Fitch Affirms Ratings for Wisconsin Energy Corp.; Revises Outlook to Negative

Business Wire, June 08, 2009

CHICAGO -- Fitch Ratings has affirmed the outstanding ratings for Wisconsin Energy Corp. (WEC), as well as its subsidiaries, Wisconsin Energy Capital Corp. (WECC), Wisconsin Electric Power Co. (WEPCO), and Wisconsin Gas LLC (WI Gas). Approximately $4.9 billion of debt is affected. The Rating Outlook for WEC, WECC, and WEPCO has been revised to Negative from Stable. The Rating Outlook for WI Gas remains Stable. A full description of the ratings is listed below:

Ratings Affirmed, Rating Outlook Negative

WEC

--Issuer Default Rating (IDR) at 'A-';

--Senior unsecured debt at 'A-';

--Junior subordinated debt at 'BBB ';

--Short-term IDR and commercial paper at 'F2'.

WECC

--IDR at 'A-';

--Senior unsecured debt at 'A-'.

WEPCO

--IDR at 'A';

--Senior unsecured debt at 'A ';

--Preferred stock at 'A';

--Short-term IDR and commercial paper at 'F1'.

Ratings Affirmed, Rating Outlook Stable

WI Gas

--IDR at 'A';

--Senior unsecured debt at 'A ';

--Short-term IDR and commercial paper at 'F1'.

The Negative Outlook for WEC and WEPCO reflect weaker than previously Fitch forecasted credit protection measures and higher debt leverage for both companies due to the impact of the economic recession on the local economy, specifically the large commercial and industrial (C&I) customers, as well as continued levels of elevated capital spending following completion of the new Oak Creek (OC) units due to planned environmental spending at the existing OC units and renewable energy investments to meet state mandated standards. The debt obligations of WECC, the funding vehicle for WEC's former non-regulated operations, are guaranteed by WEC, therefore the ratings of WECC reflect the credit quality of WEC.

Management currently estimates that total retail electric sales in 2009 will be around 8% lower than 2008 levels, with large C&I customers experiencing a 15% decline. Unemployment in WEC's service territory continues to trend slightly higher than the national average of 9.4%. While WEC plans to offset the impact of lower demand on its gross margin through internal cost controls and lower fuel prices, the company is not forecasted to experience a meaningful improvement in its credit metrics over the next three years.

The ratings for WEC take into consideration the underlying strength of its regulated electric and gas utility subsidiaries, from which it derives stable and consistent cash flow distributions. WEPCO and WI Gas continue to maintain stable operating performances and benefit from a constructive regulatory environment in Wisconsin. Both utilities have recently filed separate rate cases totaling $140.2 million, comprised of the following: $76.5 million electric rate increase, $22.1 million natural gas rate increase (WEPCO), $2.7 million steam increase, and $38.9 million natural gas rate increase (WI Gas). New rates are expected to be in effect in January 2010. WEC benefits from a fixed price construction contract on the new OC units.

Events that could lead to further negative rating action include a protracted period of reduced demand and decline in the local economy further putting pressure on the financial performance of WEC and WEPCO; lags in the recovery of capital expenditures for the scrubbers and renewable investments, which will be partially funded with debt and result in continued elevated leverage; and less supportive outcomes in the utilities' rate cases. A return to a Stable Outlook could occur if the companies withstand the current economic climate through effective and sustainable cost controls, have favorable outcomes in the current rate cases and improve credit protection measures.

WEC is on track to complete its Power of the Future (PTF) strategy by 2010, when the second coal unit at OC is expected to come into commercial operation. The first coal unit is scheduled to be complete by year-end 2009. Earlier this year, the new water intake system that serves both the existing units at OC and the two new plants was placed in service at a cost of approximately $132.5 million. The total cost for the two new units was set at $1.9 billion (WEC's share) and approximately $1.6 billion has been expended to date. Consolidated capital expenditures will continue to be at elevated levels through 2013, averaging approximately $800 million per year.

Bechtel, the contractor of the OC projects under a fixed price contract, has filed two claims totaling $485 million (WEC's share is $411 million) in costs related to severe winter weather and rain storms, changes in local labor conditions from those previously anticipated, as well as cost and schedule relief for the alleged effects of WEC directed change orders and delays in obtaining the necessary permits for unit 1. WEC believes that the only circumstances and events for which it retains price adjustment risk under the contract are force majeure, wage escalation in excess of 4%, changes in scope or performance requested by WEC. The company has invoked the formal dispute resolution process. The companies are currently in the mediation phase, which is expected to conclude in 2009. Binding arbitration, if required, would be conducted in 2009. Fitch does not expect the final outcome of the Bechtel claim, even in a severe downside scenario, to have a material impact on WEC's credit metrics or debt leverage. Resolution to the Bechtel claim is expected in 2010.