Wisconsin Energy Kept at Neutral

We reiterate our Neutral recommendation on Wisconsin Energy Corporation ( WEC - Analyst Report ) . The company’s first quarter earnings surpassed the Zacks Consensus Estimate and the year-ago quarter earnings. This was primarily driven by robust recovery of fuel costs from power generation, decline in company’s operation and maintenance costs and strong share repurchase activities.

Wisconsin Energy’s utility operations and implementation of business strategies requires substantial capital investments. From its cash balance of $18.1 million as of March 31, 2012, it is quite obvious that the company needs to have access to the capital markets, and banking and commercial paper markets under competitive terms and rates. Failure to utilize any of these markets might increase the company’s cost of capital.

Following the successful completion of the “Power the Future” (PTF) plan, Wisconsin Energy is now focusing on its smaller projects and upgrading existing plants. Presently, the company is involved in two major projects; the first deals with the construction of a 50-megawatt biomass plant in Northern Wisconsin, while the second is related to air quality control upgrade for the older coal-fired units. We believe an increase in the company’s electric generating capacity and a renewed focus on core electric and gas operations will help drive earnings going forward.

In terms of providing better return to shareholders, Wisconsin Energy adopted a new dividend policy to target dividend payout ratio of 60% of earnings in the year 2014. To achieve its objective, the company has already increased its quarterly dividend to 30 cents per share from 26 cents per share, which will result in a 15% increase in annual dividends. We believe this is a smart move to attract more investors in the future.

On the flip side, the electric and natural gas utility businesses primarily depend on seasonal changes, which subsequently impact its financial results. Demand for electricity is often high in summer and winter months. Unusually mild winters and summers can adversely impact the company’s operational results. Wisconsin Energy saw demand slackening in the first quarter of 2012 due to a mild winter. This in turn affected its top-line numbers.

During the first quarter earnings call, Wisconsin Energy posted its 2012 earning guidance in the range of $2.24 to $2.29 per share. As per the Zacks Consensus Estimates, the company’s second quarter and full year 2012 earnings are pegged at 44 cents and $2.28 per share, respectively.

Wisconsin Energy Corporation currently retains a Zacks #3 Rank (short-term Hold rating).The company competes with Xcel Energy Inc. ( XEL - Analyst Report ) .

Based in Milwaukee, Wisconsin, Wisconsin Energy Corporation is involved with the generation, distribution and sale of electric energy and steam. It is also engaged in the purchase, distribution, transportation and sale of natural gas.