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Executives

Colleen Henderson – IR

Gale Klappa – Chairman, President and CEO

Allen Leverett – President and CEO, We Generation

Rick Kuester – CFO

Jim Fleming – General Counsel

Pat Keyes – Treasurer

Steve Dickson – Controls

Analysts

Greg Gordon – ISI Group

Jim Von Riesemann – UBS

Michael Lapides – Goldman Sachs

Jay Dobson – Wunderlich Securities

Carl Seligson – Utility Financial

Dan Jenkins – State of Wisconsin

Ted Hine – Point State Capital

Paul Patterson – Glenrock Associates

Michael Lapides – Goldman Sachs

Scott Senchak – Decade Capital

Wisconsin Energy Corporation (WEC) Q3 2011 Earnings Conference Call October 27, 2011 2:00 PM ET

Colleen Henderson

Good afternoon, ladies and gentlemen. Thank you for waiting, and welcome to Wisconsin Energy’s Quarterly Conference Call. This conference is being recorded for rebroadcast and all participants are in a listen-only mode at this time.

Before the conference call begins, I will read the forward-looking language. All statements in this presentation, other than historical facts, are forward-looking statements that involve risks and uncertainties, which are subject to change at any time. Such statements are based on management's expectations at the time they are made. In addition to the assumptions and other factors referred to in connection with the statements, factors described in the Company’s latest Form 10-K and subsequent reports filed with the Securities and Exchange Commission could cause actual results to differ materially from those contemplated. During the discussions, referenced earnings per share will be based on diluted earnings per share, unless otherwise noted.

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

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

Gale Klappa

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

We have Allen Leverett, President and CEO of We Generation; Rick Kuester, our Chief Financial Officer; Jim Fleming, General Counsel; Pat Keyes, our Treasurer and Steve Dickson, of the Controls. 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 $1.69 a share for the first nine months of this year. That compares with earnings of $1.39 a share from continuing operations for the first nine months of 2010. For this year’s third quarter, our earnings from continuing operations came in at $0.55 a share, up from $0.47 a share in the third quarter a year ago.

Now, compared to our forecast, two factors influenced our positive results in the latest quarter. The first was weather. The Midwest recorded warm temperatures and high humidity this summer which led to strong demand for air conditioning. It literally was hot time in the summer in the city during much of July and August. In fact, the peak demand on our system rose to within 2.5% of our all-time record one hour demand. We also saw slightly stronger growth across the commercial sector of the region.

When we compare our numbers to the prior year third quarter, we realized higher earnings from our Power the Future assets driven by our investment in the second expansion unit at Oak Creek. We also benefited from booking higher allowance per funds used during construction at Wisconsin Electric as we continued to invest in utility projects that have been approved by the Wisconsin Public Service Commission. Overall, we are pleased with our third quarter and our year-to-date performance.

Now, I’d like to focus for a few minutes on the economy across our service area. After a nearly double-digit increase and rebound in 2010, electric sales to our large commercial and industrial customers rose by a little less than 1% in the first three quarters of 2011. When we take a closer look 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 in recovery and other sectors of the region’s economy. For example, we are seeing strength in iron ore mining, in specialty steel, and metal fabrication, paper and printing and in the production of industrial machinery. And from talking with our largest customers, we are cautiously optimistic that the recovery will continue.

Next, I’d like to update you on the three significant construction projects we have underway, a 50-megawatt biomass plant at Northern Wisconsin, The Glacier Wind Park, Northeast of Madison, and the Air Quality Control upgrade of the original Oak Creek units. You may recall last quarter we announced that construction was underway on a 50-megawatt cogeneration plant to be fueled with biomass at a paper mill owned by Domtar Corporation in Northern Wisconsin. Good progress has been made on critical underground work and on the foundation for the boiler.

On August 25, 1,700 cubic yards of concrete was continuously delivered on port for the foundation. Of course, the biomass plant will help us diversify our renewable energy portfolio. We will be able to dispatch the unit and the efficient technology that will be used to produce steam will clearly benefit the existing paper mill. Our investment in the biomass plant is expected to total between $245 million and $255 million excluding allowance for funds used during construction. We are on schedule and on budget to meet a completion date by the end of 2013.

The other large renewable project in our pipeline, of course, is the Glacier Hills Wind Park, a 162 megawatt energy center located on more than 15,000 acres of rolling farmland about 45 miles northeast of Madison. Ironically, higher than normal winds in late spring and early summer slowed our construction, but we are on track now and making excellent progress. As of yesterday, 88 of the 90 wind turbines planned for the site had been erected and approximately half of the turbines are already producing power for the grid. We are scheduled to complete the project on time and on budget by the end of this year.

Our current estimate of the capital cost for the Glacier Hills site is $361 million. This estimate does not include allowance for funds used during construction or reimbursable transmission costs.

The biomass project and the Glacier Hills Wind Park are key components that will position us to meet Wisconsin’s renewable portfolio standard for the year 2015. To refresh your memory, standard calls for an increase and the amount of electricity produced from renewable sources, from 5% in 2010 to 10% in 2015 at a statewide level. The standard 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.

When we complete the two large projects we have underway, we will be on target to meet the 2015 standard. I should point out, however, that we expect to deplete our bank of renewable credits, and as a result, we project the need for additional credits by the year 2017.

Finally, we are making excellent progress on the air quality control upgrade in the original coal-fired units at the Oak Creek side. These units are among the most efficient baseload units in the Midwest. 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 scrubbers and selective catalytic reduction facilities. As of today, the project is about 90% complete. Our project team is now finalizing an extensive testing protocol, which is a key step of course in the final stages of construction. And once again we are on time and on budget. We expect the new controls at Oak Creek to be completed during 2012.

Now, I would like to switch gears and briefly review where we stand on the regulatory fronts in both Wisconsin and Michigan. As you know on October 6, the Wisconsin Public Service Commission approved our creative approach to keep base rates flat for customers, as the economy continues to recover. We were pleased that the commission found value for customers in our proposed plan. And in this fragile economy, our customers now have certainty on the cost of electricity for the year ahead, with base rates to remain at 2011 levels through 2012.

The rate plan also authorizes us to suspend the amortization of $148 million of regulatory assets in 2012. Then the plan authorizes us to recover $148 million of carrying costs and depreciation for the air quality controls at Oak Creek and the Glacier Hills Wind Park. In addition, we have filed a fuel cost plan for the year 2012.

And finally as part of that fuel cost plan, we will provide customers with a one-time credit of $26 million. The credit stems from Wisconsin Electric settlement of spent nuclear fuel litigation with the U.S. Department of Energy. We expect an order on our fuel cost recovery plan in January 2012. It’s also important to note that we have the authority to file a full rate case next year for new rates to be effective in January of 2013.

Turning now to our Michigan operations, you will recall that earlier this year we filed a request with the Michigan Public Service Commission for a rate increase of $17.5 million annually. We are seeking to recover from Michigan customers their pro rata share of renewable generation, environmental controls, and cost associated with Unit 2 of Oak Creek.

As provided for under our Michigan law, we plan to self implement $7.7 million of our request in January of 2012 and that would represent a 4.4% rate increase. If the Commission accepts our proposal that amount would be partially offset by the Michigan portion of the DOE settlement. So, the net result would be an interim rate increase for customers of 2.8%. We expect the Michigan Commission to rule on the entire request by July of 2012.

On another important topic, the Environmental Protection Agency issued on August 8 its final Cross-State Air Pollution Rule commonly known as CSAPR. Earlier this month, the EPA announced a plan to revise CSAPR with a provisional hearing set for tomorrow actually October 28 in Washington. We believe that our additional cost to comply with CSAPR will be far less than many of our peers, because of the investments we have made in Air Quality Control technology. Investments that are complete or nearing completion at our older coal-fired units and because of the new state-of-the-art generation we’ve built through our Power the Future plan. However, we do have some concerns about CSAPR as it relates to the upper peninsula of Michigan. Based on our analysis, we believe that the EPA has failed to allocate sufficient allowances to support minimum levels of generation at our Presque Isle Power Plant.

Operations at the Presque Isle facility are necessary to maintain system reliability in what has historically been a very constrained region. We have filed petitions with both the EPA and the Washington DC Circuit Court of Appeals supporting our position. Our preferred approach is simply to have one assurance area for our integrated combined system. EPA’s current approach is to have separate and distinct assurance areas for Wisconsin and for Michigan.

Finally, I’d like to address our share repurchase plan and our dividend policy. To maintain appropriate financial strength and provide value to our stockholders, we have implemented a share repurchase plan scheduled to run through the end of 2013 that calls for us to buyback up to $300 million of Wisconsin Energy common stock through open market purchases or privately negotiated transactions.

Through today, we have repurchased approximately 2.5 million shares at an average price of $30.32. Earlier this year, we also announced that our Board of Directors approved a dividend policy that calls for a pay-out ratio of 60% of earnings in the year 2015. Trending toward a 60% pay-out ratio will allow us to be more competitive with the dividend policies of other regulated utilities across the industry. And as a first step in implementing our new dividend policy, I am pleased to report that management will recommend to the Board a dividend increase in the range of 13% to 15% for the year 2012.

In summary, with three quarters of this year already in the books, the company continues to perform at a high level and our Power the Future investments are providing tangible benefits for our customers and our stockholders.

And now with more details on the third quarter and our outlook for the remainder of 2011, here is our Chief Financial Officer, Rick Kuester. Rick?

Rick Kuester

Thank you, Gale. As Gale mentioned earlier, our 2011 third quarter earnings from continuing operations were $0.55 a share. The results were better than our plan because of hotter than normal summer weather, a slightly better than expected growth in commercial sales and a continued emphasis on cost management. I will focus my comments on operating income from continuing operations by segment and then touch on other income statement items. I will also discuss year-to-date cash flows and earnings guidance for the full year.

Our consolidated operating income in the third quarter of 2011 was $224 million as compared to $203 million in last year's third quarter, an increase of $21 million. We clearly benefited from the second expansion unit at Oak Creek. Operating income in our Utility Energy segment totaled $136 million, which is up $2 million from the prior year. When we look at our electric margins, we see a $2 million improvement.

When we breakdown the components of our electric margin, we see that weather had a negative impact of $9 million in 2011. While this summer was significantly hotter than normal, it was not as hot as the prior year. We estimate that weather helped our margins this quarter by approximately $21 million.

However, we estimate that last year’s hot summer helped our margins about $30 million. Offsetting this impact, was a stronger than expected growth in electric sales to our commercial sector and an increase in electric demand in our industrial segment. We estimate that these two items helped our margins by approximately $10 million as compared to the third quarter of 2010.

When you look at the rest of the detail of our utility operating income, you see several small items that net to a positive impact of approximately $1 million. Our operating income in the non-utility energy segment, which includes repower came in as expected and was consistent with prior quarters. We saw higher operating income of $21 million that was driven by the commercial operation of Unit 2 at Oak Creek. Unit 2 achieved commercial operation in January of this year, so we did not have any earnings associated with Unit 2 in the prior years.

Taking the changes for these two segments together, along with corporate charges and other miscellaneous items, you arrived with a $21 million increase in operating income for the third quarter of 2011. During the third quarter of 2011, earnings from our investment in American Transmission Company totaled nearly $16 million. Other income increased by $6 million, because of higher allowance for funds used during construction, or AFUDC on our utility construction projects, primarily to air quality control system for the older Oak Creek units and the Glacier Hills wind park. AFUDC of course allows us to earn a return on these approved utility projects during construction.

Our 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 Unit II. In addition, once Unit II achieved commercial operations, we no longer capitalized interest on the construction work in progress.

While we saw increased interest expense at We Power level, our holding company interest expense declined as we retired $450 million of 6.5% long-term debt on April the 1st of this year. In addition, we were able take advantage of the low interest rate environment in September when our Wisconsin Electric subsidiary issued 10-year bonds with a coupon rate below 3%.

Consolidated income tax expense increased by approximately $6 million because of higher pre-tax earnings, offset by slightly lower effective tax rate. For the year, we expect our effective tax rate to be between 34% and 35%. Combining all of these items brings you to $130 million of net income from continuing operations for the third quarter of 2011 or earnings of $0.55 per share.

During the first nine months of 2011, we generated $828 million of cash from operations on a GAAP basis, which is up $174 million from the same period in 2010. On an adjusted basis, our cash from operation increased by $5 million. The adjustments relate to how GAAP treats changes in restricted cash as an investing activity while we look at this as an operating item. Our strong cash flows were driven by higher net income and higher non-cash charges related to depreciation and deferred income tax benefits as a result of bonus depreciation.

Our 2011 operating cash flows were reduced by $257 million because of contributions to our qualified benefit plans. We made a $122 million contribution to our benefit plans in January and another $135 million contribution in September. No such contributions were made in 2010.

Our total capital expenditures were approximately $612 million in the first nine months of 2011 and we are forecasting annual capital expenditures this year of approximately of $900 million, which is below our plan of $950 million. The reduction is primarily related to the timing of expenditures on the biomass project given a later start date than originally planned.

The majority of our capital expenditures are in the utility business, and the largest projects are the air quality control system on the original Oak Creek units and the Glacier Hills wind park. We also paid a $182 million in common dividends for the first 9 months of 2011, which was a 30% increase over the same period last year. On a GAAP basis our debt-to-cap at the end of the third quarter was 56.5% and we were at 53.7% on an adjusted basis.

These ratios are slight 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 may see a slight uptick in these ratios by the end of the year as we fulfill our capital budget commitment and repurchase shares.

Consistent with our past practice we are using cash to satisfy any shares required for a 401(k) plan options and other programs. Going forward we do not expect to issue any shares, any additional shares. As we discussed in the past our Board of Directors authorized a share repurchase program that allows us to repurchase up to $300 million of our common stock through 2013.

As Gale noted through today we have repurchased approximately $2.5 million common shares at an average price of $30.32 a share. Year-to-date, our weather normalized retail sales have grown by 1.2% compared to 2010. Excluding sales to our largest customer, the iron ore mines, year-to-date normalized sales increased by 0.6% compared to 2010. These results excluding the iron ore mines are about 0.5% better than our original forecast due to modest economic recovery and delaying some customer owned generation projects.

I will now discuss our earnings guidance. We are raising our guidance for 2011 from a range of a $2.10 to $2.14 a share to a revised range of $2.13 to $2.16 a share from continuing operations. We’re comfortable raising the range because of our strong results for the first nine months of the year, which were driven by cold winter weather, hot summer weather, improved electric sales and effective cost controls.

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

Gale Klappa

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

Question-and-Answer Session

Operator

Now, we would like to take your questions. (Operator Instructions) Your first question comes from the line of Greg Gordon with ISI Group.

Gale Klappa

Hey, Greg, how about those Jets?

Greg Gordon – ISI Group

Hi, we had a good game going in the bye week. So I’m hopefully maybe we’ll get that Green Bay Jets matchup this year that we almost got last year. So anyway listen, your shareholders are sort of ecstatic that you’ve decided to increase the trajectory of the dividend come next year from your prior guidance of – I think it was 8% – 8% to 9% to the level you’ve just articulated. Can you talk through what is going on in terms of the cash flow profile of the Company that and the credit quality of company that gave your board comfort that that was a rational move and can you talk about whether you think there is more upside in your payout ratio relative to the industry average, or if you think you are getting close to the point of equilibrium?

Gale Klappa

Very good question, Greg. Let me first back up and talk about the policy that our board has adopted. As you will recall, our payout ratio because we had such a very solid use for our cash generation in investing in the Power the Future units, our payout ratio among utilities that do pay a dividend, is and remains one of the lowest payout ratios in the industry.

Clearly now, as Power the Future is behind us, we want to become more competitive with our peers in terms of the dividend payout ratio. So, as we looked at our earnings profile and our cash generation over the next five years in our analysis, we believe we could afford, while maintaining very solid credit ratings. We could afford to move to a roughly 60% payout ratio and trend toward that 60% payout ratio by the year 2015.

In our analysis, we said that that would support roughly an 8% to 9% annual dividend increase every year between now and 2015. Clearly, our cash generation is better this year than we projected, as you saw in Rick’s numbers on our debt-to-total cap, we continue to improve, and it was pretty clear to us that we could afford to move a little quicker in implementing that policy. So the policy remains same right now, of moving toward a 60% and trending toward a 60% payout ratio in 2015, is just we can move quicker with the strength of the underlying cash flows and the strength of the underlying earnings. And so, we will recommend to the board a 13% to 15% dividend increase for 2012, and then beyond that, we still believe we can support a roughly 8% annual dividend increase through 2015. I hope that responds to your question, Greg.

Greg Gordon – ISI Group

That’s crystal clear. Can I ask on a separate subject, are you – now that you’ve got the regulatory deal in Wisconsin, do you feel that you are on track – do you feel that you are on track to get the costs out of the Company that you need to meet your end of the bargain and still earn at the level of return that you are earning into 2012?

Gale Klappa

A very good question Greg. We had mentioned in previous calls and in one-on-one conversations that we would have to reduce O&M expenses in many parts of the business next year to basically come close to earning our allowed rate of return at and still have flat base rates for our customers, and yes we’ve worked diligently to put those O&M plans in place and I think we are on track to deliver our end of the bargain.

Greg Gordon – ISI Group

Great, great, but with weather having been so strong this year, are there other offsetting drivers that are going to help you get to that return because that’s clearly going to be a headwind?

Gale Klappa

Well, there are a couple of offsetting drivers; one of course is, we had a very good handle on how much O&M we were going to have to reduce and we are putting and finalizing the plans to do so. Then the second of course is with the shape of the plan that we put in place and we were basically going to get recovery on the $1.3 billion of new utility investment that will be coming into service next year. So, those two drivers I think are very important drivers to us achieving close to our allowed rate of return.

Greg Gordon – ISI Group

Okay, thanks Gale.

Gale Klappa

You’re welcome, Greg. Take care.

Operator

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

Gale Klappa

Jim, how are you doing?

Jim Von Riesemann – UBS

I’m great. How are you?

Gale Klappa

Hanging in there, we’re doing all right.

Jim Von Riesemann – UBS

Hear Rogers is the real deal.

Gale Klappa

He is the real deal. I think actually, Jim he is the most intelligent quarter back in the NFL bargain, you see really is the real deal.

Jim Von Riesemann – UBS

Well, couple of questions for you, the first one is on CapEx, your disclosures throughout the year, you talked about declining CapEx trends through 2013. But as you look out towards say 2014 and beyond what do you see is the general trend there.

Gale Klappa

Well, we have – as you know we’ve made public I believe our specific capital expenditure program for ‘12 and I think for ‘13 as well. You can see in the public material are specific ‘12 and ’13. For ’14 and ’15, obviously we are still putting the final details in place and working through our specific capital spend plan for ’14 and ’15, but we have said that ’11 through ’15 is about $3.4 billion capital spending at our company.

Jim Von Riesemann – UBS

So basically there is no change and we can expect may be 725 and around that figure for ’14 and ’15 correct.

Gale Klappa

Well I’ll let you do the math.

Jim Von Riesemann – UBS

Okay.

Gale Klappa

But I think you are pretty well right on.

Jim Von Riesemann – UBS

Okay, second question that was a follow-up to Greg’s question can you talk a little bit more about your philosophy on how you think about your cash reinvestment. So if you would could you frame your response, how you think about rate based investments, dividends and buybacks and what makes you buyback stocks and say two times book value versus redeploying is elsewhere.

Gale Klappa

Very good question, Jim and we look at it really very simply and that is what is the best after tax return for our shareholders. What is the best use of our cash? And the answer to that is what provides the best after tax return for our shareholders. So clearly the number one priority would be to invest in solid utility projects where there is a need and clearly we cannot, should not, and will not propose a utility project that’s not needed for reliability or for customer growth or for safety and regulation and continued safe operation of the system.

But as you can see we have about $3.4 billion of those kinds of utility projects on the horizon between 2011 and 2015. So number one use of the cash is to continue to be the most reliable utility in the country. Second then after that is asking the same question, what is the best after tax return for our shareholders, within the parameters of maintaining our credit ratings. And we simply drive our decisions off of that question.

Right now, if the share price that we’ve been able to buy back share so far, Rick mentioned $30.32 a share on average. That still provides a better after tax return then paying a premium to lower our debt levels. So, we continue to look for appropriate utility projects. As you know, we have a list of other projects that we have on the horizon that we're looking at. Some of them would be outside the utility for example, if the state decided to try to put up for sale some of the state owned power plants, we would view that as a potential solid utility investment perhaps outside the rate base. But in general terms to Jim kind of how we look at the business and how we try to deploy the cash.

Jim Von Riesemann – UBS

Great, thanks.

Gale Klappa

You’re welcome.

Operator

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

Michael Lapides – Goldman Sachs

Hey guys, congrats on the quarter and the dividend.

Gale Klappa

Thank you. How you doing, Mike?

Michael Lapides – Goldman Sachs

I’m okay. Can you, Rick – can you walk us through the various items from the regulatory portion of this call, increases and decreases in the line items impacted for next year? I am not asking for guidance, you talked through a number of regulatory moving parts, the amortization suspension, that type of stuff. The Michigan potential rate increase, can you just walk us through which line items get impacted by each of those items and just kind of rehash a little bit what those items were?

Rick Kuester

Yeah, we’ll give it a shot.

Gale Klappa

Give a shot, Mike. I think we will ask Steve Dickson our Controller to take the first shot at it here.

Steve Dickson

Mike, as we talk about the $148 million with the state of Wisconsin, the way that I look at that is if you just look at our income statement whatever you forecast for 2011 and use that as a base. The first thing that will happen is, within our O&M, there is a $148 million of amortization that will stop. So, everything else being equal, our O&M should be $148 million better. In addition, right now, we are accruing AFUDC on the projects, and once those projects go into service, the AFUDC will stop. So, those are two items that will stop – that will be reduced as compared to our forecast for 2011.

Then what we will have when the plans go into service, we will have additional depreciation on those units. And so our depreciation costs will go up. So, our O&M should go down. Our depreciation will go up. Our AFUDC which is in other income will go down. Net, net, net, if everything else is equal our net income should be up and in effect that reflects the recovery of the plants that will go into service. And a key point here is that revenues everything else being equal will not change. So, our customers will not pay any additional amounts so revenues are flat. Does that make sense?

Michael Lapides – Goldman Sachs

I think that makes sense. How should we think about how much the AFUDC change will be because it has become hard to disaggregate the AFUDC that’s being tied to things like Glacier Hills or being tied to things like Domtar versus what South Oak Creek?

Gale Klappa

Go ahead, Steve.

Steve Dickson

I would say this year if you look at our AFUDC, the two big items relate to the air quality control system and Glacier Hills. Glacier Hills, I think Gale said should be in at the very beginning of the year, so we should have no AFUDC on that and then the air quality will be going in early 2012. So, I can’t give you an exact amount on this, but there will be a significant reduction in AFUDC. And then on top of that we will have additional AFUDC on Domtar.

Rick Kuester

But Domtar started Michael at the middle of the year. I think originally we had planned on spending about $100 million. We ended up, I think, spending closer to or expect to spending closer to $60 million this year. So, the effect on AFUDC from Domtar is relatively minor compared to the other two projects.

Gale Klappa

The guys are right, Michael, all but about $50 million or $60 million in that range of the AFUDC you are seeing on the income statement is attributable to projects that would be going into service next year.

Michael Lapides – Goldman Sachs

So, the best way to think about revenues – the only revenue change besides load growth and besides changes in fuel costs or purchased power costs is Michigan. And then O&M declined by 148, higher D&A as the assets go into service, lower AFUDC by significant amount as Glacier Hills and South Oak Creek go into service?

Gale Klappa

You are right and there is one other category of revenue change. It is modest, but that will be from our wholesale business, that’s the FERC regulated business.

Michael Lapides – Goldman Sachs

What is it you are expecting out of there? I mean is that just a change due to pricing change or is that a contract that is new that didn’t exist?

Rick Kuester

No, no.

Gale Klappa

It’s just formula rates, Michael.

Michael Lapides – Goldman Sachs

Got it.

Rick Kuester

Under contracts now.

Gale Klappa

So, it’s an annual formula rate change.

Michael Lapides – Goldman Sachs

And have you guys quantified that?

Gale Klappa

Yeah. But it was not significant we just didn’t want you to completely ignore it.

Michael Lapides – Goldman Sachs

And last question can you – and I apologize I may have missed it because I was hoping on a little bit late, the amount of the Michigan rate increase?

Gale Klappa

Sure. Let me get back to that specific number for you. The interim self implement that we would propose to self implement in January is $7.7 million on an annual basis, the total rate increased filing is $17.5 million.

Michael Lapides – Goldman Sachs

And when would you I guess the question if you do the interim January when do you get the remainder portion?

Gale Klappa

Well, by law, the Michigan Commission is obliged to make a decision in July early July of 2012.

Michael Lapides – Goldman Sachs

Got it. Got it. Okay. Guys, thank you. Congratulations again. Much appreciated.

Gale Klappa

You’re more than welcome Michael. See you soon.

Michael Lapides – Goldman Sachs

See you in a couple of weeks.

Operator

Your next question comes from the line of Paul Ridzon with KeyBanc.

Paul Ridzon – KeyBanc

I am okay. Yourself?

Gale Klappa

You are little echoing Paul.

Paul Ridzon – KeyBanc

Yeah, I am on cell phone sorry. What are you targeting for O&M reductions ‘12 versus ‘11?

Gale Klappa

I am sorry, did you say what are we planning for O&M reductions ‘12 versus ’11?

Paul Ridzon – KeyBanc

Yes.

Gale Klappa

There will be the adjustment that Steve just talked about when the rate plan goes into effect. But in terms of strict operational O&M, we probably have to pull more than $20 million of O&M costs out of the company next year compared to this year’s O&M spend in order to reach close to our ROE target.

Paul Ridzon – KeyBanc

Where is this spend getting pulled out of – I mean you’ve done a fantastic job year-to-date?

Gale Klappa

We really have a really solid management team focused on effective cost controls and it is 100 little things across virtually every aspect of the company. There is now one big item. We are just being more productive and more effective in our spending and literally it’s across every area of the company.

Paul Ridzon – KeyBanc

Okay, good enough. What on an absolute relative basis was the swing in fuel recoveries?

Gale Klappa

Steve, for the third quarter was pretty – not much change was there.

Steve Dickson

You are absolutely right. Absolutely flat this year third quarter compared to third quarter in 2010.

Paul Ridzon – KeyBanc

And what about on an absolute basis?

Gale Klappa

Under recovery itself for Q3?

Steve Dickson

Yeah, it was 34, just right at $34 million both quarters.

Paul Ridzon – KeyBanc

$31 million over or under recovery?

Steve Dickson

$34 million under recovery.

Paul Ridzon – KeyBanc

Okay. And given you are more optimistic about the dividend hike, any chance that you could have a similar thought around the share repurchase?

Gale Klappa

We would accelerate the share repurchase or increase it.

Paul Ridzon – KeyBanc

Authorize it?

Gale Klappa

No at the moment, we will stick with up to $300 million through 2013.

Paul Ridzon - KeyBanc

Okay, thank you very much.

Gale Klappa

Welcome Paul.

Operator

Your next question comes from the line of Travis Miller with Morningstar.

Gale Klappa

Good afternoon, Travis. How are you today?

Travis Miller – Morningstar

Good afternoon. Good. Similar weather down here in Chicago, very beautiful., I am sure you are enjoying that as well, but quick question on the preferreds. Given the financing moves that you have made, I know it’s a small amount, but what’s the chance that you would address those preferreds and what factors are you thinking about, when you think about those preferred stock issues?

Gale Klappa

You are not talking about our hybrids, but you are talking about the T90 amount of preferreds that remain outstanding?

Travis Miller – Morningstar

Yeah, down at the utility right.

Gale Klappa

Of the utility. At the moment, we don’t have any plan to try to retire or recall those at all.

Travis Miller – Morningstar

Is that because of the regulatory structure or is there something else that you would consider?

Gale Klappa

Because of the effectiveness and we will let Pat Keyes answer this, but my view would be it’s because – it’s a very cost effective financing for us. Pat?

Pat Keyes

Yeah, because of the age in which we issued those, we have a tax advantage for those preferreds that every – when we look at it, it’s just no cost effective for us to take them out.

Travis Miller – Morningstar

Even given the rate that you issued new data?

Pat Keyes

Yes, given the rate. Correct.

Travis Miller – Morningstar

Okay.

Rick Kuester

Travis, we look at what is the best use of funds, as Gale talked earlier. And as you know, we took out some holding company debt earlier this year and we continue to evaluate on an ongoing basis, how to optimize the capital structure. We view the preferreds as cost effective financing for us.

Travis Miller – Morningstar

Okay, great. Thanks a lot.

Gale Klappa

Good question. Thank you Travis.

Operator

Your next question comes from the line of Andy Levi, Caris.

Andy Levi – Caris

How you are doing Andy?

Andy Levi

Nice doing. Congratulations on your regulatory victory.

Gale Klappa

I wouldn’t call it a victory, I would call it that sense prevailed. I am not sense prevailed.

Andy Levi – Caris

Well, I was surprised. I thought they were going to give you a harder time. So congratulations on that, you did a great job. Couple of very, very quick questions. When do you give 2012 guidance, would that be on the first quarter call or before that?

Gale Klappa

Andy, for you January 2013, no that’s not. It will be on our year end call in February of 2012.

Andy Levi – Caris

Don’t give me a hard time here, I work on Wall Street not the kind of CA I used to be, okay.

Gale Klappa

Yeah, you are already having a hard enough time. You have been out in The Park lately?

Andy Levi – Caris

No, but probably will be panhandling there soon. The $2.13 to $2.16, how much of that do we back out to get to our base for 2011?

Gale Klappa

The base for – you are talking about our…

Andy Levi – Caris

Well, you have guided from $2.13 to $2.16, but is that kind of a base that we grow off of or…

Gale Klappa

No, but we have said as you know, that we believe we will be able to grow at about 5% average annual EPS growth through 2015, and the base as Rick and I have emphasized, is really the midpoint of our July guidance, which was $2.12 a share.

Andy Levi – Caris

That’s right, got it. Okay, thank you on that. And last but not least, what are you guys thinking as far as M&A? Is there anything that you can shed the light on there and whether you have any thoughts as far as, whether the State of Wisconsin needed to consolidate, whether your region, whether you guys are thinking – you are going alone here, not going alone? Any type of thoughts you can share, I know it’s a tough question, but any types of thoughts?

Gale Klappa

I appreciate the question Andy. Obviously we are open and continue to look at what might make sense in terms of mergers, acquisitions, consolidation. We have very specific criteria that we believe need to be applied to any particular potential situation and that is that we would want any acquisition that we would make to be a credit neutral accretive to earnings per share at least by the end of the first year, and have a long-term growth rate at least equal to what we believe our long-term growth rate looks like.

So those are the criteria that we apply and frankly, if – I think those criteria are very important, because if you don’t adhere to those criteria, my own view is you are not creating shareholder value. So Rick and Al and I are very related to those criteria. And then beyond that there has to be a willing seller and a willing buyer. So, we are certainly not for our growth plans and for our continuing effort to deliver shareholder value. We are not counting on any potential merger or acquisition.

Andy Levi – Caris

Great, thank you guys.

Gale Klappa

Okay, hang in there, Andy.

Operator

Your next question comes from the line of Jay Dobson with Wunderlich Securities.

Gale Klappa

Hi, Jay, how are you today?

Jay Dobson – Wunderlich Securities

Great, Gale, how are you?

Gale Klappa

Doing well.

Jay Dobson – Wunderlich Securities

A quick question on Domtar you indicated that the CapEx this year was coming in about $50 million and I was wondering should we shift that to ’12 or would that be sort of spread between ’12 and ‘13 until commercial operation.

Rick Kuester

I think it will be mostly in ‘12 Jay, this is Rick.

Jay Dobson – Wunderlich Securities

Oh, great, hey Rick, how are you?

Rick Kuester

Good, good.

Jay Dobson – Wunderlich Securities

Perfect. And then on industrial sales, Gale, I hear what you are saying and sort of weak recovery, but when I looked at some of the sequential numbers 1.8% growth in the second quarter compared with 0.3% in the third quarter. I’m just wondering if you can give us a little better sense of sort of exactly what you are seeing now and then what you expect to see in 2012, again specifically on the large commercial and industrial segment of your sales?

Gale Klappa

I’d be happy to Jay, a very good question. First of all, I would caution you a little bit about looking quarter-to-quarter sequentially because some of our larger customers like for example, the iron ore mines. They might have planned outages for their own maintenance at different times in the year and I know for example, Rick and I were talking about this the other day.

Our September, individual month of September industrial sales were impacted by the fact that the mines took a planned outage earlier this year than they did last year. So, I think it's more instructive to look at a bit longer period of time, like a half or three quarters. When you look at that, industrial sales – we were I think appropriately cautious about our projections for growth in industrial sales, but we’re not seeing any substantial weakening and the sectors that I mentioned in the prepared script, iron ore mining, specialty steel and metal fabrication, production of industrial machinery, paper and printing, they are continuing to show some growth.

Then in addition to that, I’ve been very encouraged. We’ve had a number of expansions in relocation announcements in the Milwaukee region in the last few weeks and I know from personal involvement there are more to come. So, we see some traction in terms of the industrial sector of the economy here. Again, nothing robust but steady and I think cautiously optimistic for continued modest growth.

Jay Dobson – Wunderlich Securities

Gotcha. So, if we were looking out to ‘12 and appreciate you haven’t given guidance yet, but if we are looking for a roadmap for that, wouldn’t be using something like that number, I know your 0.8% year-to-date if we want to look it at the way you are. Would that be sort of a good guidepost to begin thinking about ‘12 again just for the large industrial segment of your sales?

Gale Klappa

It’s probably a decent starting point. And again we are refining all of that and we will take our full blown and fully developed plan to the board in early December, but that’s a good starting point, Jay.

Jay Dobson – Wunderlich Securities

That’s great. Hey, thanks very much for the clarity. Look forward to seeing you in Florida.

Gale Klappa

Same here. Take care.

Operator

Your next question comes from the line of Carl Seligson with Utility Financial.

Gale Klappa

Hi Carl, long time no talk too.

Carl Seligson – Utility Financial

Hey, Gale. That’s right. How you are doing?

Gale Klappa

Doing well. How about you Carl?

Carl Seligson – Utility Financial

Very well, thank you. I don’t know what you call this kind of a question, but it’s not a quick one. As you do all of your calculations, administrations over cutting O&M and where you are putting the money, how you are spending it, etcetera, etcetera. What are you thinking about in terms of rate effect on your customers? You are adding more high-priced, because I believe renewables are higher-priced than baseloads more higher price generation. And you are doing a lot of good things. And I suppose all three of you guys have a little black book like you used to have when you were in Atlanta, but it tells you all the right answers. Look at me and tell me, what are you projecting as far as annual increases for your customers? Percentage wise?

Gale Klappa

Rick had a different black book than I do.

Carl Seligson – Utility Financial

That’s right he did. I am sorry.

Gale Klappa

Well, I think actually there is good news here on the horizon for our customers. We have spent Carl, since 2003, $7.8 billion on upgrading the energy infrastructure of this region. It was badly needed. And today, we have an infrastructure in place that can actually support economic growth in this state and this region. So, that’s for starters and that has driven that $7.8 billion of spend has driven about 4% average annual rate increases for our customers in base rates for getting fuel.

Carl Seligson – Utility Financial

Which is not much?

Gale Klappa

No, but – it has a cumulative impact, but you are right. Overall, 4% average annual rate increase is not, I mean, given the spend that we have had and given the efficiency of what we built for our customers, I think it’s going to be huge value down the road, but with much of that spending behind us and even with $3.4 billion ahead of us, I think you are going to see a definite roll down in the size of the rate increases that we are going to be asking for, and I would hope we could do inflation or less in terms of after this next rate case, where we have to get $1.3 billion of new plant that will be coming into service recognized in rates. After that, I think you will see a substantially less in terms of average annual rate request from us. Rick, your thought?

Rick Kuester

I just add one other thing Gale is, I think the only thing that’s important – part of that $7.8 billion investment was significant investment in air quality control systems. And as we look at our position in the industry, we believe that we got a lot of that spending behind us. As we look forward while their impacts are on EPA rules, such as the CSAPR Rules or the 316(b) rules, we believe that our spending is really going to be relatively modest compared to many in the industry. So, I think cost relative to others, other jurisdictions, I think we are in pretty good shape.

Gale Klappa

Yeah, Rick is making a great point, Carl. You have seen estimates across the industry of the billions and billions of dollars literally that companies are projecting they are going to have to spend to meet these new EPA regulations. Our estimate is less than $100 million and it’s because we are positioned well. So, the trajectory of rate increases by the other utilities, particularly in the Eastern U.S. is going to be far greater than ours.

Rick Kuester

Well, that’s a great point for you, but it’s not necessarily a point for the public service commission. The commissions around the country have been cutting ROEs right and left as I am sure you are well aware. The most recent quarter was reported by RRA, the average ROE granted in the proceeding there was 10.2 and that’s coming down. It’s not going up and there has been some good work done by some of my colleagues in terms of the effect that, that might have and what does it mean as you get half a percentage point less and you’re allowed ROE than you did the last time around and that kind of thing. So, you’re going to have to watch it obviously and I’m sure you’re because you grow up with watching details very closely and I’m sure you're maintaining that even though you moved home.

Gale Klappa

Amen. And by the way, when Allen wanted to borrow a black book, he borrowed Rick’s number.

Carl Seligson – Utility Financial

That’s a great line. I remember that. I’ll see you in Florida.

Operator

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

Gale Klappa

Dan, nothing goofy has been going on in Madison lately. You must be out of town.

Dan Jenkins – State of Wisconsin

What do you mean, we’ve had occupy Madison here for nearly a year. They’re just getting started in New York.

Gale Klappa

Goodness, well Dan, we’re going to see you in Florida.

Dan Jenkins – State of Wisconsin

Yeah, I’ll be down there.

Gale Klappa

Okay, sounds good, what can we do for you today.

Dan Jenkins – State of Wisconsin

I’m just curious if you could talk a little bit about given your higher dividend guidance and your share buybacks and your CapEx plans. I know you don’t have any maturities coming in 2012 but how will all of that affect financing plans in 2012?

Gale Klappa

Pat, do you want to talk about our financing. We don’t have any real maturities in ‘12.

Pat Keyes

Nothing is coming in I mean, we are working on our plans Dan still for next year. We will put something out and next time around we’ll have – set as tone as one can but yeah, you’re right. We don’t have anything urgent coming up next year. That’s going to force us down a certain path.

Dan Jenkins – State of Wisconsin

Okay, then I was just curious on the sales number, the retail sales are marginally down but total sales were up 3% in the quarter. It looks like the sales for resale doubled in terms of revenue besides just opportunity sales or is there more going on there in wholesale or sales for resale?

Gale Klappa

Allen, do you want to cover that?

Rick Kuester

Well, I want to add while Allen is looking at something. We’ve got a second Oak Creek unit. So we've got more base load capacity available to sale in market, Dan.

Gale Klappa

Steve, has got a particular line item he is looking at?

Steve Dickson

Just some thoughts what Rick said sales for resale more than doubled and again we have the capacity. Here was the hot summer, so we have to sell but the margin on that is very, very low.

Gale Klappa

Margin is low but it does speak to the efficiency of those units.

Dan Jenkins – State of Wisconsin

Is that something we could anticipate going forward?

Gale Klappa

Now, lot of it I think – well to some degree yes because we have this capacity in service but a lot of that was driven by a very hot summer.

Rick Kuester

Also all of this really goes to offset cost for customers.

Gale Klappa

Yeah, and Dan, just to reinforce what Rick is saying because those Oak Creek units are dedicated to our retail customer base, if we have any sales from those Oak Creek units to customers, other than our retail customers, the margin offsets our fuel costs for retail customers.

Dan Jenkins – State of Wisconsin

Then just on, when we think of the revenues going forward, you mentioned the FERC rate order, where would that tend to show up, would that show up in wholesalers or would that show up in other retail?

Gale Klappa

I believe that’s wholesale. Steve?

Steve Dickson

That’s correct. Wholesale customers with FERC.

Gale Klappa

Yeah, so they would be in the wholesale line.

Dan Jenkins – State of Wisconsin

Okay, that’s all I had. Thanks.

Gale Klappa

You’re welcome, see you in Florida.

Dan Jenkins – State of Wisconsin

Okay.

Gale Klappa

Bring your sun tan lotion.

Dan Jenkins – State of Wisconsin

Or just a big floppy hat.

Gale Klappa

Either way, Dan.

Dan Jenkins – State of Wisconsin

Okay.

Gale Klappa

Take care.

Operator

Your next question comes from the line of (Ted Hine) with Point State Capital.

Gale Klappa

It’s good to hear from you. How are you, Ted?

Ted Hine – Point State Capital

Doing well, how are you?

Gale Klappa

We’re doing fine.

Ted Hine – Point State Capital

Great. Gale, I wanted to see if I could just ask, try to reconcile some comments you have made. The first was, I think in question that Greg asked. I believe you said, that you expected to have to grow the dividend at 8% to 9% off of the 11 base through 15 to get to a 60% payout ratio.

Gale Klappa

That was our original, yes, when we asked the board to adopt our dividend policy. The new dividend policy that we’ve announced, which is trending toward a 60% payout ratio by and in 2015. We said that based on our analysis that would support average annual dividend increases over the period from 8% to 9%.

Ted Hine – Point State Capital

Okay. If I do that math, if I grow $1.04 at 8.5% and through 15 and then apply a 60% payout ratio, that implies the earnings power of around $2.40. Then in the second question I think from Andy, you mentioned that your EPS was more of a 5% growth off of 2.12?

Gale Klappa

That is correct.

Ted Hine – Point State Capital

Which would get you more to like 2.60? So I guess I am trying to figure is 2015, 2.60 or 2.40 or – I am just trying to reconcile those two?

Gale Klappa

I appreciate the question Ted. First of all, we are not prepared today to give you 2015 guidance. But I think we can give you some insight, by just kind of recasting our situation. What we have said is, we would propose the Board for 2012 a dividend increase in the range of 13% to 15%, and then, we still believe given our analysis of our financial condition and our cash generation, that we could grow the dividend beyond that by about 8% a year for ’13,’14 and ‘15

Ted Hine – Point State Capital

Okay.

Gale Klappa

Does that help Ted?

Ted Hine – Point State Capital

That’s helpful. And then I guess just to clarify what you said to Andy, you did say that you expect to have around 5%-ish growth off of the $2.12 base.

Gale Klappa

That is correct.

Ted Hine – Point State Capital

Okay.

Gale Klappa

That’s what Rick keeps telling me. No, that’s our plan.

Ted Hine – Point State Capital

Great, thanks a lot. See you guys down in Florida.

Gale Klappa

Look forward to you, Ted.

Ted Hine – Point State Capital

Thank you, bye-bye.

Operator

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

Gale Klappa

Greetings, Paul

Paul Patterson – Glenrock Associates

How are you?

Gale Klappa

Fine. I’m still looking for element reflect look here.

Paul Patterson – Glenrock Associates

There might be lot of money in that. What I wanted to ask you…

Gale Klappa

Yeah, never mind.

Paul Patterson – Glenrock Associates

There are a bunch of transmission projects that are obviously happening in Wisconsin and one of them – the Prairie to Zion, I forget the actual name of it, but there is one that goes from I think Southeastern Wisconsin into Illinois…

Gale Klappa

Yeah, it’s Pleasant Prairie to Zion.

Paul Patterson – Glenrock Associates

Okay. And I was just wondering with – I know all this stuff is sort of interconnected, if you guys have any sense as to what we might be seeing in terms of basis differential or opportunities for off-system sales or what have you into Illinois or potential price impacts you might see, you know, all things being equal between the two areas.

Gale Klappa

We are going to let Allen take a shot at that.

Allen Leverett

Yeah, I don’t have any forecast for you, Paul specially; if you put that 345 KV segment in, and it’s a relatively short transmission segment, I certainly don’t have any you know specific forecast of what that would do to basis differential. It is forecasted to go into service I believe in 2014.

Paul Patterson – Glenrock Associates

Yeah, 2013, 2014, I think, yeah.

Allen Leverett

Yeah, so that sort of timeframe, but I do think based on the forecast that I have seen that we would see, you know, it always depends on what actual market conditions are but the long run models would indicate that there would be a pretty quick payback for our customers in terms of fuel savings for the investment that’s going into that line. So, it’s a relatively modest cost. I would expect a very quick payback, but I don’t have anything that would say, okay, in terms of dollar per megawatt hour differential change, I don’t have anything of that nature, Paul.

Paul Patterson – Glenrock Associates

Okay. But just to sort of elaborate a little bit on the fuel savings for customers, could you just say in terms of – that would be basically because you would be able to sell power for – you’d have more opportunity to sell power into Illinois?

Allen Leverett

Yes, that’s right because what happens often now because of limitations in the transmission system, in effect you sort of get shut in. You can’t run the units up to where they otherwise would have been without transmission constrains, so kind of bridging back to Steve Dickson’s response to I think may be Dan’s questions – Dan Jenkin’s question. We would hope to be able to do more sales, off system sales, get a little more margin that could then go against customer fuel cost, retail customer fuel cost.

Paul Patterson – Glenrock Associates

Any sense as to the volume I guess megawatt that could show up in the Illinois areas result of what you guys – because of this line or anything else?

Allen Leverett

Paul, I really don’t have anything.

Paul Patterson – Glenrock Associates

Okay, okay, I just thought I’d ask. All my other questions have been answered. Thanks a lot guys.

Allen Leverett

Thank you.

Gale Klappa

You’re welcome.

Paul Patterson – Glenrock Associates

Okay, thanks.

Operator

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

Gale Klappa

All right, Michael.

Michael Lapides – Goldman Sachs

Hey guys, my apologies, I wanted two quick follow-ups. First of all, residential demand, what are you seeing and how much is – have you tried to aggregate or tried to break out what’s economic and what’s energy efficiency?

Gale Klappa

We try but that is more of an art than a science as you know, Michael but I will say this, we’re beginning to see two distinct patterns develop here this year. One is residential electricity use particularly in the shoulder months where it is much more convenient if you will to conserve. We’re beginning to see more conservation than one had expected in the past in those shoulder months. So residential demand for electricity in terms of kilowatt hour sales is down more than we projected it to be but the other offsetting pattern has been the stronger use in the commercial sector in offices, stores and other non-manufacturing firms. So when you put the two together, the upside in commercial and the downside in residential, they've about offset each other in terms of our forecast.

Rick Kuester

We feel since modest or very slight customer growth in the retail sector too. I think – we used to grow about 1% a year. We’re probably 0.1% something like that now.

Michael Lapides – Goldman Sachs

Okay. And your comments on small commercial are interesting, just because a lot of companies, including some of the large ones in the southeast have actually seen small commercial demand weakness. I am just curious, is there something that's impacting the Wisconsin economy, that's significantly different than some of the other regions?

Gale Klappa

That’s a really good question. We have scratched our head about the stronger than expected growth in commercial. The only thing I can point to, is that the unemployment rate in Wisconsin and in Metro Milwaukee, as of the latest data is 7.6%. And as you know, with unemployment below the national average, that differential between where we are in the national average, is probably made up of a lot of small businesses. So I think we have got a little bit more employment here in our small businesses, given the lower unemployment rate than perhaps some other regions.

Michael Lapides – Goldman Sachs

Got it. Last question, which quarter do you expect South Oak Creek online?

Gale Klappa

It will come through the – you are talking about the air quality controls?

Michael Lapides – Goldman Sachs

Yes Gale.

Gale Klappa

It will come through – it has to be in by the end of 2012. But it will be in pieces throughout the year. Rick or Allen?

Rick Kuester

The first Unit, tie in starts this year. We got a fairly major outage this year, to tie the first unit in, and then they extend this over the first half of next year. So the unit will be coming in service, I would say roughly, half would be in April, half would be in June-July.

Michael Lapides – Goldman Sachs

So if I think about the AFUDC, you take a partial – it takes a partial dip at the beginning of the year at the end of 2011, and then another dip midway through the year when the second unit comes online?

Gale Klappa

Reasonable assumption, yes.

Michael Lapides – Goldman Sachs

Okay, thanks guys. Much appreciated.

Gale Klappa

You’re welcome, Michael

Operator

Your next question comes from the line of Scott Senchak with Decade Capital.

Gale Klappa

Good afternoon, Scott, how are you today?

Scott Senchak – Decade Capital

Good, how are you guys?

Gale Klappa

We’re doing fine.

Scott Senchak – Decade Capital

Great. You have shown us a slide before with your projected ‘12 and ‘13 rate base. Given the reduction in amortization from the rate agreements, should we now assume that that 13 rate base should be about $145 million higher?

Gale Klappa

Steve?

Steve Dickson

I think the amortizations relate to the regulatory assets, unless they are factored into the rate base.

Gale Klappa

So the answer is probably not.

Scott Senchak – Decade Capital

So your earning rate base would not go higher, even though – okay. Got you. Thank you very much.

Gale Klappa

You’re welcome.

Operator

There are no further questions. Do you have any closing remarks?

Gale Klappa

That does conclude our conference call for today. Thank you again for taking part. If you have any other questions, Colleen Henderson will be available. I am told, she has her own version of the black book, at 414-221-2592. Thanks everybody. See you soon.

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