WEC

WEC Energy Group, Inc. (Wisconsin Energy Corporation) 2006 10-K Summary

Business Context and Reporting Period

This Form 10-K covers the fiscal year ended December 31, 2006. Wisconsin Energy Corporation 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 (primarily We Power, which constructs generation assets for lease to the utility segment). The company serves approximately 1.1 million electric and 1.0 million gas customers. A key strategic initiative is the "Power the Future" (PTF) program, 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 4.7% to $3,996.4 million, driven by rate increases approved in January 2006 to recover fuel costs and PTF investments, despite a 1.8% decrease in electric sales volumes due to mild weather.
• Profitability: Net income increased 2.5% to $316.4 million. Utility energy segment operating income decreased slightly to $532.8 million (from $542.4 million) due to mild weather and higher maintenance costs, partially offset by improved fuel cost recovery. Non-utility energy segment income more than doubled to $43.1 million due to a full year of operations from the PWGS 1 unit.
• Cash Flow: Operating cash flow improved significantly by $152.9 million to $729.8 million, aided by better fuel cost collections and reduced working capital needs for gas in storage.
• Capital Expenditures: Total capital expenditures rose to $928.7 million (from $745.1 million), primarily due to construction progress on the Oak Creek expansion and PWGS 2 units under the PTF strategy.

Guidance, Outlook, and Risks

• Point Beach Sale: In December 2006, the company announced a definitive agreement to sell its Point Beach Nuclear Plant to an affiliate of FPL for approximately $998 million. The transaction is expected to close in Q3 2007. The company expects to record a gain but has filed to defer this gain as a regulatory liability for customer benefit.
• PTF Strategy: Construction continues on two coal units (Oak Creek) and a second natural gas unit (PWGS 2). The company anticipates completing the PTF units by 2010.
• Regulatory Environment: The company is subject to significant regulation by the PSCW, MPSC, and FERC. Risks include the ability to recover costs in future rate cases and compliance with environmental regulations (e.g., CAIR, CAMR).
• Market Risks: Exposure to commodity price volatility (coal, natural gas) and weather conditions. The company utilizes hedging programs and fuel cost adjustment clauses to mitigate these risks.
• Legal Matters: Ongoing arbitration with two large iron ore mine customers regarding billing disputes; approximately $29.3 million was in escrow as of year-end.

Investor Verification Checklist

• Point Beach Transaction: Verify the regulatory approval status and expected closing date of the Point Beach sale to FPL, and confirm the treatment of the gain on sale (deferred vs. recognized).
• PTF Construction Costs: Monitor the construction progress and cost adherence for the Oak Creek and PWGS 2 units to ensure costs remain within the regulatory caps (5% over target for Oak Creek).
• Fuel Cost Recovery: Review the status of fuel cost adjustment clauses and any potential refunds to customers if fuel costs remain below the established bands.
• Environmental Compliance: Assess the financial impact of ongoing environmental compliance costs, particularly the EPA consent decree estimated at $1 billion through 2013.
• Debt Covenants: Confirm continued compliance with debt covenants, specifically the total funded debt to capitalization ratio limits (70% for parent, 65% for utilities).