WEC

Business Context and Reporting Period

Company: Wisconsin Energy Corporation (WEC)
Filing Type: Form 10-K
Period Ended: December 31, 2008
Business Overview: WEC is a diversified holding company operating primarily in two segments: Utility Energy (electric and gas distribution/generation in Wisconsin and Michigan) and Non-Utility Energy (construction of new generation assets via We Power). The company serves approximately 1.14 million electric customers and 1.06 million gas customers. A key strategic focus is the "Power the Future" (PTF) initiative, involving the construction of new natural gas and coal-fired generating units.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total operating revenues increased 4.6% to $4.43 billion, driven by rate increases approved by the Public Service Commission of Wisconsin (PSCW) and increased gas margins due to colder weather. Electric revenues declined slightly due to a one-time $62.5 million refund to wholesale customers related to the Point Beach sale and cooler summer weather.
• Profitability: Net income rose 7.0% to $359.1 million. Utility segment operating income remained relatively flat ($581.9 million vs. $586.0 million), while Non-Utility segment income nearly doubled to $89.3 million due to the full-year impact of the coal handling system and the addition of the PWGS 2 unit.
• Cost Structure: Fuel and purchased power costs increased significantly ($241.6 million) primarily due to the long-term power purchase agreement entered into following the sale of the Point Beach nuclear plant. However, this was partially offset by lower nuclear operation and maintenance expenses.
• Capital Expenditures: Total capital expenditures decreased to $1.14 billion from $1.21 billion in 2007, reflecting reduced spending on PTF generation plants as projects neared completion.

Guidance, Outlook, and Risks

• Dividend Policy: In December 2008, the Board approved a new policy targeting a dividend payout ratio of 40-45% of earnings for 2009-2011. The quarterly dividend was increased by 25% to $0.3375 per share in January 2009.
• Construction Outlook: The Oak Creek expansion (two coal units) faces potential delays. Contractor Bechtel submitted claims totaling approximately $485 million ($413 million for weather/labor and $72 million for project delays) seeking cost and schedule relief. Management disputes these claims, but resolution could impact earnings if costs exceed the 5% regulatory cap and are not recoverable.
• Regulatory Environment: The company faces significant uncertainty regarding future greenhouse gas regulations and renewable portfolio standards in Wisconsin and Michigan, which could increase compliance costs. The PSCW approved a 17.2% electric rate increase in early 2008, partially offset by bill credits from the Point Beach sale proceeds.
• Liquidity: Despite global credit market turmoil, the company maintains access to capital markets. It holds approximately $1.6 billion in available undrawn bank credit facilities (excluding Lehman Brothers commitments). A significant $270 million pension contribution was made in January 2009.

Investor Verification Checklist

• Bechtel Dispute Resolution: Monitor the outcome of the arbitration regarding the $485 million in claims for the Oak Creek expansion and the potential impact on the 5% cost cap for rate recovery.
• Regulatory Rate Cases: Verify the status of the 2010 rate case filings expected in the first half of 2009 to ensure cost recovery for environmental compliance and new generation.
• Environmental Compliance Costs: Track expenditures related to the EPA Consent Decree (estimated total $1.2 billion) and potential new regulations on coal ash and greenhouse gases.
• Pension Funding: Assess the impact of the $270 million pension contribution made in early 2009 and future funding requirements based on market returns and discount rates.
• Weather Sensitivity: Evaluate the impact of seasonal weather variations on both electric (cooling) and gas (heating) sales volumes and margins.