Fitch Rates WEPCO's $250MM Issuance of Sr. Debentures 'A+'; Outlook Stable

Business Wire, Dec 9, 2008

CHICAGO -- Fitch Ratings has assigned a rating of 'A ' to Wisconsin Electric Power Co.'s (WEPCO) $250 million issuance of 6.25% senior unsecured debentures, due Dec. 1, 2015. Proceeds from the sale will be used to repay short-term debt and for working capital and other general corporate purposes. The Rating Outlook is Stable.

WEPCO's ratings reflect the company's modest leverage, consistently strong cash flow from regulated utility operations and a favorable regulatory environment in Wisconsin. The company benefits from a fuel and purchase power adjustment mechanism which helps serve to stabilize cash flow and earnings. WEPCO's ratings also take into consideration its low-cost generating mix and a diverse service territory. The utility's natural gas operations benefit from a large residential class (approximately 64% of gas operating revenues) which provides a steady, albeit weather-sensitive, load due to the lack of a weather-normalization clause. Rating concerns facing the company relate to elevated capital expenditures through 2012, as well as high leverage and capital spending at parent, Wisconsin Energy Co. (WEC, Issuer Default Rating 'A-', Stable Outlook by Fitch).

While WEPCO's earnings and cash flow streams are projected to maintain credit measures consistent with the 'A ' rating category, the company must rely on continuing supportive regulatory treatment from the Public Service Commission of Wisconsin (PSCW) to continue to recover fuel and purchased power costs, and expenses related to new generating plants at affiliate, WE Power, and maintain its credit profile. Capital expenditures are forecasted to average approximately $650 million per year through 2012, a level that is significantly higher than historical norms. Fitch expects internally generated cash flows will be supplemented with a balanced mix of debt and equity. Increased capital investments are earmarked for planned environmental spend at the existing Oak Creek units 5-8 and the wind projects to meet renewable portfolio standards. The cost of the environmental compliance is estimated to be $750 million ($830 million including AFUDC), with the work completed by 2012.

WEPCO, a wholly owned subsidiary of WEC, serves 1.1 million electric and 458,000 natural gas customers in Wisconsin and the Upper Peninsula of Michigan.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.