don't believe any of the plans that we've 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 to us meet that state standard, and regardless of which Governor or which candidate is in the Governor's mansion 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, is I think he would probably want us to step back and take our foot off the accelerator and not have a stronger standard for the year 2020 or 2025.

On the other hand if the Democratic candidate, who is the Mayor of Milwaukee, wins, he has expressed a definite interest in having a renewable portfolio standard at a higher level for the year 2025. So in essence the plans we have 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 unit, 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.

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 point out in PowerPoint presentations from different conferences you have been at that as we move through time and Power the Future begins to comes into full operation that the cash flow profile of the Company improves, and that should become more and more free cash flow positive. Can you tell us how you feel about whether or not it would be plausible to accelerate the dividend payout ratio goal of the Company with the backdrop of having to deal with pension issues also and maybe the benefits of [bonus] depreciation? When you look at the holistic cash flow profile of the Company, how plausible is it that you might potentially be able to accelerate the payout ratio trajectory?

Greg, good question. We will be basically laying out a base case and then sensitivities around the base case for our Board of Directors in December, and 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 like, with you second.

Fair enough. I can try, right?

Give it a shot, Greg.

Thanks very much.

Thanks.

Thanks for trying, Greg.

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

Hello, Michael, how are you doing?

I am okay, Gale. Yourself?

We're doing fine. We have a wind storm going on here right now, lots of customers out.

Couple of easy questions for you. First of all, if you were to do incremental renewable projects besides Glacier Hills and the biomass plant, when would you have to make decisions to get them in service to meet 2016, 2017 targets?

Good question, Michael. I'm going to ask Rick Huester, who heads up our generation unit, to answer that question for you.

If we were going to do a self-build, 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 some type of competitive RFP and then we would look for construction timeframe in the 2014 to 2015 timeframe to get the units online by the beginning of 2016. We would also evaluate going to the short-term market, we signed several short-term deals, five years in duration. On the last time we went to the market the market was over supplied and it was favorable. Don't know that way the next time but that would be another option we would have.

Got it and a 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? What other significant drivers do you expect over the next year or so?

I think the only two that I would add, Michael, whereas this year coming off the 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 VEBA trust or the pension trust in 2010. I would expect that we would make a contribution to both of those (inaudible) and candidly we're still finalizing those numbers and they will be somewhat impacted by what the final liability count rate turns out to be at the year. So that's certainly one thing that will be new in 2011 as opposed to 2010, and I would expect the deferred tax liability balance to continue to build up in 2011. And as we both of those plans, the large coal plants online, and generating tax depreciation, I would expect that to continue 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 would point out. Do keep in mind, though, that the capital spending forecast that we have currently for 2011 is about $1 billion.

Right.

So it is a pretty significant budget in 2011.

Can you talk a little bit about just a little more granularity around the delta between GAAP versus cash tax levels?

Yes. I can talk about it in terms of an increase in the deferred tax liability if that's helpful.

Please.

I would expect the current forecast that I have for the DTL balance in 2010 versus 2011 is about an increase of about $112 million in DTLs in 2011 as compared to 2010 if that's helpful.

Helpful. Thanks, guys. Much appreciated.

You're welcome, Michael. Take care.

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

Hi, Brian, how are you doing today?

Good, thanks. Good afternoon. Just a quick clarification on the RPS standard for 2015. Will you meet the 8.25% with what's currently you discussed in terms of Glacier Hills or is there additional renewables needed to meet 2015?

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 closed a bit of it already with some short-term PPAs for wind energy. Basically we're about there or close to there for 2015. However, with the projects we 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 in part by using up a bank of credits that we have already been granted, so we don't stay there in 2016. And therefore, we need to really get a sense of what the state policy will be asking us to accomplish because we can achieve and 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 is important to get clarification on the policy going forward in the state.

Okay. Understood. So I think a previously discussed solar project and possibly the need for 500 additional megawatts of likely wind capacity, that's a post- 2015 type of timeframe?

Not really. If the -- I understand exactly why you're asking the question. It is a good question. For example, if it is determined that we need to continue to stay at, say, 10% statewide post-2015, then Rick and his team would have to get moving as he mentioned earlier on some projects and looking around for what additional projects we might put in the pipeline. I could see us, for example, if we self-build beginning construction if we had to meet a continuing standard in 2012.

Okay. Great. And then just lastly, have the 2012 financial outlook drivers, have they remained consistent since your last update?

Yes. You mean the little earnings model page, Brian, that we include in our presentation?

Correct.

Yes. That's unchanged.

Okay. Thank you very much.

You're welcome. Thanks for the questions, Brian.

Your next question comes from the line of Vedula Murti with CDP.

Vedula.

Hi, good afternoon.

How are you doing, Vedula?

I am doing well. Thank you. My question I think is just follow-on or clarification of your answer to Greg Gordon just so I think about it. If we think right now given the general variables and your base plan and readjusting dividends, if we look from 2012 through like 2013, 2014 and 2015 roughly, in aggregate would you be able to say that operating cash flows would cover both dividend and capital requirements over that period such that net-net you're basically cash flow neutral cumulatively over that period?

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 a cross-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'll go through with the Board later this fall in December is to update that, but based upon the plan we laid out in February, that cross-over point was in 2012 or 2013.

And aside from the variability of renewable standards post-2015, is that the biggest moving piece that can affect that or is there -- what are the other major pieces you're focused on?

Well, that's certainly a big piece, but you have environmental spending, and as we've said in our public presentation, there's 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 would put on the list is pension, and I alluded to that in my response to Michael's question, and then the last 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 a handful of some of the bigger sensitivities that we would look at for the Board.

Thank you very much.

Thank you Vedula.

Your next question comes from the line of Nathan Judge with Atlantic Equities.

How are you doing, Nathan?

Doing well. Thanks.

Good.

Just a quick question. Sorry. I think we may have a delay here. To ask my question, I realize whether normalized sale is more of an art than a science, but you're about the only Company that I know that can take a 25% or 26% increase in sales and volume and say actually it looks to be pretty negative, weather normalized negative 4% decline. Do -- are you actually seeing evidence that people are closing up shop and going away for the summer or what is it that we're seeing that would give you any indication that, that's a realistic number? Is it just statistical noise?

Well, Allen will give you his view as well. One of the things that I think we have 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 was really no summer, there was almost no demand for air conditioning at all because of just extremely cool temperatures in the third quarter of 2009. And then you flip to the third quarter of 2010, and we had literally the warmest summer on record in the Milwaukee region, I think you begin to really see the inherent 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 first nine months weather normalization numbers looked like, and I would put a lot more credence in the first nine months than just on the weather normalization technique for Q3. Allen?

Yes. 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. If you look, Nathan, at the quarterly weather normalization, that was about a weather normalized, we were down that roughly 4% number that you mentioned. If instead you try to normalize the first nine months of 2010 versus the same period in 2009, you get a weather normalized decline of between 2.1% and 2.3%. You can see when you look at longer periods of time and not quite as much of an excursion, it would indicate a lower weather normalized decline.

And Nathan, we are seeing in the, what we call the shoulder months where there is really not a very strong requirement for air conditioning or heating. We're definitely seeing conservation where it is a little easier to conserve. We have not seen so far when it is very sticky and very warm we haven't seen a significant amount of additional conservation and when it is 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. I think that's where we're beginning to see the most impact from customer conservation.

So thinking longer term, two questions that follow onto that, then. Are you -- as it pertains to decoupling and thinking of that as well as what impacts are we talking about to rates to customers also considering that rates for renewables have to start coming into customer's bills probably in the 2011 plus period, what are we looking at if we continue to see this couple percent decline annually?

First of all, we have in our short, medium, and longer term forecasting, we have factored in already an element of conservation, and what we have seen so far, as Allen said in his remarks, in essence if you look overall across all of your retail customer groups, we are basically tracking pretty darn well against the forecast. So we haven't seen anything alarming or anything that would say that our forecasting is off base in terms of the very modest decline that we're 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 and we're actually seeing an uptick in gas distribution customers as well. So you're going to see some conservation. You're going to see, I hope, continued customer growth, and then if we get any economic rebound from here, remember our industrial sales are below 2008 levels still, so if we get any economic rebound from here, that also will help in terms of kilowatt hour sales. At the moment I don't think there is any cause for alarm or concern here related to any real change against our forecast with what we're seeing in the real world.

And then on your question about decoupling, I am still a bit of a skeptic as it relates to that dramatic a 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 decoupling underway, and I think everyone has agreed to step back and let's see the results down the road of that small decoupling 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.

That's very helpful. Thank you very much.

Thanks, Nathan. Good questions.

Your next question comes from the line of Jim von Riesemann with UBS.

Hi, Jim, how are you doing?

I am doing well. Thanks.

I like your new last name.

Yes. Anything to confuse the IRS. Keep me out of jail.

There you go.

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 sales forecast for 2011?

Sure. I will 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 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 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're still seeing the majority of the segments have growth, but there is no question that about the second to third week of September it is almost like our industrial customers took a collective breath. It is not one single segment, but across the board, the growth rate slowed down and we are really seeing a pause. Now, that pause has continued into October. I cannot tell you if it is permanent, if it is a blip, or if we're starting to see the early signs of a downturn, but I can tell you it is pretty visible in terms of at least a pause in the pace of the recovery, and it is pretty much across the board.

Yes. And then Jim, in terms of a 2011 forecast for electric, if you look at things on a weather normalized basis, so in other words, normalized 2010 and then do a forecast for 2011 based upon normal weather, my current outlook for total retail is essentially flat, maybe down about 0.4% in 2011 as compared to 2010, so still very modest in terms of our outlook on electric sales or for 2011.

And again that's weather normalized, Jim.

In both periods.

Got it. Thank you.

You're welcome.

Your next question is from Paul Ridzon with KeyBanc Capital Markets.

Good afternoon, Paul.

Good afternoon. Quick question. Press release talks about $0.11 benefit from Oak Creek but then on the numeric walk-down there is $36 million of operating income which translates into quite a bit more than $0.11. What are we missing?

Interest.

Okay.

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 of those components together, Paul, you get to the roughly $0.11 for the quarter.

And as we look forward to 2011 and 2012, what's a reasonable expectation for an effective tax rate?

The range that we're 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 in service very early in 2011, so wouldn't expect any PTCs, any production tax credits in 2011, so right now I would say 2011 would be pretty similar to 2010 in terms of the ETR.

I assume the benefits of the production tax credits for the [rate] (inaudible).

They do, and so what happens when you set the revenue requirement rate they take into account what your effective tax rate will be, so if say you saw a 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. Although the ETR may go down in 2012, that would all get washed through the rate making process so that the customers would have the benefit of that.

Are you doing ITCs any of these?

We're not doing investment tax credit on it. We did a lot of analysis. Looks to us that the better option for the customer is right now would be the PTCs the way things are currently structured.

And we did take a hard look at it. Clearly in our analysis for what we have in place the better option was the production tax credit, Paul.

Is that a function of very strong capacity factors?

No. It is a function really of the way regulation works here and -- but the capacity factor really doesn't make it much difference in the analysis.

And then just can you give us a forecast for your share of ATC CapEx for the next couple years?

Our ownership share of ATC is 26.2%. In terms of their ten-year spending plan, Paul, they're talking about $3.4 billion over the next ten years at the total ATC level, so we would be roughly a quarter of that $3.4 billion. If you look out the next couple of years in the analyst package that we used in September, we give a three-year outlook for 2010, 2011 and 2012, and I don't have that here in front of me, but if you pull that out, it drills it down to our share for each of the next three years.

Thank you very much.

Thank you, sir.

Your next question comes from the line of Ted Heyn with Catapult Capital.

Good afternoon. Can you hear me?

I sure can. How are you doing, Ted?

Very well. Thank you. Actually, most of my questions have been answered. I just wanted to double check where you guys were running on weather year-to-date versus normal and also for fuel under-recoveries?

Okay. In terms of weather versus normal, if you look year-to-date and you look at both the gas business as well as the electric business, we're about $20 million pre-tax ahead of normal and then in terms of fuel recoveries, let's see if you give me just a second, Ted.

Year-to-date is about $63 million.

In terms of cumulative under-recovery it is about $63.5 million, and my current expectation is we would end the year at about $50 million under-recovered which would imply a positive recovery position for the fourth quarter alone of about $13.5 million.

Got you. You said for the third quarter you were $30 million above on weather, right, so the first half of the year you were down $10 million.

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.

That's right.

Got you. Thanks a lot. Appreciate it.

You're welcome Ted.

Your next question comes from the line of Dan Jenkins with State of Wisconsin Investment Board.

All right, Dan. Dan, we've 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 you had done any good at all with managing his pension funds.

Well, I work on fixed income, so you can tell him at least I am doing my share.

In other words your stuff is doing just fine.

It was the other guys that's -- never mind. Okay, Dan, how are you doing on this Halloween eve?

Just trying to keep from blowing away.

Amen. What can we do for you, Dan?

Given that Oak Creek 2 is imminently going to be in commercial operations as we think of that going forward, should we use the impact to Oak Creek 1, is that is that a good guide to go by or particularly in O&M where there is shared costs that Oak Creek 2 will be significantly lower or what's the plan there?

Are you thinking about results of -- overall earnings from Oak Creek 2 versus Oak Creek 1? I just want to make sure we're answering the right question.

As -- when you breakdown the changes from last year to this year and you show where the Power the Future, the impact there and then also there is impact up above in the utility in the O&M related to it, so going into 2011, is that a good guide to measure what the impact Oak Creek 2 will have?

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 in 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 as a total package, on a consolidated basis both of the units together $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.

I think we will 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 have the common facilities for both units that came into service with Unit 1. But to put all of that into perspective, related to Allen's $100 million number, about two-thirds of the capital investment at Oak Creek was in Unit 1 in the common facilities and now the remaining one-third of the total investment will come from Unit 2. Does that help at all, Dan?

Yes, that helps. And then related to that, you mentioned that permanent financing will occur concurrent with the commercial operations. What's the size? Is that a similar size, one-third of the two-thirds or how should we think about size of that --

We can give you a number.

In terms of the -- if you think about it in terms of the total financing that we 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 $530 on or about commercial operation date for the second unit.

Okay. And then I think you mentioned no utility debt for the rest of the year but you do expect to have issuance in 2011.

That is correct.

So I was wondering if could give us any color on the size and timing of that?

I could certainly talk about size. I mean, I think based on our current projections, Dan, it is probably something in the $250 million to $350 million range. In terms of [tenor], if you look at our maturity schedule, it probably makes sense to do something on the bit of the longer end of the curve, say 20 years to 30 years in [tenor]. In terms of timing within the year, I just you haven't tied that down yet, candidly, but it would be somewhere in calendar 2011.

Dan, you might to see if the Governor is interested in any of those bonds.

That's a good retirement source for people, right?

Exactly.

Okay. That's all I had. Thanks.

Take care of yourself. Thanks.

Your next question comes from the line of Steve Gambuzza with Longbow Capital.

How are you doing, Steve?

I am doing great. Thanks.

Good.

Just wanted to ask about the outlook for flat weather normalized sales in 2011 and the context of your remarks on industrial activity? Is it fair to assume that outlook for flat weather normalized sales assumes that this slowdown in that you see in September and October is really just a pause and that we'll see positive industrial load growth in 2011?

It really almost shows no growth from what we expected in 2011 00 I am sorry in 2010. Basically if you just look at everything weather normalized across the board, particularly on the large industrial side, it is really not any uptick from what we thought we were going to experience in 2010.

And then maybe just putting numbers around it, I think that's qualitatively exactly what Gale talked about, but again overall a slight reduction in retail, about 0.4%.

For 2011?

That's correct, over weather normalized 2010.

And I guess -- I am just curious if the source of -- if you're going to have a slight reduction, would that be driven by one particular customer class or is that a slight reduction across commercial, industrial, and residential?

Well, it would break it 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 0.7%. And our current forecast is actually for a decline in large commercial and industrial right although 2%, and one of the things that's impacting that, we're going to see the final shutdown of the Chrysler plant in Kenosha. And we're also expecting that MMSD which is the Milwaukee Metropolitan Sewer District. They're going to be doing some self-generation so we expect load to come off of our system.

That's very helpful. Thank you very much.

Steve, in fact, the Chrysler engine planted saw its last production day this past Friday, so we -- but we already had that cranked into the forecast.

Excellent. Thank you.

You're welcome, Steve.

Our last question comes from the line of Jay Dobson with Wunderlich Securities.

How is it going, Jay?

Very well. Thank you. How are you?

We're doing fine.

Two questions actually. The first would be just a follow-up to the last question. If you normalized for Kenosha and the Chrysler plant and the sewer district, Allen, what would that large industrial look like growth 2011 over 2010?

Jay, right off the top of my head, I don't have anything normalized for those two.

How big are those two, then, maybe?

Chrysler is our number 20 customer. It is in the top 25, and I don't -- we just don't have the MMSD numbers in front of us.

Okay. No problem. The second question which was my primary one, Gale, you spoke of the Oak Creek Unit 2 equipment issues during start-up here, and was wondering maybe I missed it. But if you could possibly give us a little more detail on that and just remind us under the settlement you signed the impact of any delay beyond November 28 of this year?

Sure. I will ask Rick to join in and add to whatever I provide you as well.

That's great. Thanks.

In terms of the equipment issues, in essence one of the things I think that is actually a 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 accept a 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 there in the final 40 hours or something like that, Rick, of the operability run. But one of the things Bechtel wants to do which we think is a real positive is bring the unit down after the 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're seeing at the moment that is overly alarming. But just a matter of being thorough and completely walking through this so that when we take the unit, the unit has demonstrated its ability and its passed every single performance test and it is ready to rock. Rick?

I think you pretty much hit it Gale. The original plan and the reason we talked about the delay was for Bechtel to run this operability run and then concurrently also do the performance tests, and there is three performance tests, Jay. There is a capacity test, a heat rate or efficiency test, and emissions test, and they were 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're going to do some inspections and then they're going to run the performance test after that, so it is pushed 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. We still expect it to be a fourth quarter event. As you recall, these performance tests, Unit 1 passed with flying colors the first go around. Unit 2 is essentially an identical unit. We don't see any impediment to Bechtel being able to pass these performance tests.

And, Jay, to your second question, if for some reason the unit were to go beyond November 28 without being commercial, our agreement with Bechtel has November 28 set as the guarantee date. Beyond November 28, unless we and Bechtel agree on a waiver, there would be liquidated damages owed to the utility of $250,000 a day.

In a way we would have to be tied to legitimate extension of time, some type of owner-caused delay or force majeure event.

Exactly. So no cause for alarm at this stage of the game, and I must say Rick is right. We really think based on what we have seen out of Unit 1 and what we've seen so far in the testing out of Unit 2, that these are going to be very efficient, very good units for our customers for many years to come.

That's great. Thanks for the detail.

You're more than welcome, Jay. Ladies and gentlemen, well that concludes our conference call for today. We really appreciate you participating. If you have any other questions, Colleen Henderson will be alive and available in our Investor Relations office. Her direct line 414-221-2592. Thank you very much. Good afternoon, everybody.