威斯康辛能源 (WEC) 2003 Q3 法說會逐字稿

Good afternoon and welcome to the Wisconsin Energy third quarter earnings conference call. 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 Securities & 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. This conference is being recorded for rebroadcast and all participants are in a listen-only mode. After the presentation the conference will be open to analysts for questions and answers. In conjunction with this call Wisconsin Energy has posted on its Website a package of detailed financial information on its third quarter performance at www.wisconsinenergy.com. A replay of our remarks will be available approximately two hours after the conclusion of this call. Now I would like to introduce Richard Abdoo, Chairman of the board and Chief Executive Officer of Wisconsin Energy Corporation. Please go ahead sir.

Good afternoon and thank you for joining us on our conference call to review our third quarter results. Let me begin by introducing the members of the Wisconsin Energy management team that are here with me today. We have Gale Klappa, president of Wisconsin Energy, Allen Leverett, Chief Financial Officer, Jim Donnelly, president and Chief Executive Officer of WICOR Industries, Larry Salustro, Senior Vice President and general counsel, Jeff West, treasurer and Steve Dickson, controller. All of them will be available to respond to your questions at the conclusion of our prepared remarks. I would also like to take this opportunity to introduce the newest member of our leadership team Rick Kewster (ph), president and CEO of We Generation, which is responsible for our generation efforts. Rick joined us on October 13. Previously he held leadership positions at Southern Company and Mirant Corporation (ph). We are very pleased to have him with us. I am going to begin today by giving all of your an update on our Power of the Future plan. Then Gale will provide an update on other aspects of our business including the status of our nuclear units. Finally, Allen will report on our third quarter financial results. At the end of our remarks we look forward to your questions.

As we reported on our last call, we have begun construction of our first intermediate load combined cycle unit at Port Washington. This 545 megawatt unit will be fueled by natural gas and be ready for service in mid 2005. The demolition of the three existing coal units on the site was completed in June. Foundations for the heat recovery steam generators, the combustion turbine, and the steam turbine are in place and we have completed installation of major underground fire protection, piping and electrical underground duct banks. The heat recovery steam generators are on the site and the combustion turbine and steam turbine are expected to arrive within the next 60 days. We are on schedule. We are on budget. We have approximately 70% of the engineering and 5% of the construction completed to date. The second leg of our Power of the Future plan, our proposal to add 1800 megawatts of base load coal fueled generation at our Ocrig (ph) site is continuing on schedule.

On September 20th the public service commission of Wisconsin completed its technical and public hearings on our proposal. The record is now closed. Briefs have been filed. We expect that the public service commission will begin their deliberations in the near future and render a decision on our request on or about November 10th. I'm now going to turn things over to Gale for an update on other aspects of our business.

Thank you Dick, good afternoon everyone. As you saw in our news release this morning our third quarter earnings came in at 26 cents a share. That compares with 45 cents a share for the third quarter of 2002. Results for this quarter include an asset valuation charge of 22 cents a share related to the sale of our Siemens power island as well as a gain of a penny a share for the sale of Minergy investments. Without these items our earnings totaled 47 cents a share for the quarter. The asset sales I just briefly mentioned are consistent with our plan to divest our non-core holdings and reinvest in our regulated businesses. As we make progress toward this goal, we continue to reduce our business and financial risk and enhance our regulated franchise businesses.

Moving now to an update on our nuclear operations, the nuclear regulatory commission as you may know recently completed its three-phase inspection of of our Point Beach nuclear plant. This inspection included a review of our corrective action and emergency preparedness programs as well as our engineering operations and maintenance functions. Midway through the inspections the NRC stated in a public briefing that they were satisfied with our capability to protect the public health and safety. They also made positive comments about our emergency preparedness drill which took place during the time of their inspection. We expect the NRC to conduct another public meeting and another public briefing in mid November. And we will have further meetings with the NRC to discuss follow-up actions as a result of the inspection.

Now, on the 4th of October we began a refueling outage at unit 2 at Point Beach. The unit should be back on line within next few weeks, and during this outage we the completed first intrusive inspection of the reactor vessel head for unit 2. The inspection I'm pleased to report went very well. We found no recordable flaws. Last year we also successfully completed this same inspection for unit 1 at Point Beach.

We're also making good progress on the price increase request we filed in July with the public service commission of Wisconsin. The total request as you may recall was for approximately $90 million, with $64 million being for our electric and steam business and $26 million for our natural gas regulated business. These price increases are primarily related to construction at unit 1 at Port Washington which Dick referred to earlier, as well as cost associated with the major new natural gas lateral that we're just about to complete. in fact it should be completed next month here in Southeastern Wisconsin.

Testimony for our rate case is due in late November, and the schedule which the public service commission has just set, calls for hearings to start in mid December. We anticipate a decision sometime in the first quarter of 2004. Now, before I turn things over to Allen for an in-depth discussion of third quarter financials I'd like to add one other thought. As we look ahead to the remainder of 2003 and beyond, I'm convinced that our growth strategy is sound, that we have the right plan in place and a very solid theme to excuse it.

I am particular [inaudible] Rick Kewster. He brings significant generation experience to our team. He also has a strong background in nuclear engineering plant operations and power plant constructions. In fact at Mirant, Rick had overall responsibility for the construction of a major coal plant in the Philippines. So Rick we're delighted you're here. Now here is Allen with an in-depth look at our third quarter numbers. Allen.

Thanks Gale, as Gale mentioned, we are at 26 cent per share for the quarter vs. 45 cents in the same period last year. It includes 22 cents non-cash charge for the sale of the Siemens power island as well as a gain of 1 sent per share on the sale of Minergy investment. Adjusting for each of these items brings our earnings for the quarter to 47 cents per share. I’ll discuss the cash impacts of each of these sales in just a moment.

I am going to start my review of third quarter earnings by discussing the drivers of operating income and then I'll move down the income statement to the items below the operating income line. Once we've gone through the earnings for the quarter I'll provide you some details in our cash flow as well as my view on the actions that Moody's and Fitch took on our credit ratings last week. And finally, I’ll give you review on my current view of earnings for the full year. It may be helpful as I make my remarks for you to refer to pages 3 through 8 of the earnings package that we posted on our Website this morning.

On a consolidated basis our operating income was down $42 million for the quarter. This includes the asset impairment item and the gain from the sale of the Minergy investment that I have mentioned a moment ago. Operating income for the utility energy segment which includes Wisconsin Electric as well as Wisconsin Gas was 119 million. This was down 3 million from the third quarter of 2002. Negative factors included cool weather, fuel cost, employee benefit cost, and bad debt expense. Substantially cooler weather as compared to the third quarter 2002 reduced operating income $12 million. As measured by cooling degree daze the third quarter was 19% cooler than the same period last year, and 2% cooler than normal. Higher fuel and purchase power cost pulled operating income down by $6 million. Purchase power costs were higher due to an increase in natural gas prices which is the primary fuel for the power that we purchase. This resulted in a 22% increase in the cost per megawatt hour of purchased power.

Earlier this year we had asked for a $55 million annualized fuel revenue increase. Since mid March we have been charging a fuel rate on an interim basis which included this increase. In September after updating the request for recent annual data actual data including higher natural gas prices we received an order from the public service commission which set the final increase at $61 million on an annual basis. Remember that the final rate will only be charged for just over 3 months so we will not receive the full annual difference between the final and interim increases this year. Even with this fuel increase our fuel underrecovery stood at $17 million through the end of the third quarter. However, I do expect that our underrecovered balance will fall somewhat in the fourth quarter. Higher employee benefits and bad debt expenses reduced operating income 13 million and $2 million respectively in the quarter. So together weather, fuel, purchase power cost, benefits, higher bad debt expense - those all together reduced operating income by $33 million as compared to last year.

On this side, our natural gas business had a $5 million improvement from revenues it received through its gas cost incentive plan. In addition, we had a positive swing of $9 million quarter over quarter due to settlement expenses related to the Giddings and Lewis litigation in the third quarter of 2002, which did not recur this year.

We also had an $11 million improvement due to the timing of scheduled outages at our Point Beach nuclear plant. The fall outages in the forth quarter this year, while last year they fell in the third quarter. Combined with other items and $5 million, all of these taken together improved operating income by $30 million, netting the impact of the positive and the negative drivers that I just reviewed brings you to the $3 million decrease in the utility segment operating income for the quarter.

In the face of the generally soft economy, manufacturing segment posted record third quarter revenues of $183 million, up 2% over the prior year's record revenues of $179 million. Operating income margins held steady with the prior year, as the continuing cost reduction focus offset higher pension expense and the impact of price competition in certain market segments. This translated into a $1 million increase in operating income.

Sales in our water systems market manufacturing segment's largest market were up 8% over the prior year. Market share gains in Europe as well as wet conditions along the U.S. East Coast were the primary drivers for the sales increase. All other market segment sales were at or near prior year sales levels with the exception of the water treatment and beverage units which were down more than a million dollars. The non-utility segment recognized 41 million of operating losses in the third quarter compared with net operating increase of 5 million last year. The decrease was driven by the asset impairment charge of $40 million recorded in the quarter related to the pending sale of Siemens power island and the sale of Wisvest (ph), CT in December 2002, which had $8 million of operating income during the third quarter of 2002.

[Gap in audio] Corporate and other operating income improved $6 million in the third quarter of 2003. The primary driver here was the gain on the sale of the Minergy investment. Taking these four segments together brings you back to the $42 million decrease in operating income in the quarter. Without the impairment charge as well as the gain on the sale of the Minergy investment, our operating income would have been down $5 million. We think that is a pretty good performance, considering the soft economy and a cool weather and our service territory this quarter. Other income for the third quarter of 2003 was $9 million or $4 million more than 2002. This improvement was primarily due to our interest in improved earnings of American Transmission company and losses recognized in 2002 on fuel oil contracts at Wisvest Connecticut's two power plants.

Financing cost were down 3 million during the quarter; and this was due to reduced debt levels as well as lower interest rates. Third quarter 2003 effective tax rate was 38.3% as compared to a rate of 38.8% for the full year of 2002. This reduction was primarily due to tax credits associated with rehabilitation projects and other factors.

Now let's take a few moments to review our cash flow picture. We generated $542 million of funds from operations during the first nine months of 2003. We also received $19 million from asset sales during the same period, which included $13 million of sales related to our real estate investments and $5 million related to the sale of the Minergy investment. $57 million in cash proceeds from the sale of the Siemens power island expected over the next two quarters and this 57 million is comprised of 25 million directly from Siemens and 32 million of associated tax benefits. Also this week we closed on the sale of our interest in two retail energy management services companies and received approximately $20 million in proceeds including $8 million in dividend. The sale resulted in a five sent per share gain which will be reflected in fourth quarter results.

We now expect to generate nearly $100 million in cash from 2003 asset sales. This is a great start on our plan to generate $400 million from asset sales over the period from 2003 to 2008. Sales of equity from our dividend reinvestment and other plans during the first nine months brought in $43 million of cash netting out the $7 million in share repurchases we completed in the first quarter of this year brings our net year-to-date equity issue answer for the year to $36 million.

During the first nine months of 2003 the net increase in debt totaled 42 million. We used this cash to fund capital expenditures of $502 million with 243 million dedicated to our utility businesses and 129 million for our Port Washington generating station. In addition we paid $70 million in dividends. At the end of the third quarter our debt to capital ratio excluding trust preferred was 61.8% as compared to 62.9% excluding trust preferreds at the end of 2002.

Before I update our earnings outlook for the remainder of 2003, I want to comment briefly on the recent actions that Moody's and Fitch took on our credit ratings. You can refer to page 8 of our earnings package for summary of all our credit ratings. With the exception of Wisconsin Gas which was lowered two notches, both Moody's and Fitch lowered our senior unsecured debt writing by one notch. With the exception of the Moody's rating of Wisconsin Energy, which has a negative outlook, all other ratings now have a stable outlook. The change in ratings was within the range that I expected. The new ratings were based on the expectation that we would issue $300 million of equity over the period from 2003 to 2008 while generating $400 million in cash from asset sales over the same period. This will not require public offering of equity. I expect to raise all this equity through our stock plans at a rate of approximately $50 million a year. Also as I mentioned earlier we expect to generate nearly $100 million in cash including tax benefits from asset sales this year.

Looking to the remainder of the year we are tightening our annual guidance range to $2.25 to $2.35 per share, excluding the 22 cent asset valuation charge and 6 cents of gain on sales items. On a GAAP basis our annual guidance is a range of $2.09 to $2.19 per share. Also as we have disclosed on our form 10-K if we sold our remaining non-utility energy assets in today's market conditions, we believe we would experience a loss on the sale. To summarize, we had a good third quarter and are on track for the year. So with that I'll turn things back over to Dick.

Thank you Allen. Our core businesses remain strong in the quarter and we are well positioned for the future. We continue to provide reliable and affordable service to our customers and value for our shareholders. And now we would like to take your questions.

Thank you. The question-and-answer session will begin now. [operator instructions] The first question comes from Doug Fischer. Please state your question.

Thank you and good afternoon. To the degree that you can give us some color on how the hearings went on coal plants, that would be helpful. And just as to where things might stand a little bit from both getting approval for the plants, and also, cost of equity and capital structure issues, so the degree to which you could give us some color there would be helpful.

This is Larry Salustro. The hearings were extensive. There were many parties participating. The hearings went two weeks. They went into the evenings, and they went on two Saturdays. But they were completed according to the schedule that the commission set. Briefs have been filed. We anticipate the commission will be discussing for the first time in a public meeting next week what they thought of what everyone said and what everyone argued. And we believe that they will adhere to the final scheduled date that they set for a final decision of November 10th. We really don't have anything to say as to what the likely outcome is or how any particular issue is going to be resolved. We have to wait and see.

Larry, what day would you expect the commission to begin their deliberations?

The only information we have is that it will be sometime of the middle of next week. I don't know whether that is Tuesday, Wednesday or Thursday. It's completely within their discretion. And they have not publicly announced, as far as I know, which date that is. Or whether it will be one day, two day, or a three-day discussion.

Doug, that will be a public meeting though, and as we understand it, it will be available on the Internet.

While we're all down in Florida [laughter]

Just can you comment at all as to when you're going to give us a -- an '04 earnings outlook and any kind of color on the '04 outlook from where we stand right now?

We will, when we have our earnings call in February, where we review 2003 performance, we'll give you guidance for 2004. But at this point, I don't really have any color on 2004.

And then one last question, thank you for that Allen. One last question, I suspect that currency was an issue at manufacturing. Can you comment on that?

This is Jim Donnelly. For the quarter, currency was about $3 million in terms of an increase in revenue, and 12 million year-to-date. On an earnings basis it was much less than that, almost nothing in the quarter and maybe a million dollars, less than a million dollars, year-to-date.

Okay, thanks Jim. That's it for me right now.

Thank you Doug.

Next question comes from David Broomhouse. Please state your affiliation followed by your question.

Copier Capital (ph). Good afternoon. Doug took a lot of my questions but could you talk a little bit about the manufacturing business, it's obviously seems like it's had a good performance year-to-date. What you foresee over the next 6 to 12 months, and also set of long term plans with that. I know there's speculation that you might find a partner there, et cetera.

Jim Donnelly again. Looking forward, we don't see anything that would significantly change the pace of performance that we've been on thus far this year. We don't yet have detailed plans for next year, and so I really couldn't -- couldn't comment on that at this time. But there isn't anything else out there that I would expect would significantly affect those results either up or down.

David, Donnelly and his team continue to do a very good job focusing on first efficiency improvements and cost reductions. That has been a big helpful factor this year as some of the markets segments clearly have slowed. Others of course, given the wet weather in the East have done well. Focus on efficiency improvement I think has been a real plus this year.

And long term plans are still to hold that business?

Obviously, this business has performed very well for us. We have no current plans to sell the business. Over the long term, we always look at every business in the portfolio. But again, this has been a very good performing business for us. It's a cash generator which is very helpful to us at the current time, and we're very comfortable with its long term performance.

Okay, great, thanks for the questions.

Thank you.

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

Yes. You've done a good job of disposing of certain non-core assets. Calumet is still an issue. What -- any new thoughts or any updated thoughts on Calumet and what it's future might be now that you've gone through the summer with it?

Well, on Calumet, I think all of us feel like over the longer term, that asset will be well-positioned. Clearly, there is market excess in the lower Midwest, not in Wisconsin but in the lower Midwest right now. So the asset actually performed about exactly where we expected it to be in terms of the budget this year, and longer termed it should be a well-positioned asset. And we're not in any particular hurry to do anything with an asset that we think will have a little bit greater value down the road.

Any -- can you comment on what the heat rate of that CT is and then roughly speaking, when might we see a better supply-demand balance in the Chicago area?

we will have to get back with you. One of our folks will get a call back to you on the specific heat rate. I can't recall off the top of my head and we don't have that in the room with us. I would say, given my sense of the lower Midwest market and the capacity abundance today, you're probably looking at although not nearly as great an overcapacity as some of the regions, you'll probably see 36 months before you start to see much more balance in terms of demand and supply.

Then a final question. What did you sell at Minergy?

We had an investment in a grinding plant that took the residue from one of our renewable plants and processed it into a -- and adder to Portland cement. And we were minority holder and the majority partners wanted to purchase the facility outright. And we agreed to sell it to them.

At a nice gain?

At a nice gain. And a contract where they continue to take the residual from our renewable plant.

And then just if you could repeat what you said about the sale of those two energy services businesses, what were the proceeds and the cash and the gain? I -- that went a little quickly for me.

Doug, let me thank you for that. It was 20 million in total proceeds. $12 million of that was from the buyer and $8 million was dividended out of the company. 12 from the buyer and 8 million of dividends that we were able to take out of the company in connection with the sale. So that gets you to the $20 million and in terms of the book gain, it would be about five cents a share. But we booked that in the fourth quarter, Doug.

Thank you, Allen.

And Doug, if you're concerned about being in Florida next week, you might invite the commission down there to take its hearing with you.

Doug Fischer Thank you, Gale. [laughing] I'm sure they don't want to move from Wisconsin. They like it too much.

The next question comes from Paul Ridzen. Please state your affiliation followed by your question.

McDonald Investments. I am just wondering if you could comment on your expectations for pension costs. And then if you could just-- given the recent rating agency actions if it's reasonable to expect the dividend policy is just going to sit tight for a while.

Let me deal with the pension question first. At this point our current long term earnings rate assumption is 9%. And this year we've done fairly through the end of September, gross of fees is just over 12%. So we're looking pretty good at least in the current year on pension earnings. And of course, all the details of FAS 87, all the smoothing and some good years dropping off and some bad years coming on. So I would expect the pension increase -- pension expense, rather, to increase somewhat over the next couple of years. And we can certainly when we talk about our guidance in February we'll talk more detail sort of the trend that we see. But the trend is definitely up.

I think your second question went to dividend policy. And what we're going to do, get this order from the commission in November which will really tack down our capital requirements for the next several years, of course meet with our board. And I would hope that some time early next year we would be able to give you some more views on dividend policy.

Allen's exactly right. We will have much greater clarity than we've had in a considerable time. As you will remember the evolution of the Power of the Future plan goes back three years. So with the anticipated decision from the commission sometime in early November, we'll have much greater clarity on our precise capital spending needs and our sources of funds, also, you know, if we're fortunate enough to get an order to build plants we'll have an idea of what the return on equity and capital structure is going to be. So much greater clarity on our cash flow and financial picture and capital spend, and we will be chatting with our board, and try to give all of you clarity on our dividend policy going forward early next year.

Okay, thank you.

Next question comes from Paul Paterson (ph). Please state your affiliation followed by your question.

Glen Rock Associates. How you guys doing?

Fine. How about you Paul?

Little hectic, actually. I apologize if these were asked. What was weather for the quarter versus normal and versus year-to-date?

While Allen is looking up the numbers, you heard about endless summer, we had one that didn't show up.

I also thought it was pretty mild there.

It was 19% cooler, this summer, summer of '03, compared to summer of '02 in Wisconsin and I think 2% below normal Allen?

That’s right. In terms of cooling degree days, putting the earnings numbers around that, or the operating numbers rather, if you compare it to the third quarter of 2002, we were -- that income or operating income was reduced $12 million. Now, we were pretty close to normal for the third quarter. We were only 2% cooler than normal. So I would say probably operating income was only affected $2 million or so versus normal.

By operating income do you mean after tax or pretax?

Pretax.

Pretax?

Compared -- it was a tough comparison from a weather standpoint compared to last year as you know.

Maybe because you guys were from Southern Company?

Used to a little more humidity.

What did Wisconsin Park do -- what was it for the year, what was the weather for the year, year-to-date?

Weather on a revenue year-to-date, about $5 million.

Positive or negative?

Negative.

Okay.

That's on revenues. Deduct fuel costs and --

That's just revenues?

Yes.

Ok, so it's almost negligible?

Very slight, very slight negative if you look at the whole nine months.

Okay and then Wisconsin Park for the quarter?

Wisconsin Park for the quarter was not very significant at all. They had operating income less than 300,000. So not that significant.

You guys didn't sell anything I guess from there?

Not too much.

Nothing material.

Great, thanks a lot guys.

You're welcome.

The next question comes from Jessica Rutledge (ph). Please state your affiliation followed by your question.

Lazed Asset Management (ph). Curious now that the records closed on Power of the Future and we are about to see the debate start. What you think the most contention part of the plan are likely to be or what you expect to hear challenge in the next couple of weeks.

We just need to let the whole process unfold and it will start as Larry said very, very quickly middle of next week the commission will start its public debate. It’s very difficult to tell. Actually when you say contention. I mean the way the commission works here is very judicial in nature. And the record is closed, the briefs are in. And they will literally sit in a room, that you can listen to the audiotape live on. And they will discuss the issues in a very reasoned and rational way. So I mean clearly, all of the major issues that are there, things like which site we proposed alternative sites, a North side site or a South site. The in-service date are the years we propose, the dates they think are the most appropriate. What should the capital structure be, what should be the return on equity be. Is there a need for the plants? All of those things will be discussed in an issue matrix and they will debate their options and debate it in a very open way. Larry?

No, that's correct. There isn't -- there has not been, among the commissioners themselves, contentions and disputes and arguments. They don't conduct themselves that way.

Okay, thank you.

Thank you Jessica.

[operator instructions]

Hearing no more questions, that concludes our conference call for today. I want to thank all of you for participating. If you have additional questions, Colleen Henderson will be available in the investor relations office at 414-221-2592. Have a good afternoon and thank you for participating. Good day.

Bye-bye.

Ladies and gentlemen, if you wish to access replay for this call, you may do so by dialing 1-800-428-6051, or 973-709-2089 with ID number of 307141. Thank you for participating, and have a good day. All parties my now disconnect.