WEC

Business Context and Reporting Period

Company: Wisconsin Energy Corporation (WEC)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2007
Business Overview: WEC is 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 develops generation assets under the "Power the Future" strategy). The company is a large accelerated filer with 116,950,273 shares of common stock outstanding as of March 31, 2007.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Operating revenues increased $54.1 million (4.3%) driven by rate increases effective in 2007 and colder weather increasing gas demand. Electric revenues rose $32.7 million, while gas revenues increased $16.9 million.
• Profit Decline: Net income decreased $4.8 million (4.5%) to $100.9 million. This was primarily due to a $60.4 million increase in fuel and purchased power costs, which outpaced revenue growth in the electric segment.
• Utility Segment Performance: Utility operating income fell $8.0 million. While gas margins improved $23.5 million due to weather and rate adjustments, electric operating income was pressured by higher fuel costs and a 58.2% decline in wholesale sales due to planned outages.
• Capital Spending: Capital expenditures increased $75.7 million to $290.2 million, largely driven by construction of "Power the Future" (PTF) generating units (PWGS 2 and Oak Creek expansion).
• Interest Expense: Net interest expense decreased $2.5 million despite higher gross interest costs, due to increased capitalization of interest on PTF construction projects.

Outlook, Guidance, and Risks

• Point Beach Sale: WEC announced a definitive agreement to sell the Point Beach Nuclear Plant for approximately $998 million. Closing is anticipated in Q3 2007, subject to regulatory approvals (NRC, PSCW, MPSC, FERC). Proceeds are expected to offset future rate increases.
• Rate Cases: On May 7, 2007, WEC filed for rate increases effective January 2008. Proposed increases include 7.5% for electric customers and 1.8% to 4.1% for gas customers, depending on the subsidiary. These are intended to recover PTF costs, transmission costs, and environmental compliance expenses.
• Power the Future (PTF): Construction continues on PWGS 2 (expected commercial operation Q2 2008) and the Oak Creek expansion. Legal challenges regarding the Oak Creek WPDES permit are ongoing but the permit remains in effect.
• Fuel Cost Recovery: WEC experienced an unfavorable fuel collection position of approximately $19 million in Q1 2007. Management estimates the full-year 2007 unfavorable position will not exceed $10 million.
• Effective Tax Rate: The effective tax rate for Q1 2007 was 39.0%. Management expects the 2007 annual effective tax rate to be between 38.0% and 39.0%.
• Risks: Key risks include regulatory approval of the Point Beach sale, construction delays or cost overruns on PTF projects, changes in fuel prices, and the outcome of the MISO Midwest Market retroactive resettlement (financial impact currently undetermined but not expected to be material).

Investor Verification Checklist

• Point Beach Transaction: Verify the status of regulatory approvals required to close the $998 million sale and the associated long-term power purchase agreement.
• Fuel Cost Volatility: Monitor the "unfavorable fuel collection" position throughout 2007 to ensure it remains within the projected $10 million limit.
• PTF Construction Progress: Track capital expenditure burn rates and potential delays related to the Oak Creek expansion permit modification process.
• Rate Case Outcome: Assess the final approved rate increases for 2008 and the impact of Point Beach proceeds on customer bill credits.
• Wholesale Sales: Review the recovery of wholesale sales volumes following the planned outages that caused a 58% decline in Q1.