Fitch Revises Wisconsin Energy Corp.'s Outlook to Negative; Affirms WEC and Subs.

NEW YORK -- Fitch has affirmed the outstanding ratings of Wisconsin Energy Corp. (WEC) and its subsidiaries, Wisconsin Energy Capital Corp. (WECC), Wisconsin Electric Power Co. (WEPCO), and Wisconsin Gas LLC. (WI Gas). Approximately $3.9 billion of debt is affected. The Rating Outlooks for WEC and WECC have been revised to Negative from Stable. The Rating Outlooks for WEPCO and WI Gas remain Stable. WEC's 'BBB+' preferred securities rating has been withdrawn as all securities have been repaid. A detailed description of the ratings action is shown below.

Fitch affirms the following:

WEC

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

-- Senior unsecured debt at 'A-'

-- Short-term IDR at 'F2'

WECC

-- IDR at 'A-'

-- Senior unsecured debt at 'A-'

WEPCO

-- IDR at 'A';

-- Senior secured debt at 'AA-';

-- Senior unsecured debt at 'A+';

-- Preferred stock at 'A';

-- Short-term IDR at 'F1'.

WI Gas

-- IDR at 'A';

-- Senior unsecured debt at 'A+';

-- Short-term IDR at 'F1'.

The following rating is being withdrawn:

WEC Capital Trust I

-- Preferred securities at 'BBB+'.

The Outlook revision reflects WEC's high parent and consolidated debt levels which are not expected to be materially reduced over the next several years. WEC is in the process of undergoing a significant capital expenditure program, called Power of the Future (PTF), which includes the construction of two gas-fired combined-cycle units, two pulverized coal-fired units, wind generation facilities, environmental compliance costs, and other transmission and distribution projects at an approximate cost of $5 billion through 2010. Funding for PTF is expected to be met with a mix of internally generated cash and external debt financings. Consequently, consolidated leverage, as measured by the ratio of debt to EBITDA, is forecasted by Fitch to remain above average for the 'A-' rating category at more than 4 times (x) through 2009.

While WEPCO's debt will also increase, the utility's earnings and cash flow streams are projected to maintain credit measures consistent with the 'A+' rating category. Nevertheless, the utility will be highly dependent on continuing regulatory support from the Public Service Commission of Wisconsin (PSCW) to recover its increased costs and higher capital expenditures. Historically, the regulatory environment in Wisconsin has been very constructive for utilities operating within the state. Earlier this year, WEPCO and WI Gas received favorable outcomes to their respective rate cases. However, during this significant construction phase, WEPCO will be more vulnerable to adverse regulatory decisions.

WEC depends on WEPCO for cash distributions to meet dividend payments and service debt obligations. In the event of operating problems, higher than expected costs related to PTF, or unfavorable rate treatment of the utility, WEPCO would likely be able to meet its financial commitments, but there would be less cash available to WEC. WEC as the parent would then face increased leverage and weakened credit metrics. A return to a Stable Rating Outlook for WEC could result if financing actions reduce consolidated debt levels and improve credit coverages.

WEC's ratings continue to be supported by its regulated electric and gas utility subsidiaries, WEPCO and WI Gas. The utility operations benefit from stable cash flows, strong credit protection measures, solid competitive positions, and a constructive regulatory environment. Following the divestiture of WICOR Industries in 2004, approximately all of WEC's consolidated asset base and cash flow generation is derived from its regulated businesses. The ratings analysis for the subsidiaries also takes into consideration the financial and functional separation of the utilities from the parent. In particular, WEPCO and WI Gas maintain distinct credit facilities, $500 million and $300 million, respectively, which provide access to short-term liquidity. Additionally, there are regulatory restrictions in place in Wisconsin that limit the amount of cash distributions a subsidiary can upstream to its parent based on the utility's common equity ratio. As a result of these factors, the Rating Outlooks for WEPCO and WI Gas remain Stable.

Progress on the construction of the PTF plants remains on schedule. The first gas-fired plant went into service in July 2005, and the second plant is anticipated to be completed in time for the summer of 2008. Activity at the site of the two new coal-fired units began in June 2005, after several months of legal objections. The delay is not expected to have an impact on the timeline for final completion of the projects, with the first Oak Creek unit in service in the summer of 2009, and the second in 2010. WEC has the development rights to two wind-farm projects and plans to build wind turbines with generating capacity of up to 200 MW (megawatts). The company has filed for the necessary regulatory approvals for this project, and the turbines could be placed into service in 2007 or 2008.

WEC is the holding company for WEPCO, WI Gas, and Edison Sault Electric Co. in Michigan. WEC's non-utility energy operations consist primarily of WE Power. WECC is the funding vehicle for some of WEC's non-regulated investments. The debt obligations of WECC are supported through an agreement with WEC.

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.