QUOTE AND NEWS
Motley Fool  Jul 14  Comment 
The merger of Wisconsin Energy and Integrys isn't big news in a utility sector that has a history of deal making—and famed value investor Mario Gabelli thinks there's plenty more deal making to come.
DailyFinance  Jul 2  Comment 
The securities litigation law firm of Brower Piven, A Professional Corporation, has commenced an investigation into possible breaches of fiduciary duty to current shareholders of Integrys Energy Group, Inc. (“Integrys” or...
Motley Fool  Jun 26  Comment 
Wisconsin Energy yesterday announced it would buy Integrys Energy Group for a healthy premium. The market rewarded Integrys' shareholders and punished those of Wisconsin Energy. Here's why.
StreetInsider.com  Jun 26  Comment 
UPGRADES RBC Capital lifts Zulily, Inc (Nasdaq: ZU) from Sector Perform to Outperform with a price target of $50. Click Here for more color. Guggenheim raises Nabors (NYSE: NBR) from Sell to Neutral. UBS upgrades Wisconsin Energy (NYSE: WEC)...
SeekingAlpha  Jun 24  Comment 
By The Value Investor: Wisconsin Energy (WEC) announced the largest deal of the latest version of Merger Monday. In a $9.1 billion deal it seeks to acquire Integrys Energy Group (TEG). Investors are not applauding the deal yet as synergies are...
Benzinga  Jun 24  Comment 
Analysts at Canaccord Genuity upgraded IDEXX Laboratories (NASDAQ: IDXX) from “hold” to “buy.” The target price for IDEXX Laboratories has been raised from $116 to $148. IDEXX's shares closed at $132.62 yesterday. Wells Fargo upgraded...
TheStreet.com  Jun 24  Comment 
NEW YORK (TheStreet) -- Wisconsin Energy  stock has been upgraded to "outperform" from "market perform," Wells Fargo said Tuesday. The firm said its acquisition of Integrys Energy  will be strategically and financially advantageous. Must read:...
DailyFinance  Jun 23  Comment 
Kirby McInerney LLP is investigating potential claims against the Board of Directors of Integrys Energy Group, Inc. (“Integrys” or the “Company”) (NYSE:TEG) concerning the proposed acquisition of the Company by...
Motley Fool  Jun 23  Comment 
Is this meaningful or just another movement?
MarketWatch  Jun 23  Comment 
Wisconsin Energy Corp., Oracle Corp., and General Electric Co. may all see active trading after deals, or talk of deals.




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Wisconsin Energy Corporation (NYSE:WEC) is the largest electric and natural gas utility in Wisconsin[1] and the 7th largest in the country. WEC serves 1,132,500 electric customers and 1,049,500 natural gas customers in the Great Lakes region (Michigan and Wisconsin). [2]

Following the rolling blackouts in California during the late 1990s, Wisconsin, which had traditionally underinvested in its electric utility infrastructure,[citation needed] approved WEC's plans to add two coal-fired generation plants as well as a natural gas facility and a wind powered facility. The company expects the expansion to increase its megawatt production by about 38% by 2010.[3] Analysts estimate that the expansion will cost the company $2B between 2008 and 2009, and about $6B over the life of the project.[4] WEC is funding the expansion through its own cash along with debt financing. As of mid 2008, the company was spending more on the construction of the new plants than it generates in cash flow. The company is depending on pre-approved rate increases to make its new plants profitable. Any changes to rates by regulators would have a dramatic impact on WEC's future profitability. [5]

In 2007, coal and pure natural gas accounted for 54% and 5% of electricity sales, respectively. [6] Coal prices nearly doubled between 2006 and early 2008, but WEC entered long term contracts in 2006 which have helped to mitigate the impact of rising prices. Natural gas prices increased 174% between 2002 and 2008,[7]. WEC has started a hedging program to counter the increase in prices. Another major factor influencing WEC is the weather. In years with milder weather, in particular warmer than average winters, WEC tends to see decreased revenues as it did in 2006 when the number of heating degree days dropped 9% and revenues compared to 2005 dropped 2%.[8]


Business Overview

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Utilities Services (98% of revenue)

  • WE Energies is the trade name of Wisconsin Electric Power Company and Wisconsin Gas LLC, the principal utility subsidiaries of Wisconsin Energy Corporation. We Energies serves more than 1.1 million electric customers in Wisconsin and Michigan’s Upper Peninsula, and more than one million natural gas customers in Wisconsin. The company also serves about 2,500 water customers in Milwaukee's northern suburbs and about 500 steam customers in downtown Milwaukee.
  • The Edison Sault Electric Company engages in electricity generation and distribution to 22,000 residential, commercial and industrial customers in Michigan's Eastern Upper Peninsula. Edison Sault generates and sells low-cost power from the company's historic hydro plant and the U.S. Army Corps of Engineers' hydro plant, both located on the St. Mary's river system at Sault Ste. Marie, Mich.

Non-Utilities Services (2% of revenue)

This segment builds and operates power plants. It also has miscellaneous investments in real estate

Power the Future Campaign

The company is expanding its energy production capacity by replacing its coal-based generating units at Port Washington Power Plant with two natural-gas-based units. In addition to the new natural-gas units, WE Energies is constructing two new coal-based units under the Oak Creek expansion project. The new generation will be added in phases through the year 2010. When completed, We Energies’ total generation would expand from about 6,000 megawatts today to approximately 8,300 megawatts. In total, WE Energies' $6 billion investment in Wisconsin's energy infrastructure is estimated to create $24 billion in economic growth and activity in the region by 2010.[10]

Trends and Forces

Principal Coal Contracts[11]
Contract Expiration Date Annual Tonnage of Coal %
Dec 2008 4,150 33.7%
Dec 2009 6,500 52.8%
Dec 2010 1,660 13.5%

Long Term Contracts Buffer Against Rising Coal Prices

Historically, WEC has entered into long term contracts for coal which helps the company buffer against rising coal prices. WEC renewed its contracts in 2006. Coal prices started to spike in late 2007 and early 2008, but due to the long term contracts, WEC has been largely insulated from the rising prices. However, if coal prices remain at a high level then WEC will likely suffer when it has to renew its contracts again. WEC gets it's coal primarily from northern and central appalachia where coal prices have increased over 230% between July 2007 and July 2008.[12] WEC's average cost per MWh of coal was $20.52 in 2007, that was a 12% increase from 2006 .[13] Coal made up about 64% of WEC's electric supply capacity and 54% of electric supply sales in 2007.[14]

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Natural Gas Prices Increased 174% between 2002 and 2008

Natural gas prices have been on the rise since 2002 with prices up almost 174% between January 2002 and January 2008.[16] WEC has implemented a hedging strategy to counter the rising prices, but is still paying more for natural gas than any of its other energy sources. In 2007, average cost per MWh for pure natural gas generation was $61.27.[17] That was down almost 28% from 2005 as natural gas prices declined in 2007. However, prices have started to increase again in early 2008.[18] Natural gas made up about 29% of WEC's electic supply capacity in 2007, but pure natural gas generation made up only 5% of electric supply sales.[19]

Environmental Compliance Costs

Coal-fired plants, such as those operated by WEC, are the leading emitors of greenhouse gases. In recent years, Global Warming has become a primary source of political action. Federal and state legislators are proposing strict regulations of greenhouse gas emissions, particularly CO2. WEC had capital expenditure costs related to compliance, primarily pollution control, of 31M in 2007 and 79M in 2006.[20] WEC expects to incur costs of $119M in 2008.[21]. This is much less than other more coal dependent utilities.

WEC is Highly Regulated

Wisconsin Energy Corporation is subject to state, local and federal governmental regulation. The Company's retail electric, gas, hydroelectric and steam businesses are monitored by the Public Service Commission of Wisconsin (PSCW), the Michigan Public Service Commission (MPSC), and the Federal Energy Regulatory Oversight Committee (FERC). The utility energy operating revenue by regulated jurisdiction is 91.1%, 4.7%, and 4.2%, respectively.[22] A high degree of oversight and regulation imposes strict restrictions on WEC's operations and substantial compliance costs. WEC is betting that the pre-approved rate increases will not change because WEC is spending more on this expansion than it is making in operating cash flow. WEC is funding the expansion through its own cash along with debt financing. Therefore, a negative change in the regulated rates would make it difficult for WEC to make the necessary cash flow to pay off the debt payments. WEC had a debt to capital ratio of 59% in 2007.[23]

Mild Weather Means Lower Revenues

WEC's electric and gas utility services are a seasonal business. Demand for electricity is higher in the summer and winter months and demand for natural gas peaks in the winter heating season. Historically, the Company has experienced lower revenues and net income when weather conditions are milder. In 2006, the number of WEC's heating degree days was about 9% lower than the usual level and, as a result, 2006 revenues dropped about 2% from 2005.[24]

Competition

Wisconsin Energy Corporation is the largest utilities service provider in its operating territory. WE Energies, the Utility Service segment of WEC, is fully regulated by the Public Service Commission of Wisconsin. As a regulated business entity, WEC is closely monitored by a number of governmental agencies. Although WE Energies is under constant government supervision, as government regulated utility provider, the company maintains a virtual monopoly over the state of Wisconsin. Therefore, WEC's Utilities Services segment, which generates the vast majority the company's revenues, does not directly compete with other energy providers. As a virtual monopolist in the state of Wisconsin, WEC pays close attention to the changing regulatory environment in the states where it conducts business operations, Wisconsin and Michigan, since regulatory changes may significantly impact its bottom-line.




References

  1. WEC 2007 10-K, pg.10
  2. WEC 2007 10-K, pg.10
  3. Oak Creek Power Plant Expansion
  4. WEC Morningstar Report 6-10-2008
  5. WEC Morningstar Report 6-10-2008
  6. WEC 2007 10-K, pg.12
  7. Energy Information Administration, Natural Gas Prices
  8. WEC 2007 10-K, pg.17
  9. WEC 2007 10-K, pg.80
  10. Oak Creek Power Plant Expansion
  11. WEC 2007 10-K, pg.14
  12. Energy Information Association, Coal Prices
  13. WEC 2007 10-K, pg.13
  14. WEC 2007 10-K, pg.12
  15. WEC 2007 10-K, pg.13
  16. Energy Information Administration, Natural Gas Prices
  17. WEC 2007 10-K, pg.13
  18. Energy Information Administration, Natural Gas Prices
  19. WEC 2007 10-K, pg.14
  20. WEC 2007 10-K, pg.25
  21. WEC 2007 10-K, pg.25
  22. WEC 2007 10-K, pg.24
  23. Morningstar, WEC
  24. WEC 2007 10-K, pg.17
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