WEC

Business Context and Reporting Period

Company: Wisconsin Energy Corporation (WEC Energy Group, Inc.)
Filing Type: Form 10-Q (Unaudited)
Period Ended: September 30, 2004

Wisconsin Energy is a diversified holding company operating primarily in utility energy (electric, gas, steam), non-utility energy, and manufacturing segments. The manufacturing segment (WICOR Industries) was sold to Pentair, Inc. effective July 31, 2004, and is reported as discontinued operations. The company's primary subsidiaries include Wisconsin Electric Power Company, Wisconsin Gas LLC, and W.E. Power, LLC.

Key Financial Metrics

Material Changes vs. Prior Period

• Discontinued Operations: Net income was significantly boosted by a $147.2 million gain on the sale of the manufacturing segment (WICOR) in Q3 2004. Total income from discontinued operations for the nine months ended Sep 30, 2004, was $176.7 million compared to $33.4 million in 2003.
• Continuing Operations Loss: Continuing operations reported a loss of $66.2 million for Q3 2004 compared to income of $21.3 million in Q3 2003. This was driven by $149.0 million in non-cash asset valuation charges.
• Asset Impairments: The company recorded $149.0 million in asset valuation charges in Q3 2004: $122.0 million for the Calumet peaking facility (non-utility) and $27.0 million for the Minergy Neenah facility (corporate/other).
• Utility Segment Performance: Utility operating income decreased $16.1 million in Q3 2004 vs. Q3 2003, primarily due to increased operation and maintenance expenses (including $12.7 million in severance costs) and higher nuclear expenses, partially offset by rate increases.
• Debt Reduction: Proceeds from the WICOR sale were used to redeem $300 million of senior notes and $200 million of Trust Preferred Securities, reducing total debt significantly.

Guidance, Outlook, and Risks

• Power the Future Strategy: Construction continues on the Port Washington Generating Station (Unit 1 expected operational Q3 2005) and Elm Road units. Regulatory approvals are largely secured, though some legal challenges remain regarding environmental permits.
• Severance Plans: The company announced voluntary separation plans for management and represented employees, expecting to eliminate at least 170 positions. Pre-tax costs are estimated not to exceed $25 million, with some costs recognized in Q4 2004.
• Regulatory Matters:
  • Rate Increases: Approved rate increases in May 2004 cover construction costs for Power the Future and low-income uncollectible expenses.
  • Environmental Trust Bonds: PSCW approved authority to issue up to $425 million in environmental trust bonds to finance control costs, with issuance anticipated in 2005.
  • Bad Debt Deferral: Authority received to defer residential bad debt costs incurred in 2004 exceeding current rates.
• Risks: Key risks include construction cost overruns on new plants, credit rating downgrades (potential $118.4 million in termination payments), weather variability affecting sales, and regulatory changes regarding Midwest ISO market implementation.

Investor Verification Checklist

• Final Sale Proceeds: Verify the final cash proceeds from the WICOR sale to Pentair, Inc., which are subject to adjustment based on the audited July 31, 2004 balance sheet.
• Severance Costs: Monitor Q4 2004 filings for the final number of employees accepting voluntary separation and the total associated costs.
• Asset Valuation Charges: Confirm the tax implications and future cash flow impacts of the $149 million impairment charges on Calumet and Minergy Neenah.
• Regulatory Approvals: Track the status of the Elm Road unit permits and the finalization of the Midwest ISO energy market implementation.
• Debt Refinancing: Verify the issuance of the $250 million intermediate-term debt by Wisconsin Electric anticipated in Q4 2004 and the $425 million environmental trust bonds in 2005.