WEC

Business Context and Reporting Period

Company: Wisconsin Energy Corporation (WEC Energy Group, Inc.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2008
Business Overview: A diversified holding company operating primarily in two segments: Utility Energy (electric, gas, and steam services in Wisconsin and Michigan) and Non-Utility Energy (primarily We Power, LLC, which constructs and leases generation assets to the utility segment). The company is a large accelerated filer with 116.9 million shares of common stock outstanding.

Key Financial Metrics

Note: Operating income includes significant amortization of gain from the sale of Point Beach ($87.0M for Q2; $246.0M for YTD).

Material Changes vs. Prior Period

• Revenue Growth: Operating revenues increased 4.4% in Q2 2008 and 7.7% in the first six months of 2008 compared to the prior year. This was driven by rate increases approved in January 2008 and higher fuel recovery rates, partially offset by cooler weather reducing electric sales.
• Profitability: Net income increased slightly in Q2 ($58.0M vs. $57.5M) and significantly in the first six months ($181.2M vs. $158.4M). The Utility segment operating income decreased in Q2 due to higher fuel costs but increased for the six-month period.
• Cost Increases: Fuel and purchased power costs rose 28.2% in Q2 and 37.6% YTD. The primary driver was a new power purchase agreement following the sale of the Point Beach nuclear plant in September 2007, which increased costs by approximately $56.4M in Q2 and $121.7M YTD.
• Interest Expense: Net interest expense decreased 15.7% in Q2 and 11.9% YTD due to higher levels of capitalized interest associated with the "Power the Future" (PTF) construction program.

Guidance, Outlook, and Risks

• Power the Future (PTF) Strategy:
  • PWGS 2: Placed in service in May 2008. Fully operational.
  • Oak Creek Expansion: Contractor Bechtel notified the company in July 2008 of a forecasted three-month delay for Unit 1 (now expected late 2009) and a one-month acceleration for Unit 2. The delay is attributed to severe weather and labor conditions. Management estimates a delay of one month reduces 2009 earnings by $0.03 per share.
  • Regulatory: A final modified WPDES permit for Oak Creek was issued in July 2008 following a settlement with environmental groups.
• Rate Matters:
  • Wisconsin: January 2008 rate order resulted in a net 3.2% electric rate increase for 2008. A fuel recovery increase of 5.1% was approved in July 2008.
  • Michigan: A 14.7% rate increase request was filed in January 2008; an order is expected in Q4 2008.
• Environmental Risks:
  • Mercury: Wisconsin proposed rules requiring 90% mercury emission reductions by 2015. Estimated compliance costs range from $50 million to $200 million.
  • CAIR/CAMR: Federal rules regarding ozone and mercury were vacated by courts in 2008, creating uncertainty regarding future compliance requirements and costs.
• Liquidity: The company maintains approximately $1.8 billion in available undrawn bank credit facilities. Management expects to meet capital requirements through internal funds and short-term borrowings, supplemented by long-term debt issuance.

Investor Verification Checklist

• Oak Creek Construction Claims: Verify the status of cost relief and schedule extension claims expected from contractor Bechtel by December 31, 2008, and their potential impact on 2009 earnings.
• Point Beach Amortization: Confirm the schedule for the remaining amortization of the $902.2 million gain from the Point Beach sale, which is being used for customer bill credits.
• Environmental Compliance Costs: Monitor the finalization of Wisconsin's mercury emission rules and the potential $50M-$200M capital expenditure required for compliance.
• Fuel Cost Volatility: Assess the impact of rising natural gas and coal transportation costs on future fuel recovery filings and rate cases.
• Michigan Rate Case: Track the outcome of the pending 14.7% rate increase request filed with the Michigan Public Service Commission.