Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Wisconsin Energy Corporation (NYSE:WEC)

Q2 2011 Earnings Call

July 28, 2011 2:00 PM ET

Executives

Gale Klappa – Chairman, President and CEO

Frederick Kuester – EVP and CFO

Steve Dickson – VP and Controller

Allen Leverett – EVP; President and CEO, We Generation

Analysts

Paul Ridzon – KeyBanc

Brian Russo – Ladenburg Thalmann

Michael Lapides – Goldman Sachs

Paul Patterson – Glenrock Associates

Andrew Levi – Caris & Company

Dan Jenkins – State of Wisconsin Conference

Tim Winter – Gabelli & Company

Andy Levi – Caris & Company

Operator

Good afternoon, ladies and gentlemen. Thank you for waiting, and welcome 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 made based on management’s expectations at the time they are made.

In addition to the assumptions and other factors referred to in connection with the statements, factors described in the company’s latest Form 10-K and subsequent reports filed with the Securities and Exchange Commission could cause actual results to differ materially from those contemplated. During the discussions, referenced earnings per share will be based on diluted earnings per share, unless otherwise noted.

After the presentation, the conference will be open to analysts for questions and answers. In conjunction with this call, Wisconsin Energy has posted on its website a package of detailed financial information at www.wisconsinenergy.com. A replay of our remarks will be available approximately two hours after the conclusion of this call.

And now, I would like to introduce Mr. Gale Klappa, Chairman of the Board, President and Chief Executive Officer of Wisconsin Energy Corporation.

Gale Klappa

Colleen, thank you. Good afternoon, everyone and thank you for joining us as we review the company’s 2011 second quarter results. Let me begin as always by introducing the members of the Wisconsin Energy Management team who are here with me today.

We have Allen Leverett, President and CEO of We generation; Rick Kuester, our Chief Financial Officer; Jim Fleming, our generous General Counsel; Pat Keyes, our Treasurer; and Steve Dickson, our Controller.

Rick will review our financial results in detail in just a moment, but as you saw from our news release this morning, we reported earnings from continuing operations of $0.41 a share for the second quarter of 2011. This compares with $0.37 a share for the comparable period last year.

Our second quarter 2011 were driven by earnings from our $668 million investment in the second expansion unit at expansion unit at Oak Creek, which as you know came on line in January this year. Overall, we are quite pleased with our second quarter and our year-to-date performance.

Now I would like to focus for a few minutes on the economy across our service area. After nearly double-digit rebound in 2010, electric sales to our large commercial and industrial customers rose by a little more than 1% in the first half of the 2011.

When we take a look a little deeper inside the numbers, we see that the demand destruction from five large plant closings during the great recession is now being largely offset by modest growth and recovery in other sectors of the region’s economy. For example, we are seeing strength in iron ore mining, specialty steel production and in the paper and printing industries. And from talking with our largest customers, we are cautiously optimistic that the recovery will continue throughout the remainder of the year.

Now, when we look at our residential customers, we see flat sales for the first half of this year compared to the first six months of 2010. As you know, however, the Midwest was in the grip of old-fashioned heat wave and residential and commercial dimension was strong. In fact the peak demand on our system rose to within 2.5% of our all-time record one-hour demand.

One other point about recent heat wave, I’m pleased to report that our for new power the future units, the two natural-gas fired units at Port Washington and the two coal-fire units at Oak Creek performed very well. Before units were online the throughout the hot spell, they were war course units. Helping to meet customer needs in a very cost-effective manner. As a result, there were no runouts, no blankouts, no threats of curtailment and no long calls to interrupt our industrial customers.

The experience reaffirms our decision to complete our Power the Future plan, investing in critical energy infrastructure to ensure the liability from Wisconsin and the upper peninsula of Michigan. And now I would like to update you on the three significant construction projects that we have underway. The 50 Megawatt biomass plant in northern Wisconsin, the glazier hills wind park, north-east of Madison and the air quality control upgrade of original Oak Creek units.

As a mention on previous call, 50 megawatt cogeneration plant to be fueled with biomass at a paper mill site in Northern Wisconsin, which is owned by Domtar Corporation was proposed by our company really know almost 2 years ago generation plan will help us to diversify our renewable energy portfolio. We will have the ability, as you know, to dispatch the unit and the efficient technology will clearly benefit the existing paper mill.

In the second quarter of this year the Wisconsin Public Service Commission gave the final approval for the project. The project was also approved by our board and by the Domtar Corporation Board of Directors.

In late June we broke around and began construction. The investment in the biomass plant is expected to total between 245 and $255 million excluding allowance for funds used during construction. At the early stage of the project, we are on schedule and on budget to meet the completion day by the end of 2013.

The other large renewable project on our pipeline is the Glacier Hills Wind Park, the 162 MW energy center located approximately 45 miles northeast of Madison. We’re now erecting 90 wind towers across more than 15,000 acres of rolling farmland and we’re scheduled to complete the project on time and on budget by the end of this year.

Our current estimate of the capital cost for Glacier Hills is $361 million. This estimate does not include allowance for funds used during construction or reimbursable transmission costs. The Glacier Hills Wind Park and the biomass projects are two key components that will allow us to meet Wisconsin’s renewable portfolio standard for the year 2015.

To refresh your memory, the standard calls for an increase in the amount of electricity we supply with renewable sources from 5% in 2010 to 20% in 2015 at a state-wide level. The standard also sets targets for each of the Wisconsin utilities using an historical baseline. Using that baseline, approximately 8.25% of our retail electricity sales must come from renewable sources in 2015.

As I mentioned, when the complete the two large renewable projects, we now have under construction, we will be well positioned to meet the 2015 standard. I should point out however that we will be depleting our bank of our renewable credits after 2015 and as a result, we expect to need additional renewable capacity by the year 2017.

Finally, we are well along on the air quality control upgrade at the original coal-fired units on the Old Creek site. The older units at Oak Creek are among the most efficient base load units in the mid-west. So the economic solution for our customers was to invest approximately $900 million including allowance for funds used during construction for the installation of wet flue gas desulfurization and selective catalytic reduction facilities.

We expect the new controls to be completed in 2012. Construction is progressing very well, the project now is about 83% complete and once again we are on time and on budget.

And now I’d like to briefly mention where we stand on the Wisconsin and Michigan regulatory fronts on May 26 we filed an application with the Wisconsin Public Service Commission requesting no net increase in base rates for the year 2012. Our proposal includes the following key items. First authorization to suspend the amortization of a $148 million of regulatory assets in 2012.

Second authorization to include $148 million of the carrying costs and depreciation, for the air quality controls of that will creek and for the Glacier Hills Wind Park. Third a fuel cost plan for 2012, and finally a one-time credit to customers of $26 million. The credits stand for most Wisconsin Electric’s settlement and spread nuclear field litigation in the US Department of energy.

We also ask for the authority to re-open the rate proceeding next year, for new rates that would be effective in 2013. Now keep in mind that under a traditional rate case, we would have filed for a base rate increase of approximately 6% for Wisconsin Electric’s retail customers in the year 2012.

We also said that if the commission was not comfortable with our creative approach. We’d proceed with a traditional rate case. After reviewing our request, the commission stab issued a memo last week with several alternatives for the commission to consider. A stab asked for final comments from all the parties in the case by the end of the day tomorrow July, 29. So as to think about our request and about the stab memo. There are several things to keep in mind. First, the stab ordered of our projected revenue needs points as we expected to a revenue deficiency for 2012.

Using the stab numbers, we believe the revenue deficiency would be approximately $100 million in 2012. And that’s before any company – to the stab’s proposed adjustments. Company would take place in any additional rate proceedings. This clearly implies that a traditional rate case would result in rate increase in 2012.

Secondly, we offered, what we believe was a unique approach to keeping base rate flat for customers during the economic recovery. And finally the company has big ability to file a full rate case at any point in time. So after assessing the stab memo, we believe the only viable alternatives are the two past, we’re originally proposed.

A zero based at increased by 2012 with our recommended approach or a traditional rate case. We expect to this constant commission to decide in August. Starting that to our Michigan operations. Earlier this month we be filed $17.5 million rate increase request with Michigan Public Service Commission.

The request is recover from a Michigan customers, they’ll provide a share of renewable generation, environment controls and costs associated with the unit 2 at Oak Creek. These costs are already by the way being recovered in the Wisconsin jurisdiction in Michigan recovery takes place only after an asset is completed and placed into commercial service. As provided for under Michigan law, we planned to self-implement 7.7 million of our rate increase request in January of 2012 we expect the Michigan commission to rule on the entire request by July of next year.

In summary, at the halfway point of 2011, the companies performing at a high-level and our power in the future investments are clearly providing tangible benefits for our customers and our stock holders. And while we systematically look for solid utility investments in the future that we meet our risk profile, we’re pleased that our board is approved two measures that will deliver additional shareholder value.

As I mentioned in May we have approval to repurchase up to $300 million of Wisconsin Energy common stock between now and the end of 2013. The board has also approved a dividend policy that will target a 60% payout ratio by the year 2015. This policy of course should support dividend increases of about 8% to 9% a year for the next several years. And now with more details on our second quarter and our outlook for the remainder of 2011, here’s our Chief Financial Officer Rick Kuester. Rick?

Frederick Kuester

Thanks Gale. As Gale mentioned earlier, our 2011 second quarter earnings from continuing operation were $0.41 per share. The results were slightly better than our plan because of lower than the expected benefits cost and a favorable adjustment related to income tax expense. Although, I’ll focus my comments in operating income from continuing operations by segment and then touch on other income statement items, I did want to mention that we also recorded a gain of $0.05 per share from discontinued operations. As a result of the resolution of several state and federal tax issues. I will also discuss year-to-date cash flows and guidance for the third quarter and the full year.

Our consolidated operating income in the second quarter of 2011 was $174 million as compared to $163 million in last year’s second quarter, an increase of $11 million. We clearly benefited from a full quarter’s earnings from the second expansion unit at (inaudible). Operating income in our utility energy segment totaled $88 million which is down $10 million from the prior year. As we discuss on our last call we expect our utility earnings to be down this quarter because of warmer than normal second quarter in 2010 and increased operating cost in 2011.

Colder weather negatively impacted this quarter results but our calls came in slightly better than anticipated. We estimate that a cooler April and May helped our gas margins by $11 million as compared to second quarter 2010. However we experienced a mild June this year and we estimate weather reduced our electrical margins $16 million as compared to second quarter last year. When we combine the electric and gas margins. We experienced to decline of $5 million on the year-over-year basis due to weather. The other significant factor in packing utility operating income for the quarter relates to the collection of fuel revenues.

On the net basis, we were $9 million worse in the second quarter of 2011 as compared with last year. When you take the weather and fuel recovery together, with all other items you see the $10 million decline in the operating income at the utility.

Our operating income in the non-utility energy segment which includes repower came in as expected. We saw higher operating income of $21 million that was driven by the commercial operation of unit 2 Widow Creek.

We would expect this favorable variance to continue in the third and the fourth quarter. Taking the changes for these two segments together, you arrive at $11 million increase in operating income for the second quarter of 2011.

During the second quarter of 2011 earnings from our investment in the American transmission Company total just over $15 million. Other income increased by $5 million because of higher APDC on our utility construction projects.

Primarily the air quality control system for the elder Creek units and the Glacier Hills went par. Net interest expense increased by $4 million primarily because of interest expense associated with the second unit at Oak Creek.

In January we issued $420 million of long-term debt, to replace short-term debt used to finance the construction of the unit 2.

In addition once unit 2 achieves commercial operation, we no longer capitalized interest on the construction work in the progress. While we saw increased interest expense at to the power level, our holding company interest expense a decline as we retired $450 million or 6.5% long-term debt on April 1 of this year.

Consolidated income tax expense increased by approximately $2 million because of higher pre-tax earnings, offset by slightly lower effective tax rate. During the second quarter, our income tax expenses was reduced by $2.2 billion because of our favorable resolution of uncertain tax decision in our continuing operations. For the year we expect our effective tax rate to be between 34% and 35%.

Combining all of these items brings you to get $98 of net income from continuing operation for the second quarter of 2011 or earnings of $.41 per share.

During the first six months of 2011 we generated $649 million of cash from operations on a GAAP basis, which is up $225 million in the same period in 2010.

Our strong cash flows were driven by higher net income and a higher non-cash charge of related to depreciation and deferred income tax. On an adjusted basis our cash of operation increased by $106 million. The adjustment related to how GAAP treat changes in restrictive cash as in inventing activity, while we look at this as an operating on item.

Our 2011 cash flows were also reduce by $122 million, because of contributions to our benefit plans. No such contributions were made in 2010. Our total capital expenditures were approximately $347 million in the first six months of 2011. And we are forecasting annual capital expenditure this year of approximately $950 million. The majority of our capital expenditures are in the utility business and the largest project the air quality control system at the Oak Creel site and the Glacier Hills in Wind Park.

We also paid $122 million in common dividends in first half 2011, which was a 30% increase over the same period last year. On a GAAP basis, our debt-to-cap ratio was 55.2% and we were at 52.4% on an adjusted basis. These ratios were an improvement over our December 31, 2010 levels of 56.9% and 54.1% respectively. The adjusted amount treats half of our hybrid securities as common equity. We might see a slight uptick these ratios by the end of the year as we fulfill our capital budget commitments and repurchase shares.

However, we expect our year-end ratios to be well under the prior year numbers. Consistent with our past practice, 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. Through July 25, 2011, we have repurchased approximately 650,000 common shares at an average price of approximately $31.40 under the $300 million share repurchase program that Gale mentioned.

We will update you each quarter on the progress of our share repurchase program.

As Gale mentioned, we are cautiously optimistic that the investment recovery will continue through the year based on our electric sales volume for the first half. Anticipated declines due to plant closings in some segments were offset by growth in other segments. To-date, our weather normalized retail sales have grown by 0.8% as compared to 2010. Excluding sales to our largest customers the iron ore mine, normalized sales were leveled with 2010 for the first half of the year. These results were in line with our overall forecast.

I will now discuss our earnings guidance for this year. We are raising our annual earnings guidance from a range of $2.05 to $2.10 a share to a revised range of $2.10 to $2.14 a share from the continuing operations. We’re comfortable rising this range, because of our strong results through the first half of the year, which were driven by cold weather, slightly strong electric sales to our largest customers and effective cost controls. We will also benefit from the extremely hot weather we have experienced in July, but with that said, we still have over five months to avoid the risk. Offsetting these factors will be unfavorable fuel collections as compared to our original plan.

For the third quarter of 2011, we are forecasting earnings per share from continuing operations in the $0.47 to $0.50 a share range. Last year we earned $0.47 a share in the third quarter, restated for the 2 for 1 stock split earlier this year. On a quarter-over-quarter basis, we see four large items that are expected to cause variance in quarterly earnings.

First, last year was very hard and we estimate that weather helped our third quarter earnings by $0.8 a share. Second, with the implementation of new fuel rules, we expect to see a favorable variance of $0.05 in fuel recoveries this quarter. We expect to undercollect fuel cost in the third quarter, but collect more than in 2010. Third, we expect increased O&M expenses associated with strong damage in July and a major maintenance project that went about 18 facilities.

Finally, the income from unit 2 at Oak Creek should boast third quarter earnings by $0.3 a share. These four factors get us to about $0.48 a share from continuing operation for the third quarter of 2011. We increased the range slightly for the hot July weather.

With that, I will turn things back over to Gale.

Gale Klappa

Rick, Thank you very much. Overall, we are on track and focused on delivering value for our customers and our stockholders.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Paul Ridzon with KeyBanc.

Gale Klappa

Hi, Paul. Good afternoon.

Paul Ridzon – KeyBanc

Good afternoon. Congratulations.

Gale Klappa

Thank you. Is there anything particular you’re congratulating us about, Paul?

Paul Ridzon – KeyBanc

Solid quarter, good company, good management.

Gale Klappa

Keep on, I like that. Thank you, Paul. What can we do for you?

Paul Ridzon – KeyBanc

Just wondering the lower benefits you experienced in the second quarter, was there a timing issues or should that fall through the rest of the year?

Gale Klappa

Actually, it’s a very good question. And let me say this. One of the benefits that we saw in terms of lower costs in the first half was related to employee healthcare, our active medical plans and the cost they incurred. Whether that really transcend through the entire year this year. We just don’t know yet. But certainly that was one of the major factors that helped us achieve lower O&M cost during the first half of the year. As you know sometime these medical claims content to be lumpy, but we did have a very good experience on medical claims and medical payments in the first half.

Paul Ridzon – KeyBanc

Okay, thank you.

Gale Klappa

You’re welcome.

Operator

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

Brian Russo – Ladenburg Thalmann

Hi, good afternoon.

Gale Klappa

Hi, Brian, how are you doing today?

Brian Russo – Ladenburg Thalmann

Good, thanks. Could you just remind us when the share buyback program went into effect? And it looks like you’ve done $20 million worth of buyback. It was in effect, just wondering if that’s kind of a run rate we should expect?

Gale Klappa

Well, obviously we’re looking at this as we go. I wouldn’t necessarily project the continuous run rate. But the share buyback program was authorized by our board. At the board meeting right before annual meeting on May 5, and I believe we actually began repurchasing some shares in July.

Brian Russo – Ladenburg Thalmann

Okay. And then, on the tax rate, I think you said 34% to 35% in ‘11, is – will it revert back to 36% tax rate post 2011? Or is that kind of the new-tax basis?

Gale Klappa

We’ll ask our controller Steve Dickson to answer that question for you.

Steve Dickson

I think next year it’ll take up a little bit slightly. This year we’re getting the benefit from equity AFUDC, as Rick had mention on the air quality project and – excuse the, wind mill in the glacier hills. So, once those (inaudible) and the service will stop having AFUDC equity, which has – as a permanent item. That’s giving us a little benefit this year and we’ll lose a little bit of that next near.

Brian Russo – Ladenburg Thalmann

Great, thank you.

Gale Klappa

Thank you, Brian. Appreciate your questions.

Operator

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

Gale Klappa

There are going to be football, Michael.

Michael Lapides – Goldman Sachs

There is going to be football although. I’m more of a college guy, so NFL plays, and NFL players. As long as the SEC is meaning the southeastern conference has been busy is busy, I’m okay.

Gale Klappa

Yeah, roll tight, okay.

Michael Lapides – Goldman Sachs

You got it. Question for you. When you think about procedurally how kind of what happens from here at the PSCW around your request kind of the accounting order for such having a full bloom GRC. And if you wind up having a full bloom GRC, what would the timeline in the implementation of rates look like, I mean you’re kind of already – several months behind in the process, if you’re about the start up a typical nine or 10 month process.

Gale Klappa

Good question, Michael. First of all, we do expect that the commission will vote on our proposal in August. So I don’t think we’re going to see a significant delay from here in getting a decision from the commission on Door A or Door B. Door A being our creative approach to holding base rates flat or us filing a full rate case and moving through that proceeding. One bit of insight into, if we had to go through Door B, which obviously we believe the company would be just fine going through Derby.

We have already filed – when we filed on May 26, we already filed all the backup data related to our projected revenue requirements for 2012. And when the staff did its memo relating to various options or various ideas that they had, what they actually published in that memo was a preliminary audit of our 2012 – what a 2012 rate case might look like. So we are not as far behind procedurally if we had to go through Derby as one might expect because all the data has been on file. We would refresh the data and if the Commission wants us to proceed with a full general rate case, my guess is, we could file the remaining refreshed data within a couple of weeks after that decision.

Michael Lapides – Goldman Sachs

Got it. Okay. So we wouldn’t be starting from August into a nine or 10 months process? We would be in kind of the mid-point of it and you would start getting briefs and final briefs and have hearings and go from there in the back end half of the year?

Gale Klappa

That certainly would be our thinking. We would not be in anyway share perform into a nine or 10 months process from there. I just do not see that. And is to say, we are really ahead of the curve from the standpoint of – really on May 26, we filed all the necessary data to allow the staff to audit the revenue projections and the cost for 2012.

Michael Lapides – Goldman Sachs

Got it. Okay. Thank you, guys. Much appreciate it.

Gale Klappa

Rick is making a point, Michael. We did that for base rates. And then under the new fuel rules, all the utilities have to file their separate fuel plan really within a matter over the next few weeks.

Michael Lapides – Goldman Sachs

Got it. Okay. I will follow-up offline in the fuel plan stuff.

Gale Klappa

Okay. Terrific. Thank you, Michael.

Michael Lapides – Goldman Sachs

Thank you.

Operator

Your next question comes from the line of Paul Patterson with Glenrock Associates.

Gale Klappa

Hello, Paul. How are you today?

Paul Patterson – Glenrock Associates

All right. Good afternoon. I want to follow-up on Michael’s question on the rate case.

Gale Klappa

Do you have Michael’s number?

Paul Patterson – Glenrock Associates

No. I don’t. I don’t actually. But I wanted to ask you about, I mean, it sounded like they were giving you – that they were presenting options and when I – and maybe I got it wrong, but I was at the impression that this is sort of a take or leave it option that you are providing in terms of this alternative? That in other words, you basically go to a full on rate case as opposed to some of the alternatives that they were proposing. Could you elaborate a little bit on that or where that stands now?

Gale Klappa

Sure, I’ll be happy to. The staffs did seem to – as we went through the staff memo, the staffs certainly did seem to provide some potential alternatives adjustments. I’m not sure as I’ve read through that they have actually recommended anything except that they put on the table several other options. One, I think compelling point, as we’ve read through that staff memo is that, if the answer is zero then getting to zero with staff adjustments versus getting the zero with our proposal, leaves the customer in exactly the same spot in 2012.

The customers now better off. But if the staff makes adjustments, then the company would be weaker. So our view as I mentioned in the script is really our only two viable, workable options here. One is, the creative approach with the order that we described or we will certainly proceed with the full case and that’s because the real issue here is how to make room for and how to begin recovering almost $1.3 billion of new investments in projects the commission is already approved and projects are on time and on budget.

So the issue we are trying to deal with here is, we clearly have under Wisconsin regulation, we clearly have $1.3 billion but has to begin being recovered in rates next year and we thought we could find a way through the accounting order and the seizing of the amortization of some of the commission I’ll use, they’ve given us. We thought we could manage the company and stay flat with base rates next year but if that’s not the case, in other words if they feel like that’s just not the way to go. Then you’re correct, the only viable alternative is to proceed with the full case.

Paul Patterson – Glenrock Associates

Okay. And then switching to the MISO market and the capacity proposal that they came up with now I know that you are mostly regulated and I would think that they probably want to be that much opportunity from a profit and loss perspective perhaps doing capacity sales or what have you into another market. But I was just wondering if there was any impact on rates or any comment that you have with respect to the MISO capacity market filing, what they made it for it?

Gale Klappa

Well certainly let Alan give you his view of just to frame it. Again all of the new capacity we have built– you’re absolutely right. It’s dedicated to retail customers. So I wouldn’t see from the MISO capacity proposal really any significant impact on any of the power of the future units. We do make opportunity sales, but I don’t see any major impact, Alan, do you?

Allen Leverett

No I think from a practical standpoint. Given the capacity situation in the MISO foot print as a whole, meaning a reserved margin as a whole as MISO act. I don’t see any impact really of any significant degree on us for a quite a long time.

Paul Patterson – Glenrock Associates

Okay.

Allen Leverett

And once I impact any sort of additional credits coming back to retail customers.

Paul Patterson – Glenrock Associates

Okay. Great I appreciate it.

Gale Klappa

You’re more than welcomed. Thanks for your question.

Operator

Your next question comes from the line of (inaudible) with TDP Capitals.

Unidentified Analyst

Well (inaudible) how are you today?

Gale Klappa

I’m doing well. Good afternoon.

Unidentified Analyst

I got to ask now – are you being paid in Canadian dollars on in U. S. dollars because I’m worried about the exchange rates.

Unidentified Analyst

U. S. unfortunately. So we will see.

Gale Klappa

Well, try to renegotiate this.

Unidentified Analyst

Well, I’m domestic. So, I won’t have a currency translation issue.

Gale Klappa

Okay. How are you doing?

Unidentified Analyst

I’m doing well. My question is – as I recall vaguely, and you can remind me whether, what I’m thinking of – I thought there was like I think, either the – Wisconsin or a municipal entity had sold, like a power plant or something like that within the state of Wisconsin. And I’m wondering as you have opportunities to deploy capital, besides from, renewables and maybe additional ATC opportunity et cetera. Are there – do you could see the opportunity for assets within state of Wisconsin that are currently owned by cooperative sort of municipal’s that may be going through financial to us right now given the economy and everything like that or simply priorities that may become available to you that – we are to be that could be possible?

Gale Klappa

Very good question but you will – and you have seen some something, I’m sure referring to and some of the new stories about the state budget issues. The state does own, the state of Wisconsin itself, does own 29 different steam or power generation facilities, many of them co-gen facilities, scattered throughout the state of Wisconsin. These facilities have traditionally been owned by the state operated by state employees and generally provide energy services or steam services to state buildings ranging from the University of Wisconsin campus in Madison to the state actually.

Walker administration has taken a position that they believe given the major amounts of capital that will probably have to be spend to upgrade a number of these plants with modern environmental control, that they might consider a sale, of those state own power plants, that would take a piece of legislation. We believe the legislation might be introduced this fall, to enable the Department of Administration, to basically conduct a sale of some or all of those plants. So that is probably what you are hearing. We would have some interest in some of those facilities and it certainly could be if the legislation pass, the potential investment opportunity for us right here inside the state of Wisconsin.

Unidentified Analyst

And, does that appear that – that’s probable?

Gale Klappa

Again I think the Walker Administration is going to assess whether or not they will not introduce the legislation this fall. We have some recall elections that are underway in the state right now and I don’t think anything will be decided in terms of a particular piece of legislation on this or any other subject now until after the recall elections. Recall election should be completed by mid-August and then I would think we would have a much clear view of the landscape.

Unidentified Analyst

Okay. That was it. Thank you very much.

Gale Klappa

Thank you, (inaudible).

Operator

Your next question comes from the line of Andrew Levi with Caris & Company.

Just, I had missed, reason you took up guidance was why?

Gale Klappa

The reason, I don’t know why that made me laugh. Andy, because we wanted to make your day. How’s that.

Andrew Levi – Caris & Company

That’s fine. I didn’t hear, I apologize.

Gale Klappa

No, no problem. We had a solid first half. Much of it driven by a colder winter. We have effective cost controls and as we look at where we stand erect, we decided it was the right thing to do to raise the guidance.

Steve Dickson

Yep. Maybe a little bit improvement in electric sales in the second quarter to (inaudible).

Andrew Levi – Caris & Company

Okay. And just to understand there’s Door A, Door B on this proposal, but there’s no Door C, that’s basically what you’re saying.

Gale Klappa

That is correct. And we’re not trying to difficult about it. It’s just that, we have real situations with 1.3 billion of capital, coming into service on project that commission has approved. And that has to be dealt with. So that’s why there’s only a Door A, or Door B.

Andrew Levi – Caris & Company

And when we get comments tomorrow, I guess, then the next open meeting or open is what August 3rd or something like that? And then August 10th, after that is that kind of where we should think there might be some type of oath by the commissioners?

Gale Klappa

I believe, although I don’t think there are seven concrete I believe it’s August 3, and August 11.

Andrew Levi – Caris & Company

11, okay, thank you. And just to understand the $100 million that was the revenue deficiency? That was based on what 10, 5 ROE?

Gale Klappa

No, that was based on our current allowed ROE.

Andrew Levi – Caris & Company

Which is the – what is that – it had them?

Gale Klappa

10 forward.

Andrew Levi – Caris & Company

10 forward.

Gale Klappa

And Andy, you’ll see some tomorrow. All of the parties in our proceeding year are supposed to have their comments in tomorrow.

Andrew Levi – Caris & Company

All right.

Gale Klappa

Well, actually see in our comments a chart, that lays out how – that lays out how we get to that roughly $100 million based on staff adjustments revenue deficiency for 2012.

Andrew Levi – Caris & Company

Okay.

Gale Klappa

That will be very clear for you tomorrow, and for everyone to see.

Andrew Levi – Caris & Company

Okay. So you guys will be filing something tomorrow as well.

Gale Klappa

Absolutely, we upgrade.

Andrew Levi – Caris & Company

Okay. Thank you very much guys. And doing a great job as Mr. Richard said.

Gale Klappa

Thank you very much.

Operator

(Operator Instructions). Your next question comes from the line of Dan Jenkins, State of Wisconsin Conference.

Gale Klappa

Dan?

Dan Jenkins – State of Wisconsin Conference

Hi.

Unidentified Analyst

I have ask this but how was I make it bike riding?

Dan Jenkins – State of Wisconsin Conference

Unfortunately, I didn’t see it. I wasn’t a participant, but I didn’t see it unfortunately.

Gale Klappa

Let me get this straight about medicine law. Someone said it’s only illegal to do that if you get complained about.

Dan Jenkins – State of Wisconsin Conference

I think that’s subject to interpretation.

Gale Klappa

Well. I’m glad you knew relative (inaudible)

Steve Dickson

What can we do for you, Dan?

Dan Jenkins – State of Wisconsin Conference

First a little bit on the Wisconsin rate filing, are there any interveners involved in that case beyond the staff and the company that have taken positions yet or expected to take positions?

Gale Klappa

Yes, Dan, there are two traditional participants in the case other than the staff and the company and that’s CUB, the Citizens Utility Board and WIEG, the Wisconsin Industrial Energy Group. Their initial comments were we don’t have a philosophical opposition to door A or door B, but they’d like to see some numbers from the staff. So now that the staff has done its memo, we would expect that CUB and WIEG would make some comments. They certainly have been invited to by the deadline by the end of the day tomorrow.

Dan Jenkins – State of Wisconsin Conference

Okay. So that will pretty much all clarified by tomorrow.

Gale Klappa

That would be our thought.

Dan Jenkins – State of Wisconsin Conference

Okay. And then related to the Michigan rate request, I missed them, what was the amount of that again?

Gale Klappa

The request is $17.5 million, of which under Michigan law, we would plan to self-implement a portion of that about $7.7 million in January. And then we would expect a – under Michigan procedures and law, we would expect a decision from the Michigan Commission on the full case by July of next – sometimes July of next year.

Dan Jenkins – State of Wisconsin Conference

Okay. And what was the ROE that you requested in that case?

Gale Klappa

I believe it’s exactly same ROE, 10.4.

Dan Jenkins – State of Wisconsin Conference

10.4. Okay. And then I was curious on your electric forecast, the fact that you did raise guidance a little bit. I was wondering what your second half assumptions are related to retail sales growth and in terms of megawatt hours both topline and for the large CNI group?

Gale Klappa

Well, Dan, essentially we are leaving our forecast unchanged. We make an annual forecast – really when you weather normalize our first half, we are dead on the forecast. Some segments are better, some segments are worse, but when you net it all through and weather normalize, our first half 2011 sales actually have been literally dead on the forecast. So we didn’t see a need to actually change the forecast, because that forecast, as you know, is done on a weather normal basis, but obviously we have seen very strong demand in July and that couple with the cold winter and solid earnings for the first half really lead us to a decision to raise the guidance.

Dan Jenkins – State of Wisconsin Conference

Now do you anticipate the 1.8 that you saw from the large CNI in the second quarter being kind of the run rate going forward or do you have an opinion on what to expect in that class.

Gale Klappa

We would hope so, but again at this stage of the game, we don’t think there’s a lot of merit in doing minor adjustments to the annual sales forecast. But again, there would be upside if we saw the stronger economic recovery in the industrial sectors in the second half.

Dan Jenkins – State of Wisconsin Conference

Okay. And then the last thing I was wondering about relates to cash from operations, it’s quite a bit stronger in the first half versus last year and I know you had the tax settlements so forth in one of the big gain for us in the deferred income tax, investment tax credits. And then also on working capital, and so as well how we should think about those categories on the cash flow in the second half.

Gale Klappa

Ric or Steve, you want to try to answer Dan’s question about, particularly about working capital.

Steve Dickson

I think the question was cash from operations and it was strong, and I would see it continuing strong. Net income, we project it to be up over the prior year, depreciation, non-cash charges, those should increase over prior year’s, so those are good uses of cash.

Our deferred income tax as I talked about it earlier is bonus depreciation as it carry through the end of the year, and our working capital, one of the guidance in there was we are able to reduce some of our inventory, so that was strong for the first six months.

I think our working capital is one of the drivers there as our gap in storage and if you can tell us the gas price will be at the end of the year, we will have a better idea but we feel good about the first six months we are seeing it continuing through the year.

Gale Klappa

And just to refresh your memory, Dan, we said we’ve about 100 million impact from bonus depreciation issue and $200 million next year as cash stand point

Dan Jenkins – State of Wisconsin Conference

Okay. So I guess– how does that translate given you have about 600 million of CapEx in the second half into financings each in the second half.

Gale Klappa

We, we have to look also at maturities when you look at our financing needs. I would expect because it’s in our financial plans, that we would, we would have a bond offering at Wisconsin electric level sometime in the second half of this year.

Dan Jenkins – State of Wisconsin Conference

Okay. Thank you.

Gale Klappa

You are more than welcome. Careful on the bike.

Dan Jenkins – State of Wisconsin Conference

Okay.

Gale Klappa

Bye.

Dan Jenkins – State of Wisconsin Conference

Bye.

Operator

Our next question comes from the line of Tim Winter with Gabelli & Company

Gale Klappa

Hi, Tim, how are you?

Tim Winter – Gabelli & Company

There I go – how are you? I’ve got a couple, couple of questions. One is if you go down and have fully fall rate case. What – is it like and then extends into next year is it? Would it be likely that the rain increase would be retroactive to January 1st?

Gale Klappa

No. Under Wisconsin law, there really is no retroactive rate making if you will. So – but there will be two pieces, obviously, there would be the separate fuel plan, fuel cost plan and under the new fuel rules that went into effect the commission would – we would file and we were not to do, nor was any other utility in Wisconsin due to file the fuel cost plan until next month.

So we would be on time in terms of the normal schedule for a fuel adjustment, at the end of December starting in January.

So that piece would not be affected by a schedule for a general rate case. So the only piece that would be, would be base rates. And there we would certainly try to work with the commission and the staff to try to get a timely decision.

As you may have heard me answer one of the other callers, we’re really not all that far behind the curve because of all the data that was filed on May 26, that has already allowed the commission staff to do a preliminary audit of 2012 adjustments and expenses in revenue needs.

Tim Winter – Gabelli & Company

Okay. Great. Then second question, can you update us on the ‘12 and ‘13 CapEx budget? And then maybe give some idea what types of rate base growth that you may have post 13?

Gale Klappa

Absolutely, we would be happy, Rick and I will do that together. And we’re turning to a page right now where we have our ‘12 and ‘13 broken down.

Steve Dickson

This is on our website too.

Gale Klappa

We have about – just to start off. We have about a run rate on depreciation. We have about $250 million a year, $250 to $260. For actually it would be going up to – 2012 would be $310 and 2013 would be $320, that’s our estimate of depreciation in each of those two years. And then as you know – we have a significant amount of capital spend that we need to do on what I call network renewal.

And a lot of that is simply replacement of aging powerful transformers, substations, conductors etcetera. So we have a run rate of about $400 million a year in ‘12 and ‘13 for network renewal and then we also have additional spending on environmental and renewable, Rick?

Frederick Kuester

Yeah. And then if you look at our rate base, we are showing our rate bases $6.7 billion in $2012 and essentially flat to 2013 because of the effects of the bonus depreciation. So basically a flat rate base from ‘12 to ‘13 exactly right, if you would have looked at this slide, that’s on our website, six months ago or some months ago we would have been projecting about a $7 billion rate base in 2013. With the bonus depreciation, which gives us cash now, basically it took the rate base growth down back, took the rate base growth down and that’s why we are showing the 67 and 67 in terms of projected rate base for 12, 13. Is that respond to your question.

Tim Winter – Gabelli & Company

Yeah. So I was just wondering, what sorts of longer-term projects post our team, that you’re considering?

Gale Klappa

We have a very significant list of projects that we are systematically working our way through. We talked about a couple of them earlier, one is the possibility that the state may divest some of its energy assets. And that would certainly give us an investment opportunity. We know, as I mentioned in the script that we’re going to under the current law need additional renewables beyond 2016. We still have to deal with aging gas and electric distribution infrastructure.

And I’m very confident that we’re going to be seeing additional capital spending probably in that ‘13 and ‘14 timeframe and we have budgeted related to – additional regulations related to gas distribution and pipeline safety. Of those regulations and those proposals are being debated right now by FERC and the Congress.

But remember we have a pretty sizable natural gas distribution business. And I’m quite confident we’re going to see to meet additional requirements of the gas network in particular additional capital spend. And then as you know, EPA is continuing to form related additional air quality control rules and air quality control, it’s the water intake rules as well of many of the power plants. The plants that don’t have cooling towers today.

So there is a whole range of potential investment opportunities and we are systematic working our way through those to see what our 2014, 2015, 2013 capital spend looks like. Rick anything you would like to add?

Frederick Kuester

Thank you very much. Gale.

Tim Winter – Gabelli & Company

Great. Thank you guys.

Frederick Kuester

You’re welcome.

Operator

Our next question comes from the line of Andy Levi with Caris & Company.

Gale Klappa

Hi, Andy. You’re back.

Andy Levi – Caris & Company

Yeah. And just a quick follow-up, the 210 to 214 can we carry out through to 2012.

Gale Klappa

Andy, right now, because of where we stand in terms of trying to work through the 2012 revenues with the commission, I think, we really can’t give you 2012 guidance right now. But we certainly wanted to give our best look at the remainder of 2011. Inspired

Andy Levi – Caris & Company

I understand the guidance, but in the sense the things that get you to the 210, 214 or sustainable in 2012.

Gale Klappa

Well, part of what get us to the cold winter and hot July. So I would leave that to your discretion but I would say that at the present time we need to keep our power cool here for 2012 dry exactly.

But the other hand is that why we do have some APDC in there for Glacier Hills went apart and the air controls that swap or create like that is kind of centerpiece of next year right case whether be door A or door B and we would expect to cover on those projects such are going into service.

Andy Levi – Caris & Company

Okay, thank you.

Gale Klappa

You’re welcome, Andy.

Operator

All right. With that, ladies and gentlemen, I believe concludes our conference call for today. Thank you so much for participating. If you have any others, our favorite, Colleen Henderson will be available in the Investor Relations Officer and her direct line, 414-221-2590. Thanks everyone, have a good day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Wisconsin Energy Corporation's CEO Discusses Q2 2011 Results - Earnings Call Transcript
This Transcript
All Transcripts