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On Mar 22, 2013, we downgraded our recommendation on Wisconsin Energy Corporation (WEC - Analyst Report) to Neutral from Outperform. The company currently has a Zacks Rank #3 (Hold).

Reasons for Downgrade

The combined negative impact from strict regulatory guidelines, likelihood of issues from the labor unions, possibilities of delay or cancellation of projects, volatile commodity prices and greater dependence on weather conditions forced the downward revision.

Causes for Concern

Like most of the utility providers, Wisconsin Energy’s operations are subject to the federal, state, and local legislative requirements. The regulators frequently adjust and modify the existing rules to control pollution and waste management. These companies’ incur significant costs related to the changes in existing compliances and addition of the new laws, which subsequently impacts their margins and Wisconsin Energy is no exception.

Apart from a strong cash and liquidity position along with technological advancement, skilled and efficient workforce plays significant roles for the utility companies’ regular operations. We know that all of Wisconsin Energy’s labor agreements will lapse in 2013. If, the company fails to resolve the issues with the labor unions, there might be work stoppages by the affected workers, that will subsequently impact the company’s overall performance.

Wisconsin Energy is in the middle of several electricity generation and distribution projects and also has numerous upcoming ventures. These projects will enable the company to provide more power to its customers. A delay or cancellation of these projects will impact the company’s power generation goals and weigh on its financial performance.

Other Stocks to Consider

Besides Wisconsin Energy Corporation, other stocks in the utility sector that are currently performing well include Brookfield Infrastructure Partners L.P. (BIP - Snapshot Report), Huaneng Power International, Inc. (HNP - Snapshot Report) and Pike Electric Corporation (PIKE - Snapshot Report). All these stocks presently carry a Zacks Rank #1 (Strong Buy).

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