WEC

Business Context and Reporting Period

Company: Wisconsin Energy Corporation (WEC Energy Group, Inc.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2007
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 (generation assets via We Power). The company operates under the trade name "We Energies" for its utility subsidiaries.

Key Financial Metrics (Nine Months Ended Sept 30, 2007)

Note: Cash balance includes $969.1 million in restricted cash related to the Point Beach sale proceeds.

Material Changes vs. Prior Period

• Sale of Point Beach: In September 2007, the company sold the Point Beach Nuclear Plant to an affiliate of FPL for approximately $924 million. The buyer assumed decommissioning liabilities. WEC retained approximately $486 million in unrestricted cash and $552 million in decommissioning funds, which were placed in a restricted cash account for customer benefits.
• Revenue Growth: Operating revenues increased 6.5% year-over-year, driven by higher fuel and purchased power costs passed through to customers and increased sales to other utilities.
• Cost Increases: Fuel and purchased power costs rose 22.5% ($132.3 million) due to higher coal prices, increased reliance on natural gas generation, and lower nuclear output from planned outages.
• Capital Expenditures: Increased 26.8% to $842.2 million, primarily due to construction of the "Power the Future" (PTF) generating units (Port Washington and Oak Creek).
• Debt Structure: Issued $500 million in Junior Notes in May 2007. Total debt increased, though short-term debt decreased slightly due to repayments.

Guidance, Outlook, and Risks

• Regulatory Outlook: WEC filed a 2008 rate case seeking net price increases of 7.5% for electric customers in 2008 and 2009, partially offset by credits from the Point Beach sale proceeds (estimated at $696 million). Proposed credits include $372 million in 2008 and $188 million in 2009.
• Construction Progress:
  • Port Washington (PWGS 2): Expected commercial operation in Q2 2008.
  • Oak Creek Expansion: New coal handling system expected in Q4 2007; OC 1 and OC 2 units under construction.
  • Wind Generation: Blue Sky Green Field project construction began June 2007; service expected Q2 2008.
• Key Risks:
  • Regulatory: Uncertainty regarding the implementation of the MISO Midwest Market and potential changes to fuel cost recovery rules.
  • Environmental: Compliance with EPA consent decrees (estimated total cost $1.0 billion through 2013) and potential impacts of new greenhouse gas or air quality regulations.
  • Operational: Reliance on purchased power from the new Point Beach owner under a long-term agreement; potential for higher costs if credit ratings decline.
• Liquidity: Management expects to meet capital requirements through internal funds, short-term borrowings, and asset sale proceeds. Approximately $1.7 billion in unused bank credit facilities remains available.

Investor Verification Checklist

• Point Beach Proceeds: Verify the timing and regulatory approval for the application of the $969.1 million restricted cash balance to customer bill credits.
• 2008 Rate Case: Monitor the Public Service Commission of Wisconsin (PSCW) decision on the proposed 7.5% electric rate increase and the specific allocation of Point Beach sale credits.
• PTF Construction Costs: Track capital expenditure variances for the Port Washington and Oak Creek projects against the $1.371 billion 2007 budget.
• Fuel Cost Volatility: Assess the impact of rising coal and natural gas prices on operating margins, given the shift away from nuclear generation.
• Debt Ratios: Review the adjusted debt-to-capitalization ratio (56.8% as of Sept 30, 2007) and the impact of the $500 million Junior Notes on credit ratings.