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, 2008
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 (primarily We Power, LLC, which constructs and leases generation assets to the utility segment). The company is a large accelerated filer.

Key Financial Metrics (Nine Months Ended Sept 30, 2008)

Note: Debt to Total Capitalization includes an adjusted presentation reflecting rating agency treatment of Junior Notes.

Material Changes vs. Prior Period

• Utility Segment Performance: Operating income remained relatively flat ($410.0M vs $409.1M) despite a 17.5% decline in the third quarter. This stability was driven by rate increases approved in January 2008, which offset higher fuel costs and cooler weather reducing demand.
• Non-Utility Segment Growth: Operating income increased significantly to $63.1 million (from $34.3 million in 2007), primarily due to lease income from the Port Washington Generating Station Unit 2 (PWGS 2), which began service in May 2008.
• Point Beach Sale Impact: The 2008 results reflect the sale of the Point Beach nuclear plant in September 2007. While this eliminated nuclear O&M expenses, it introduced higher purchased power costs under a new power purchase agreement. Additionally, $403.4 million of the gain on the sale was amortized to revenue in 2008 to fund customer bill credits.
• Weather Impact: A cooler summer in 2008 reduced electric demand (cooling degree days were 15.7% lower than 2007), negatively impacting revenues by approximately $17.3 million in Q3 and $27.2 million for the nine-month period.
• Interest Expense: Net interest expense decreased by $13.8 million (10.8%) due to lower short-term interest rates, partially offset by increased capitalized interest on the Oak Creek construction project.

Guidance, Outlook, Risks, and Contingencies

• Capital Markets & Liquidity: Management noted significant contraction in global credit markets in Q3 2008, leading to higher short-term rates and difficulty issuing commercial paper with maturities longer than one day. However, the company successfully remarketed $147 million in tax-exempt bonds and issued $300 million in debentures in October 2008. They maintain approximately $1.6 billion in available bank credit lines (excluding Lehman Brothers commitments).
• Oak Creek Construction Dispute: Contractor Bechtel notified the company in July 2008 that Unit 1 of the Oak Creek expansion would be delayed by three months (beyond the guaranteed date of Sept 29, 2009). Bechtel expects to submit claims for schedule extensions and cost relief. WEC has invoked the formal dispute resolution process. Management estimates a one-month delay in Unit 1 would reduce 2009 earnings by $0.03 per share.
• Regulatory Matters:
  • Rate Cases: A 17.2% electric rate increase was approved in Wisconsin (netting to 3.2% after bill credits). A settlement for a 7.2 million rate increase in Michigan is expected to be effective Jan 1, 2009.
  • Environmental: The company is navigating complex environmental regulations including the Clean Air Interstate Rule (CAIR), which was vacated by a federal court in July 2008, and new state mercury emission rules. Compliance costs for mercury controls are estimated between $50 million and $200 million.
• Pension Funding: Due to lower-than-expected returns on pension assets, the company anticipates contributing approximately $180 million to pension plans in 2009.

Investor Verification Checklist

• Oak Creek Delay Claims: Monitor the outcome of the dispute resolution process with Bechtel regarding cost relief and schedule extensions for the Oak Creek expansion.
• Environmental Compliance Costs: Verify the final cost estimates for mercury emission controls and the impact of the vacated CAIR rule on future capital expenditures.
• Capital Market Access: Track the company's ability to refinance short-term debt and maintain liquidity given the volatility in credit markets.
• Rate Case Settlements: Confirm the approval and effective date of the Michigan rate increase settlement and any future Wisconsin fuel cost adjustments.
• Pension Contributions: Assess the impact of the projected $180 million pension contribution in 2009 on free cash flow.