威斯康辛能源 (WEC) 2002 Q2 法說會逐字稿

Good morning, and welcome to the Wisconsin Energy conference call and webcast. 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 and involve risks and uncertainties, which is subject to change at any time. Such statements are based on management's expectations at the time they are made. In addition to these assumptions, other factors described in the company's latest form, 10-K and subsequently filed the Securities Exchange Commission, could cause actual results to differ materially from those contemplated. During the discussions, earnings per share comments will be based on diluted earnings per share unless otherwise noted.

This conference call is being recorded for rebroadcast and all participants are in a listen only mode at this time. After the presentation, the conference call will be open to questions and answers. You are welcome to follow the presentation for this call at www.wisconsinenergy.com. A replay of the presentation, both audio and visual will be available approximately two hours after the conclusion of this call. I would now like to introduce Richard A Abdoo, Chairman of the Board, President, and Chief Executive Officer of Wisconsin Energy Corporation. Please go a head Sir.

Good morning, and thank you for joining Wisconsin Energy Corporation's conference call review of our second quarter 2002 results. Let me begin by introducing the Wisconsin Energy management team with me here today, including Paul Donovan, Executive Vice President and Chief Financial Officer of WEC, Richard Grigg, President and Chief Operation Officer of our Utility segment and Executive Vice President of WEC, Jim , President and Chief Executive Officer of our manufacturing segment, Larry Salustro, Senior Vice President and General Council, Jeff West, Treasurer, and Steve , controller. All of whom will be available to respond to your questions at the conclusion of our prepared remarks.

During the call today, we will report on second quarter 2002 financial results, bring you up to date on WEC's accomplishments and challenges during the second quarter, discuss our progress on our Power the Future plan, and review our earnings outlook for 2002. As you saw in the press release this morning, Wisconsin Energy reported earnings on a GAAP basis of $0.39 per share for the second quarter of 2002, compared to earnings per share of $0.39 in last year's second quarter. However, as you can see from this slide, $0.14 of the quarter's earnings last year came from asset sales, while this year's second quarter earnings primarily reflect core business results.

As a result, Wisconsin Energy reported adjusted earnings per share of $0.37 for the second quarter of 2002 compared with adjusted earnings per share of $0.21 in the second quarter of 2001. We are very pleased with this quarter, and we think it demonstrates that our long-term strategy makes sense. We are accomplishing what we told you we would accomplish, and our model is quite different from other energy companies and the merchant or IPP power businesses. Back in September of 2000, when we announced our long-term growth strategy, Power the Future, we told you that we were going to be a very different company than we were at that moment.

We said we would pursue a strategy focused on building on our core competencies, divesting non-core assets, when implementing for the measures to improve our bottom line, and enhance shareholder value. And we have been doing it successfully. We said we were coming home, that we would make significant investments in our service territory, building new electric generation, refurbishing existing generation, and upgrading our electric and gas distribution systems. we have followed this strategic direction. Since the announcement of our new strategy nearly two years ago, we have divested about $1 billion in assets, including the sale of Wisvest-Connecticut assets, which is expected to close later this year. We also have lowered the risk profile of our existing business by essentially selling or shutting down our non-regulated generation in trading activities and by reemphasizing the building of new power plants through a long-term lease structure, which is subject to approval by the public service commission of Wisconsin.

While other companies pursue strategies outside state boundaries, or focus significant resources on businesses outside the energy industry, we are concentrating on regulatory approval for our new in-state projects. Our plan is to stay on course, to continue the asset divestitures and to focus on our core businesses and the opportunities they present. And we will continue to pursue a balanced consensus approach, in Wisconsin, to building electric generation through our Power the Future plan. Now let me update you on Power the Future, our plan to supply Wisconsin with the quality reliable and reasonably priced electric energy that the state needs to continue it's economic growth. We recently achieved a significant milestone with the signing of a memorandum of understanding, or MOU, with the customer's first coalition, Wisconsin Industrial Energy Group, Wisconsin Initiative Seeking Energy Reform, and the Citizens Utility Board. We reached agreement with these key groups, covering the interests of large and small energy users across the state, as well as municipal and cooperative utility companies, on the key financial terms for Power the Future.

The MOU covers the two proposed gas fueled plants at our Port Washington power plant site, and two of the three proposed coal fueled units at our Elm Roads site. Although there have been changes in the financial terms, since our initial proposal, developing consensus support for Power the Future continues to be critical to the final approval of these projects. This MOU removes some of the barriers to speedy approval of our applications. The financial terms of the agreement will be discussed in greater detail by Paul Donovan in a few moments. Regarding the gas fuel, the Port Washington generating station portion of our Power the Future application, we will have public hearings in the city of Port Washington in late August, and hearings in Madison at the Public Service Commission of Wisconsin in mid September. We remain cautiously optimistic that we will receive final regulatory approval for the Port Washington project before the end of this year.

This will allow us to begin construction of the first gas-fueled unit early next year, and have the power available when our customers need it in the summer of 2005. Our subsidiary WE Power, will design, build and own the new generation in Wisconsin. Now I am going to turn the presentation over to Paul Donovan, our Chief Financial Officer, who will discuss our financial results for the quarter. Paul.

Thank you Dick. As Dick mentioned, we are very pleased with our earnings in the quarter, because they are based on a strong performance of both our utility and manufacturing businesses. On a consolidated basis, the company's utility energy businesses contributed $0.42 per share, and our manufacturing businesses contributed $0.11 per share in the quarter. Both of these segments showed strong improvements from 2001. Wisconsin Energy's corporate and other costs reduced the earnings by $0.16 per share in the quarter, which compares favorably to an $0.18 per share reduction last year. As a result, adjusted earnings per share were $0.37 for the second quarter of 2002, $0.16 per share, or 76% higher than the $0.21 we earned in 2001's second quarter. If you were to adjust the 2001 results by adding back the amortization of good will, adjusted earnings per share would be $0.11, or 42% higher than last year's second quarter. Now I'd like to discuss the results we achieved in the second quarter in our utility segment.

This segment recorded revenues of $635 million dollars this quarter, up $11 million from the same period in 2001. Overall, this segment benefited from favorable weather and increased sales related to a slightly improved economy. We had the unique situation this quarter, as we experienced both extreme hot and extreme cold weather, sometimes within the same week. This benefited both our electric and our gas businesses. Our electric utility revenue increased to $467 million dollars compared with $450 million in the second quarter of last year. This reflects a 2% increase in sales volume, again due primarily to favorable weather and improved sales to our commercial and industrial customers. This $17 million increase can be attributed to a $13 million, or 8% increase in residential revenues, and a $10 million, or 4% increase in commercial and industrial sales. Partially offsetting these increases was an $8 million decline in opportunity or off system sales.

The increase in residential revenues reflects periods of very warm weather in April and June. For the quarter, cooling degree-days were up 43% over last year, and 38% over normal. Now let's take a look at our natural gas revenues. In the second quarter of 2002, our gas revenues were $163 million dollars, down $7 million when compared to last year. This reduction reflects a $17 million decline in the cost of gas sold, as a result of lower natural gas costs. Partially offsetting the decline in the trust of gas was an increase of sales volume of $10 million that resulted from the cold weather we experience in our service territory in April and May. In addition to the warm weather that we discussed earlier, we experienced periods of very cool weather during the quarter, as heating degree-days were 26% greater than last year, and 12% greater than normal. Now let's look at the primary expenses we incurred in running the utility segment. During the quarter, we incurred over $122 million of fuel and purchase power costs. Down $4 million verses the same period last year.

This 3% decline in costs reflected lower natural gas costs and improved efficiencies in generation as our sales volumes increased by 2%. For the quarter, generation from our fleet was level with last year; however we benefited from a shorter refueling average at our nuclear power plant, which favorably impacted our fuel costs by about $2 million. The costs of purchase power declined in the second quarter as compared with last year, due to lower gas prices and additional availability in the Midwest. At the same time, we experienced a higher load requirement than during this same quarter in 2001.

As we look at the third quarter, our fleet is running as planned, and we expect to have adequate capacity to meet the summer load. Overall, our electric margins increased by $22 million when compared to the prior year. As discussed earlier, this increase was primarily the result of higher sales volume and reduced fuel and purchased power expenses. Looking at our cost of gas sold, and our gas net margins in the quarter, we see that our gas costs related to the gas distribution business declined $17 million, or 15%. This decline reflects a reduction in the costs of natural gas. Our average costs for the quarter was $3.32 per decathlon, which was 34% lower than last year. As we previously mentioned, our gas volumes increased because of favorable weather in April and in May. When we look at our gas margin for the quarter, we see an increase of $10 million, or 18% compared to last year.

The biggest factor in the increase relates to higher gas usage because of the colder temperatures compared to a year earlier. Our non-fuel were $220 million, or $13 million higher than the costs we incurred in the second quarter of 2001. Three factors were primarily responsible for the increased in the quarter. First, during the quarter we made a onetime payment of $8.7 million to settle litigation with the city of West Allis. Second, our bad debt expense increased by $5 million as we saw a $10 million reduction in state and federal funds for low income energy assistance. And third, our medical costs increased $6 million due to external market place factors. Unfortunately we may continue to see increased benefit costs with the decline in earnings in our pension funds, and increased bad debt costs as federal and state heating assistant programs are reduced. These increases will be offset somewhat by our continuing emphasis on cost reduction.

In the second quarter of 2002, we recorded utility operating income of $98 million, a $17 million increase over the same period a year ago. All in all, it was a very good quarter for our core utility segment. Now I'd like to briefly comment on the performance of our manufacturing business. During the quarter, the manufacturing segment posted revenues of $193 million, an all-time quarterly record, and an increase of $33 million, or 21% over the previous year. This $33 million increase in revenues reflects a combination of growth in our base businesses coupled with additional revenues from two recent acquisitions. The July 2001 acquisition of , a manufacturer of spa and jetted tub pumps, and the April 2002 acquisition of Air Motor, a water systems pump manufacturer, contributed $24 million of incremental revenues in the second quarter. We've been very pleased with the new products and new customer additions that our business has contributed since it was acquired a year ago, and we are equally excited about the new opportunities that our recently acquired Air Motor business will bring to the manufacturing segment. We expect a positive financial contribution from Air Motor over the balance of the year, following the completion of its consolidation and integration into our existing Sta-Rite infrastructure. We saw particularly strong growth in our European and Australian water systems markets during the quarter, which were both up 22% over 2001.

In addition, revenue from our North American water treatment market was up 9% due to demand from both retail and OEM customers. Second quarter operating income of $22 million was up $6 million over the same period of 2001. Acquisitions contributed $2 million to operating income, with an additional $2 million coming from growth in our base business. Cost reductions activities, partially offset by the incremental costs of several new software systems, including a new enterprise resource planning system, contributed to the balance of the improvement. We are encouraged by the improved second quarter revenues and the fact that July order rates are on target with our expectations. We remain optimistic about the short-term and long-term future of our manufacturing businesses, and expect that the plant consolidations and the recent acquisitions will produce positive financial results for the balance of 2002. Let's go back now to the Wisconsin Energy results.

Our corporate costs for the quarter were down $0.02 per share year-over-year, as a result of the elimination of good will amortization and lower interest costs. These savings were partially offset by the development costs for Power the Future. Setup costs for our energy power plant, which was placed in service in June of 2002, and costs associated with turbines, which are held for sale. Now I'd like to briefly touch on several other key financial factors. First, our year-to-date 2002 cash sources of $383 million consisted of $133 million of adjusted earnings and $179 million in depreciation and amortization. Our depreciation and amortization costs were lower in 2002, due to the elimination of the amortization of good will and the sale of assets. In addition, we received the litigation refund of $71 million on an after-tax basis. This $383 million of cash sources, plus $18 million from a declining working capital of other items, was used to fund our capital expenditures $256 million. In total, we generated $145 million in cash from operations during this first six months of 2002. Proceeds from sales totaled $51 million dollars in the first half of the year. When combined with cash flow from operations, total cash-flow before financing was $196 million. In April we signed an agreement with a subsidiary for the sale of two fossil fueled power plants owned and operated by our Wisvest-Connecticut subsidiary. We expect to receive approximately $280 million in proceeds related to the sale. approval has been obtained and a request for approval is pending at the Federal Energy Regulatory Commission. We plan to close this transaction in 2002.

During the first six months of the year, we received $26 million of proceeds from the issuance of new shares, primarily from our dividend reinvestment program, and we repurchased $41 million of our shares in the open market under our share repurchase program. We paid $46 million in dividends, and reduced that by $133 million. Our total debt to capital ration of 64.7% at the end of the second quarter declined from 65.1% at yearend. The sale of our Wisvest-Connecticut asset should have us improve this ratio to about 64% by yearend 2002. Now lets look at the status of the share repurchase program. Since the inception of our share repurchase program in September of 2000, we have repurchased over 12.6 million shares, worth $260 million of Wisconsin Energy stock.

For the first six months of the year, we reduced our buyback program somewhat, because of the uncertainty around the timing of the sale of our 9 utility assets. Now we'd like to briefly expand on the memorandum of understanding that Dick mentioned earlier. In early July, we signed an MOU with key outside stakeholders to supply energy in Wisconsin. This MOU outlined an agreement on the key financial terms to our Power the Future project. We worked very hard to expand the support that we already had with the Customer's First Coalition by adding the support of the very important industrial groups, while at the same time tried to make sure that the financial terms would still enable us to fund the construction projects. New terms would base the lease contracts on a 12.9% return on equity and a 55% equity balance for the gas plants, and a 58% equity balance for the coal plants. In addition we have extended the lease contracts for the gas plants to 25 years, and for the coal plants, to 30 years.

These financial terms are less than our original proposed return on equity of 13.9%; however we believe that the benefits of obtaining the support of these industrial and consumer groups justify the reduction. These groups acknowledge the need for the new plants in Wisconsin, and believe that our Power the Future proposal is the best alternative for the state. Their support enhances the prospects for regulatory approval. I want to reemphasize here that we have already asked our shareholders to invest in Power the Future through the September 2000 dividend reduction. This reduction, when compounded over a 10 year period, will reflect an almost $2 billion investment by our shareholders in Power the Future. This investment is the driver of the increased earnings that we project from the Power the Future program.

Now I'd like to discuss our earnings expectations for 2002. In our first quarter conference call, I indicated that we expected earnings to be near the lower end of the range of $2.20 to $2.40 per share for the year. We are pleased with results to date, and now believe that it is reasonable to assume that Wisconsin Energy's 2002 earnings may approach the midpoint of the $2.20 to $2.40 per share range. This guidance assumes normal weather and excludes the nonrecurring impairment charge of $0.79 taken in the first quarter, and the costs associated with the city of West Allis litigation. Now I'd like to turn the call back to Dick Abdoo.

Thank you Paul. And now we would be pleased to take your questions.

Thank you. The question and answer session will begin now. If you are using a speakerphone, please pick up the handset before pressing any numbers. If you have a question, please press '1' '4' on your pushbutton telephone. If you wish to withdraw your question, please press '1' '3'. Your question will be taken in order as it is received. Please stand by for your first question. Your first question comes from . Please state your affiliation followed by your question.

. Congratulations on an excellent quarter. Two things, could you quantify whether the impact of weather on a - either a net income or per share basis verses normal in the quarter, and secondly could you quantify the impact of currency changes at the pump business for the quarter?

Yes, as Paul mentioned, we did from weather. On the GAAP side of the business, we believe that on the per share basis, that favorably impacted us by $0.03 to $0.05 per share. On the electric side of the business, it was about it was about $0.02 to $0.04 per share.

Did those verses normal or verses last year?

, the verses normal. And on the foreign currency, there was really a - it's insignificant to the Wisconsin Energy earnings as a whole. They did not have a significant impact - the favorable currency rates.

Ok, thank you.

Your next question comes from . Please state your affiliation followed by your question.

Morning. . I was just wondering if you could go over some of the drivers that you're seeing - that's giving you the strength at the pump business, given the general weakness in the economy over all? Kind of, I guess there has been a drought, I would have expected that to be a negative. What's offsetting that?

The - this is Donaly. Yes in fact the drought is helping our water system segment of the business, but in addition to that, we're really seeing strength in just about all other areas, perhaps with the exception of industrial, which isn't a very large segment for us, and that's down in the order of 2% year-over-year. Swimming pool business is very strong, the RV portion of our business, that is where we supply pumps to RV manufacturers as well as boat manufacturers, continues at a high level, significantly above a year ago. So it's - we're generally seeing - especially consumer driven segments continue to remain very positive.

about beverage and things like that?

Beverage is doing well, up fairly significant. There we have a limited number of customers, and it's really the introduction of new systems and new programs that they are coming out with, that has helping our business in that portion.

You seeing more OEM strength, or just replacement type business?

It's really both. You know, I couldn't really say that one is stronger than the other. In many of the segments that I've just mentioned, OEM is really the customer, and others it's really replacement business, such as our retail pump sales through the chain. So it's a combination.

Sometimes do a year-over-year earnings reconciliation, kind of piece by piece, do you have something like that prepared for this quarter, or don't flux?

No we ...

No we don't have that, Paul.

Ok, thank you very much.

As a reminder, ladies and gentlemen, should you have a question, please press '1' followed by '4' on your pushbutton phones at this time. Your next question comes again from . Please restate your affiliation followed by your question.

. Just to follow up a little bit on Paul's question. On the pump side, is housing and pools the biggest part of the advance that we're seeing in the pump business? Is it something that you would conceptually tie to the strong housing market?

Those are factors in the overall results, as I mentioned earlier. We are seeing strength in each of our other sectors. I didn't mention . is strong and that is over 50% OEM, new equipment - so it's a - I wouldn't attribute it all just to the pool business, and water systems.

Ok, thank you. And then could you just - on the utility side, would you just review for us the rate freeze and the exceptions that you have, and when that expires, and anything going on, on the non-Power the Future part of electric and gas rates?

This is Larry Salustro. The rate freeze goes through 2005. It does - it has exceptions, or carve-outs for a number of items, including additional capital expenditures for reliability, fuel changes in fuel costs, in purchase power, government mandates, tax changes and other government mandates.

Are you - Larry, are you filing every year a new forecast of fuel and purchase power costs?

Excuse me, there is also a carve-out for our guardian pipeline project, which is underway now. We do review the - we review all these things each year, and we do calculate, especially what we expect fuel and purchase power to be, and then do our procedures at the commission, that permit us to adjust those based on our actual experience and our forecast for the coming year.

And then review for us, in '05, the commission will deal with the whole issue of the good will that came on the books as a result of the acquisition of the Wicor Utility properties.

Well, in the commission will do something to set rates beginning January 2006, because that's the end of the rate freeze, and it is not known right now, it's not settled right now, exactly what the commission will look at in and what sort of a regulatory program we will have to set rates going into '06. That's yet to come, and it's not settled one way or another how that procedure is going to go.

Is it fair to say that you have some inclination towards proposing some kind of incentive type plan rather than just strictly a cost to service plan?

No we yet.

Ok, thank you.

Your next question comes from please state your affiliation followed by your question.

Morning. Lehman Brothers.

Morning Greg.

Good morning. I was just wondering if you could touch on, kind of the outlook for asset sales? What we should look for?

We have about $300 to $350 million dollars of assets that we still want to sell. That's really not including the $280 million that we expect to receive from the Wisvest-Connecticut plants later this year. I don't think you'll see many more asset sales for the remainder of this year, except for Wisvest-Connecticut, but we are hopeful that those other assets will be moved sometime during next year.

Ok, thanks.

You're welcome.

Your next question comes again from . Please state your question.

Just a clarification, is drought good or bad? I was under the impression that a drought had a negative impact on some pumps and the like, and then, just -- $0.41 operating in the third quarter of last year, wonder if you could maybe walk through some of the - have you seen changed?

(Inaudible) Jim Donaly again. Just to comment on the drought. It all depends - it depends on what time of the year, and it depends on what regions of the country. Generally the drought that we're experiencing pretty much throughout the United States, at this point is helpful to the business. It is falling water tables with a need to redrill wells, in many instances, and that is a factor that would add to - add to our sales of well pumps. On the other hand, you are correct, in drought conditions, you don't sell very many sump pumps or cellar drainers. So there is a partial offset there.

Paul, as far as your comment to the third quarter last year, we had recurring was about $0.41. And one thing that we had said in our forecast. In the beginning of the year, that we got two outages at our nuclear plant. Last year and this year they were in the second quarter. The second outage is going to begin in mid September. So there will be costs this year that we didn't have last year. And then the last year in the third quarter we got a favorable pickup because we recorded interest income related to the verdict, the appeal in the state appellate court. The had previously said that we feel comfortable with approaching the middle part of the range at $2.20 to $2.40.

How much was the interest income?

On a pretext basis, I think that was about $7 or $8 million dollars.

How has the weather been thus far?

This is Dick Grigg. The weather has been quite warm in July. In fact we're ahead at this point and time.

Ok, thank you.

.

Your next question comes from . Please state your affiliation followed by your question.

Yes. It's Good morning.

Morning.

Just coming back to question. I was wondering, Paul, if you could update us on the remaining $300 to $350 million of assets for sale? What's the, sort of composition of those assets?

We have that we have had on order for some period of time. They're worth probably about $70 or $80 million. We have our Power plant down in Illinois, which is a potential for sale. And we have a variety of other real estate assets that are available for sale.

And is there any way to break down what the balance is between and the real estate?

No, I'd really prefer not to do that, because of those assets being up for potential sale.

Ok. Thank you very much.

As a final reminder, should you have a question, please press '1' '4' on your pushbutton phones at this time. Your next question comes from . Please state your affiliation followed by your question.

. I've got a question on the Wicor pump business. Given the good results and maybe the outlook for the economy going forward as - what's your thinking on the long-term disposition of those assets?

We have no plans to sell the pump business. They were extremely performer for Wicor, and my recollection is that early in Wicor's history as they were building the pump group, they were about 25% of the total revenue, and Wicor was successful in growing them to 50% of total revenue, and we'd certainly like to see Jim continue to do what he is doing so well, and to grow that business.

What's your outlook for the growth of that business going forward from here?

Without acquisitions we're probably talking in the mid to high single digit range. I think we can get from just normal organic growth, and then certainly acquisitions had that part of our historical growth pattern. I think putting those in on top of organic growth, we've been able to generate somewhere around 10% to 12% a year, and top line sales growth, and of course, multiple of that on the bottom line through cost reduction, efficiencies and a lot of other initiatives.

Ok, thank you.

If there are no further questions I will turn the conference back to the President and CEO of Wisconsin Energy, Dick Abdoo.

abdoo. Thank you very much. That concludes our conference call for today. If you have additional questions, will be available in the investor relations office, at 414-221-2592. That concludes our second quarter 2002 conference call. Thank you very much for participating. Have a great day and a good weekend. Thank you very much.

Ladies and gentlemen, if you wish to access the replay of this call, you may so by dialing 1-800-428-6051, or 973-709-2089 with the pin 219345. This concludes our conference for today. Thank you all for participating and have a nice day. All parties may now disconnect.