威斯康辛能源 (WEC) 2004 Q3 法說會逐字稿

Good afternoon and welcome to the Wisconsin Energy earnings third quarter 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. These statements are based on management’s expectations at the time they are made. In addition to the assumptions and other factors referred to in connection with the statements, factors described in the Company's latest Form 10-K and subsequent reports filed with the Securities and Exchange Commission, could cause actual results to differ materially from those contemplated. During the discussion referenced EPS will be based on diluted EPS unless otherwise noted.

This conference is being recorded for rebroadcast, and all participants are in a listen-only mode at this time. 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 Mr. Gale Klappa, Chairman of the Board, President and Chief Executive Officer of Wisconsin Energy Corporation. Please go ahead, sir.

Thank you. Good afternoon everyone. In honor of election day across the land I would just like to say I'm Gale Klappa and I support this message. We have our own members of the Wisconsin Energy electoral college here with me today, and I promise the election parallel will end right here -- Rick Kuester, President and CEO of WE Generation, Allen Leverett, Chief Financial Officer, Larry Salustro, our General Counsel, Jeff West, our Treasurer, and Steve Dickson, our Controller. All of us will be available to respond to your questions at the conclusion of our prepared remarks.

As you saw in our news release this morning, our third quarter earnings came in at 71 cents a share. That's compared with 26 cents a share in the third quarter of 2003. Results this quarter include a gain of $1.23 a share on the sale of our pump and water systems business, offset somewhat by asset impairment charges of 82 cents a share, debt redemption costs of 9 cents a share and severance costs of 7 cents a share. In the third quarter of last year we recorded net non-cash charges of 21 cents a share. Now if we strip out the one time adjustments in both years, our third quarter earnings came in at 46 cents a share. That's compared to 47 cents a share in last year's third quarter.

Overall we delivered strong positive results despite one of the coolest summers on record in Wisconsin. We've also made major progress this year in strengthening our balance sheet. Allen will discuss our debt to total capital ratios in just a few minutes. I would like to point out in the first nine months of 2004, we've reduced our total debt outstanding by more than $875 million.

Now I'd like to update you on the progress of our power of the future plan. Let me begin with our Port Washington project. As you know the Public Service Commission has approved the construction of two natural gas fired units at our Port Washington site, north of Milwaukee. Each unit will have a capacity of 545 megawatts. Construction on the first Port Washington combined cycle unit is now approximately 67% complete. We currently expect the unit to be operational in July of next year and the project remains on budget.

Back in April a Wisconsin circuit court judge dismissed the first appeal of the Commissions order for the gas units and that case is now closed. However the same petitioner filed a second appeal challenging the Commission’s reauthorization of our project. Following procedural decisions by the court in the past few months which have been favorable to the Company, the petitioner recently requested a voluntary dismissal of his appeal and the other parties obviously agreed. The court signed an order over the weekend dismissing this appeal and ending the litigation.

In May we filed an update of the state's capacity and demand situation as required before beginning construction of the second unit at Port Washington. Our latest model runs show that the need for capacity in the state is even greater than when the Commission first reviewed the need back in 2002.

As a result we have officially initiated construction of the second gas unit, by kicking off the demolition of the recently retired coal units at the site. The demolition will be followed by construction of the new unit. That should start in 2006. And the second unit is scheduled for service in time for the peak summer season in 2008.

Now we will turn to the status of our construction plans at Oak Creek. In November of 2003 the Commission approved the construction of two 615 Megawatt coal fired units at our Oak Creek site, south of Milwaukee. The first of these base load units is scheduled to go into service in 2009, and the second unit in 2010. I expect that Wisconsin energy will own approximately 83% of this capacity, or about 1,030 megawatts, and invest approximately $1.8 billion.

As you know there are legal challenges to the Commission's decision on this project as well as environmental permits that must be obtained. The authorizations for the coal units are the subject of five appeals, primarily raising environmental issues. All of these appeals were consolidated several months ago into a single case in Dane County circuit court. The hearing is now complete. All the briefs are in and the judge held a conference with the attorneys for all of the parties on October 8. We expect that the judge will issue his ruling on this case before the end of December.

Of course another key step in the process is obtaining all major environmental permits for the coal units. Four basic permits are required. Three relate to the construction and one to the operation of the units.

First we received our air permit from the Wisconsin Department of Natural Resources in January of this year. In this case the permit is issued first and then it can be contested under state law. The contested hearings concluded on October 21st and all briefs need to be filed by the 30th of December. The judge expects to make a final decision on the air permit by the end of January.

The second permit is the state water and wetlands permit from the Wisconsin Department of Natural Resources. This permit is often referred to as the chapter 30 permit, and it's required to construct facilities in a wetland area. This type of permit is issued only after contested hearings have been held. These hearings were completed on the 25th of August and we anticipate a final decision from the state Department of Natural Resources before the end of the year.

The U.S. Army Corps of Engineers must issue a permit that is similar to the chapter 30 permit whenever a project involves a navigable water way. Public hearing by the Corps of Engineers was held on September 29, and we hope to have a decision on this permit as well before the end of the year.

Finally, there's a permit required for the operation of the water intake and discharge systems. We anticipate that a draft of that permit will be issued for public comment well before the end of the year. We have initiated site preparation activities this fall at Oak Creek and subject to the issuance of permits and satisfy progress on the litigation, we plan to issue full notice to proceed to our contractor at the Oak Creek site in the spring of 2005.

Turning now to other developments, in May we filed a price increase request for approximately $85 million for our electric and steam business. These increases are needed to recover costs related to the continuing construction of unit one at Port Washington and the initial work on unit one at Oak Creek. Technical hearings will be held by the Public Service Commission in mid-November to review this request. We are asking that the price increases take effect in January of 2005.

In March of this year Governor Doyle signed into law a measure that gives utilities the ability to securitize the portion of customer bills that recovers the cost of environmental upgrades. In June, based on that legislation, we filed an application with the Commission seeking authority to issue up to $500 million of what is known now as environmental trust bonds.

A few weeks ago the Commission, after deliberating, authorized the issuance of approximately $425 million of the environmental trust bonds. We are still seeking approvals from the appropriate taxing authorities. Once we receive those approvals we expect to issue the bonds in early 2005. This financing approach will result in a lower cost to our customers, as we work to cut plant emissions across our system by 50%.

In September we also announced an enhanced severance plan for selected management employees who elect to voluntarily resign. This voluntary severance package is being offered to help reduce our operating expenses across the Company. Eligible employees have until November 12 to apply. We expect that at least 120 employees will volunteer for the program. Actually more than 100 have already signed up. In addition we've also announced a similar voluntary program for one of our unions. A total of 49 employees can participate in the union program.

The environmental trust financing that I mentioned earlier, and this voluntary severance plan that I just described, are part of an ongoing effort to reduce our costs and mitigate the need for price increases in the future.

Finally a brief comment on two other matters of interest -- in September, Wisconsin Energy received the highest possible score from Governance Metrics International, a corporate governance research and ratings agency. 26 companies, 20 of them American, 5 Canadian and 1 Australian, received the perfect scores of ten. That's GMI's highest rating, from among a population of 2100 global companies. GMI's rating system looks at financial disclosure and internal controls, board accountability and social responsibility. We are very pleased to be recognized for our corporate governance policies here at Wisconsin Energy.

Just a couple of weeks ago, WE Energies was named the most reliable utility in America. The award is granted each year by a national consulting firm, and is based on a rigorous process that analyzes data on outages and service interruptions. This is the third straight year that we have been name the most reliable in the midwest, and it's the first year that we've received the national award. Now I will turn the call over to Allen for a detailed review of this quarter's financial results.

Now as Gale mentioned, on a GAAP basis we earned 71 cents a share for the quarter, versus 26 cents a share in the same period last year. If you adjust for all of the one time items in both the third quarter of this year as well as last year, we earned 46 cents a share versus 47 cents last year.

Because of the number of one time items in the results in this quarter, I am first going to walk through the drivers for the quarter without the one time items, and then I will review the one time items, so that you can reconcile to the GAAP results. Once I've reviewed the earnings for the quarter, I will provide you some details on our cash flow, as well as update our guidance for the year. It may be helpful for you to refer to page eight of the earnings package that we posted on our website this morning as I make my remarks.

On a consolidated basis our operating income excluding one time items was $118 million versus $134 million last year. Operating income for the utility energy segment, which includes Wisconsin Electric as well as Wisconsin Gas, was 115 million compared to 118 million in the last year's third quarter. Operating income declined by 13 million versus 2003 due to substantially cooler weather. As measured by cooling degree days, the third quarter of 2004 was 34% cooler than the third quarter of 2003 as well as the 20-year average.

On the positive side, our bad debt expenses were $6 million lower during the third quarter of 2004 as we received approval to defer residential bad debt cost in excess of the amounts included in base rates. Also, reduced nuclear costs of $4 million due to outage timing helped to partially offset the reduction in income related to the cool weather. Together these items added $10 million to operating income as compared to last year. Netting the impact of the positive and negative drivers I just reviewed brings you to the $3 million decrease in the utilities segment's operating income for the third quarter.

Operating income at our pump and water systems business, which was accounted for as a discontinued business during the third quarter of 2004, was $3 million. Now this compares to $16 million in the third quarter of 2003. The key driver of the difference between these two numbers is the fact that we only received earnings from the pump and water systems business in the month of July this year. Taking these two segments together brings you back to the $16 million decrease in operating income excluding one time items for the quarter.

Other income for the third quarter of 2004 was $14 million, which is up 5 million from last year. This was driven primarily by increased earnings on unconsolidated investments. Total financing costs decreased by $8 million, and this decrease was driven by the large reduction in our debt levels. Income taxes were down 2 million due to reduced earnings. Adding these items brings you to $55 million of net income excluding one time items for the quarter versus $56 million last year, or in EPS terms, 46 cents versus 47 cents.

Now let's review the one time items. Results this quarter include a gain of $1.23 a share on the sale of the pump and water systems business, offset somewhat by valuation charges of 82 cents a share associated with our Calumet and Minergy Neenah facilities, debt redemption costs of 9 cents a share, and severance costs of 7 cents a share. Adjusting the 46 cents for these items brings you to the 71 cents per share on a GAAP basis.

In the third quarter of 2003 we had valuation charges of 22 cents a share and a gain of 1 cent a share on the sale of a Minergy investment. Reflecting these items brings you to 26 cents a share on a GAAP basis for the third quarter of last year.

Let me turn now to cash flow. During the first nine months of 2004 we generated $586 million of cash from continuing operations. This was $113 million better than the same period of 2003 and reflects both strong cash earnings as well as improvements in working capital levels. We also received cash proceeds of $902 million from asset sales during the same period, which includes 871 million related to the sale of the pump and water systems business, and 31 million in sales related to our real estate investments.

Through the first nine months of 2004 we repurchased approximately 1.6 million shares of our common stock at a total cost of $49 million. And in early October we repurchased an additional $1 million in shares to complete our $50 million share repurchase plan. In addition we are using cash to satisfy any shares required for our 401 K plan, options and other programs. So going forward we do not expect to issue any additional shares.

On the uses side, we had Capital expenditures of $416 million during the first nine months of 2004, with 293 million of this dedicated to our utility businesses, and 114 million of this for our power of the future construction expenditures. In addition we paid $73 million in common dividends.

At the end of the third quarter, our debt to capital ratio was 58.3%, and this compares to 64.4% at the end of 2003. I expect our debt to capital ratio at year end will be well below the 61.5% target we set for 2004.

For 2004 our earnings guidance remains at $2.28 to $2.38 per share. Now this translates into a fourth quarter earnings outlook of 74 to 84 cents per share. These values include pump and water systems earnings through the end of July, but exclude the net gain we recorded on the sale of this business, as well as charges incurred for severance, debt redemption and asset impairments.

However if the weather is normal in the final two months of the year, and the plants operate as expected, we are well-positioned to finish within the upper half of this range. So again we expect to finish in the upper half of our $2.28 to $2.38 guidance range in 2004. In addition to the severance costs recorded through September 30, we estimate that additional fourth quarter severance charges could run between 5 and 7 cents per share. So on a GAAP basis I expect our earnings for 2004 to be $2.39 to $2.49 per share.

Although we will not be giving 2005 earnings guidance on this call, I did want to give you a base of earnings in 2004 that excludes the pump and water systems business, and includes the benefit of the debt and share reductions stemming from the sale of this business. This range is $2.14 to $2.24 per share. So again a pro forma earnings range for 2004, excluding the pump and water systems business and including the benefit of the recapitalization, is $2.14 to $2.24 per share. Clearly we expect growth in 2005 off this pro forma 2004 base. So with that I will turn things back over to Gale.

Allen, thank you very much. We delivered a strong quarter. We are well-positioned as we work into the fourth quarter of this year. And at this stage we will be happy to answer any questions that you might have.

Thank you. (OPERATOR INSTRUCTIONS) Asher Khan of SAC Capital.

Good afternoon and congratulations on a great quarter. I know you guys mentioned the 2.14 to 2.24 as a pro forma. As you mention in your call that you will come in upper half of the guidance range if things remain normal, that would imply upper half of this range as a normalized starting point if I'm correct.

You are absolutely correct, Asher.

Then can you just take us to things in '05 that we can look towards as being positives or negatives as we build up our models? I know you aren't giving any guidance but could you guide us towards things which we can look at generically?

Sure. We’ll be happy to do that. There are a number of positives and a number of negatives that we are continuing to work our way through as we get to a point of being able to issue guidance. I will let Allen cover those details with you.

First on the positive side, of course would expect some volume growth at the utility. We will have a half year of earnings from the first unit at Port Washington. And we are doing the work force reductions that Gale mentioned, and also we will have a bit less depreciation expense on our nonregulated investments. So, Asher, those would be four positive drivers.

On the negative side, first we will have two nuclear outages next year as opposed to one. And those outages will be a little longer than normal outages because we are replacing the reactor vessel heads. We have continued pressure from benefits cost, and that's active, retiree medical as well as pension.

And then finally on the fuel cost side, that will be a challenge next year as well because as we look year-to-year as we go from '04 to '05, because we are adding the new gas units there's much more gas in the mix than what you had in 2004. So at least on a qualitative perspective, Asher, those are some positives and negatives looking year over year.

As Allen said, we clearly expect some growth in '05 off the 2004 pro forma range that Allen described.

Could you quantify or it's too early what these work force reductions savings could be from the plans that you have announced this year?

It's slightly too early, Asher, because as I mentioned in the script employees have until November 12 to sign up. Then with our recent agreement with one of our unions, that program which is just beginning now will run I believe until early to mid-December. So it's a little bit too early to specifically quantify how many employees, and therefore what the overall benefit will be. I

can tell you, though, that we expect the total charge in both third and fourth quarters total, the total one-time charge to not exceed $25 million. And whatever the charge is, I would expect since the program is designed on about a thirteen-month pay back, I would expect we would get 95% or better of the savings next year.

Can you just comment on what you might expect out of the Commission with the new Commissioner in terms of your thoughts, whether the ROEs will be maintained, or any kind of thoughts on the way the Commission might, the new Commission's outlook might change versus the previous Commission?

Well, let me first say that the gentlemen who was appointed by the Governor very recently is someone with a background in energy issues with the state. He has served in the state legislature for a number of years and has been on committees in the legislature that dealt with energy issues. So he has a solid background in the kinds of issues that will be brought before the Commission.

I think probably the best idea I can give you about the Commission's philosophy going forward really has come from the Commission itself, and that is pretty much a steady as she goes, no significant deviation from past policy in terms of their approach to utility regulation. Larry Salustro, anything would you like to add?

Sure, this is Larry Salustro. I agree with what Gale said. This new Commissioner is appointed by the same Governor as the last one was appointed, so two out of three were appointed by the same Governor. And there's no reason to believe there will be major philosophical differences between the two. There certainly will be disagreements on individual issues. There's so many issues and they are so complicated. But as a general matter we don't see a different direction from the Commission based on this new appointment.

We will take our next question from Paul Paterson, Glenrock Associates.

Good afternoon, guys.

Hi, Paul.

I wanted to touch base on the write offs. First of all what happened that made these write-offs happen in this quarter in terms of timing? I know that they weren't exactly the best performing assets, but what happened in terms of that? I guess also going forward. You mentioned that there would be less depreciation in the nonregulated business. I was wondering if you could quantify that because it does seem like a pretty substantial write off. Is that because of the write off?

Let me first talk about the factors that led to these asset impairment charges. I will cover Minergy Neenah, I will ask Allen to cover the Calumet situation, and then give you a direct answer to the lower level of depreciation going forward.

On the Minergy Neenah contract, the Minergy Neenah plant is essentially an energy island. This energy island provides steam and electricity to a large paper mill near Neenah, Wisconsin. It also burns paper sludge from the paper manufacturing operation there at the site. This particular paper manufacturing plant, this particular paper mill, has fallen on very, very difficult times and had been on the verge of closing. They've already had major layoffs at this paper mill.

If you remember the concept that this is an energy island, and essentially our equipment there, our plant there is committed to that energy island and we have really no other outlet for the steam, principally the steam and the power, but absolutely no other outlet for the steam. So essentially we negotiated a revised contract with the paper mill at the site. That contract runs through 2017, and the steam revenues will be less going forward because of the revised contract.

On the other hand, we got a substantial up-front cash payment in return for renegotiating the contract. But going forward, we found an asset impairment when you simply run the appropriate cash flow models, because there are substantially lower steam revenues going forward through 2017. That's the specific incident -- basically a revised contract that was signed in October that triggered the asset impairment at Minergy Neenah. Calumet, Allen?

Let me pick up on Calumet. For those of you that are not familiar, Calumet is a 308 Megawatt natural gas fired peaking plant that's located near Chicago. Paul, it's really the confluence of three circumstances. And you needed all three together to result in the impairment.

The first thing in May of this year, the commonwealth Edison transmission system to which Calumet is connected went into the PJM interconnection. Now, one of the primary sources, projected sources of revenue for the plant is selling energy into the day ahead energy market. And under the rules in PJM if you bid into that market and do not run, you're exposed to significant liquidated damages. Now that's not that big of a deal if you have a fleet of units in PJM but we don't have a fleet of unions, we have a single unit. So the first circumstance, we're being exposed to these liquidated damages in PJM.

The second circumstance was related to our marketing agreement. Currently the outfit of that unit is marketed by Sempra. There was a fair amount of uncertainty before the third quarter. There was a possibility that they might actually take on that risk because they have a portfolio of resources in PJM. So we weren't certain whether they would or they wouldn't take that risk. They have now emphatically told us they wouldn't take that risk, so the risk is going to go to us. That was the second circumstance.

The third circumstance that you needed, we went out and said, all right, can we get outage insurance? Can we buy an insurance product that would back us if we bid into a day ahead energy market, did not run and incurred liquidated damages, can we insure that risk? And the short answer is, in today's market you can. But there's quite a bit of uncertainty as to in the future if you are going to be able to get that insurance.

And in fact when you run the impairment analysis and look at the sensitivity of your forward cash flows to the ability to get that insurance, if just one out of every three years you are unable get that insurance, you have an impaired asset. So it's really a confluence of those three things, being in PJM, no ability to layoff the risk of liquidated damages to a marketer, and really an uncertain commercial insurance market for outage insurance. So the three of those together resulted in a write off.

Your other question related to total reduction in depreciation. If you look at the total reduction in plant balance for these two impairments, both the Neenah plant that Gale went through, as well as Calumet, it's right at $149 million. And if you look at the depreciation break that you will then get, it's about $5 million on a pretax basis, Paul.

Let me ask you this, then. First of all, it sounds like there’s also an impact in that you are also going to be seeing less profitability specifically with Minergy Neenah, because you have a less advantages contract or what have you. Is that correct? I mean from a net income perspective we really should not expect much of a benefit from this at all.

It's going to be very small, the reduction in the steam price. Because remember when you do the impairment analysis you have to bring back all of the reductions in revenue over the term of the agreement. So that goes out almost, what?

2017.

About 13, 12 or 13 years. So if you look at it on an annual basis in any one year it's pretty small, Paul.

Okay. Could you give a breakdown of what was Neenah and what was Calumet in terms of the $149 million?

In terms of the charge, right at 121 million was Calumet and about 28 million was Neenah.

And in terms of the exposure that you see at PJM and what have you, where are you exactly in terms of Neenah? Is this a risk that we think to think about? Obviously you've taken a charge which reflects some of that risk, but in terms of operating going forward is there any risk that you are going to be hammered, or any more volatility because of bidding into the day ahead market or what have you? How do you reconcile the risks that you would -- the three confluence issues that you talked about, how do you -- how should we think about the potential of impacting earnings going forward?

I understand. I think as you look to next year, we have insurance for next year. We have outage insurance. So I wouldn't really worry about any volatility or liquidated damage exposure next year because we have insurance. The uncertainty then is after next year, I mean every year you have to look at re-upping these policies in the commercial insurance market.

So '06 and forward there is some obvious uncertainty. But in '05, I'm not really worried about that risk. As it turns out we could get insurance for '05. I think as we look today at our policy with this unit, if we don't have this insurance in a given year, we are not going to sell into that market because that's just not a risk that we can effectively manage, because as I mentioned we don't have a portfolio or group of assets that are all selling into that market.

Thanks for your help.

[David Sitka], Deephaven.

A number of my questions have been answered. But Allen can you clarify when -- exactly in that pro forma number you gave that excludes the pump business, does, do the benefits -- do those include the full year of those benefits or only the actual since the time the pay downs occurred?

It's an attempt to estimate the full year, David.

David, they let you back from San Diego?

They did.

I’m impressed.

Andy Levy, Bear Wagner.

All my questions were asked. The only thing I missed was on the cost savings side from the employee reduction.

What we said there was it is a little too early to quantify because employees have until November 12 to sign up. We have said and I still believe that our total one-time charge in 2004 for the work force reduction will be no more than $25 million pretax. Whatever the number is, assume it's a little less than 25 million, I would expect our ongoing savings next year to be about 95% of that number because we have a thirteen-month pay back on the plan.

Great. That's what I missed. Thank you.

You're welcome, Andy.

Michael Lapides, Hibernia.

You talked about the nuclear refueling outage for '05. Could you rehash for us the schedule for those? And off of the '03 earnings from your American, your stake in the American Transmission Company, I'm trying to figure out how to model forth growth from that for '05 and '06.

Okay. We will tackle them one at a time. On the outages, the nuclear refueling outages for both units at Point Beach next year, and I'm looking toward Rick Kuester for specific dates. One unit will have a spring outage and the other will have a fall outage at this point.

That's correct, Gale. I'm not sure I have got the specific dates in front of me.

Rick says he doesn't have the very specific dates in front of him. Our spring outages normally start in April, our fall outages normally start in October.

We can get the exact dates.

We will follow up. Colleen can call you back with the specific plan dates. But one is spring normally starting in April. One is fall and normally starting in October. And again as Allen pointed out earlier and we should remind you, these outages will be slightly longer than normal because we are replacing the vessel heads on both units.

Michael, this is Allen. I think your other question related to the base of American Transmission Company earnings in 2004. Is that correct?

Yeah, I mean I was looking honestly at '03 earnings for ATC, and trying to figure out kind of modeling it through the next few years, I mean really trying to get out to the '06, '07, '08 time frame.

Let me offer this up. In terms of the earnings contribution that I would expect from ATC this calendar year, I would expect that to be in the neighborhood of $18 million after tax. Now of course going forward the additional income contribution from that is dependent on how quickly they deploy capital. But I would say a reasonable planning estimate is, say, 4 to 5% growth a year in that net income.

Okay. Thank you.

Paul Ridzon of Keybanc McDonald.

Have you voted yet, Paul.

Oh, yes.

You can ask your question now, Paul.

2.14 to 2.24 pro forma, have you incorporated any weather normalization into that?

That assumes normal weather basically.

That's based on the actual earnings this year.

Right, right.

What has the weather been year-to-date?

Oh, gosh, Allen is right. Next year we will assume normal weather. This year the weather has been abnormally mild.

So there’s upside of 2.14 to 2.24 if we weather normalize? Or has that been done?

The 2.14 to 2.24 is not weather normalized.

Correct.

To the extent that you, we don't know what the weather is going to be like obviously in November and December. But to the extent you look at the whole year for the gas and electric business, if you're below average that would be a bit of an upside for '05.

Can you quantify the year-to-date versus normal?

We basically -- and I'll be candid with you, I don't think weather normalization methodology completely captures the impact of a summer as mild as we had here. We had more days in the 60s with high temperatures in the 60s than we had with high temperatures in the high 70s or 80s. So the weather normalization calculation would say it's about 13 million in terms of the impact, but my guess -- and that's a net income after tax basis. So but whether that's the full reflection of this year or not I think is a good question and is up for debate, but that's certainly a number you can start with.

Your Neenah impairment, I assume you've netted the up front payment against the cash flow impairment?

I don't think under the impairment rules, Steve Dickson is here, our Controller, I don't think you can do that under the impairment rules.

That's correct, Gale. The impairment rules say if we think the future undiscounted cash flows are less than our carrying value then we have an impairment. And we calculate the impairment by trying to determine fair value and we determine fair value by the discounted cash flows. So we took all the cash flows in the future and discounted them back to determine a fair value.

So where did the up front payment appear, was that in this quarter’s earnings?

No, no.

How is it netted against the future cash flows?

The way that you asked the question, they were included in the cash flows when we determined the fair value, but again as Allen and Gale said those cash flows went over 15 years to 2017 and then we discounted them back. The way you asked the question, yes, they are buried within the cash flows when we discounted them back to determine the fair value.

I would make sure we don't miss the other part of your question. The up front payment is not in third quarter earnings.

Okay. That was my real question.

Right. But the contract was not signed until October, so there's no way to put it in third quarter earnings.

Can you address what risks there are with contract reopeners with Bechtel, if we don't have a resolution to these legal challenges?

Rick Kuester is here and we will ask Rick to answer that.

There are some, obviously there's some change order reopeners as if the scope changes. From a schedule standpoint, we start in the spring of next year. We are in good shape in terms of that contract. There are some minor increases that are well within our head room as long as we stay in the starting point of that first quarter, first half of next year.

Thank you.

You're welcome.

Nathan Judge, Atlantic Equities, please state your question.

A little late over in London, isn't it?

It is rather late.

Is the election done over there yet?

We are following it closely, don't worry. Can you comment on the iron ore mines that are there? There's been a strong pickup in the first half of the year. Could you comment what you are looking for, for the rest of this year and perhaps next year?

Be happy to, Nathan. For those of you who are not familiar or as familiar as Nathan with the Company, one of our largest customers is a company that owns two iron ore mines in the Upper Peninsula of Michigan.

Essentially through the first nine months of this year the demand, the kilowatt hour sales demand from the iron ore mines is up about 8.5% compared to the same period a year ago. Obviously that's being driven by the strong uptick in demand for iron ore, particularly from China. That has really benefited that particular company and those particular mines.

So to the extent that you think China demand and world demand for iron ore is going to remain strong, then I would think that those mines and our Company would be a beneficiary of the uptick in kilowatt hour sales. But up about 8.5% so far this year, and I would expect some modest growth next year.

A bit more of a thematic question. If you look across the industry at one of the recurring themes recently has been regarding consolidation. Now as you look across there's been a lot of asset sales in the state of Wisconsin, particularly there's been a nuclear machine that's been sold or in the process of being sold.

Could you just comment what your thoughts are with relative to the next three to five years as far as particular assets in your portfolio, where you think the Company is positioned? And given that you're well ahead of your debt to total capital target, how you could possibly use that to the benefit of debtholders as well as shareholders?

Nathan, we would be happy to comment on that. I think first let me state very clearly that as our power of the future plan unfolds we have a plate full. So in terms of asset acquisitions I would not expect that we would be focused very heavily on asset acquisitions. You would never say never. There may be one or two assets that come to the market that we think would be attractive. But by and large our plate is full, and our focus is on executing the power of the future plan on time, on budget. So that's our principal effort. That's our principal growth vehicle, and that's our principal focus.

In terms of other assets that we might at some point in time take a look at, I will ask Allen to address that specifically. We've said in a number of instances that there are three buckets of assets that we could look at to continue to monetize, the first of which would be a very solid real estate portfolio that the Company has.

We have at the end of the third quarter about 140 million book value of real estate in business parks and in other well leased buildings around southeastern Wisconsin. This is a very solid portfolio of real estate assets. And we've said publicly that we would like to take that down to 80 to 90 million maximum over the next 18 months or so, again, as a way to raise cash to finance power of the future. Then Allen, the other assets?

The other, of course we have the remaining unregulated power assets which is primarily Calumet. And then we also have what's basically a regulated investment which is the interest in the Guardian pipeline. Since we sold the pump business this year obviously we don't have a lot near-term pressure to do additional asset sales in the '05 time period, so we can be a little choosy about the prices and the timing. But those are the areas that we would primarily draw from.

Is there any possible alternatives (sic) that the Company may be considering as far as, one of the things that you've commented during the quarter was that you're well ahead of your expectations as far as debt to total capital. You have been a proponent of actually buying back shares. Is there any possible, I realize there's quite a large demand on the cash flow for the Company but is there room for possible additional share buybacks?

I don't see that sitting here today, but if down the road if we can generate some additional up sides on cash, that might be a possibility. We will just have to -- we are certainly, let me reiterate, as people exercise options as we have to buy shares for our benefits plans, we are using cash for that. So that's soaking up some cash as well.

Absolutely. Thank you, very much.

Nathan, thanks for calling.

Juan Sanabria, Goldman Sachs.

I had a question regarding news about the Illinois Attorney General, and concerns about water intakes in cooling towers and how you thought that process was going to go along and what to look for there.

To give you a general comment about that and then I will and Larry Salustro to respond in more detail, clearly, the Army Corps of Engineers follows a very well laid out process to come to a conclusion on a permit such as the one that we are seeking. We have never heard from nor had the Corps of Engineers in any of the testimony, in any of the briefings or any of the public hearings, no one from the Illinois State Attorney General's Office had made any input whatsoever. So this letter came as one piece of input, candidly after all the public hearings have been concluded. Larry?

This is Larry Salustro. That's correct. We do need a permit from the Corps of Engineers. There were hundreds of comments that were submitted. There were hundreds of people that showed up at the hearing. And we understand that there is sensitivity to use of the Great Lakes, because it's a multistate international resource. And that's why we've been so careful to make sure that we are using technologies which are the most protective of the environment, the most protective of the lake, not consumptive uses where we are taking water out of the lake that we are not reusing.

And we've done everything we think we can to satisfy those concerns. We don't need permits or approvals from the state of Illinois. But that's not at all to minimize what we understand is the sensitivity of that issue because we've heard it from a lot of people, and we have spent a lot of time and we are spending money to make sure we address all of those concerns.

Just to add one thought to what Larry said which I think was a very important point, the technology we've chosen here, I think most experts would agree and most environmental experts would agree, is the best available control technology and the best available technology to minimize any impact on the lake.

Great. Thank you.

Doug Fischer, A.G. Edwards.

Hi there, Gale, a quick question on Calumet and Neenah. I don't recall, have you told us roughly what the remaining book value of these assets is after these charge-offs?

We certainly can do that. Allen?

Doug, the remaining book value on Calumet is approximately $27 million. The remaining book value on the Minergy Neenah facility is approximately $16 million, so between the two, book value of about 43 million.

When you are talking about some of the drivers for next year's earnings, particularly the nuclear outages, the higher fuel costs, what's your ability to deal with them in terms of carve out issues or just the fuel mechanism in Wisconsin?

Doug, this is Gale. To directly answer your question there are a very clear set of fuel rules in the state of Wisconsin. And the Wisconsin Commission has been very responsive to request from utilities who are projecting to go below basically their recovery rate in the existing fuel recovery clause.

For example, the last time Wisconsin Energy dropped below its fuel recovery rate we filed an application with the Commission and the Commission held hearings -- first of all granted an interim rate increase, and granted that interim rate increase very quickly, held hearings and then put a permanent rate increase into effect on the fuel side. So there are very specific and clear rules which the Commission has followed to a T, essentially to try to minimize the volatility in terms of us dropping below our fuel cost recovery.

So I guess I'm a little puzzled by you raising those issues as potential drags in '05. Is there a brief period of time where you are at risk and then there's some possible recourse?

Yes.

Well, Doug, the way the fuel rules work, you have to basically be under recovered in a given month before you can go in prospectively for a higher level of fuel recovery. So if you have -- in an increasing fuel price cost environment, you basically have to bleed if you will, you have to under recover and so that affects earnings. So you have lag, is another way to put it, and you can't go back. You can only change for prospective fuel costs after you make your filing.

That is why, Allen is exactly right. Doug, that is why we listed fuel and a lag in fuel cost recovery as one of the items on the pressure side for next year.

Okay. Thank you.

You're welcome, Doug.

Vedula Murti of Zimmer Lucas.

Good afternoon. When you talked about the pro forma '04 and in response to Paul Ridzon's question regarding weather and that you had not normalized it, you indicated there was a number year to date that you felt, $13 million net tax and that basically works out roughly 11 cents. So if one were to adjust your range that would imply closer to 2.25 to 2.35 being kind of like the pro forma. Is that reasonable or is that somewhat overstating it do you think at this point? Or how should we kind of think about that?

I wouldn't give a weather normalized range for '04. But I think something else you need to keep in mind, this year what we've been able to do is offset some of the effects of weather by managing O&M, so some of those things you can only put off for so long. And, yes, we would hope that we have a return to normal weather next year and that would be a pick up. But we will also have to incur some expenditures that were deferred this year. So you really have to look at the net of the two. And I would really -- we will talk about that when we do our earnings guidance in a couple of months.

But for practical purposes what you are telling us here is that we really should be starting from 2.14 to 2.24 and that really is the pro forma before you give us additional details on your budget.

I think you would be very smart to start there, yes.

That's exactly right.

Okay. All right.

[James Stalaker] of Highbridge.

Hi, how are you guys doing? Just following up on Vedula's question too, on the pluses and minuses that we try and reconcile going into '05, can you give us a rough idea of what it costs you on a per unit basis for an outage?

For a nuclear outage?

Yeah, I know these are going to be a little bit longer but just in general.

O&M is approximately $16 million.

And then you have to add -- depending upon where we are in our fuel recovery you may or may not have to add fuel costs to that.

That's a pretax number, correct?

Yes.

Okay. And then the other question I had just to reconfirm, Port Washington you get a half year of that next year.

Yes.

The lease payments are pretty levelized. And I believe the last time you guys spoke about the contribution it was going to be 16, $17 million after tax.

Full year after tax is 17 million.

So we can just pretty much just cut that in half.

Yes.

Paul Paterson, Glenrock Associates, please state your question.

Hi. Can you hear me? Just a follow-up on -- any activity on Wisvest on the real estate business?

That would be Wis Park.

Wisconsin Park, I'm sorry, the names always get me confused. Wis Park, anything going on there and could you remind us year-to-date what that business has been performing at least (ph)?

I am going to let Steve Dickson talk about year-to-date earnings. We are pretty steadily, onesies, twosies, selling parcels out of that subsidiary. Steve, why don’t you give Paul the -- (multiple speakers)?

At the operating income level, Wis Park contributed about $5 million of earnings at the operating income.

After tax?

No, that's operating, so that's before interest and before taxes. And that's about $3 million better than last year through nine months. But again that's before interest, before taxes. It's not that significant overall.

How does that look? Any outlook on that, is that opportunistic or -- (multliple speakers)?

Yeah, it's very hard to predict and it is somewhat opportunistic because we want to get good prices. If somebody came in and offered a good price for a big block you’d do it, but they may not. So you have to look at the prices that you can get. Are we not in a hurry, we want to get good prices.

I think that's the key point. We the progress we've made in strengthening the balance sheet this year, we can, we absolutely can take our time and be very opportunistic with any future asset sales.

How much do you guys have in terms of total market value of the assets that you have now approximately?

In terms of book value at Wis Park, it's about $140 million. I think typically when we sold assets there we've garnered anywhere from say mid 20s to mid 30s above book value, and again that's parcel by parcel.

Okay. Just finally to go over the severance again, it's 25 million pretax that you're talking about right, and a fifteen-month pay back?

That's a maximum number.

That's a maximum number, right.

And that's between the third and fourth quarters combined.

Thanks a lot, guys.

Andy Levy, Bear Wagner.

I'm all set guys, thank you.

Thanks.

At this time we've run out of time for questions. I'd like to turn the conference back over to the speakers for any additional or closing remarks.

We appreciate all of you participating today in our third quarter conference call. If you have any additional questions at all, don't hesitate to call Colleen Henderson. She will be available in our Investor Relations office, and that direct line is (414) 221-2592. Thanks for participating. We will see you next quarter. Good bye.

That does conclude today's presentation. We thank you for your participation and you may disconnect at this time.