威斯康辛能源 (WEC) 2002 Q3 法說會逐字稿

Welcome to the Wisconsin Energy web cast. All statements in this presentation other than historical facts are forward looking statements that involve risks and uncertainties that are subject to change at anytime. Such statements are based on management's expectations at time they are made. In addition to these assumptions, other factors described in the company's latest form 10K and subsequent reports filed with the S.E.C. could cause actual results to differ 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.

After the presentation the conference will be open to analysts for questions and answers. You're welcome to follow the presentation at www.wisconsinenergy.com. A replay of this presentation both audio and visual will be available approximately two hours after the conclusion of this call. And now I'd like to introduce Richard A. Abdoo, Chairman of the Board, President and Chief Executive Officer of Wisconsin Energy Corporation. Please about ahead, sir.

Good morning. Thank you for joining Wisconsin Energy's Corporation conference review of our third quarter 2002 results. Let me begin by introducing the Wisconsin Energy management team with me here today. We have Paul Donovan, Executive Vice President and Chief Financial Officer of WEC, Dick Grigg, President and Chief Operating Officer of our utility segment and Executive Vice President of WEC, Jim Donnelly, President and Chief executive officer of our manufacturing segment, Larry Salustro, Senior Vice President and General Counsel, Jeff West, Treasurer, and Steve Dickson, 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 third quarter 2002 financial results, bring you up to date on accomplishments during the third quarter, and discuss our progress on our Power of the Future plan, and review our earnings outlook for the remainder of 2002 and provide an estimate for 2003 earnings. Before we get into the call, I want to take a few moments to talk about what happened to our stock earlier this week. I'm sure you've all seen that we took a beating.

Largely as the result of completely unfounded rumors that linked us with a political scandal unfolding in Madison. Let me set the record straight. The criminal complaint filed against state senator (inaudible) does not allege any wrong doing by Wisconsin Energy or our representatives.

Nor does the complaint allege any wrongdoing in connection with the enactment of legislation involving our Power of the Future plan. As we stated in a news release Monday, we have no reason to believe that there will be any effect on the validity of the legislation that was approved by unanimous vote of both political parties or that agency review of the project will be delayed by the indictment by this legislator.

We regret that erroneous reports by third parties can adversely affect our reputation, undermine the good work of our employees and hurt our shareholders. Because we know how important it is for you to have a good understanding of this issue, Larry Salustro, our general counsel, will address this matter in more detail at the end of our prepared remarks.

Now, on a more positive note, let me comment about our strong third-quarter performance. As you saw in the press release this morning, Wisconsin Energy reported net income of 52.1 million or 45 cents per share for the third quarter of 2002, compared to 47.9 million or 41 cents per share in the -- in last year's third quarter. We are pleased with the results we achieved and especially the way our core business has performed. As Paul will explain light later, our electric business achieved excellent operating results and our pump business posted record earnings for this second consecutive quarter. Our growth strategy of focusing on our core businesses, investing noncore assets and strengthening performance is on track. We have also made significant progress on our Power of the Future plan to build new power plants in the state of Wisconsin. Since we last discussed our progress, our Power of the Future plan took a major step forward when we completed regulatory and public hearings for the proposed new gas fuel generation units at our Port Washington power plant site. We also signed a historic development agreement with the city of Port Washington ensuring its support throughout the regulatory proceedings.

The public service commission of Wisconsin has indicated that it intends to issue an oral decision on the project by November 21st and issue a written order by December 19th. If we receive regulatory approval in December, we would be able to begin construction in early 2003, and we could expect to have the first of the two Port Washington units in service by the peak summer demand period 2005.

The next step in our Power of the Future proposal will be to receive a completeness determination from the public service commission of Wisconsin on our application for three proposed coal-based units at our Elm Road site. Once that action is completed, we will have a better idea about the regulatory schedule for the 1800 megawatts of coal-based generation that is part of our Power of the Future plan.

At this time, we anticipate that these regulatory proceedings could take most of 2003 calendar year. As part of our continued commitment to the environment, earlier this month, we signed an innovative multi emission cooperative agreement with the Wisconsin department of natural resources to voluntarily reduce emissions at our power plants over the next ten years. These expenditures were part of our previously announced $7 billion financial commitment related to Power of the Future. At the same time we signed the emissions agreement, the United States environmental protection agency named us a climate leader for our efforts to reduce greenhouse gas emissions. We continue to be at the forefront of the climate change issue, as a participant in the Department of Energy's climate challenge program, our company has recorded over 27 million tons of greenhouse gas reductions since 1995. Further evidence of our commitment to improving the environment for environmental performance of our power plants.

Now I'll 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 this quarter, because they were based on the solid performance of our core utility and manufacturing businesses. On a consolidated basis, the company's utility energy businesses contributed 54 cents per share and our manufacturing businesses contributed 8 cents per share to our earnings in the quarter. Our non-utility energy businesses showed a loss of 3 cents per share in the third quarter of 2002, compared to a 4 cents per share loss for the same quarter last year. Wisconsin Energy's corporate and other costs reduced earnings by 14 cents per share in the quarter, which compared to an 18 cents per share reduction last year.

Our core utility business had a strong quarter. However, when compared to the prior year, our 2002 earnings are lower due to some nonrecurring items. On an operating basis, our electric margins improved by 10 cents per share. However, this was offset by several nonrecurring items. First, in September of 2002, we settled the final outstanding litigation against the company related to the Giddings & Lewis West Allis matter. This final settlement resulted in a 5 cents per share charge in the quarter. You may remember that last year in the third quarter, we received a favorable ruling from the appellate court that overturned the punitive damage award. This ruling allowed us to record interest income on our $100 million litigation deposit of 4 cents per share in 2001. In addition, in the third quarter of 2002, we had a very successful scheduled refueling outage at our Point Beach nuclear plant which resulted in 6 cents per share of additional costs when compared to the third quarter of 2001. Despite these items, I think that you can see that our utility business had a very strong quarter. Now I'd like to review the income statement of our utility business in more depth.

Our utility segment recorded revenues of $630 million this quarter, up $13 million from the same period in 2001. Overall, the business benefited from favorable weather and increased sales primarily to our residential and small commercial and industrial customers. Our electric utility revenues increased to $529 million compared with $516 million in the third quarter of last year. This reflects a 2% increase in sales volume in the third quarter. We experienced very warm weather in our service territory this summer, which contributed to an $18 million increase in residential revenues and a $7 million increase in commercial and industrial revenues. However, our wholesale revenues declined by $12 million primarily due to reduced demand for wholesale power. For the quarter, cooling degree days were up 20% over last year and 24% over normal.

Now, let's take a look at our natural gas revenues. In the third quarter of 2002, gas revenues were $97 million, essentially flat when compared to last year's third quarter. We had a slight increase in our rates compared to last year. Offset by a slight reduction in volumes. As you know, this quarter traditionally represents the lowest period during the year for revenues and earnings for the gas distribution business due to the lack of heating load. Now let's look at the primary expenses we incurred in running the utility SEG the. During the quarter, we incurred $145 million of fuel and purchase power costs, down $6 million from the same period last year. This 4% decline in cost reflected improved deficiencies in generation, lower fuel prices, as well as lower purchase power costs.

For the quarter, our total megawatt hour generation was comparable to last year. Even though we had the scheduled refueling outage at Point Beach, which began in the third quarter of this year, our overall generation from nuclear was comparable to last year due to higher unit availability.

The cost of purchase power was down slightly this year compared with 2001 due to a decline in natural gas costs. When you combine the increased electric revenues with the reduced fuel and purchase power costs, our electric margins increased by $20 million when compared to the prior year.

Now let's look at the costs we incurred for nonfuel O&M for the third quarter. Our nonfuel O&M costs were $210 million or $32 million higher than the costs we incurred in the third quarter of 2001. During the quarter, there were two large items which caused increases in our nonfuel O&M costs. First were $11 million of increased nuclear operating costs. As I mentioned in the past, our two nuclear plant units undergo scheduled fueling outages every 18 months. This year we had scheduled outages in both the second and third quarters. In 2001, we had only one scheduled outage, which occurred in the second quarter.

The September scheduled outage for Unit 1 was completed successfully and we are very pleased that extensive examinations of the reactor vessel head showed no evidence of cracking or leakage. Second, we made a one-time payment of $9 million to settle litigation with Giddings & Lewis which closes the litigation against us in this case. In the second quarter of this year, we reached a similar settlement with the city of West Allis. We have put our insurance carriers and other parties on notice that we believe we have valid claims against them for reimbursement of the costs we incurred in connection with the case, and we intend to vigorously pursue collection. In addition to these items, the balance of our nonfuel O&M costs increased by $12 million. This increase is made up of many smaller items including increased medical and pension costs, general inflation, and the timing of costs on a year-to-year basis. This final utility segment slide shows that in the third quarter of 2002, we recorded utility operating income of $121 million, a $9 million decrease from the same period a year ago, reflecting the impact of the key items that I discussed earlier.

Now I'd like to briefly comment on the performance of our manufacturing business, which, as Dick said earlier, posted very strong results. Our manufacturing segment recorded third-quarter revenues of $179 million, an all-time quarterly record, an increase of $43 million, or 32%, over the previous year. The $43 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 VICO, a manufacturer of spa and jetted tub pumps and the April 2002 acquisition of Air Motor, a water systems pump manufacturer, contributed $14 million of incremental revenues in the third quarter. We continue to be pleased with the new products and new customer additions that our VICO business has contributed. And we are equally excited about the opportunities that our Air Motor business is bringing to the manufacturing segment. Even more impressive is the strong performance of our base manufacturing business. Quarterly based revenues improved $29 million or 21% over the prior year.

Nearly all market segments were up from 2001 but we saw particular strength from our global water systems, food and beverage and pool and spa businesses. Drought conditions in over 40% of North America and large portions of Australia coupled with new customer and new product introductions produced a 32% increase in quarterly revenues from our largest market segment. In addition, revenue from our food and beverage unit was up $3 million due to a market share increase from existing products, as well as incremental revenues from new product rollouts. Following solid second quarter sales gains, the pool and spa business, our second largest market segment, posted quarterly revenue growth benefiting from the continuation of a healthy pool construction season and the introduction of new products.

Third quarter operating income of $15 million was up $8 million over the same period in 2001. Acquisitions contributed $2 million to operating income with an additional $5 million coming from the growth in our base businesses. We are very pleased with the third-quarter results and the fact that order rates continue at a healthy pace. We remain optimistic about the short and long-term future of our manufacturing business and expect that ongoing cost reduction initiatives and the recent acquisitions will produce positive financial results for the balance of 2002 and into 2003.

Our nonutility energy segment had losses of 3 cents per share for the quarter as compared to losses of 4 cents per share in 2001. This segment was impacted by F.A.S. 133 charges and operating results of our nonutility investments. Last year, we incurred a 12 cents per share FAS 133 charge related to a decline in fuel prices. This year prices were relatively stable. Operating earth for this segment declined by 11 cents per share this quarter due to depressed wholesale power prices and an unscheduled outage at one of the Wisvest-Connecticut units which reduced the available capacity at that plant. That unscheduled outage began in mid August and the unit is expected to be back in service in early November. This segment also includes annual costs of 3 cents per share in 2002 and 2003 related to We Power as this entity is incurring costs associated with Power of the Future.

Our corporate costs for the quarter were down 4 cents per share. Primarily reflecting the elimination of the amortization of Goodwill. Now I'd like to briefly touch on our year-to-date cash flow and other key 2002 financial factors. Our year-to-date 2002 cash sources of $527 million consisted of $185 million of adjusted earnings and $271 million of depreciation and amortization.

Our depreciation and amortization costs were lower in 2002 due to the elimination of the amortization of Goodwill and the sale of assets. In addition, we received a litigation refund of $71 million in 2002 on an after-tax basis.

This $527 million of cash sources, plus the $64 million decline in working capital, was used to fund our capital expenditures of $394 million. In total, we generated $197 million in cash from operations during the first nine months of 2002. During this period, we made acquisitions totaling $16 million and investments in the Guardian pipeline totaling $16 million. We also received proceeds from asset sales totaling $63 million. When combined with cash flow from operations, total cash flow before financing was $228 million. During the first nine months of the year, we received $42 million of proceeds from the issuance of new shares related to our dividend reinvestment program and employee benefit plans. We repurchased 2 million of our shares in the open market under our share repurchase program for $52 million. We paid $69 million in dividends and reduced debt by $160 million. Our debt to total capital ratio of 64.2% at the end of the third quarter declined from 65.1% at the 2001 levels.

As you know, in June, we signed an agreement with the subsidiary of Public Service Enterprise Group for the sale of two fossil fuel power plants owned and operated by our Wisvest-Connecticut subsidiary. We expect to receive approximately $280 million in total proceeds related to the sale before the end of the year.

The deal has obtained (inaudible) approval and a request for approval is pending at the Federal Energy Regulatory Commission. The sale of our Wisvest-Connecticut assets should help us to improve our debt to debt to capital ratio to about 63% by the end of 2002.

One item that may impact our debt to total capital ratio at yearend is the accounting impact of the decline in value of our pension assets. Excuse me. I'm sure many of you are well aware of the announcement that companies have recently made related to the funded status of their pension plans in light of the negative returns over the past couple of years. We have been looking at this situation very closely with our actuaries. First, our pension plans are very well funded. We have close to $1 billion in assets on which we expect to earn on average about $90 million per year over the long term. Each year we pay out about $80 million in pension benefits to our retirees. As a result, we have not had to make a contribution to the plan for the past several years.

As of the end of 2001, our assets exceeded our obligations by about $25 million. However, the continued decline in the stock market has reduced the value of our assets, and the decline in the discount rate has increased the cost of our obligations. As a result, we believe that our plans may end up under funded as of the end of this year as defined by generally accounted -- accepted accounting principals.

Under the accounting rules, if a plan is under funded, the company must record a noncash charge to shareholder's equity. If the market ends up with a 20% loss this year, and if we use a discount rate of 6.75% we estimate our charge to equity could range up to $250 million-- if we take a noncash charge to equity, this amount may be reversed in the future when the pension assets exceed the obligation. This could occur through favorable investment returns, contributions to the plan or an increase in the discount rate. We will continue to monitor this situation very closely.

Let's look at the status of our share repurchase program. Since the inception of our share repurchase program in September of 2000, we have repurchased over 13 million shares or $287 million of Wisconsin Energy stock. For the first nine months of the year, we reduced our buy-back program somewhat because of the uncertainty around the timing of the sale of our nonutility assets. We plan to go back to our board of directors this year to request an extension of our $400 million share repurchase program, which is due to expire in December of 2002.

Now I'd like to discuss our earnings expectation for 2002. In our second quarter conference call, I indicated that we expected Wisconsin Energy's 2002 earnings to approach the mid-point of the $2.20 to $2.40 per share range. We continue to believe that this range is appropriate for the 2002 fiscal year. The guidance assumes normal weather in the fourth quarter and excludes the nonrecurring impairment charge of 79 cents per share taken in the first quarter, the 9 cents per share costs associated with the city of West Allis/Giddings & Lewis litigation and a potential 6 cents per share cost associated with a planned early redemption of high coupon debt which I will discuss in a moment.

I'd like to provide preliminary guidance regarding our earnings outlook for 2003. We are currently in the process of finalizing our 2003 budgets, so we are providing a range that we are comfortable with at this time. If we start with our 2002 earnings range of $2.20 to $2.40 per share, and then deduct the impact of favorable weather for the year, we get a 2002 normalized earnings range of $2.15 to $2.32 per share. We expect to add earnings growth of 5% to 10% per year until the favorable impacts of our Power of the Future program kick in. This 5% to 10% growth will be achieved through normal growth within our utility and manufacturing businesses, our share repurchase program, and continued cost management throughout the company. Assuming a 5% to 10% growth rate we would expect 2003 earnings to be in the range of $2.25 to $2.50 per share. However, as you can see by this next slide, there are some significant macroeconomic factors which will put pressure on our 2003 earnings.

First I'd like to discuss the impact of our nonutility energy segment and its impact on next year's earnings. As you will recall, we announced in September of 2000 that we planned to sell most of our nonutility energy assets. We have made great progress towards achieving that goal. In 2000 we sold our investment in Sky (inaudible) for $220 million and realized after tax gains of $55 million. In 2001 we completed the sale of our investments in Blithe and Field Tech for $60 million and realized after-tax gains of $16 million. With the expected sale of Wisvest-Connecticut in 4th quarter of this year we will have received over $600 million in proceeds from the sales of our nonutility energy assets in just over two years. After the sale of Wisvest-Connecticut, however, we still have two major nonutility energy assets, a 500-megawatts Siemen's Westinghouse advanced technology natural gas power Island and a 308 megawatt (inaudible) plant in Calumet, Illinois. We are actively pursuing the sale of the power Island. However, due to the depressed market for turbines, we have been unsuccessful to date.

The Calumet Plan is operating and running well, however, due to the slow economy and the short-term excess capacity of electricity in the Midwest, we do not expect the plant to be profitable in the near future.

We have received inquiries from outside parties regarding our interest in selling Calumet. As with all of our sets we would be willing to sell it at the right price. If we don't sell these assets, we expect that our nonutility energy segment will have an additional 6 cents to 10 cents per share drag on our 2003 earnings when compared to 2002.

Secondly, we are facing significant increases in medical and pension costs. With the continued decline in the stock market, our pension investments have declined, which will result in higher pension costs. Also, medical costs in southeast Wisconsin are projected to increase close to 20%. Third, as you are well aware, the insurance markets have experienced significant increases in premiums since 9/11. In addition to these premium increases, we expect to receive lower dividends from mutual insurance companies as they have also experienced reduced investment returns. Finally, because we have not been able to divest as many noncore assets as we have projected due to market conditions, we have slowed our share repurchase program.

We do expect some positive financial items in 2003. First, we will only have one scheduled nuclear plant refueling outage next year. As you know, we have roughly scheduled 18-month refueling outages at each of our two units. In 2003 and 2004, we expect to have only one scheduled refueling outage in each year. We also expect some recovery in the economy next year, which should increase our electric and natural gas revenues.

Finally, the company's utility subsidiary, Wisconsin electric, is planning to issue debt securities later this year subject to regulatory approval. The proceeds will be used to refinance $225 million of high coupon debt and to refund $150 million of maturing debt. We expect to save approximately $5 million in interest costs or 2 cents to 3 cents per share in 2003 as a result of this refinancing. The costs of this refinancing could be about 6 cents per share in 2002. Therefore, we believe that our earnings range of 2000 -- for 2003 will be in the $2.20 to $2.40 per share range. However, if we are able to sell certain of our nonutility energy assets early next year, we would be able to improve our 2003 earnings per share by eliminating the losses associated with these assets and by using the proceeds to reduce interest by paying down debt or by ramping up our share repurchase program.

In both scenarios, we continue to believe that the most significant risks associated with the forecast relates to our ability to recover our fuel and purchase power costs and the growth of the overall economy.

Now I'd like to turn the call back over to Dick.

Thank you, Paul.

I'd like to introduce Larry Salustro, our General Counsel, who will provide you some background on the indictment announced last week in Madison and its impact on our company. Larry?

Thank you, Dick. I'll take just a couple of minutes to address this situation. Let me first state three important points regarding the criminal complaint against Senator Charles Kuala who is until recently the Majority Leader in the Wisconsin State Senate. First, there are no allegations in the complaint of any wrongdoing by Wisconsin Energy or any of its employees. Second, there are no allegations of any improprieties with respect to Power of the Future legislation. Third, the only allegations in the complaint that reference Wisconsin Energy at all relate to the senator's alleged misuse of funds contributed by numerous business entities. In fact, there are 14 businesses and other entities identified in the complaint; to a nonprofit issue advocacy group. The compliant indicates the contributions to these organizations were lawful but that the senator concealed his alleged misuse of the funds from others after the complaint -- after the contributions were made.

By way of background, the complaint -- and let me stress, it's only a complaint at this point, there's been no trial - the complaint charges the senator with various violations of law, including extortion, also known as pay-to-play allegations, misconduct in public office, unlawful political contributions, and various campaign finance violations. There are two types of contributions covered by the complaint. Contributions solicited in connection with specific legislation. These are the extortion claims. In contributions solicited without regard to specific legislation, these involve the senator's misuse of funds. With regard to the extortion, the complaint alleges that the senator demanded contributions from businesses in exchange for action on pending legislation. None of these extortion charges relates to the company or to the Power of the Future legislation in any way. Three instances of extortion are alleged and they deal solely with legislation concerning certain real estate matters in the wholesale distribution of beer. With regard to the contribution not connected to specific legislation, there are two aspects. The contributions themselves and subsequent misuse of the money contributed. Wisconsin Energy made a contribution in June 2001 to a nonprofit issue advocacy group, The Independent Citizens for Democracy-Issues Inc. The complaint specifies at least 14 other companies also made contributions to the same group.

The complaint does not allege that these contributions were in any way illegal and notes that the law permits such contributions. Instead, the allegations are that the money was subsequently misused by the Senator and, an associate in connection with elections the following year 2002. Neither the company nor its representatives knew of the misuse of funds. In fact, the complaint specifies that the senator and his associate were careful to conceal what they were doing with the money. So our reading of the complaint is that Wisconsin Energy made a legitimate contribution at the time and the contribution was not part of any alleged extortion to influence action on legislation, and Wisconsin Energy was not aware of any misuse of the funds. And I will add that the company does make contributions to other issue advocacy groups and national party committees, such as the nonfederal account side of the National Republican Congressional Committee and the Democratic Senatorial Campaign Committee. In our judgment, the indictment and the publicity surrounding it should not have an adverse impact on our Power of the Future plan for at least two reasons.

First, the complaint does not allege any illegal acts concerning Power of the Future legislation. As I said earlier, the extortion or pay-for-play portions of the complaint concerns specific bills involving real estate and beer distribution for which specific donations were requested and they do not involve Power of the Future in any way.

Second, although the complaint notes that the contribution was made while PTF legislation was pending, the PTF project was well along in the legislative process at the time the contribution was made in June 2001.

Committee hearings had already been held prior to June 2001, and the key vote on the PTF vote was in May 2001 when the Joint Finance Committee made up of both State Senate Assembly Republicans and Senate Democrats unanimously approved PTF voting 16-0. And, of course, Power of the Future was enacted prior to the 2002 elections, in which the misuse of funds allegedly occurred. We do expect that opponents of the plan currently independent power producers and some residents of the area where we are trying to build the plant will try to use this situation to delay the project.

Although, a prominent independent power producer and its lobbyists were also contributors to the Independent Citizens for Democracy. But we also believe that people will remember why Power of the Future has so far been successful. The PTF law was enacted because an extraordinary coalition of consumer activists, labor leaders, large and small business customer groups, public power interests, Wisconsin Energy and others, concluded that it was vitally important for the state's future to provide an additional option to the public service commission to finance the rebuilding of the state's energy infrastructure. That's what they told legislators in Madison in public hearings. That's what they've told their constituents in the media over a two-year period. Although we will be working through some details of plan at the PFC as we have been so far, especially the environmental issues, we still have a strong coalition.

PTF is moving forward because of the continuing consensus that it's a good plan for the state and the coalition members and for Wisconsin Energy employees and customers and for our shareholders.

As I said at the beginning, these are only allegations. Nothing has been proven about the senator. And this is only our interpretation of the complaint. For those who wish to read it themselves, I refer you to a local website, www.WISpolitics.com, and you can look down the right column to the date October 17 and click on "complaint." Thank you, Dick.

Thank you. As we said earlier we believe the company is moving in the right direction, and we are pleased with our financial results. And now we would like to take your questions.

Thank you, sir. The question and answer session will begin at this time. If you're using as speakerphone please pick up the handset before pressing any numbers. Please press 1 followed by 4 if you have a question. Should you wish to withdraw that question, please press 1 followed by 3. Your questions will be taken in the order they are received. Our first question comes from Andrew Levy. Please state your affiliation followed by your question, sir.

Hi, guys. How you doing? We'll skip our question.

Okay, thank you.

Our next questioning queue comes from Rick Sheldon.

Hi, Rick Sheldon, (inaudible) Capital. How you doing? On the earnings guidance I was hoping you could clarify something for me. You said you expect 2.25 to 2.50. And does that include any of these items like the nonsale of the assets; the lower dividends from mutual insurance and pension cost? The slow share repurchase program. What are the expectations in that 2.25 to 2.50?

The 2.25 to 2.40 is really our official forecast for 2003 and it includes all of the factors that I mentioned above, including the nonsale of the utility assets.))

Okay. And then also, just in terms of the potential write-off for the pension as well as some of this impact to the balance sheets from additional write-offs maybe for the sale of Wisvest, we're kind of reduced -- increasing the debt ratio, debt to cap ratio, I was wondering if that would have any impact on your covenants on your bank facilities, your debt covenants and what the rating agencies were saying with regards to these issues.

Well, as far as the debt covenants are concerned, we have plenty of room so there's no concern there at all. We have been working very closely with the rating agencies over the past year or so or couple years since we acquired WICOR. We have a plan to continue to divest assets over time to reduce our debt ratio. As you'll recall, we also reduced our dividend over a year ago from $1.56 a share to 80 cents per share. So that's rebuilding equity at fairly rapid rate as we go forward. And I think the rating agencies have been relatively comfortable with our ratings. We're rated with a stable outlook by the agencies. Power of the Future is a very large project, however, but we think that we'll be able to finance it without having to raise any additional equity or having a major negative impact on our debt ratio overtime, which we expect will be reduced to below 60% over the next several years. And that's our strategic plan.

All right. Great. Thank you very much.

Thank you. Our next questioning queue comes from Paul Ridzon. Please state your affiliation followed by your question.

Paul Ridzon, McDonald Investments. Walk through the ins and outs of treating Wisvest-Connecticut as an asset (Inaudible) for sale. Both last year and this year.

What's your specific question on that, Paul?

What was the impact of treating Wisvest as an asset for sale last year and this?

Early in the first quarter we wrote down the asset, and I'll look to see for the specific amount.

On an operating basis, for the year for the nine months we're going to come -- we'll be following our 10Q shortly either today or early next week. Last year on Wisvest-Connecticut, they had operations of about 16.8 million for the first nine months.))

I'm just wondering for the third quarter.

All right. Let me get that, then. All right. For the third quarter Wisvest-Connecticut last year had operations of 7.4 million, but then they had a FAS 133 charge of 14.3. They had a net negative impact of 7.1 million. This year they have operating earnings of 3.6 million. Their 133 charge is small, it's about .7 negative. So you get 2.9. That's the operations and FAS 133 Wisvest-Connecticut for the quarter third quarter.))

Those are excluding the results you reported?

No, operations are included in the nonutility energy which had a loss for the quarter of 3 cents per share. Last year it was a loss per quarter of 4 cents per share.

If they're held for sale why are you including them?

If they're held for sale, unfortunately, under the GAAP rules, we cannot show them as discontinued operations, and so we've tried to specifically identify where they are in our 10Q's. But under GAAP we can't show them as discontinued operations.

Okay. Thank you.

Thank you. Our next questioning queue comes from Vedoula Merty ph. Please state your affiliation

SEC capital. How are you?

Fine. How are you?

I want to make sure in terms of the '03 outlook when we look backwards from 2.25 to your 2.20 to2-point FRORT, are you assuming no asset sales are completed during 2003 as part of that outlook?

We're assuming that Wisvest-Connecticut will be completed this year. We'll have continued real estate sales next year. What is not expected in the forecast as it's laid out is the sale of the Siemen's Power Island that I mentioned before or the Calumet operation in Illinois.

And at this point, I understand you did that to probably be conservative. What do you really suspect are the prospects for those sales sometime during 2003 and what is the potential favorable variance versus 2.20/2.40?

It's difficult to answer, it really depends on the timing of the sale. If we were to be able to sell these assets either before the end of this year, which I think is unlikely, or early next year, then you could have a pickup of anywhere between, say, 15 cents to 20 cents in our forecast. If we're unable to do it, you know, the forecast would be as stated. I think, you know, the turbine market is very tough. We do have inquiries from two to three parties that are very interested in purchasing the turbines, and the heat recovery steam generators. So I think that could happen perhaps in the first six months. But it really depends on the overall market for new projects. The Calumet power plant is really not held for sale. It would be an opportunity to sale if somebody came along and offered us an attractive price.

So if you were to continue to run Calumet through 2003 but you were able to sell the Power Island during the first six months of next year, of the 15 to 20 cents potential favorable variance, how much of that do you think you could recoup?

Probably a little bit more than 5 cents per share.

Okay

Again, you know, subject to timing, which is - you know, it's all interest and depreciation, et cetera. So timing is very critical.))

All right. You indicated you expect an oral decision from Wisconsin PSE on Power of the Future by November 19th. Can you be a little bit more specific as to when those opportunities may actually materialize with respect to actually hearing something?

Yeah, I'm going to ask Larry to respond to that question.

The public service commission has indicated their target date of middle to late November as stated, and that would be the time that they discuss for -- discuss our project and the hearings that were held and the positions of all of the parties in their open meeting. They have open meeting discussions. So that would be the discussion date that the commission itself has targeted. As far as we know they're still on schedule for that. They then have to write a formal order and issue it in writing before it's effective, and they have targeted -- they've targeted the December date of -- for that being accomplished.

Given, you know, the noise around the political issue previously discussed, has there been any feedback with respect to your other coalition members with regards to Power of the Future either publicly or in some other fashion, and do you expect to be able to perhaps get a more detailed public, you know, reaffirmation from those parties?

No, we haven't heard anything, anything public that I'm aware of. What we'll get is -- today as a matter of fact, all the parties in the first part of the hearing, the Port Washington hearing concerning the gas fuel base plans, everyone will file briefs today. So they'll say whatever it is they want to say when they file their briefs in the first part of the case. And I don't have any reason to believe it will be different than the position stated at the hearing, which is, although there's some issues we're still discussing with everyone, they support the project.

Now, I want to make sure when -- in November and December in the event that the PSC approves the plan, what exactly would all be approved? Would it be the gas units or the gas units and the coal units? And in the past you've talked about in the '05 period being able to accelerate your growth outlook. If it's approved, is there any change in your outlook as to your growth outlook then? And what would be the potential risks to that outlook at that point in time post approval of the Power of the Future plan?

I'll take the first part of the question. What will be decided by the commission at this point has to do with the gas plants only, not the coal plants. And the financial arrangements in the operational arrangements for the gas plants not for the coal plants. It's our belief that if that is done on time, we can begin construction early in 2003 and make the peak season in the summer of 2005. And Paul can address the other implications

And that essentially would keep us on track for at least the gas portion of the project, so there would be really no change in the guidance that we've given for the out years regarding Power of the Future. Just as an editorial, I would like to say how pleased we are with our core operating businesses this year and next year. They've been performing very well, and we expect them to continue to perform. And once we sell some of the -- certain of the nonregulated energy assets, nonutility energy assets, I think the company's going to be in very good shape.

And I guess also, in the event that the plan were rejected, can you kind of go through then what you would be the kind of outlook going forward and what the process then would be with respect to power and cost recovery given you currently have a rate freeze through '05?

I think it's highly unlikely that the plants would be rejected. The state really needs this power. There's going to be a very significant shortfall in the amount of megawatts that the state needs by the end of this decade. These states -- these -- it's actually essential that these plants get built and I believe the state would really have to scramble very quickly to figure out what to do as an alternative. As you know, some of the IPP's historically over the past few years have been granted CPCN's to build new power plants, and they've declined to do so. And so there's really nowhere else to turn. So we not only would have to go back to the drawing board, but the state would as well.

But in the absence of that, even given the supply/demand dynamic, would you basically say that the 5% to 10% outlook you generally have you feel is the underlying growth rate is still maintained even without Power of the Future?

Yes, I think it certainly would be maintained. As a matter of fact, our cash flow would increase very substantially. We would continue to be -- maybe even more aggressive in the acquisition area on the pump side of our business. We could increase our share repurchase program. We could substantially pay down our debt and reduce our interest expense. And we would still have the core growth in our utility business. And the distribution portion of Power of the Future, I believe, would continue a pace. So I think you would probably even have -- I guess I would say the 5% to 10% would be even more solid than it is now.

And one last thing. I apologize for the whole series of questions here. With regards to the political issue again, this fund in terms of the price it appears that only the names of utilities have been kind of noted in the public. I'm wondering can you discuss whether companies in other sectors had contributed, maybe how large that fund may have been, and, you know, how you guys kind of fit into that, proportionally, and that kind of thing?

All of the contributions to the fund were -- I don't know that they were all listed in the complaint, but there were 14 different companies that contributed to the fund. What's been publicized and gotten attention is the choice of the people who decided to publicize it. But we all -- all 14 of us made those contributions. And I think it's unfair to frankly single a couple of companies out and I would just as soon not name all the other companies that are listed. But frankly refer you to the complaint that's on the website.

But it wasn't -- it was not exclusively or disproportionately a utility type of fund?

No, absolutely not.

Thank you very much.

Thanks.

Thank you. Our next question comes from Mr. David Diggens ph. Please state your affiliation followed by your question, sir.

Hi. Bepayment Capital. My question is on the changes in the pension assumptions. You mentioned the potential of $250 million write-down to equity if the plan comes up as under funded. Can you also talk about the earnings impact? Do you mark the difference between the actual performance and the actuarial assumptions to market on an annual base to use some sort of smoothing mechanism?

This is Steve Dickson. I'll take this question because I think it's an accounting type question. First to clarify, FAZ 87 requires that if the plan is under funded it is defined by GAAP with a liabilities and pension obligation exceeds the assets. You have to record a minimum pension liability and then you have a charge to equity. And one of the reasons our number is big is because, as Paul stated, when we acquired WICOR in 2000, GAAP required us to write up the pension assets of WICOR, very high. It was at the top of the market. Now that the market has declined, the charge will go to equity. On an ongoing basis, there are many factors that impact your annual pension expense, and one of them is the long-term investment rate. We've used 9 in the past. We're looking at that. But on the long-term basis that still seems reasonable. Our discount rate, because interest rates have dropped, actuaries are leaning us towards 6.75. But the bottom line is because the market has declined, if it ends up at about a 15% decline for the year, that could have a 10 million pre-tax impact on our pension costs, our ongoing pension cost, 2002 to 2003. When the market declined significantly, you don't take the full charge to the P&L because of the smooth mechanisms but you do have to take the hit to equity when you have a minimum liability. I know that's a long complex answer but it's a complex question.

What period do you use for the smoothing?

Well, for the smoothing of the investment gains, I believe that's over at least 5-year period.

All right. Thank you can you give us also --you mentioned increase in health care, you know, other benefit expenses like health care. Can you give us some idea of the magnitude you expect there? And also what the benefit is from one refueling outage verse versus two

All right. I'll take the health care, and then I'll defer the fueling question to Dick Grigg. The medical costs in southwest WI projected to be a 20% increase on pre tax basis as it relates to our ongoing medical costs that could be a $5 million to $7 million increase year-to-year pre-tax. It's pretty significant. And we're looking at ways to manage those costs.

The increased medical costs will also impact our postretirement medical cost and that could be $3 million to $5 million. Again, you use a lot of assumptions, long-term assumptions on the medical trend rates. Dick, do you want to talk about the benefits of the refueling?

Yeah, this is Dick. One of the benefits for refueling up once a year instead of twice shows up in two areas. One is the area of fuel costs, one is the area of O&M costs. So when you only have one outage as opposed to two, fuel costs are lower and your O&M costs are lower as a result of there being no outage expenditures.

Can you give us a magnitude of benefit there?

On the O&M side, this year we thought the additional outage cost us about 6 cents a share. So we would get that pickup next year. On the fuel side, it's a little bit more complex, because we will have reduced fuel costs when the plants are running more. But we put that into our total fuel mix and we look at the overall recoverability of fuel under the fuel accounting rules that the state of Wisconsin has. So we will have a reduction in fuel costs next year as it relates to the specific plans. But we expect increased fuel costs because increase demand, increased capacity charges, and so those two will basically net out and we'll have to monitor our fuel on an ongoing basis, which is why we identified fuel as one of the significant risks, our ability to recover fuel.

Okay. My final question is, you mentioned that the -- mentioned that the overall 2.25 to 2.40 for next year included some recovery in the economy. Could you give is you an idea of what you have baked into -- how much you've baked in terms of recovery or what that range would be if we just assumed a continuation of the current environment?

We built in a 3 cents to 5 cents improvement per share into that forecast.

All right. Thank you much.

You're very welcome.

Thank you. As a reminder, ladies and gentlemen, should you have a question, please press the 1followed by 4 on your push button telephones our next question in queue comes from once again Mr. Andrew Levy. Please state your affiliation.

Andy Levy from Bear Wagner. Sorry about before, guys. I want to make sure of something so we all don't get burned on this political item. You had a gentleman working for you named Wally Kunicki who was originally hired to do one job and now was switch jobs. Can you just describe with a he was originally hired to do, what he's doing now, and what his background was before he was hired? And then I have one more question relating to that.

Wally, Mr. Kunicki, was previously a legislator, and he was at one time the leader of the assembly which is the house on the Democrat side. Wally Kunicki has -- since he has been hired in the company has had responsibilities in the government relations area, in the customer account area, and now is -- and is currently and has been for either a year or a year and a half responsible for the energy business.

And the one related question I have with that is, did Mr. Kunicki and the gentleman who's being abused of whatever he's being accused of have any contact in relation to Wisconsin Energy and any political items?

You'll have to read the complaint for the allegations. I think the answer is no.

Okay. Thank you very much.

Just one point of clarification before we go on. Couple of people have mentioned our forecast for 2003 as being 2.25 to 2.50. And with the adjustments, it's actually 2.20 to 2.40 per share. With the upside if we sell some of the nonutility energy assets.

Thank you. Our next question comes once again from Mr. Paul Ridzon. Please state your affiliation followed by your question

McDonald Investments. You're not - are you -- I imagine you're still depreciating the Wisvest-Connecticut assets? Then I've got another question after that.

Yeah, we're not depreciating the -- those assets because they are held for sale.

But you're booking the earnings but you're not depreciating or -- do I have that wrong?

No, under generally accepted accounting principals if you have an asset for sale you stop the depreciation on those assets. So we're not booking depreciation on the Wisvest-Connecticut assets which are held for sale.

But you're booking the earnings.

Yes.

Or the losses.

Right. And kind of -- sorry about that. Back to Power of the Future, you kind of indicated that absent Power of the Future you might have enhanced earnings growth prospects

Well, no, with Power of the Future, we believe that our earnings can accelerate to the double-digit area over time. And that's our goal. Absent Power of the Future, I think he was asking can the 5 to 10% earnings per share growth that we expect to be able to achieve over the next few years before Power of the Future is implemented, can we continue that rate if Power of the Future is not approved and the answer was yes.

I got you. Lastly, on Point Beach, are you -- I know you're doing inspections. Can you describe those inspections? Are they visual or electronic, ultrasound? And do you have 100% head access?

This is Dick Grigg. We just completed an inspection that included both visual and ultrasonic and we have a reactor that is in very good condition. There's no indication of cracks or leakage. And we did get 100%.

Are you planning any head replacements?

We're still considering that question and have not come to a conclusion on that.

What's lead time on a reactor head, do you know?

It depends on which kind you need and where you get it. But it's a couple of years.

Okay. Thank you

You're welcome.

Thank you. Our last question comes from Mr. James Salger. Please state your name followed by your affiliation.

Yes. It's Cell Cap (ph).

Hi, Jim.

How you guys doing? Just two follow-up questions. One on the assets held for the other assets, the Calumet and the Power Island. Can you give us a rough idea of what the book value of those two specific 8 assets are and what sort of debt is associated with them

Combined there 300 million. But Calumet is not held for sale. And we continue to -- plan to continue to operate that long term unless we receive a very good opportunistic offer. And we have had people make inquires. That's why we mentioned it.

That's the book value, 300 million?

Yes, for the two.

What's the debt associated with it?

About 60%. It kind of mirrors our general debt on our balance sheet.

Okay. And then just going back to the pension questions. It seems like you've got a - somewhat of an idea of what the sensitivities to potentially the OCI charge should there be a decline of 20%. Do you have a rough idea of what the sort of the sensitivity is if there was a 15% decline versus a 20% decline or 10% decline?

We do. I just don't have it with me, Jim. And we'll have Colleen give you a call. But we have it for 5,10,15, 20, et cetera.

Yeah, I think the range was if we had a 5% loss in the market and we used about a 6.75, that the after-tax charge could be 75 million. So 5% loss, 75 million, 20% loss, 250.

Just to expand on what we'll more than likely do, if the market continues to sort of remain weak or if it follows the pattern of the 1970's, I think that we'll probably begin to put in $10 million or $20 million a year over time to solve that problem. If the markets recover, you know that the way the accounting rules work, we can remove that equity charge that we're taking and restore the equity based upon the recovery in the market. And that's why we're not putting in cash right away.

Right. Then that all flows through OCI --

Right. Exactly.

And I guess the same issue. You talked about a 15% decline from an income statement perspective. Could increase your pre-tax cost about $10 million. Is there a similar type of sensitivity on the income statement impact?

Oh, I see what you mean. If we have a 10% decline.

Yeah, why don't we get back to you on that, Jim. We just don't have it in front of us.

And I guess the final question is, in the 2.20 to 2.40 guidance for next year, what have you guys assumed? Is it the 10 million of incremental costs, or have you assumed something -- some sort of band?

Well, we have the pension expense, Steve, was what in the forecast?

I'll tell you what, Jim, let me answer that prior question, because I got that in front of me. Then if you could restate this question.

Sure

The variability, if we use a 6.75 discount rate, if you use a 5% negative return for the year, it could be $5 million difference. If it's a 20% negative return, it could be 5 million going the other way. So that gives you about a band. And what was the most recent question then you asked?

Oh, I was just saying in the 2.20 to 2.40 guidance for next year, what has been the assumption of the incremental pension costs that you guys have assumed?

We thought that that would be a pretax about $10 million more than this year.

Okay. So that's -- got you. Great. Thank you so much.

Okay, Jim.

At that time I would now like to turn the conference back to Mr. Abdoo to conclude. Thank you that concludes our conference call today. If you have additional questions, Colleen Henderson in the Investor Relations Office will be available at 414-221-2592. This concludes Wisconsin Energy's third-quarter 2002 conference call. Thank you very much for participating. Have great weekend.

Ladies and gentlemen, an archive of this web cast will be available approximately two hours after the call at www.wisconsinenergy.com or a telephone rebroadcast will be available approximately one hour from now. To access this rebroadcast dial 1-800-428-6051 and enter the pass code ID number of 219346. This rebroadcast will be available until November 1, 2002, at 11:00 p.m. eastern standard time. Thank you for participating in today's conference. And have great day. All parties may now disconnect.