Welcome to Wisconsin Energy's conference call to review first quarter 2009 results. (Operator Instructions).
Before the conference call begins I will read the forward-looking language. All statements in this presentation other than historical facts, 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 on its 2009 first quarter results 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.
Colleen, thank you. Good afternoon everyone. Thank you for joining us on our conference call to review the company's 2009 first 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. Regeneration; Allen Leverett, our Chief Financial Officer; Jim Fleming, General Counsel; 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 $1.20 a share for the first quarter of 2009. This compares with $1.04 a share from the same period in 2008. Our stronger earnings this quarter were largely driven by a reduction in our cost of fuel and purchase power.
On April 27, we filed with the Public Service Commission of Wisconsin to reduce retail prices for our electric customers in Wisconsin, in light of the significant drop we've seen in the cost of fuel, particularly natural gas and diesel. Based on actual fuel costs to date, and projected data for the remainder of this year, we expect that our annual fuel costs for 2009 would be about $67 million less than what we had been collecting in customer rates.
Now, I would like to touch briefly on the impact of the ongoing recession across our service area. Generally our region has a well diversified industrial and commercial base which helps to mitigate the impact of most economic downturns. However, in this economy we're seeing three sectors that have been dramatically affected. They are ore mining, primary metals and paper production.
Led by declines in this three sectors our electricity sales to large commercial and industrial customers dropped by 17.8% in the first quarter, as compared to first quarter of 2008. Electricity used by small commercial and industrial customers declined by 2.3%. Consumption of electricity by residential customers was down 3.5%, driven primarily by milder winter weather.
Now, over the past few weeks, we have seen anecdotal evidence that industrial production and economic output in our region maybe stabilizing. Stabilizing at levels that are clearly below what we expected as we entered 2009. There are, however, some bright spots. Our largest customer, the iron ore mines in the Upper Peninsula of Michigan had been planning to close their mines for the entire month of July. They've now announced they will operate through July, and they plan to add 600,000 tons of production in their forecast for 2009.
In the heavy machinery sector for mining equipment, major producers actually increased their electricity consumption in the first quarter of this year by an average of 5%. In the healthcare industry across southeastern Wisconsin, we're continuing to see positive growth of electricity use in the first quarter of 4% over the comparable period last year, and several major hospital and health service expansions remain on track.
And finally, energy used in the gaming and entertainment sector was up 4% for the quarter, reflecting a major casino expansion that was completed late last year.
Now, I would like to spend just a moment on our continuing effort to upgrade the energy infrastructure in Wisconsin. Our power of the future plan is fundamental with the principle of energy self-sufficiency. Key components of our focus on self-sufficiency include investing in two combined cycle gas fired units at Port Washington, north of Milwaukee, construction of two supper-critical pulverized coal units at Oak Creek, which is south of city and building a significant amount of renewable generation.
As we've discussed on previous calls, both units at Port Washington are in service, construction was completed on time and on budget. The units are among the most efficient in the Midwest market, they are operating well and our customers are now benefiting from the low price of natural gas that fuel these units.
Let's turn now to the status of the two new coal-fired units at Oak Creek. Based on Bechtel's revised schedule, Unit 1 and the common facilities are approximately 92% complete, and Unit 2 is approximately 45% complete. Progress on Unit 1 is shifting rapidly from construction to commissioning. Many of the electrical systems, load centers and controls have been handed over to start up, while construction crews continue to finish up the large mechanical systems, such as the boiler and the turbine generator.
Completing the duct work, needed to convey the air and exhaust gases through the boiler and through the air quality controls to the chimney stack is now a critical activity at the site. This work is nearing completion as the access points are being closed in preparation for firing the boiler on natural gas. The internal surfaces of the boiler tubes must be chemically cleaned before the boiler can be fired; of course, this cleaning process is scheduled to start later this month.
During April, our contractor also completed the necessary hydrostatic pressure tests on the feed water system. This system will supply high pressure, high temperature water to the boiler.
Regarding the Hitachi Supply Turbine Generator, Bechtel completed the lubricating oil flush last month. This ensures that the system, which supplies oil to the main turbine generator bearings are free of contamination from construction. And I'm pleaded to report that the turbine generator was placed on turning gear for the first time last night.
As I mentioned in our last call, the cooling water intake system was placed in the commercial service on January 18. This means we are drawing water through the tunnel and supplying it to the four existing units at the Oak Creek site. Of course, the tunnel will also supply cooling water to the new units when they become operational. I should add that the first of six circulating water pumps for the new units is scheduled to run for the first time next week.
Bechtel is continuing to target commercial operation of Unit 1 by the end of this year, and Unit 2 by the end of August, 2010. Over the past few months, Bechtel has made significant progress at the site, including making up the time that it had previously lost in piping installation. Bechtel is behind its plan for turning over individual systems from construction start up. Bechtel has delivered a recovery plan and is adding resources in an effort to recover the schedule.
We will have a better feel for the likely completion date for Unit 1, once first fire is achieved and that first fire milestone is currently scheduled to take place in mid-August.
Now, as you know, Bechtel filed a formal claim last December seeking relief under the contract. Bechtel is citing a number of factors, including weather conditions in the winters of '06-'07, and '07-'08. Heavy rains in the spring of '08 and what Bechtel believes to be changes in local labor conditions. Claims for schedule and cost relief related to these factors totaled $413 million. Bechtel also stated its belief that the weather events constitute a force majeure.
We don't believe there is a contractual basis for some of the claims that Bechtel submitted. For example, we disagree that Bechtel is entitled to cost or schedule relief as a result of alleged changes in the labor market. Bechtel also filed a $72 million claim, the alleged effects of changes and delays prior to the issuance of the full notice to proceed back in 2005. We believe this claim is without merit, and that Bechtel was fully compensated for any and all impacts of the delayed start.
Finally, Bechtel has asked for six months of relief from liquidated damages beyond the September 29, 2009 guaranteed date for Unit 1, and three months of relief from liquidated damages beyond the September 29, 2010 guaranteed date for Unit 2. We are reviewing the claims, of course, and we've asked Bechtel for additional information. We expect the claims will be resolved through the contract's formal dispute resolution process.
A step of that process called for management meetings to see if we could reach a resolution. This step has been completed and we were unable to resolve our differences with Bechtel. Currently, we are in the nonbinding mediation stage of the process. If this step is not completed successfully, then we are likely to begin binding arbitration by early fall. Binding arbitration could certainly carried on until mid-year 2010.
As we assess these developments, I believe there are several key points to keep in mind. First, we are still recovering carrying costs associated with the construction of these units. Under the terms of the lease agreements between Wisconsin Electric and W.E. Power, we are recovering based on a mix of debt and equity, our capital carrying costs as construction continues on the Oak Creek Project. We're allowed to recover our carrying costs up to the total budget for the project that's been approved by Wisconsin Commission. So we believe our ability to recover cash carrying costs should be largely unaffected by a slight change in the construction schedule.
I would also like to repeat an important point about the ultimate recovery of any potential cost increases. We believe we have several layers of protection for recovery of our costs. So for example, to conclude that an additional cost is not ultimately recoverable, you would have to believe that the costs will not qualify for recovery under at least four opportunities.
First, the remaining contingency in the project is not sufficient to offset the cost. Second, that the cost would fall outside the 5% band that the commission has deemed reasonable for prudent costs above the approved amount for the project. Third, that the cost was not caused buy a force majeure event as defined by the lease agreements. And finally, after an opportunity to demonstrate prudency that the cost would be ultimately deemed to be imprudent.
One more important point; liquidated damage payments will be due from Bechtel on Unit 1, unless it is determined that any days granted for scheduled release are equal to or exceed the delay of the schedule. Of course, as we move forward we'll provide you with updates on any major developments through our SEC filings and on our scheduled earnings calls.
Now turning to renewables; the State of Wisconsin has a renewable portfolio standard that increase from 5% in 2010 to 10% in 2015 at a statewide level. The standard sets targets for each of the utilities using an historical baseline. So using that baseline, approximately 8.5% of our retail electricity sales must come from renewable sources in 2015.
Meeting the aggressive 2015 targets could require a mixture of additional projects and short-term purchase power agreements. Of course, with the completion of our Blue Sky Green Field Wind Farm last year, we took a significant step toward meeting Wisconsin's goal to reduce its carbon footprint. With a total of '88 turbines, each with a capacity of 1.65 megawatts, Blue Sky Green Field is the largest wind farm to date in Wisconsin. It was completed under-budget and ahead of schedule.
To continue on the path of carbon reduction, we acquired FPL Energy a wind site in Colombia County in East Central Wisconsin. In October of last year, we filed for approval to build our new wind project, which is called the Glacier Hills Wind Park. The Public Service Commission deemed our application to be completed on January 27, so the Commission's 180 day review period is now underway. The site can accommodate between 130 and 207 megawatts of new capacity, depending on the final layout and the turbine equipment that we select. The first full year of operation under our plan is expected to be 2012.
Construction, as you may know, is also underway on a major upgrade of the air quality controls of the existing coal-fired units at Oak Creek. We expect the cost of this facility will be about $960 million. That includes allowance for funds used during construction, for the installation of wet flue gas de-sulfurization and selective catalytic reduction facilities. We expect these controls to be completed in 2012.
In other recent developments, on March 13, we filed a general rate case on our normal cycle for our Wisconsin Electric and Wisconsin Gas utilities. Filing includes a request for a $76.5 million or 2.8% increase to support electric operations. A $38.9 million or 4.6% increase for Wisconsin Gas operations. A $22.1 million offer 3.6% increase for Wisconsin Electric and Gas operations, and $2.7 million for our two steam utilities.
On evaluating our electric operations, we concluded that a 6.1% increase could clearly be justified, but we are limiting the electric request to take into account the difficult conditions our customers face in today's economy. We plan to make up for the difference by continuing to manage company budgets and proposing to recover certain costs over a slightly longer period of time.
The increase in electric rates that we've requested will continue to support investment in our power of the future plan, upgrades to the transmission grid by the American Transmission Company, employee benefit costs, and very slightly higher (inaudible). The Wisconsin Commission will hold hearings on our request in the fall and we expect new rates to be effective in January of 2010.
Now, I'll turn the call over to Allen, who will give you more details on you financial performance for the first quarter.
Thank you, Gale. As Gale mentioned earlier, our first quarter 2009 earnings from continuing operations were $1.20 per share. I'll focus on operating income by segment and then touch on other income statement items. I will also discuss cash flows for the quarter and discuss our earnings guidance for 2009.
You may want to refer to page six of the earnings package as I make my remarks. Our consolidated operating income was $243 million as compared to $218 million in the first quarter of 2008 or an increase of $25 million. Operating income in our utility energy segment totaled $260 million or an increase of $10 million versus last year.
The largest single factor impacting our utility operating income related to favorable recoveries of fuel. In the first quarter of 2009, we experienced $28 million in favorable fuel recoveries, as compared to the first quarter of 2008, where we realized $14 million in unfavorable fuel recoveries. On a quarter-to-quarter comparison, this led to a $42 million favorable impact on operating income.
In addition to the fuel recoveries, our first quarter 2009 benefited from $28 million of other pricing increases, largely related to the January, 2008, Wisconsin Retail Rate Order, net of bill credits. On the negative side, the decline in retail electric sales resulted in a $20 million reduction in operating income. We experienced $15 million in increased amortization related costs and we recorded a $10 million reduction in revenues, because of the PSCW mandated refund.
Our depreciation expense increased $5 million on a quarter-to-quarter basis, due in large part to the wind additions in May, 2008. While 2009 has been slightly colder than normal, we estimate that weather had a negative $5 million impact, as compared to 2008, because the prior year experienced an extremely cold first quarter. Other items had a net negative $5 million impact.
I will expand on our discussion on fuel recoveries and electric sales later in this presentation as I look at the full year. However, I did want to mention at this point that the $10 million refund mandated by the PSCW is not expected to have a net impact on our earnings this year. We anticipate that this refund will be offset by approximately $10 million in fuel credits that are expected from MISO over the rest of the year.
Operating income in the non-utility energy segment, which primarily includes W.E. Power, was up $14 million. The key drivers of this increase related to a full quarter's earnings contribution from Unit 2 at Port Washington, which was placed into service in May, 2008. Our earnings also benefited from the water intake system at Oak Creek that was placed into service in January of this year.
Corporate and other affiliates had an operating loss of $1 million in 2009, compared to an operating loss of $2 million in 2008. This improvement reflected the shutdown of our Minergy operation at the end of last year. Taking the changes for each of these segments together brings you back to the $25 million increase in operating income for 2009.
During the first quarter of 2009, earnings from our investment in the American Transmission Company increased $3 million. Other income declined $3 million, primarily because of lower property sales. Interest expense increased $2 million, because of the interest expense associated with Unit 2 at Port Washington, and additional long-term debt issued during the fourth quarter of 2008.
Consolidated income tax expense increased by approximately $4 million, because of higher pre-tax earnings, offset in part by a lower effective income tax rate. Our effective tax rate for the first quarter was 36.5%, compared to 38.6% last year. I expect that our annual effective tax rate in 2009 will be approximately 37%. Combining all of these items, brings you to $142 million of net income from continuing operations for the first quarter of 2009 or earnings of $1.20 per share.
During the first quarter of 2009, we generated $20 million of cash from operations on a GAAP basis, which is down $324 million from the same period in 2008. While our cash earnings were up, there were two large factors that reduced our cash from operations. First, we contributed $289 million to our benefit plans in January of 2009, of which $270 million went to fund our pension plan.
In the first quarter of 2008, our contributions to benefit plans totaled $48 million. The second factor which reduced cash from operations related to a reduction in our accounts payable, primarily as a result of falling natural gas prices. This was partially offset by lower receivable balances. On an adjusted basis, our cash from operations totaled $78 million, as compared to $432 million in the first quarter of 2008. The adjusted number includes $58 million of cash impact from the bill credits in 2009, and $88 million in 2008.
Under GAAP, the cash from the bill credits is reflected in the change and restricted cash, which GAAP defines as an investing activity. From a management standpoint, we consider this, the source of cash as it directly relates to the bill credits. Our total capital expenditures were approximately $171 million in the first quarter of 2009, which is down from the $348 million in the first quarter of 2008.
On an annual basis, we expect our capital expenditures to be about $300 million lower than 2008 capital expenditures, as we move closer to the completion of our Power the Future construction program. On a GAAP basis, our debt to capital ratio was 58.5% as of March 31, and we were at 55.5% on an adjusted basis. This is essentially flat compared to our December 31, 2008 levels even when considering the $289 million contribution to our benefit plans in January of this year.
I would expect our debt to capital ratio to increase slightly by the end of this year as compared to last year. Our goal remains to maintain our adjusted debt to capital ratio at no more than 60% during the period we are constructing our new coal-fired generation. 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.
Now, I would like to wrap things up for the discussion of earnings guidance for 2009, as well as the second quarter. Our earnings guidance for 2009 remains in the range of $3.05 to $3.15 per share, as we discussed in our last call. We expect the total earnings contribution of $0.39 per share from our Power the Future program in 2009. This includes a full calendar year contribution from the two units at Port Washington, as well as the water and coal handling systems at Oak Creek.
In 2011, when we expect both of the new Oak Creek units to be online for a full year, assuming a favorable resolution of the Bechtel claim, we project an additional $0.75 per share of earnings from our Power the Future program. Although our bottom-line guidance for 2009 is unchanged, I did want to discuss our latest outlook for electric fuel cost recovery, as well as electric sales.
Previously, we expected to be in a fully recovered position on fuel costs in 2009. As it turns out, prices for natural gas and diesel fuel have dropped more than we expected, and we were in a $28 million favorable recovery position as of March 31 of this year.
The drop in natural gas prices was a key reason for our filing with Public Service Commission of Wisconsin last week to reduce the fuel recovery rate for our retail electric customers in Wisconsin. However, since the new fuel rate can only be implemented on a perspective basis, we now estimate that the company will be in a positive recovery position of approximately $20 million for calendar year 2009.
Now, although this is a positive development, we now expect that the downturn in the economy will have a more negative impact on our electricity sales than we previously expected. Our sales of electricity to large commercial and industrial customers were down almost 18% in the first quarter. On a comparable basis, the sales outlook that we provided last December assumed a 15% reduction in electric sales for the first quarter.
The previous electric sales outlook [called] for an annual 6% reduction in electricity sales to large commercial and industrial customers in 2009. When we included projected sales to the Cleveland Cliffs mines in Michigan, the previous outlook was for a 9% decline. The previous forecast also reflected a 2.5% reduction for small commercial and industrial customers in 2009 and sales to residential customers being essentially flat.
Taking into account what we are seeing across the economy, our new outlook for 2009 forecast an 11% reduction in electric sales to large commercial and industrial customers, excluding sales to Cleveland Cliffs, and a 15% reduction including those sales. Sales to small commercial and industrial customers are now expected to fall 6%, while residential sales are projected to decline 2% on a weather normalized basis.
I currently expect the net impact of these further sales reductions to also be about $20 million on a pre-tax basis, as compared to our prior forecast. So we currently expect the fuel recovery and the net impact of the change in sales forecast to offset each other. And our 2009 guidance remains in the range of $3.05 to $3.15 per share. Our current forecast for earnings in the second quarter is $0.38 to $0.43 per share. This expectation reflects lower recovery to fuel as a result of the recent rate reduction and lower retail electric sales.
With that I'll turn things back over to Gale.
Allen, thank you very much. Overall, we are on track and focused on delivering value for our customers and our stockholders.
(Operator instructions) Paul Ridzon from KeyBanc, please state your question.
Paul Ridzon - KeyBanc
One of the trends I think we have all been surprised by is the fact that industrial sales seemed to have less of an impact than people had feared, given that latter rates are set on monthly peak demand charges rather than absolute megawatt hours. Is that kind of how your rates are structured?
Paul, you are absolutely right. Particularly, with our large, commercial and industrial customers the demand component is a significant portion of their bill. And what we are seeing, anecdotally, with the pretty significant decline in kilowatt hour sales to major manufacturing firms. We are seeing them reduce weekend production. We are seeing them reduce second and third shift production. When they do run, they are running pretty much at full capacity. So you are absolutely right, in that. We haven't seen a significant margin erosion as one might expect if you just looked at an 18% decline in sales.
Paul Ridzon - KeyBanc
I guess the biggest risk is that they actually shutdown and what do you see as far as that trend?
We stay in pretty good close touch with our customers at the moment and we did see this happen obviously late last week. We have one major additional shutdown and that's the engine plant that has been a long time Chrysler engine manufacturing plant near Kenosha. That's one of our 20 largest customers. Obviously, Chrysler went into bankruptcy. That plant will not operate, nor will any other Chrysler plant until Chrysler emerges from bankruptcy.
And then the current thinking is that that plant will shutdown permanently at the end of 2010. Although, the state is making a major effort to try to extend the life of the plant, but the only major customer that I see at risk in terms of complete shutdown at the moment would be the one we saw announced last week and that's Chrysler.
Paul Ridzon - KeyBanc
And what are the wholesale markets currently offering as far as margins relative to kind of the special rates that these large industrials get?
Well, really that's not a very big impact if any impact on our earnings, because if you think about where our earnings come from, probably 90% to 92% of our earnings are coming from our retail regulated operations. We have formulary tariffs for our wholesale power business. And so, the month-to-month or day-to-day gyrations in the wholesale market are not having a major impact on us. But I will say and I'm looking at Rick to see if he has any additional information.
We have seen a major decline in the MISO prices across the first quarter. We have very, very efficient new natural gas units at Port Washington, they are among the most efficient in the country, and there were times, when our natural gas units were being dispatched into the MISO market ahead of our base load coal. So, really the world has kind of turned upside down with natural gas prices at $3. But in terms of just day-to-day impacts of the MISO market not a huge impact on earnings.
Paul Ridzon - Keybanc
Okay. Allen talked about a $10 million offsetting impact of MISO refund relative to the fuel refund to customers. What was that item?
It's called revenue sufficiency guarantee money. Essentially, its dollars that generators are paid to make sure that the system is well supported and functioning well, and, that proper reserves are in place in any given hour. And FERC ordered basically a recalculation of RSG payments to generators, compared to what MISO had been paying to generators. Those dollars, theoretically, are being collected by MISO from those who owe the money, which is largely power marketers and the dollars will flow to the generators we believe over the course of the remainder of 2009. Allen?
Yes, originally, Paul, we had expected to just flow those dollars back to customers as we received them. What the Commission ordered us to do, instead of that is say, all right, look, you anticipate $10 million from the stream of revenues later in the year, go ahead and give back the $10 million now and then obviously the company will retain those $10 million later in the year to offset the $10 million that we are giving to customers this month.
So in essence there are two different fuel actions taking place. This month, there is a one-time refund to customers for fuel [over] recovery in 2008 and for this particular refund that we talked about the RSG revenues and then in addition to that the lower ongoing fuel recovery rate went into effect on May 1. Is that responsive and helpful?
Yes. So we should continue to see April benefit from lower fuel in the second quarter?
The answer is yes.
Leslie Rich from Columbia Management, please state your question.
Leslie Rich - Columbia Management
Allen was zipping through those percentage declines in the different customer classes.
He zips pretty good.
Leslie Rich - Columbia Management
Yeah, he is very zippy. And I want to make sure I understand your current expectations versus previous. I believe at the beginning of the year, you had forecasted 3% decline in total retail sales. Is that still your current thinking, or you are thinking it's going to be down 6%?
Our original forecast for the entire retail across all classes, Leslie, so residential, commercial and industrial, small as well as large, including the mines, the original forecast was for about 4% reduction overall. And what I would say today again on the same basis, about an 8% reduction.
Leslie Rich - Columbia Management
Across all classes?
Leslie Rich - Columbia Management
Okay and then that translates into about $20 million pre-tax?
It roughly translates into about $40 million. My assumption is that we can offset about $20 million of that within the business and then the other $20 million is assumed to be offset with fuel.
That would be the first quarter fuel positive recovery.
Then [Cedilla Merky with CDP US], please state your question.
Cedilla Merky - CDP US
Couple of things, one, can you, given the changes in gas prices and everything like that, when the coal units go into operation, what are you currently kind of estimating are the fuel savings associated with displacing purchase power (inaudible) with natural gas?
I am we have the precise number in the room with us, but our 2.8% requested rate increase for 2010 reflects both the increased investment costs as the units come into service, but it also reflects the fact that our two new coal units will dispatch a very significant amount of time and lower our fuel costs. So, the net of the two is about a 2.8% increase.
Cedilla Merky - CDP US
Okay. And secondarily, what's the latest with regards to your carbon sequestration [pilot project] update?
Glad you asked that question. In fact, we'll be having our annual stockholders meeting day after tomorrow and we plan to update our stockholders on the progress of the test. It is certainly promising. We've had over 3,600 hours of operation of the technology. And late last fall for the first time, technology achieved the kind of results in the field that we have seen it achieved in the laboratory. In other words, it was capturing more than 90% of the carbon from the emission stream that was being captured.
So very promising, we believe the testing now will extend several more months. All the partners of the project have agreed to continue the testing on into probably the end of 2009 at our Pleasant Prairie Plant. Then we are all comfortable enough with the results that we are seeing that a commitment has been made to scale up the technology by a factor of 10. Install that scaled up technology at American Electric Power's Mountaineer Plant in West Virginia. So that would be the next step.
And by the way, and Rick's pointing it out, that particular plant in West Virginia that AEP owns has the geologic capability of sequestering the CO2. So that also would be the next step in commercialization of the technology, but overall pretty promising.
Justin Maurer with Lord Abbett, please state your question.
Justin Maurer - Lord Abbett
Good afternoon, guys. Couple of follow-ups to Paul's questions; first, on the industrial customers, just so that I understand the way the rates are structured. Again, you talked a little bit about that they are not working weekends or working more shifts, is there anything they can do to lower their costs, if you will, by scheduling differently? Or is it kind of a fixed cost to them to a certain extent anyway?
Well, some of our customers are on different versions of real-time pricing. So they can react to market prices. But the truth of the matter is many of our large industrial customers don't have with their running a lot of capability to shift. For example, one of our large customers melts steel and when they are operating that melter is operating full bore. So yes, there are little things that can be done around the edges. But what our customers are looking at, and you would expect this, is they are looking at what maximizes their total production costs.
In other words, they are looking at labor, they are looking at overtime, so they are looking at the whole package of their costs and saying when should I run to minimize my cost and maximize my production? And right now what we are seeing them do, largely, is run weekdays during the day. So eight hour shifts during weekdays. And I wouldn't frankly expect unless the economy gets materially worse for that to change.
Justin Maurer - Lord Abbett
Okay. Is there a way to frame it up though, to say okay, of our average customer, to the extent there is such a thing that two-thirds of their cost is fixed, if you will, a third is variable or is it not that straightforward?
Justin, I wish it was that straightforward, but for each different customer, it really is different.
Justin Maurer - Lord Abbett
Everybody is trying to guesstimate kind of the direction of the economy as we move into the spring, that there was a huge shutdown in November- December or January-February, maybe a little bit late in March. Where do you get a sense, like you said you are very close contact with your customers, are they seeing not great, but reasonable sequential improvement as we get into April here, early May or is it still kind of choppy?
Justin, I don't think we are seeing any material sequential improvement. What I think we are seeing and we are now looking at data literally each day and each week. For the past four weeks, we have seen very good stabilization. If you look at our forecasts and you look at what's actually happening in the industrial sector, the last four weeks, we have been about dead on. As I mentioned earlier in our prepared remarks, I think we are seeing clear signs of stabilization, but at a lower level. So to put it to vernacular, I'm thinking and hoping that we are scraping along the bottom right now.
Justin Maurer - Lord Abbett
Then just so I am clear on the fuel recovery and the rebate, so the up front portion of that was already paid in the first quarter in March, correct? And then balance of that will unwind, if you will, as we go through the rest of the year?
There are two refunds, Justin. There is one refund that's roughly $8.6 million that was associated with 2008. So that was accrued for in 2008. The dollars were collected in 2008 and those dollars are being returned to customers this month. So there are $10 million. And that's the $10 million charge that we took in the first quarter of this year. So we go ahead and give that $10 million back in May, and then the company expects though to receive the $10 million throughout the remainder of the year.
Justin Maurer - Lord Abbett
Okay. So to Paul's question of the second quarter, those two amounts would net each other, although, I guess you took the charge in the first quarter so you're still benefit?
Once again, Andrew Levi with Incremental Capital, please state your question.
Andrew Levi - Incremental Capital
Did you give guidance for the second quarter, did I miss that?
Allen gave you a range of guidance. I think he can repeat it for you.
I'm sorry you missed it Andy, I can repeat it. It's $0.38 to $0.43 Andy for the quarter.
Andrew Levi - Incremental Capital
There you go, that's why the stock came in. And second question; then you mentioned about $0.75 of incremental earnings for 2010, is that what you said, too?
What I said was we have two coal units that we are building. And I would expect at this point at least that both of those units would be online for all of calendar year 2011. So, given that we would expect $0.75 of incremental earnings in 2011 for those coal units and then some of that $0.75 will then materialize in 2010 based on the final timings of Unit 1 and Unit 2. But in 2011, if you assume both are online for full-year that's $0.75 of earnings incremental.
What we are trying to do Andy is to give you sense of additional earnings from power of the future, once all the units are completed are in their first full-year of operation.
Scott Engstrom with Blenheim Capital Management, please state your question.
Scott Engstrom - Blenheim Capital Management
Just further nuisance on the new retail volume forecast you have. I assume your initial forecast, for example, called for a weak first half and maybe a better flat or stable second half. I'm wondering how much of the new forecast really represents the kind of a plunge here in the first quarter, or how much of it reflects less optimism on the second half of the year?
Well, to tell you the truth, Scott, it was a bit of both. Let me explain what I mean by that. If you look at the forecast, our original forecast for the first quarter, for residential, we were just slightly worse than that forecast. In fact, on a weather normalized basis, you might make the case that we are actually in line with the weather normalized forecast.
On small commercial and industrial we are actually a bit better than our forecast for the first quarter. Then as you heard from our prepared remarks on large commercial and industrial, we were quite a bit worse. So for residential and small C&I, I expect the back half to be worse than what we had originally expected, therefore quite a bit worse than last year. And the reason we believe that is because of what we are seeing with unemployment trends.
Our original underlining forecast had about 8%, 8.5% unemployment. It's likely to go say 9%, 9.5%. I think our state currently is at around 9%. Generally, what we see with electric sales, there is a bit of a lag effect. So what I'm saying is, if underlying unemployment is going to be that much worse in the back half of the year, we should see some really further degradation versus our original forecast for those two classes, but large C&I, worse thing in that right now. We saw it in the first quarter. So I would hope to begin to see a little bit of improvement there, but its improvement relative to a much lower forecast now within the year.
Obviously, we are trying to be appropriately conservative against what we are seeing. Particularly, I mean, we are kind of in uncharted territory. We have looked back in our records and this company has been very good at keeping records for decades. And we have not seen, and I don't think many companies have, this kind of precipitous decline in this shorter period of time ever. So we want to make sure we are appropriately conservative in terms of estimating what the second half looks like and it looks flat. It looks worse from a small C&I standpoint.
Scott Engstrom - Blenheim Capital Management
Could you just remind me what's your flexibility then as with respect to the rate case filing, on volumes?
We are very early in the rate case process. In fact, hearing dates have not yet been set, so there will be plenty of time over the course of the next four to five months as testimony is prepared, as rebuttal is put in, and as hearings take place, for us to refine our forecast and we would expect exactly to do that. We just filed the case in March and we will know much more three or four months down the road as we see more of what's happening in the real world and in the economy. So, we will refine our numbers in the rate case as we move forward and the process gives us plenty of opportunity to do so.
(inaudible) of Wisconsin, please state your question.
We're just talking about the rate requests. I missed the amounts that you mentioned before for the requests you are asking for?
Okay. I'll be happy to go over that again for you. Get back to the page where we have listed each one of them. [Dan], we made the filing on March 13, on our normal cycle with the Wisconsin Commission. For the electric business a $76.5 million or 2.8% increase, for Wisconsin Gas, $38.9 million or a 4.6% increase, for the gas operations of Wisconsin Electric, $22.1 million or a 3.6% increase, and then we have two small steam utilities, and for the two steam utilities $2.7 million.
Okay. Then as far as your request to change the fuel recovery for the declines that you've seen, will that go into effect sooner or when do you expect to see the impact from that part?
In fact, Dan it's already in effect. We filed right at the end of April for a fuel cost reduction going forward. So reduction in the fuel cost recovery rate. The Commission acted with more speed and turned that request around and the new lower fuel recovery rates went into effect, May 1.
So we filed April 27, I believe and the new rates went in May 1 for fuel.
I was curious looking at the income statement. It looks like the other O&M was down about $35 million. What was driving that decline?
In terms of O&M, and unfortunately, it's not a very simple story; if you adjust we had a one time amortization of a regulatory asset in the first quarter of last year. So if you adjust for that that was about $44 million. So if you adjust for that, O&M was actually up about $25 million. But then, when you look at that $25 million, $15 million of that $25 million was associated with the increased amortization costs that I talked about. Of that $15,million roughly half was related to transmission, half was related to amortization of the [PTF] costs, and then the other $10 million was related to just O&M that was sprinkled throughout the business that was really no one big category that was driving that.
Day-to-day O&M was almost flat.
Okay. I was curious on the Bechtel. I think I asked you last time, if you had gotten any sort of breakdown as to the various claims, and how much was related to each one. Have you been able to obtain that information from Bechtel yet? And if so, are you able to share that with us?
Good question, Dan. At this point there has been no additional breakdown of the elements of the claim.
Okay. And then the last thing I was curious about is kind of related to, looks like you have about $800 million of short term debt, and so, I was curious, is that draws on your bank line or is that CP, or what's that?
It's commercial paper, Dan. And at this point, my financing plan for 2009 wouldn't call for any permanent or term financing at the holding company. The plan does call for about $250 million worth of term financing at Wisconsin Electric Power Company. And then what I would expect to do in calendar 2010, or late this year, essentially coincident with the in service date of the coal plant is do the permanent financing for the coal plants. That would be around $900 million if you put the two units together. So essentially, that $900 million will be used to pay-off short-term debt at the holding company. This year, expect a very modest amount of term financing, only about $250 million and that of the utility.
Okay. Thank you.
You are welcome. And the bank lines are undrawn. Operator, do we have any other questions?
(Operator Instructions) [Julian Vermilion-Smith] with UBS. Please state you question.
Julian Vermilion-Smith - UBS
Just wanted to follow-up, last year you guys had talked a bit about potential legislation in Wisconsin and adjusting the fuel clause. Any updates on that front?
Very good question. The Wisconsin Commission does believe they need some legislative change to make it clear that they have the authority to change the administrative operation of the fuel. There is some discussion that the administration will have a complete energy package, a state energy package that would be presented to the legislature later this year.
We believe that if the administration does follow through with an energy package piece of legislation that provides fuel rules or at least the authority for the Commission to change the fuel rules administratively would be in that package. There is also some discussion about potentially having a separate line item in the Governor's budget bill that might give the authority to the Commission to administratively change the fuel rules.
So everything is in a bit of a state of flux as you can imagine, as the legislature is in a session, but if I were a betting man, I would say that before the end of the year, there would be something in front of the state legislature to clarify the Commission's authority to essentially change administratively the operation of the fuel rules.
Julian Vermilion-Smith - UBS
Thank you. From that regard, would you assume that going forward in 2010 say, in that time frame, the rules would be adjusted? Would there be sort of a sufficient amount of time for the Commission to come back and make that change official?
I believe there would be. There would be time so that for the calendar year 2010 we would be all operating under revised fuel rules.
There appear to be no further questions at this time. I will turn the conference back over to Mr. Klappa for any additional or closing remarks.
Well that concludes our conference call for today. We appreciate you taking part. If you have any additional questions, don't hesitate to call Colleen Henderson in our Investor Relations office and her number is 414-221-2592. Thank you very much. Have a good day.
And that does conclude today's conference call. Thank you all for your participation.
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