WEC

Business Context and Reporting Period

Company: Wisconsin Energy Corporation (WEC Energy Group, Inc.)
Filing Type: Form 10-Q (Unaudited)
Period Ended: September 30, 2003
Business Overview: A diversified holding company operating in three primary segments: Utility Energy (electric, gas, and steam services in Wisconsin and Michigan), Non-Utility Energy (independent power projects and investments), and Manufacturing (pumps, water treatment, and fluid handling equipment via WICOR Industries).

Key Financial Metrics (Nine Months Ended Sept 30, 2003)

Note: 2003 results include a $40.1 million non-cash asset valuation charge in the Non-Utility Energy segment. 2002 results included a $141.5 million asset valuation charge.

Material Changes vs. Prior Period

• Revenue Growth: Operating revenues increased 10.8% year-over-year, driven primarily by higher gas costs passed through to customers and rate increases for fuel recovery in the Utility segment.
• Profitability: Net income increased 84.6% ($78.9 million), largely due to the absence of the massive $141.5 million asset valuation charge recorded in Q1 2002, partially offset by a $40.1 million charge in Q3 2003.
• Utility Segment: Operating income remained relatively flat ($389.4M vs $390.9M). Cooler weather reduced electric sales, while higher fuel costs increased expenses. Gas margins improved due to weather-related demand and cost recovery mechanisms.
• Manufacturing Segment: Operating income increased 24.1% ($54.5M vs $43.9M) due to base business growth, particularly in Water Systems, and favorable currency translation effects.
• Non-Utility Energy: Operating loss narrowed significantly to $49.0M from $125.1M in the prior year, reflecting the sale of Wisvest-Connecticut in late 2002 and a smaller asset valuation charge in 2003.
• Debt Structure: The company issued $843.1 million in long-term debt and retired $523.8 million, reducing short-term debt by $276.9 million.

Guidance, Outlook, Risks, and Unusual Items

Management Commentary and Outlook

• Power the Future Strategy: Significant capital is being deployed for new generation capacity (Port Washington and Oak Creek projects). The company expects to spend approximately $693 million on capital expenditures for the full year 2003.
• Rate Adjustments: The Public Service Commission of Wisconsin (PSCW) approved a fuel surcharge adjustment in October 2003. The company anticipates an order on 2004 revenue deficiencies in early 2004.
• Divestitures: The company continues to divest non-core assets, expecting approximately $100 million in cash benefits from 2003 asset sales.
• Stock Repurchases: The company does not expect to continue repurchasing shares due to significant capital requirements for the Power the Future program.

Risks and Contingencies

• Credit Ratings: In October 2003, Moody's and Fitch downgraded certain security ratings of Wisconsin Energy and its subsidiaries. Moody's placed a negative outlook on the parent company.
• Regulatory Approvals: The "Power the Future" strategy is subject to regulatory approvals (CPCN) and permitting. The PSCW reached preliminary decisions on the Oak Creek project in October 2003, approving two coal units but rejecting a gasification unit.
• Legal Proceedings: A jury verdict of $104.4 million was returned against subsidiary Sta-Rite Industries in August 2003; the company intends to appeal and believes it has adequate insurance coverage.
• Environmental: Ongoing EPA consent decree regarding air emissions requires approximately $600 million in capital investment over 10 years. Mercury emission rules remain uncertain.
• Asset Valuation: A $40.1 million non-cash charge was recorded in Q3 2003 related to a 500 MW power island where carrying value exceeded market value.

Investor Verification Checklist

• Asset Valuation Charges: Verify the final sale price and timing of the 500 MW power island and other non-utility assets to confirm the accuracy of the $40.1 million impairment charge.
• Regulatory Rate Orders: Monitor the final PSCW order regarding the 2004 revenue deficiency filing ($90.3 million request) and the finalization of the Oak Creek CPCN.
• Credit Rating Impact: Assess the impact of the October 2003 downgrades by Moody's and Fitch on future borrowing costs and liquidity covenants.
• Sta-Rite Litigation: Track the appeal process of the $104.4 million verdict and confirm insurance coverage adequacy.
• Capital Expenditure Execution: Monitor the "Power the Future" project costs against the $693 million budget, specifically regarding the Port Washington and Oak Creek units.
• Fuel Cost Recovery: Verify the final reconciliation of the fuel surcharge to ensure no refunds are required to customers.