-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GVoqjFz3++7Egi+vO6h2pc6If/Sx0nZZRs0dxPHUq7UfCrGjt5nDsGcybA9k76dh FaWXxaZx6Pe0tEDKWQjf+A== 0000107815-01-000007.txt : 20010326 0000107815-01-000007.hdr.sgml : 20010326 ACCESSION NUMBER: 0000107815-01-000007 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010323 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WISCONSIN ENERGY CORP CENTRAL INDEX KEY: 0000783325 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 391391525 STATE OF INCORPORATION: WI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-09057 FILM NUMBER: 1576871 BUSINESS ADDRESS: STREET 1: 231 W MICHIGAN ST STREET 2: P O BOX 2949 CITY: MILWAUKEE STATE: WI ZIP: 53201 BUSINESS PHONE: 4142212345 MAIL ADDRESS: STREET 1: 231 WEST MICHIGAN STREET STREET 2: P O BOX 2949 CITY: MILWAUKEE STATE: WI ZIP: 53201 10-K 1 0001.txt WISCONSIN ENERGY CORPORATION UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 2000 Commission Registrant; State of Incorporation IRS Employer File Number Address; and Telephone Number Identification No. ----------- ---------------------------------- ------------------ 001-09057 WISCONSIN ENERGY CORPORATION 39-1391525 (A Wisconsin Corporation) 231 West Michigan Street P.O. Box 2949 Milwaukee, WI 53201 (414) 221-2345 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in the definitive Proxy Statement incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ( ) The aggregate market value of the common stock of Wisconsin Energy Corporation held by non-affiliates is approximately $2.6 billion based upon the reported last sale price of such securities as of February 28, 2001. Securities Registered Pursuant to Section 12(b) of the Act: Name of Each Exchange Title of Each Class on Which Registered ------------------- --------------------- Common Stock, $.01 New York Stock Par Value Exchange Securities Registered Pursuant to Section 12(g) of the Act: None Indicate the number of shares outstanding of each of the Registrant's classes of common stock, as of the latest practicable date (February 28, 2001): Common Stock, $.01 Par Value, 118,036,434 shares outstanding Documents Incorporated by Reference ----------------------------------- Portions of Wisconsin Energy Corporation's definitive Proxy Statement for its Annual Meeting of Stockholders, to be held on May 2, 2001, are incorporated by reference into Part III hereof.
WISCONSIN ENERGY CORPORATION -------------------------------- FORM 10-K REPORT FOR THE YEAR ENDED DECEMBER 31, 2000 TABLE OF CONTENTS Item Page - ---- ---- Part I ------ 1. Business................................................................... Introduction............................................................. Utility Energy Segment................................................... Electric Utility Operations............................................ Electric Sales....................................................... Competition.......................................................... Electric Supply...................................................... Coal-Fired Generation................................................ Nuclear Generation................................................... Hydroelectric Generation............................................. Natural Gas-Fired Generation......................................... Oil-Fired Generation................................................. Purchase Power Commitments........................................... Electric Transmission................................................ Renewable Electric Energy............................................ Gas Utility Operations................................................. Gas Deliveries....................................................... Competition.......................................................... Gas Supply, Pipeline Capacity and Storage............................ Other Utility Operations............................................... Utility Rate Matters................................................... Non-Utility Energy Segment............................................... Wisvest Corporation.................................................... Other Non-Utility Energy Operations.................................... Manufacturing Segment.................................................... U.S. Operations........................................................ International Operations............................................... Raw Materials and Patents.............................................. Other Non-Utility Operations............................................. Minergy Corp. ......................................................... Wispark LLC............................................................ Other Non-Utility Subsidiaries......................................... Regulation............................................................... Wisconsin Energy Corporation........................................... Utility Energy Segment................................................. Non-Utility Energy Segment............................................. Environmental Compliance................................................. Environmental Expenditures............................................. Solid Waste Landfills.................................................. Coal-Ash Landfills..................................................... Manufactured Gas Plant Sites........................................... Air Quality............................................................ Other.................................................................... 2. Properties................................................................. Utility Energy Segment................................................... Non-Utility Energy Segment............................................... Manufacturing Segment.................................................... Other.................................................................... 3. Legal Proceedings.......................................................... Environmental Matters.................................................... Utility Rate Matters..................................................... Other Matters............................................................ 4. Submission of Matters to a Vote of Security Holders........................ Executive Officers of the Registrant....................................... Part II ------- 5. Market for Registrant's Common Equity and Related Stockholders Matters..... Number of Common Stockholders............................................ Common Stock Listing and Trading......................................... Dividends and Common Stock Prices........................................ 6. Selected Financial Data.................................................... Consolidated Selected Financial and Statistical Data..................... Consolidated Selected Quarterly Financial Data........................... Consolidated Selected Utility Operating Data............................. 7. Management's Discussion & Analysis of Financial Condition & Results of Operations.................................................... Results of Operations.................................................. Consolidated Earnings................................................ Utility Energy Segment Contribution To Earnings...................... Electric Utility Revenues, Gross Margins and Sales................. Gas Utility Revenues, Gross Margins and Therm Deliveries........... Pro Forma Gas Utility Revenues, Gross Margins and Therm Deliveries. Other Utility Segment Items........................................ Non-Utility Energy Segment Contribution to Earnings.................. Manufacturing Segment Contribution To Earnings....................... Pro Forma Manufacturing Segment Revenues and Gross Margins......... Liquidity and Capital Resources........................................ Cash Flows........................................................... Operating Activities............................................... Investing Activities............................................... Financing Activities............................................... Capital resources and Requirements................................... Capital Resources.................................................. Capital Requirements............................................... Factors Affecting Results, Liquidity and Capital Resources............. Outlook.............................................................. Forecasts.......................................................... Factors Affecting Forecasts........................................ Investments, Mergers, Divestitures and Asset Sales................... Electric Generation................................................ Energy Distribution................................................ Rates and Regulatory Matters......................................... Wisconsin Jurisdiction............................................. Michigan Jurisdiction.............................................. Industry Restructuring and Competition............................... Electric Utility Industry.......................................... Natural Gas Utility Industry....................................... Electric System Reliability.......................................... Nuclear Operations................................................... Legal Matters........................................................ Environmental Matters................................................ Market Risks......................................................... Accounting Developments.............................................. Cautionary Factors................................................... Operating, Financial & Industry Factors............................ Business Combination Factors....................................... 7A. Quantitative and Qualitative Disclosures About Market Risk................. 8. Financial Statements and Supplementary Data................................ Consolidated Income Statement............................................ Consolidated Statement of Cash Flows..................................... Consolidated Balance Sheet............................................... Consolidated Statement of Capitalization................................. Consolidated Statement of Common Equity.................................. Notes to Consolidated Financial Statements............................... Note A - Summary of Significant Accounting Policies.................... Note B - Mergers and Acquisitions...................................... Note C - Asset Sales and Divestitures.................................. Note D - Non-Recurring Charges......................................... Note E - Income Taxes.................................................. Note F - Nuclear Operations............................................ Note G - Common Equity................................................. Note H - Trust Preferred Securities.................................... Note I - Long-Term Debt................................................ Note J - Short-Term Debt............................................... Note K - Fair Value of Financial Instruments........................... Note L - Benefits...................................................... Note M - Segment Reporting............................................. Note N - Commitments and Contingencies................................. Report of Independent Accountants........................................ 9. Changes in & Disagreements with Accountants on Accounting and Financial Disclosure................................... Part III -------- 10. Directors and Executive Officers of the Registrant......................... 11. Executive Compensation..................................................... 12. Security Ownership of Certain Beneficial Owners and Management............. 13. Certain Relationships and Related Transactions............................. Part IV ------- 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........... Schedule 1 - Condensed Parent Company Financial Statements................. Consents of Independent Accountants........................................ Signatures................................................................. Exhibit Index..............................................................
PART I ------ ITEM 1.BUSINESS INTRODUCTION Wisconsin Energy Corporation was incorporated in the state of Wisconsin in 1981 and became a diversified holding company in 1986. It maintains its principal executive offices in Milwaukee, Wisconsin. Unless qualified by their context when used in this document, the terms "Wisconsin Energy" or the "Company" refer to the holding company and all of its subsidiaries. Wisconsin Energy conducts its operations primarily in three operating segments: a utility energy segment, a non-utility energy segment and a manufacturing segment. The Company's primary subsidiaries are Wisconsin Electric Power Company ("Wisconsin Electric"), Wisconsin Gas Company ("Wisconsin Gas") and WICOR Industries, Inc. UTILITY ENERGY SEGMENT: The utility energy segment consists of: Wisconsin Electric, which serves over 1,000,000 electric customers in Wisconsin and the Upper Peninsula of Michigan, 400,000 gas customers in Wisconsin and about 450 steam customers in metro Milwaukee; Wisconsin Gas, which serves about 550,000 gas customers in Wisconsin and about 1,840 water customers in suburban Milwaukee; and Edison Sault Electric Company ("Edison Sault"), which serves approximately 22,000 electric customers in the Upper Peninsula of Michigan. NON-UTILITY ENERGY SEGMENT: The non-utility energy segment consists primarily of: Wisvest Corporation ("Wisvest"), which develops, owns and operates electric generating facilities and invests in other energy-related entities; WICOR Energy Services Company ("WICOR Energy"), which engages in natural gas purchasing and marketing as well as energy and price risk management; and FieldTech, Inc. ("FieldTech"), which provides meter reading and technology services for gas, electric and water utilities. In December 2000, Wisconsin Energy entered into an agreement to sell Wisvest's two existing non-utility power plants, located in the state of Connecticut, which will significantly reduce the size of current non-utility energy segment operations. The sale of these two plants, which were originally acquired in April 1999, is expected to close in the second quarter of 2001. MANUFACTURING SEGMENT: The manufacturing segment consists of WICOR Industries, Inc., an intermediary holding company, and its three primary subsidiaries: Sta-Rite Industries, Inc. ("Sta- Rite"), SHURflo Pump Manufacturing Co. ("SHURflo") and Hypro Corporation ("Hypro"), which are manufacturers of pumps, water treatment products and fluid handling equipment with manufacturing, sales and distribution facilities in 14 countries. OTHER: Other non-utility operating subsidiaries of Wisconsin Energy include primarily Minergy Corp. ("Minergy"), which develops and markets recycling technologies, and Wispark LLC ("Wispark"), formerly Wispark Corporation, which develops and invests in real estate. In May 2000, Wisconsin Energy announced that it would sell approximately 80% of its portfolio of non- utility real estate assets during the following two years, which is expected to significantly reduce the size of existing non- utility real estate operations. Wisconsin Gas, WICOR Energy, FieldTech, WICOR Industries, Sta- Rite, SHURflo and Hypro were acquired by Wisconsin Energy as a result of the Company's acquisition of WICOR, Inc. ("WICOR") on April 26, 2000. WICOR remains a subsidiary of Wisconsin Energy, functioning as an intermediary holding company of the historical WICOR companies. For additional information concerning Wisconsin Energy's acquisition of WICOR, see "Factors Affecting Results, Liquidity and Capital Resources" in Item 7 of this report. For further financial information about Wisconsin Energy's business segments, see "Results of Operations" in Item 7 and "Note M - Segment Reporting" in the Notes to Financial Statements in Item 8 of this report. CAUTIONARY FACTORS: A number of forward-looking statements are included in this document. When used, the terms, "anticipate," "believe," "estimate," "expect," "objective," "plan," "possible," "potential," "project" and similar expressions are intended to identify such forward-looking statements. Forward-looking statements are subject to certain risks, uncertainties and assumptions which could cause actual results to differ materially from those that are described, including factors described throughout this document and in "Factors Affecting Results, Liquidity and Capital Resources" in Item 7 of this report. UTILITY ENERGY SEGMENT ELECTRIC UTILITY OPERATIONS The Company's electric utility operations consist of the electric operations of Wisconsin Electric as well as Edison Sault. Wisconsin Electric, which is the largest electric utility in the state of Wisconsin, generates, distributes and sells electric energy in a territory of approximately 12,000 square miles with a population estimated at 2,300,000 in southeastern (including the metropolitan Milwaukee area), east central and northern Wisconsin and in the Upper Peninsula of Michigan. Edison Sault generates, distributes and sells electric energy in a territory of approximately 2,000 square miles with a population of approximately 55,000 in the eastern Upper Peninsula of Michigan. Electric Sales See "Consolidated Selected Utility Operating Data" in Item 6 of this report for certain electric utility operating information by customer class during the period 1996 through 2000. WISCONSIN ELECTRIC: Wisconsin Electric is authorized to provide retail electric service in designated territories in the state of Wisconsin, as established by indeterminate permits, certificates of public convenience and necessity, or boundary agreements with other utilities, and in certain territories in the state of Michigan pursuant to franchises granted by municipalities. Wisconsin Electric also sells wholesale electric power. Electric energy sales by Wisconsin Electric to all classes of customers totaled approximately 31.4 million megawatt hours during 2000, a 2.5% increase over 1999. Approximately 0.2 million of megawatt-hour sales during 2000 were to Edison Sault. There were approximately 1,027,000 electric customers at December 31, 2000, an increase of 2.1% since December 31, 1999. Electric energy sales are impacted by seasonal factors and varying weather conditions from year-to-year. Wisconsin Electric, a summer peaking utility as a result of cooling load, reached its all-time electric peak demand obligation of 5,974 megawatts on July 29, 1999. During the years 2001 through 2005, Wisconsin Electric currently estimates that electric peak demand obligation will grow at an annualized rate of 1.8% to approximately 6,400 megawatts by the year 2005. EDISON SAULT: Edison Sault is authorized to provide retail electric service in certain territories in the state of Michigan pursuant to franchises granted by municipalities. Edison Sault also provides wholesale electric service under contract with one rural cooperative. Electric energy sales by Edison Sault to all classes of customers totaled approximately 0.8 million megawatt hours during 2000 and 1999. There were approximately 22,000 electric customers at December 31, 2000, an increase of 0.9% since December 31, 1999. Edison Sault, a winter peaking utility as a result of heating load, reached its all-time peak electric demand of 139 megawatts on December 27, 2000. SALES TO LARGE ELECTRIC RETAIL CUSTOMERS: Wisconsin Electric provides electric utility service to a diversified base of customers in such industries as mining, paper, foundry, food products, machinery production as well as to large retail chains. Edison Sault provides electric service to large industrial accounts in the paper, crude oil pipeline and limestone quarry industries as well as to several state and federal government facilities. Cleveland-Cliffs, Inc. manages the Company's two largest retail electric customers, the Empire and Tilden iron ore mines located in the Upper Peninsula of Michigan. Wisconsin Electric currently has special negotiated power-sales contracts with the mines that expire in 2007. The combined electric energy sales to the two mines accounted for 7.7%, 7.0% and 8.0% of the Company's total electric utility energy sales during 2000, 1999 and 1998, respectively. SALES TO WHOLESALE CUSTOMERS: During 2000, Wisconsin Electric sold wholesale electric energy to five municipally owned systems, two rural cooperatives and two municipal joint action agencies located in the states of Wisconsin, Michigan and Illinois. Wholesale electric energy sales by Wisconsin Electric were also made to 43 other public utilities and power marketers throughout the region under rates approved by the Federal Energy Regulatory Commission. Edison Sault sold wholesale electric energy to one rural cooperative during 2000. Wholesale sales accounted for approximately 12.7% of the Company's total electric energy sales and 7.2% of total electric operating revenues during 2000 compared with 12.7% of total electric energy sales and 6.8% of total electric operating revenues during 1999. ELECTRIC SYSTEM RELIABILITY MATTERS: In spite of continued tight regional electric supply, especially during episodes of hot and humid weather, the Company had adequate capacity to meet all of its firm electric load obligations during 2000 and expects to have adequate capacity to meet all of its firm obligations during 2001. However, the Company anticipates that the regional electric energy supply will remain tight during 2001. For additional information, see "Factors Affecting Results, Liquidity and Capital Resources" in Item 7 of this report. "POWER THE FUTURE" STRATEGY: Demand for electricity in the state of Wisconsin is currently expected to outstrip supply by 4,000 megawatts by 2010. Wisconsin Electric's electric load is currently growing at approximately 100 to 150 megawatts per year. In response, Wisconsin Energy announced an enhanced 10- year, $7 billion strategy in February 2001 to improve the supply and reliability of electricity in Wisconsin. For additional information, see "Factors Affecting Results, Liquidity and Capital Resources" in Item 7 of this report. As part of its enhanced "Power the Future" strategy, Wisconsin Energy expects to create a new non-utility energy subsidiary that would construct and own 2,800 megawatts of new natural gas-fired and coal-fired generating capacity in Wisconsin and that would be leased back to Wisconsin Electric under 20- to 25-year contracts approved by the Public Service Commission of Wisconsin ("PSCW"). Wisconsin Electric would operate and maintain the new plants and would have the right to renegotiate the leases or acquire the associated plants outright at market value at the end of the lease contracts. Implementation of the "Power the Future" strategy is subject to a number of state and federal regulatory approvals as well as the amendment of several state laws in Wisconsin. Competition Driven by a combination of market forces, regulatory and legislative initiatives and technological changes, the nation's electric utility industry continues a trend towards restructuring and increased competition. However, given the current status of restructuring initiatives in regulatory jurisdictions where the Company primarily does business, Wisconsin Energy cannot predict the ultimate timing or impact of a restructured electric industry on its financial position or results of operations. For additional information, see "Factors Affecting Results, Liquidity and Capital Resources" in Item 7 of this report. Electric Supply The table below indicates the Company's sources of electric energy supply, including net generation by fuel type, for the following years ended December 31.
2001 (a) 2000 1999 1998 (b) -------- ---- ---- -------- Coal 62.2% 62.9% 62.3% 62.6% Nuclear 24.1 22.8 21.5 18.1 Hydroelectric 1.8 1.6 1.8 1.2 Natural Gas 0.7 1.0 1.3 1.8 Oil and Other(c) 0.1 0.2 0.2 0.2 ----- ----- ----- ----- Net Generation 88.9 88.5 87.1 83.9 Power Purchases (d) 11.1 11.5 12.9 16.1 ----- ----- ----- ----- Total 100.0% 100.0% 100.0% 100.0% ===== ===== ===== ===== (a) Estimated assuming that there are no unforeseen contingencies such as unscheduled maintenance or repairs of Wisconsin Energy's generating facilities or of regional electric transmission facilities. See "Factors Affecting Results, Liquidity and Capital Resources - Cautionary Factors" in Item 7 of this report. (b) Includes Edison Sault beginning in June 1998. (c) Includes generation by alternative renewable sources. (d) Excludes purchases by Edison Sault of power supplied by Wisconsin Electric.
Wisconsin Energy's net generation totaled 29.8 million megawatt- hours during 2000 compared with 28.6 million megawatt hours during 1999 and 26.4 million megawatt hours during 1998. Net generation has increased in each of the past two years in large part due to higher availability of Wisconsin Electric's Point Beach Nuclear Plant. Wisconsin Electric's average total fuel costs per million British thermal units by fuel type for the years ended December 31 are shown below. As described in further detail in "Factors Affecting Results, Liquidity and Capital Resources" in Item 7 of this report, the price of natural gas (as well as oil) increased significantly during 2000 as fuel supplies failed to keep up with growing demand.
2000 1999 1998 ---- ---- ---- Coal $1.11 $1.10 $1.17 Nuclear 0.53 0.55 0.53 Natural Gas 5.08 2.82 2.74 Oil 5.27 3.57 3.70
Coal-Fired Generation COAL SUPPLY: Wisconsin Electric diversifies the coal supply for its power plants in the states of Wisconsin and Michigan by purchasing from mines in northern and central Appalachia as well as from various western mines. During 2001, 99% of Wisconsin Electric's projected coal requirements of 12.2 million tons will be under contract. Wisconsin Electric does not anticipate any problem in procuring its remaining 2001 coal requirements through short-term or spot purchases and inventory adjustments. Following is a summary of the annual tonnage amounts for Wisconsin Electric's principal long-term coal contracts by the month and year in which the contracts expire.
Contract Expiration Date Annual Tonnage ------------------------ -------------- Dec. 2002 4,900,000 Dec. 2003 500,000 Dec. 2005 3,200,000 Dec. 2006 2,000,000
As of the beginning of 2001, Wisconsin Electric had approximately a 107-day supply of coal in inventory at its coal-fired facilities. The following summarizes the status of coal supply for each of the coal-fired facilities that supply electricity to Wisconsin Electric: PLEASANT PRAIRIE POWER PLANT: All of the estimated 2001 coal requirements for this plant are presently under contract. OAK CREEK POWER PLANT: All of the estimated 2001 coal requirements for this plant are presently under contract or agreed upon in principle. PRESQUE ISLE POWER PLANT: Approximately 99% of the estimated 2001 coal requirements for this plant are presently under contract. EDGEWATER 5 GENERATING UNIT: Coal for this unit, in which Wisconsin Electric has a 25% interest, is purchased by the majority owner of the facility, Wisconsin Power and Light Company, a subsidiary of Alliant Energy Resources. VALLEY AND PORT WASHINGTON POWER PLANTS: Coal requirements for these plants will be supplied in 2001 under existing contracts or contracts that have been agreed upon in principle. MILWAUKEE COUNTY POWER PLANT: Coal for this facility is purchased by Wisconsin Electric through annual spot purchases. COAL DELIVERIES: Approximately 80% of Wisconsin Electric's 2001 coal requirements are expected to be delivered by Wisconsin Electric-owned unit trains. The unit trains will transport coal for the Oak Creek and Pleasant Prairie Power Plants from Pennsylvania, New Mexico and Wyoming mines. Coal from Pennsylvania and Colorado mines is also transported via rail to Lake Erie or Lake Michigan transfer docks and delivered to the Valley and Port Washington Power Plants by lake vessels. Coal from central Appalachia is shipped via rail to Lake Erie transfer docks and delivered to the Milwaukee County Power Plant by truck once it arrives by lake vessel in Milwaukee. Montana and Wyoming coal for Presque Isle Power Plant is transported via rail to Superior, Wisconsin, placed in dock storage and reloaded into lake vessels for plant delivery. Central Appalachian and Colorado coal bound for Presque Isle Power Plant is shipped via rail to Lake Erie and Lake Michigan (Chicago) coal transfer docks, respectively, for lake vessel delivery to the plant. ENVIRONMENTAL MATTERS: For information regarding emission restrictions, especially as they relate to coal-fired generating facilities, see "Environmental Compliance" below. Nuclear Generation POINT BEACH NUCLEAR PLANT: Wisconsin Electric owns two 510- megawatt electric generating units at Point Beach Nuclear Plant in Two Rivers, Wisconsin. The United States Nuclear Regulatory Commission operating licenses for Point Beach expire in October 2010 for Unit 1 and in March 2013 for Unit 2. For additional information concerning Point Beach, see "Factors Affecting Results, Liquidity and Capital Resources" in Item 7 and "Note F - Nuclear Operations" in Item 8 of this report. NUCLEAR MANAGEMENT COMPANY: In August 2000, the Nuclear Management Company, LLC assumed operating responsibility for Point Beach with the transfer of operating authority under its operating licenses. During 1999, the Company and the affiliates of three other unaffiliated investor-owned utilities in the region formed the Nuclear Management Company, which manages seven nuclear generating units in the Midwest as of December 31, 2000. Wisconsin Electric continues to own Point Beach and retains exclusive rights to the energy generated by the plant as well as financial responsibility for the safe operation, maintenance and decommissioning of Point Beach. For further information, see "Factors Affecting Results, Liquidity and Capital Resources" in Item 7 of this report. NUCLEAR FUEL SUPPLY: Wisconsin Electric purchases uranium concentrates ("Yellowcake") and contracts for its conversion, enrichment and fabrication. Wisconsin Electric maintains title to the nuclear fuel until fabricated fuel assemblies are delivered to Point Beach, whereupon it is sold to and leased back from the Wisconsin Electric Fuel Trust. For further information concerning this nuclear fuel lease, see "Note I - Long-Term Debt" in Item 8 of this report. URANIUM REQUIREMENTS: Wisconsin Electric requires approximately 400,000 pounds of Yellowcake to refuel a generating unit at Point Beach. During 1998, Wisconsin Electric initiated staggered, extended fuel cycles that are expected to average approximately 18 months in duration. The supply of Yellowcake for these refuelings is currently provided through one long-term contract, amended in 2000, which supplies 100% of annual requirements under these staggered, extended fuel cycles through 2007. CONVERSION: Wisconsin Electric has a long-term contract with a provider of uranium conversion services to supply 75% of the conversion requirements for the Point Beach reactors through 2004. Wisconsin Electric has an additional long-term conversion contract with a second conversion supplier to supply the remaining 25% of Wisconsin Electric's annual conversion requirements through 2004. ENRICHMENT: Wisconsin Electric effectively has one long-term contract that provides for 100% of the required enrichment services for the Point Beach reactors through the year 2006. FABRICATION: Fabrication of fuel assemblies from enriched uranium for Point Beach is covered under a contract with Westinghouse Electric Corporation for the balance of the plant's current operating licenses. During its fall 2000 refueling outage, the first reload region of a new fuel design from Westinghouse was loaded into Point Beach Unit 2. The first reload of the new fuel design in Unit 1 is scheduled for the spring of 2001. The new fuel design is expected to provide additional safety margin and cost savings and to reduce the number of discharged spent fuel assemblies over the remaining operating license. USED FUEL STORAGE & DISPOSAL: For information concerning used fuel storage and disposal issues, see "Factors Affecting Results, Liquidity and Capital Resources" in Item 7 of this report. NUCLEAR DECOMMISSIONING: Wisconsin Electric provides for costs associated with the eventual decommissioning of Point Beach through the use of an external trust fund. Payments to this fund, together with investment earnings, brought the balance in the trust fund at December 31, 2000 to approximately $613 million compared with an estimated cost to decommission Point Beach of $586 million in current dollars. For additional information regarding decommissioning, see "Note F - Nuclear Operations" in Item 8 of this report. NUCLEAR PLANT INSURANCE: For information regarding nuclear plant insurance, see "Note F - Nuclear Operations" in Item 8 of this report. Hydroelectric Generation WISCONSIN ELECTRIC: Wisconsin Electric's hydroelectric generating system consists of fourteen operating plants with a total installed capacity of approximately 89 megawatts and a dependable capability of approximately 65 megawatts. Of these fourteen plants, thirteen are licensed by the Federal Energy Regulatory Commission. The fourteenth plant, with an installed generating capacity of approximately 2 megawatts, does not require a license. Of the thirteen licensed plants, twelve plants, representing a total of 85 megawatts of installed capacity, have long-term licenses from the Federal Energy Regulatory Commission, and one plant, the Sturgeon project, will not be relicensed and is intended to be removed. In December of 2000, Wisconsin Electric sold a fifteenth plant, with an installed generating capacity of approximately 1 megawatt, to an independent party. EDISON SAULT: Edison Sault's primary source of generation is its 30-megawatt hydroelectric generating plant located on the St. Mary's River in Sault Ste. Marie, Michigan. The water for this facility is leased under a contract with the United States Corps of Engineers with tenure to December 31, 2050. However, the Secretary of the Army has the right to terminate the contract subsequent to December 2020. Edison Sault pays for all water taken from the St. Mary's River at predetermined rates with a minimum annual payment of $0.1 million. The total flow of water taken out of Lake Superior, which in effect is the flow of water in the St. Mary's River, is under the direction and control of the International Joint Commission, created by the Boundary Water Treaty of 1909 between the United States and Great Britain, now represented by Canada. Water elevation levels on Lake Superior have been below normal levels since May 1998. As a result, the International Joint Commission has placed limitations on the flow of water from Lake Superior that limits Edison Sault's amount of hydroelectric generation. During any limited flow months, it is necessary for Edison Sault to purchase additional power from other sources or increase the use of Edison Sault's diesel generation. Hydroelectric generation is also purchased by Edison Sault under contract from the United States Corps of Engineers' hydroelectric generating plant located within the Soo Locks complex on the St. Mary's River in Sault Ste. Marie, Michigan. This 17-megawatt contract has a tenure to November 1, 2040 and cannot be terminated by the United States government prior to November 1, 2030. During 2000, hydroelectric energy provided 42% of Edison Sault's total energy requirements of which 23% was generated by Edison Sault's facility and 19% was purchased from the United States Corps of Engineers. Natural Gas-Fired Generation The Concord and Paris Combustion Turbine Power Plants, Germantown Unit 5 and the Oak Creek combustion turbine use natural gas as their primary fuel, with fuel oil as backup. Natural gas is also used for boiler ignition and flame stabilization purposes at the Pleasant Prairie and Oak Creek Power Plants. Gas for these plants is purchased on the spot market from gas marketers and/or producers and delivered on the local distribution system of Wisconsin Electric's gas operations. Wisconsin Electric also has a power purchase agreement with Mirant (formerly Southern Energy, Inc.) where Wisconsin Electric delivers fuel to their Neenah Power Plant and receives the electric power produced, as discussed in "Purchase Power Commitments" below. This plant uses natural gas as its primary fuel, with fuel oil as backup. Wisconsin Electric supplies fuel to Mirant's Neenah Power Plant utilizing the same procedures and agreements that are used for Wisconsin Electric's facilities. An interruptible balancing and storage agreement with ANR Pipeline is intended to facilitate the variable gas usage pattern of the combustion turbine plants. Natural gas for the gas-fired boiler at the Milwaukee County Power Plant and for boiler ignition and flame stabilization at the Valley Power Plant is purchased under an agency agreement with a gas marketing company. The agent purchases natural gas and arranges for interstate pipeline transportation to the local gas distribution utility. The local gas distribution utility then transports Wisconsin Electric's gas to each plant under interruptible tariffs. Wisconsin Electric is the gas distribution utility for Concord, Paris, Pleasant Prairie and Oak Creek Power Plants. Wisconsin Gas is the gas distribution utility for the Valley and Milwaukee County Power Plants. Both the Germantown Power Plant and Mirant's Neenah Power Plant are directly connected to ANR Pipeline, with no gas distribution utility involvement. Firm gas transportation has been contracted for during the peak summer period between the Joliet gas trading hub south of Chicago, Illinois and Wisconsin Electric's power plant interconnects. A portion of Wisconsin Electric's gas requirements will be purchased at the Joliet hub. Oil-Fired Generation Fuel oil is used for the combustion turbines at the Point Beach, Germantown and Port Washington Power Plants. It is also used for boiler ignition and flame stabilization at the Presque Isle Power Plant, as backup for ignition at the Pleasant Prairie Power Plant and as a backup fuel for the natural gas-fired gas turbines discussed above. Fuel oil requirements are purchased under partnering agreements with suppliers that assist Wisconsin Electric with inventory tracking and oil market price trends. Subject to various regulatory approvals, the four original generating units at the Germantown Power Plant will be converted, one unit per year from 2001 to 2004, to dual fuel (natural gas and oil). A fifth dual fuel combustion turbine began commercial operation at Germantown Power Plant in 2000. Purchase Power Commitments WISCONSIN ELECTRIC: To meet a portion of its anticipated increase in future electric energy supply needs, Wisconsin Electric had entered into separate long-term power purchase contracts with subsidiaries of Cogentrix, Inc. and Southern Energy, Inc., now Mirant. In addition, in December 2000, Wisconsin Electric executed a power purchase agreement with a subsidiary of the Calpine Corporation for new capacity beginning in 2002. The contract with LSP-Whitewater, LP, a subsidiary of Cogentrix, Inc., for 236 megawatts of firm capacity from a gas-fired cogeneration facility located in Whitewater, Wisconsin, does not include any minimum energy requirements. Wisconsin Electric treats this power purchase contract as a capital lease. For additional information, see "Note I - Long-Term Debt" in Item 8 of this report. Mirant's Neenah Power Plant began commercial operations in May 2000. The Neenah plant is a 300-megawatt gas turbine peaking facility in the town of Neenah, Wisconsin. The purchase power agreement is similar in structure to arrangements commonly referred to in the electric industry as a "tolling arrangement." That is, Wisconsin Electric delivers fuel to the facility and receives electric power. Wisconsin Electric pays Mirant a "toll" to convert Wisconsin Electric's fuel into the electric energy. The output of the facility will be available for Wisconsin Electric to dispatch during the eight-year term of the agreement which ends in May 2006. Wisconsin Electric's agreement with the Calpine Corporation calls for new generating capacity to be constructed by a Calpine subsidiary, with electric generating units in both northern Illinois and in central Wisconsin, to supply power to Wisconsin Electric. Two 150-megawatt natural gas-fired turbine peaking units will be constructed, one each in 2002 and 2003, and one 225-megawatt natural gas-fired combined cycle facility is to be constructed in 2004. The agreement remains contingent for both parties upon certain site related issues that are anticipated to be resolved in 2001. This power purchase agreement also is a tolling agreement. The output of each unit will be committed to Wisconsin Electric for ten years from its start of commercial operation. Wisconsin Electric currently expects to utilize a combination of new generating capacity identified in its "Power the Future" proposal and purchase power commitments similar to the agreements with Mirant and Calpine to meet its electric demand load growth. In the normal course of business, Wisconsin Electric utilizes contracts of various duration for the forward purchase of electricity to meet load requirements in an economic manner and when the anticipated market price for electric energy is below Wisconsin Electric's expected incremental cost of generation. Contracts of this nature are one of the power supply resources Wisconsin Electric uses to meet its reliability requirements. EDISON SAULT: Edison Sault purchased 667.6 thousand megawatt hours or 77% of its energy supply during 2000 to meet its energy requirements, including 175.6 thousand megawatt hours from Wisconsin Electric. Effective January 1, 2001, Edison Sault began purchasing additional capacity and energy from Wisconsin Electric under the terms of a joint operating agreement. Under the agreement, Edison Sault and Wisconsin Electric each retain the rights to any generation and purchased power contracts that were in place on July 1, 2000. Any additional capacity and energy needs of the two companies would be obtained on a joint basis and the costs shared. Purchases by Edison Sault under the joint operating agreement are expected to replace some of the capacity and energy previously purchased from an unaffiliated utility. Electric Transmission AMERICAN TRANSMISSION COMPANY: Effective January 1, 2001, the Company transferred all of the electric utility transmission assets of Wisconsin Electric and Edison Sault to the American Transmission Company LLC in exchange for equity interests in this new company. Joining the American Transmission Company is consistent with the Federal Energy Regulatory Commission's Order No. 2000, designed to foster competition, efficiency and reliability in the electric industry. The American Transmission Company is owned and governed by the utilities that contributed facilities or capital in accordance with 1999 Wisconsin Act 9. Governance of the company also includes outside directors not associated with the energy business. Stock of the corporate manager of the American Transmission Company eventually may be offered for public ownership. The American Transmission Company's sole business is to provide reliable, economic transmission service to all customers in a fair and equitable manner. Specifically, the American Transmission Company plans, constructs, operates, maintains and expands transmission facilities it owns to provide for adequate and reliable transmission of electric power. It is expected to provide comparable service to all customers, including Wisconsin Electric and Edison Sault, and to support effective competition in energy markets without favoring any market participant. The American Transmission Company is regulated by the Federal Energy Regulatory Commission for all rate terms and conditions of service and is a transmission-owning member of the Midwest ISO. Wisconsin Electric has contracted to provide, at cost, services required by the American Transmission Company and which the American Transmission Company is not able to provide itself at the time of start-up. Services include transmission line and substation operation and maintenance, engineering, project, real estate, environmental, supply chain, control center, accounting and miscellaneous services. The annual cost of the services is estimated to be about $67 million in the first year of operation declining to less than $3 million after three years. For further information, see "Factors Affecting Results, Liquidity and Capital Resources" in Item 7 of this report. Renewable Electric Energy A renewable portfolio standard that will require retail energy providers in the state of Wisconsin, like Wisconsin Electric, to obtain an increasing percentage of their energy supply from renewable resources is also included under the provisions of 1999 Wisconsin Act 9. Beginning in 2001, retail energy providers must provide 0.5% of their Wisconsin retail electric sales from renewable energy, with the percentage increasing to 2.2% by the year 2011. The Company's "Power the Future" proposal includes a commitment to significantly increase the amount of renewable generation utilized by the Company beyond that required by Wisconsin law. In May 1999, the PSCW approved Wisconsin Electric's request to expand its "energy for tomorrowT" renewable energy program to allow participation of virtually all of its firm load customers in Wisconsin. In November 1999, the Michigan Public Service Commission approved Wisconsin Electric's request to offer the "energy for tomorrowT" renewable energy program to all of its firm load customers in the state of Michigan. The program currently has over 11,000 participants. GAS UTILITY OPERATIONS The Company's gas utility operations consist of Wisconsin Gas Company, which was acquired as part of the WICOR merger in April 2000, as well as the gas operations of Wisconsin Electric. Both companies are authorized to provide retail gas distribution service in designated territories in the state of Wisconsin, as established by indeterminate permits, certificates of public convenience and necessity, or boundary agreements with other utilities. The two companies also transport customer-owned gas. Wisconsin Gas, the largest natural gas distribution utility in Wisconsin, operates throughout the state in a territory of approximately 12,400 square miles with an estimated population of approximately 2,000,000. Wisconsin Electric's gas utility operates in four distinct service areas of about 3,800 square miles in Wisconsin: west and south of the city of Milwaukee, the Appleton area, the Prairie du Chien area and areas within Iron and Vilas Counties with an estimated population of approximately 1,200,000. COMBINATION OF GAS UTILITY OPERATIONS: On November 1, 2000, Wisconsin Electric and Wisconsin Gas filed a joint application with the PSCW for authority to transfer the physical gas utility assets of Wisconsin Electric together with certain liabilities associated with such assets, with a net book value of approximately $365 million as of December 31, 2000, to Wisconsin Gas in return for stock in Wisconsin Gas in a tax free transaction. Wisconsin Energy expects that the combined gas operation will result in improved customer service and greater synergies as a result of the WICOR acquisition. The combined gas operations would retain the name Wisconsin Gas Company and become the 9th largest gas distribution company in the United States as measured by delivery volumes. Assuming that the PSCW approves the transaction described above, Wisconsin Electric and Wisconsin Gas expect to make a second filing in 2001 seeking authorization to combine tariffs and rates. Gas Deliveries The Company's gas utility business is highly seasonal, particularly as to residential and commercial sales for space heating purposes, with a substantial portion of its gas deliveries occurring during the winter heating months. Sales of gas are also impacted by varying weather conditions from year-to- year. See "Consolidated Selected Utility Operating Data" in Item 6 of this report for selected gas utility operating information by customer class during the period 1996 through 2000. See "Results of Operations" in Item 7 of this report for selected pro forma gas utility operating information by customer class prepared as if Wisconsin Gas had been a part of Wisconsin Energy since January 1, 1998. WISCONSIN GAS: Following its acquisition by the Company at the end of April 2000, Wisconsin Gas delivered approximately 676.6 million therms to customers during 2000, 44% of which was customer-owned transported gas. Because of the timing of the acquisition, Wisconsin Gas was not a part of Wisconsin Energy during the winter of 1999-2000 heating months, limiting Wisconsin Gas's contribution to the Company's total gas deliveries during 2000. During the entire twelve months of 2000, Wisconsin Gas delivered a total of approximately 1,253.3 million therms, including customer-owned transported gas, a 2.7% increase compared with 1999. At December 31, 2000, Wisconsin Gas was transporting gas for approximately 4,600 customers who choose to purchase gas directly from other suppliers. Transported gas accounted for approximately 40% of total therms delivered by Wisconsin Gas during all of 2000 compared with 41% during 1999 and 40% during 1998. Wisconsin Gas had approximately 544,400 customers at December 31, 2000, an increase of approximately 1.2% since December 31, 1999. Wisconsin Gas's maximum daily send-out during 2000 was 811,635 dekatherms on January 20, 2000. A dekatherm is equivalent to ten therms or one million British thermal units. WISCONSIN ELECTRIC: Total gas therms delivered by Wisconsin Electric, including customer-owned transported gas, were approximately 944.9 million therms during 2000, a 0.1% increase compared with 1999. At December 31, 2000, Wisconsin Electric was transporting gas for approximately 445 customers who choose to purchase gas directly from other suppliers. Transported gas accounted for approximately 41% of total therms delivered by Wisconsin Electric during 2000, 43% during 1999 and 46% during 1998. Wisconsin Electric had approximately 407,800 gas customers at December 31, 2000, an increase of approximately 2.2% since December 31, 1999. Wisconsin Electric's maximum daily send-out during 2000 was 706,810 dekatherms on December 5, 2000. SALES TO LARGE GAS CUSTOMERS: The Company provides gas utility service to a diversified base of industrial customers who are largely within its electric service territory. Major industries served include the paper, food products and fabricated metal products industries. The electric utility operations of Wisconsin Electric is the Company's largest single gas customer. Competition Competition in varying degrees exists between natural gas and other forms of energy available to consumers. Many of the Company's large commercial and industrial customers are dual-fuel customers that are equipped to switch between natural gas and alternate fuels. The Company offers lower-priced interruptible rates and transportation services for these customers to enable them to reduce their energy costs and use gas rather than other fuels. Under gas transportation agreements, customers purchase gas directly from gas marketers and arrange with interstate pipelines and the Company to have the gas transported to the facilities where it is used. The Company earns substantially the same margin (difference between revenue and cost of gas), whether it sells and transports gas to customers or only transports their gas. The Company's future ability to maintain its present share of the industrial dual-fuel market (the market that is equipped to use gas or other fuels) depends on the success of the Company and third-party gas marketers in obtaining long-term and short-term supplies of natural gas at marketable prices and their success in arranging or facilitating competitively-priced transportation service for those customers that desire to buy their own gas supplies. Federal and state regulators continue to implement policies to bring more competition to the gas industry. For information concerning proceedings by the PSCW to consider how its regulation of gas distribution utilities should change to reflect the changing competitive environment in the gas industry, see "Factors Affecting Results, Liquidity and Capital Resources" in Item 7 of this report. While the gas utility distribution function is expected to remain a heavily regulated, monopoly function, the sales of the natural gas commodity and related services are expected to become increasingly subject to competition from third parties. However, it remains uncertain if and when the current economic disincentives for small customers to choose an alternative gas commodity supplier may be removed such that the Company begins to face competition for the sale of gas to its smaller firm customers. Gas Supply, Pipeline Capacity and Storage Both Wisconsin Gas and the gas operations of Wisconsin Electric have been able to meet their contractual obligations with both their suppliers and their customers despite periods of severe cold and unseasonably warm weather. PIPELINE CAPACITY AND STORAGE: Interstate pipelines serving Wisconsin originate in three major gas producing areas of North America: the Oklahoma and Texas basins, the Gulf of Mexico and western Canada. The Company has contracted for long-term firm capacity from each of these areas. This strategy reflects management's belief that overall supply security is enhanced by geographic diversification of the supply portfolios and that Canada represents an important long-term source of reliable, competitively-priced gas. Because of the daily and seasonal variations in gas usage in Wisconsin, the companies have also contracted for substantial underground storage capacity, primarily in Michigan. Storage enables the companies to manage significant changes in daily demand and to optimize their overall gas supply and capacity costs. In summer, gas in excess of market demand is transported into the storage fields, and in winter, gas is withdrawn from storage and combined with gas purchased in or near the production areas ("flowing gas") to meet the increased winter market demand. As a result, the companies can contract for less long-line pipeline capacity than would otherwise be necessary, and can purchase gas on a more uniform daily basis from suppliers year- round. Each of these capabilities enables the companies to reduce their overall costs. The companies also maintain high deliverability storage in the mid-continent and Southeast production areas, as well as in its market area. This storage capacity is designed to deliver gas when other supplies cannot be delivered during extremely cold weather in the producing areas, which can reduce long-line supply. The companies hold firm daily transportation and storage capacity entitlements from pipelines and other service providers under long-term contracts. TERM GAS SUPPLY: Wisconsin Gas and the gas operations of Wisconsin Electric have contracts for firm supplies with terms in excess of 30 days with more than 20 gas suppliers for gas produced in each of the three producing areas discussed above. The term contracts have varying durations so that only a portion of the companies' respective firm gas supply expires in any year. Management of each of the companies believes that the volume of gas under contract is sufficient to meet its forecasted firm peak day demand. SECONDARY MARKET TRANSACTIONS: Capacity release is a mechanism by which pipeline long-line and storage capacity and gas supplies under contract can be resold in the secondary market. Local distribution companies, such as Wisconsin Gas and the gas operations of Wisconsin Electric, must contract for capacity and supply sufficient to meet the firm peak day demand of their customers. Peak or near peak demand days generally occur only a few times each year. Capacity release facilitates higher utilization of contracted capacity and supply during those times when the full contracted capacity and supply are not needed by the utility, helping to mitigate the fixed costs associated with maintaining peak levels of capacity and gas supply. Through pre- arranged agreements and day-to-day electronic bulletin board postings, interested parties can purchase this excess capacity and supply. The proceeds from these transactions are passed through to ratepayers, subject to the Wisconsin Electric and Wisconsin Gas incentive gas cost mechanisms pursuant to which the companies have an opportunity to share in the cost savings. See "Factors Affecting Results, Liquidity and Capital Resources - Rates and Regulatory Matters" in Item 7 of this report for information on the incentive gas cost recovery mechanism. During 2000, the companies continued their active participation in the capacity release market. SPOT MARKET GAS SUPPLY: Wisconsin Gas and the gas operations of Wisconsin Electric expect to continue to make gas purchases in the 30-day spot market as price and other circumstances dictate. The Company has supply relationships with a number of sellers from whom it purchases spot gas. GUARDIAN PIPELINE: In March 1999, WICOR announced the formation of a joint venture, Guardian Pipeline, L.L.C., to construct the Guardian interstate natural gas pipeline from the Joliet, Illinois market hub to southeastern Wisconsin ("Guardian Pipeline"). CMS Energy, a Dearborn, Michigan-based international energy company, and a subsidiary of Xcel Energy, a Minneapolis- based diversified energy company, are cosponsors of the project with WICOR. The three partners will have equal ownership interests in the project. On March 14, 2001, the Federal Energy Regulatory Commission issued a certificate of public convenience and necessity authorizing construction and operation of the Guardian Pipeline. The Guardian Pipeline will consist of 141 miles of 36-inch pipe and related compression equipment as well as an additional 8.5 mile, 16-inch lateral and will be designed to carry about 750,000 dekatherms per day of gas. The total cost of the project is approximately $238 million. The joint venture intends to finance this project using $70 million of capital contributions from the three co-owners and issuing long-term debt for the balance of the construction costs. Currently, Guardian Pipeline has firm precedent agreements to transport 88% of its design capacity. The pipeline is scheduled to be in service in November 2002. Wisconsin Gas has committed to purchase 650,000 dekatherms per day of capacity on the pipeline and will construct a 35-mile lateral at a cost of approximately $62 million to connect its distribution system to the Guardian Pipeline. In November 1999, Wisconsin Gas filed an application with the PSCW to construct and operate the lateral. In October 2000, the PSCW affirmed the need for the Wisconsin Gas lateral in a preliminary determination. The preliminary determination covers all non-environmental aspects of Wisconsin Gas's application, including need and economic justification. Wisconsin Gas anticipates final approval by the PSCW in the summer of 2001. Pending receipt of all regulatory approvals, lateral construction is expected to begin in the spring of 2002 with commercial operation beginning in the fall of the same year. Wisconsin Gas expects to fund the lateral project using long-term debt financing. The Guardian Pipeline is expected to serve growing demand for natural gas in Wisconsin and Northern Illinois. OTHER UTILITY OPERATIONS STEAM UTILITY OPERATIONS: Wisconsin Electric's steam utility generates, distributes and sells steam supplied by its Valley and Milwaukee County Power Plants. Wisconsin Electric operates a district steam system in downtown Milwaukee and the near south side of Milwaukee. Steam is supplied to this system from Wisconsin Electric's Valley Power Plant, a coal-fired cogeneration facility. Wisconsin Electric also operates the steam production and distribution facilities of the Milwaukee County Power Plant located on the Milwaukee County Grounds in Wauwatosa, Wisconsin. Annual sales of steam fluctuate from year to year based upon system growth and variations in weather conditions. During 2000, the steam utility had $21.9 million of operating revenues from the sale of 3,085 million pounds of steam compared with $21.3 million of operating revenues from the sale of 2,914 million pounds of steam during 1999. As of December 31, 2000, steam was used by 451 customers for processing, space heating, domestic hot water and humidification compared with 450 customers at December 31, 1999. WATER UTILITY OPERATIONS: To leverage off of operational similarities with its natural gas business, Wisconsin Gas entered the water utility business in November 1998. As of December 31, 2000, the water utility served about 1,840 water customers in the suburban Milwaukee area compared with approximately 1,430 customers at December 31, 1999. The Company also provides contract services to local municipalities and businesses within its service territory for water system repair and maintenance. During all of 2000, the water utility had $0.9 million of operating revenues compared with $0.3 million of operating revenues during 1999. UTILITY RATE MATTERS See "Factors Affecting Results, Liquidity and Capital Resources - Rates and Regulatory Matters" in Item 7 of this report. NON-UTILITY ENERGY SEGMENT The non-utility energy segment is involved in a variety of businesses including: development, ownership and operation of independent electric generating facilities; natural gas purchasing and marketing; energy and price risk management; investment in other energy-related entities; meter reading and technology services for gas, electric and water utilities; and tree-trimming services to electric utilities. During 2000, the Company performed a comprehensive review of its existing portfolio of businesses and began implementing a strategy of divesting many of its current non-utility energy segment businesses. The Company expects to significantly reduce the size of current non-utility energy segment operations during 2001. As noted in further detail below, Wisconsin Energy entered into an agreement in December 2000 to sell its two existing non- utility power plants, located in the state of Connecticut. The sale of these two plants, which were originally acquired in April 1999, is expected to close in the second quarter of 2001. Also during 2000, Wisconsin Energy announced that it planned to create a separate non-utility energy subsidiary that would construct and own 2,800 megawatts of new natural gas-fired and coal-fired generating capacity in the state of Wisconsin which would then be leased back to and operated by Wisconsin Electric. For further information about Wisconsin Energy's "Power the Future" strategy, see "Utility Energy Segment" above as well as "Factors Affecting Results, Liquidity and Capital Resources" in Item 7 of this report. Implementation of the "Power the Future" strategy is subject to a number of state and federal regulatory approvals as well as the amendment of several state laws in Wisconsin. Wisvest Corporation The mission of Wisvest Corporation ("Wisvest") has been to develop, own and operate electric generating facilities and to invest in other energy-related entities. During the twelve months ended December 31, 2000, Wisvest had $253.3 million of consolidated operating revenues compared with $193.2 million of consolidated operating revenues during 1999. During 2001, the Company expects to divest of certain of Wisvest's assets. As of December 31, 2000, Wisvest operations and investments included: WISVEST-CONNECTICUT, LLC: Wisvest-Connecticut, LLC, a wholly- owned subsidiary of Wisvest, owns and operates two fossil-fueled power plants in the state of Connecticut. The plants include the Bridgeport Harbor Station, which has an active generating capacity of 590 megawatts, and the New Haven Harbor Station, which has an active generating capacity of 466 megawatts. These plants were originally acquired in April 1999. Wisconsin Energy expects to close on the sale of its two Connecticut power plants in the second quarter of 2001. For additional information concerning the pending sale of these plants, see "Note C - Asset Sales and Divestitures" in the Notes to Financial Statements in Item 8 of this report. GRIFFIN ENERGY MARKETING: Griffin Energy Marketing, L.L.C., a division of Wisvest, markets energy-related services and trades electricity. CHILLED WATER PRODUCTION AND DISTRIBUTION FACILITIES: The chilled water production and distribution facilities that are part of the Milwaukee County Power Plant which provides services to customers on the Milwaukee County Grounds in Wauwatosa, Wisconsin. CALUMET ENERGY TEAM, LLC: In November 1999, Calumet Energy Team, LLC signed two agreements with the City of Chicago, Illinois to support the construction of a 308-megawatt natural gas-fired peaking power plant and to enter into a ten-year capacity reservation agreement for 50 megawatts of plant capacity. Wisvest has a 90% ownership interest in Calumet Energy Team, LLC, the developer and intended operator of the project. Construction is currently in progress. The facility is anticipated to have a total project cost of approximately $150 million with startup anticipated in the summer of 2001. The project is being financed through utilization of Wisconsin Energy corporate facilities. OTHER: The Company has minority interests in other energy- related entities such as a cogeneration facility in the state of Maine, the Androscoggin Cogeneration Center, and Kaztex Energy Management, Inc., a strategic energy management services company with a focus on natural gas management. Kaztex is the oldest energy marketer in the state of Wisconsin. Other Non-Utility Energy Operations WICOR ENERGY SERVICES COMPANY: WICOR Energy, which was acquired as part of the WICOR merger in April 2000, engages in natural gas purchasing and marketing as well as in energy and price risk management. WICOR Energy sells gas on a for-profit basis and supplies gas to many large interruptible customers that formerly purchased gas from the Company. WICOR Energy is positioning itself to supply smaller firm customers if and when regulation changes to permit customer choice. During the twelve months ended December 31, 2000, WICOR Energy had $134.0 million of operating revenues compared with $48.6 million of operating revenues during 1999. In February 2001, the Company announced that it expects to merge WICOR Energy into Kaztex Energy Management, Inc. in April 2001. FIELDTECH, INC.: FieldTech, which was acquired as part of the WICOR merger in April 2000, provides meter reading and technology services for gas, electric and water utilities. FieldTech is positioning itself to provide services to customers if and when regulation changes to open those services to competition. During the twelve months ended December 31, 2000, FieldTech had $14.8 million of operating revenues compared with $11.9 million of operating revenues during 1999. NORTHERN TREE SERVICE, INC.: Northern Tree Service, Inc. is engaged in tree trimming in the state of Michigan's eastern Upper Peninsula. During the twelve months ended December 31, 2000, Northern Tree had $0.5 million of revenues compared with $0.6 million of revenues during 1999. MANUFACTURING SEGMENT Wisconsin Energy acquired its manufacturing segment as part of the WICOR merger in April 2000. Prior to April 2000, Wisconsin Energy did not have any manufacturing operations. The manufacturing segment consists of WICOR Industries, Inc., an intermediary holding company, and its three primary subsidiaries: Sta-Rite, SHURflo and Hypro. During the twelve months ended December 31, 2000, WICOR Industries, Inc. had $563.7 million of consolidated operating revenues compared with $511.0 million of consolidated operating revenues during 1999. STA-RITE INDUSTRIES, INC.: Sta-Rite is incorporated under the laws of the state of Wisconsin and maintains its principal office and place of business in Delavan, Wisconsin. Sta-Rite is a manufacturer and marketer of pumps, tanks, water treatment products and fluid handling equipment for the water systems, agricultural, pool/spa and water treatment markets world wide. Sta-Rite's products are manufactured at 16 locations with facilities in the United States, Australia, China, Germany, India, Italy, Mexico and New Zealand and are sold through a world wide network of distributors, retailers and original equipment manufacturers. SHURFLO PUMP MANUFACTURING CO.: SHURflo is incorporated under the laws of California and maintains its principal office and place of business in Santa Ana, California. SHURflo manufactures high performance pumps and fluid handling equipment for the beverage/food service, recreational vehicle, marine, industrial, and water treatment markets. Its products are manufactured in California and England. They are sold and distributed globally through original equipment manufacturers and a network of distributors. HYPRO CORPORATION: Hypro is incorporated under the laws of the state of Minnesota and maintains its principal office and place of business in New Brighton, Minnesota. Hypro manufactures pumps, accessories and pumping systems for agricultural, marine, industrial and firefighting markets. Hypro's products are manufactured in Minnesota, Oregon and England and are sold to original equipment manufacturers, distributors and agricultural retailers. U.S. Operations Water products include jet, centrifugal, sump, submersible and submersible turbine water pumps, water storage and pressure tanks, water filters, pool and spa filters, pool heaters and pump and tank systems. These products pump, filter and store water used for drinking, cooking, washing and livestock watering, and are used in private and public swimming pools, spas, hot tubs, jetted bathtubs, and fountains. The manufacturing businesses also produce large higher capacity water pumps used in agricultural and turf irrigation systems and in a wide variety of commercial, industrial and municipal fluids-handling applications. High performance pumps, related fluids-handling products, accessories and pumping systems have applications in a variety of markets, including: (1) the food service industry, where gas- operated pumps are used for pumping soft drinks made from syrups, and electric motor driven pumps are used for water boost and drink dispensing; (2) the recreational vehicle and marine markets, where electric motor driven pumps are used for multiple applications including pumping potable water in travel trailers, motor homes, camping trailers and boats, and for other purposes including marine engine cooling, marine washdown, bilge and livewell pumping; (3) agricultural markets, for spraying fertilizers and pesticides on crops; (4) industrial markets, where applications include carpet cleaning machines for soil extraction, firefighting and pressure cleaning applications and general industrial uses requiring fluid handling; and (5) the water purification industry, where electric motor driven pumps are used to pressure reverse osmosis systems for water transfer. Sales of pumps and water processing equipment are somewhat related to the season of the year as well as the level of activity in the housing construction industry and are sensitive to weather, interest rates, discretionary income, and leisure and recreation spending. The markets for most water and industrial products are highly competitive, with price, service and product performance all being important competitive factors. The Company believes it is a leading producer of pumps for private water systems and swimming pools and spas, and for the food service, recreational vehicle, agricultural spraying, marine engine cooling, and foam proportioning systems for the firefighting markets. Management believes the Company also ranks among the larger producers of pool and spa filters and submersible turbine pumps. Trademarked brand names include "AquaTools," "Berkeley," "Edwards," "Fiberdyne," "Flotec," "FoamPro," "Hydro-Flow," "Hypro," "Lurmark," "Nocchi," "Omnifilter," "Onga," "Park," "Rivaflo," "Sherwood," "SHURflo," "Simer," "Sta-Rite" and "Tate- Western." Domestic pumps and water products are sold and serviced primarily through a network of independent distributors, dealers, retailers and manufacturers' representatives serving the well drilling, hardware, plumbing, water treatment, pump installing, irrigation, pool and spa, food service, recreational vehicle, marine, industrial, commercial and do-it-yourself markets. Sales are also made on a private label basis to large customers in various water products markets and to original equipment manufacturers. Backlog of orders for pumps and water products is not a significant indicator of future sales. International Operations International operations are conducted primarily by international subsidiaries and export operations from the United States. Products are sold to markets in approximately 100 countries on five continents. Foreign manufacturing is carried out by Australian, Chinese, English, German, Indian, Italian, Mexican and New Zealand operations. The products sold in international markets in some cases are similar to those sold in the United States, but in many instances have distinct features required for those markets. Product distribution channels are similar to those for domestic markets. During the twelve months ended December 31, 2000, non-domestic operating revenues, including exports, were 24% of 2000 manufacturing segment sales compared with 27% during 1999. Raw Materials and Patents Raw materials essential to the manufacturing operations are available from various established sources in the United States and overseas. The principal raw materials needed for production of the Company's primary lines of products include: cast iron, aluminum and bronze castings for pumps; copper wire, steel and aluminum for motors; stainless and carbon sheet steel, bar steel and tubing; plastic resins for injection molded components; and powdered metal components. The manufacturing units also purchase from third-party suppliers completely assembled electric motors, plastic molded parts, elastomers for valves and diaphragms, components for electric motors, stamped and die-cast metal parts, and hardware and electrical components. Although the manufacturing subsidiaries own a number of patents and hold licenses for manufacturing rights under other patents, no one patent or group of patents is material to the success of the manufacturing businesses as a whole. OTHER NON-UTILITY OPERATIONS Minergy Corp. Minergy Corp. is engaged in the development and marketing of proprietary technologies designed to convert high volume industrial and municipal wastes into value-added products, including renewable energy. During the twelve months ended December 31, 2000, Minergy had $17.3 million of consolidated operating revenues compared with $9.7 million of consolidated operating revenues during 1999. Current Minergy operations and investments include: MINERGY NEENAH, LLC: In 1998, Minergy Neenah, LLC opened a facility in Neenah, Wisconsin that recycles paper sludge from area paper mills using the Company's patented Glass Aggregate technology into three usable and salable products: Glass Aggregate, steam and electricity. The plant also provides substantial environmental and economic benefits to the area by providing an alternative to landfilling paper sludge. The Neenah facility has demonstrated the feasibility of the technology and provided important data for the development of future Minergy technologies. During 2000, Wisconsin Energy engaged an outside consultant to evaluate the Neenah facility and the long-term benefits of the Minergy technologies. The results of the consultant's evaluation confirmed that the Minergy technologies are viable, innovative and needed in the market. As a result of this study, the Company intends to continue to pursue development of the Minergy businesses. GLASSPACK, LLC: Minergy has designed, permitted and constructed the GlassPack demonstration facility in Winneconne, Wisconsin. This facility is a scaled-down modular version of the Glass Aggregate technology and is ideally suited for smaller wastewater treatment plants. Minergy has successfully tested numerous municipal and paper wastewater sludge at this plant. Minergy is currently pursuing development of GlassPack installations with several municipalities in the United States. MINERGY DETROIT, LLC: In September 1999, the City Council of Detroit, Michigan, awarded a 15-year contract to Minergy Detroit, LLC, a wholly owned subsidiary of Minergy Corp., to recycle 500 to 600 dry tons per day of the city's wastewater solids into a Glass Aggregate product. The 15-year contract is contingent upon obtaining proper performance bonding and financing as well as upon reaching agreement with the City of Detroit on the results of a series of post-startup tests. Subject to the satisfactory resolution of the contingent items, Minergy Detroit, LLC expects to begin construction of a proposed $150 million recycling facility project in the Delray area of Detroit in the fourth quarter of 2001 with startup anticipated in 2004. Wispark LLC Wispark LLC, formerly Wispark Corporation, develops and invests in real estate. During the twelve months ended December 31, 2000, Wispark had $35.5 million of consolidated operating revenues compared with $19.5 million of consolidated operating revenues during 1999. Wispark has developed several well known business parks primarily in southeastern Wisconsin, and to a lesser extent in the metropolitan Chicago and Minneapolis/St. Paul markets. Wispark's flagship development, the 1600-acre LakeView Corporate Park located near Kenosha, Wisconsin is home to more than 65 companies located in more than 7 million square feet of buildings that have been developed on property in excess of 750 acres. Many out-of- state firms have located in this park, creating a significant number of new jobs and increased demand for electricity and natural gas. In May 2000, Wisconsin Energy announced that Wispark would substantially reduce its existing real estate portfolio and concentrate its efforts in southeastern Wisconsin. During 2000, two significant transactions with Interstate Partners, LLC and CenterPoint Properties were completed selling over $107 million of assets to those entities. Additional dispositions are anticipated in 2001. Wispark has also forged a joint venture with CenterPoint Properties to develop industrial buildings on the remaining land in the three business parks in which Wispark will continue to have considerable land holdings for the near future: LakeView Corporate Park; GrandView Business Park (Racine County, WI); and NorthWest Corporate Park (Elgin, IL). During 2001, Wispark plans to revise its mission to place emphasis upon smaller projects and those located within the existing developed urban areas of the larger cities in southeastern Wisconsin. Other Non-Utility Subsidiaries Other non-utility subsidiaries primarily include: WISCONSIN ENERGY CAPITAL CORPORATION: Wisconsin Energy Capital Corporation engages in investing and financing activities. Activities include advances to affiliated companies, and investments in financial instruments and in partnerships developing low- and moderate-income housing projects. Other investments may be made from time to time. WEC NUCLEAR CORPORATION: WEC Nuclear Corporation has a 20% ownership interest in Nuclear Management Company, LLC. Formed during the first quarter of 1999, Nuclear Management Company, LLC provides services to Wisconsin Electric in connection with Point Beach Nuclear Plant as well as to other unaffiliated companies with nuclear generating facilities. For additional information about the Nuclear Management Company, see "Factors Affecting Results, Liquidity and Capital Resources" in Item 7 of this report. WITECH CORPORATION: Witech Corporation is a venture capital company operating in the state of Wisconsin. At December 31, 2000, Witech had investments in nine companies and one fund totaling more than $51 million. Among others, the companies include: a provider of partner relationship management and business to business e-Commerce solutions for manufacturers in selected industries with shared service networks and distribution channels, and a manufacturer of electronic components. Wisconsin Energy continues to evaluate the Witech portfolio in connection with its announced strategy to focus on core investments. WEC INTERNATIONAL INC.: WEC International, Inc. currently has one investment in a joint venture in the Netherlands involving waste treatment and by-product utilization activities. This investment is insignificant to Wisconsin Energy. The joint venture filed for bankruptcy in January of 2001. BADGER SERVICE COMPANY: Badger Service Company holds coal rights in Indiana. Estimates indicate that 40 million tons of coal could be recovered from this property with conventional mining techniques. However, there are no current plans to develop the property. Badger Service Company may sell or develop these rights in the future as conditions warrant. REGULATION Wisconsin Energy Corporation Wisconsin Energy is an exempt holding company by order of the United States Securities and Exchange Commission under Section 3(a)(1) of the Public Utility Holding Company Act of 1935 and, accordingly, is exempt from the law's provisions other than with respect to certain acquisitions of securities of a public utility. NON-UTILITY ASSET CAP: In October 1999, the Wisconsin State Legislature passed amendments to the non-utility asset cap provisions of Wisconsin's public utility holding company law as part of the 1999-2001 biennial state budget, 1999 Wisconsin Act 9. As a result, Wisconsin Energy remains subject to certain restrictions which have the potential of limiting diversification into non-utility activities. Under the amended public utility holding company law, the sum of certain assets of all non-utility affiliates in a holding company system may not exceed 25% of the assets of all public utility affiliates. However, among other items, the amended law exempts energy-related assets and assets used for providing environmental engineering services and for processing waste materials from being counted against the asset cap provided that they are employed in qualifying businesses. In addition, the amended law exempts the provision of metering services and manufacturing, distributing or selling products for filtration, pumping water or other fluids, processing or heating water, handling fluids or other related activities. For Wisconsin Energy to qualify for the amended non-utility asset cap rules, all of its public utility affiliates were required to irrevocably transfer their electric transmission facilities and rights of way in the state of Wisconsin to the American Transmission Company, LLC. As described in further detail under "Utility Energy Segment" above and in "Factors Affecting Results, Liquidity and Capital Resources" in Item 7 of this report, Wisconsin Electric and Edison Sault transferred their electric transmission system assets to the American Transmission Company effective January 1, 2001. Utility Energy Segment Wisconsin Electric and Wisconsin Gas are subject to the regulation of the PSCW as to retail electric, gas, steam and water rates in the state of Wisconsin, standards of service, issuance of securities, construction of new facilities, transactions with affiliates, levels of short-term debt obligations, billing practices and other various matters. Wisconsin Electric and Edison Sault are both subject to the regulation of the Michigan Public Service Commission as to the various matters associated with retail electric service in the state of Michigan as noted above except as to issuance of securities, construction of certain new facilities, levels of short-term debt obligations and advance approval of transactions with affiliates. Wisconsin Electric's hydroelectric facilities are regulated by the Federal Energy Regulatory Commission. Wisconsin Electric and Edison Sault are subject to regulation of the Federal Energy Regulatory Commission with respect to wholesale power service, and accounting. Edison Sault is subject to regulation of the Federal Energy Regulatory Commission with respect to the issuance of certain securities. The following table compares the source of the Company's utility energy segment operating revenues by regulatory jurisdiction for each of the three years in the period ended December 31, 2000.
2000 1999 1998 ------------ ------------ ------------ Amount Percent Amount Percent Amount Percent ------ ------- ------ ------- ------ ------- (Millions of Dollars) Public Service Commission of Wisconsin Electric Utility - Retail $1,517.7 59.3% $1,465.7 71.5% $1,434.3 72.5% Gas Utility - Retail 736.3 28.8% 306.8 15.0% 295.9 14.9% Other Utility - Retail 22.6 0.9% 21.3 1.0% 20.5 1.0% -------- ------ -------- ------ -------- ------ Total 2,276.6 89.0% 1,793.8 87.5% 1,750.7 88.4% Michigan Public Service Commission Electric Utility - Retail 151.2 5.9% 139.7 6.8% 128.3 6.5% Federal Energy regulatory Commission Electric Utility - Wholesale 128.9 5.1% 116.7 5.7% 101.0 5.1% -------- ------ -------- ------ -------- ------ Total Utility Operating Revenues $2,556.7 100.0% $2,050.2 100.0% $1,980.0 100.0% ======== ====== ======== ====== ======== ======
For information concerning the pending implementation of full electric retail competition in the state of Michigan effective January 1, 2002, see "Factors Affecting Results, Liquidity and Capital Resources" in Item 7 of this report. Operation and construction relating to Wisconsin Electric's Point Beach Nuclear Plant facilities are subject to regulation by the United States Nuclear Regulatory Commission. Total flow of water to Edison Sault's hydroelectric generating plant is under the control of the International Joint Commission, created by the Boundary Water Treaty of 1909 between the United States and Great Britain, now represented by Canada. Wisconsin Electric's, Wisconsin Gas's and Edison Sault's operations are also subject to regulations, where applicable, of the United States Environmental Protection Agency, the Wisconsin Department of Natural Resources, the Michigan Department of Natural Resources and the Michigan Department of Environmental Quality. ELECTRIC RELIABILITY LEGISLATION: In 1998, the Wisconsin State Legislature passed and the Governor of Wisconsin signed into law 1997 Wisconsin Act 204, intended to address concerns with electric reliability in the state of Wisconsin. The 1997 Wisconsin Act 204 included new requirements concerning market power which utilities and their affiliates must meet in order to construct generating facilities. The requirements apply to utility facilities in excess of 100 megawatts. The PSCW is currently engaged in a rule making proceeding involving the applicability of Act 204 to utility affiliates seeking to construct facilities in the state of Wisconsin. PUBLIC BENEFITS: Public benefits legislation was also included in 1999 Wisconsin Act 9. The law created new funding of $44 million to be collected by utilities and remitted to the Wisconsin Department of Administration. The law also required utilities to continue to collect the funds at existing levels for low-income, conservation and environmental research and development programs and to begin transferring the funds for these programs to the Department of Administration. The Company implemented this change in October 2000. The utilities' traditional role of providing these programs is being shifted to the Department of Administration, which will administer the funds for a statewide public benefits program. The new law also requires utilities to provide a specified proportion of its retail energy sales in programs such as Wisconsin Electric's "energy for tomorrow" renewable energy program. AFFILIATE INTEREST POLICIES DOCKET: From late 1998 through early 2000, the PSCW reviewed the policies on standards of conduct governing diversification of activities that can be performed within the utility and utility affiliates. During these proceedings, Wisconsin Electric took the position that state policy should protect competition, not individual competitors, and that customers should have the choice to use either Wisconsin Electric or another vendor for these products and services. In April 2000, the PSCW issued an order which allows utilities to continue to provide and sell products and services other than core utility products as long as the related costs are fully allocated and not subsidized by ratepayers. Non-Utility Energy Segment Wisvest-Connecticut, LLC is an exempt wholesale generator pursuant to Section 32 of the Public Utility Holding Company Act of 1935. Wisvest-Connecticut, LLC's operations are subject to regulation of the Federal Energy Regulatory Commission with respect to wholesale power service and to regulations, where applicable, of the United States Environmental Protection Agency ("EPA") and the Connecticut Department of Environmental Protection. ENVIRONMENTAL COMPLIANCE Environmental Expenditures Expenditures for environmental compliance and remediation issues are included in anticipated capital expenditures described in "Liquidity and Capital Resources" in Item 7 of this report. For discussion of additional environmental issues, see "Environmental Matters" in Item 3 of this report. For further information concerning air quality standards and rulemaking initiated by the EPA, including estimated costs of compliance, see "Factors Affecting Results, Liquidity and Capital Resources" in Item 7 of this report. UTILITY ENERGY SEGMENT: Compliance with federal, state and local environmental protection requirements resulted in capital expenditures by Wisconsin Electric of approximately $37 million in 2000 compared with $44 million in 1999. Expenditures incurred during 2000 primarily included costs associated with the installation of pollution abatement facilities at Wisconsin Electric's power plants. Such expenditures at Wisconsin Electric are budgeted at approximately $59 million during 2001, reflecting nitrogen oxide ("NOx") control equipment needed to comply with ozone non-attainment rules promulgated by the Environmental Protection Agency. Operation, maintenance and depreciation expenses for Wisconsin Electric's fly ash removal equipment and other environmental protection systems are estimated to have been approximately $41 million during 2000 and $37 million during 1999 and 1998. NON-UTILITY ENERGY SEGMENT: Wisvest-Connecticut, LLC and its two power plants are subject to various rules and regulations promulgated by the EPA, including ozone non-attainment rules applicable to a 19-state region east of the Mississippi River. The state of Connecticut has adopted the EPA's requirements, which will require affected plants, including those owned by Wisvest-Connecticut, LLC, to reduce emissions of NOx. The state of Connecticut adopted additional regulations in December 2000 to further reduce the emissions of NOx and sulfur dioxide ("SO2"). The ultimate method and cost of compliance will be the responsibility of the anticipated acquirer of the two power plants, which are expected to be sold during 2001. Sub-surface, non-aqueous petroleum liquids have been identified at both power plant sites that were acquired by Wisvest- Connecticut, LLC. The Company is currently completing studies and plans to bring the two sites into compliance with applicable standards in the state of Connecticut. The ultimate methods and costs of compliance will be the responsibility of the anticipated acquirer of the two power plants, which are expected to be sold during 2001. Solid Waste Landfills The Company provides for the disposal of non-ash related solid wastes and hazardous wastes through licensed independent contractors, but federal statutory provisions impose joint and several liability on the generators of waste for certain cleanup costs. Remediation-related activity pertaining to specific sites is discussed below. GIDDINGS AND LEWIS, INC./CITY OF WEST ALLIS LAWSUIT: In July 1999, a jury decided against Wisconsin Electric and awarded the plaintiffs $4.5 million as actual damages and $100 million in punitive damages in a lawsuit alleging that Wisconsin Electric had placed contaminated wastes at two sites in the City of West Allis, Wisconsin. Wisconsin Electric is appealing the case. For additional information, see "Environmental Matters" in Item 3 and "Note N - Commitments and Contingencies" in the Notes to Financial Statements in Item 8 of this report. MUSKEGO LANDFILL: On January 2, 2001, three individuals filed an action in the circuit court of Milwaukee County against Waste Management of Wisconsin, Inc., Wisconsin Electric and others alleging environmental contamination emanating from the Muskego landfill in Muskego, Wisconsin. The Muskego landfill was operated by Waste Management and was classified as an EPA Superfund Site. The plaintiffs, who are adjacent landowners to the site, are alleging that the defendants are liable on various theories for groundwater contamination. Plaintiffs are requesting, inter alia, further remediation, damages for personal injury, loss of property value and punitive damages. Wisconsin Electric is investigating the matter but believes that in 1996 it entered into a buyout agreement as a De Minimis party with Waste Management and nine other potentially responsible parties ("PRP's") concerning groundwater contamination on this site and that the PRP's must therefore indemnify and defend Wisconsin Electric in this action. WEST AVENUE LANDFILL: During 1996, Wisconsin Electric was informed by the City of Waukesha that it has been identified as a "responsible party" at a former Waukesha landfill which the city will be remediating under Wisconsin state law. The City of Waukesha invoked a new statutory negotiation procedure to attempt to obtain consensual agreement regarding responsible parties and remediation cost sharing and hired a private environmental allocation consultant to apportion cost shares in an attempt to promote voluntary settlement. The consultant issued a non- binding final allocation report assigning a zero share of responsibility to Wisconsin Electric. Wisconsin Electric was offered and accepted a De Minimis Party Settlement Agreement releasing and indemnifying Wisconsin Electric from claims for site liabilities in exchange for a settlement payment of $3,500. Coal-Ash Landfills Some early designed and constructed coal-ash landfills may allow the release of low levels of constituents resulting in the need for various levels of remediation. Where Wisconsin Electric has become aware of these conditions, efforts have been expended to define the nature and extent of any release, and work has been performed to address these conditions. For additional information, see "Note N - Commitments and Contingencies" in the Notes to Financial Statements in Item 8 of this report. Sites currently undergoing remediation include: HIGHWAY 59 LANDFILL: In 1989, a sulfate plume was detected in the groundwater beneath a Wisconsin Electric-owned former ash landfill located in the Town of Waukesha, Wisconsin. After notifying the Wisconsin Department of Natural Resources, Wisconsin Electric initiated a five-year expanded monitoring program. In July 1995, Wisconsin Electric prepared an environmental contamination assessment of the landfill and submitted the report to the Wisconsin Department of Natural Resources. Wisconsin Electric has petitioned the City of Waukesha to extend city water service to residents of the Town of Waukesha affected by contamination from the site. The City Council has agreed to extend service at Wisconsin Electric's cost. In addition to providing City water to affected residents, Wisconsin Electric has completed excavation of saturated ash and placement of a cap on the landfill, and will complete final landscaping of the site in early 2001. Total remediation of this site is estimated to be $6 million. KANSAS AVE. LANDFILL: The Kansas Ave. site, located in the City of St. Francis, Wisconsin, was a small landfill area used to support the operations of Wisconsin Electric's former Lakeside Power Plant. Wisconsin Electric has entered into an agreement with the Wisconsin Department of Natural Resources to place a cover over the former ash landfill site. Expenses associated with a cover installation are expected to be minimal. No groundwater treatment is planned at this time. OAK CREEK NORTH LANDFILL: Groundwater impacts at this landfill, located in the City of Oak Creek, Wisconsin, prompted Wisconsin Electric to investigate, during 1998, the condition of the existing cover and other conditions at the site. Surface water drainage improvements were implemented at this site during 1999 and 2000, which are expected to eliminate ash contact with water and remove unwanted ponding of water near monitoring systems. Future financial impacts to Wisconsin Electric are projected to be minimal. LAKESIDE LANDFILL: During 2001, Wisconsin Electric expects to begin investigation of property that was used primarily for coal storage, fuel oil transport and coal ash disposal in support of the former Lakeside Power Plant in St. Francis, Wisconsin. Until the investigation work has been completed and a remedial plan developed, Wisconsin Electric cannot estimate any related remediation costs. Manufactured Gas Plant Sites The Company is reviewing and addressing environmental conditions at a number of former manufactured gas plant sites. See "Note N - Commitments and Contingencies" in the Notes to Financial Statements in Item 8 of this report. Air Quality The 1990 amendments to the Federal Clean Air Act mandate significant nationwide reductions in air emissions. The most significant sections of this law applicable to the country's electric utilities are the acid rain and nonattainment provisions. The acid rain provisions limit SO2 and NOx emissions in phases. Phase I became effective in 1995 and Phase II became effective during the year 2000. The Company has met the requirements of Phase I. The Phase II requirements of the 1990 amendments to the Federal Clean Air Act are expected to have minimal future impacts on the Company's utilities because of existing cost effective compliance strategies and previous actions taken. Ozone nonattainment rules implemented by the state of Wisconsin and ozone transport rules implemented by the state of Michigan, both under authority of the Federal Clean Air Act, will limit NOx emissions in phases over the next seven years. See "Factors Affecting Results, Liquidity and Capital Resources" in Item 7 of this report for information concerning National Ambient Air Quality Standards established during 1997 by the EPA and ozone non-attainment rulemaking promulgated by the EPA during 1998. OTHER RESEARCH AND DEVELOPMENT: Research and development expenditures by Wisconsin Electric amounted to $6.8 million during 2000, $8.0 million during 1999 and $7.5 million during 1998. Such expenditures were primarily for improvement of service and abatement of air and water pollution by the electric utility operations. During all of 2000, the manufacturing segment incurred research and development expenditures of approximately $12 million for the development of new or improved products. Research and development activities include work done by employees, consultants and contractors, plus sponsorship of research by industry associations. EMPLOYEES: The Company added 4,581 employees during 2000 including approximately 4,500 new employees due to the WICOR merger on April 26, 2000. At December 31, 2000, the following number of individuals were employed by Wisconsin Energy and its subsidiaries:
Full Time Part Time Total --------- --------- ----- Utility Energy Segment Wisconsin Electric 5,402 168 5,570 Wisconsin Gas 951 83 1,034 Edison Sault 70 - 70 ------ --- ------ Total 6,423 251 6,674 Non-Utility Energy Segment 736 16 752 Manufacturing Segment 2,936 - 2,936 Other 96 - 96 ------ --- ------ Total Employees 10,191 267 10,458 ====== === ======
Of these employees, the following number of individuals were represented under labor agreements as of December 31, 2000.
Number of Employees ------------------- Utility Energy Segment Wisconsin Electric 3,733 Wisconsin Gas 633 Edison Sault 49 ----- Total 4,415 Non-Utility Energy Segment Wisvest-Connecticut, LLC 116 ----- Total Employees 4,531 =====
ITEM 2.PROPERTIES The principal properties of Wisconsin Energy and its subsidiaries are owned in fee except that the major portion of electric utility distribution lines, steam utility distribution mains and gas utility distribution mains and services are located, for the most part, on or in streets and highways and on land owned by others. Substantially all of Wisconsin Electric's utility plant is subject to a first mortgage lien. UTILITY ENERGY SEGMENT Effective January 1, 2001, Wisconsin Electric and Edison Sault exited the electric transmission business by contributing all of their transmission assets to the American Transmission Company LLC in exchange for equity interests in this new company. For further information, see "Factors Affecting Results, Liquidity and Capital Resources" in Item 7 of this report. WISCONSIN ELECTRIC: Wisconsin Electric owns the following generating stations with dependable capabilities as indicated.
Dependable Capability In Megawatts (a) No. of --------------------- Generating August December Name Fuel Units 2000 2000 ---- ---- ----- ---- ---- Steam Plants Point Beach Nuclear 2 1,012 1,022 Oak Creek Coal 4 1,135 1,139 Presque Isle Coal 9 617 617 Pleasant Prairie Coal 2 1,200 1,210 Port Washington Coal 4 320 320 Valley Coal 2 267 227 Edgewater 5 (b) Coal 1 102 102 Milwaukee County Coal 3 11 11 -- ----- ----- Total Steam Plants 27 4,664 4,648 Hydro Plants (14 in number) 37 63 67 Germantown Combustion Turbines (c) Gas/Oil 5 345 345 Concord Combustion Turbines Gas/Oil 4 376 376 Paris Combustion Turbines Gas/Oil 4 388 388 Other Combustion Turbines & Diesel Gas/Oil 6 55 62 -- ----- ----- Total System 83 5,891 5,886 == ===== ===== (a) Dependable capability is the net power output under average operating conditions with equipment in an average state of repair as of a given month in a given year. Changing seasonal conditions are responsible for the different capabilities reported for the winter and summer periods in the above table. The values were established by test and may change slightly from year to year. (b) Wisconsin Electric has a 25% interest in Edgewater 5 Generating Unit, which is operated by Wisconsin Power and Light Company, an unaffiliated utility. (c) During 2000, a fifth generating unit was added and inlet air coolers were installed on existing generating units at Germantown Power Plant, increasing the capacity of the plant and improving dependable capability during hot summer months.
At December 31, 2000, Wisconsin Electric was operating approximately 21,900 pole-miles of overhead distribution lines and 17,800 miles of underground distribution cable as well as approximately 350 distribution substations and 243,900 line transformers. As of December 31, 2000, Wisconsin Electric's gas distribution system included approximately 8,200 miles of mains connected at 22 gate stations to the pipeline transmission systems of ANR Pipeline Company, Natural Gas Pipeline Company of America, Northern Natural Pipeline Company and Great Lakes Transmission Company. Wisconsin Electric has a liquefied natural gas storage plant which converts and stores in liquefied form natural gas received during periods of low consumption. The liquefied natural gas storage plant has a send-out capability of 70,000 dekatherms per day. Wisconsin Electric also has propane air systems for peaking purposes. These propane air systems will provide approximately 7,000 dekatherms per day of supply to the system. At December 31, 2000, the combined steam systems supplied by the Valley and Milwaukee County Power Plants consisted of approximately 43 miles of both high pressure and low pressure steam piping, 8.8 miles of walkable tunnels and other pressure regulating equipment. Wisconsin Electric owns various office buildings and service centers throughout its service area. WISCONSIN GAS: Wisconsin Gas owns a distribution system which, on December 31, 2000, included approximately 9,600 miles of distribution and transmission mains, 455,000 service laterals and 535,000 active meters. Wisconsin Gas' distribution system consists almost entirely of plastic and coated steel pipe. Wisconsin Gas owns its main office building in Milwaukee, office buildings in certain other communities in which it serves, gas regulating and metering stations, peaking facilities and its major service centers, including garage and warehouse facilities. In December 2000, the Company announced that it expects to sell the main office building of Wisconsin Gas during the second quarter of 2001. EDISON SAULT: Edison Sault's major source of electric energy is its 29.8 megawatt hydroelectric generating plant on the St. Mary's River in Sault Ste. Marie, Michigan. In addition, Edison Sault owns and operates a 4.8 megawatt diesel-fired peaking power plant. Edison Sault owned two 138 kilovolt submarine transmission cable circuits which interconnect with Consumers Energy Company in the Lower Peninsula of Michigan, as well as two 138 kilovolt substations which interconnect with a 46 mile, 138 kilovolt transmission line owned and operated by Cloverland Electric Cooperative. In total, Edison Sault had 306 miles of transmission line in service as of December 31, 2000, all of which were transferred to the American Transmission Company, LLC on January 1, 2001. Edison Sault maintains approximately 800 miles of primary distribution lines and renders service to its customers through approximately 9,100 line transformers. NON-UTILITY ENERGY SEGMENT WISVEST CORPORATION: Wisvest owns a chilled water production and distribution facility located in Milwaukee County, Wisconsin. Wisvest-Connecticut, LLC, owns two fossil-fueled power plants in the state of Connecticut: the Bridgeport Harbor Station with an active generating capacity of 590 megawatts, and the New Haven Harbor Station with an active generating capacity of 466 megawatts. The Company expects to close on the sale of Wivest-Connecticut, LLC's two plants during the second quarter of 2001. MANUFACTURING SEGMENT The manufacturing segment has manufacturing or assembly facilities located in California (4), Indiana, Minnesota (2), Nebraska, New Hampshire, Oregon, Wisconsin, Australia, China, England, Germany, India, Italy (3), Mexico (2) and New Zealand. These plants contain more than 1,400,000 square feet of floor space. In addition, through its manufacturing business, the Company owns or leases eight sales/distribution facilities in the United States, six in Australia, two each in Mexico, Italy and New Zealand and one each in Canada, China, France, Germany, India, Italy, Kazakhstan, Russia and the United Kingdom. OTHER WISPARK LLC: In May 2000, the Company announced that it would sell approximately 80% of the assets of Wispark over the following 12 to 18 months. During the fourth quarter of 2000, the Company completed the sale of approximately 44% of the Wispark portfolio that is expected to be sold. As of December 31, 2000, remaining Wispark properties included the following commercial and industrial parks in the state of Wisconsin: LakeView, located near Kenosha; GrandView in Racine County; Westridge in New Berlin; Mitchell International in Milwaukee County; and Cottonwood Commerce in Hartland. Wispark also owns Gaslight Pointe, a residential and commercial complex located in Racine, the Radisson Hotel and Conference Center in Kenosha, plus other properties located in Wisconsin Electric's service territories that are held for future development. Wispark is also developing other real estate property located in the states of Illinois and Minnesota. MINERGY CORP.: Minergy owns a Glass Aggregate facility located in Neenah, Wisconsin and a GlassPack facility in Winneconne, Wisconsin. OTHER: Badger Service Company holds rights to coal in an area of 8,568 acres in Knox County, Indiana. ITEM 3.LEGAL PROCEEDINGS ENVIRONMENTAL MATTERS Wisconsin Energy is subject to federal, state and certain local laws and regulations governing the environmental aspects of its operations. The Company believes that, perhaps with immaterial exceptions, its existing facilities are in compliance with applicable environmental requirements. See "Environmental Compliance" in Item 1 of this report, which is incorporated by reference herein, for a discussion of matters related to certain solid waste and coal-ash landfills, manufactured gas plant sites and air quality. GIDDINGS & LEWIS, INC./CITY OF WEST ALLIS LAWSUIT: See "Note N - Commitments and Contingencies" in the Notes to Financial Statements in Item 8 of this report for matters related to a July 1999 jury verdict against Wisconsin Electric in a lawsuit alleging that Wisconsin Electric had placed contaminated wastes at two sites in the City of West Allis, Wisconsin. Two shareholders have brought separate derivative proceedings in Milwaukee County Circuit Court for alleged damages resulting from the Giddings & Lewis/City of West Allis Lawsuit. All of the directors of Wisconsin Energy and Wisconsin Electric are named as defendants in one of the derivative actions and a number of individual employees, as well as the Chief Executive Officer of Wisconsin Energy and Wisconsin Electric, are named as defendants in the other. In accordance with Wisconsin law, a special committee of independent directors of Wisconsin Energy, based upon an investigation of the allegations contained in both lawsuits, concluded that the maintenance of these actions is not in the best interests of the Company. Accordingly Wisconsin Energy has moved to dismiss the actions. The matter is pending. UTILITY RATE MATTERS See "Factors Affecting Results, Liquidity and Capital Resources" in Item 7 of this report for information concerning rate matters in the jurisdictions where Wisconsin Electric, Wisconsin Gas and Edison Sault do business. OTHER MATTERS USED NUCLEAR FUEL STORAGE & REMOVAL: See "Factors Affecting Results, Liquidity and Capital Resources" in Item 7 of this report for information concerning the United States Department of Energy's breach of a contract with Wisconsin Electric that required the United States Department of Energy to begin permanently removing spent nuclear fuel from Point Beach Nuclear Plant by January 31, 1998. MACKINAC ISLAND LAWSUIT: On September 1, 2000, two plaintiffs individually and on behalf of a class of plaintiff's yet to be certified, filed a lawsuit against Edison Sault in the state court in St. Ignace, Mackinac County, Michigan for an unknown amount of damages which allegedly arose from an outage which occurred on Mackinac Island in July 2000. The matter is pending. The Company intends to vigorously defend itself against this lawsuit. STRAY VOLTAGE: On July 11, 1996, the PSCW issued its final order regarding the stray voltage policies of Wisconsin's investor-owned utilities. The order clarified the definition of stray voltage, affirmed the level at which utility action is required, and appropriately placed some of the responsibility for this issue in the hands of the customer. Additionally, the order established a uniform stray voltage tariff which delineates utility responsibility and provides for the recovery of costs associated with unnecessary customer demanded services. While this action has been beneficial in Wisconsin Electric's efforts to manage this controversial issue, it has not had a significant impact on Wisconsin Electric's financial position or results of operations. In recent years, several actions by dairy farmers have been commenced or claims made against Wisconsin Electric for loss of milk production and other damages allegedly caused by stray voltage resulting from the operation of its electrical system. At the present time, four such actions are pending and one case is on appeal. Wisconsin Electric does not believe that these or any other claims thus far made or threatened against Wisconsin Electric by reason of stray voltage will result in any substantial liability on its part. Currently, there are no cases pending or threatened against Edison Sault. ELECTROMAGNETIC FIELDS: Claims have been made or threatened against electric utilities across the country for bodily injury, disease or other damages allegedly caused or aggravated by exposure to electromagnetic fields associated with electric transmission and distribution lines. Results of scientific studies conducted to date have not established the existence of a causal connection between electromagnetic fields and any adverse health affects. Wisconsin Electric and Edison Sault believe that their facilities are constructed and operated in accordance with all applicable legal requirements and standards. Currently, there are no cases pending or threatened against Wisconsin Electric nor against Edison Sault. ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of Wisconsin Energy's security holders during the fourth quarter of 2000. EXECUTIVE OFFICERS OF THE REGISTRANT The names, ages at December 31, 2000 and positions of the executive officers of Wisconsin Energy are listed below along with their business experience during the past five years. All officers are appointed until they resign, die or are removed pursuant to the Bylaws. There are no family relationships among these officers, nor is there any agreement or understanding between any officer and any other person pursuant to which the officer was selected. Richard A. Abdoo (56): Chairman of the Board, President and Chief Executive Officer of Wisconsin Energy since 1991. Chairman of the Board and Chief Executive Officer of Wisconsin Electric since 1990. Chairman of the Board and Director of WICOR and Wisconsin Gas since April 2000. Director of Wisconsin Energy since 1988. Director of Wisconsin Electric since 1989. Charles R. Cole (54): Senior Vice President of Wisconsin Electric since January 1, 2001. Vice President - Distribution Operations of Wisconsin Electric from August 1999 to December 2000. Vice President - Customer Services of Kansas City Power & Light from 1995 to 1999. Stephen P. Dickson (40): Controller of Wisconsin Energy and Wisconsin Electric since April 2000. Controller of Wisconsin Gas since June 1998. Director of Business Risk Consulting Services of Arthur Andersen LLP from 1997 to 1998. Senior Manager of Arthur Andersen LLP from 1995 to 1997. James C. Donnelly (55): Vice President of WICOR since 1992. President and Chief Executive Officer of WICOR Industries, Inc. since June 2000. President and Chief Executive Officer of Sta-Rite Industries, Inc. since 1994. Paul Donovan (53): Senior Vice President and Chief Financial Officer of Wisconsin Energy since August 1999, and of Wisconsin Electric and Wisconsin Gas since July 2000. Executive Vice President and Chief Financial Officer of Sundstrand Corporation from 1990 and 1998, respectively, to 1999. Richard R. Grigg (52): Senior Vice President of Wisconsin Energy and WICOR since July 2000 and President and Chief Operating Officer of Wisconsin Electric since 1995. Vice President of Wisconsin Energy from 1995 to June 2000. Chief Nuclear Officer of Wisconsin Electric from December 1996 to March 1998. Director of Wisconsin Energy since 1995. Director of Wisconsin Electric since 1994. Larry Salustro (53): Senior Vice President and General Counsel of Wisconsin Energy, WICOR, Wisconsin Electric and Wisconsin Gas since July 2000. Vice President of Wisconsin Electric from 1997 through June 2000. Regional Vice President - Law and Governmental Affairs with AT&T from 1995 to 1997. Thomas F. Schrader (51): President of Wisconsin Gas since October 2000. Senior Vice President - Strategic Process Integration of Wisconsin Electric since April 2000. Senior Vice President of WICOR since August 2000 and Director of WICOR since 1988. Vice President of WICOR from 1988 to 1997. President and Chief Operating Officer of WICOR and Vice Chairman of its subsidiaries from 1997 to 2000. President and Chief Executive Officer of Wisconsin Gas from 1988 to 1997. Georger E. Wardeberg (65): Vice Chairman of the Board of Wisconsin Energy, WICOR, Wisconsin Electric and Wisconsin Gas and Director of Wisconsin Energy and Wisconsin Electric since April 2000. Director of WICOR and Wisconsin Gas since 1992. Chairman of the Board and Chief Executive Officer of WICOR from 1997 to April 2000. Certain executive officers also hold offices in Wisconsin Energy's non-utility subsidiaries. PART II ------- ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS NUMBER OF COMMON STOCKHOLDERS As of year-end 2000, based upon the number of Wisconsin Energy Corporation stockholder accounts (including accounts in Wisconsin Energy's dividend reinvestment and stock purchase plan), there were 77,051 registered stockholders. COMMON STOCK LISTING AND TRADING Wisconsin Energy Corporation common stock is listed on the New York Stock Exchange. The ticker symbol is WEC. Daily trading prices and volume can be found in the "NYSE Composite" section of most major newspapers, usually abbreviated as WI Engy. DIVIDENDS AND COMMON STOCK PRICES COMMON STOCK DIVIDENDS OF WISCONSIN ENERGY: Cash dividends on Wisconsin Energy's common stock, as declared by the board of directors, are normally paid on or about the first day of March, June, September and December. Wisconsin Energy reviews its dividend policy on a regular basis. Subject to any regulatory restrictions or other limitations on the payment of dividends, future dividends will be at the discretion of the board of directors and will depend upon, among other factors, earnings, financial condition and other requirements. In September 2000, the board of directors authorized a quarterly cash dividend on its common stock, payable December 1, 2000, of $0.20 per share ($0.80 on an annualized basis), which was reduced from prior quarterly dividends paid during 2000 of $0.39 per share (or $1.56 on an annualized basis). RANGE OF WISCONSIN ENERGY COMMON STOCK PRICES AND DIVIDENDS:
2000 1999 ---------------------------------------- ---------------------------------------- Quarter High Low Dividend High Low Dividend - ------- ---- --- -------- ---- --- -------- First $21.19 $16.81 $0.39 $31.56 $25.06 $0.39 Second 22.94 19.81 0.39 28.13 25.06 0.39 Third 23.56 18.94 0.39 26.00 22.44 0.39 Fourth 23.00 17.88 0.20 24.19 19.06 0.39 ----- ----- Year $23.56 $16.81 $1.37 $31.56 $19.06 $1.56 ===== =====
ITEM 6. SELECTED FINANCIAL DATA WISCONSIN ENERGY CORPORATION CONSOLIDATED SELECTED FINANCIAL AND STATISTICAL DATA Financial 2000 (a) 1999 1998 1997 1996 --------- -------- ---- ---- ---- ---- Year Ended December 31 Net income (Millions) $154.2 (b) $209.0 (c) $188.1 $60.7 (d) $218.1 Earnings per share of common stock Basic $1.28 (b) $1.79 (c) $1.65 $0.54 (d) $1.97 Diluted $1.27 (b) $1.79 (c) $1.65 $0.54 (d) $1.97 Dividends per share of common stock $1.37 $1.56 $1.555 $1.535 $1.5075 Operating revenues (Millions) Utility energy $2,556.7 $2,050.2 $1,980.0 $1,789.6 $1,773.8 Non-utility energy 372.8 193.2 34.1 7.0 - Manufacturing 374.2 - - - - Other 51.0 29.2 25.3 10.3 13.7 -------- -------- -------- -------- -------- Total operating revenues $3,354.7 $2,272.6 $2,039.4 $1,806.9 $1,787.5 ======== ======== ======== ======== ======== At December 31 (Millions) Total assets $8,406.1 $6,061.8 $5,185.6 $4,881.6 $4,652.8 Long-term debt and mandatorily redeemable trust preferred securities $2,932.7 $2,334.6 $1,749.0 $1,532.4 $1,416.1 Utility Energy Statistics ------------------------- Electric Megawatt-hours sold (Thousands) 32,042.4 31,257.1 29,940.4 27,671.8 27,560.4 Customers (End of year) 1,048,711 1,027,785 1,010,318 978,835 968,735 Gas Therms delivered (Millions) 1,621.5 944.1 922.8 980.7 936.9 Customers (End of year) 952,177 398,508 388,478 376,732 367,275 Steam Pounds sold (Millions) 3,085.2 2,913.9 2,773.1 3,160.6 2,704.6 Customers (End of year) 451 450 454 474 465 Non-Utility Energy Statistics - ----------------------------- Independent Power Production Electric megawatt-hour sales (Thousands) 3,213.2 2,417.2 - - - Energy Marketing, Trading & Services Electric megawatt-hour sales (Thousands) 2,091.2 1,598.1 723.7 - - Gas therm sales (Millions) 187.6 - - - -
CONSOLIDATED SELECTED QUARTERLY FINANCIAL DATA (Unaudited) (Millions of Dollars Except Per Share Amounts) (e) --------------------------------------------------- March June ------------------- ------------------- Three Months Ended 2000 1999 2000 (a) 1999 - ------------------ ---- ---- -------- ---- Total operating revenues $628.0 $556.7 $755.0 $539.0 Operating income 119.2 104.1 102.1 108.1 Net income 50.6 53.5 30.1 48.9 Earnings per share of common stock Basic $0.42 $0.46 $0.25 $0.42 Diluted $0.42 $0.46 $0.25 $0.42 September December ------------------- ------------------- Three Months Ended 2000 (a) 1999 2000 (a) 1999 - ------------------ -------- ---- -------- ---- Total operating revenues $850.8 $591.3 $1,120.9 $585.6 Operating income 134.7 142.5 88.9 121.4 Net income 44.6 68.9 28.9 (b) 37.7 (c) Earnings per share of common stock Basic $0.37 $0.59 $0.24 (b) $0.32 (c) Diluted $0.36 $0.59 $0.24 (b) $0.32 (c) (a) Includes WICOR, Inc. and its subsidiaries subsequent to their acquisition on April 26, 2000. (b) Includes net non-recurring costs, after tax, of $28.7 million or $0.24 per diluted share ($0.45 per share non-recurring gain offset by $0.69 per share of non-recurring charges relating primarily to the WICOR merger and the divestiture of non-core businesses). (c) Includes non-recurring charges, after tax, of $10.8 million or $0.09 per diluted share for the settlement of litigation. (d) Includes non-recurring charges, after tax, of $36.8 million or $0.33 per diluted share ($0.17 per share related to the terminated merger agreement with Northern States Power Company and $0.16 per share related to the write-down of equipment). (e) Quarterly results of operations are not directly comparable because of seasonal and other factors. See Management's Discussion and Analysis of Financial Condition and Results of Operations.
WISCONSIN ENERGY CORPORATION CONSOLIDATED SELECTED UTILITY OPERATING DATA Year Ended December 31 2000 (a) 1999 1998 1997 1996 -------- ---- ---- ---- ---- Electric Utility ---------------- Operating Revenues (Millions) Residential $606.7 $584.3 $576.2 $487.2 $494.1 Small Commercial/Industrial 550.0 524.9 496.2 430.2 421.5 Large Commercial/Industrial 472.8 459.4 455.3 402.7 383.1 Other Retail/Municipal 64.7 56.7 54.7 55.2 56.3 Resale- Utilities 79.1 74.7 60.9 24.6 26.4 Other Operating Revenues 24.5 22.1 20.3 12.2 11.9 -------- -------- -------- -------- -------- Total Operating Revenues $1,797.8 $1,722.1 $1,663.6 $1,412.1 $1,393.3 ======== ======== ======== ======== ======== Megawatt-hour Sales (Thousands) Residential 7,633.2 7,503.1 7,405.0 6,863.6 6,998.8 Small Commercial/Industrial 8,524.7 8,257.7 7,746.2 7,433.1 7,204.7 Large Commercial/Industrial 11,824.0 11,542.8 11,523.3 11,021.5 10,785.5 Other Retail/Municipal 1,755.8 1,531.4 1,409.3 1,412.6 1,477.0 Resale- Utilities 2,304.7 2,422.1 1,856.6 941.0 1,094.4 -------- -------- -------- -------- -------- Total Sales 32,042.4 31,257.1 29,940.4 27,671.8 27,560.4 ======== ======== ======== ======== ======== Number of Customers (Average) Residential 934,494 915,713 904,703 876,776 867,917 Small Commercial/Industrial 101,665 99,209 97,858 93,259 91,565 Large Commercial/Industrial 716 720 724 714 706 Other 2,327 1,978 1,899 1,844 1,832 --------- --------- --------- --------- --------- Total Customers 1,039,202 1,017,620 1,005,184 972,593 962,020 ========= ========= ========= ========= ========= Gas Utility ----------- Operating Revenues (Millions) Residential $450.2 $193.8 $176.5 $222.0 $218.8 Commercial/Industrial 225.2 95.1 87.9 113.6 108.1 Interruptible 13.7 5.3 7.1 9.0 11.5 ------ ------ ------ ------ ------ Total Retail Gas Sales 689.1 294.2 271.5 344.6 338.4 Transported Customer-Owned Gas 31.3 14.6 12.0 13.4 11.7 Transported - Interdepartmental 1.5 1.8 2.5 3.1 3.1 Other Operating Revenues 14.4 (3.8) 9.9 (5.9) 11.7 ------ ------ ------ ------ ------ Total Operating Revenues $736.3 $306.8 $295.9 $355.2 $364.9 ====== ====== ====== ====== ====== Therms Delivered (Millions) Residential 569.0 329.0 289.5 347.9 372.0 Commercial/Industrial 336.5 195.3 182.0 211.5 225.2 Interruptible 24.9 16.3 23.3 24.5 35.9 ------ ------ ------ ------ ------ Total Retail Gas Sales 930.4 540.6 494.8 583.9 633.1 Transported Customer-Owned Gas 650.1 347.9 349.4 387.2 292.6 Transported - Interdepartmental 41.0 55.6 78.6 9.6 11.2 ------- ----- ----- ----- ----- Total Therms Delivered 1,621.5 944.1 922.8 980.7 936.9 ======= ===== ===== ===== ===== Number of Customers (Average) Residential 697,570 360,084 347,747 339,002 330,153 Commercial/Industrial 62,626 32,594 31,586 30,594 29,936 Interruptible 72 89 146 170 190 Transported Customer-Owned Gas 3,247 328 271 254 230 Transported - Interdepartmental 6 6 6 7 8 ------- ------- ------- ------- ------- Total Customers 763,521 393,101 379,756 370,027 360,517 ======= ======= ======= ======= ======= Degree Days (b) ----------------------- Heating (6,887 Normal) 6,716 6,318 5,848 7,101 7,469 Cooling (681 Normal) 566 753 800 407 608 (a) Includes Wisconsin Gas Company subsequent to the acquisition of WICOR, Inc. on April 26, 2000. Average gas customers are weighted for the eight months when Wisconsin Gas was a part of Wisconsin Energy. (b) As measured at Mitchell International Airport in Milwaukee, Wisconsin. Normal degree days are based upon a twenty-year moving average.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Wisconsin Energy Corporation is a diversified holding company with subsidiaries primarily in a utility energy segment, a non- utility energy segment and a manufacturing segment. Unless qualified by their context, when used in this document the terms "Wisconsin Energy" or the "Company" refer to the holding company and all of its subsidiaries. The utility energy segment is engaged primarily in the business of generating electricity and distributing electricity and natural gas. Currently, the non-utility energy segment is principally engaged in independent electric power production as well as in energy marketing, trading and services activities. The manufacturing segment consists of companies which manufacture pumps as well as fluid processing and pump filtration equipment. In addition, Wisconsin Energy has several other subsidiaries, the primary two of which are engaged in the development and marketing of recycling technologies and in the development and investment in real estate. The Company seeks to grow shareholder value by leveraging on the core competencies of its business segments. To accomplish this goal, Wisconsin Energy performed a comprehensive review of its portfolio of businesses during 2000 and began implementing the following general strategies for the next decade: * ELECTRIC GENERATION: Improve the supply of reasonably priced electric power in Wisconsin through the "Power the Future" strategy. * ENERGY DISTRIBUTION: Upgrade the Company's electric and gas utility distribution systems to increase reliability and enable economic expansion in Wisconsin through the "Power the Future" strategy and combine the gas operations and the customer service functions of its gas utilities to realize synergy savings and increase customer satisfaction. * MANUFACTURING: Globalize the pump manufacturing business, improve margins, grow market share and make value-adding acquisitions. This comprehensive portfolio review also led to a decision to divest of businesses that the Company determined to not involve core competencies. In December 2000, Wisconsin Energy entered into an agreement to sell its two existing non-utility power plants, located in the state of Connecticut, which will significantly reduce the size of current non-utility energy segment operations. The sale of these two plants, which were originally acquired in April 1999, is expected to close in the second quarter of 2001. In May 2000, the Company announced that it would sell approximately 80% of its portfolio of non-utility real estate assets during the next two years, which is expected to significantly reduce the size of its non-utility real estate operations. For information concerning the "Power the Future" strategy, see "Factors Affecting Results, Liquidity and Capital Resources" below. ACQUISITION OF WICOR, INC.: On April 26, 2000, Wisconsin Energy acquired WICOR, Inc. ("WICOR"). WICOR is the parent of Wisconsin Gas Company ("Wisconsin Gas"), the largest natural gas distribution utility in Wisconsin, and of WICOR Industries, Inc., an intermediate holding company which holds the stock of several manufacturers of pumps as well as fluid processing and filtration equipment. This business combination was accounted for as a purchase, and, therefore, is reflected prospectively in Wisconsin Energy's consolidated financial statements from and after the date of the acquisition. CAUTIONARY FACTORS: A number of forward-looking statements are included in this document. When used, the terms "anticipate," "believe," "estimate," "expect," "objective," "plan," "possible," "potential," "project" and similar expressions are intended to identify forward-looking statements. Forward-looking statements are subject to certain risks, uncertainties and assumptions which could cause actual results to differ materially from those that are described, including the factors mentioned throughout this document and below in "Cautionary Factors." RESULTS OF OPERATIONS CONSOLIDATED EARNINGS The Company's earnings for the year ended December 31, 2000 were negatively impacted by the timing of the WICOR acquisition, by non-recurring charges related to the WICOR acquisition and the announced divestiture of certain non-core businesses. Following their acquisition, the WICOR companies contributed $0.26 per share to Wisconsin Energy's earnings during 2000. However, WICOR merger-related costs of $0.41 per share, consisting primarily of goodwill and interest charges, exceeded WICOR's earnings before such costs by $0.15 per share. WICOR's post-merger earnings during 2000 did not include the first quarter heating season of Wisconsin Gas, which historically is its highest quarter of earnings. For the year ending 2001, management expects the WICOR acquisition to be accretive to the Company. In December 2000, the Company recorded non-recurring charges totaling $0.69 per share, including $0.33 per share related to severance, merger-related and other items, $0.26 per share related to the write-down of certain non-core investments and a one-time contribution of $0.10 per share to the Wisconsin Energy Foundation to assist it in becoming self-funded. Of the $0.69 per share of non-recurring charges during 2000, $0.38 was attributable to the utility energy segment and $0.31 was associated with the divestiture of non-core businesses or the write-down of certain non-utility investments. In October 2000, the Company completed the sale of its investment in SkyGen Energy Holdings, LLC, which resulted in a gain of $0.45 per share. During 2000, Wisconsin Energy's earnings before non-recurring items were $1.51 per share compared with $1.88 per share during 1999. In addition to the impact of the WICOR acquisition, 2000 earnings were also negatively impacted by increased fuel and purchased power expenses and by cool summer weather during 2000. During 1999, the Company had recorded a one time charge of $0.09 per share related to the settlement of litigation. With no non-recurring items during the year, Wisconsin Energy posted earnings of $1.65 per share during 1998. The following table compares Wisconsin Energy's diluted earnings per share by business segment for each of the comparative periods.
2000 ---------------------------------- Excluding Merger Diluted Earnings Per Share Merger Costs (a) Total 1999 1998 -------------------------- --------- --------- ----- ---- ---- Utility Energy Segment $1.82 ($0.12) $1.70 $1.94 $1.62 Non-Utility Energy Segment 0.01 - 0.01 0.02 (0.02) Manufacturing Segment 0.18 (0.12) 0.06 - - Other (0.09) (0.17) (0.26) (0.08) 0.05 ----- ------- ----- ----- ----- Earnings Before Non- Recurring Items 1.92 (0.41) 1.51 1.88 1.65 Non-Recurring Items (b) (0.24) - (0.24) (0.09) - ----- ------- ----- ----- ----- Net Earnings $1.68 ($0.41) $1.27 $1.79 $1.65 ===== ======= ===== ===== ===== (a) Includes $0.10 per share of goodwill amortization expense and $0.26 per share of interest expense net of tax related to the WICOR merger. (b) During 2000, non-recurring items consists of $0.69 per share of non-recurring charges partially offset by a $0.45 per share gain on the sale of the Company's interest in SkyGen. During 1999, non-recurring items consists of a $0.09 per share charge for settlement of litigation.
An analysis of contributions to earnings by segment follows. UTILITY ENERGY SEGMENT CONTRIBUTION TO EARNINGS Utility net earnings during 2000, which include non-recurring charges and merger costs associated with Wisconsin Gas, declined by $56.0 million when compared to 1999. The primary causes for this decline were $43.9 million of non-recurring charges, net of tax, at Wisconsin Electric primarily associated with the WICOR merger, increased fuel and purchased power costs at Wisconsin Electric and cooler than normal summer weather. In addition, Wisconsin Gas contributed earnings of $9.9 million before non- recurring charges of $2.0 million and merger-related costs of $14.3 million. During 1999, utility energy segment earnings increased by $31.3 million when compared with 1998 due in large part to increases in electric and gas utility gross margins offset in part by a one time charge during 1999 related to the settlement of litigation. The following table summarizes the utility energy segment's earnings during 2000, 1999 and 1998.
2000 ------------------------------- Wisconsin Utility Energy Segment Gas (a) Other (b) Total 1999 1998 - ---------------------------------- --------- --------- ----- ---- ---- (Millions of Dollars) Operating Revenues Electric Utility $ - $1,797.8 $1,797.8 $1,722.1 $1,663.6 Gas Utility 336.7 399.6 736.3 306.8 295.9 Other Utility 0.6 22.0 22.6 21.3 20.5 ------ -------- -------- -------- -------- Total Operating Revenues 337.3 2,219.4 2,556.7 2,050.2 1,980.0 Fuel and Purchased Power - 513.5 513.5 458.9 461.4 Cost of Gas Sold 228.0 258.7 486.7 174.0 175.5 ------ -------- -------- -------- -------- Gross Margin 109.3 1,447.2 1,556.5 1,417.3 1,343.1 Other Operating Expenses Other Operation and Maintenance 55.0 702.9 757.9 656.6 666.7 Depreciation, Decommissioning and Amortization 32.3 276.2 308.5 237.2 227.3 Property and Revenue Taxes 3.2 67.8 71.0 68.3 61.7 ------ -------- -------- -------- -------- Operating Income 18.8 400.3 419.1 455.2 387.4 Other Income (Deductions) (3.8) (9.8) (13.6) (5.5) 8.0 Financing Costs 20.9 119.6 140.5 115.5 113.2 ------ -------- -------- -------- -------- Income Before Income Taxes (5.9) 270.9 265.0 334.2 282.2 Income Taxes 0.5 104.5 105.0 118.2 97.5 ------ -------- -------- -------- -------- Net Earnings (Loss) ($6.4) $166.4 $160.0 $216.0 $184.7 ====== ======== ======== ======== ======== (a) Wisconsin Energy's financial statements reflect the operations of Wisconsin Gas subsequent to the WICOR merger on April 26, 2000. (b) Other includes Wisconsin Electric, Edison Sault and consolidating adjustments and eliminations between the utilities. Electric Utility Revenues, Gross Margins and Sales The following table compares Wisconsin Energy's electric utility operating revenues and its gross margin (total electric utility operating revenues less fuel and purchased power expenses) during 2000 with similar information for 1999 and 1998.
Electric Utility Operations 2000 1999 1998 - --------------------------- -------- -------- -------- (Millions of Dollars) Electric Operating Revenues $1,797.8 $1,722.1 $1,663.6 Fuel and Purchased Power Fuel 325.3 299.1 303.0 Purchased Power 182.0 153.7 153.0 -------- -------- -------- Total Fuel and Purchased Power 507.3 452.8 456.0 -------- -------- -------- Gross Margin $1,290.5 $1,269.3 $1,207.6 ======== ======== ========
During 2000, Wisconsin Energy's total electric utility operating revenues increased by $75.7 million or 4.4% compared with 1999. Wisconsin Energy attributes this growth mostly to higher electric energy sales and rate increases during 2000. Interim and final electric rate increases at Wisconsin Electric, that became effective in early April 2000 and on August 30, 2000, respectively, contributed approximately $22.1 million to the increase in electric operating revenues. For additional information concerning these rate increases, see "Factors Affecting Results, Liquidity and Capital Resources" below. Fuel and purchased power expenses increased by $54.5 million or 12.0% during 2000, reflecting increased generation and significantly higher natural gas prices. Purchased power expenses also grew due to higher fixed costs during 2000 associated with long-term purchased power contracts. To a certain extent, Wisconsin Energy was able to limit the increase in fuel and purchased power costs during 2000 by changing its electric supply mix away from higher cost natural gas-fired generation and power purchases to lower cost nuclear and coal-fired generation. Primarily due to an increase in total electric energy sales during 1999, Wisconsin Energy's total electric utility operating revenues increased by $58.5 million or 3.5% when compared with 1998.
Operating Revenues Megawatt-Hour Sales ------------------------------- ------------------------------- Electric Utility Operations 2000 1999 1998 2000 1999 1998 - ------------------------------- ------ ---- ---- ------ ---- ---- (Millions of Dollars) (Thousands) Customer Class Residential $606.7 $584.3 $576.2 7,633.2 7,503.1 7,405.0 Small Commercial/Industrial 550.0 524.9 496.2 8,524.7 8,257.7 7,746.2 Large Commercial/Industrial 472.8 459.4 455.3 11,824.0 11,542.8 11,523.3 Other-Retail/Municipal 64.7 56.7 54.7 1,755.8 1,531.4 1,409.3 Resale-Utilities 79.1 74.7 60.9 2,304.7 2,422.1 1,856.6 Other Operating Revenues 24.5 22.1 20.3 - - - -------- -------- -------- -------- -------- -------- Total $1,797.8 $1,722.1 $1,663.6 32,042.4 31,257.1 29,940.4 ======== ======== ======== ======== ======== ======== Weather - Degree Days (a) Heating (6,887 Normal) 6,716 6,318 5,848 Cooling (681 Normal) 566 753 800 (a) As measured at Mitchell International Airport in Milwaukee, Wisconsin. Normal degree days are based upon a twenty-year moving average.
During 2000, total electric energy sales increased by 785.3 thousand megawatt-hours or 2.5% compared with 1999, mostly reflecting growth in the average number of residential, small commercial/industrial and other retail/municipal customers and a 13.1% increase in sales to the Empire and Tilden iron ore mines, Wisconsin Electric's two largest retail customers. Excluding the Empire and Tilden mines, total electric sales increased by 1.7% and sales to the remaining large commercial/industrial customers were unchanged between the comparative periods. Growth in the average number of customers partially offset the effects of cooler weather during the 2000 cooling season on total electric energy sales and operating revenues. As measured by cooling degree days, 2000 was 24.8% cooler than 1999 and 16.9% cooler than normal. From August through mid-October 1999, the Empire and Tilden iron ore mines were temporarily shut down. As a result, electric energy sales to the mines decreased 9.8% during 1999 compared to 1998. Excluding the Empire and Tilden iron ore mines, total electric energy sales increased by 5.6% during 1999 and sales to the remaining large commercial/industrial customers increased by 2.8% when compared with 1998. Sales for resale to other utilities increased by 30.5% during 1999 primarily due to higher opportunity sales. When comparing 1999 electric sales with 1998, summer cooling load due to weather was not a significant factor. As measured by cooling degree days, 1999 was 5.9% cooler than 1998. However, 1999 and 1998 were 10.6% and 17.5% warmer than normal, respectively. Gas Utility Revenues, Gross Margins and Therm Deliveries The following table compares Wisconsin Energy's gas utility operating revenues and its gross margin (total gas utility operating revenues less cost of gas sold) during 2000 with similar information for 1999 and 1998. Gross margin is a better performance indicator than revenues because changes in the cost of gas sold flow through to revenue under gas cost recovery mechanisms that do not impact gross margin.
Gas Utility Operations 2000 (a) 1999 1998 - --------------------------- -------- -------- -------- (Millions of Dollars) Gas Operating Revenues $736.3 $306.8 $295.9 Cost of Gas Sold 486.7 174.0 175.5 ------ ------ ------ Gross Margin $249.6 $132.8 $120.4 ====== ====== ====== (a) Wisconsin Energy's gas utility information reflects the operations of Wisconsin Gas subsequent to the WICOR merger on April 26, 2000. For further information concerning gas utility operations during the comparative periods, see "Pro Forma Gas Utility Revenues, Gross Margins and Therm Deliveries" below.
During 2000, Wisconsin Energy's total gas utility operating revenues increased by $429.5 million or 140.0% compared with the same period during 1999. Gross margin on gas utility operating revenues increased by $116.8 million or 88.0%. Of these changes, $336.7 million of the increase in total gas utility operating revenues and $109.3 million of the increase in gross margin were attributable to Wisconsin Gas. Excluding Wisconsin Gas, Wisconsin Energy's total gas utility operating revenues increased by $92.8 million or 30.2% during 2000 while gross margin on increased by $8.1 million or 6.1% when compared with 1999. Significantly higher natural gas prices mostly contributed to the increase in total gas utility operating revenues. Because changes in the cost of natural gas purchased at market prices were included in customer rates through the gas cost recovery mechanism, gas operating revenues changed by approximately the same amount as the cost of gas sold and gross margin was unaffected by such changes. Interim and final retail gas rate increases at Wisconsin Electric, that became effective in early April 2000 and on August 30, 2000, respectively, along with a weather-related increase in higher margin residential and commercial/industrial retail gas sales during the fourth quarter of 2000, contributed to the increase in operating revenues and gross margin during 2000. For additional information concerning the rate increases, see "Factors Affecting Results, Liquidity and Capital Resources" below. A decrease in revenues from interdepartmental therm deliveries to Wisconsin Electric's natural gas-fired electric generating facilities during 2000 partially offset the increases in gas utility operating revenues and gross margin noted above. Due in large part to increased retail gas sales during 1999, especially to higher margin residential and commercial/industrial customers, Wisconsin Electric's gross margin on gas utility operating revenues increased by $12.4 million or 10.3% compared with 1998. In spite of the increase in retail gas sales, however, the cost of gas sold decreased by 0.9% during 1999 due to a decrease in the price of purchased gas.
Operating Revenues Therm Deliveries ------------------------------- ------------------------------- Gas Utility Operations 2000 (a) 1999 1998 2000 (a) 1999 1998 - ------------------------------- ------- ---- ---- -------- ---- ---- (Millions of Dollars) (Millions) Customer Class Residential $450.2 $193.8 $176.5 569.0 329.0 289.5 Commercial/Industrial 225.2 95.1 87.9 336.5 195.3 182.0 Interruptible 13.7 5.3 7.1 24.9 16.3 23.3 ------ ------ ------ ------- ----- ----- Total Retail Gas Sales 689.1 294.2 271.5 930.4 540.6 494.8 Transported Customer-Owned Gas 31.3 14.6 12.0 650.1 347.9 349.4 Transported-Interdepartmental 1.5 1.8 2.5 41.0 55.6 78.6 Other Operating Revenues 14.4 (3.8) 9.9 - - - ------ ------ ------ ------- ----- ----- Total $736.3 $306.8 $295.9 1,621.5 944.1 922.8 ====== ====== ====== ======= ===== ===== Weather - Degree Days (b) Heating (6,887 Normal) 6,716 6,318 5,848 (a) Wisconsin Energy's gas utility information reflects the operations of Wisconsin Gas subsequent to the WICOR merger on April 26, 2000. For further information concerning gas utility operations during the comparative periods, see "Pro Forma Gas Utility Revenues, Gross Margins and Therm Deliveries" below. (b) As measured at Mitchell International Airport in Milwaukee, Wisconsin, normal degree days are based upon a twenty-year moving average.
Pro Forma Gas Utility Revenues, Gross Margins and Therm Deliveries The following table compares pro forma gas utility operating revenues, gross margins and therm deliveries during 2000, 1999 and 1998 as if Wisconsin Gas had been part of Wisconsin Energy since January 1, 1998.
Gross Margin Therm Deliveries Pro Forma ---------------------------- ------------------------------ Gas Utility Operations 2000 1999 1998 2000 1999 1998 - ------------------------------- ---- ---- ---- ---- ---- ---- (Millions of Dollars) (Millions) Operating Revenues Residential $606.3 $473.1 $433.7 803.8 769.4 698.1 Commercial/Industrial 292.7 216.3 205.4 462.1 445.8 422.6 Interruptible 18.1 16.7 20.8 35.2 45.3 59.9 ------ ------ ------ ------- ------- ------- Total Retail Gas Sales 917.1 706.1 659.9 1,301.1 1,260.5 1,180.6 Transported Customer-Owned Gas 41.4 38.1 34.5 856.1 848.1 809.5 Transported-Interdepartmental 1.5 1.8 2.5 41.0 55.6 78.6 Other Operating Revenues (7.8) - 27.5 - - - ------ ------ ------ ------- ------- ------- Total Operating Revenues 952.2 746.0 724.4 2,198.2 2,164.2 2,068.7 Cost of Gas Sold 613.7 424.2 427.7 ======= ======= ======= ------ ------ ------ Gross Margin $338.5 $321.8 $296.7 ====== ====== ======
As noted above, significantly higher natural gas prices during 2000, which are passed through to customers under gas cost recovery mechanisms at Wisconsin Electric and Wisconsin Gas, primarily contributed to the increase in total pro forma gas utility operating revenues but did not significantly affect gross margin. Other Utility Segment Items OTHER OPERATION AND MAINTENANCE EXPENSES: Other operation and maintenance expenses increased by $46.3 million during 2000 when compared with 1999 excluding Wisconsin Gas, which had $55.0 million of expenses subsequent to the WICOR merger. The most significant change in other operation and maintenance expenses between the comparative periods resulted from $52.7 million of non-recurring charges at Wisconsin Electric associated with the WICOR merger including severance, benefits and other matters. Increased other operation and maintenance expenses during 2000, excluding Wisconsin Gas, were also attributable to $14.8 million of higher non-fuel fossil generation expenses and $9.0 million of higher electric distribution expenses offset in part by an $8.8 million decline in nuclear non-fuel expenses and a $9.9 million decline in customer service expenses. Non-fuel fossil generation expenses increased during 2000 primarily due to differences in the scope and timing of scheduled maintenance outages for various generating facilities at Wisconsin Electric. Electric distribution expenses were higher due in large part to increased forestry and maintenance activity. During 2000, nuclear non-fuel expenses were lower as a result of continued progress on various performance improvement initiatives. Between the comparative periods, customer service expenses were lower primarily due to a change in the period over which conservation expenses are being amortized. During 1999, other operation and maintenance expenses for the utility energy segment decreased by $10.1 million when compared with 1998. The most significant changes in other operation and maintenance expenses between the comparative periods include a $28.0 million decrease in nuclear non-fuel expenses partially offset by a $4.9 million increase in administrative and general expenses, a $2.9 million increase in electric transmission expenses, a $2.2 million increase in payroll taxes and a $2.1 million increase in non-fuel fossil generation expenses. Nuclear non-fuel expenses decreased as a result of progress on various performance improvement initiatives, while administrative and general expenses increased mostly due to higher employee benefits paid and to increased staffing, which also increased payroll taxes. Electric transmission expenses increased primarily due to higher purchased power transmission fees during 1999, and non-fuel fossil generation expenses increased as a result of an increase in the number of maintenance outages early in 1999 at Wisconsin Electric's fossil-fuel power plants in anticipation of higher electric demand during the summer of 1999. DEPRECIATION, DECOMMISSIONING AND AMORTIZATION EXPENSES: Excluding Wisconsin Gas, depreciation, decommissioning and amortization expenses were $39.0 million higher during 2000 compared with 1999. Pursuant to a 1998 rate order for the 1998/1999 test year, Wisconsin Electric was amortizing pre-1991 contributions in aid of construction. This amortization, which was completed as of December 31, 1999, had the effect of reducing depreciation expense by $22.8 million during 1999. Higher average depreciable property during 2000 also contributed to an increase in depreciation expense. Primarily due to an increase in average depreciable property, Wisconsin Energy's utility energy segment depreciation, decommissioning and amortization expenses increased by $9.9 million during 1999 when compared with 1998. OTHER INCOME AND DEDUCTIONS: Other income and deductions was $8.1 million lower when comparing 2000 with 1999 and $13.5 million lower when comparing 1999 with 1998. These changes primarily reflect increased contributions by Wisconsin Electric and Wisconsin Gas to the Wisconsin Energy Foundation during the fourth quarter of 2000. In 1999, Wisconsin Electric made a one- time $18.0 million litigation settlement payment that was offset in part by a $6.1 million gain on the sale of certain properties. INCOME TAXES: The effective income tax rate increased during 2000 due in large part to the end of amortization of pre-1991 contributions in aid of construction as described above and to the amortization of non-deductible goodwill beginning during 2000. NON-UTILITY ENERGY SEGMENT CONTRIBUTION TO EARNINGS In December 2000, the Company announced that it expects to sell its two non-utility power plants in the state of Connecticut during the second quarter of 2001, which will substantially reduce its non-utility energy operations. Excluding the WICOR non-utility energy companies, non-utility energy segment earnings increased by $37.4 million during 2000. Wisconsin Energy attributes this increase mostly to a one-time, $54.6 million after-tax gain in October 2000 on the sale of its interest in SkyGen Energy Holdings LLC, offset in part by $16.0 million of after-tax non-recurring charges during the fourth quarter of 2000 relating to severance costs associated with the divestiture of non-core businesses and for write-downs associated with certain investments. During 1999, non-utility energy segment earnings increased by $4.8 million when compared with 1998 primarily because of the April 1999 acquisition of the two Connecticut power plants and, to a lesser extent, as a result of increased energy marketing, trading and services activities. The following table summarizes the non-utility energy segment's earnings during 2000, 1999 and 1998. In addition, the table summarizes electric megawatt-hour sales from independent power production activities during the comparative periods as well as electric megawatt-hour sales and natural gas therm sales as a result of non-utility energy marketing, trading and services activities.
2000 ------------------------------- Non-Utility Energy Segment WICOR (a) Other (b) Total 1999 1998 - ---------------------------------- --------- --------- ----- ---- ---- (Millions of Dollars, Except Statistics) Operating Revenues Independent Power Production $ - $149.5 $149.5 $101.1 $ - Energy Marketing, Trading & Services 118.7 75.5 194.2 74.5 25.1 Other 0.2 28.9 29.1 17.6 9.0 ------ ------ ------ ------ ------ Total Operating Revenues 118.9 253.9 372.8 193.2 34.1 Fuel and Purchased Power - 168.6 168.6 129.2 24.8 Cost of Gas Sold 108.0 - 108.0 - - Cost of Goods Sold 8.2 - 8.2 - - ------ ------ ------ ------ ------ Gross Margin 2.7 85.3 88.0 64.0 9.3 Other Operating Expenses 3.5 82.7 86.2 44.3 10.2 ------ ------ ------ ------ ------ Operating Income (Loss) (0.8) 2.6 1.8 19.7 (0.9) Other Income 0.1 99.0 99.1 6.8 2.0 Financing Costs 0.4 29.4 29.8 21.8 4.0 ------ ------ ------ ------ ------ Income Before Income Taxes (1.1) 72.2 71.1 4.7 (2.9) Income Taxes (0.4) 32.1 31.7 2.0 (0.8) ------ ------ ------ ------ ------ Net Earnings (Loss) ($0.7) $40.1 $39.4 $2.7 ($2.1) ====== ====== ====== ====== ====== Statistics Independent Power Production Electric Megawatt-Hour Sales (Thousands) - 3,213.2 3,213.2 2,417.2 - Energy Marketing, Trading & Services Electric Megawatt-Hour Sales (Thousands) - 2,091.2 2,091.2 1,598.1 723.7 Gas Therm Sales (Millions) 187.6 - 187.6 - - (a) Wisconsin Energy's financial statements and statisticsreflect the operations of WICOR Energy Services and FieldTech, subsidiaries of WICOR, subsequent to the merger on April 26, 2000. (b) Other consists primarily of Wisvest Corporation, a wholly-owned non-utility energy subsidiary of Wisconsin Energy ("Wisvest"). MANUFACTURING SEGMENT CONTRIBUTION TO EARNINGS Excluding costs related to the WICOR merger, the manufacturing segment contributed $21.5 million to net earnings during 2000. Prior to the WICOR acquisition, Wisconsin Energy did not have a manufacturing segment. The following table summarizes the manufacturing segment's earnings during 2000 following the WICOR merger, including related merger costs of $14.0 million.
Manufacturing Segment 2000 (a) --------------------- -------- (Millions of Dollars) Operating Revenues Domestic $286.1 International 88.1 ------ Total Operating Revenues 374.2 Cost of Goods Sold 262.8 ------ Gross Margin 111.4 Other Operating Expenses 78.9 ------ Operating Income 32.5 Other Deductions (3.7) Financing Costs 14.1 ------ Income Before Income Taxes 14.7 Income Taxes 7.2 ------ Net Earnings $7.5 ====== (a) Wisconsin Energy's financial statements reflect operations of the manufacturing segment subsequent to the WICOR merger on April 26, 2000.
Assuming that WICOR had been a part of Wisconsin Energy since January 1, 1998 and excluding costs related to the WICOR merger, the manufacturing segment would have posted pro forma net earnings of approximately $29.0 million during the twelve months of 2000 compared with pro forma net earnings of $29.6 million during 1999 and $23.8 million during 1998. The manufacturing segment's results for 2000 were impacted by a series of expenses associated with defenses of intellectual property rights, development of a new beverage dispensing technology and the integration of an acquisition. Management believes that these expenses are substantially past. For further pro forma information concerning manufacturing segment revenues and gross margin during the comparative periods, see "Pro Forma Manufacturing Segment Revenues and Gross Margin" below. Pro Forma Manufacturing Segment Revenues and Gross Margins The following table summarizes pro forma revenues and gross margins for the manufacturing segment during the comparative periods as if the manufacturing segment had been part of Wisconsin Energy since January 1, 1998.
Pro Forma Manufacturing Gross Margin 2000 1999 1998 - ------------------------------ -------- -------- -------- (Millions of Dollars) Operating Revenues Domestic $426.9 $372.6 $323.2 International 136.8 138.4 139.4 ------ ------ ------ Total Operating Revenues 563.7 511.0 462.6 Cost of Goods Sold 397.4 357.7 329.2 ------ ------ ------ Gross Margin $166.3 $153.3 $133.4 ====== ====== ======
LIQUIDITY AND CAPITAL RESOURCES CASH FLOWS The following table summarizes Wisconsin Energy's cash flows during 2000, 1999 and 1998:
Wisconsin Energy Corporation 2000 1999 1998 - ---------------------------- -------- -------- -------- (Millions of Dollars) Cash Provided by (Used in): Operating Activities $461.0 $306.9 $451.4 Investing Activities (1,520.5) (888.8) (469.4) Financing Activities 1,026.5 638.8 15.0
Operating Activities During 2000, cash provided by operating activities increased by $154.1 million compared with 1999, reflecting a $110 million contested liability payment made during the fourth quarter of 1999 in the Giddings & Lewis Inc./City of West Allis lawsuit and increased non-cash charges for depreciation and amortization and reduced tax payments during 2000. Cash provided by operating activities decreased by $144.5 million during 1999 compared with 1998, reflecting the $110 million contested liability payment in the Giddings & Lewis Inc./City of West Allis lawsuit noted above and changes in working capital requirements, offset in part by increased non-cash charges for depreciation and amortization and for net deferred income taxes. During 2000, cash from operations provided for approximately 75% and 48% of the Company's capital expenditure requirements before and after the payment of common dividends, respectively, compared with 59% and 24%, respectively, during 1999 and 113% and 69%, respectively, during 1998. During each of these years, Wisconsin Energy used net borrowings to supplement the funding of its capital requirements. Investing Activities For the year ended December 31, 2000, Wisconsin Energy spent $1.5 billion in investing activities. The largest investment was the $1.2 billion acquisition of WICOR, Inc. in April 2000. In addition, the Company invested $400.0 million in utility plant, $107.7 million in non-utility energy projects, $20.3 million in manufacturing and $83.0 million in other non-utility activities. In addition to investments in its core businesses, Wisconsin Energy began a program of divesting of non-core businesses and assets. During 2000, the Company received proceeds of approximately $408.4 million from the sale of assets including $219.5 million for its interest in SkyGen Energy Holdings, LLC, $57.2 million for other non-utility energy segment assets and $128.3 million for the sale of non-utility real estate assets held by Wispark. Financing Activities During 2000, the Company financed the WICOR acquisition, paid down debt through sales of non-core businesses, implemented a share repurchase program and reduced its dividend. Wisconsin Energy funded the April 2000 acquisition of WICOR, Inc. through issuance in the institutional private placement market of $1.2 billion of commercial paper with a weighted average effective interest rate of 6.09%. As a result of refinancing some short-term debt which has matured since the merger, the weighted average interest rate for this commercial paper was 6.59% as of December 31, 2000. Wisconsin Energy arranged for two new bank back-up credit facilities to provide credit support for the issuance of Wisconsin Energy's commercial paper: a $1.0 billion 364-day bank back-up credit facility and a $500 million three-year bank back-up credit facility. In addition, approximately $267 million of WICOR debt remained outstanding following the merger. The Company intends to extend a portion of the $1.0 billion bank back-up credit facility that expires in April 2001. In anticipation of reducing this facility, the Company plans to refinance a portion of the commercial paper with longer term unsecured debt. During 2000, the Company purchased approximately 5.0 million shares of common stock for $100.8 million under a $400 million board-approved repurchase program that was initiated in June 2000 and modified in September 2000. Also in September 2000, the board of directors authorized a quarterly cash dividend on its common stock, payable December 1, 2000, of $0.20 per share ($0.80 on an annualized basis), which was reduced from prior quarterly dividends paid during 2000 of $0.39 per common share (or $1.56 on an annualized basis). Through a reduced dividend, the Company expects to be able to reinvest in core business areas, reduce debt and lower borrowing costs, and thereby to increase its overall financial strength. CAPITAL RESOURCES AND REQUIREMENTS As Wisconsin Energy continues to implement its strategy of leveraging on the core competencies of its business segments and building financial strength, Wisconsin Energy expects to continue to divest of non-core assets, invest in core assets, buy back common stock and pay down debt. Capital Resources Wisconsin Energy currently expects cash from operations to provide about 72% of the Company's capital expenditure requirements during 2001 before the payment of common dividends and receipt of proceeds from asset sales. Wisconsin Energy anticipates receiving approximately $120 million of cash distributions from the American Transmission Company LLC during the first half of 2001. In addition, the Company currently expects to receive approximately $500 million of net proceeds during 2001 as a result of asset sales. The Company plans to issue up to $1 billion of intermediate-term unsecured debt in the capital markets during the first quarter of 2001 dependent upon market conditions and other factors. Proceeds from issuance of any debt securities will be used to repay short-term borrowings and for other corporate purposes. Beyond 2001, Wisconsin Energy anticipates meeting its capital requirements through internally generated funds supplemented, when required, through the issuance of capital market securities. The Company has access to outside capital markets and has been able to generate funds internally and externally to meet its capital requirements. Wisconsin Energy's ability to attract the necessary financial capital at reasonable terms is critical to the Company's overall strategic plan. Wisconsin Energy believes that it has adequate capacity to fund its operations for the foreseeable future through its borrowing arrangements and internally generated cash. On December 31, 2000, Wisconsin Energy had $2.0 billion of available unused lines of bank credit on a consolidated basis, $1.5 billion of which were obtained in conjunction with the WICOR acquisition. Wisconsin Energy has historically used these lines primarily to support its outstanding commercial paper and other short-term borrowings. The following table shows Wisconsin Energy's consolidated capitalization structure at December 31:
Capitalization Structure 2000 1999 - ------------------------ ---------------------- ----------------------- (Millions of Dollars) Common Equity $2,016.8 31.4% $2,007.8 40.6% Preferred Stock 30.4 0.5% 30.4 0.6% Trust Preferred Securities 200.0 3.1% 200.0 4.0% Long-Term Debt (including current maturities) 2,788.1 43.4% 2,203.7 44.5% Short-Term Debt 1,386.1 21.6% 507.5 10.3% -------- ------ -------- ------ Total $6,421.4 100.0% $4,949.4 100.0% ======== ====== ======== ======
As described in "Note A - Summary of Significant Accounting Policies" in the Notes to Financial Statements, certain restrictions exist on the ability of Wisconsin Energy's subsidiaries to transfer funds to Wisconsin Energy. The Company does not expect these restrictions to have any material effect on its operations or ability to meet its cash obligations. Access to capital markets at a reasonable cost is determined in large part by credit quality. In March 2001, in conjunction with Wisconsin Energy's pending issuance of $1 billion of unsecured senior notes, Standard & Poors Corporation ("S&P") assigned an A+ rating to the Company's $1 billion shelf registration and maintained the negative outlook for Wisconsin Energy and its subsidiaries. Fitch also assigned an A+ rating to the $1 billion shelf registration but revised its rating outlook for Wisconsin Energy Corporation and Wisconsin Energy Capital Corporation from stable to negative. In addition, Fitch reaffirmed its ratings of the securities of the Company's utility subsidiaries, Wisconsin Electric Power Company and Wisconsin Gas Company. Moody's Investors Service ("Moody's") assigned a rating of A2 to the $1 billion of senior unsecured notes that Wisconsin Energy plans to issue in the first quarter of 2001 and lowered Wisconsin Energy's issuer rating from A1 to A2, Wisconsin Energy Capital Corporation's unsecured debt rating from A1 to A2 and WEC Capital Trust I's Trust Preferred Securities rating from A1 to A2. In addition, Moody's reaffirmed its ratings of the securities of the Company's utility subsidiaries, Wisconsin Electric and Wisconsin Gas. Moody's outlook remains stable for all companies. The following table summarizes the current ratings of securities of Wisconsin Energy and its subsidiaries by S&P, Moody's and Fitch. Commercial paper of WICOR Industries, Inc. is unrated.
S & P Moody's Fitch --------- --------- --------- Wisconsin Energy Corporation Commercial Paper A-1 P-1 F1 Senior Unsecured Debt A+ A2 A+ Wisconsin Electric Power Company Commercial Paper A-1+ P-1 F1+ Senior Secured Debt AA- Aa2 AA Unsecured Debt A+ Aa3 AA- Preferred Stock A aa3 AA- Wisconsin Gas Company Commercial Paper A-1+ P-1 F1+ Senior Unsecured Debt AA- Aa2 AA- Wisconsin Energy Capital Corporation Unsecured Debt A+ A2 A+ WEC Capital Trust I Trust Preferred Securities A- a2 A
These ratings provide a significant degree of flexibility in obtaining funds on competitive terms and reflect the views of the rating agencies. An explanation of the significance of these ratings may be obtained from each rating agency. Such ratings are not a recommendation to buy, sell or hold securities, but rather an indication of creditworthiness. Capital Requirements Total capital expenditures, excluding the purchase of nuclear fuel, are currently estimated to be $715.0 million during 2001 attributable to the following operating segments:
Estimated Actual Capital Expenditures 2001 2000 - -------------------- --------- ------ (Millions of Dollars) Utility Energy Segment $480.0 $400.0 Non-Utility Energy Segment 90.0 107.7 Manufacturing Segment 35.0 20.3 Other Minergy 55.0 2.3 Other 55.0 80.7 ------ ------ Total $715.0 $611.0 ====== ======
Due to changing environmental and other regulations such as air quality standards or electric reliability initiatives that especially impact the Company's utility energy segments, future long-term capital requirements may vary from recent capital requirements. The utility energy segment currently expects capital expenditures, excluding the purchase of nuclear fuel and expenditures for new generating capacity contained in the "Power the Future" strategy described below, to be between approximately $380 million and $480 million per year during the next five years. FACTORS AFFECTING RESULTS, LIQUIDITY AND CAPITAL RESOURCES OUTLOOK The following forecasts are forward-looking statements subject to certain risks, uncertainties and assumptions. Actual results may vary materially. Factors that could cause actual results to differ materially include, but are not limited to: general economic conditions; business, competitive and regulatory conditions in the deregulating and consolidating energy industry, in general, and in the Company's utility service territories; availability of the Company's generating facilities; changes in purchased power costs and supply availability; changes in coal or natural gas prices and supply availability; unusual weather; risks associated with non-utility diversification; regulatory decisions; obtaining the necessary regulatory approvals and investment capital to implement the "Power the Future" strategy; the timing and extent of realization of anticipated synergy benefits from the WICOR merger; disposition of legal proceedings; and foreign governmental, economic, political and currency risk; and other factors referred to under "Market Risks" and "Cautionary Factors" below. Forecasts EARNINGS: Subject to the many variables which can affect such a projection, including weather and other factors listed above, diluted earnings per share of common stock are expected to be in the range of $2.00 to $2.25 per share during 2001, reflecting a full year of earnings contributions from WICOR and merger-related synergies. ELECTRIC SALES: Assuming moderate growth in the economy of its electric utility service territories and normal weather, the Company presently anticipates total retail and municipal electric kilowatt-hour sales of the utility energy segment to grow at a compound annual rate of 2.5% over the five-year period ending December 31, 2005. GAS DELIVERIES: Assuming moderate growth in the economy of its gas utility service territories and normal weather, the Company currently forecasts total therm deliveries of natural gas to grow at a compound annual rate of approximately 1.7% for the combined gas operations of Wisconsin Electric and Wisconsin Gas over the five-year period ending December 31, 2005. Factors Affecting Forecasts GAS COSTS: The cost of natural gas rose approximately 325% during 2000, affecting Wisconsin Energy's electric and gas utility operations. Based upon December closing prices for natural gas futures on the New York Mercantile Exchange, the cost of gas increased from $2.344 per decatherm in January 2000 to $9.978 per decatherm in January 2001. Based upon February closing prices, the cost of gas increased from $2.603 per decatherm in March 2000 to $4.998 per decatherm in March 2001, an increase of approximately 90%. Gas costs have increased significantly because the supply of gas in recent years has not kept pace with the demand for natural gas, which has grown throughout the United States as a result of increased reliance on natural gas-fired electric generating facilities and colder winter weather in late 2000. Wisconsin Energy expects that demand for natural gas will remain high into the foreseeable future and that significant price relief will not occur until additional natural gas is added to the nation's energy supply mix over a period of several years. Higher gas costs increase the working capital requirements of the Company, result in higher gross receipts taxes in the state of Wisconsin and expose the Company to greater risks of accounts receivable write-offs. As a result of gas cost recovery mechanisms, the gas distribution subsidiaries of Wisconsin Energy receive dollar for dollar pass through on most of the cost of natural gas. However, increased natural gas costs increase the risk that customers will switch to alternative fuel sources, which could reduce future gas margins. The electric operations of Wisconsin Electric burns natural gas in several of its peaker power plants or as a supplemental fuel at several coal-fired plants, and the cost of purchased power is tied to the cost of natural gas in many instances. As described below, Wisconsin Electric bears significant regulatory risk for the recovery of fuel costs related to electric generation and purchased power that are higher that the base rate established in its rate structure. RECOVERY OF FUEL AND PURCHASED POWER COSTS: The electric operations of Wisconsin Electric operates under a fuel cost adjustment clause for its fuel and purchased power costs associated with the generation and delivery of electricity. This clause establishes a base rate for fuel and purchased power, and Wisconsin Electric assumes the risks and benefits of fuel cost variances that are within 3% of the base rate. For 2000 and 1998, actual Wisconsin Electric fuel and purchased power costs exceeded base costs by $25.9 million and $11.3 million, respectively. For 1999, actual Wisconsin Electric fuel and purchased power costs were $1.5 million less than base costs. For 2001, the 3% range is plus or minus approximately $14 million. If actual fuel and purchased power costs exceed the 3% window, Wisconsin Electric has the opportunity to make a filing with the Public Service Commission of Wisconsin ("PSCW") to establish new base fuel costs prospectively and adjust rates accordingly. This procedure is subject to normal PSCW hearings and the regulatory process but is limited to only fuel costs. If costs are less than the 3% window, the rate is reduced immediately. The base fuel rates include, among other things, assumptions regarding the availability of the Company's generating assets, including Point Beach Nuclear Plant, and the cost of natural gas and purchased power. As described in further detail below in "Rates and Regulatory Matters," Wisconsin Electric implemented an interim fuel adjustment surcharge in February 2001 under this procedure. In December 2000, the PSCW initiated a review of fuel rules and solicited comments from Wisconsin utilities. The Company has submitted comments to the PSCW which seek to minimize or eliminate risks associated with fuel costs. It is expected that the PSCW will modify existing fuel rules during the latter part of 2001. Any permanent changes to the fuel rules will require Wisconsin legislative approval. WEATHER: The rates of Wisconsin Electric and Wisconsin Gas are set by the PSCW based upon weather which approximates 20-year averages. Wisconsin Electric's electric revenues are sensitive to the summer cooling season, and to some extent, to the winter heating season. The gas revenues of Wisconsin Electric and Wisconsin Gas are sensitive to the winter heating season. A summary of actual weather information for 2000, 1999 and 1998 as measured by degree-days may be found above in "Results of Operations." INTEREST RATES: The Company has approximately $1,386.1 million of variable rate short-term debt and $913.5 million of variable rate long-term debt outstanding as of December 31, 2000. Changes in future interest rates will have an impact on future interest expense. INFLATION: The Company continues to monitor the impact of inflation in order to minimize its effects in future years through pricing strategies, productivity improvements and cost reductions. With expectations of low-to-moderate inflation, Wisconsin Energy does not believe the impact of inflation will have a material effect on its future results of operations. INVESTMENTS, MERGERS, DIVESTITURES AND ASSET SALES Electric Generation "POWER THE FUTURE" STRATEGY: In late February 2001, Wisconsin Energy announced enhancements to a 10-year, $7 billion strategy, originally proposed in September 2000, that would improve the supply and reliability of electricity in Wisconsin and that is expected to improve the Company's financial results. The "Power the Future" strategy is needed to meet growing load and ensure a diverse fuel mix while keeping electricity prices reasonable. Demand for electricity in the state of Wisconsin is currently expected to outstrip supply by 4,000 megawatts by 2010. Wisconsin Electric's load is growing at approximately 100- 150 megawatts per year. "Power the Future" adds new coal capacity to the power portfolio and allows Wisconsin Electric to maintain roughly the same fuel mix as today. A mix of coal and gas capacity is expected to save customers over $1.6 billion (over the life of the plants and estimating future natural gas costs) compared to the alternative all-gas scenario. As part of its "Power the Future" strategy, Wisconsin Energy would invest in the following over the next ten years: * Approximately $3 billion in at least 2,800 megawatts of new natural gas-fired and coal-fired generating capacity; * Approximately $1.3 billion in existing electric generating assets; and * Approximately $2.7 billion in new and existing electric utility distribution system assets and other capital projects. Wisconsin Energy anticipates creating a new non-utility energy subsidiary that would construct and own the new generating capacity noted above. Under the enhanced "Power the Future" strategy, Wisconsin Electric would sign 20 to 25-year leases for each facility, approved by the PSCW, and would operate and maintain the new plants as part of the lease agreements. At the end of the original contracts, Wisconsin Electric would have the right to renegotiate and continue the leases, or acquire the associated plants outright, at market value. Smaller investor- owned or municipal utilities, cooperatives and power marketing associations would have some opportunity to expand or extend wholesale power purchases from Wisconsin Electric as a result of the additional electric generating capacity included in the proposal. Implementation of the "Power the Future" strategy is subject to a number of state and federal regulatory approvals as well as the amendment of several state laws in Wisconsin. In late February 2001, Wisconsin Energy filed its enhanced "Power the Future" proposal with the PSCW. The enhanced "Power the Future" proposal has benefited from a broad coalition of support including customer groups, public power, municipal and cooperative utilities and smaller investor-owned utilities in Wisconsin. Depending upon the response of the PSCW to this preliminary filing, the Company anticipates filing detailed plans later in 2001. Wisconsin Energy anticipates obtaining the capital necessary to finance and execute this strategy from internal and external sources. WISVEST CORPORATION: In April 1999, Wisvest-Connecticut, LLC, a wholly-owned subsidiary of Wisvest, acquired two fossil-fueled power plants in the state of Connecticut for $277 million. Wisconsin Energy accounted for the transaction under the purchase method of accounting and included the results of operations from the two plants in its consolidated financial statements as of the acquisition date. In December 2000, Wisvest-Connecticut, LLC signed a definitive purchase and sale agreement for the sale of the plants and associated assets. The Company anticipates receiving estimated proceeds of $350 million, including amounts for inventory, with a projected closing by the end of the second quarter of 2001, subject to various regulatory approvals and certain other closing conditions. Energy Distribution ACQUISITION OF WICOR, INC: On April 26, 2000, Wisconsin Energy acquired all of the outstanding common shares of WICOR, Inc. for approximately $1.2 billion in cash plus related fees and expenses. Approximately $267 million of WICOR debt remained outstanding following the acquisition. The business combination, which was funded through the issuance of commercial paper, was accounted for as a purchase, and the excess of the purchase price over the fair value of net assets and liabilities assumed was recorded as approximately $818 million of goodwill. WICOR was a diversified utility holding company with consolidated total assets of approximately $1.1 billion at December 31, 1999 in utility and non-utility energy subsidiaries as well as in pump manufacturing subsidiaries. Following the merger, WICOR and its subsidiaries, including Wisconsin Gas Company, the largest natural gas distribution public utility in Wisconsin, became subsidiaries of Wisconsin Energy. The Company intends to continue the primary business operations of WICOR. The Company has integrated the gas operations of Wisconsin Electric and Wisconsin Gas as well as many corporate support areas and expects to integrate customer billing systems in the third quarter of 2001. On November 1, 2000, Wisconsin Electric and Wisconsin Gas filed an application with the PSCW for authority to transfer Wisconsin Electric's gas utility assets, together with certain associated liabilities, to Wisconsin Gas. The matter is pending. Assuming timely realization of estimated synergies from the merger, Wisconsin Energy expects the merger to begin contributing approximately $35 million to annual pre-tax earnings during 2001. Synergies are expected from lower expenses for the cost of gas, materials and services through enhanced purchasing power, through elimination of duplication through attrition, and through sharing of resources. Additional synergies are anticipated from the logical consolidation of common functions over time as well as from such areas as insurance and regulatory costs and legal, audit and consulting fees. The PSCW approved the WICOR merger in March 2000. As described in further detail below in "Rates and Regulatory Matters," the PSCW's order provided for a qualified five-year rate freeze for Wisconsin Electric's and Wisconsin Gas' natural gas, electric and steam utility services beginning January 1, 2001. In its order, the commission found that it was reasonable to allow the utilities to retain synergy savings associated with the merger during the 5-year rate restriction period. AMERICAN TRANSMISSION COMPANY LLC: During 2000, Wisconsin Electric and Edison Sault agreed to join the American Transmission Company LLC by transferring all of their electric utility transmission assets in exchange for equity interests in the new company. Transfer of these electric transmission assets, with a net book value of approximately $252 million, became effective on January 1, 2001. During the first half of 2001, the American Transmission Company is expected to issue debt and to distribute cash to Wisconsin Electric and Edison Sault in an amount equal to approximately 50% of the net book value of the assets originally transferred. Joining the American Transmission Company is consistent with the Federal Energy Regulatory Commission's Order No. 2000, designed to foster competition, efficiency and reliability in the electric industry. Wisconsin Electric and Edison Sault expect to receive earnings contributions from the American Transmission Company in proportion to their ownership share. The Company anticipates that transfer of its electric transmission assets to the American Transmission Company will be earnings neutral subject to future rate recovery of any related deferred charges. RATES AND REGULATORY MATTERS The Public Service Commission of Wisconsin regulates retail electric, natural gas, steam and water rates in the state of Wisconsin, while the Federal Energy Regulatory Commission regulates wholesale power, electric transmission and interstate gas transportation service rates. The Michigan Public Service Commission regulates retail electric rates in the state of Michigan. Wisconsin Jurisdiction WICOR MERGER ORDER: As a condition of its March 2000 approval of the WICOR acquisition, the PSCW ordered a qualified five-year freezing of rates for Wisconsin Electric's electric, natural gas and steam utility services and for natural gas rates at Wisconsin Gas that were in effect on January 1, 2001. The Company may seek biennial rate reviews during the five-year rate restriction period limited to changes in revenue requirements as a result of: * Governmental mandates; * Abnormal levels of capital additions required to maintain or improve reliable electric service; or * Major gas lateral projects associated with approved natural gas pipeline construction projects. To the extent that natural gas rates and rules need to be modified during the integration of the gas operations of Wisconsin Electric and Wisconsin Gas, the Company's total gas revenue requirements are to remain revenue neutral under the merger order. In its order, the PSCW found that electric fuel cost adjustment procedures as well as gas cost recovery mechanisms would not be subject to the five-year rate restriction period and that it was reasonable to allow the Company to retain synergy savings associated with the merger. A full rate review will be required by the PSCW at the end of the five-year rate restriction period. WISCONSIN ELECTRIC POWER COMPANY: The table below summarizes the anticipated annualized revenue impact of recent rate changes, primarily in the Wisconsin jurisdiction, authorized by regulatory commissions for Wisconsin Electric's electric, natural gas and steam utilities.
Annualized Authorized Revenue Percent Return on Increase Change Common Effective Service - Wisconsin Electric (Decrease) in Rates Equity Date - ---------------------------- ---------- -------- ---------- --------- (Millions) (%) (%) Fuel electric, WI (a) $37.8 2.5% - 2/09/01 Fuel electric, MI 1.0 2.4% - 1/01/01 Retail electric, WI 27.5 1.8% 12.2% 1/01/01 Retail electric, WI (b) 36.5 2.5% 12.2% 8/30/00 Retail gas (b) 8.0 2.1% 12.2% 8/30/00 Retail electric, WI (b) 25.2 1.7% 12.2% 4/11/00 Retail gas (b) 11.6 3.3% 12.2% 4/11/00 Fuel electric, WI (7.8) (0.5%) - 5/01/99 Retail electric, MI 2.1 6.0% 11.0% 4/13/99 Retail electric, WI (c) 160.2 12.7% 12.2% 5/01/98 Retail gas (c) 18.5 5.4% 12.2% 5/01/98 Steam heating (c) 1.2 9.3% 12.2% 5/01/98 Retail electric, WI (c) 134.9 10.7% 12.2% 1/01/98 Retail gas (c) 18.5 5.5% 12.2% 1/01/98 Steam heating (c) 0.8 6.3% 12.2% 1/01/98 Fuel electric, WI (d) 11.9 1.0% - 1/01/98 (a) The February 9, 2001 order is an interim order subject to refund pending the outcome of a full review of fuel costs by the PSCW. A final order is expected in May 2001. (b) The April 11, 2000 order was an interim order that was effective until the August 30, 2000 final order was received from the PSCW. The final August 30, 2000 order superseded the April 11, 2000 interim order. (c) The January 1, 1998 order was an interim order that was effective until the May 1, 1998 final order was received from the PSCW. The final May 1, 1998 order superseded the January 1, 1998 interim order. (d) A final order from the PSCW, dated December 23, 1997, authorized a total increase in fuel revenue of $27.2 million less $15.3 million previously collected through an interim order during 1997.
On March 23, 2000, the PSCW approved Wisconsin Electric's request for interim price increases related to the 2000/2001 biennial period, authorizing a $25.2 million (1.7%) increase for electric operations and an $11.6 million (3.3%) increase for gas operations. The interim increase, which was subject to potential refund, became effective April 11, 2000. Rates in the interim order were based upon a 12.2% return on common equity. On August 30, 2000, the PSCW issued its final order in the 2000/2001 pricing proposal. The final order authorized a $36.5 million (2.5%) increase for electric operations (or $11.3 million higher than authorized in the interim order) as well as an $8 million (2.1%) increase for gas operations (or $3.6 million lower than authorized in the interim order). Wisconsin Electric has refunded to gas customers revenues that resulted from the difference in gas rates between the interim and final orders. In its August 30, 2000 final order, the PSCW authorized a second $27.5 million (1.8%) increase for electric operations effective January 1, 2001. Rates in the final order were based upon a 12.2% return on common equity. Wisconsin Electric filed a petition for a rehearing of the final order with the PSCW to reconsider the revenue increase for gas operations. On November 9, 2000, the PSCW denied Wisconsin Electric's petition. On November 14, 2000, Wisconsin Electric filed a petition for judicial review with the Milwaukee County Circuit Court seeking its review of the PSCW's decision. The court has set a briefing schedule with final briefs due on May 5, 2001. In its final order related to the 2000/2001 biennial period, the PSCW authorized recovery of revenue requirements for, among other things, electric reliability and safety construction expenditures as well as for nitrogen oxide ("NOx") remediation expenditures. Revenue requirements for electric reliability and safety construction expenditures are subject to refund at the end of 2001 to the extent that actual expenditures are less than forecasted expenditures included in the final order. In March 2000, the PSCW had previously authorized all Wisconsin utilities to depreciate NOx emission reduction costs over an accelerated 10-year recovery period. Due to the uncertainty regarding the level and timing of these expenditures, the PSCW, in its final order, required Wisconsin Electric to establish escrow accounting for revenue requirement components associated with NOx expenditures. Depending upon Wisconsin Electric's actual NOx remediation expenditures during the 2000/2001 biennial period, any over or under-spent balances at the end of 2001 in the NOx escrow account will need to be addressed in future rate making activities. WISCONSIN GAS COMPANY: Wisconsin Gas Company rates are set within the framework of the Productivity-based Alternative Ratemaking Mechanism, which was established in 1994 and has been extended through October 31, 2001. Under this mechanism, Wisconsin Gas has the ability to raise or lower margin rates within a specified range on a quarterly basis. Currently, Wisconsin Gas's rates recover $1.5 million per year less than the maximum amount allowed by the PSCW's rate order. The Productivity-based Alternative Ratemaking Mechanism has certain criteria that allow it to be reopened at any time for significant deterioration in safety, failures to meet conservation goals, significant changes in interest rates and "extraordinary items." To date, none of the criteria has been triggered. In its approval of the WICOR acquisition, the PSCW ordered that Wisconsin Gas Company's natural gas rates remain under the Productivity-based Alternative Ratemaking Mechanism for the program's duration and remain revenue neutral during the remainder of the five-year rate restriction period noted above. FUEL COST ADJUSTMENT PROCEDURE: As noted above, Wisconsin Electric operates under a fuel cost adjustment clause for its fuel and purchased power costs associated with the generation and delivery of electricity. On December 8, 2000, Wisconsin Electric submitted an application with the PSCW seeking a $51.4 million increase in rates in it's Wisconsin jurisdiction to recover increased cost of fuel and purchased power in 2001 on an expedited basis to be effective February 1, 2001. Wisconsin Electric revised it's projected fuel cost shortfall on January 10, 2001 to reflect updated natural gas cost projections for 2001. This update resulted in a request for an additional $11.1 million in 2001, bringing the total requested increase to $62.5 million. Hearings on this matter were held on January 17, 2001. On February 9, 2001, the PSCW issued an interim order authorizing a $37.8 million increase in rates for 2001 fuel costs subject to refund pending the outcome of a full review of fuel costs. Hearings on the final phase of the case have been scheduled for March 23 and April 2, 2001. A final order in this case is expected in early spring 2001. GAS COST RECOVERY MECHANISM: As a result of the acquisition of WICOR by Wisconsin Energy, the PSCW required similar gas cost recovery mechanisms ("GCRM") for the gas operations of Wisconsin Electric and for Wisconsin Gas. In recent years, Wisconsin Electric has operated under a modified dollar for dollar GCRM, which includes after the fact prudence reviews by the PSCW, while the Wisconsin Gas GCRM includes an incentive mechanism that provides an opportunity for Wisconsin Gas to increase or decrease earnings within certain limited ranges as a result of gas acquisition activities and transportation costs. For both companies, the majority of gas costs are passed through to customers under their existing gas cost recovery mechanisms. In February 2001, the PSCW issued separate orders to Wisconsin Electric and to Wisconsin Gas authorizing a similar GCRM for each company. These new GCRMs, which are effective April 1, 2001, are similar to the existing GCRM at Wisconsin Gas. Under the new GCRMs, gas costs will be passed directly to customers through a purchased gas adjustment clause. However, both companies will have the opportunity to increase or decrease earnings by up to approximately 2.5% of their total annual gas costs based upon how closely actual gas commodity and capacity costs compare to benchmarks established by the PSCW. Michigan Jurisdiction WISCONSIN ELECTRIC POWER COMPANY: In mid-November 2000, Wisconsin Electric submitted an application with the Michigan Public Service Commission requesting an electric retail rate increase of $3.7 million (9.4%) on an annualized basis. Hearings on this rate relief request are scheduled for April of 2001 with a final order anticipated to be issued in August of 2001. EDISON SAULT ELECTRIC COMPANY: In September 1995, the Michigan Public Service Commission approved Edison Sault's application to implement price cap regulation for its electric customers in the state of Michigan, capping base rates at existing levels, rolling its existing fuel cost adjustment procedure or Power Supply Cost Recovery ("PSCR") factor into base rates and suspending its existing PSCR clause. Edison Sault is required to give thirty days notice for rate decreases. The order authorizing Edison Sault's price cap represents a temporary experimental regulatory mechanism and allows Edison Sault to file an application seeking an increase in rates under extraordinary circumstances. On October 2, 2000, Edison Sault filed a report with the Michigan Public Service Commission addressing its experience under the price-cap mechanism. On January 2, 2001, Edison Sault submitted a compliance filing to the Michigan Public Service Commission which recommended that no changes be made to its price-cap mechanism. The matter is pending. FUEL COST ADJUSTMENT PROCEDURE: In September 2000, Wisconsin Electric submitted applications with the Michigan Public Service Commission requesting reinstatement on January 1, 2001 of its PSCR mechanism. On January 1, 2001, Wisconsin Electric self- implemented a PSCR factor of 1.41 mills per kilowatt-hour and expects to collect approximately $1 million of PSCR revenue during 2001. Hearings on Wisconsin Electric's application are anticipated in the second quarter of 2001. PSCR revenues collected during 2001 are subject to a true-up hearing procedure in 2002. INDUSTRY RESTRUCTURING AND COMPETITION Electric Utility Industry Driven by a combination of market forces, regulatory and legislative initiatives and technological changes, the nation's electric industry continues a trend towards restructuring and increased competition. In the region, the state of Illinois has passed legislation that introduced retail electric choice for large customers in 1999 and introduces choice for all retail customers by May 2002. As described in further detail below, full retail electric choice is scheduled to be introduced in the state of Michigan in January 2002. Congress continues to evaluate restructuring proposals at the federal level. However, recent severe electric supply constraints and a resulting rise in the cost of electricity in California has revitalized public debate in Wisconsin concerning deregulation. Given the current status of restructuring initiatives in regulatory jurisdictions where the Company primarily does business, Wisconsin Energy cannot predict the ultimate timing or impact of a restructured electric industry on its financial position or results of operations. RESTRUCTURING IN WISCONSIN: Due to many factors, including relatively competitive electric rates charged by the state's electric utilities, Wisconsin is proceeding with restructuring of the electric utility industry at a much slower pace than many other states in the United States. Instead, the PSCW has been focussed in recent years on electric reliability infrastructure issues for the state of Wisconsin such as: * Improvements to existing and addition of new electric transmission lines in the state; * Addition of new generating capacity in the state; * Modifications to the regulatory process to facilitate development of merchant generating plants; * Development of a regional independent electric transmission system operator; and * The previously described formation of a statewide transmission company, the American Transmission Company LLC, which became operational January 1, 2001. The PSCW continues to maintain the position that the question of whether to implement electric retail competition in Wisconsin should ultimately be decided by the Wisconsin legislature. No such legislation has been introduced in Wisconsin to date. RESTRUCTURING IN MICHIGAN: In June 2000, the Governor of the state of Michigan signed the "Customer Choice and Electric Reliability Act" into law empowering the Michigan Public Service Commission to enforce implementation of prior electric retail access plans. In effect, the new law provides that all Michigan retail customers of investor-owned utilities will have the ability to choose their electric power producer as of January 1, 2002. As directed by the Michigan Public Service Commission, Wisconsin Electric and Edison Sault jointly submitted a customer choice implementation plan in October 2000 and an updated filing in February 2001. Such plan envisions certain additional filings in June 2001 including proposed unbundled rates. During 2000, revenues in the state of Michigan from Wisconsin Energy's electric retail customers were approximately $151 million, representing 5.9% of total utility operating revenues and 8.4% of total electric utility operating revenues. The Empire and Tilden iron ore mines, Wisconsin Electric's two largest retail customers, are located in the Upper Peninsula of Michigan. These mines, from which Wisconsin Electric received approximately $74 million of electric utility operating revenues during 2000, will not be subject to Michigan's customer choice plan until special negotiated power sales contracts between Wisconsin Electric and the mines expire in 2007. Wisconsin Electric and Edison Sault believe that their power supply costs are and will be competitive when the customer choice program commences in January of 2002. In addition, alternative electric suppliers will use the companies' electric distribution systems under unbundled effective rates. Natural Gas Utility Industry RESTRUCTURING IN WISCONSIN: The PSCW has instituted generic proceedings to consider how its regulation of gas distribution utilities should change to reflect the changing competitive environment in the natural gas industry. To date, the commission has made a policy decision to deregulate the sale of natural gas in customer segments with workably competitive market choices and has adopted standards for transactions between a utility and its gas marketing affiliates. However, work on deregulation of the gas distribution industry by the PSCW is presently on hold. Currently, Wisconsin Electric and Wisconsin Gas are unable to predict the impact of potential future deregulation on the Company's results of operations or financial position. ELECTRIC SYSTEM RELIABILITY Wisconsin Electric had adequate capacity to meet all of its firm electric load obligations during 2000. Public appeals for conservation were not required, nor was there the need to interrupt or curtail service to non-firm customers who participate in load management programs in exchange for discounted rates. All of Wisconsin Electric's generating plants performed well during the hottest periods of the summer and all power purchase commitments under firm contract were received. Wisconsin Electric expects to have adequate capacity to meet all of its firm load obligations during 2001. However, the Company anticipates that the regional electric energy supply will remain tight into the foreseeable future. As a result of this, or of extremely hot weather along with unexpected equipment unavailability, Wisconsin Electric could be required to call upon load management procedures during 2001 as it has in past years. Wisconsin Electric is proceeding with several long-term measures to enhance the reliability of its own system, including the "Power the Future" strategy discussed above. NUCLEAR OPERATIONS POINT BEACH NUCLEAR PLANT: Wisconsin Electric owns two 510- megawatt electric generating units at Point Beach Nuclear Plant in Two Rivers, Wisconsin. During 2000, 1999, and 1998, Point Beach provided 23%, 22% and 18% of Wisconsin Electric's net electric energy supply, respectively. The United States Nuclear Regulatory Commission operating licenses for Point Beach expire in October 2010 for Unit 1 and in March 2013 for Unit 2. As a result of various performance improvement initiatives, Wisconsin Electric's total nuclear operation and maintenance expenses, excluding fuel and benefit overheads, decreased from $156 million during 1998 to $128 million during 1999 and $119 million during 2000. Unplanned shutdowns or power reductions of Point Beach Units 1 or 2 may occur from time to time as Wisconsin Electric continues to perform reviews of facility design and to implement further improvement initiatives. In July 2000, Wisconsin Electric's senior management authorized the commencement of initial design work for the power uprate of both units at Point Beach. Subject to approval by the PSCW, the project is scheduled to be completed by May 2004 and is expected to add approximately 76 megawatts of electrical output to Point Beach. Wisconsin Electric has formed an operating license renewal team which is expected to complete a technical and economic evaluation of license renewal by mid-2002. Based upon the results of this evaluation and subject to approval by executive management and by the boards of directors of Wisconsin Electric and Wisconsin Energy in the second half of 2002, Wisconsin Electric will determine whether to seek appropriate regulatory approvals, including submittal of an application to the Nuclear Regulatory Commission, in late 2002 for an extension of the operating licenses for Point Beach Nuclear Plant for a period of up to 20 years. NUCLEAR MANAGEMENT COMPANY: During 1999, WEC Nuclear Corporation, a subsidiary of Wisconsin Energy, Northern States Power Company (now Xcel Energy), WPS Nuclear Corporation (a subsidiary of WPS Resources Corporation) and an affiliate of Alliant Energy Resources announced the formation of the Nuclear Management Company, LLC ("NMC"). In November 2000, Consumers Energy signed an agreement to become a full partner in the NMC. Assuming that Consumers Energy receives requisite regulatory approvals to transfer its operating licenses to the NMC during 2001, the NMC will operate a total of eight nuclear generating units at six sites in the states of Wisconsin, Minnesota, Michigan and Iowa with a total combined generating capacity of about 4,500 megawatts. During 2000, the four original participants in the NMC received all necessary regulatory approvals, and the NMC assumed operating responsibility in August 2000 for Point Beach Nuclear Plant with the transfer of operating authority under its operating licenses. Each NMC participant continues to own its respective nuclear generating units and retains exclusive rights to the energy generated as well as financial responsibility for the safe operation, maintenance and decommissioning of its respective plants. On September 7, 2000, the NMC announced the combination of the operations of Point Beach with Kewaunee Nuclear Power Plant into a "virtual 3-unit site." Kewaunee Nuclear Power Plant, owned by two other participants in the NMC, is located about five miles from Point Beach. Support functions including training, engineering, assessment, business and site services have been combined under this new management structure. USED NUCLEAR FUEL STORAGE AND DISPOSAL: During 1995, Wisconsin Electric completed construction of a facility at Point Beach for the temporary dry storage of up to 48 canisters containing used nuclear fuel. During 2000, Wisconsin Electric finished loading the last of twelve canisters originally authorized by the PSCW. On March 13, 2001, the PSCW approved a May 2000 application for authority to load additional temporary used fuel dry storage containers beyond the twelve that were originally authorized. The application requested authorization for sufficient additional containers, at a cost of up to approximately $46 million, to operate Point Beach Units 1 and 2 to the end of their current operating licenses, but not to exceed the original 48-canister capacity of the facility. The PSCW's decision is expected to be finalized in an order to be issued in the second quarter of 2001. Temporary storage alternatives at Point Beach are necessary until the United States Department of Energy takes ownership of and permanently removes the used fuel as mandated by the Nuclear Waste Policy Act of 1982, as amended in 1987 (the "Waste Act"). Effective January 31, 1998, the Department of Energy failed to meet its contractual obligation to begin removing used fuel from Point Beach, a responsibility for which Wisconsin Electric has paid a total of $170.8 million as of December 31, 2000. The Department of Energy has indicated that it does not expect a permanent used fuel repository to be available any earlier than 2010. It is not possible, at this time, to predict with certainty when the Department of Energy will actually begin accepting used nuclear fuel. On August 13, 2000, the United States Court of Appeals for the Federal Circuit ruled in a lawsuit brought by Maine Yankee and Northern States Power Company that the Department of Energy's failure to begin performance by January 31, 1998 constituted a breach in the Standard Contract, providing clear grounds for filing complaints in the Court of Federal Claims. Consequently, Wisconsin Electric filed a complaint on November 16, 2000 against the Department of Energy in the Court of Federal Claims. The matter is pending. As of August 2000, Wisconsin Electric has incurred damages in excess of $35 million, which it seeks to recover from the Department of Energy. Damages will continue to accrue, and, accordingly, Wisconsin Electric expects to seek to recover all of its damages in this lawsuit. During 2000, President Clinton vetoed legislation that would have required the Department of Energy to establish a temporary used fuel repository in the state of Nevada until a permanent repository is available and to begin taking ownership from utilities and removing used fuel as required by the Waste Act. The Senate and the House failed to override the President's veto. Wisconsin Electric is unable to predict whether similar legislation might be reintroduced and passed during 2001 or whether the new administration might support and sign such legislation. LEGAL MATTERS GIDDINGS & LEWIS INC./CITY OF WEST ALLIS LAWSUIT: In July 1999, a jury issued a verdict against Wisconsin Electric awarding the plaintiffs $4.5 million in compensatory damages and $100 million in punitive damages in an action alleging that Wisconsin Electric had deposited contaminated wastes at two sites in West Allis, Wisconsin owned by the plaintiffs. Internal investigations lead Wisconsin Electric to believe that it was not the source of this waste. In December 1999, in order to stop the post-judgment accrual of interest at 12% during the pendency of an appeal, Wisconsin Electric tendered a contested liability payment of $110 million, which is part of Deferred Charges and Other Assets - - Other on the Consolidated Balance Sheet, to the Milwaukee County Clerk of Circuit Court representing the amount of the verdict and accrued interest. In further post-trial proceedings, the Circuit Court Judge issued a ruling during 2000 related to representations made by Wisconsin Electric during trial, imposing sanctions against Wisconsin Electric. Wisconsin Electric is appealing the judgment entered on the jury's verdict as well as the Judge's ruling on the sanctions matter. As further developments, two shareholders filed separate shareholder derivative proceedings in Milwaukee County Circuit Court during 2000 for alleged injuries to shareholders resulting from this litigation. The two lawsuits have been consolidated for pre-trial purposes. The matter is pending. In the opinion of management, based in part on the advice of legal counsel, the jury verdict was not supported by the evidence or the law and the unprecedented award of punitive damages of this magnitude was unwarranted and should therefore be reversed or substantially reduced on appeal. Management also believes that the sanctions imposed by the Judge were not supported by the evidence or the law. As such, Wisconsin Electric has not established a reserve for potential damages from this suit. For further information, see "Note N - Commitments and Contingencies" in the Notes to Financial Statements. WISCONSIN INTERNATIONAL ELECTRIC POWER LITIGATION: During 1999, Wisconsin Electric and Wisconsin International Electric Power, Ltd. reached settlement of litigation brought by Wisconsin International Electric Power against Wisconsin Electric claiming that Wisconsin Electric had breached contractual duties allegedly owed to the plaintiff relating to development of an electric generating plant at Subic Bay in the Philippines. While Wisconsin Electric does not believe that it breached any contractual duties allegedly owed to the plaintiff, Wisconsin Electric paid Wisconsin International Electric Power, Ltd. $18.0 million ($10.8 million, or $0.09 per share for Wisconsin Energy, after tax) in November 1999 to settle the case, and the plaintiff's claims were dismissed with prejudice. ENVIRONMENTAL MATTERS Consistent with other companies in the energy industry, Wisconsin Energy faces potentially significant ongoing environmental compliance and remediation challenges related to current and past operations. Specific environmental issues affecting the Company's utility and non-utility energy segments include but are not limited to (1) air emissions such as carbon dioxide ("CO2"), sulfur dioxide ("SO2"), nitrogen oxide ("NOx"), small particulates and mercury, (2) disposal of combustion by-products such as fly ash, (3) remediation of former manufactured gas plant sites, (4) disposal of used nuclear fuel, and (5) the eventual decommissioning of nuclear power plants. Wisconsin Energy is currently pursuing a proactive strategy to manage its environmental issues including (1) substitution of new and cleaner generating facilities for older facilities as part of the "Power the Future" strategy, (2) development of additional sources of renewable electric energy supply, (3) participation in regional initiatives to reduce the emissions of NOx from the Company's fossil fuel-fired generating facilities, (4) participation in voluntary programs with the Wisconsin Department of Natural Resources and the United States Environmental Protection Agency to reduce overall emissions, including mercury, from Wisconsin Electric's coal-fired power plants, (5) recycling of ash from coal-fired generating units and (6) the voluntary clean-up of former manufactured gas plant sites. For further information concerning disposal of used nuclear fuel and nuclear power plant decommissioning, see "Nuclear Operations" above and "Note F - Nuclear Operations" in the Notes to Financial Statements, respectively. NATIONAL AMBIENT AIR QUALITY STANDARDS: In July 1997, the United States Environmental Protection Agency revised the National Ambient Air Quality Standards for ozone and particulate matter. Although specific emission control requirements are not yet defined and despite legal challenges to these standards that will impact compliance requirements and timing, Wisconsin Electric believes that the revised standards will likely require significant reductions in SO2 and NOx emissions from coal-fired generating facilities. If these new standards withstand ongoing legal challenges, Wisconsin Electric expects that reductions needed to achieve compliance with the ozone attainment standards will be implemented in stages from 2004 through 2012, beginning with the ozone transport reductions described below. Reductions associated with the new particulate matter standards will likely be implemented in stages after the year 2010 and extending to the year 2017. Beyond the cost estimates identified below, Wisconsin Electric is currently unable to estimate the impact of the revised air quality standards on its future liquidity, financial condition or results of operation. OZONE NON-ATTAINMENT RULEMAKING: In October 1998, the Environmental Protection Agency promulgated ozone transport rules to address transport of NOx and ozone into ozone non-attainment areas in the eastern half of the United States. The rules would have required electric utilities in 22 eastern states and the District of Columbia, including the state of Wisconsin, to significantly reduce NOx emissions by May 1, 2003. A court decision on these challenges was issued in March 2000 excluding the state of Wisconsin but continuing to include southern Michigan as one of 19 states in a region east of the Mississippi River that would remain subject to the October 1998 rules. Further appeals are ongoing. Independent of any court decisions, Wisconsin and some other states in the Lake Michigan region have concluded rulemakings that require utilities, including Wisconsin Electric, to reduce NOx emissions as part of separate, existing 1-hour ozone attainment demonstration rules required by the Environmental Protection Agency for the Lake Michigan region's severe non- attainment areas. Wisconsin Electric is working with a variety of stakeholders to provide input to the plan under development by the state of Michigan. Wisconsin's rule is already in effect. Wisconsin Electric is evaluating various NOx control techniques under various regulatory scenarios to develop a least cost compliance plan and currently expects to incur total capital costs of $150 million to $200 million and annual operation and maintenance costs of $2 million to $4 million during the period 2001 through 2004 to comply with such a plan. Wisconsin Electric believes that compliance with the NOx emission reductions required by Wisconsin's non-attainment rules will substantially mitigate costs to comply with the Environmental Protection Agency's July 1997 revisions to the ozone National Ambient Air Quality Standards discussed above. In January 2000, the PSCW approved Wisconsin Electric's comprehensive plan to meet the Environmental Protection Agency regulations, permitting recovery in rates of NOx emission reduction costs over an accelerated 10-year recovery period and requiring that these costs be separately itemized on customer bills. MANUFACTURED GAS PLANT SITES: Wisconsin Electric and Wisconsin Gas are voluntarily reviewing and addressing environmental conditions at a number of former manufactured gas plant sites. For further information, see "Note N - Commitments and Contingencies" in the Notes to Financial Statements. ASH LANDFILL SITES: Wisconsin Electric aggressively seeks environmentally acceptable, beneficial uses for its combustion byproducts. However, combustion byproducts have been, and to some degree continue to be, disposed in company-owned, licensed landfills. Some early designed and constructed landfills may allow the release of low levels of constituents resulting in the need for various levels of remediation. Where Wisconsin Electric has become aware of these conditions, efforts have been expended to define the nature and extent of any release, and work has been performed to address these conditions. The costs of these efforts are included in the environmental operating and maintenance costs of Wisconsin Electric. MANUFACTURING SEGMENT: WICOR Industries, Inc. has provided reserves sufficient to cover its estimated costs related to known contamination associated with its manufacturing facilities. MARKET RISKS The Company is potentially exposed to market risk due to changes in interest rates, the return on marketable securities, foreign currency exchange rates and the market price of electricity as well as to changes in fuel costs incurred to generate electricity and in the cost of gas for its gas operations. Exposure to interest rate changes relates to the Company's short and long- term debt as well as its preferred equity obligations, while exposure to fluctuations in the return on marketable securities relates to debt and equity security investments held in various trust funds. Purchases or sales of products by the Company's manufacturing segment exposes the Company to foreign currency risk. Exposure to electricity market price risk relates to forward activities taken to manage the supply of and demand for electric energy. Exposure to fuel and gas cost variations relates to the supply of and demand for coal, uranium, natural gas and fuel oil. For additional information concerning risk factors, including market risks, see "Cautionary Factors" below. INTEREST RATE RISK: The Company, including its affiliates, have various short-term borrowing arrangements to provide working capital and general corporate funds. The level of borrowings under such arrangements vary from period to period, depending upon, among other factors, capital investments. Future short- term interest expense and payments will reflect both future short- term interest rates and borrowing levels. As of December 31, 2000, the Company had approximately $1,386.1 million of short-term debt outstanding with a weighted average interest rate of 6.67%, representing approximately $92.5 million of annual pre-tax interest expense. A 1/8 percent change in effective interest rates would increase or decrease annual interest expense by approximately $1.7 million. The table below provides information about the long-term financial instruments that were held by the Company at December 31, 2000 and that are sensitive to changes in interest rates. For long-term debt, the table presents anticipated principal cash flows by maturity date and the related annualized average interest rate of the maturing long-term debt. The annualized average interest rate on the variable rate long-term debt was estimated based upon a weighted average interest rate at December 31, 2000. As part of the financing package used to acquire two fossil- fueled power plants in the state of Connecticut in April 1999, Wisvest-Connecticut, LLC entered into an interest rate swap agreement to exchange fixed rate payment obligations for variable rate receipt rights without exchanging the underlying notional amounts. For the interest rate swap, the table presents notional amounts and weighted average interest rates by expected (contractual) maturity dates. Notional amounts are used to calculate the contractual payments to be exchanged under contract. Weighted average variable rates are based upon implied forward rates in the yield curve at the reporting date. The fair value of the interest rate swap is the amount that Wisvest- Connecticut, LLC would receive if the outstanding contract were terminated on December 31, 2000.
Expected Maturity Date Fair Value ---------------------------------------------- as of Wisconsin Energy Corporation 2001 2002 2003 2004 2005 Thereafter Total 12/31/00 - ---------------------------- ---- ---- ---- ---- ---- ---------- ----- ---------- (Millions of Dollars) Fixed Rate Long-Term Debt $20.4 $165.2 $14.1 $143.2 $79.4 $1,271.6 $1,693.9 $1,639.7 Average Interest Rate 6.64% 6.61% 6.76% 7.25% 6.49% 7.08% 7.01% Variable Rate Commercial Paper Classified as Long-Term Debt - $60.0 $449.7 - - - $509.7 $509.7 Average Interest Rate 6.98% 6.59% 6.64% Other Variable Rate Long-Term Debt $8.7 $30.5 $14.2 $10.8 $172.3 $167.3 $403.8 $403.8 Average Interest Rate 7.96% 8.17% 8.05% 7.99% 7.99% 4.82% 6.69% Interest Rate Swaps - Fixed to Variable (b) $3.2 $3.5 $3.7 $4.0 $58.7 - $73.1 ($0.4) Average Pay Rate 5.99% 5.99% 5.99% 5.99% 5.99% - 5.99% Average Receive Rate 5.87% 5.56% 5.82% 5.96% 5.98% - 5.85% Trust Preferred Securities - - - - - $200.0 $200.0 $185.5 Average Dividend Rate - - - - - 6.85% 6.85% Preferred Stock Not Subject to Mandatory Redemption - - - - - - $30.4 $15.4 Average Dividend Rate - - - - - - 4.0%
On March 8, 2001 and March 14, 2001, Wisconsin Energy entered into several treasury lock agreements in order to mitigate Wisconsin Energy's interest rate risk associated with the anticipated issuance of fixed-rate debt. These treasury lock agreements locked in the underlying Treasury yield for $800 million of an anticipated $1 billion debt issuance expected by the end of March 2001. Under a treasury lock agreement, Wisconsin Energy agrees to pay or receive an amount equal to the difference between the net present value of the cash flows for the notional amount of the instrument based on the yield of a U.S. treasury bond at the date when the agreement is established and at the yield of a U.S. treasury bond at the date when the agreement is settled, which typically coincides with the debt issuance. The treasury rate lock agreements were entered into with a major financial institution in order to minimize counterparty credit risk. At the end of the first quarter of 2001, the treasury rate lock agreements will be reflected at fair value in Wisconsin Energy's consolidated balance sheet and the related gain or loss on these agreements will be deferred in shareholders' equity (as a component of comprehensive income) as the instruments have been designated, and qualify for, cash flow hedge accounting treatment. The deferred gain or loss will then be amortized as an adjustment to interest expense over the same period in which the related interest cost on the new debt issuances is recognized in income. MARKETABLE SECURITIES RETURN RISK: The Company funds its pension, other postretirement benefit and nuclear decommissioning obligations through various trust funds, which in turn invest in debt and equity securities. Changes in the market price of the assets in these trust funds can affect pension, other postretirement benefit and nuclear decommissioning expenses in future periods. Future annuity payments to these trust funds can be affected by changes in the market price of the trust fund assets. Wisconsin Energy expects that the risk of expense and annuity payment variations as a result of changes in the market price of trust fund assets would be mitigated in part through future rate actions by the Company's various utility regulators. At December 31, 2000, the Company had the following total trust fund assets at fair value, primarily consisting of publicly traded debt and equity security investments.
Wisconsin Energy Corporation Millions of Dollars - ---------------------------- ------------------- Pension trust funds $1,224.8 Nuclear decommissioning trust fund 613.3 Other postretirement benefits trust funds 149.8
FOREIGN CURRENCY EXCHANGE RATE RISK: The Company manages foreign currency market risks through the use of a variety of financial and derivative instruments. The Company uses forward exchange contracts and other activities to hedge the U.S. dollar value resulting from anticipated foreign currency transactions. The notional amount of these contracts is not significant to the Company. COMMODITY PRICE RISK: In the normal course of business, the Company's utility and non-utility power generation subsidiaries utilize contracts of various duration for the forward sale and purchase of electricity. This is done to effectively manage utilization of their available generating capacity and energy during periods when available power resources are expected to exceed the requirements of their obligations. This practice may also include forward contracts for the purchase of power during periods when the anticipated market price of electric energy is below expected incremental power production costs. The Company manages its fuel and gas supply costs through a portfolio of short and long-term procurement contracts with various suppliers. Wisconsin Electric's retail fuel cost adjustment procedure in Wisconsin mitigates some of the risk of fuel cost price fluctuation. On a prospective basis, if cumulative fuel and purchased power costs for electric utility operations deviate from a prescribed range when compared to the costs projected in the most recent retail rate proceeding, retail electric rates may be adjusted. For its gas utility operations, the gas cost recovery mechanism in Wisconsin currently mitigates most of Wisconsin Electric's risk of gas cost variations. Wisconsin Gas has a commodity risk management program that has been approved by the PSCW. This program allows Wisconsin Gas to utilize call and put option contracts to reduce market risk associated with fluctuations in the price of natural gas purchases and gas in storage. Under this program, Wisconsin Gas has the ability to hedge up to 50% of its planned gas deliveries for the heating season. The PSCW has also allowed Wisconsin Gas to hedge gas purchased for storage during non-heating months. The cost of the call and put option contracts, as well as gains or losses realized under the contracts, do not affect net income as they are fully recovered under the purchase gas adjustment clause of Wisconsin Gas's gas cost recovery mechanism. In addition, under its Gas Cost Incentive Mechanism, Wisconsin Gas uses derivative financial instruments to reduce the cost of gas. The cost of these financial instruments, as well as any gains or losses on the contracts, are subject to sharing under the incentive mechanism. For additional information concerning the electric utility fuel cost adjustment procedure and the natural gas utilities' gas cost recovery mechanisms, see "Rates and Regulatory Matters" above. ACCOUNTING DEVELOPMENTS NEW PRONOUNCEMENTS: Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities ("FAS 133"), is effective for fiscal years beginning after June 15, 2000. The Company will adopt this statement effective January 1, 2001, which will have an insignificant impact on net income and other comprehensive income. For further information, see "Note A - Summary of Significant Accounting Policies" in the Notes to Financial Statements. REGULATORY ACCOUNTING: Wisconsin Energy's utility subsidiaries operate under rates established by state and federal regulatory commissions which are designed to recover the cost of service and provide a reasonable return to investors. Developing competitive pressures in the utility industry may result in future utility prices which are based upon factors other than the traditional original cost of investment. In such a situation, continued deferral of certain regulatory asset and liability amounts on the utilities' books, as allowed under Statement of Financial Accounting Standards No. 71, Accounting for the Effects of Certain Types of Regulation ("FAS 71"), may no longer be appropriate and the unamortized regulatory assets net of the regulatory liabilities would be recorded as an extraordinary after-tax non-cash charge to earnings. Such a charge could be material. The Company continually reviews the applicability of FAS 71 and has determined that it is currently appropriate to continue following FAS 71. At this time, the Company is unable to predict whether any adjustments to regulatory assets and liabilities will occur in the future. See "Note A - Summary of Significant Accounting Policies" in the Notes to Financial Statements for additional information. CAUTIONARY FACTORS This report and other documents or oral presentations contain or may contain forward-looking statements made by or on behalf of Wisconsin Energy. Such statements are based upon management's current expectations and are subject to risks and uncertainties that could cause Wisconsin Energy's actual results to differ materially from those contemplated in the statements. Readers are cautioned not to place undue reliance on the forward-looking statements. When used in written documents or oral presentations, the terms "anticipate," "believe," "estimate," "expect," "objective," "plan," "possible," "potential," "project" and similar expressions are intended to identify forward-looking statements. In addition to the assumptions and other factors referred to specifically in connection with such statements, factors that could cause Wisconsin Energy's actual results to differ materially from those contemplated in any forward-looking statements include, among others, the following. Operating, Financial and Industry Factors * Factors affecting utility operations such as unusual weather conditions; catastrophic weather-related damage; availability of electric generating facilities; unscheduled generation outages, or unplanned maintenance or repairs; unanticipated changes in fossil fuel, nuclear fuel, purchased power, gas supply or water supply costs or availability due to higher demand, shortages, transportation problems or other developments; nonperformance by electric energy or natural gas suppliers under existing power purchase or gas supply contracts; nuclear or environmental incidents; resolution of used nuclear fuel storage and disposal issues; electric transmission or gas pipeline system constraints; unanticipated organizational structure or key personnel changes; collective bargaining agreements with union employees or work stoppages; inflation rates; or demographic and economic factors affecting utility service territories or operating environment. * Regulatory factors such as unanticipated changes in rate- setting policies or procedures; unanticipated changes in regulatory accounting policies and practices; industry restructuring initiatives; transmission system operation and/or administration initiatives; recovery of costs of previous investments made under traditional regulation; required approvals for new construction; changes in the United States Nuclear Regulatory Commission's regulations related to Point Beach Nuclear Plant; changes in the United States Environmental Protection Agency's regulations as well as regulations from the Wisconsin or Michigan Departments of Natural Resources or the state of Connecticut related to emissions from fossil fuel power plants; or the siting approval process for new generation and transmission facilities. * The rapidly changing and increasingly competitive electric and gas utility environment as market-based forces replace strict industry regulation and other competitors enter the electric and gas markets resulting in increased wholesale and retail competition. * Consolidation of the industry as a result of the combination and acquisition of utilities in the midwest, nationally and globally. * Restrictions imposed by various financing arrangements and regulatory requirements on the ability of its subsidiaries to transfer funds to Wisconsin Energy in the form of cash dividends, loans or advances. * Changes in social attitudes regarding the utility and power industries. * Customer business conditions including demand for their products or services and supply of labor and material used in creating their products and services. * The cost and other effects of legal and administrative proceedings, settlements, investigations and claims, and changes in those matters, including the final outcome of the Giddings & Lewis, Inc./City of West Allis lawsuit against Wisconsin Electric. * Factors affecting the availability or cost of capital such as: changes in interest rates; the Company's capitalization structure; market perceptions of the utility industry, the Company or any of its subsidiaries; or security ratings. * Federal, state or local legislative factors such as changes in tax laws or rates; changes in trade, monetary and fiscal policies, laws and regulations; electric and gas industry restructuring initiatives; or changes in environmental laws and regulations. * Authoritative generally accepted accounting principle or policy changes from such standard setting bodies as the Financial Accounting Standards Board and the Securities and Exchange Commission. * Unanticipated technological developments that result in competitive disadvantages and create the potential for impairment of existing assets. * Possible risks associated with non-utility diversification, such as: general economic conditions; competition; operating risks; dependence upon certain suppliers and customers; the cyclical nature of property values that could affect real estate investments; unanticipated changes in environmental or energy regulations; timely regulatory approval without onerous conditions of potential acquisitions; risks associated with minority investments, where there is a limited ability to control the development, management or operation of the project; and the risk of higher interest costs associated with potentially reduced securities ratings by independent rating agencies as a result of these and other factors. * Legislative or regulatory restrictions or caps on non- utility acquisitions, investments or projects, including the state of Wisconsin's amended public utility holding company law. * Factors affecting foreign non-utility operations and investments, including: foreign governmental actions; foreign economic and currency risks; political instability; and unanticipated changes in foreign environmental or energy regulations. * Factors which impede execution of Wisconsin Energy's "Power the Future" strategy announced in September 2000 and revised in February 2001, including receipt of necessary state and federal regulatory approvals and amendment of applicable laws in the state of Wisconsin, and obtaining the investment capital from outside sources necessary to implement the strategy. * Other business or investment considerations that may be disclosed from time to time in Wisconsin Energy's Securities and Exchange Commission filings or in other publicly disseminated written documents. Business Combination Factors * Unanticipated costs or difficulties related to the integration of the businesses of Wisconsin Energy and WICOR. * Unanticipated financing or other consequences resulting from the additional short-term debt issued to fund the acquisition of WICOR. * Unexpected difficulties or delays in realizing anticipated net cost savings or unanticipated effects of the qualified five- year electric and gas rate freeze ordered by the PSCW as a condition of approval of the merger. Wisconsin Energy undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK See "Factors Affecting Results, Liquidity and Capital Resources - Market Risks" in Management's Discussion and Analysis of Financial Condition and Results of Operations in this report for information concerning potential market risks to which Wisconsin Energy and its subsidiaries are exposed due to changes in interest rates, the return on marketable equity securities, foreign currency exchange rates and the price of commodities.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA WISCONSIN ENERGY CORPORATION CONSOLIDATED INCOME STATEMENT Year Ended December 31 2000 1999 1998 ----------- ---------- ----------- (Millions of Dollars, Except Per Share Amounts) Operating Revenues Utility energy $2,556.7 $2,050.2 $1,980.0 Non-utility energy 372.8 193.2 34.1 Manufacturing 374.2 - - Other 51.0 29.2 25.3 -------- -------- -------- Total Operating Revenues 3,354.7 2,272.6 2,039.4 Operating Expenses Fuel and purchased power 682.1 588.1 486.2 Cost of gas sold 594.7 174.0 175.5 Cost of goods sold 271.1 - - Other operation and maintenance 945.3 708.7 691.5 Depreciation, decommissioning and amortization 336.3 250.8 232.4 Property and revenue taxes 80.3 74.9 63.1 -------- -------- -------- Total Operating Expenses 2,909.8 1,796.5 1,648.7 -------- -------- -------- Operating Income 444.9 476.1 390.7 Other Income and Deductions Interest income 20.3 22.3 14.6 Allowance for other funds used during construction 2.6 3.8 2.9 Gains on asset sales 98.7 6.1 - Other (41.6) (37.7) (6.7) -------- -------- -------- Total Other Income and Deductions 80.0 (5.5) 10.8 Financing Costs Interest expense 243.5 148.3 127.8 Allowance for borrowed funds used during construction (13.6) (9.5) (7.8) Distribution on preferred securities of subsidiary trust 13.7 10.5 - Preferred dividend requirement of subsidiary 1.2 1.2 1.2 -------- -------- -------- Total Financing Costs 244.8 150.5 121.2 -------- -------- -------- Income Before Income Taxes 280.1 320.1 280.3 Income Taxes 125.9 111.1 92.2 -------- -------- -------- Net Income $154.2 $209.0 $188.1 ======== ======== ======== Earnings Per Share of Common Stock Basic $1.28 $1.79 $1.65 Diluted $1.27 $1.79 $1.65 Average Outstanding Number of Shares of Common Stock (Millions) 120.6 117.0 114.3 Diluted Shares (Millions) 121.2 117.0 114.3 The accompanying notes are an integral part of these financial statements.
WISCONSIN ENERGY CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS Year Ended December 31 2000 1999 1998 ----------- ----------- ----------- (Millions of Dollars) Operating Activities Net income $154.2 $209.0 $188.1 Reconciliation to cash Depreciation, decommissioning and amortization 372.8 283.4 264.4 Nuclear fuel expense amortization 27.4 25.8 18.9 Deferred income taxes, net 10.3 33.6 0.6 Investment tax credit, net (4.6) (4.3) (3.4) Allowance for other funds used during construction (2.6) (3.8) (2.9) Gains on asset sales (98.7) (6.1) - Change in - Accounts receivable and accrued revenues (188.0) (56.3) (28.8) Inventories (68.9) (6.8) (0.6) Other current assets 22.1 (55.4) (6.6) Accounts payable 163.5 (13.4) 36.0 Other current liabilities 63.7 2.2 (12.3) Other 9.8 (101.0) (2.0) -------- ------ ------ Cash Provided by Operating Activities 461.0 306.9 451.4 Investing Activities Capital expenditures (611.0) (518.1) (399.0) Acquisitions, net of cash acquired (1,234.7) (276.8) - Proceeds from asset sales, net 408.4 11.5 - Allowance for borrowed funds used during construction (13.6) (9.5) (7.8) Nuclear fuel (41.6) (18.6) (17.5) Nuclear decommissioning funding (17.6) (17.7) (15.5) Other (10.4) (59.6) (29.6) -------- ------ ------ Cash Used in Investing Activities (1,520.5) (888.8) (469.4) Financing Activities Issuance of common stock 89.3 79.1 10.3 Issuance of long-term debt 513.9 443.2 313.6 Issuance of mandatorily redeemable trust preferred securities - 193.7 - Repurchase of common stock (100.8) - - Retirement of long-term debt (137.4) (115.5) (93.0) Change in short-term debt 826.8 220.6 (38.5) Dividends paid on common stock (165.3) (182.3) (177.4) ------ ------ ------ Cash Provided by Financing Activities 1,026.5 638.8 15.0 -------- ------ ------ Change in Cash and Cash Equivalents (33.0) 56.9 (3.0) Cash and Cash Equivalents at Beginning of Year 73.5 16.6 19.6 -------- ------ ------ Cash and Cash Equivalents at End of Year $40.5 $73.5 $16.6 ======== ====== ====== Supplemental Information - Cash Paid For Interest (net of amount capitalized) $223.6 $156.1 $133.2 Income taxes 82.4 114.9 103.9 The accompanying notes are an integral part of these financial statements.
WISCONSIN ENERGY CORPORATION CONSOLIDATED BALANCE SHEET December 31 ASSETS 2000 1999 ------ --------- --------- (Millions of Dollars) Property, Plant and Equipment Utility energy $7,327.7 $6,168.7 Non-utility energy 21.7 221.3 Manufacturing 119.5 - Other 135.3 321.1 Accumulated depreciation (3,912.9) (3,250.0) -------- -------- 3,691.3 3,461.1 Construction work in progress 246.3 174.8 Leased facilities, net 121.7 127.3 Nuclear fuel, net 93.1 83.4 -------- -------- Net Property, Plant and Equipment 4,152.4 3,846.6 Investments Nuclear decommissioning trust fund 613.3 625.7 Other 166.0 324.6 -------- -------- Total Investments 779.3 950.3 Current Assets Cash and cash equivalents 40.5 73.5 Accounts receivable, net of allowance for doubtful accounts $36.0 and $17.6 532.6 242.3 Accrued revenues 269.8 134.6 Materials, supplies and inventories 381.7 231.6 Assets held for sale 464.0 - Prepayments 81.7 100.9 Deferred income taxes 73.4 37.3 Other 19.9 12.3 -------- -------- Total Current Assets 1,863.6 832.5 Deferred Charges and Other Assets Deferred regulatory assets 276.8 216.9 Goodwill, net 826.9 57.8 Other 507.1 157.7 -------- -------- Total Deferred Charges and Other Assets 1,610.8 432.4 -------- -------- Total Assets $8,406.1 $6,061.8 ======== ======== The accompanying notes are an integral part of these financial statements.
WISCONSIN ENERGY CORPORATION CONSOLIDATED BALANCE SHEET December 31 CAPITALIZATION AND LIABILITIES 2000 1999 ------------------------------ --------- --------- (Millions of Dollars) Capitalization Common equity $2,016.8 $2,007.8 Preferred stock 30.4 30.4 Company-obligated mandatorily redeemable preferred securities of subsidiary trust holding solely debentures of the Company 200.0 200.0 Long-term debt 2,732.7 2,134.6 -------- -------- Total Capitalization 4,979.9 4,372.8 Current Liabilities Long-term debt due currently 55.4 69.1 Short-term debt 1,386.1 507.5 Accounts payable 427.0 174.0 Payroll and vacation accrued 68.2 35.6 Taxes accrued - income and other 54.8 31.3 Interest accrued 26.0 22.2 Other 191.2 48.0 -------- -------- Total Current Liabilities 2,208.7 887.7 Deferred Credits and Other Liabilities Accumulated deferred income taxes 587.1 464.4 Accumulated deferred investment tax credits 80.8 79.9 Deferred regulatory liabilities 321.0 124.8 Other 228.6 132.2 -------- -------- Total Deferred Credits and Other Liabilities 1,217.5 801.3 Commitments and Contingencies (Note N) - - -------- -------- Total Capitalization and Liabilities $8,406.1 $6,061.8 ======== ======== The accompanying notes are an integral part of these financial statements.
WISCONSIN ENERGY CORPORATION CONSOLIDATED STATEMENT OF CAPITALIZATION December 31 2000 1999 -------- -------- (Millions of Dollars) Common Equity (See Consolidated Statement of Common Equity) Common stock - $.01 par value; authorized 325,000,000 shares; outstanding - 118,645,341 and 118,904,210 shares $1.2 $1.2 Other paid in capital 833.3 838.3 Retained earnings 1,159.7 1,170.8 Accumulated other comprehensive income (2.9) - Unearned compensation - restricted stock award (3.9) (2.5) Stock options exercisable 29.4 - ------- -------- Total Common Equity 2,016.8 2,007.8 Preferred Stock Wisconsin Energy $.01 par value; authorized 15,000,000 shares; none outstanding - - Wisconsin Electric Six Per Cent. Preferred Stock - $100 par value; authorized 45,000 shares; outstanding - 44,498 shares 4.4 4.4 Serial preferred stock - $100 par value; authorized 2,286,500 shares; 3.60% Series redeemable at $101 per share; outstanding - 260,000 shares 26.0 26.0 $25 par value; authorized 5,000,000 shares; none outstanding - - Wisconsin Gas - Cumulative without par value; authorized 1,500,000 shares; none outstanding - - ------- -------- Total Preferred Stock 30.4 30.4 Company-obligated mandatorily redeemable preferred securities of subsidiary trust holding solely debentures of the Company 200.0 200.0 Long-Term Debt First mortgage bonds Wisconsin Electric - 7-1/4% due 2004 140.0 140.0 7-1/8% due 2016 100.0 100.0 6.85% due 2021 9.0 9.0 7-3/4% due 2023 100.0 100.0 7.05% due 2024 60.0 60.0 9-1/8% due 2024 3.4 3.4 8-3/8% due 2026 100.0 100.0 7.70% due 2027 200.0 200.0 Edison Sault - 7.90% to 10.31% due 2001-2009 - 5.2 Debentures (unsecured) Wisconsin Electric - 6-5/8% due 2002 150.0 150.0 6-5/8% due 2006 200.0 200.0 9.47% due 2006 4.2 4.9 8-1/4% due 2022 25.0 25.0 6-1/2% due 2028 150.0 150.0 6-7/8% due 2095 100.0 100.0 Wisconsin Gas - 6.60% due 2013 45.0 - The accompanying notes are an integral part of these financial statements.
WISCONSIN ENERGY CORPORATION CONSOLIDATED STATEMENT OF CAPITALIZATION - (Cont'd) December 31 2000 1999 -------- -------- (Millions of Dollars) Long-Term Debt (Cont'd) Notes (secured) Wisvest - 8.02% variable rate due 2005 (a) $208.0 $205.9 6.36% effective rate due 2006 6.6 7.7 Sta-Rite Industries, Inc. - 5.58% variable rate due 2007 and 2009 (a) 5.0 - Wispark - 8.26% variable rate due 2002 (a) 21.2 26.3 8.22% variable rate due 2003 (a) 4.2 3.0 Variable rate due 2000-2008 - 25.6 7.2% to 8.67% due 2002-2012 - 15.7 Notes (unsecured) Wisconsin Electric - 6.36% effective rate due 2006 7.2 8.4 4.75% variable rate due 2006 (a) 1.0 1.0 4.75% variable rate due 2015 (a) 17.4 17.4 4.90% variable rate due 2016 (a) 67.0 67.0 4.75% variable rate due 2030 (a) 80.0 80.0 Wisconsin Gas - 6-3/8% due 2005 65.0 - 5-1/2% due 2009 50.0 - Edison Sault - 6.55% to 8.00% due 2000-2008 4.8 5.4 Wisconsin Energy Capital Corporation - 6.22% to 6.49% due 2000 - 27.0 6.40% due 2001 15.0 15.0 6.33% due 2002 12.0 12.0 6.66% due 2003 10.6 10.6 6.85% due 2005 10.0 10.0 6.21% due 2008 20.0 20.0 6.48% due 2008 25.4 25.4 6.51% due 2013 30.0 30.0 6.94% due 2028 50.0 50.0 Commercial paper supported by multiple-year bank lines 509.7 - Obligations under capital leases 215.5 215.9 Unamortized discount, net and other (34.1) (23.1) Long-term debt due currently (55.4) (69.1) -------- -------- Total Long-Term Debt 2,732.7 2,134.6 -------- -------- Total Capitalization $4,979.9 $4,372.8 ======== ======== The accompanying notes are an integral part of these financial statements. (a) Variable interest rate as of December 31, 2000.
WISCONSIN ENERGY CORPORATION CONSOLIDATED STATEMENT OF COMMON EQUITY Accumulated Other Stock Common Other Paid Retained Comprehensive Unearned Options Stock In Capital Earnings Income Compensation Exercisable Total ------ ---------- -------- ------------- ------------ ----------- ----- (Millions of Dollars) Balance - December 31, 1997 $1.1 $729.7 $1,132.2 $ - $ - $ - $1,863.0 Net income 188.1 188.1 Common stock cash dividends $1.555 per share (177.4) (177.4) Sale of common stock 10.3 10.3 Acquisition of ESELCO, Inc. 0.1 19.2 1.2 20.5 Restricted stock award (1.4) (1.4) Amortization and forfeiture of restricted stock 0.1 0.1 ---- ------ -------- ----- ----- ----- -------- Balance - December 31, 1998 1.2 759.2 1,144.1 - (1.3) - 1,903.2 Net income 209.0 209.0 Common stock cash dividends $1.56 per share (182.3) (182.3) Sale of common stock 79.1 79.1 Restricted stock award (1.4) (1.4) Amortization and forfeiture of restricted stock 0.2 0.2 ---- ------ -------- ----- ----- ----- -------- Balance - December 31, 1999 1.2 838.3 1,170.8 - (2.5) - 2,007.8 Net income 154.2 154.2 Other comprehensive income Foreign currency translation (0.7) (0.7) Minimum pension liability (2.2) (2.2) ---- ------ -------- ----- ----- ----- -------- Comprehensive Income - - 154.2 (2.9) - - 151.3 Common stock cash dividends $1.37 per share (165.3) (165.3) Sale of common stock 89.3 89.3 Repurchase of common stock (100.8) (100.8) Restricted stock award (1.4) (1.4) WICOR restricted stock awards - converted (1.2) (1.2) Amortization and forfeiture of restricted stock 1.2 1.2 WICOR stock options converted 35.9 35.9 Stock options exercised and other 6.5 (6.5) - ---- ------ -------- ----- ----- ----- -------- Balance - December 31, 2000 $1.2 $833.3 $1,159.7 ($2.9) ($3.9) $29.4 $2,016.8 ==== ====== ======== ===== ===== ===== ======== The accompanying notes are an integral part of these financial statements.
WISCONSIN ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES GENERAL: The consolidated financial statements include the accounts of Wisconsin Energy Corporation ("Wisconsin Energy" or the "Company"), a diversified holding company, as well as its principal subsidiaries in the following operating segments: * UTILITY ENERGY SEGMENT - Consisting of Wisconsin Electric Power Company ("Wisconsin Electric"), Wisconsin Gas Company ("Wisconsin Gas") and Edison Sault Electric Company ("Edison Sault") and engaged primarily in the generation of electricity and the distribution of electricity and natural gas; * NON-UTILITY ENERGY SEGMENT - Consisting of Wisvest Corporation ("Wisvest"), WICOR Energy Services Company, FieldTech, Inc. and Northern Tree Service, Inc. and engaged primarily in independent electric power production as well as in energy marketing, trading and services activities; and * MANUFACTURING SEGMENT - Consisting of WICOR Industries, Inc., an intermediary holding company, and its primary subsidiaries, Sta-Rite Industries, Inc., SHURflo Pump Manufacturing Co. and Hypro Corporation, and engaged in the manufacture of pumps as well as fluid processing and pump filtration equipment. Other non-utility subsidiaries of Wisconsin Energy include primarily Minergy Corp., which develops and markets recycling technology products, and Wispark LLC ("Wispark"), formerly Wispark Corporation, which develops and invests in real estate, and other non-utility companies. All significant intercompany transactions and balances have been eliminated from the financial statements. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities and disclosure of contingent assets and liabilities at the date of financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. RECLASSIFICATIONS: Certain prior year financial statement amounts have been reclassified to conform to their current year presentation. These reclassifications had no effect on net income or earnings per share. REVENUES: Energy revenues are recognized on the accrual basis and include estimated amounts for service rendered but not billed. The manufacturing segment recognizes revenue from product sales upon shipment. Based upon experience, the manufacturing segment estimates and records provisions for sales returns, allowances and original warranties in the period the sale is reported. Wisconsin Electric's rates include base amounts for estimated fuel and purchased power costs. It can request recovery of fuel and purchased power costs prospectively from retail electric customers in the Wisconsin jurisdiction through its rate review process with the Public Service Commission of Wisconsin ("PSCW") and in interim fuel cost hearings when such annualized costs are more than 3% higher than the forecasted costs used to establish rates. Wisconsin Electric's and Wisconsin Gas's retail gas rates include monthly adjustments which permit the recovery or refund of actual purchased gas costs incurred subject to a partial sharing mechanism between Wisconsin Gas and its customers. PROPERTY AND DEPRECIATION: Property is recorded at cost. Additions to and significant replacements of property are charged to property, plant and equipment at cost; minor items are charged to maintenance expense. Cost includes material, labor and capitalized interest or allowance for funds used during construction. The cost of depreciable utility property, together with removal cost less salvage, is charged to accumulated depreciation when property is retired. Depreciation expense is accrued at straight line rates over the estimated useful lives of the assets. For manufacturing property, depreciation expense is primarily included in cost of goods sold. Utility depreciation rates are certified by the state regulatory commissions and include estimates for salvage and removal costs. Depreciation as a percent of average depreciable utility plant was 4.5% in 2000 and 4.1% in 1999 and 1998. Nuclear plant decommissioning costs are accrued and included in depreciation expense (see Note F). Estimated useful lives are 3 to 10 years for manufacturing equipment, 3 to 15 years for other non-utility equipment and 30 to 40 years for non-utility buildings. ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION: Allowance for funds used during construction is included in Wisconsin Electric's utility plant accounts and represents the cost of borrowed funds used during plant construction and a return on stockholders' capital used for construction purposes. Allowance for borrowed funds also includes interest capitalized on qualifying assets of non-utility subsidiaries. On the Consolidated Income Statement, the cost of borrowed funds (before income taxes) is a reduction of interest expense and the return on stockholders' capital is an item of non-cash other income. As approved by the PSCW, Wisconsin Electric's allowance for funds used during construction was capitalized during the following periods on 50% of construction work in progress at the following rates: * September 1, 2000 - December 31, 2000 10.18% * June 1, 1998 - August 31, 2000 10.21% * January 1, 1998 - May 31, 1998 10.29% EARNINGS PER COMMON SHARE: Basic earnings per common share have been computed by dividing net earnings by the weighted average number of common shares outstanding. Diluted earnings per share have been computed by dividing net earnings by the weighted average number of common shares outstanding including the dilutive effects of stock options. MATERIALS, SUPPLIES AND INVENTORIES: Inventory at December 31, 2000 and 1999 consists of:
Materials, Supplies and Inventories 2000 1999 - ------------------------ -------- -------- (Millions of Dollars) Fossil Fuel $78.2 $113.8 Gas in Storage 92.1 29.8 Materials and Supplies 89.0 88.0 Manufacturing 122.4 - ------ ------ Total $381.7 $231.6 ====== ======
Substantially all fossil fuel, materials and supplies and gas in storage inventories are priced using the weighted average method of accounting. As a result of the merger with WICOR in April 2000, the Company acquired the manufacturing inventories of WICOR Industries, Inc. Approximately 83% of the manufacturing inventories in 2000 are priced using the last-in, first-out method (not in excess of the market), with the remaining inventories priced using the first-in, first-out method. If the first-in, first-out method of accounting had been used exclusively, manufacturing inventories would have been $0.4 million higher at December 31, 2000. GOODWILL AND LONG-LIVED ASSETS: Goodwill represents the excess of acquisition costs over the fair value of the net assets of acquired businesses and is amortized on a straight line basis over its estimated life, which is generally 40 years. The Company reviews the carrying value of goodwill and long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment would be determined based upon a comparison of the undiscounted future operating cash flows anticipated to be generated during the remaining life of the goodwill or long-lived assets to the carrying value. Measurement of any impairment loss would be based upon discounted operating cash flows. REGULATORY ACCOUNTING: The utility energy segment accounts for its regulated operations in accordance with Statement of Financial Accounting Standards No. 71, Accounting for the Effects of Certain Types of Regulation. This statement sets forth the application of generally accepted accounting principles to those companies whose rates are determined by an independent third- party regulator. The economic effects of regulation can result in regulated companies recording costs that have been or are expected to be allowed in the ratemaking process in a period different from the period in which the costs would be charged to expense by an unregulated enterprise. When this occurs, costs are deferred as assets in the balance sheet (regulatory assets) and recorded as expenses in the periods when those same amounts are reflected in rates. Additionally, regulators can impose liabilities upon a regulated company for amounts previously collected from customers and for amounts that are expected to be refunded to customers (regulatory liabilities). Deferred regulatory assets and liabilities at December 31 consist of:
Deferred Regulatory Assets and Liabilities 2000 1999 - ------------------------------------------ -------- -------- (Millions of Dollars) Deferred Regulatory Assets Deferred income taxes $148.7 $155.3 Postretirement benefit costs 31.2 - Purchase power commitment 30.6 22.1 Lightweight aggregate plant 19.7 - Department of Energy assessments 18.5 21.1 Deferred nuclear costs 8.3 11.8 Deferred uncollectible expenses 7.8 - Other 12.0 6.6 ------ ------ Total Deferred Regulatory Assets $276.8 $216.9 ====== ====== Deferred Regulatory Liabilities Deferred income taxes $111.0 $117.8 WICOR acquisition purchase adjustments 173.1 - Tax and interest refunds 24.7 2.3 Other 12.2 4.7 ------ ------ Total Deferred Regulatory Liabilities $321.0 $124.8 ====== ======
In connection with the WICOR acquisition, the Company recorded the Wisconsin Gas pension and postretirement medical plans at fair value. Due to the regulatory treatment of Wisconsin Gas, a regulatory liability was also recorded and is being amortized over the average remaining service life of 15 years. During 2000, Wisconsin Electric discontinued operation of its lightweight aggregate plant at Oak Creek Power Plant. As authorized by the PSCW, Wisconsin Electric transferred the associated remaining undepreciated plant balance of $19.7 million on December 31, 2000 to a deferred regulatory asset account, which will be amortized on a straight-line basis over the five- year period ending December 31, 2005. Utility operations in the state of Wisconsin are precluded from discontinuing service to residential customers within their service areas during the heating season. As a result, Wisconsin Gas defers any differences between doubtful account provisions based upon actual experience and provisions allowed for ratemaking purposes by the PSCW for recovery in future rates. DERIVATIVE FINANCIAL INSTRUMENTS: The Company has limited involvement with derivative financial instruments. Wisconsin Gas uses such instruments to manage commodity risks associated with the price of natural gas, and the manufacturing segment uses derivative financial instruments to manage foreign exchange risk. In addition, Wisvest-Connecticut, LLC, a wholly-owned non-utility energy affiliate, has entered into an interest rate swap agreement to manage interest rate risk related to debt (see Note I) issued in the acquisition of two fossil-fueled power plants (see Note B). STATEMENT OF CASH FLOWS: Cash and cash equivalents include marketable debt securities acquired three months or less from maturity. During 1998, Wisconsin Energy recorded a $19.3 million non-cash acquisition of ESELCO, Inc. accounted for as a pooling of interests (see Note B). In 1999, Wisconsin Electric recorded a $110 million cash payment, included in Operating Activities - Other, related to a contested July 1999 jury verdict (see Note N). RESTRICTIONS: Various financing arrangements and regulatory requirements impose certain restrictions on the ability of the principal utility subsidiaries and various financing arrangements impose restrictions on the non-utility subsidiaries to transfer funds to Wisconsin Energy in the form of cash dividends, loans or advances. Under Wisconsin law, Wisconsin Electric and Wisconsin Gas are prohibited from loaning funds, either directly or indirectly, to Wisconsin Energy. The Company does not believe that such restrictions will affect its operations. NEW ACCOUNTING PRONOUNCEMENTS: In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities ("FAS 133"), which has been amended by FAS 137, Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FAS 133, an amendment of FAS 133, and by FAS 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities, an amendment of FAS 133. FAS 133 requires that every derivative instrument be recorded on the balance sheet as an asset or liability measured at its fair value and that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. FAS 133, as amended, is effective for fiscal years beginning after June 15, 2000 and must be applied to: (1) derivative instruments; and (2) certain derivative instruments embedded in hybrid contracts that were issued, acquired or substantively modified after December 31, 1998. Wisconsin Energy has identified a limited number of both financial and physical commodity contracts that meet the definition of a derivative under FAS 133 in its electric and natural gas utility operations as well as in its non-regulated energy operations. These contracts are used to manage the Company's exposure to commodity price and interest rate volatility. The adoption of FAS 133, as amended, on January 1, 2001, was insignificant to the income statement and to other comprehensive income. The Company believes that its electric capacity contracts qualify for the normal purchase and sale exception under FAS 133, and therefore are not considered derivative instruments. The Financial Accounting Standards Board is currently reviewing a proposal that would allow electric capacity option contracts to qualify for the normal purchase and sale exception. The Financial Accounting Standards Board's final conclusion may impact the Company's ongoing application of FAS 133 related to its electric capacity contracts. Following initial adoption of FAS 133, changes in the net value of the effective portion of derivatives qualifying as cash flow hedges are recorded, net of tax, in other comprehensive income. The ineffective portion of the derivative's change in fair value is required to be recognized in earnings immediately. In the case of Wisconsin Gas, the ineffective portion is recorded as regulatory asset or liability as these transactions are part of the purchased gas cost recovery mechanism. The fair value of the derivative investments is determined by reference to quoted market prices of listed contracts, published quotations or quotations from independent parties. In the absence thereof, the Company utilizes mathematical models based on current and historical data. B - MERGERS AND ACQUISITIONS Utility Energy Segment WICOR, INC.: On April 26, 2000, the Company acquired all of the outstanding common stock of WICOR, Inc., a diversified utility holding company. The purchase price included the payment of $1.2 billion of cash, the assumption of options and restricted shares valued at $37.1 million and the payment of $10.2 million in transaction costs. The Company also assumed approximately $267 million of existing WICOR debt. The cash purchase price of approximately $1.2 billion was funded with commercial paper borrowings. The acquisition was accounted for as a purchase under Accounting Principles Board Opinion No. 16, Business Combinations ("APB 16"), and accordingly, the operating results have been included in the Company's consolidated results of operations from the date of acquisition. In accordance with APB 16, the purchase price has been allocated to assets acquired and liabilities assumed based upon an estimate of fair value at the date of acquisition while approximately $818 million was recorded as goodwill and is being amortized over 40 years. Portions of the purchase price were identified by independent appraisers utilizing proven valuation procedures and techniques and are subject to adjustment as these estimates are refined and finalized. The following unaudited pro forma data summarize the results of recurring operations for the periods indicated as if the WICOR acquisition had been completed as of the beginning of the periods presented. The pro forma amounts give effect to actual operating results prior to the acquisition, adjusted to include the pro forma effect of interest expense, amortization of intangibles and income taxes. The pro forma information does not necessarily reflect the actual results that would have occurred nor is it necessarily indicative of future results of operations of the combined companies.
Pro Forma ---------------------------------- Wisconsin Energy Corporation 2000 1999 - ---------------------------- -------- -------- (Millions of Dollars, Except Per Share Amounts) Total Operating Revenues $3,789.9 $3,282.8 Net Income $182.4 $201.3 Earnings Per Share Basic $1.51 $1.72 Diluted 1.51 1.72
ESELCO, INC.: On May 31, 1998, Wisconsin Energy acquired ESELCO, Inc. in a tax-free reorganization accounted for as a pooling of interests. ESELCO was the parent company of Edison Sault, an electric utility serving customers in Michigan's eastern Upper Peninsula. In connection with the acquisition, Wisconsin Energy issued 2.4 million shares of Wisconsin Energy common stock with a value of $70.9 million for the outstanding shares of ESELCO common stock. Due to the immaterial nature of the transaction, Wisconsin Energy has not restated any historical financial or statistical information. Instead, Wisconsin Energy combined ESELCO's May 31, 1998 balance sheet with Wisconsin Energy's, including a $1.2 million credit to retained earnings of which $0.9 million represented ESELCO's consolidated net income during the first five months of 1998. Non-Utility Energy Segment WISVEST-CONNECTICUT, LLC: In April 1999, Wisvest-Connecticut, LLC, a wholly owned subsidiary of Wisvest Corporation, acquired two fossil-fueled power plants in the state of Connecticut for $276.8 million from The United Illuminating Company, an unaffiliated investor-owned utility in New Haven, Connecticut. Pursuant to the agreement, Wisvest-Connecticut, LLC purchased the Bridgeport Harbor Station, which has an active generating capacity of 590 megawatts, as well as the New Haven Harbor Station, which has an active generating capacity of 466 megawatts. Wisconsin Energy accounted for the transaction under the purchase method of accounting. Related goodwill in the amount of $55.9 million, which is being amortized over a 30-year estimated life, remains outstanding at December 31, 2000. Due to the immaterial nature of the transaction, Wisconsin Energy has not presented pro forma financial information. As discussed in Note C, the Company has announced the pending sale of these two fossil-fueled power plants. Manufacturing Segment In August 2000, WICOR Industries, Inc. completed the acquisition of a privately held manufacturer of fiber-wound pressure tanks for the water treatment industry. The aggregate purchase price for this transaction was approximately $33.5 million and was financed using cash and short-term borrowings. The acquisition was accounted for as a purchase with the acquired company's results of operations included in the consolidated financial statements from the acquisition date. The excess of the purchase price over the estimated fair value of the net assets of the acquired company was approximately $22.6 million, which has been recorded as goodwill and is being amortized over a period of 40 years. Due to the immaterial nature of the transaction, Wisconsin Energy has not presented pro forma financial information. C - ASSET SALES AND DIVESTITURES During 2000, the Company's management announced a strategy, which, among other things, identified the divestiture of non-core investments. In October 2000, the Company closed on the sale of its interest in SkyGen Energy Holdings LLC which resulted in cash proceeds totaling approximately $332 million (including approximately $112 million for the repayment of certain advances, short-term notes receivables and interest) and a gain of $54.6 million after tax or $0.45 per share. As of December 31, 2000, Wisconsin Energy held additional assets for sale as follows:
Assets Held For Sale December 31, 2000 - -------------------- ----------------- (Millions of Dollars) Non-Utility Energy $331.8 Other - Real Estate 132.2 ------ Total $464.0 ======
In May 2000, Wisconsin Energy announced that it planned to market and sell approximately 80% of the assets of Wispark. During the fourth quarter of 2000, the Company completed the sale of approximately 44% of the Wispark portfolio anticipated to be sold, receiving approximately $128 million of gross proceeds. Wisconsin Energy anticipates selling the balance of the assets identified for sale over the next two years. In December 2000, the Company signed an agreement to sell Wisvest- Connecticut, LLC's two fossil-fueled generating stations in the state of Connecticut for anticipated gross proceeds of approximately $350 million, including amounts for inventory. The sale of these plants and associated assets is expected to close by the end of the second quarter of 2001 subject to various regulatory approvals and other closing conditions. Concurrent with the sale of the Connecticut generating stations, Wisvest expects to retire $208.0 million of variable rate notes which are secured by the plants. During the fourth quarter of 2000, the Company signed an agreement to sell Wisvest's interest in Blythe Energy, LLC, an independent power production project in the state of California. Initial proceeds of $42 million for the reimbursement of certain development costs were received in the fourth quarter of 2000. Additional proceeds are due in 2001 upon completion of certain regulatory and contractual matters, which is expected to result in a gain on the sale. Proceeds from these sales, and additional sales of real estate by Wispark, are being used primarily to reduce debt. In 2000, Wisconsin Electric and Edison Sault agreed to join the American Transmission Company LLC by transferring their electric utility transmission assets in exchange for equity interests in this new company. Transfer of these electric transmission system assets, with a net book value of approximately $252 million, became effective on January 1, 2001. During the first half of 2001, the American Transmission Company LLC expects to issue debt and distribute cash to Wisconsin Electric and Edison Sault in an amount equal to approximately 50% of the net book value of the assets transferred. D - NON-RECURRING CHARGES During the fourth quarter of 2000, the Company recorded charges totaling $0.69 per diluted share. Of this, $0.33 per share related to severance and employee benefits and merger-related items. In connection with the WICOR merger and the divestiture of non-core businesses, approximately 300 employees are to receive severance benefits under severance agreements and enhanced retirement initiatives. As of December 31, 2000, approximately $14.0 million of severance benefits remained as an outstanding liability on the balance sheet. The Company also recorded charges totaling $0.26 per share during the fourth quarter of 2000 related to the valuation of non-core investments. The Company reviewed its non-core businesses and investments and determined that the expected future cash flows on certain investments, including real estate, international waste to energy projects and energy marketing companies would not exceed the historical costs of those investments. In addition, the Company made a contribution of $0.10 per share to the Wisconsin Energy Foundation to assist it in becoming self funding. During 1999, Wisconsin Electric reached agreement in the settlement of litigation related to the development of an electric generating plant in the Philippines at a cost of $0.09 per diluted share. E - INCOME TAXES The Company follows the liability method in accounting for income taxes as prescribed by Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes ("FAS 109"). FAS 109 requires the recording of deferred assets and liabilities to recognize the expected future tax consequences of events that have been reflected in the Company's financial statements or tax returns and the adjustment of deferred tax balances to reflect tax rate changes. The following table is a summary of income tax expense for each of the years ended December 31:
Income Tax Expense 2000 1999 1998 ------------------ -------- -------- -------- (Millions of Dollars) Current tax expense $120.2 $81.8 $95.0 Deferred income taxes, net 10.3 33.6 0.6 Investment tax credit, net (4.6) (4.3) (3.4) ------ ------ ----- Total Tax Expense $125.9 $111.1 $92.2 ====== ====== =====
The provision for income taxes for each of the years ended December 31 differs from the amount of income tax determined by applying the applicable U.S. statutory federal income tax rate to income before income taxes and preferred dividend as a result of the following:
2000 1999 1998 --------------------- --------------------- --------------------- Effective Effective Effective Income Tax Expense Amount Tax Rate Amount Tax Rate Amount Tax Rate ------------------ ------ --------- ------ --------- ------ --------- (Millions of Dollars) Expected tax at statutory federal tax rates $98.5 35.0% $112.5 35.0% $98.5 35.0% State income taxes net of federal tax benefit 20.7 7.4% 16.6 5.2% 13.5 4.8% Unrealized capital loss 7.5 2.7% - - - - Investment tax credit restored (4.6) (1.6%) (4.6) (1.4%) (4.7) (1.7%) Amortization of goodwill 4.2 1.5% - - - - Flowback of prior contributions in aid of construction - - (8.1) (2.5%) (8.0) (2.9%) Other, net (0.4) (0.1%) (5.3) (1.6%) (7.1) (2.6%) ------ ----- ------ ----- ----- ----- Total Tax Expense $125.9 44.9% $111.1 34.7% $92.2 32.6% ====== ===== ====== ===== ===== =====
The components of FAS 109 deferred income taxes classified as net current assets and net long-term liabilities at December 31 are as follows:
Current Assets (Liabilities) Long-Term Liabilities (Assets) ---------------------------- ------------------------------ Deferred Income Taxes 2000 1999 2000 1999 --------------------- ---- ---- ---- ---- (Millions of Dollars) Property-related $ - $ - $671.9 $568.1 Construction advances - - (66.5) (61.8) Decommissioning trust - - (52.9) (44.2) Contested liability payment - - 43.8 43.8 Recoverable gas costs 18.1 (0.4) - - Uncollectible account expense 18.0 6.6 - - Employee benefits and compensation 15.7 8.4 4.1 (34.5) Asset impairment charge 10.8 12.1 - - Other 10.8 10.6 (13.3) (7.0) ----- ----- ------ ------ Total Deferred Income Taxes $73.4 $37.3 $587.1 $464.4 ===== ===== ====== ======
Wisconsin Electric, Wisconsin Gas and Edison Sault have also recorded deferred regulatory assets and liabilities representing the future expected impact of deferred taxes on utility revenues (see Note A). F - NUCLEAR OPERATIONS POINT BEACH NUCLEAR PLANT: Wisconsin Electric owns two 510- megawatt electric generating units at Point Beach Nuclear Plant in Two Rivers, Wisconsin. Point Beach Nuclear Plant is operated by the Nuclear Management Company, a company that, as of December 31, 2000, manages seven nuclear generating units in the Midwest owned by four different companies in the region. Wisconsin Electric currently expects the two units at Point Beach to operate to the end of their operating licenses, which expire in October 2010 for Unit 1 and in March 2013 for Unit 2. In 1997, the PSCW authorized Wisconsin Electric to defer certain nuclear non-fuel operation and maintenance costs in excess of those included in 1997 rates. As a result, Wisconsin Electric deferred $18 million during 1997. During 1998, the PSCW authorized a five-year recovery in the electric retail jurisdiction in the state of Wisconsin of the excess 1997 nuclear non-fuel operation and maintenance costs, and Wisconsin Electric began amortizing the $18 million of deferred costs on a straight line basis over the five year recovery period. As of December 31, 2000, $8.3 million of deferred costs remain on the Consolidated Balance Sheet in Deferred Charges and Other Assets - Deferred Regulatory Assets (see Note A). NUCLEAR INSURANCE: The Price-Anderson Act as amended and extended to August 1, 2002, currently limits the total public liability for damages arising from a nuclear incident at a nuclear power plant to approximately $9.5 billion, of which $200 million is covered by liability insurance purchased from private sources. The remaining $9.3 billion is covered by an industry retrospective loss sharing plan whereby in the event of a nuclear incident resulting in damages exceeding the private insurance coverage, each owner of a nuclear plant would be assessed a deferred premium of up to $88.1 million per reactor (Wisconsin Electric owns two) with a limit of $10 million per reactor within one calendar year. As the owner of Point Beach, Wisconsin Electric would be obligated to pay its proportionate share of any such assessment. Wisconsin Electric participated in an industry-wide insurance program, with an aggregate limit of $200 million which covered radiation injury claims of nuclear workers first employed after 1987. This program was replaced with a new program (which has no retrospective assessment provisions) at the end of 1997. However, the discovery period for claims covered under the former program remains open until the end of 2007 for those few former insureds who no longer need to participate in the new, replacement program. If claims in excess of the funds available under the old program develop, Wisconsin Electric would be assessed up to a maximum of approximately $6.3 million. Wisconsin Electric, through its membership in Nuclear Electric Insurance Limited ("NEIL"), carries decontamination, property damage and decommissioning shortfall insurance covering losses of up to $1.5 billion at Point Beach. Under policies issued by NEIL, the insured member is liable for a retrospective premium adjustment in the event of catastrophic losses exceeding the full financial resources of NEIL. Wisconsin Electric's maximum retrospective liability under its policies is $7.8 million. Wisconsin Electric also maintains insurance with NEIL covering business interruption and extra expenses during any prolonged accidental outage at Point Beach, where such outage is caused by accidental property damage from radioactive contamination or other risks of direct physical loss. Wisconsin Electric's maximum retrospective liability under this policy is $3.8 million. It should not be assumed that, in the event of a major nuclear incident, any insurance or statutory limitation of liability would protect Wisconsin Electric from material adverse impact. NUCLEAR DECOMMISSIONING: Nuclear decommissioning costs are included in depreciation expense under an external sinking fund method as these costs are recovered through rates over the expected service lives of the generating units. Decommissioning expenses of $17.6 million, $17.7 million and $15.5 million were accrued during 2000, 1999 and 1998, respectively, under this method. Decommissioning costs collected through rates are deposited into the nuclear decommissioning trust fund and also included in accumulated depreciation. As a result, these funds do not add to the cash flows available for general corporate purposes. Earnings on the fund balance accumulate in the nuclear decommissioning trust fund and in accumulated depreciation as part of the decommissioning liability. It is expected that the annual payments to the nuclear decommissioning trust fund along with related earnings will provide sufficient funds at the time of decommissioning. Wisconsin Electric believes it is probable that any shortfall in funding would be recoverable in utility rates. The estimated cost to decommission the plant in 2000 dollars is $586 million based upon a site specific decommissioning cost study completed in 1998, and includes additional costs from prior estimates for work management by an independent decommissioning general contractor. Assuming plant shutdown at the expiration of the current operating licenses, prompt dismantlement and annual escalation of costs at specific inflation factors established by the PSCW, it is projected that approximately $1.9 billion will be spent over a thirty-three year period, beginning in 2010, to decommission the plant. Following is a summary at December 31 of the Nuclear Decommissioning Trust Fund balance, stated at fair value, which is equal to the accrued decommissioning liability balance included in accumulated depreciation.
Nuclear Decommissioning Trust Fund 2000 1999 - ---------------------------------- ---- ---- (Millions of Dollars) Total funding and realized net earnings $408.1 $357.7 Unrealized gains, net 205.2 268.0 ------ ------ Total $613.3 $625.7 ====== ======
As required by Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities, Wisconsin Electric's debt and equity security investments in the Nuclear Decommissioning Trust Fund are classified as available for sale. Gains and losses on the fund were determined on the basis of specific identification; net unrealized holding gains on the fund were recorded as part of the fund and as part of accumulated depreciation. DECONTAMINATION AND DECOMMISSIONING FUND: The Energy Policy Act of 1992 established a Uranium Enrichment Decontamination and Decommissioning Fund ("D&D Fund") for the United States Department of Energy's nuclear fuel enrichment facilities. Deposits to the D&D Fund are derived in part from special assessments on utilities using enrichment services. As of December 31, 2000, Wisconsin Electric has recorded its remaining estimated liability equal to projected special assessments of $16.1 million. A corresponding deferred regulatory asset is detailed in Note A. The deferred regulatory asset will be amortized to nuclear fuel expense and included in utility rates over the next seven years ending in 2007. G - COMMON EQUITY During 2000, the board of directors approved a common stock repurchase plan which authorizes the Company to purchase up to $400 million of its shares of common stock in the open market over the following 24 months. Through December 31, 2000 Wisconsin Energy purchased approximately 5.0 million shares of common stock for $100.8 million. The Company is currently retiring the stock that is purchased. Wisconsin Energy issued approximately 4.7 million and 3.3 million new shares of common stock during 2000 and 1999, respectively, which were primarily purchased by participants in the Company's stock plans with cash investments and reinvested dividends totaling approximately $89.3 million during 2000 and $79.1 million during 1999. In September 2000, the board of directors authorized a quarterly cash dividend on its common stock, payable December 1, 2000, of $0.20 per share ($0.80 on an annualized basis), which was reduced from prior quarterly dividends paid during 2000 of $0.39 per common share (or $1.56 on an annualized basis). STOCK OPTION PLANS AND RESTRICTED STOCK: The Omnibus Stock Incentive Plan ("OSIP"), as approved by stockholders in 1994 and amended by the board of directors in 1998, enables the Company to provide a long-term incentive, through equity interests in Wisconsin Energy, to outside directors, selected officers and key employees. The OSIP provides for the granting of stock options, stock appreciation rights, stock awards and performance units during the ten-year term of the plan. Awards may be paid in common stock, cash or a combination thereof. No stock appreciation rights have been granted to date. Four million shares of common stock have been reserved under the OSIP. In addition, under the terms of the Merger Agreement with WICOR, each outstanding option to purchase shares of WICOR common stock, $1.00 par value (with attached common stock purchase rights, a "WICOR Option") was assumed by Wisconsin Energy and converted into an option to purchase shares of the Company's common stock on the same terms and conditions as were applicable under such WICOR Options. The WICOR Options that were outstanding on June 27, 1999 became fully vested at the effective time of WICOR's merger with the Company. The exercise price of a stock option under the OSIP is to be no less than 100% of the common stock's fair market value on the grant date and options may not be exercised within six months of the grant date except in the event of a change in control. The following is a summary of the Company's stock options issued through December 31, 2000.
2000 1999 1998 --------------------- -------------------- ------------------- Weighted- Weighted- Weighted- Number Average Number Average Number Average Stock Options of Exercise of Exercise of Exercise ------------------- Options Price Options Price Options Price ------- -------- ------- -------- ------- -------- Outstanding at January 1 1,234,700 $28.11 858,700 $28.53 530,200 $28.00 Granted 1,198,211 $19.95 376,000 $27.14 331,500 $29.37 Conversion of WICOR options 4,571,345 $13.71 - - - - Exercised (735,948) $12.49 - - (3,000) $27.38 Forfeited (51,473) $25.86 - - - - --------- --------- ------- Outstanding at December 31 6,216,835 $17.81 1,234,700 $28.11 858,700 $28.53 ========= ========= ======= Exercisable at December 31 4,647,406 $16.08 369,763 $28.99 120,500 $27.05
As of December 31, 2000, the 6,216,835 options outstanding are exercisable at per share prices of between $6.79 and $30.88 with a weighted-average remaining contractual life of 7.2 years. At December 31, 2000, 3,824,049 converted WICOR options are vested and exercisable. An additional 517,700 of the outstanding options have "cliff vesting" terms and are exercisable four years after the grant date, while 1,805,086 of the options vest on a straight-line "graded" basis over a four-year period from the grant date and 70,000 of the options vest on a straight-line "graded" basis over a three-year period from the grant date. All outstanding options, including the converted WICOR options, expire no later than eleven years from the date of grant. As of December 31, 2000, the 4,647,406 exercisable options are exercisable at per share prices of between $6.79 and $30.88 with a weighted-average remaining contractual life of 6.6 years. The Company applies Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25") and related interpretations in accounting for its stock option plans and has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("FAS 123"). The Black-Scholes option-pricing model was used to estimate FAS 123 compensation expense with the following assumptions for 2000, 1999 and 1998, respectively: dividend yields of 4.0%, 5.7% and 5.3%; risk free interest rates of 6.4%, 6.7% and 5.7%; expected volatility of 21.0%, 13.2% and 15.0%; and an expected option life of 10 years for all periods. The weighted average fair value of options granted in 2000, 1999 and 1998 was $4.73, $3.05 and $3.34 per share, respectively. Had compensation cost for the Company's 2000, 1999 and 1998 grants for stock-based compensation plans been determined consistent with FAS 123, the Company's net income and diluted earnings per share would have been reduced to the pro forma amounts indicated below:
Pro Forma Earnings Under FAS 123 2000 1999 1998 - -------------------------------- ---- ---- ---- (Millions of Dollars, Except Per Share Amounts) Net Income As reported $154.2 $209.0 $188.1 Pro forma $153.0 $208.6 $187.9 Diluted Earnings Per Common Share As reported $1.27 $1.79 $1.65 Pro forma $1.26 $1.78 $1.64
The Company has granted restricted shares of common stock to certain key employees. The following restricted stock activity occurred during 2000, 1999 and 1998:
2000 1999 1998 -------------------- ------------------- ------------------ Weighted- Weighted- Weighted- Number Average Number Average Number Average Restricted Shares of Market of Market of Market --------------------- Shares Price Shares Price Shares Price ------ -------- ------ -------- ------ -------- Outstanding at January 1 103,250 55,750 6,000 Granted 64,750 $21.12 51,500 $27.41 49,750 $28.62 WICOR restricted shares converted 57,745 $20.73 - - - - Released/Forfeited (20,804) $25.01 (4,000) $28.32 - - ------- ------- ------ Outstanding at December 31 204,941 103,250 55,750 ======= ======= ======
Recipients of the restricted shares, who have the right to vote the shares and to receive dividends, are not required to provide consideration to the Company other than rendering service. Forfeiture provisions on the restricted stock expire 10 years after award grant subject to an accelerated expiration schedule based on the achievement of certain financial performance goals. Under the provisions of APB 25, the market value of the restricted stock awards on the date of grant is recorded as a separate unearned compensation component of common stock equity and is then charged to expense over the vesting period of the awards. Adjustments are also made to expense for achievement of performance goals. Restricted stock compensation charged to expense during 2000, 1999 and 1998 was immaterial. H - TRUST PREFERRED SECURITIES In March 1999, WEC Capital Trust I, a Delaware business trust of which Wisconsin Energy owns all of the outstanding common securities, issued $200 million of 6.85% trust preferred securities to the public. The sole asset of WEC Capital Trust I is $206 million of 6.85% junior subordinated debentures issued by Wisconsin Energy and due March 31, 2039. The terms and interest payments on these debentures correspond to the terms and distributions on the trust preferred securities. Wisconsin Energy used the proceeds from the sale of its junior subordinated debentures to fund a capital contribution of approximately $105 million to Wisvest-Connecticut, LLC for acquisition in mid- April 1999 of two fossil-fueled power plants (see Note B) and for repayment of short-term borrowings. WEC Capital Trust I has been consolidated into Wisconsin Energy's financial statements. For tax purposes, Wisconsin Energy is allowed to deduct an amount equal to the distributions on the trust preferred securities. Wisconsin Energy may elect to defer interest payments on the debentures for up to 20 consecutive quarters, causing corresponding distributions on the trust preferred securities to also be deferred. In case of a deferral, interest and distributions will continue to accrue, along with quarterly compounding interest on the deferred amounts. Wisconsin Energy may redeem all or a portion of the debentures after March 25, 2004, requiring an equal amount of trust preferred securities to be redeemed at face value plus accrued and unpaid distributions. Wisconsin Energy has entered into a limited guarantee of payment of distributions, redemption payments and payments in liquidation with respect to the trust preferred securities. This guarantee, when considered together with Wisconsin Energy's obligations under the related debentures and indenture and the applicable declaration of trust, provide a full and unconditional guarantee by Wisconsin Energy of amounts due on the outstanding trust preferred securities. I - LONG-TERM DEBT FIRST MORTGAGE BONDS, DEBENTURES AND NOTES: At December 31, 2000, the maturities and sinking fund requirements through 2005 for the aggregate amount of long-term debt outstanding (excluding obligations under capital leases) were:
(Millions of Dollars) 2001 $29.0 2002 255.8 2003 478.0 2004 154.0 2005 251.6 Thereafter 1,439.0 -------- Total $2,607.4 ========
Sinking fund requirements for the years 2001 through 2005, included in the preceding table, are $18.0 million. Commercial paper in the amount of $509.7 million, issued under bank back-up credit facilities that expire between 2001 through 2003, is included in the preceding table. Substantially all of Wisconsin Electric's utility plant is subject to a first mortgage lien. Long-term debt premium or discount and expense of issuance are amortized by the straight line method over the lives of the debt issues and included as interest expense. In connection with the WICOR acquisition, Wisconsin Energy (1) issued $1.2 billion of commercial paper of which $449 million is supported by multiple-year back-up credit facilities and classified as long-term debt which the Company has both the ability and intent to maintain for more than one year, and (2) assumed $215 million of existing WICOR long-term debt. During 1999, Wispark Corporation secured $53 million of bank financing in the form of adjustable and fixed rate mortgage notes due 2001-2012 to finance the construction or purchase of various facilities. In December 1999, Wisconsin Electric issued $150 million of 6- 5/8% debentures due 2002. Proceeds from the issue were added to Wisconsin Electric's general funds and were used to reduce short- term borrowings and for other general corporate purposes. In April 1999, Wisvest-Connecticut, LLC issued $210 million of nonrecourse variable rate notes secured by the acquired assets and due December 31, 2005, the proceeds of which were used to help finance the acquisition of two fossil-fueled power plants (see Note B) and for related working capital. Associated with issuance of this debt, Wisvest-Connecticut, LLC has entered into an interest rate swap agreement to exchange fixed rate payment obligations for variable rate receipt rights without exchanging the underlying notional amounts. This agreement, which expires on December 31, 2005, serves to convert variable rate debt under Wisvest-Connecticut, LLC's long-term nonrecourse notes to fixed rate debt to reduce the impact of interest rate fluctuations. The variable rate is based upon a three-month LIBOR rate and the fixed rated is 5.99%. At year-end 2000, three-month LIBOR was 6.44%. The notional amounts parallel a portion of the underlying debt levels and are used to measure interest to be paid or received and do not represent an exposure to credit loss. The notional amount of Wisvest-Connecticut, LLC's interest rate swaps was $73.1 million at December 31, 2000. This notional amount decreases on a quarterly basis over the remaining term of the agreement. The difference between the amounts paid and received under the interest rate swap is accrued as interest rates change and is recorded as an adjustment to interest expense over the life of the hedged agreement. Wisvest-Connecticut, LLC is exposed to credit loss in the event of nonperformance by the other party to the interest rate swap. However, it does not anticipate any losses from this agreement, which is with a major financial institution. OBLIGATIONS UNDER CAPITAL LEASES: To meet a portion of its electric energy supply needs, Wisconsin Electric entered into a long-term power purchase contract with an unaffiliated independent power producer. The contract, for 236 megawatts of firm capacity from a gas-fired cogeneration facility, includes no minimum energy requirements. When the contract expires in 2022, Wisconsin Electric may, at its option and with proper notice, renew for another ten years or purchase the generating facility at fair value or allow the contract to expire. Wisconsin Electric treats this contract as a capital lease. The leased facility and corresponding obligation under capital lease were recorded at the estimated fair value of the plant's electric generating facilities. The leased facility is being amortized on a straight line basis over the original 25-year term of the contract. Imputed interest costs on the capitalized purchase power obligation were $23.9 million, $23.4 million and $22.9 million during 2000, 1999 and 1998, respectively, and total amortization costs of the leased facilities were $5.7 million per year during 1998 through 2000. The long-term power purchase contract is treated as an operating lease for rate-making purposes. As a result, the difference between the minimum lease payments and the sum of the imputed interest and amortization costs are recorded as a deferred regulatory asset (see Note A). Due to the timing of the minimum lease payments, Wisconsin Electric expects the regulatory asset to increase to approximately $78.5 million by the year 2009 and the total obligation under capital lease to increase to $160.2 million by the year 2005 before each is reduced over the remaining life of the contract. The minimum lease payments are classified as purchased power expense on the Consolidated Income Statement. Interest expense on the purchase power obligation, included in purchased power expense, was $21.0 million, $20.4 million and $20.3 million during 2000, 1999 and 1998, respectively. Wisconsin Electric has a nuclear fuel leasing arrangement with Wisconsin Electric Fuel Trust ("Trust") which is treated as a capital lease. The nuclear fuel is leased and amortized to fuel expense for a period of 60 months or until the removal of the fuel from the reactor, if earlier. Lease payments include charges for the cost of fuel burned, financing costs and management fees. In the event Wisconsin Electric or the Trust terminates the lease, the Trust would recover its unamortized cost of nuclear fuel from Wisconsin Electric. Under the lease terms, Wisconsin Electric is in effect the ultimate guarantor of the Trust's commercial paper and line of credit borrowings financing the investment in nuclear fuel. Interest expense on the nuclear fuel lease, included in fuel expense, was $3.9 million, $3.5 million and $3.1 million during 2000, 1999 and 1998, respectively. Following is a summary of Wisconsin Electric's capitalized leased facilities and nuclear fuel at December 31.
Capital Lease Assets 2000 1999 - ---------------------------------------- ---- ---- (Millions of Dollars) Leased Facilities Long-term purchase power commitment $140.3 $140.3 Accumulated amortization (18.6) (13.0) ------ ------ Total Leased Facilities $121.7 $127.3 ====== ====== Nuclear Fuel Under capital lease $121.4 $112.6 Accumulated amortization (63.1) (51.8) In process/stock 34.8 22.6 ------ ------ Total Nuclear Fuel $93.1 $83.4 ====== ======
Future minimum lease payments under the capital leases and the present value of the net minimum lease payments as of December 31, 2000 are as follows:
Purchase Power Nuclear Capital Lease Obligations Commitment Fuel Lease Total - ------------------------------------------- ---------- ---------- ----- (Millions of Dollars) 2001 $26.0 $29.0 $55.0 2002 26.9 22.5 49.4 2003 28.0 11.4 39.4 2004 29.0 4.3 33.3 2005 30.1 1.9 32.0 Later Years 501.1 - 501.1 ------ ----- ------ Total Minimum Lease Payments 641.1 69.1 710.2 Less: Estimated Executory Costs (132.2) - (132.2) ------ ----- ------ Net Minimum Lease Payments 508.9 69.1 578.0 Less: Interest (356.6) (5.9) (362.5) ------ ----- ------ Present Value of Net Minimum Lease Payments 152.3 63.2 215.5 Less: Due Currently - (26.2) (26.2) ------ ----- ------ $152.3 $37.0 $189.3 ====== ===== ======
J - SHORT-TERM DEBT Short-term notes payable balances and their corresponding weighted-average interest rates at December 31 consist of:
2000 1999 ---------------------- ---------------------- Interest Interest Short-Term Debt Balance Rate Balance Rate - --------------------------- ------- -------- ------- -------- (Millions of Dollars) Banks Domestic subsidiaries $57.9 6.77% $50.9 6.32% Foreign subsidiaries 10.6 5.39% - - Commercial paper 1,627.3 6.61% 256.6 6.20% Medium-term notes due in less than one year 200.0 6.74% 200.0 6.16% Commercial paper classified as long-term debt (Note I) (509.7) 6.64% - - -------- ------ $1,386.1 6.67% $507.5 6.20% ======== ======
In November 1999, Wisconsin Energy Capital Corporation sold $200 million aggregate principal amount of nine-month adjustable medium-term notes due August 16, 2000. The initial interest rate for the medium-term notes was 6.16%. Proceeds from the 1999 sale of the notes were used to fund a $150 million capital contribution by Wisconsin Energy to Wisconsin Electric and to reduce short-term borrowings and for other general corporate purposes. In August 2000, these notes matured, and Wisconsin Energy Capital Corporation issued $200 million of new twelve- month adjustable medium-term notes due August 16, 2001 to fund the maturity of the 2000 notes. The initial interest rate on the new notes, which is reset quarterly based on 3-month LIBOR plus five basis points, was 6.74%. At December 31, 2000, Wisconsin Energy had $2.0 billion of available unused lines of bank credit on a consolidated basis primarily in support of commercial paper, $1.5 billion of which was obtained in conjunction with the WICOR acquisition. In support of various informal lines of credit from banks, Wisconsin Energy's subsidiaries have agreed to maintain unrestricted compensating balances or to pay commitment fees; neither the compensating balances nor the commitment fees are significant. K - FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amount and estimated fair value of certain of Wisconsin Energy's recorded financial instruments at December 31 are as follows:
2000 1999 --------------------- --------------------- Carrying Fair Carrying Fair Financial Instruments Amount Value Amount Value - ----------------------------- -------- ----- -------- ----- (Millions of Dollars) Nuclear decommissioning trust fund $613.3 $613.3 $625.7 $625.7 Preferred stock - redemption required 30.4 15.4 30.4 18.0 Trust preferred securities 200.0 185.5 200.0 156.0 Long-term debt including current portion 2,607.4 2,553.2 2,010.9 1,923.5
The carrying value of cash and cash equivalents, net accounts receivable, accounts payable and short-term borrowings approximates fair value due to the short maturities of these instruments. The nuclear decommissioning trust fund is carried at fair value as reported by the trustee (see Note F). The fair values of Wisconsin Energy's preferred stock - redemption required and trust preferred securities (see Note H) are estimated based upon the quoted market value for the same or similar issues. The fair value of Wisconsin Energy's long-term debt, including the current portion of long-term debt but excluding capitalized leases, is estimated based upon quoted market value for the same or similar issues or upon the quoted market prices of U.S. Treasury issues having a similar term to maturity, adjusted for the issuing company's bond rating and the present value of future cash flows. L - BENEFITS PENSIONS AND OTHER POSTRETIREMENT BENEFITS: The Company provides defined benefit pension and other postretirement benefit plans to employees. The status of these plans, including a reconciliation of benefit obligations, a reconciliation of plan assets and the funded status of the plans follows.
Other Postretirement Pension Benefits Benefits ------------------- -------------------- Status of Benefit Plans 2000 1999 2000 1999 - ----------------------------------- ---- ---- ---- ---- (Millions of Dollars) Change in Benefit Obligation Benefit Obligation at January 1 $780.7 $752.4 $195.5 $180.8 Service cost 17.7 16.3 4.7 3.3 Interest cost 67.2 51.1 18.0 12.5 Plan participants' contributions - - 5.3 5.1 Plan amendments 4.6 - (29.7) - Actuarial (gain) loss 31.5 (8.0) 6.1 7.6 Acquisitions 162.6 17.7 62.8 1.4 Special termination benefits 1.7 - - - Benefits paid (67.5) (48.8) (18.0) (15.2) -------- ------ ------- ------- Benefit Obligation at December 31 $998.5 $780.7 $244.7 $195.5 Change in Plan Assets Fair Value at January 1 $944.9 $839.7 $83.9 $68.9 Actual return on plan assets (6.4) 137.3 (4.4) 13.1 Employer contributions 2.0 2.5 11.1 10.5 Plan participants' contributions - - 5.3 5.1 Acquisitions 351.8 14.2 71.9 1.5 Benefits paid (67.5) (48.8) (18.0) (15.2) -------- ------ ------- ------- Fair Value at December 31 $1,224.8 $944.9 $149.8 $83.9 -------- ------ ------- ------- Funded Status of Plans Funded status at December 31 $226.3 $164.1 ($94.9) ($111.8) Unrecognized Net actuarial (gain) loss (61.0) (186.9) (42.6) 5.6 Prior service cost 30.0 28.5 0.3 2.4 Net transition obligation (asset) (9.1) (11.4) 27.2 60.3 -------- ------ ------- ------- Net Asset (Accrued Benefit Cost) $186.2 ($5.7) ($110.0) ($43.5) ======== ====== ======= =======
The components of net periodic pension and other postretirement benefit costs as well as the weighted-average assumptions used in accounting for the plans include the following:
Other Postretirement Pension Benefits Benefits -------------------------------- -------------------------------- Benefit Plan Cost Components 2000 1999 1998 2000 1999 1998 - ---------------------------- ---- ---- ---- ---- ---- ---- (Millions of Dollars) Net Periodic Benefit Cost Service cost $17.7 $16.3 $13.1 $4.7 $3.3 $2.7 Interest cost 67.2 51.1 48.7 18.0 12.5 11.8 Expected return on plan assets (89.0) (64.3) (57.8) (11.3) (5.8) (5.0) Amortization of Transition obligation (asset) (2.3) (2.2) (2.2) 4.6 4.6 4.6 Prior service cost 3.9 3.1 3.1 0.1 0.2 0.2 Actuarial loss (gain) 0.6 0.7 0.6 (0.2) 0.2 (0.3) Terminations/curtailment 1.2 - - 8.8 - - ----- ----- ----- ----- ----- ----- Net Periodic Benefit Cost ($0.7) $4.7 $5.5 $24.7 $15.0 $14.0 ===== ===== ===== ===== ===== ===== Weighted-Average Assumptions at December 31 (%) Discount rate 7.5 7.5 6.75 7.5 7.5 6.75 Expected return on plan assets 9.0 9.0 9.0 9.0 9.0 9.0 Rate of compensation increase 3.0 to 3.0 to 3.0 to 3.0 to 4.75 to 3.0 to 5.0 5.0 5.0 5.0 5.0 5.0
PENSION PLANS: Pension plan assets, the majority of which are equity securities, are held by pension trusts. Other pension plan assets include corporate and government bonds and real estate. In the opinion of the Company, current pension trust assets and amounts which are expected to be paid to the trusts in the future will be adequate to meet pension payment obligations to current and future retirees. Commencing November 1, 1992, pension costs or credits for Wisconsin Electric, Wisconsin Gas and Edison Sault have been calculated in accordance with FAS 87, Employers' Accounting for Pensions, and are recoverable from utility customers. Prior to this date, pension costs were recoverable in rates as funded. Wisconsin Gas has recorded a deferred regulatory liability, which is being amortized as a reduction of pension expense over an eight-year period effective November 1, 1994, for the cumulative difference between the amounts funded and FAS 87 pension expenses through November 1, 1992. The values reported for fiscal 1999 now include amounts with respect to Wisvest-Connecticut postretirement welfare plans. The 1999 valuation of these plans was not completed prior to the prior year's filing deadline. Open Window benefits were offered to certain participants in the Wisconsin Electric Retirement Account Plan and Wisconsin Gas Pension Plan for Non-Union Employees. This benefit enhancement resulted in a one-time FAS 88 cost. The measurement date for Wisconsin Gas and WICOR was changed from September 30 to December 31 to match the measurement date used for the other reporting entities within Wisconsin Energy. OTHER POSTRETIREMENT BENEFITS PLANS: The Company uses Employees' Benefit Trusts to fund a major portion of other postretirement benefits for employees of Wisconsin Electric, Wisconsin Gas and the non-utility affiliates. The majority of the trusts' assets are mutual funds or commingled indexed funds. Effective January 1, 1992, postretirement benefit costs have been calculated in accordance with FAS 106, Employers' Accounting for Postretirement Benefits Other Than Pensions, and are recoverable from the utility customers of Wisconsin Electric, Wisconsin Gas and Edison Sault. Wisconsin Gas and Edison Sault have recorded deferred regulatory assets, which are being amortized over a twenty-year period effective January 1, 1992, for the cumulative difference between the amounts funded and FAS 106 postretirement expenses through January 1, 1992. In 2000, the benefit attribution period was modified for the Wisconsin Electric Postretirement medical plans to equal the 10 years of service following the later of age at hire or age 45. This change resulted in a "negative" plan amendment and a "plan curtailment". The measurement date for Wisconsin Gas and WICOR was changed from September 30 to December 31 to match the measurement date used for the other reporting entities within Wisconsin Energy. The assumed health care cost trend rate for 2001 is at 9% for all plan participants decreasing gradually to 5% in 2005 and thereafter. Assumed health care cost trend rates have a significant effect on the amounts reported for health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects:
1% Increase 1% Decrease ----------- ----------- (Millions of Dollars) Effect on Postretirement benefit obligation $19.3 ($16.3) Total of service and interest cost components 2.6 (2.1)
SAVINGS PLANS: Certain operating subsidiaries of the Company sponsor savings plans which allow employees to contribute a portion of their pretax and/or after tax income in accordance with plan-specified guidelines. Matching contributions under these plans charged to expense amounted to $11.2 million, $9.1 million and $7.4 million during 2000, 1999 and 1998, respectively. M - SEGMENT REPORTING Wisconsin Energy Corporation is a diversified holding company with subsidiaries in utility and non-utility businesses. Wisconsin Energy's reportable operating segments include a utility energy segment, a non-utility energy segment and a manufacturing segment. Wisconsin Energy has organized its reportable operating segments based in part upon the regulatory environment in which its utility subsidiaries operate. In addition, the segments are managed separately because each business requires different technology and marketing strategies. The accounting policies of the reportable operating segments are the same as those described in Note A. The utility energy segment primarily includes Wisconsin Energy's electric and natural gas utility operations. The electric utility operation engages in the generation, transmission, distribution and sale of electric energy in southeastern (including Metropolitan Milwaukee), east central and northern Wisconsin and in the Upper Peninsula of Michigan. The natural gas utility operation is responsible for the purchase, distribution and sale of natural gas to retail customers and the transportation of customer-owned natural gas throughout Wisconsin. The non-utility energy segment derives its revenues primarily from energy activities including independent power production, energy marketing, contract meter reading and related services. The manufacturing segment is responsible for the manufacturing of pumps and processing equipment used to pump, control, transfer, hold and filter water and other fluids. Summarized financial information concerning Wisconsin Energy's reportable operating segments for each of the years ended December 31, 2000, 1999 and 1998 is shown in the following table. Current year information is not comparable with the prior years due to the addition of the operating results of the WICOR subsidiaries subsequent to April 26, 2000 and the allocation of merger-related costs (principally interest and goodwill amortization expense) to the operating segments. Substantially all long-lived assets and operations of the Company are domestic.
Reportable Operating Segments ---------------------------------------- Other (a), Energy Corporate & ------------------------ Reconciling Total Year Ended Utility Non-Utility Manufacturing Eliminations Consolidated ------------------- ------- ----------- ------------- ------------ ------------ (Millions of Dollars) December 31, 2000 ----------------- Operating Revenues (b) $2,556.7 $372.8 $374.2 $51.0 $3,354.7 Depreciation, Decommissioning and Amortization 308.5 10.9 5.6 11.3 336.3 Operating Income (Loss) 419.1 1.8 32.5 (8.5) 444.9 Net Income (Loss) 160.0 39.4 7.5 (52.7) 154.2 Capital Expenditures (c) 400.0 107.7 20.3 83.0 611.0 Total Assets 6,526.5 597.9 850.2 431.5 8,406.1 December 31, 1999 ----------------- Operating Revenues (b) $2,050.2 $193.2 $ - $29.2 $2,272.6 Depreciation, Decommissioning and Amortization 237.2 7.0 - 6.6 250.8 Operating Income 455.2 19.7 - 1.2 476.1 Net Income (Loss) 216.0 2.7 - (9.7) 209.0 Capital Expenditures (c) 356.7 43.0 - 118.4 518.1 Total Assets 4,975.3 640.9 - 445.6 6,061.8 December 31, 1998 ----------------- Operating Revenues (b) $1,980.0 $34.1 $ - $25.3 $2,039.4 Depreciation, Decommissioning and Amortization 227.3 1.2 - 3.9 232.4 Operating Income (Loss) 387.4 (0.9) - 4.2 390.7 Net Income (Loss) 184.7 (2.1) - 5.5 188.1 Capital Expenditures (c) 336.1 0.2 - 62.7 399.0 Total Assets 4,675.5 169.2 - 340.9 5,185.6 (a) Other includes all other non-utility activities, primarily non-utility real estate investment and development and non-utility investment in recycling technology as well as interest on corporate debt. (b) Intersegment revenues are not material. (c) Excludes acquisitions.
N - COMMITMENTS AND CONTINGENCIES CAPITAL EXPENDITURES: Certain commitments have been made in connection with 2001 capital expenditures. During 2001, total capital expenditures are estimated to be approximately $715.0 million of which approximately $480.0 million, excluding the purchase of nuclear fuel, is attributable to the utility energy segment, $90.0 million is attributable to the non-utility energy segment, $35.0 million is attributable to the manufacturing segment, $55.0 million is attributable to development and investment in recycling technology and $55.0 million is attributable to other. GIDDINGS & LEWIS, INC./CITY OF WEST ALLIS LAWSUIT: In July 1999, a jury issued a verdict against Wisconsin Electric awarding the plaintiffs, Giddings & Lewis, Inc., Kearney & Trecker Corporation, now a part of Giddings & Lewis, and the City of West Allis, $4.5 million in compensatory damages and $100 million in punitive damages in an action alleging that Wisconsin Electric had deposited cyanide contaminated wood chips in 1959 at two sites in West Allis, Wisconsin owned by the plaintiffs. Internal investigations lead Wisconsin Electric to believe that it was not the source of this waste. Environmental remediation at both sites was completed several years ago, with the current owners paying for disposal of materials found on their respective portions of the sites. In December 1999, in order to stop the post-judgment accrual of interest at 12% during the pendency of the appeal, Wisconsin Electric tendered a contested liability payment of $110 million, which is part of Deferred Charges and Other Assets - Other on the Consolidated Balance Sheet, to the Milwaukee County Clerk of Circuit Court representing the amount of the verdict and accrued interest. Under Wisconsin law, the plaintiffs are liable to Wisconsin Electric upon reversal or reduction of the judgment for the applicable amount of the funds tendered with interest. In further post-trial proceedings, the plaintiffs filed with the Circuit Court a motion for sanctions based upon representations made by Wisconsin Electric during trial that Wisconsin Electric had no insurance coverage for the punitive damage award. On April 27, 2000, the Circuit Court Judge issued a ruling on the matter, imposing the following sanctions against Wisconsin Electric: (i) "judgment in the alternative" as a sanction, thereby finding an alternative basis upon which to sustain the $104.5 million verdict returned by the jury; (ii) a bar against Wisconsin Electric pursuing insurance coverage for the punitive damage portion of the verdict; and (iii) a requirement that Wisconsin Electric pay the plaintiffs' costs relating to the sanctions matter. In addition to appealing the judgment entered on the jury's verdict, Wisconsin Electric is appealing the Judge's ruling on the sanctions matter. In the opinion of management, based in part on the advice of legal counsel, the jury verdict was not supported by the evidence or the law and the unprecedented award of punitive damages of this magnitude was unwarranted and should therefore be reversed or substantially reduced on appeal. Management also believes that the sanctions imposed by the Judge were not supported by the evidence or the law. As such, Wisconsin Electric has not established a reserve for potential damages from this suit. As further developments, two shareholders filed separate shareholder derivative proceedings in Milwaukee County Circuit Court in August and September 2000 for alleged injuries to shareholders resulting from the Giddings & Lewis/City of West Allis litigation. The two lawsuits have been consolidated for pre-trial purposes. In accordance with Wisconsin law, a special committee of independent directors of Wisconsin Energy conducted an investigation into the allegations contained in the lawsuits and concluded that the maintenance of the two actions is not in the best interest of the Company. As a result, Wisconsin Energy moved to dismiss the actions, which is pending before the court. ENVIRONMENTAL MATTERS: The Company periodically reviews its reserves for remediation costs as evidence becomes available indicating that its remediation liability has changed. Given current information, including the following, management believes that future costs in excess of the amounts accrued and/or disclosed on all presently known and quantifiable environmental contingencies will not be material to the Company's financial position or results of operations. During 2000, the Company expanded a voluntary program of comprehensive environmental remediation planning for former manufactured gas plant sites and coal-ash disposal sites. Wisconsin Electric has performed a preliminary assessment of twenty-one sites, including eleven manufactured gas plant sites discussed below, and expects to conduct additional investigations during 2001 as well as to begin discussions with the Wisconsin Department of Natural Resources as necessary. At this time, the Company cannot estimate future remediation costs associated with these sites beyond those described below. MANUFACTURED GAS PLANT SITES: Included as part of its voluntary program noted above, the Company continues to investigate the remediation of thirteen former manufactured gas plant sites and currently estimates that future costs for detailed site investigation and remediation will be $25 million to $40 million over the next ten years for eleven sites at Wisconsin Electric and approximately $6 million for two sites at Wisconsin Gas. Actual costs are uncertain pending the results of further site specific investigations and the selection of site specific remediation. Wisconsin Electric has begun remediation activities at former manufactured gas plant sites in the Cities of Burlington and Kenosha, Wisconsin and expects to begin remediation at sites in Fort Atkinson and Waukesha, Wisconsin in 2001. Remediation of these sites is anticipated to be accomplished at an aggregate cost of between $5 million and $6 million. In Wisconsin Electric's February 13, 1997 Rate Order, the PSCW amplified its position on the recovery of manufactured gas plant site remediation costs. It reiterated its position that such costs should be deferred and amortized and recovered, without carrying costs, in future rate cases. Since the timing and recovery of remediation costs will be affected by the biennial rate case cycle, the timing and magnitude of remediation expenditures, and their recovery, may be affected. ASH LANDFILL SITES: Wisconsin Electric aggressively seeks environmentally acceptable, beneficial uses for its combustion by- products. However, such coal-ash by-products have been, and to some degree, continue to be disposed in company-owned, licensed landfills. Some early designed and constructed landfills may allow the release of low levels of constituents resulting in the need for various levels of remediation. Where Wisconsin Electric has become aware of these conditions, efforts have been expended to define the nature and extent of any release, and work has been performed to address these conditions. The costs of these efforts are included in the environmental operating and maintenance costs of Wisconsin Electric. During 2000, the Company incurred $2.9 million in coal-ash remediation expenses and expects to incur $3.0 million in 2001. MANUFACTURING SEGMENT: The Company's manufacturing subsidiaries are involved in various environmental matters, including matters in which the subsidiaries or alleged predecessors have been named as potentially responsible parties under the Comprehensive Environmental Response Compensation and Liability Act (CERCLA). The Company has established reserves for all of these environmental contingencies of which management is currently aware. REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and the Stockholders of Wisconsin Energy Corporation In our opinion, the consolidated financial statements listed in the index appearing under Item 14(a)(1) present fairly, in all material respects, the financial position of Wisconsin Energy Corporation and its subsidiaries at December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 14(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. /s/PRICEWATERHOUSECOOPERS LLP - -------------------------------------- PricewaterhouseCoopers LLP Milwaukee, Wisconsin February 6, 2001 ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Information regarding a change in accountants was previously reported in a Current Report on Form 8-K dated as of March 8, 2001. PART III -------- ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information under "Item 1: Election of Directors - Terms Expiring in 2004" and "Section 16(a) Beneficial Ownership Reporting Compliance" in Wisconsin Energy's definitive Proxy Statement for its Annual Meeting of Stockholders to be held May 2, 2001 (the "2001 Annual Meeting Proxy Statement") is incorporated herein by reference. Also see "Executive Officers of the Registrant" in Part I of this report. ITEM 11. EXECUTIVE COMPENSATION The information under "Compensation of the Board of Directors," "Executive Officers' Compensation," "Employment and Severance Arrangements" and "Retirement Plans" in the 2001 Annual Meeting Proxy Statement is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The security ownership information under "WEC Common Stock Ownership" in the 2001 Annual Meeting Proxy Statement is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information under "Certain Related Transactions" in the 2001 Annual Meeting Proxy Statement is incorporated herein by reference. PART IV ------- ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1. FINANCIAL STATEMENTS AND REPORTS OF INDEPENDENT ACCOUNTANTS INCLUDED IN PART II OF THIS REPORT Consolidated Income Statement for the three years ended December 31, 2000. Consolidated Statement of Cash Flows for the three years ended December 31, 2000. Consolidated Balance Sheet at December 31, 2000 and 1999. Consolidated Statement of Capitalization at December 31, 2000 and 1999. Consolidated Statement of Common Equity for the three years ended December 31, 2000. Notes to Consolidated Financial Statements. Report of Independent Accountants. 2. FINANCIAL STATEMENT SCHEDULES INCLUDED IN PART IV OF THIS REPORT Schedule I Condensed Parent Company Financial Statements for the periods ended December 31, 2000. Other schedules are omitted because of the absence of conditions under which they are required or because the required information is given in the financial statements or notes thereto. 3. EXHIBITS AND EXHIBIT INDEX See the Exhibit Index included as the last part of this report, which is incorporated herein by reference. Each management contract and compensatory plan or arrangement required to be filed as an exhibit to this report is identified in the Exhibit Index by two asterisks (**) following the description of the exhibit. (b) REPORTS ON FORM 8-K A Current Report on Form 8-K dated as of December 21, 2000 was filed by Wisconsin Energy on December 27, 2000 to announce the agreement to sell Wisvest-Connecticut, LLC's two fossil-fueled power plants in the state of Connecticut to NRG Energy, Inc. A Current Report on Form 8-K dated as of March 2, 2001 was filed by Wisconsin Energy on March 2, 2001 to report its 2000 Annual Financial Statements and Review of Operations. A Current Report on Form 8-K dated as of March 8, 2001 was filed by Wisconsin Energy on March 15, 2001 to report a change in accountants.
WISCONSIN ENERGY CORPORATION INCOME STATEMENT (Parent Company Only) SCHEDULE I - CONDENSED PARENT COMPANY FINANCIAL STATEMENTS Year Ended December 31 --------------------------------------------------- 2000 1999 1998 ---- ---- ---- (Millions of Dollars) Miscellaneous Income $48.2 $6.9 $1.9 Miscellaneous Expense 16.6 3.8 2.0 Interest Expense 63.0 3.0 3.2 Distributions on Preferred Securities 13.7 10.5 - Merger Expense 1.1 0.7 0.5 ------ ------ ------ (46.2) (11.1) (3.8) Income Taxes (15.4) (3.9) (1.1) ------ ------ ------ (30.8) (7.2) (2.7) Equity in Subsidiaries' Earnings 185.0 216.2 190.8 ------ ------ ------ Net Income $154.2 $209.0 $188.1 ====== ====== ====== See accompanying notes to condensed parent company financial statements.
WISCONSIN ENERGY CORPORATION STATEMENT OF CASH FLOWS (Parent Company Only) SCHEDULE I - CONDENSED PARENT COMPANY FINANCIAL STATEMENTS - (Cont'd) Year Ended December 31 ------------------------------------- 2000 1999 1998 ---- ---- ---- (Millions of Dollars) Operating Activities Net Income $154.2 $209.0 $188.1 Reconciliation to cash Equity in subsidiaries' earnings (185.0) (216.2) (190.8) Dividends from subsidiaries 181.6 181.6 179.0 Other (15.2) (8.0) (0.6) -------- ------ ------ Cash Provided by Operating Activities 135.6 166.4 175.7 Investing Activities Equity investment in subsidiaries, net (600.0) (255.0) (19.0) Change in notes receivable from associated companies (773.0) 20.1 (43.1) Other (11.6) (0.3) 2.7 -------- ------ ------ Cash Used in Investing Activities (1,384.6) (235.2) (59.4) Financing Activities Issuance of common stock 89.3 79.1 10.3 Repurchase of common stock (100.8) - - Issuance of manditorily redeemable trust preferred securities - 193.7 - Dividends paid on common stock (165.3) (182.3) (177.4) Change in notes payable 1,168.1 (24.2) 66.6 Change in notes payable from associated companies 253.3 6.9 (15.6) -------- ------ ------ Cash Provided By (Used in) Financing Activities 1,244.6 73.2 (116.1) -------- ------ ------ Change in Cash and Cash Equivalents (4.4) 4.4 0.2 Cash and Cash Equivalents at Beginning of Year 4.6 0.2 - -------- ------ ------ Cash and Cash Equivalents at End of Year $0.2 $4.6 $0.2 ======== ====== ====== Cash Paid (Received) For Interest $68.8 $2.9 $3.0 Income taxes (4.2) (1.3) (2.2) See accompanying notes to condensed parent company financial statements.
WISCONSIN ENERGY CORPORATION BALANCE SHEET (Parent Company Only) SCHEDULE I - CONDENSED PARENT COMPANY FINANCIAL STATEMENTS - (Cont'd) December 31 ------------------------------ 2000 1999 ---- ---- (Millions of Dollars) Assets ------ Current Assets Cash and cash equivalents $0.2 $4.6 Accounts and notes receivable from associated companies 803.0 23.7 Other 19.5 5.3 -------- -------- Total Current Assets 822.7 33.6 Property and Investments Investment in subsidiary companies 2,869.3 2,217.4 Other 1.2 1.0 -------- -------- Total Property and Investments 2,870.5 2,218.4 Deferred Charges 33.8 24.5 -------- -------- Total Assets $3,727.0 $2,276.5 ======== ======== Liabilities and Equity ---------------------- Current Liabilities Accounts and notes payable $1,211.4 $42.7 Accounts and notes payable to associated companies 263.2 7.6 Other 9.1 0.2 -------- -------- Total Current Liabilities 1,483.7 50.5 Deferred Credits 20.8 15.5 Manditorily Redeemable Trust Preferred Securities 200.0 200.0 Stockholders' Equity Common stock 837.3 842.3 Retained earnings 148.2 134.7 Undistributed subsidiaries' earnings 1,037.0 1,033.5 -------- -------- Total Stockholders' Equity 2,022.5 2,010.5 -------- -------- Total Liabilities and Equity $3,727.0 $2,276.5 ======== ======== See accompanying notes to condensed parent company financial statements.
WISCONSIN ENERGY CORPORATION NOTES TO FINANCIAL STATEMENTS (Parent Company Only) SCHEDULE I - CONDENSED PARENT COMPANY FINANCIAL STATEMENTS - (Cont'd) 1. The condensed parent company financial statements and notes should be read in conjunction with the consolidated financial statements and notes of Wisconsin Energy Corporation appearing in this Annual Report on Form 10-K. 2. Various financing arrangements and regulatory requirements impose certain restrictions on the ability of the principal utility subsidiaries and various financing arrangements impose restrictions on the non-utility subsidiaries to transfer funds to Wisconsin Energy in the form of cash dividends, loans or advances. Under Wisconsin law, Wisconsin Electric Power Company and Wisconsin Gas Company are prohibited from loaning funds, either directly or indirectly, to Wisconsin Energy. The Company does not believe that such restrictions will affect its operations. CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements of Wisconsin Energy Corporation listed below of our report dated February 6, 2001 relating to the financial statements, which appears in this Form 10-K: 1. Registration Statement on Form S-3 (Registration No. 333- 34854) - Stock Plus Investment Plan. 2. Registration Statement on Form S-8 (Registration No. 333- 86467) - Employee Retirement Savings Plan. 3. Registration Statements on Form S-8 (Registration Nos. 33- 65225 and 333-41104) - 1993 Omnibus Stock Incentive Plan. 4. Registration Statement on Form S-8 (Registration No. 333- 35800) - Assumed WICOR 401(k) Plans. 5. Registration Statement on Form S-8 (Registration No. 333- 35798) - Assumed WICOR Stock Options. 6. Registration Statement on Form S-3 (Registration No. 333- 73137) - Debt and Trust Preferred Securities. 7. Registration Statement on Form S-3 (Registration No. 333- 56508) - Debt Securities. /s/PricewaterhouseCoopers LLP - ----------------------------- PRICEWATERHOUSECOOPERS LLP Milwaukee, Wisconsin March 22, 2001
SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, therunto duly authorized. WISCONSIN ENERGY CORPORATION By /s/RICHARD A. ABDOO ---------------------------------------- Date: March 22, 2001 Richard A. Abdoo, Chairman of the Board, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated. /s/RICHARD A. ABDOO March 22, 2001 - -------------------------------------------------- Richard A. Abdoo, Chairman of the Board, President and Chief Executive Officer and Director- Principal Executive Officer /s/PAUL DONOVAN March 22, 2001 - -------------------------------------------------- Paul Donovan, Senior Vice President and Chief Financial Officer - Principal Financial Officer /s/STEPHEN P. DICKSON March 22, 2001 - -------------------------------------------------- Stephen P. Dickson, Controller - Principal Accounting Officer /s/JOHN F. AHEARNE March 22, 2001 - -------------------------------------------------- John F. Ahearne, Director /s/JOHN F. BERGSTROM March 22, 2001 - -------------------------------------------------- John F. Bergstrom, Director /s/BARBARA L. BOWLES March 22, 2001 - -------------------------------------------------- Barbara L. Bowles, Director /s/ROBERT A. CORNOG March 22, 2001 - -------------------------------------------------- Robert A. Cornog, Director /s/WILLIE D. DAVIS March 22, 2001 - -------------------------------------------------- Willie D. Davis, Director /s/RICHARD R. GRIGG March 22, 2001 - -------------------------------------------------- Richard R. Grigg, Director /s/FREDRICK P. STRATTON, JR. March 22, 2001 - -------------------------------------------------- Fredrick P. Stratton, Jr., Director /s/GEORGE E. WARDEBERG March 22, 2001 - -------------------------------------------------- George E. Wardeberg, Director
WISCONSIN ENERGY CORPORATION (Commission File No. 001-09057) EXHIBIT INDEX to Annual Report on Form 10-K For the year ended December 31, 2000 The following exhibits are filed with or incorporated by reference in the report with respect to Wisconsin Energy. (An asterisk (*) indicates incorporation by reference pursuant to Exchange Act Rule 12b-32.) Number Exhibit - ------ ------------------------------------------------- 2 Plan of acquisition, reorganization, arrangement, liquidation, or succession 2.1* Agreement and Plan of Merger, dated as of June 27, 1999, as amended as of September 9, 1999, by and among Wisconsin Energy Corporation, WICOR, Inc. and CEW Acquisition, Inc. (Appendix A to the joint proxy statement/prospectus dated September 10, 1999, included in Wisconsin Energy's Registration on Form S-4 filed on September 9, 1999 File No. 333-86827 (the "Form S-4").) 2.2* Amendment to Agreement and Plan of Merger dated as of September 9, 1999. (Exhibit 2.2 to the Form S-4.) 2.3* Second Amendment to Agreement and Plan of Merger dated as of April 26, 2000 (Exhibit 2.3 to Wisconsin Energy's Current Report of Form 8-K dated as of April 26, 2000). 3 Articles of Incorporation and Bylaws 3.1 * Restated Articles of Incorporation of Wisconsin Energy Corporation, as amended and restated effective June 12, 1995. (Exhibit (3)-1 to Wisconsin Energy's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995, File No. 1-9057.) 3.2 * Bylaws of Wisconsin Energy, as amended to May 1, 2000. (Exhibit 3.1 to Wisconsin Energy's Quarterly Report on Form 10-Q for the quarter ended March 31, 2000). 4 Instruments defining the rights of security holders, including indentures 4.1 * Reference is made to Article III of the Restated Articles of Incorporation. (Exhibit 3.1 herein.) Mortgage, Indenture, Supplemental Indenture or Securities Resolutions: 4.2 * Mortgage and Deed of Trust of Wisconsin Electric, dated October 28, 1938 (Exhibit B- 1 under File No. 2-4340.) 4.3 * Second Supplemental Indenture of Wisconsin Electric, dated June 1, 1946 (Exhibit 7-C under File No. 2-6422.) 4.4 * Third Supplemental Indenture of Wisconsin Electric, dated March 1, 1949 (Exhibit 7-C under File No. 2-8456.) 4.5 * Fourth Supplemental Indenture of Wisconsin Electric, dated June 1, 1950 (Exhibit 7-D under File No. 2-8456.) 4.6 * Fifth Supplemental Indenture of Wisconsin Electric, dated May 1, 1952 (Exhibit 4-G under File No. 2-9588.) 4.7 * Sixth Supplemental Indenture of Wisconsin Electric, dated May 1, 1954 (Exhibit 4-H under File No. 2-10846.) 4.8 * Seventh Supplemental Indenture of Wisconsin Electric, dated April 15, 1956 (Exhibit 4-I under File No. 2-12400.) 4.9 * Eighth Supplemental Indenture of Wisconsin Electric, dated April 1, 1958 (Exhibit 2-I under File No. 2-13937.) 4.10 * Ninth Supplemental Indenture of Wisconsin Electric, dated November 15, 1960 (Exhibit 2-J under File No. 2-17087.) 4.11 * Tenth Supplemental Indenture of Wisconsin Electric, dated November 1, 1966 (Exhibit 2- K under File No. 2-25593.) 4.12 * Eleventh Supplemental Indenture of Wisconsin Electric, dated November 15, 1967 (Exhibit 2-L under File No. 2-27504.) 4.13 * Twelfth Supplemental Indenture of Wisconsin Electric, dated May 15, 1968 (Exhibit 2-M under File No. 2-28799.) 4.14 * Thirteenth Supplemental Indenture of Wisconsin Electric, dated May 15, 1969 (Exhibit 2-N under File No. 2-32629.) 4.15 * Fourteenth Supplemental Indenture of Wisconsin Electric, dated November 1, 1969 (Exhibit 2-O under File No. 2-34942.) 4.16 * Fifteenth Supplemental Indenture of Wisconsin Electric, dated July 15, 1976 (Exhibit 2-P under File No. 2-54211.) 4.17 * Sixteenth Supplemental Indenture of Wisconsin Electric, dated January 1, 1978 (Exhibit 2-Q under File No. 2-61220.) 4.18 * Seventeenth Supplemental Indenture of Wisconsin Electric, dated May 1, 1978 (Exhibit 2-R under File No. 2-61220.) 4.19 * Eighteenth Supplemental Indenture of Wisconsin Electric, dated May 15, 1978 (Exhibit 2-S under File No. 2-61220.) 4.20 * Nineteenth Supplemental Indenture of Wisconsin Electric, dated August 1, 1979 (Exhibit (a)2(a) under File No. 1-1245, 9/30/79 Wisconsin Electric Form 10-Q.) 4.21 * Twentieth Supplemental Indenture of Wisconsin Electric, dated November 15, 1979 (Exhibit (a)2(a) under File No. 1-1245, 12/31/79 Wisconsin Electric Form 10-K.) 4.22 * Twenty-First Supplemental Indenture of Wisconsin Electric, dated April 15, 1980 (Exhibit (4)-21 under File No. 2-69488.) 4.23 * Twenty-Second Supplemental Indenture of Wisconsin Electric, dated December 1, 1980 (Exhibit (4)-1 under File No. 1-1245, 12/31/80 Wisconsin Electric Form 10-K.) 4.24 * Twenty-Third Supplemental Indenture of Wisconsin Electric, dated September 15, 1985 (Exhibit (4)-1 under File No. 1-1245, 9/30/85 Wisconsin Electric Form 10-Q.) 4.25 * Twenty-Fourth Supplemental Indenture of Wisconsin Electric, dated September 15, 1985 (Exhibit (4)-1 under File No. 1-1245, 9/30/85 Wisconsin Electric Form 10-Q.) 4.26 * Twenty-Fifth Supplemental Indenture of Wisconsin Electric, dated December 15, 1986 (Exhibit (4)-25 under File No. 1-1245, 12/31/86 Wisconsin Electric Form 10-K.) 4.27 * Twenty-Sixth Supplemental Indenture of Wisconsin Electric, dated January 1, 1988 (Exhibit 4 under File No. 1-1245, 1/26/88 Wisconsin Electric Form 8-K.) 4.28 * Twenty-Seventh Supplemental Indenture of Wisconsin Electric, dated April 15, 1988 (Exhibit 4 under File No. 1-1245, 3/31/88 Wisconsin Electric Form 10-Q.) 4.29 * Twenty-Eighth Supplemental Indenture of Wisconsin Electric, dated September 1, 1989 (Exhibit 4 under File No. 1-1245, 9/30/89 Wisconsin Electric Form 10-Q.) 4.30 * Twenty-Ninth Supplemental Indenture of Wisconsin Electric, dated October 1, 1991 (Exhibit 4-1 under File No. 1-1245, 12/31/91 Wisconsin Electric Form 10-K.) 4.31 * Thirtieth Supplemental Indenture of Wisconsin Electric, dated December 1, 1991 (Exhibit 4-2 under File No. 1-1245, 12/31/91 Wisconsin Electric Form 10-K.) 4.32 * Thirty-First Supplemental Indenture of Wisconsin Electric, dated August 1, 1992 (Exhibit 4-1 under File No. 1-1245, 6/30/92 Wisconsin Electric Form 10-Q.) 4.33 * Thirty-Second Supplemental Indenture of Wisconsin Electric, dated August 1, 1992 (Exhibit 4-2 under File No. 1-1245, 6/30/92 Wisconsin Electric Form 10-Q.) 4.34 * Thirty-Third Supplemental Indenture of Wisconsin Electric, dated October 1, 1992 (Exhibit 4-1 under File No. 1-1245, 9/30/92 Wisconsin Electric Form 10-Q.) 4.35 * Thirty-Fourth Supplemental Indenture of Wisconsin Electric, dated November 1, 1992 (Exhibit 4-2 under File No. 1-1245, 9/30/92 Wisconsin Electric Form 10-Q.) 4.36 * Thirty-Fifth Supplemental Indenture of Wisconsin Electric, dated December 15, 1992 (Exhibit 4-1 under File No. 1-1245, 12/31/92 Wisconsin Electric Form 10-K.) 4.37 * Thirty-Sixth Supplemental Indenture of Wisconsin Electric, dated January 15, 1993 (Exhibit 4-2 under File No. 1-1245, 12/31/92 Wisconsin Electric Form 10-K.) 4.38 * Thirty-Seventh Supplemental Indenture of Wisconsin Electric, dated March 15, 1993 (Exhibit 4-3 under File No. 1-1245, 12/31/92 Wisconsin Electric Form 10-K.) 4.39 * Thirty-Eighth Supplemental Indenture of Wisconsin Electric, dated August 1, 1993 (Exhibit (4)-1 under File No. 1-1245, 6/30/93 Wisconsin Electric Form 10-Q.) 4.40 * Thirty-Ninth Supplemental Indenture of Wisconsin Electric, dated September 15, 1993 (Exhibit (4)-1 under File No. 1-1245, 9/30/93 Wisconsin Electric Form 10-Q.) 4.41 * Fortieth Supplemental Indenture of Wisconsin Electric, dated January 1, 1996 (Exhibit (4)-1 under File No. 1-1245, 1/1/96 Wisconsin Electric Form 8-K.) 4.42 * Indenture for Debt Securities of Wisconsin Electric (the "Wisconsin Electric Indenture"), dated December 1, 1995 (Exhibit (4)-1 under File No. 1-1245, 12/31/95 Wisconsin Electric Form 10-K.) 4.43 * Securities Resolution No. 1 of Wisconsin Electric under the Wisconsin Electric Indenture, dated December 5, 1995 (Exhibit (4)-2 under File No. 1-1245, 12/31/95 Wisconsin Electric Form 10-K.) 4.44 * Securities Resolution No. 2 of Wisconsin Electric under the Wisconsin Electric Indenture, dated November 12, 1996 (Exhibit 4.44 under File No. 1-9057, 12/31/96 Wisconsin Energy Corporation Form 10-K.) 4.45 * Securities Resolution No. 3 of Wisconsin Electric under the Wisconsin Electric Indenture, dated May 27, 1998 (Exhibit (4)- 1 under File No. 1-1245, 6/30/98 Wisconsin Electric Form 10-Q.) 4.46 * Securities Resolution No. 4 of Wisconsin Electric under the Wisconsin Electric Indenture, dated November 30, 1999 4.47 * Indenture for Debt Securities of Wisconsin Energy (the "Wisconsin Energy Indenture"), dated as of March 15, 1999 (Exhibit 4.46 under File No. 1-9057, 3/25/99 Wisconsin Energy Form 8-K.) 4.48 * Securities Resolution No. 1 of Wisconsin Energy under the Wisconsin Energy Indenture, dated as of March 16, 1999 (Exhibit 4.47 under File No. 1-9057, 3/25/1999 Wisconsin Energy Form 8-K.) 4.49 * Amended and Restated Trust Agreement among Wisconsin Energy, as Depositor, The First National Bank of Chicago, as Property Trustee, First Chicago Delaware Inc, as Trustee, and the Administrative Trustees for WEC Capital Trust I, dated as of March 25, 1999 (Exhibit 4.48 under File No. 1-9057, 3/25/1999 Wisconsin Energy Form 8-K.) 4.50 * Guarantee Agreement between Wisconsin Energy, as Guarantor, and The First National Bank of Chicago, as Trustee, dated as of March 25, 1999 (Exhibit 4.49 under File No. 1-9057, 3/25/1999 Wisconsin Energy Form 8-K.) Certain agreements and instruments with respect to long-term debt not exceeding 10 percent of the total assets of the Registrant and its subsidiaries on a consolidated basis have been omitted as permitted by related instructions. The Registrant agrees pursuant to Item 601(b)(4) of Regulation S-K to furnish to the Securities and Exchange Commission, upon request, a copy of all such agreements and instruments. 10 Material Contracts 10.1 * Supplemental Executive Retirement Plan of Wisconsin Energy Corporation (as amended and restated as of June 2, 1999). (Exhibit (10)-1 to Wisconsin Energy Corporation's 6/30/1999 Form 10-Q.)** See Note. 10.2 Non-Qualified Trust Agreement by and between Wisconsin Energy Corporation and The Northern Trust Company dated December 1, 2000, regarding trust established to provide a source of funds to assist in meeting of the liabilities under various nonqualified deferred compensation plans made between Wisconsin Energy Corporation or its subsidiaries and various plan participants.** See Note. 10.3 Employment arrangement with Charles R. Cole, effective August 1, 1999.** See Note. 10.4 * Executive Deferred Compensation Plan of Wisconsin Energy Corporation, effective January 1, 1989, as amended and restated as of June 2, 1999. (Exhibit (10)-2 to Wisconsin Energy Corporation's 6/30/1999 Form 10-Q.)** See Note. 10.5 * Directors' Deferred Compensation Plan of Wisconsin Energy Corporation, effective January 1, 1987, and as restated as of January 1, 1996. (Exhibit (10)-4 to Wisconsin Energy Corporation's Annual Report on Form 10-K for the year ended December 31, 1995, File No. 1 - 9057.) ** See Note. 10.6 * Forms of Stock Option Agreements under 1993 Omnibus Stock Incentive Plan. (Exhibit 10.5 to Wisconsin Energy Corporation's Annual Report on Form 10-K for the year ended December 31, 1995, File No. 1-9057. Updated as Exhibit 10.1(a) and 10.1(b) to Wisconsin Energy Corporation's 3/31/2000 Form 10-Q.)** See Note. 10.7 Employment arrangement with Larry Salustro, effective December 12, 1997.** See Note. 10.8 * Supplemental Benefits Agreement between Wisconsin Energy Corporation and Richard A. Abdoo dated November 21, 1994, as amended by an April 26, 1995 letter agreement. (Exhibit (10)-1 to Wisconsin Energy Corporation's 6/30/95 Form 10-Q.) ** See Note. 10.9 * Amended and Restated Wisconsin Energy Corporation Special Executive Severance Policy, effective as of April 26, 2000. (Exhibit 10.3 to Wisconsin Energy Corporation's 3/31/2000 Form 10-Q.)** See Note. 10.10* 1993 Omnibus Stock Incentive Plan adopted by the board of directors on December 15, 1993, approved by shareholders at the Annual Meeting of Stockholders held on May 11, 1994, and amended by the board of directors on May 19, 1998 offering performance-based incentives and other equity interests in Wisconsin Energy Corporation to directors, officers and other key employees. (Exhibit 10.10 to Wisconsin Energy Corporation's 12/31/1998 Form 10-K.) ** See Note. 10.11* 1998 Revised forms of award agreements under 1993 Omnibus Stock Incentive Plan, as amended, for non-qualified stock option awards to non-employee directors, restricted stock awards, incentive stock option awards and non-qualified stock option awards. (Exhibit 10.11 to Wisconsin Energy Corporation's 12/31/1998 Form 10-K.)** See Note. 10.12 Short-Term Performance Plan of Wisconsin Energy Corporation effective January 1, 1992, as amended and restated as of August 15, 2000.** See Note. 10.13* Service Agreement dated January 1, 1987, between Wisconsin Electric, Wisconsin Energy Corporation and other non-utility affiliated companies. (Exhibit (10)-(a) to Wisconsin Electric's Current Report on Form 8-K dated January 2, 1987 in File No. 1-1245.) 10.14* Senior Officer Change in Control Agreement between Wisconsin Energy Corporation and Richard A. Abdoo effective July 18, 2000. (Exhibit 10.1 to Wisconsin Energy Corporation's 6/30/00 Form 10-Q.)** See Note. 10.15* Form of Deferred Compensation Agreement between Wisconsin Gas Company and certain of its executive officers (Incorporated by reference to Exhibit 10.30 to WICOR, Inc.'s Annual Report on Form 10-K for 1990 (File No. 001-07951).)** See Note. 10.16* Senior Officer Change in Control, Severance, Special Pension, and Non-Compete Agreement between Wisconsin Energy Corporation and Paul Donovan effective November 8, 2000. (Exhibit 10.1 to Wisconsin Energy Corporation's 9/30/00 Form 10-Q.)** See Note. 10.17* Employment agreement with George E. Wardeberg as Vice Chairman of the Board of Directors of Wisconsin Energy Corporation, effective April 26, 2000. (Exhibit 10.2(a) to Wisconsin Energy Corporation's 3/31/2000 Form 10-Q.)** See Note. 10.18* Non-Qualified Stock Option Agreement with George E. Wardeberg, dated April 26, 2000, granted pursuant to the Employment Agreement. (Exhibit 10.2(b) to Wisconsin Energy Corporation's 3/31/2000 Form 10-Q.)** See Note. 10.19* Amended and Restated Wisconsin Energy Corporation Executive Severance Policy, effective as of April 26, 2000. (Exhibit 10.4 to Wisconsin Energy Corporation's 3/31/2000 Form 10-Q.)** See Note. 10.20 Senior Officer Change in Control, Severance and Non-Compete Agreement between Wisconsin Energy Corporation and Richard R. Grigg effective January 29, 2001.** See Note 10.21* Form of amendment to the Deferred Compensation Agreement between Wisconsin Gas Company and Thomas F. Schrader (Incorporated by reference to Exhibit 10.1 to the WICOR, Inc.'s Quarterly Report on Form 10-Q dated November 12, 1999 (File No. 001-07951).)** See Note. 10.22* Service Agreement, dated as of June 1, 1994, among WICOR, Inc., Wisconsin Gas Company, Sta-Rite Industries, Inc., WEXCO of Delaware, Inc. and SHURflo Pump Manufacturing Co. (Incorporated by reference Exhibit 10.1 to the WICOR, Inc.'s Annual Report Form 10-K for 1995 (File No. 001-07951).)** See Note. 10.23* Endorsement of Hypro Corporation, dated as of July 19, 1995, to Service Agreement among WICOR, Inc., Wisconsin Gas Company, Sta-Rite Industries, Inc. and WEXCO of Delaware, Inc. (Incorporated by reference to Exhibit 10.2 to the WICOR, Inc.'s Annual Report Form 10-K for 1995 (File No. 001- 07951).)** See Note. 10.24* WICOR, Inc. 1994 Long-Term Performance Plan, as amended (Exhibit 10.1 to WICOR, Inc.'s Form 10-Q for the quarter ended June 30, 1998 (File No. 001-07951).)** See Note. 10.25* Form of Nonstatutory Stock Option Agreement under the WICOR, Inc. 1994 Long-Term Performance Plan (Exhibit 4.2 to WICOR's Registration Statement on Form S-8 (Reg. No. 33-55755).)** See Note. 10.26* Form of Nonstatutory Stock Option Agreement for February, 2000 Grants of Options under the WICOR, Inc. 1994 Long-Term Performance Plan (Exhibit 4.5 to Wisconsin Energy's Registration Statement on Form S-8 (Reg. No. 333-35798).)** See Note. 10.27* WICOR, Inc. 1992 Director Stock Option Plan, as amended (Exhibit 10.3 to WICOR's Form 10-K for the year ended December 31, 1998 (File No. 001-07951).)** See Note. 10.28* Form of Director Nonstatutory Stock Option Agreement under the WICOR, Inc. 1992 Director Stock Option Plan (Exhibit 4.2 to WICOR's Registration Statement on Form S-8 (Reg. No. 33-67132).) **See Note. 10.29* Form of Director Nonstatutory Stock Option Agreement for February, 2000 Option Grants under the WICOR, Inc. 1992 Director Stock Option Plan (Exhibit 4.8 to Wisconsin Energy's Registration Statement on Form S-8 (Reg. No. 333-35798).)** See Note 10.30* WICOR, Inc. 1987 Stock Option Plan, as amended (Exhibit 4.1 to WICOR's Registration Statement on Form S-8 (Reg. No. 33-67134).) **See Note. 10.31* Form of Nonstatutory Stock Option Agreement under the WICOR, Inc. 1987 Stock Option Plan (Exhibit 10.20 to WICOR's Form 10-K for the year ended December 31, 1991 (File No. 001-07951).)**See Note. 10.32 Service Agreement, dated April 25, 2000, between Wisconsin Electric Power Company and Wisconsin Gas Company. 10.33 Service Agreement, dated December 29, 2000, between Wisconsin Electric Power Company and American Transmission Company LLC. Note: Two asterisks (**) identify management contracts and executive compensation plans or arrangements required to be filed as exhibits pursuant to Item 14(c) of Form 10-K. Certain compensatory plans in which directors or executive officers of Wisconsin Electric are eligible to participate are not filed as Wisconsin Electric exhibits in reliance on the exclusion in Item 601(b)(10)(iii)(B)(6) of Regulation S-K. 21 Subsidiaries of the registrant 21.1 Subsidiaries of Wisconsin Energy Corporation 23 Consents of experts and counsel 23.1 PricewaterhouseCoopers LLP - Milwaukee, WI Consent of Independent Accountants appearing in this Annual Report on Form 10-K for the year ended December 31, 2000. EX-10.2 2 0002.txt NON-QUALIFIED TRUST AGREEMENT Exhibit 10.2 RABBI TRUST AGREEMENT AGREEMENT made as of December 1, 2000, by and among Wisconsin Energy Corporation, a corporation organized under the laws of the State of Wisconsin or any successor corporation (hereinafter referred to as the "Company"), and The Northern Trust Company, an Illinois corporation, of Chicago, Illinois (hereinafter referred to as the "Trustee"). WITNESSETH: WHEREAS, the Company has adopted the nonqualified deferred compensation plans listed in attached Exhibit A (hereinafter referred to collectively as "Plans"); WHEREAS, the Company and certain of its subsidiaries have incurred or expect to incur liability under the terms of such Plans with respect to the individuals participating in such Plans (hereinafter referred to as the "Participants"); and WHEREAS, the Company has previously established a grantor trust (hereinafter referred to as the "Trust") for the purpose of accumulating assets to assist it in fulfilling its obligations under the Plans, to which Trust the Company shall make contributions in the amounts determined in accordance with the terms of the Plans and the Company now wishes to amend and restate that trust into the form of this Agreement; and WHEREAS, the Company desires the Trustee to hold all funds contributed by the Company and the Trustee is willing to hold and administer such funds pursuant to the terms of this Agreement; and WHEREAS, the Company will establish separate accounts (hereinafter referred to as "Accounts") with respect to each Participant in the Plans to provide a source of payments of the Company's obligations to Participants under the Plans; and WHEREAS, the Company desires that the assets of the Trust should be available to satisfy the claims of the Company's or its subsidiaries' general creditors in case of Insolvency, as defined in Article SEVENTH hereof. NOW, THEREFORE, in consideration of the premises and of the mutual covenants herein contained, the Company and the Trustee do hereby covenant and agree as follows: FIRST The Trustee shall receive any contributions paid to it in cash or in other property acceptable to it, which shall from time to time be transferred to the Trustee by the Company. All contributions so received together with the income therefrom and any other increment thereon (hereinafter referred to as the "Trust Fund") shall be held, managed and administered by the Trustee pursuant to the terms of this Agreement. The amount of contributions by the Company to the Trust Fund shall be determined in accordance with the provisions of Article SECOND hereof, and the Trustee shall have no duty or responsibility with respect thereto. The Trustee may maintain one or more separate investment funds in the Trust Fund, and it may commingle the assets of the Plans; provided, however, that the Company reserves the right to designate a specific asset or amount as belonging to a particular fund at the time such asset or amount is contributed to or acquired by the Trust Fund. The Company shall create a separate Account for each Participant under each Plan, where appropriate as determined by the Company, based upon the contributions for the Participant from the Company. The rights of each Participant may not be assigned, pledged, alienated, or conveyed and are not subject to attachment, garnishment or execution. The Trustee shall revalue the Trust Fund as of the last business day of each calendar month at current market values, as determined by the Trustee. The Trustee may rely conclusively upon the determination of the Company with respect to the fair market value of any Trust assets which the Trustee deems not to have a readily ascertainable fair market value and upon the determination of the issuer of any insurance contracts/policies with respect to the fair market value of such insurance contracts/policies. Net investment gains and losses (i.e., appreciation or depreciation in the value of assets, income and losses) shall be allocated by the Company proportionately among Participants' Accounts as of the end of each calendar month ("Accounting Date"). The Company shall maintain the record of the Accounts of each Participant in the Trust Fund based on the information provided by the Trustee regarding net investment gains and losses and on information provided by the Company regarding aggregate contributions to and distributions from the Trust Fund with respect to each Participant. SECOND The Company shall pay to the Trustee such amount as may be considered appropriate to provide for the payment of benefits under the Plans and the expenses of administration of the Trust. Immediately prior to the occurrence of a Change in Control or on the occurrence of a Potential Change in Control (as defined in Article FIFTEENTH of this Trust Agreement), the Company shall make an irrevocable contribution to the Trust in an amount that is sufficient to pay each Plan participant or beneficiary one hundred and ten percent (110%) of the benefits to which Plan participants or beneficiaries would be entitled pursuant to the terms of the Plans(s) as of the date of the Change in Control or Potential Change in Control, and the Company shall make a contribution during each January thereafter (the date of such contribution being referenced to as the "January Contribution Date") in an amount which, when taken together with the assets of the trust as of such January Contribution Date, is sufficient to pay each Plan participant or beneficiary 110% of the benefits to which Plan participants or beneficiaries would be entitled pursuant to the terms of the Plan(s) as of the preceding December 31. Notwithstanding any other provision of this Trust Agreement, if no Change in Control has occurred during the period beginning on the occurrence of a Potential Change in Control and ending on the date which is six months following such Potential Change in Control (such period being referred to as the "Six-Month Period") any amounts contributed by the Company to the Trust during the Six-Month Period shall be returned to the Company by the Trustee. The Trustee shall have no duty to determine the adequacy of or enforce any funding obligations of the Company, and the duties of the Trustee shall be governed solely by the terms of the Trust without reference to the terms of the Plans. THIRD The Trustee shall from time to time, upon the direction of the Company, make distributions or payments out of the Trust Fund, to such persons, in such manner and in such amounts as the Company shall deem necessary to satisfy the Company's obligation to provide benefits under the Plans, and the Company shall charge Participants' Accounts accordingly. The Trustee shall not be liable for the proper application of any part of the Trust Fund and shall not be liable for any distribution made in good faith at the direction of the Company without actual notice or knowledge of the changed status or condition of any recipient. The Trustee shall withhold such amounts from distributions as the Company directs and shall follow the instructions of the Company with respect to remission of such withheld amounts to the Company or to the appropriate governmental authorities. The Company shall have sole responsibility for any withholding related filings or reports. Nothing in this Agreement shall relieve the Company of its liabilities to pay the benefits provided under the Plans except to the extent such liabilities are met by the application of Trust Fund assets. It is the intention of the Company to have each Account established hereunder treated as a separate account designed to satisfy the Company's legal liability under the applicable Plan in respect of the Participant for whom such Account has been established, provided, however, that if a Participant's benefits under each of the Plans are paid directly by the Company, the balance of his Accounts shall revert to the Company pursuant to direction of the Company upon certification by the Company to the Trustee that the Company's legal liabilities to such Participant under each of the Plans have been satisfied. This Trust is intended to be a grantor trust of which the Company is the grantor, within the meaning of the applicable provisions of the Internal Revenue code. The Company therefore agrees that all income, deductions and credits of each such Account belong to it as owner for income tax purposes and will be included on the Company's income tax returns. FOURTH The "Trust Fund" as of any date will consist of all property of every kind then held by the Trustee. FIFTH Subject to investment guidelines which may be issued by the Company to the Trustee from time to time and subject to Article SIXTH hereof, the Trustee shall have the following powers and authority in the administration of the Trust Fund: (a) To invest and reinvest the Trust Fund without distinction between principal and income in any kind of property, real, personal or mixed, tangible or intangible, and in any kind of investment, security or obligation, including any pooled fund or other commingled investment fund maintained by the Trustee or any other bank or entity for trust investment purposes or any mutual fund (including those for which it or any of its affiliates serves as investment advisor); (b) To sell for cash or on credit, to grant options, convert, redeem, exchange for other securities or other property, or otherwise to dispose of any securities or other property at any time held; (c) To settle, compromise, contest, prosecute, abandon or submit to arbitration, any claims, debts or damages, due or owing to or from the Trust; (d) To exercise any conversion privilege and/or subscription right available in connection with any securities or other property at any time held; to oppose or to consent to the reorganization, consolidation, merger, or readjustment of the finances of any corporation, company or association or to the sale, mortgage, pledge or lease of the property of any corporation, company or association any of the securities of which may at any time be held and to do any act with reference thereto, including the exercise of options, the making of agreements or subscriptions, which may be deemed necessary or advisable in connection therewith, and to hold and retain any securities or other property so acquired; (e) To exercise, personally or by general or by limited power of attorney, any right, including the right to vote, appurtenant to any securities or other property held at any time; (f) To borrow money from any lender in such amounts and upon such terms and conditions as shall be deemed advisable or proper to carry out the purposes of the Trust and to pledge any securities or other property for the repayment of any such loan; (g) To hold cash uninvested for a reasonable period of time under the circumstances without liability for interest, pending investment thereof or the payment of expenses or making distributions therewith; (h) To form corporations and to create trusts to hold title to any securities or other property, all upon such terms and conditions as may be deemed advisable; (i) To employ suitable agents and counsel and to pay their reasonable expenses and compensation; (j) To register any securities held hereunder in the name of the Trustee or in the name of a nominee with or without the addition of words indicating that such securities are held in a fiduciary capacity and to hold any securities in bearer form. (k) To stop making payments to Participants or beneficiaries and hold Trust Fund assets for the benefit of the creditors of the Company or its subsidiaries and to deliver assets to satisfy such creditor's claims as directed by a regulatory agency or court of competent jurisdiction, all pursuant to Article SEVENTH below; (l) To make, execute and deliver, as Trustee, any and all conveyances, contracts, waivers, releases or other instruments in writing necessary or proper for the accomplishment of any of the foregoing powers, and (m) To perform other acts necessary or appropriate for the proper administration of the Trust Fund. SIXTH The Trustee shall purchase or continue in effect such insurance contracts, including annuity contracts and policies of life insurance, as the Company shall direct, and the Trustee shall act with respect to those contracts only as directed by the Company and shall have no investment responsibility for such contracts. SEVENTH Notwithstanding any provision in this Agreement to the contrary, if at any time while the Trust is still in existence the Trustee receives a written notice from the Company or written allegations from a third party as provided below that the Company has become Insolvent (as defined herein), the Trustee shall suspend the payment of all benefits from the Trust Fund and shall, except as provided below, thereafter hold the Trust Fund in suspense until it receives an order from a regulatory agency or court of competent jurisdiction directing the disposition of the Trust Fund ("Order"); provided, however, that the Trustee may deduct or continue to deduct its fees and expenses and other expenses of the Trust, including taxes, pending the receipt of an Order. The Company shall be considered to be Insolvent if it (a) is unable to pay its debts as they fall due or (b) is subject to a pending proceeding as a debtor under the United States Bankruptcy Code. By its approval and execution of this Agreement, the Company represents and agrees that its Board of Directors and Chief Executive Officer, as from time to time acting, shall have the fiduciary duty and responsibility on behalf of the Company's creditors to give to the Trustee prompt written notice of the Company's Insolvency, and the Trustee shall be entitled to rely thereon to the exclusion of all subsequent directions or claims to pay benefits. If after notice to the Trustee of Insolvency by the Company, the Company, in the absence of an Order, alleges that it is no longer Insolvent, or if the Trust Department of the Trustee receives written allegations of an event of Insolvency from a third party, the Trustee shall appoint an independent accounting firm to determine whether the Company is Insolvent. In no event shall knowledge of the Company's credit status held by banking officers or employees of The Northern Trust Company be imputed to the Trustee. In the absence of an Order to the contrary, the Trustee shall resume distributions hereunder upon receipt of written certification from such accounting firm that the Company was not or is no longer Insolvent. The Trustee's only responsibility shall be the prudent selection of such accounting firm. Participants and beneficiaries have only the Company's unsecured promise to pay benefits under the terms of the Plans and the status of an unsecured general creditor of the Company. Participants and beneficiaries receive and have no security interest in assets of the Trust. EIGHTH The Trustee shall pay out of the Trust Fund all taxes of any and all kinds levied or assessed under existing or future laws against the Trustee in its capacity as such or against the Trust Fund. The Trustee shall be paid such reasonable compensation as shall from time to time be agreed upon by the Company and the Trustee. Such compensation and all expenses of administration of the Trust, including attorneys' fees, shall be withdrawn by the Trustee out of the Trust Fund unless paid by the Company. NINTH The Trustee shall keep accurate and detailed accounts of all investments, receipts, disbursements and other transactions hereunder, and all accounts, books and records relating thereto shall be open to inspection and audit at all reasonable times by any person designated by the Company. Within 30 days after the close of each fiscal year (or such other date as may be agreed upon in writing between the Company and the Trustee), and within 60 days after the effective date of the resignation or removal of the Trustee as provided in Article ELEVENTH hereof, the Trustee shall file with the Company a written account setting forth all investments, receipts, disbursements and other transactions effected by it during the year ending on such date (but not including any part of such year for which such an account has previously been filed) and certified as to the accuracy of the information set forth therein. Such account may incorporate by reference any and all schedules and other statements setting forth investments, receipts, disbursements and other transactions effected during the period for which such account is rendered which the Trustee has furnished to the Company prior to the filing of such account. Each account so filed (and copies of any schedules and statements incorporated therein by reference as aforesaid) shall be open to inspection during business hours by any Participant in a Plan and any person designated by such Participant for a period of 60 days immediately following the date on which the account is filed with the Company. The Company may approve such accounts by an instrument in writing delivered to the Trustee. In the absence of the filing in writing with the Trustee by the Company of exceptions or objections to any such account within 6 months of the completion of the Plan(s) annual audit by the Company or its appointed auditor, the Company shall be deemed to have approved such account; and in such case, or upon the written approval of the Company of any such account, the Trustee shall be released, relieved and discharged with respect to all matters and things set forth in such account as though such account had been settled by the decree of a court of competent jurisdiction except with respect to claims of fraud or willful misconduct. TENTH The Trustee shall be fully protected in relying upon a certification of an authorized representative of the Company with respect to any instruction, direction or approval of the Company, and protected also in relying upon the certification until a subsequent certification is filed with the Trustee. The Trustee shall be fully protected in acting upon any instrument, certificate, or paper believed by it to be, genuine and to be signed or presented by the proper person or persons, and the Trustee shall be under no duty to make any investigation or inquiry as to any statement contained in any such writing but may accept the same as conclusive evidence of the truth and accuracy of the statements therein contained. All persons dealing with the Trustee are released from inquiry into the decision or authority of the Trustee and from seeing to the application of any moneys, securities or other property paid or delivered to the Trustee. The Trustee shall not be liable hereunder for any loss or diminution of the Trust Fund resulting from any action taken at the direction of the Company, or omitted because of the lack of any direction from the Company. The Company (which has the authority to do so under the laws of its state of incorporation) shall indemnify The Northern Trust Company and defend it and hold it harmless from and against any and all liabilities, losses, claims, suits or expenses (including attorneys' fees) of whatsoever kind and nature which may be imposed upon, asserted against or incurred by The Northern Trust Company at any time (1) by reason of its carrying out its responsibilities or providing services hereunder, or its status as Trustee, or by reason of any act or failure to act under this Agreement, except to the extent that any such liability, loss, claim, suit or expense arises directly from the Trustee's gross negligence or willful misconduct in the performance of responsibilities specifically allocated to it under this Agreement, or (2) by reason of the Trust's failure to qualify as a grantor rabbi trust exempt from the Employee Retirement Income Security Act. This paragraph shall survive the termination of this Agreement. The duties of Trustee shall be governed solely by the terms of this Agreement without reference to the terms of the Plans. Trustee shall not be liable for any delay in performance, or non-performance, of any obligation hereunder to the extent that such obligation is due to forces beyond Trustee's reasonable control, including but not limited to delays, errors or interruptions caused by Trustee or third parties; any industrial, juridical, governmental, civil or military action; acts of terrorism, insurrection or revolution; nuclear fusion, fission or radiation; failure or fluctuation in electrical power, heat, light, air conditioning or telecommunications equipment; or acts of God. In making payments to service providers pursuant to authorized directions, the Company acknowledges that the Trustee is acting as paying agent, and not as the payor, for tax information reporting and withholding purposes. ELEVENTH The Trustee acting hereunder may resign or the Company may remove the Trustee at any time by giving at least 60 days written notice to the other. In the case of the resignation or removal of the Trustee the Company shall appoint a successor Trustee, which shall be a bank or trust company. Any successor Trustee shall have the same obligations, powers and duties as those conferred upon the Trustee hereunder unless otherwise specified in an agreement between the Company and the successor Trustee and the appointment of a new Trustee shall be by a written instrument delivered to the Trustee acting hereunder. Upon receipt of such written instrument executed by the Company and a written instrument executed by the successor Trustee accepting the appointment, the Trustee shall deliver the assets of the Trust Fund to the successor Trustee but may reserve such reasonable amount as the Trustee may deem necessary for outstanding and accrued charges against the Trust Fund with written notice to the Company of the reasons for reserving such amounts. TWELFTH This Agreement and the Trust created hereby shall be irrevocable; provided, however, that any property held in the Trust Fund shall be subject to the claims of general creditors of the Company and its subsidiaries under the Federal or state law in the event of Insolvency. In the event that the Company certifies to the Trustee that the Plans are terminated and there are no remaining Participants or beneficiaries entitled to benefits thereunder, this Trust shall terminate and, subject to the Trustee's right to reserve such reasonable amount as it may deem necessary for outstanding and accrued charges against the Trust Fund with written notice to the Company of the reasons for reserving such amounts, title to any remaining assets shall revert to the Company. Except as provided in Articles SECOND, THIRD and SEVENTH, the Company shall have no right or power to direct the Trustee to return to the Company or to divert to others any of the Trust assets before all payment of benefits have been made to Plan participants and their beneficiaries pursuant to the terms of the Plans, as certified to in writing by the Company (upon which certification the Trustee may conclusively rely without further action). THIRTEENTH This Agreement and the Trust created herein shall be construed, regulated and administered under the laws of the State of Illinois. All contributions to the Trustee shall be deemed to take place in the State of Illinois. The Trustee may at any time initiate an action or proceeding for the settlement of its accounts or for the determination of any question of construction which may arise or for instructions, and the only necessary party defendant to such action shall be the Company, except that the Trustee may, if it so elects, bring in as parties defendant any other person or persons. FOURTEENTH Company may amend this Agreement at any time pursuant to a resolution of the Board of Directors or a written instrument executed by its designee and delivery to the Trustee of a certified copy of such resolution and a written instrument duly executed and acknowledged in the same form as this Agreement; provided, however, that the duties and responsibilities of the Trustee shall not be affected without the Trustee's written consent, respectively, and, provided further, that no amendment shall reduce a Participant's benefits to less than the amount he would be entitled to receive on the date before the amendment. Notwithstanding the foregoing, no such amendment shall (a) conflict with the terms of the Plans, or, following a Change in Control, adversely affect the rights of Plan participants and beneficiaries, as certified to in writing by the Company (upon which certification the Trustee may conclusively rely), or (b) make the Trust revocable. FIFTEENTH For purposes of the Trust, a "Change in Control" with respect to the Company shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred: (1) any Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its affiliates) representing 20% or more of the combined voting power of the Company's then outstanding securities, excluding any Person who becomes such a Beneficial Owner in connection with a transaction described in clause (a) of paragraph (3) below; or (2) the following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on December 1, 2000, constitute the Board and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of the Company) whose appointment or election by the Board or nomination for election by the Company's shareholders was approved or recommended by a vote of at least two-thirds of the directors then still in office who either were directors on December 1, 2000 or whose appointment, election or nomination for election was previously so approved or recommended; or (3) there is consummated a merger or consolidation of the Company or any direct or indirect subsidiary of the Company with any other corporation, other than (a) a merger or consolidation immediately following which the directors of the Company immediately prior to such merger or consolidation continue to constitute at lest a majority of the board of directors of the Company, the surviving entity or any parent thereof or (b) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person is or becomes the Beneficial owner, directly or indirectly, of securities of the Company (not including in the securities Beneficially Owned by such Person any securities acquired directly from the Company or its affiliates) representing 20% or more of the combined voting power of the Company's then outstanding securities; or (4) the shareholders of the Company approve a plan of complete liquidation or dissolution of the Company or there is consummated an agreement (or series of related agreements) for the sale or disposition by the Company of all or substantially all of the Company's assets, disregarding any sale or disposition to a company, at least a majority of the directors of which were directors of the Company immediately prior to such sale or disposition; or (5) the Board of Directors determines in its sole and absolute discretion that there has been a Change in Control of the Company. Further, for purposes of this Trust, a "Potential Change in Control" with respect to the Company shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred: (i) the Company enters into an agreement, the consummation of which would result in the occurrence of a Change in Control; (ii) the Company, or any Person publicly announces an intention to take or to consider taking actions which, if consummated, would constitute a Change in Control; (iii) any Person becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing 15% of more of either the then outstanding shares of common stock of the Company or the combined voting power of the Company's then outstanding securities (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its affiliates); or (iv) the Board adopts a resolution to the effect, that, for purposes of this Agreement, a Potential Change in Control has occurred. For purposes of the above definitions of the terms "Change in Control" and "Potential Change in Control" the terms set forth below shall have the following meanings: "Beneficial Owner" shall have the meaning set forth in Rule 13d-3 under the Exchange Act. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time. "Person" shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof, except that such term shall not include (i) the Company or any of its subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its affiliates, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, or (iv) a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock in the Company. The Company shall immediately notify the Trustee in writing of any Potential Change of Control or Change of Control. The Trustee may conclusively rely upon such notice and shall have no duty to determine whether a Potential Change of Control or Change of Control has occurred. SIXTEENTH Actions of the Trustee may be evidenced by a written instrument signed by the Trustee, and all third parties shall be entitled to rely on said written instrument. SEVENTEENTH This Agreement may be executed in any number of counterparts, each one of which shall be deemed to be the original although the others shall not be produced. [SIGNATURE PAGE FOLLOWS] IN WITNESS WHEREOF, this instrument has been executed as of the day and year first above written. WISCONSIN ENERGY CORPORATION Attest: ______________________________ By: /S/Thomas H. Fehring -------------------- _____________________________ Name: Thomas H. Fehring Title: Corporate Secretary The undersigned, Joyce Feaster, does hereby certify that she is the duly elected, qualified and acting Assistant Secretary of Wisconsin Energy Corporation (the "Company") and further certifies that the person whose signature appears above is a duly elected, qualified and acting officer of the Company with full power and authority to execute this Trust Agreement on behalf of the Company and to take such other actions and execute such other documents as may be necessary to effectuate this Agreement. _________________________________ Assistant Corporate Secretary Wisconsin Energy Corporation TRUSTEE: Attest: - ------------------------ By: ---------------------- Print Name: -------------- Title: ------------------- EX-10.3 3 0003.txt EMPLOYMENT ARRANGEMENT Exhibit 10.3 July 7, 1999 C O N F I D E N T I A L VIA FEDERAL EXPRESS July 7, 1999 Charles R. Cole (Home Address) Dear Charlie: This letter will confirm our offer of employment to you, with the specifics to be as follows: a. Position: You will be employed as Vice President, Distribution Operations. You will report to Dave Porter, in his capacity as Senior Vice President of the Company. b. Base Salary: Base salary will be payable to you at the rate of One Hundred and Eighty Thousand Dollars ($180,000) per year, payable in accordance with the Company's regular payroll practices. c. Special Signing Bonus: As a special inducement, we will pay you a special signing bonus of Twenty Five Thousand Dollars ($25,000) promptly after you report for work with us. d. Moving Expenses and Temporary Living Expenses: The Company will pay or reimburse you for your reasonable moving costs in accordance with standard Company policy. e. Other Benefits: You will be entitled to participate in all applicable retirement and savings plans and all welfare benefit plans and practices which the Company makes available to its salaried employees generally. In addition: o You will participate in the Wisconsin Energy Corporation short-term incentive plan at a target award level of 40 percent of your base salary. o You will participate in the Wisconsin Energy Corporation long-term incentive plan. Subject to the approval by the Compensation Committee of the Board of Directors, you will be placed in award category `C.' The previous (1999) awards at that level were an option to purchase 10,000 shares of WEC common stock at fair market value at time of award, plus 2,000 shares of restricted stock. o You will participate in the Wisconsin Energy Corporation Supplemental Executive Retirement Plan with respect to monthly benefits "A" and "B." Monthly benefit "A" is designed to make up for any limitations imposed on the amount of your accrued benefit under the Company's tax-qualified defined benefit plan (the "Retirement Account Plan") upon your retirement at or after age 60, because of benefit limits under Section 415 of the Internal Revenue Code or the limit on annual compensation imposed by Section 401(a)(17) of such Code. Monthly benefit "B" is a special supplemental pension benefit equal to a life annuity of 10% of your average total compensation during your highest 36 consecutive months, which will become available to you on your retirement at or after age 60. o You will participate in the executive deferred compensation plan, which allows deferral of a portion of base salary and performance awards into a nonqualified fund. o You will be eligible to take up to 5 weeks of vacation annually. Your vacation during the balance of 1999 will be pro- rated. o You will participate in a split dollar life insurance program at 3 times your base salary. o You will be eligible for a financial planning benefit of $4,000 in the first year and every fifth year thereafter, and $2,500 in intervening years. o You will also participate on a basis commensurate with other senior executives of the Company in any other executive benefits, which currently include an annual physical examination by a physician or clinic of your choice, travel and accident insurance, and various perquisites. 6. Special Deferred Compensation Benefit: The Company agrees to create a special bookkeeping account (the "Account") and to credit the same with Two Hundred and Fifty Thousand Dollars ($250,000) as of August 1, 1999. This amount will be adjusted as of December 31, 1999 with a pro rata share of investment results and annually thereafter as of December 31 of each year with annual investment results. Investment results will be the same as would have been credited to the Account had it been invested as a part of the funds of the Company's tax-qualified defined benefit plan, the Retirement Account Plan. The current value recorded in the Account will become payable to you in a single lump sum, less applicable withholding, on the first to occur of any of the following events: a) Your termination of employment for any reason at any time on or after age 60 (the "Vesting Date"). b) Your termination of employment at any time prior to the Vesting Date because of death or such disability as prevents you from continuing to substantially perform the duties of your job. c) The Company's termination of your employment at any time prior to the Vesting Date without "Cause." "Cause" shall mean any willful and continued failure on your part to substantially perform the duties of your job, or any willful act of misconduct or dishonest act by you involving the Company. Should you voluntarily terminate your employment prior to the Vesting Date or should the Company terminate your employment for Cause prior to the Vesting Date, you will forfeit any interest in the Account. Values held in the Account or which become payable to you from the Account will not be included or taken into consideration in the calculation of any benefits due you under any other retirement or welfare benefit plan or program of the Company which bases benefits in whole or in part on compensation. The Account will be solely a bookkeeping reserve established by the Company as a device for determining amounts that may become payable to you and any right to receive payments under this paragraph will be an unsecured claim against the general assets of the Company. Any claims for payments under this paragraph will be subject to same claim procedure rules as apply to the Retirement Account Plan. You will have the right to name a beneficiary to receive any benefits that may become payable under this paragraph on your death, by filing a written notice with the Company on a form prescribed by it. If you fail to designate a beneficiary, any unpaid benefits due will be paid to your estate. __________________________________________ All benefits described above which are further defined in plan documents are subject to all of the terms in those documents which supersede any other description. Management reserves the right in its discretion to change or terminate all current benefit plans or practices and other policies and procedures. Your employment would be considered at-will; that is, you could be discharged for any reason or no reason at all, at any time and without notice, and likewise, you may resign at any time and without notice. This offer also requires successful completion of a pre-employment drug screen. This offer supersedes all prior discussions and will remain open until July 15, 1999. We look forward to hearing from you and hope that you will join us for what looks to be an exciting future! Sincerely, /s/Richard R. Grigg - ------------------------ Richard R. Grigg President and Chief Operating Officer Copy to: Richard Abdoo Barbara Bras Thomas Fehring/Lisa George EX-10.7 4 0004.txt EMPLOYMENT ARRANGEMENT Exhibit 10.7 November 14, 1997 Mr. Larry Salustro (Home Address) Dear Larry: This letter will confirm our offer of employment to you, with the specifics to be as follows: 1) Position: Vice President, Legal, Regulatory and Governmental Affairs. You would report to me in my capacity as Chief Executive Officer of the Company. In addition, you would be expected to participate in a senior strategy group I have organized. The office of the Corporate Secretary and the Law department and Governmental Affairs department (federal, state & local) will report to you. Further, upon completion of existing cases, all future regulatory affairs (including matters before the FERC, DOE, PSCW and MPSC) will be your responsibility. 2) Base Salary: Base salary will be payable to you at the rate of Two Hundred and Five Thousand Dollars ($205,000) per year, payable in accordance with the Company's regular payroll practices. 3) Special Signing Bonus: In recognition of the financial detriment to you regarding termination from your present employment at this time, we will pay you a special signing bonus of Seventy-Five Thousand Dollars ($75,000) promptly after you report for work with us. 4) Stock Based Incentives: You will receive a grant of a non-qualified stock option covering 40,000 shares of the common stock of Wisconsin Energy Corporation at an option price equal to 100% of the fair market value of the stock on the date of grant, promptly after you report for work with us. The option will vest or become exercisable by you 4 years from the date of grant, provided you then remain in our employ, or upon your earlier death or disability. You will also promptly after you report for work with us receive an award of restricted stock for 6,000 shares of the common stock of Wisconsin Energy Corporation. The restrictions on these shares will lapse 4 years from the date of the award, provided you then remain in our employ, or upon your earlier death or disability. 5) Other Benefits: You will participate in the Wisconsin Energy Corporation Supplemental Executive Retirement Plan with respect to monthly benefits "A" and "B." Monthly benefit "A" is designed to make up for any limitations imposed on the amount of your accrued benefit under the Company's tax-qualified defined benefit plan (the "Retirement Account Plan") upon your retirement at or after age 60, because of benefit limits under Section 415 of the Internal Revenue Code or the limit on annual compensation imposed by Section 401(a)(17) of such Code. Monthly benefit "B" is a special supplemental pension benefit equal to a life annuity of 10% of your average total compensation during your highest 36 consecutive months, which will become available to you upon your retirement at or after age 60. You will also participate on a basis commensurate with other senior executives of the Company in any other employee benefits, perquisites, vacations plans, or executive short term and long term incentive compensation programs as may exist from time to time. Also, you will be entitled to participate in all applicable retirement and savings plans and all welfare benefit plans and practices which the Company makes available to its salaried employees generally. The Company requires an annual medical physical exam by a physician or clinic of your choice, at Company expense. 6) Additional Pension Benefit: In addition, the Company will provide an additional pension benefit to you upon your retirement at or after age 60 (or prior to age 60 with the approval of the Chief Executive Officer of the Company and the Board of Directors of the Company). This additional pension benefit will be equal to the difference, if any, between (a) and (b) below, less the amount of the monthly vested retirement benefit payable to you at 65 or that would have been payable to you at that age from defined benefit plans of previous employers for periods of employment prior to your employment by the Company had you elected to receive your accrued benefits from such plans of such prior employers at age 65 (the "Reduction Amount"), where (a) and (b) are defined as follows: (a) equals the monthly retirement benefit that is payable from the Retirement Account Plan of the Company, plus the amounts of any actual "make whole" pension supplement due under the provisions of Section IX(1) and (2) of the Wisconsin Energy Corporation Executive Deferred Compensation Plan, plus any amount payable under monthly benefit "A" under Wisconsin Energy Corporation's Supplemental Executive Retirement Plan, and (b) equals the monthly retirement benefit that would have been payable from the Management Employees' Retirement Plan of the Company as in effect on December 31, 1995 (the "1995 Management Plan") had the defined benefit formula in effect on December 31, 1995 continued until your retirement, calculated without regard to any limitations imposed by Section 415 of the Internal Revenue Code or any limitation on annual compensation imposed by Section 401(a)(17) of such Code and under the assumptions that (i) your participation in the 1995 Management Plan had commenced on the first day of the month following your 25th birthday and continued uninterrupted thereafter, (ii) any deferrals of base salary you elected under the Wisconsin Energy Corporation Executive Deferred Compensation Plan were disregarded and instead included in your compensation base for calculating retirement income under the 1995 Management Plan, and (iii) the amount of any Performance Award, Incentive Award or Special Award, calculated at the time of its determination by the Board of Directors had also been included in your compensation base for calculating retirement income under the 1995 Management Plan. The Reduction Amount shall be converted into an actuarial equivalent of a life annuity form of payment payable at age 65 using the actuarial equivalency factors under the Retirement Account Plan of the Company, but shall be subtracted, without any further adjustment, from any additional pension benefit calculated as above set forth, whenever the same commences, whether before or after your 65th birthday. Further, the Reduction Amount applies to any additional pension benefit calculated as above set forth and expressed as a life annuity form of benefit and shall be made prior to the application of factors applicable for any other form of benefit available under the 1995 Management Plan (which forms shall be available to you). Prior to the date of your retirement, you will provide the Company with certified information regarding the Reduction Amount. 7) Additional Preretirement Spouse's Benefit: Further in the event of your death while in the employ of the Company, the Company will pay to your surviving spouse (if any) a monthly benefit equal to the difference between (i) and (ii) below, but reduced as provided below to reflect the value of any vested defined benefit retirement benefits attributable to prior employment (the "Reduction Amount" as defined above), where (i) and (ii) are defined as follows: (i) equal the monthly spouse's benefit that is payable from the Retirement Account Plan of the Company, plus the amounts of any actual "make whole" spousal pension supplements due under the provisions of Sections IX(1) and (2) of the Wisconsin Energy Corporation Executive Deferred Compensation Plan, plus any amount payable under monthly benefit "A" under the Wisconsin Energy Corporation Supplemental Executive Retirement Plan, and (ii) equals the monthly spouse's benefit which would have been payable from the 1995 Management Plan had the defined benefit formula in effect on December 31, 1995 continued until your death, calculated on all the same assumptions as set forth in subsection (b) above. The Reduction Amount in the event the above surviving spouse benefit becomes payable is to be applied by reducing the monthly surviving spouse benefit calculated as above set forth by 1/2 of the dollar amount of the Reduction Amount that would have been offset in the event the additional pension benefit provisions of paragraph 6 (a) and (b) above were applicable. 8) Conditions of Payment Regarding Additional Pension Benefits: The additional pension benefits provided for in paragraphs 6 and 7 hereof shall be subject to and administered as if the same were payable directly from the 1995 Management Plan and all of the forms of payment available under the 1995 Management Plan shall be available to you. However, you may at the time of your retirement make a written request to the Board of Directors of the Company for a single lump sum payment of an amount equal to the then present value of all additional benefits accrued under paragraphs 6 and 7, calculated using (i) an interest rate equal to the 5-Year United States Treasury Note yield in effect on the last business day of the month prior to the payment (as reported in the Wall Street Journal or comparable publication), and (ii) the mortality tables then in use under the Retirement Account Plan of the Company. The Board of Directors of the Company, in its sole and absolute discretion, may grant or deny such request. Further, upon the occurrence of a "Change in Control" of the Wisconsin Energy Corporation (as defined in Exhibit A attached to and made a part of this letter), then notwithstanding any other provision hereof, the Company shall promptly pay to you or to anyone then receiving additional benefits under paragraphs 6 or 7 of this letter a single lump sum payment of an amount equal to the then present value of all such additional benefits accrued (whether or not in pay status and without regard to whether your employment is continuing), calculated using the same assumptions as set forth in the immediately preceding paragraph, with an interest rate to equal the 5-Year United States Treasury Note yield in effect on the last business day of the month prior to the date when the Change in Control occurred. If you continue in employment and the additional benefits provided for in this letter continue, appropriate provisions shall be made so that any subsequent payments under paragraphs 6 or 7 of this letter are reduced to reflect the value of such lump sum payment. 9) Moving Expenses and Temporary Living Expenses: The Company will pay or reimburse you for your reasonable moving costs in accordance with standard Company policy. In addition, the Company will pay or reimburse you for your reasonable temporary living expenses in the Milwaukee area for a period of up to 120 days prior to your purchase of a residence here. All the benefits described above which are further defined in plan documents are subject to all of the terms in those documents which supersede any other description. Management reserves the right in its discretion to change or terminate all current benefit plans or practices and other policies and procedures. Your employment would be considered at-will; that is, you could be discharged for any reason or no reason at all, at any time and without notice, and, likewise, you may resign at any time and without notice. We anticipate that your staring date with us would be within 30 days. This offer supersedes all our prior discussions and will remain open until December 2, 1997. We look forward to hearing from you and hope that you will join us. Very truly yours, /s/Richard A. Abdoo ------------------------- Richard A. Abdoo, Chairman of the Board and CEO EXHIBIT A Change in Control Definition For purposes of this Plan, a "Change in Control" with respect to Wisconsin Energy Corporation shall mean the occurrence of any of the following events, as a result of one transaction or a series of transactions: (a) any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, but excluding the Company, its affiliates and any qualified or non-qualified plan maintained by the Company or its affiliates) becomes the "beneficial owner" (as defined in Rule 13d-3 promulgated under such act), directly or indirectly, of securities of the Company representing more than 20% of the combined voting power of the Company's then outstanding securities; (b) individuals who constitute a majority of the Board immediately prior to a contested election for positions on the Board cease to constitute a majority as a result of such contested election; (c) the Company is combined (by merger, share exchange, consolidation, or otherwise) with another corporation and as a result of such combination, less than 60% of the outstanding securities of the surviving or resulting corporation are owned in the aggregate by the former shareholders of the Company; (d) the Company sells, leases, or otherwise transfers all or substantially all of its properties or assets not in the ordinary course of business to another person or entity; or (e) the Board determines in its sole and absolute discretion that there has been a Change in Control of the Company. These Change in Control provisions shall apply to successive Changes in Control on an individual transaction basis. EX-10.12 5 0005.txt SHORT-TERM PERFORMANCE PLAN Exhibit 10.12 WISCONSIN ENERGY CORPORATION SHORT-TERM PERFORMANCE PLAN As amended and restated as of August 15, 2000 WISCONSIN ENERGY CORPORATION SHORT-TERM PERFORMANCE PLAN This Plan ("the Wisconsin Energy Corporation Short-Term Performance Plan") succeeds to and constitutes an amendment and restatement of the Wisconsin Energy Corporation Short-Term Performance Plan, effective January 1, 1992; such amendment and restatement is effective as of August 15, 2000. All the provisions of this amended and restated Plan, as subsequently amended, shall apply to all active employee Participants. I) Purpose and Objectives The purpose of this Plan is to provide an annual incentive compensation plan which permits the awarding of annual cash bonuses to eligible employees of Wisconsin Energy Corporation (the "Company") and/or its subsidiaries, based on the achievement of pre-established performance goals which promote the achievement of shareholder, customer and employee-focused objectives while recognizing individual performance. II) Eligibility 1) Definition of a "Participant" The term "Participant" as used in this Plan refers to any key employee of the Company and/or its subsidiaries who is designated for participation in the Plan annually by the Chief Executive Officer of the Company, the Company's Board of Directors (the "Board") or the Compensation Committee of the Board (the "Committee"). An employee can be designated as a "Participant" for either Benefit A or Benefit B as described in the Plan. Employees designated as Participants in either Benefit A or Benefit B of the Plan shall be so notified in writing, and shall be apprised of the performance goals and related target awards for the relevant plan year. 2) Partial Plan Year Participation Generally, Participants will be in the active employ of the Company prior to the first day of any plan year, but an individual who becomes employed after that date may be designated as a Participant. In that event, such employee's final award shall be prorated based upon the number of full months of eligibility during such plan year. The Chief Executive Officer, the Board or the Committee shall have full discretion to determine the proper calculation for such proration, or adjust the target and/or performance awards. III) Award Determination 1) Target Award Level Prior to the beginning of each plan year or as soon as practicable thereafter, the Chief Executive Officer, the Board or the Committee shall approve a target award for each Participant. The established target award shall vary in relation to the Participant's responsibilities and influence on achievement of short-term goals. In the event a Participant's responsibilities change during a plan year, the Participant's target award may be adjusted to reflect the level of responsibility at the end of the plan year. 2) Performance Goals Prior to the beginning of each plan year, or as soon as practicable thereafter, performance goals for that plan year shall be established with the approval of the Chief Executive Officer, the Board or the Committee. The goals may be based on any combination of corporate, subsidiary, divisional, and/or individual goals. More than one performance goal may be established, and multiple goals may have the same or different weightings. Various achievement levels of performance for each performance goal may be established. The Chief Executive Officer, the Board or the Committee may also establish one or more Company-wide performance goals which must be achieved for any Participant to receive an award for that plan year. 3) Adjustment of Performance Goals The Chief Executive Officer, the Board or the Committee may make an adjustment to the performance goals and the target awards (either up or down) during a plan year if it determines that external changes or other unanticipated business conditions have materially affected the fairness of the goals and have unduly influenced the Company's ability to meet them. Further, in the event of a plan year of less than twelve (12) months, the Chief Executive Officer, the Board or the Committee may make an adjustment to the performance goals and the target awards accordingly, at his or its discretion. 4) Final Award Determinations At the end of each plan year, final awards shall be computed for each Participant as approved by the Chief Executive Officer, the Committee or the Board. Final award amounts may vary above or below the target awards, based on achievement of the pre-established corporate, subsidiary, divisional, and/or individual performance goals. 5) Award Cap The Chief Executive Officer, the Committee or the Board may establish guidelines governing the maximum final awards that may be earned by Participants (either in the aggregate, by employee groups established for this purpose, or among individual Participants) in each plan year. The guidelines may be expressed as a percentage of Company-wide goals or financial measures, or such other measures. 6) Pro Rata Target Award Upon a Change in Control Notwithstanding any other provision of this Plan, upon the occurrence of a "change in control" of the Company as defined in paragraph 11 of the Company's Omnibus Stock Incentive Plan (which is hereby incorporated by reference), each Participant in the employ of the Company or a subsidiary on the effective date of such change in control shall become entitled to the target award established for such Participant for the plan year in which the change in control occurs, but only to the extent that such Participant is not already entitled to a special bonus payout under the provisions of any other agreement. Such target award shall be prorated based on the number of full months of service completed by such Participant during such plan year prior to the occurrence of such change in control. IV) Payment of Final Awards 1) Form and Timing of Payments Final award payments shall be paid as soon as practicable after award amounts are approved. 2) Awards Under Benefit A a) Deferral of Award A Participant may elect to defer a portion or all of the final award under Benefit A pursuant to the terms and conditions set forth in the Company's Executive Deferred Compensation Plan, which are hereby incorporated by reference. b) Retirement Income Consideration Final awards under Benefit A shall be excluded from the compensation used for calculating retirement income under the qualified defined benefit retirement plan of the Company. In consideration of this exclusion, there is a "make-whole" pension supplement applicable to Participants in this Plan regarding final awards under Benefit A. For such Participants who are also participants in the Company's Supplemental Executive Retirement Plan, which is hereby incorporated by reference (the "SERP"), the pension supplement will be provided pursuant to the terms and conditions of the SERP. For such Participants who are not also participants in the SERP, the pension supplement will be the additional pension benefit to which such Participant would have become entitled under the terms of the qualified defined benefit retirement plan of the Company had the entire amount of each final award under Benefit A been taken into account as pension eligible earnings (without regard to any limitations imposed by the Internal Revenue Code on benefits or compensation) at the time when such award would have been regularly paid (disregarding any deferral election). Further, for such non-SERP Participants, the additional pension benefit shall be paid in a lump sum form at the same time as the benefit payable to the Participant under the Company's qualified defined benefit plan. However, if such a non-SERP Participant leaves employment in connection with the Participant's immediate transfer to and acceptance of employment with another employer which is providing services essential to the utilities business conducted by the Company or its subsidiaries, then such Participant will not be considered to have terminated employment for purposes of determining the time when such Participant will be deemed to have commenced benefits under the Company's qualified defined benefit pension plan. Instead such Participant will be deemed to have continued in employment for as long as such Participant remains in the employ of such other employer and such employer continues to provide such services and will be deemed to have commenced benefits under the Company's qualified defined benefit plan only when such Participant's termination of service from such deemed continuing employment occurs, without regard to when actual payment of benefits under the Company's qualified defined benefit plan commences. For such non-SERP Participants, the terms and conditions of the Company's qualified defined benefit plan shall provide the governing principles as to the calculation and payment of the additional pension benefit arising under this Plan. 3) Awards Under Benefit B Final awards for employees designated as Participants under Benefit B are not subject to any "make-whole" pension supplement and such awards may not be deferred under the Company's Executive Deferred Compensation Plan. 4) Unsecured Interest No Participant or any other party claiming an interest in amounts earned under the Plan shall have any interest whatsoever in any specific asset of the Company. To the extent that any party acquires a right to receive payments under the Plan, such right shall be equivalent to that of an unsecured general creditor of the Company. V) Termination of Employment 1) Termination of Employment Due to Death, Disability or Retirement In the event a Participant's employment is terminated by reason of death, "Disability," or "Retirement," the final award determined in accordance with Section III(4), shall be reduced to reflect participation prior to termination only. For purposes of this Plan, "Retirement" shall have occurred if the Participant terminates service either on or after age 55 with at least 10 years of service, at or after age 65, or at time when such Participant is eligible for an employer provided retiree medical plan and "Disability" shall have the same meaning as in the Company's long-term disability plan. The reduced award shall be determined by multiplying said final award by a fraction, the numerator of which is the number of full months of employment in the plan year and the denominator of which is twelve (12). In the case of a Participant's Disability, the employment termination shall be deemed to have occurred on the date the Chief Executive Officer, the Board or the Committee determines the definition of Disability to have been satisfied. The final award thus determined shall be paid as soon as practicable following the end of the plan year in which employment termination occurred. 2) Termination of Employment for Other Reasons In the event a Participant's employment is terminated for any reason other than death, Disability, or Retirement (of which the Chief Executive Officer, the Board or the Committee shall be the sole judge), all of the Participant's rights to a final award for the plan year then in progress shall be forfeited. However, except in the event of an employment termination for "Cause," the Chief Executive Officer, the Board or the Committee may waive such provisions and allow a prorated award for the portion of that plan year that the Participant was employed by the Company. Cause shall be defined as: a) the willful and continued failure of the Participant to substantially perform the Participant's duties (other than failure resulting from incapacity due to physical or mental illness), after a written demand for substantial performance is delivered to the Participant by the Board, the Committee or an elected officer of the Company which specifically identifies the manner in which the Board, the Committee or the elected officer believes that the Participant has not substantially performed the Participant's duties, or b) the willful engaging by the Participant in illegal conduct or gross misconduct which is materially and demonstrably injurious to the Company. However, no act, or failure to act, on the Participant's part shall be considered "willful" unless done, or omitted to be done, by the Participant not in good faith and without reasonable belief that his or her action or omission was in the best interest of the Company. VI) Rights of Participants 1) Employment Nothing in the Plan shall interfere with or limit in any way the right of the Company or employing subsidiary to terminate any Participant's employment at any time, nor confer upon any Participant any right to continue in the employ of the Company or any subsidiary. 2) Nontransferability No right or interest of any Participant in the Plan shall be assignable or transferable, or subject to any lien, directly, by operation of law, or otherwise, including, but not limited to, execution, levy, garnishment, attachment, pledge, and bankruptcy. VII) Beneficiary Designation Each Participant under the Plan may, from time to time, name any beneficiary or beneficiaries (who may be named contingently or successively) to whom any benefit under the Plan is to be paid in case of his or her death before he or she receives any or all of such benefit. Each designation will revoke all prior designations by the same Participant, shall be in a form prescribed by the Company and will be effective only when filed in writing with the Company during the Participant's lifetime. In the absence of any such designation, or if the beneficiary predeceases the Participant, benefits remaining unpaid at the Participant's death shall be paid to the Participant's estate. VIII) Amendments The Board or the Committee, in its sole discretion, without notice, at any time and from time to time, may modify or amend, in whole or in part, any or all of the provisions of the Plan, or suspend or terminate it entirely; provided, however, that no such modification, amendment, suspension, or termination may, without the consent of a Participant (or his or her beneficiary in the case of the death of the Participant), reduce the right of a Participant (or his or her beneficiary as the case may be) to a payment or distribution hereunder of a final award to which he or she is entitled. The Chief Executive Officer may also make amendments to the Plan at any time, consistent with the authority delegated to the Chief Executive Officer by the Board regarding such amendments. IX) Miscellaneous 1) The Chief Executive Officer, the Board or the Committee may establish, amend or rescind from time to time rules and regulations which are necessary or desirable in connection with the Plan. The Chief Executive Officer may not act on any matter involving his own participation in this Plan. The Company shall have the right to withhold from any amounts payable under this Plan any taxes or other amounts required to be withheld by any governmental authority. 2) Every person receiving or claiming payments under this Plan shall be conclusively presumed to be mentally competent until the date on which the Company receives a written notice, in form and manner acceptable to it, that such person is incompetent and that a guardian, conservator, or other person legally vested with the care of such person's estate has been appointed. In the event a guardian or conservator of the estate of any person receiving or claiming payments under this Plan shall be appointed by a court of competent jurisdiction, payments may be made to such guardian or conservator provided that proper proof of appointment and continuing qualification is furnished in a form and manner acceptable to the Company. Any such payment so made shall be a complete discharge of any liability therefor. 3) Participation in this Plan, or any modifications thereof, or the payment of any benefits hereunder, shall not be construed as giving to the Participant any right to be retained in the service of the Company or its subsidiaries, limiting in any way the right of the Company or its subsidiaries to terminate the Participant's employment at any time, evidencing any agreement or understanding, express or implied, that the Company or its subsidiaries will employ the Participant in any particular position or at any particular rate of compensation and/or guaranteeing the Participant any right to receive a salary increase in any year, such increase being granted only at the sole discretion of the Compensation Committee of the Board. 4) The Company, or its subsidiaries, or their Boards of Directors or any committees thereof, or any officer or director of the Company or its subsidiaries or any other person shall not be liable for any act or failure to act hereunder, except for fraud. 5) This Plan shall be governed by and construed in accordance with the laws of the State of Wisconsin, to the extent not preempted by federal law, without reference to conflicts of law principles. EX-10.32 6 0006.txt SERVICE AGREEMENT BETWEEN WE AND WG Exhibit 10.32 March 29, 2000 Ms. Lynda Dorr Secretary Public Service Commission of Wisconsin 610 North Whitney Way Madison, WI 53707 Dear Ms. Dorr: Please find enclosed a service agreement between Wisconsin Electric Power Company (WEPCo) and Wisconsin Gas Company (WGC), for which the companies seek the Commission's approval. The Commission has recently approved the merger of Wisconsin Energy Corporation (of which WEPCo is a utility subsidiary) and WICOR, Inc (of which WGC is a utility subsidiary). Closing of the merger of these two holding companies is scheduled to occur on April 26, 2000. After that closing, it is anticipated that certain transactions will be conducted between the two utility affiliates. The enclosed service agreement contains the terms under which those transactions will take place. The terms continued in this agreement are consistent with Commission guidelines for such transactions. It should be noted that the enclosed agreement is signed by the appropriate parties from each company, but is not dated. The date of the agreement will be the date of closing. The companies request that the enclosed service agreement be approved as soon as possible so as to coincide with the closing date of the merger. In the near future, Wisconsin Energy expects to file an affiliated interest agreement which covers transactions between utility and non-utility affiliates in the Wisconsin Energy system after the merger. If you have any questions regarding this application, please call me at 414-221-2285. Sincerely, /s/Roman A. Draba - ----------------- Roman A. Draba Manager-State Regulatory Affairs cc: Ms. Diane Braun Mr. Robert Norcross Ms. Jodie Bartels bcc: Charles Cummings Phyllis Dube' Sally Bentley William Finke SERVICE AGREEMENT THIS AGREEMENT is made and entered into this 25th day of April, 2000, by and between Wisconsin Electric Power Company and Wisconsin Gas Company, the parties being hereinafter collectively called the "Companies" and individually called the "Company". WHEREAS, the Companies are affiliated interests pursuant to Sec. 196.52, Wis. Stats.; and WHEREAS, from time to time either Company may perform various services involving the use of its employees and/or property for the other Company; and WHEREAS, from time to time either Company may lease or rent office space to the other Company; and WHEREAS, from time to time either Company may make its property available for joint use by both Companies; NOW, THEREFORE, in consideration of the premises and of the mutual covenants herein set forth, the parties agree as follows: ARTICLE I SERVICES OF EMPLOYEES --------------------- Each Company will furnish such services involving use of its employees and/or property to the other Company as such Company may from time to time reasonably request, for the compensation as determined under Article V, upon the terms and conditions herein set forth. ARTICLE II SALE OR TRANSFER OF PROPERTY ---------------------------- Each Company may sell or transfer to the other Company upon request, property independent of and not related to the provision of any of the services furnished under Article I. The Company selling or transferring such property shall be compensated for such property at the cost to the Company of such property as recorded on its books of account. ARTICLE III LEASE OF OFFICE SPACE --------------------- Each Company may lease or rent office space to the other Company upon request with rental payments to be based upon the providing Company's actual cost, including a return of original cost and a return on the depreciated original cost equal to its latest overall rate of return authorized by the Public Service Commission of Wisconsin and adjusted for the income tax effect. ARTICLE IV JOINT USE OF PROPERTY --------------------- Each Company will permit the joint use of its property, whether real or personal, by both Companies. The Company owning such property shall be compensated for the proportionate use of such property made by the other Company on the basis of the owning Company's actual cost, including a return of original cost and a return on the depreciated original cost equal to its latest overall rate of return authorized by the Public Service Commission of Wisconsin and adjusted for the income tax effect. ARTICLE V COMPENSATION FOR SERVICES ------------------------- Compensation for services provided by either Company to the other Company shall be at the cost to the providing Company of rendering such services. For purposes of this Agreement, the cost to the providing Company of rendering each such service shall be determined as follows: 1. Each employee of the providing Company who in any month was involved in providing any service to the other Company shall for that month identify the service and the time spent providing such service. The Companies may agree in advance to sharing services of an employee of either Company and to a fixed apportionment of such employee's time. 2. The hourly rates shall be computed for employees identified in paragraph 1 above, which shall include vacation, absent time, benefits and payroll taxes. 3. The sum of the number of hours spent by each employee identified in paragraph 1 above, providing each service to the other Company, multiplied by the hourly rate as determined for that employee under paragraph 2 above, shall be determined. 4. An overhead rate shall be established for the providing Company based upon: a. costs associated with training and professional development; b. costs of office space based upon a return of original cost and a return on the depreciated original cost, based on the Company's latest overall rate of return authorized by the Public Service Commission of Wisconsin and adjusted for the income tax effect and/or actual rental payments made by the Company; c. costs of office supplies; d. costs for office furniture and equipment based upon a return of original cost and a return on the depreciated original cost, based on the Company's latest overall rate of return authorized by the Public Service Commission of Wisconsin and adjusted for the income tax effect. e. costs for miscellaneous administrative and general support. The total labor charges determined in paragraph 3 shall be increased by the overhead rate. 5. The number of miles traveled in the specific month by the Company's employees in their own vehicles in performing each service for the other company shall be multiplied by the appropriate per mile rate at which the providing Company reimburses its employees for the use of their own personal vehicles for utility business. The use of Company vehicles in performing services for the other Company will be billed at the prevailing hourly rate (rate charged to providing Company accounts and customers for work performed) plus overhead. The sum of the charges calculated in paragraphs 4 and 5 shall constitute the cost of services provided by either Company to the other Company. ARTICLE VI BILLING AND PAYMENT ------------------- A bill will be prepared by each Company reflecting the cost of providing the services and/or providing, renting, leasing or jointly using the property of such Company. Bills shall be sent to the other Company for the charges associated with the services and/or property furnished to the other Company by the end of the month following the month on which the charges were based. Bills shall be due and payable thirty (30) days after issuance. Charges of third party suppliers, to the maximum extent practicable, shall be paid directly by the appropriate Company. Any invoices paid by either Company on behalf of the other Company will be billed whether real or personal, by both Companies. The Company owning such property shall be compensated for the proportionate use of such property made by the other Company on the basis of the owning Company's actual cost, including a return of original cost and a return on the depreciated original cost equal to its latest overall rate of return authorized by the Public Service Commission of Wisconsin and adjusted for the income tax effect. ARTICLE VII MISCELLANEOUS ------------- This Agreement shall become effective upon the execution by both Companies and approval by the Public Service Commission of Wisconsin and shall remain in effect until cancelled upon sixty (60) days written notice given by either Company or until replaced by a successor Agreement. This Agreement may be amended or modified by mutual agreement of the Companies at any time. Any such modification or amendment shall not become effective until approved by the Public Service Commission of Wisconsin. Nothing herein contained shall be construed to release the officers and directors of either Company from the obligation to perform their respective duties, or to limit the exercise of their powers in accordance with the provisions of law or otherwise. The performance of this Agreement shall be subject to valid rules, regulations and orders of any regulatory body having jurisdiction, including approval by the Public Service Commission of Wisconsin. IN WITNESS WHEREOF, EACH OF THE PARTIES HERETO HAS CAUSED THIS Agreement to be executed on its behalf by its officers thereunto duly authorized as of the day and year first above written. WISCONSIN ELECTRIC POWER COMPANY By /s/Calvin H. Baker ------------------ Title Vice President-Finance and CFO ------------------------------ WISCONSIN GAS COMPANY By /s/Robert A. Nuernberg ---------------------- Title Vice President -------------- EX-10.33 7 0007.txt SERVICE CONTRACT BETWEEN WE AND ATC Exhibit 10.33 OPERATION AND MAINTENANCE AGREEMENT FOR TRANSMISSION FACILITIES (Transferred Under Wisconsin "Reliability 2000" Legislation) Between American Transmission Company LLC and Wisconsin Electric Power Company * Dated as of December 29, 2000 1. DEFINITIONS AND INTERPRETATION 3 1.1 Definitions, Generally. 3 1.2 Special Definitions. 3 1.2.1 Baseline Maintenance Budget. 3 1.2.2 Baseline Resource Hours. 3 1.2.3 Emergency Response Services. 3 1.2.4 Facilities Maintenance Plan. 3 1.2.5 Good Cause. 4 1.2.6 Good Utility Practice. 4 1.2.7 Key Personnel. 4 1.2.8 Maintenance Resource Budget. 4 1.2.9 Maintenance Resource Hours. 5 1.2.10 Maintenance Services. 5 1.2.11 Operations Date. 5 1.2.12 Operation Services. 5 1.2.13 Party. 5 1.2.14 Parties. 6 1.2.15 Services. 6 1.2.16 Technology. 6 1.2.17 Transmission Facilities. 6 1.2.18 Transmission System. 7 2. TERM 7 2.1 Term of Agreement. 7 2.2 Extension. 7 3. REQUIRED REGULATORY APPROVALS 7 4. RESPONSIBILITIES OF UTILITY CONTRACTOR 7 4.1 Scope of Services. 7 4.2 Performance Standards. 8 4.3 Operation Services. 10 4.4 Maintenance Services. 12 4.5 Utility Contractor Resources. 16 4.6 Facilities Maintenance Plan. 17 4.7 Budget. 19 4.8 Reports. 20 4.9 Training. 20 4.10 Contracts with Third Parties. 21 5. RESPONSIBILITIES OF ATCLLC 22 6. COMPENSATION OF UTILITY CONTRACTOR 23 6.1 Compensation for Operation Services and Maintenance Services. 23 6.2 Methods of Calculating the Compensation Due. 23 6.3 Minimum Compensation for Maintenance Services. 24 6.4 Compensation for Inventory and Storage. 25 6.5 Billing and Payment. 26 6.6 Audits and Adjustments. 26 7. OWNERSHIP 27 8. DISPUTE RESOLUTION 28 9. FORCE MAJEURE 28 10. LIMITATION ON LIABILITY 29 11. INDEMNITY 30 12. INSURANCE 32 13. SUCCESSORS AND ASSIGNS 34 14. NOTICE 35 15. MISCELLANEOUS 36 15.1 Compliance with Laws. 36 15.2 Entire Agreement. 36 15.3 Counterparts. 36 15.4 Amendment. 37 15.5 Survival. 37 15.6 Independent Contractor. 37 15.7 Confidentiality. 37 15.8 Standards of Conduct. 38 15.9 No Implied Waivers. 39 15.10 No Third-Party Beneficiaries. 39 15.11 Severability. 39 15.12 Governing Law. 40 15.13 Operation and Prospective Planning. 40 15.14 Headings. 40 15.15 Affiliate Status of Parties. 40 OPERATION AND MAINTENANCE AGREEMENT FOR TRANSMISSION FACILITIES THIS OPERATION AND MAINTENANCE AGREEMENT FOR TRANSMISSION FACILITIES ("Agreement") is entered into as of December 29, 2000 by and between Wisconsin Electric Power Company or WEPCO ("Utility Contractor"), a Wisconsin corporation, and American Transmission Company LLC ("ATCLLC"), a Wisconsin limited liability company (Utility Contractor and ATCLLC are individually referred to as "Party" and collectively as "the Parties"). RECITALS WHEREAS, Wisconsin Act 9 ("Reliability 2000 Legislation"), effective October 29, 1999, authorized the organization of a new company to provide electric transmission service; WHEREAS, pursuant to the provisions of the Reliability 2000 Legislation, ATCLLC was organized to provide transmission service; WHEREAS, the Reliability 2000 Legislation authorized electric transmission utilities to transfer their transmission assets to a new company organized to provide transmission service; WHEREAS, WEPCO has agreed to transfer its transmission assets to ATCLLC; WHEREAS, the Reliability 2000 Legislation requires ATCLLC to contract with each utility that has transferred transmission facilities to the new company for the utility to provide reasonable and cost-effective operation and maintenance services to ATCLLC for a period of three years after ATCLLC commences operations; WHEREAS, Utility Contractor and ATCLLC each desire to use this Agreement to satisfy said requirement of the Reliability 2000 Legislation. WHEREAS, in furtherance of said requirement of the Reliability 2000 Legislation, the Parties desire to reflect herein their agreement for the provision of Operation Services and Maintenance Services as defined in this Agreement. The Parties have also entered into a Forming Party Agreement Regarding Operating Principles dealing with the performance of certain functions in operation of the Transmission System and a Transitional Services Agreement pursuant to which the Parties have arranged for the provision of additional services upon commencement of operations by ATCLLC and over a transitional period. WHEREAS, since the Parties intend that Utility Contractor will commit resources to performance of the services contemplated hereunder and that ATCLLC will develop the nature and level of maintenance activity to be performed in accordance with the procedures, and subject to the standards of, this Agreement, the Parties have provided that ATCLLC will commit to pay for a certain level of activity in any event. To minimize the possibility that changes in ATCLLC's maintenance plans will result in incurrence of this fixed cost obligation, the Parties have further agreed that ATCLLC may, subject to certain conditions, including compliance with applicable labor agreements, use the services of Utility Contractor elsewhere on its system. For convenience, the Parties have expressed the foregoing commitment as an obligation to use an annual minimum of 85% of the number of hours of Utility Contractor's own labor used in a representative year for Transmission Facilities maintenance, to pay the direct costs of such Utility Contractor's own labor at an agreed upon rate per hour, and all associated overheads, and to pay an annual minimum of 85% of the annual expenditure of Utility Contractor for Transmission Facilities maintenance in a representative year. NOW, THEREFORE, in consideration of the promises and mutual covenants contained herein, the Parties hereby agree as follows: 1. DEFINITIONS AND INTERPRETATION 1.1 Definitions, Generally. Unless defined in Section 1.2 of this Agreement, the definition of each defined term used in this Agreement shall be the same as the definition for that term set forth in the OATT, the Operating Agreement of ATCLLC, or the Asset Contribution Agreement between the Parties. 1.2 Special Definitions. The following capitalized terms used in this Agreement shall be defined as set forth below: 1.2.1 Baseline Maintenance Budget. "Baseline Maintenance Budget" shall mean 85% of the Maintenance Resource Budget. 1.2.2 Baseline Resource Hours. "Baseline Resource Hours" shall mean eighty-five percent (85%) of Maintenance Resource Hours. 1.2.3 Emergency Response Services. "Emergency Response Services" shall have the definition provided in Section 4.3 of this Agreement and includes those Services identified on Exhibit A to this Agreement as "Emergency Response Services." 1.2.4 Facilities Maintenance Plan. "Facilities Maintenance Plan" shall mean the plan for the provision of Maintenance Services as defined in Section 4.6 of this Agreement. 1.2.5 Good Cause. "Good Cause" shall mean (i) misconduct that is or could be materially detrimental to the Utility Contractor or ATCLLC, (ii) breach of a material provision of any agreement to which the Utility Contractor is a party; (iii) the commission of one or more acts which constitute an indictable crime under United States Federal, state, or local law, or (iv) the failure to substantially perform work- related duties. 1.2.6 Good Utility Practice. "Good Utility Practice" shall mean any of the practices, methods and acts engaged in or approved by a significant portion of the electric utility industry during the relevant time period, or any of the practices, methods and acts which, in the exercise of reasonable judgment in light of the facts known at the time the decision was made, could have been expected to accomplish the desired result at a reasonable cost consistent with good business practices, reliability, safety and expedition. Good Utility Practice is not intended to be limited to the optimum practice, method or act to the exclusion of all others, but rather is intended to include acceptable practices, methods, or acts generally accepted in the region. 1.2.7 Key Personnel. "Key Personnel" shall mean individuals employed by the Utility Contractor in the positions of managers and supervisors and who are designated as the individuals directly responsible for supervising or managing work to be performed or services to be provided under this Agreement. 1.2.8 Maintenance Resource Budget. "Maintenance Resource Budget" shall mean the total Transmission Facilities maintenance costs established consistent with Schedule 1 of this Agreement, of Utility Contractor for the Transmission Facilities for a year representative of normal conditions, which representative year shall be based upon a normalized average of such costs over the past five years or the projected 1/1/2001 Transmission Facilities maintenance budget of Utility Contractor, as agreed by the Parties. 1.2.9 Maintenance Resource Hours. "Maintenance Resource Hours" is an annual unit of measurement that shall mean the number of hours of transmission maintenance work performed by Utility Contractor's own employees on the Transmission Facilities in a year representative of normal conditions, which representative year shall be based upon an average of such hours over the past five years or as otherwise agreed by the Parties. Maintenance Resource Hours does not include any work performed by Utility Contractor's supervisory or management employees covered in overhead, or by Utility Contractor's subcontractors. 1.2.10 Maintenance Services. "Maintenance Services" shall mean those Services identified on Exhibit A to this Agreement as "Maintenance Services and as further defined in Section 4.4." 1.2.11 Operations Date. "Operations Date" shall mean January 1, 2001 or such later date on which ATCLLC receives the necessary approvals, and commences operations. 1.2.12 Operation Services. "Operation Services" shall mean those Services identified on Exhibit A to this Agreement as "Operation Services" and "Emergency Response Services," and as further defined in Sections 4.3(a) and (b). 1.2.13 Party. "Party" shall mean either Utility Contractor or ATCLLC. 1.2.14 Parties. "Parties" shall mean both Utility Contractor and ATCLLC. 1.2.15 Services. "Services" shall mean all Operation Services and Maintenance Services. 1.2.16 Technology. "Technology" shall mean any ideas, know-how, inventions, developments, discoveries, trade secrets, processes, technical information, and improvements relating in any way to the Services, including without limitations, machines, manufactures, methods, techniques, systems, computer software and documentation, data and information (including, but not limited to, maintenance records, reports, training materials, findings, charts, tables and diagrams) (irrespective of whether in human or machine- readable form), works of authorship, and products, whether or not patentable, copyrightable, or susceptible to any other form of protection and whether or not reduced to practice, and whether or not described in writing. 1.2.17 Transmission Facilities. "Transmission Facilities" shall mean the facilities for the transmission of electric energy and ancillary services transferred to ATCLLC by Utility Contractor pursuant to, and identified in, the Asset Contribution Agreement between ATCLLC and WEPCO, dated December 15, 2000, and new facilities constructed or acquired by ATCLLC to the extent ATCLLC requests that Utility Contractor provide Services for such facilities and to the extent Utility Contractor agrees to provide such Services. 1.2.18 Transmission System. "Transmission System" shall mean the system of facilities for the transmission of electric energy and ancillary services owned or controlled by ATCLLC and which are covered by the ATCLLC OATT. 2. TERM 2.1 Term of Agreement. Subject to Article 3, this Agreement shall be effective from the date of its execution or the Operations Date, whichever is earlier, and shall continue in effect for an initial term through the day before the third anniversary of the Operations Date. 2.2 Extension. This Agreement shall automatically renew for subsequent one year terms unless sooner terminated in accordance with the terms of this Agreement or either Party provides written notice of its intent not to renew at least one year prior to the end of the then-current term. 3. REQUIRED REGULATORY APPROVALS The effectiveness of this Agreement is hereby expressly conditioned upon the receipt by Utility Contractor and ATCLLC of all permits, regulatory authorizations and regulatory approvals that shall be required by the Parties to enter into and perform their obligations under this Agreement in a form acceptable in the reasonable judgment of the Party affected thereby. 4. RESPONSIBILITIES OF UTILITY CONTRACTOR 4.1 Scope of Services. (a) Utility Contractor shall perform, or cause to be performed, the Services in accordance with the terms, conditions and procedures specified in this Agreement. (b) Except as specifically provided in this Agreement, Utility Contractor shall be the exclusive provider of the Services to the Transmission Facilities during the term of this Agreement. (c) ATCLLC shall have the right to direct Utility Contractor to provide any Operation Services, including Emergency Response Services, that may be necessary or appropriate, in accordance with Good Utility Practice, for the operation of any of the Transmission Facilities. (d) Utility Contractor shall provide Maintenance Services for the Transmission Facilities subject to any limitations on Utility Contractor's obligation or right to provide such services which are contained in this Agreement. 4.2 Performance Standards. (a) In meeting their responsibilities hereunder, the Parties shall at all times follow Good Utility Practice, the adequacy obligation set forth in Section 2.7 of the Operating Agreement of ATCLLC, and the requirements of this Agreement. (b) Utility Contractor shall provide Services in accordance with ATCLLC direction as necessary to give effect to ATCLLC policies, plans and business decisions but Utility Contractor shall be responsible for determining the manner of performance and for supervision of the work specified by ATCLLC or its duly authorized designee. With respect to performance of Operation Services, should Utility Contractor object to following the specifications or directives of ATCLLC on any basis, Utility Contractor shall nonetheless follow such directives and specifications. Where, in the judgment of Utility Contractor, following the specifications or directives of ATCLLC would pose a substantial risk to property or human safety, Utility Contractor shall, where time permits, notify a representative of ATCLLC and seek relief from the specification or directive. Where Utility Contractor does not have time to notify an ATCLLC representative and obtain relief, the Utility Contractor may take reasonable steps to mitigate damage to property or risk to human safety. In any non-emergency case in which Utility Contractor objects to following the directives or specifications of ATCLLC, its Key Personnel shall so notify ATCLLC in writing or confirm oral notice in writing. Utility Contractor may, where it has given the notice required in this Section, subsequently address its objections under the dispute resolution process set forth in Article 8 of this Agreement. (c) Except as directed by ATCLLC and/or the Facilities Maintenance Plan, Utility Contractor shall make good faith efforts to maintain the pre-Agreement quality and timeliness of its performance of the Services in accordance with Good Utility Practice, including priority of work, maintenance intervals, and methods. (d) In providing the Operation Services, and in implementing the Facilities Maintenance Plan, Utility Contractor shall, except as directed by ATCLLC and/or provided in Facilities Maintenance Plans, continue to seek to preserve the useful life of the Transmission Facilities. (e) Except as otherwise directed by ATCLLC or as provided in the Facilities Maintenance Plan, the Budget, or prescribed by Good Utility Practice, Utility Contractor shall maintain and operate the Transmission Facilities (i) in accordance with standards and procedures necessary to preserve coverages under all insurance policies applicable to the Transmission Facilities; (ii) in accordance with the procedures required to preserve all applicable manufacturers' warranties; and (iii) with best efforts to leave any portion of the Transmission Facilities on which work is performed in good repair and reliable working order on completion of the work. (f) Utility Contractor shall not be deemed to have failed to adequately perform a specific Service under this Agreement where (i) Utility Contractor has performed the specific Service in accordance with Good Utility Practice, the Facilities Maintenance Plan, or any directive, specification, procedure or policy of ATCLLC; or (ii) where its ability to adequately perform a specific Service was constrained by an ATCLLC-imposed budgetary limitation on that specific Service to which limitation Utility Contractor objected in writing, or if orally, confirmed in writing by Key Personnel, at such time as the effect of the budget restraint became known. (g) If ATCLLC discovers that any Services performed fail to conform to this Agreement, Utility Contractor shall, at ATCLLC's option, promptly correct or re-perform such non-conforming Services so that they conform to this Agreement. Without limiting the generality of this provision, Utility Contractor shall provide the labor, engineering, supervision, equipment, tools and materials necessary to effect such remedy. Utility Contractor shall perform its remedial obligations hereunder in a timely manner consistent with ATCLLC's reasonable requirements. If Utility Contractor repeatedly fails, or is unable, to remedy such non-conforming Services during a period consistent with ATCLLC's reasonable requirements, ATCLLC may undertake to remedy the non-conforming Services and in such case Utility Contractor shall reimburse ATCLLC for any reasonable costs incurred thereby. This subsection shall be in addition to any other remedies provided by this Agreement or available at law or equity. (h) In its performance of Emergency Response Services, Utility Contractor shall undertake service restoration efforts in a fashion which does not unduly favor or discriminate against any distribution system. 4.3 Operation Services. (a) Operations Services. Utility Contractor shall perform all of ATCLLC's requirements for Operation Services identified in Exhibit A as specified and directed by ATCLLC. Exclusive of Emergency Response Services, which are addressed separately below, Operation Services consist of the following: (i) field switching of transmission equipment, (ii) investigating system anomalies and performing other field operational activities necessary or appropriate for the operation of the Transmission System. Utility Contractor shall perform these switching and related activities using its employees who typically perform such functions. (b) Emergency Response Services. Utility Contractor shall perform, or cause to be performed, all of ATCLLC's requirements for Emergency Response Services. Emergency Response Services shall mean all services needed for emergency response, repairs and reporting related to the Transmission Facilities, including those items designated on Exhibit A as Emergency Response Services. Utility Contractor shall maintain an organization and personnel sufficient for 24- hours per day, seven days per week provision of Emergency Response Services to ATCLLC. Communications between ATCLLC and Utility Contractor concerning Emergency Response Services shall be made using the method or methods appropriate under the circumstances at the time the communication takes place. In carrying out such Services: (1) Utility Contractor shall make timely reports to ATCLLC Operation Centers of the impact of anticipated and actual weather and emergency conditions on the Transmission Facilities, including regular updates as to the actions taken by Utility Contractor in response thereto. (2) Utility Contractor shall work closely with ATCLLC to coordinate communications with customers, public agencies and the media about emergency conditions and service restoration efforts. (3) Utility Contractor shall take prompt and timely action to prevent or minimize damage to Transmission Facilities, and to facilitate their restoration to service, in a weather or other emergency. Utility Contractor shall seek prior approval of such actions by ATCLLC if practicable. Such prior approval may be in the form of an emergency response plan agreed to by ATCLLC and Utility Contractor. (4) Unless otherwise directed by ATCLLC, Utility Contractor shall repair and replace damaged Transmission Facilities, and promptly restore the Transmission Facilities to pre-emergency conditions. (5) If ATCLLC reasonably believes that Utility Contractor either lacks, or will be unable or unwilling to deploy, sufficient resources to promptly restore Transmission Facilities to their pre-emergency condition or to promptly facilitate their restoration to service, ATCLLC may, notwithstanding Section 4.1(b), provide such resources itself or through third parties, consistent with Good Utility Practice. In such event, and to the extent available, Utility Contractor shall provide the necessary equipment, spare parts, materials and supplies to ATCLLC or its contractors as requested by ATCLLC. 4.4 Maintenance Services. (a) General. Except as expressly provided in this Agreement, Utility Contractor shall perform, or cause to be performed, all Maintenance Services as described in Exhibit A to this Agreement and in each Quarterly update of the Facilities Maintenance Plan. In accordance with each Facilities Maintenance Plan, the work shall include: (1) periodic inspection, testing and monitoring; (2) scheduling and execution of preventive and corrective maintenance; (3) scheduling and execution of outages needed to perform preventive and corrective maintenance; (4) compiling and maintaining records, reports and data bases related to preventive and corrective maintenance activities; (5) ensuring compliance with quality assurance policies and procedures of ATCLLC, consistent with Good Utility Practice; and (6) forestry work or other work for the maintenance of Transmission Facilities rights-of-way or easements. (b) Unscheduled Maintenance. (1) Utility Contractor shall perform unscheduled maintenance on the Transmission Facilities when such maintenance is required by Good Utility Practice. For substantial unscheduled maintenance that is not covered in the Facilities Maintenance Plan, Utility Contractor shall first provide ATCLLC with a description of the work that Utility Contractor proposes to perform, the resources needed to carry out the work, a schedule for the work, and an estimate of the cost of the work to be performed. Utility Contractor shall proceed with substantial unscheduled maintenance only after receiving approval from ATCLLC, which approval may be given orally if promptly confirmed in writing. For purposes of this paragraph, substantial means having a cost, as determined in Article 6 of this Agreement, of more than $2,500. (c) Limits on Obligation or Right to Take or Provide Maintenance Services. (1) Utility Contractor shall not be required to perform Maintenance Services during any year, the cost of which exceeds 115% of the Maintenance Resource Budget or to use its own employees in excess of 115% of the number of Maintenance Resource Hours. (2) ATCLLC may provide, either itself or through third parties, up to 5% of the Baseline Maintenance Budget for the Transmission Facilities, provided such Maintenance Services are not typically performed by Utility Contractor's non- supervisory employees. (3) Utility Contractor and ATCLLC shall use reasonable good faith efforts to identify Resource Hours in excess of 115% of Baseline Maintenance Hours which Utility Contractor may have available to perform Maintenance Services ("Additional Resource Hours"). To the extent such Additional Resource Hours are identified, ATCLLC, if it needs or desires more Maintenance Services than could be obtained using 115% of the Baseline Maintenance Hours, shall first request Utility Contractor to provide such additional Maintenance Services. Utility Contractor shall respond to ATCLLC's request for such additional Maintenance Services as soon as reasonably possible but within seven days. (4) Use of Utility Contractor's Employees for Maintenance Services on the Transmission System: If at any point in time in a given calendar year ATCLLC reasonably believes it may not, during the course of that calendar year, request an amount of Maintenance Services from Utility Contractor sufficient to exhaust the Baseline Resource Hours or Baseline Maintenance Budget for work on the Transmission Facilities, ATCLLC may direct Utility Contractor to perform Maintenance Services on other transmission facilities owned by ATCLLC and Utility Contractor shall perform such Services using either Utility Contractor's own employees or subcontractors, provided that: (i) Such employees are otherwise typically assigned to perform Maintenance Services; (ii) Such employees are qualified to perform Maintenance Services on such transmission facilities; (iii) the provisions of any applicable labor agreement are not violated; (iv) subcontractors are not used to perform the Services unless and until Baseline Resource Hours are exhausted; and (v) performance by subcontractors is allowed under the relevant subcontract. Utility Contractor shall not enter into any labor contract or subcontract for any of the Services during the term of this Agreement that would limit ATCLLC's use of Utility Contractor's own employees or subcontractors under this Section 4.4(c). (5) ATCLLC Use of Other Utilities to Perform Maintenance Services: Utility Contractor agrees that ATCLLC may direct any other utility which has contributed or will contribute transmission facilities to ATCLLC (a "Contributing Utility") to perform Maintenance Services on the Transmission Facilities using Contributing Utility's employees or subcontractor if each of the following conditions is satisfied: (i) ATCLLC reasonably believes that the amount of Maintenance Services it will request Utility Contractor to perform during the year will equal or exceed either the Baseline Resource Hours in the case of using Utility Contractor's own employees or the Baseline Maintenance Budget in the case of using Utility Contractor's subcontractors; (ii) The amount of Maintenance Services ATCLLC will request a Contributing Utility to perform under an Operation and Maintenance Agreement relating to transmission facilities that it contributed to ATCLLC will be less than the Baseline Resource Hours or the Baseline Maintenance Budget provided for in that Operation and Maintenance Agreement; (iii) The Contributing Utility's employees are (A) typically assigned to perform Maintenance Services, and (B) qualified to perform Maintenance Services on the Transmission Facilities; and further provided that the provisions of any applicable labor agreement would not be violated by Contributing Utility's performance of services on the Transmission Facilities. (iv) The provisions of any applicable subcontract between Contributing Utility and subcontractor would not be violated. (v) Subcontractors are not used to perform the services unless and until Utility Contractor's Baseline Resource Hours are exhausted. 4.5 Utility Contractor Resources. (a) Utility Contractor shall maintain and manage the organizational and physical resources needed to continue to perform the Services . (b) Utility Contractor shall maintain an organization and personnel, including contractors, capable of performing the Services in a cost effective manner. Qualifications for Key Personnel assigned to manage the performance of Services shall be available to ATCLLC at any reasonable time. ATCLLC shall have the right to interview the Key Personnel proposed by Utility Contractor to manage the performance of Services and to reject such Key Personnel for Good Cause at any time during the term of this Agreement. (c) Utility Contractor shall maintain and manage the equipment, spare parts, materials and supplies needed to perform the Services as required by this Agreement. 4.6 Facilities Maintenance Plan. (a) As soon as reasonably possible before the anticipated date for transfer of the Transmission Facilities from Utility Contractor to ATCLLC, and thereafter at least 90 days before the beginning of each quarter throughout the term of this Agreement, ATCLLC will submit in writing to Utility Contractor, for Utility Contractor's review and comment, a Facilities Maintenance Plan for the 12 month planning period beginning with such quarter, and for each month in such planning period, describing ATCLLC's updated proposed plan for the operation and maintenance of the Transmission Facilities. It is agreed however that ATCLLC shall use Utility Contractor's Facilities Maintenance Plan and Budget for the first 12 month period, subject to quarterly updates and revisions as provided herein. (b) The Facilities Maintenance Plan shall include the information, and follow the format, specified by ATCLLC. The Facilities Maintenance Plan shall, consistent with Good Utility Practice and the adequacy standard set forth in Section 2.7 of the Operating Agreement of ATCLLC, describe the Maintenance Services that ATCLLC expects Utility Contractor to perform for the first quarter of the 12 month planning period, and shall include a good faith estimate of the work ATCLLC proposes to have performed during the balance of the 12 month period covered by the plan, and the scheduled outages associated with these activities. The Facilities Management Plan shall provide for full utilization of Baseline Resource Hours and Baseline Maintenance Budget and shall include sufficient detail to permit Utility Contractor to plan the work, prepare the Budget, and have available the necessary parts, materials, and supplies to perform the Maintenance Services. (c) Utility Contractor shall review, and recommend revisions as it deems appropriate and are consistent with Good Utility Practice, and return the Facilities Maintenance Plan to ATCLLC within 30 days after its submittal. ATCLLC, may, after review and consultation with Utility Contractor with respect to work force and material availability issues, revise the plan, provided that any such revisions are consistent with the responsibilities of the Parties, and approve and return the plan to Utility Contractor within 30 days prior to the start of the next quarter. ATCLLC may at any time, in response to suggestions made by Utility Contractor or on its own initiative, elect to revise the Facilities Maintenance Plan to meet the then current needs of ATCLLC provided that such revisions are consistent with the responsibilities of the Parties under this Agreement, including ATCLLC's commitment to fully utilize Baseline Resource Hours and its commitment to pay the Baseline Maintenance Budget. If ATCLLC does so elect to revise the Facilities Maintenance Plan, ATCLLC shall notify Utility Contractor with a change order in a timely fashion consistent with the circumstances, and if such notification is given orally, ATCLLC shall promptly confirm it in writing or via fax or electronic medium; provided, however, that any costs incurred by Utility Contractor in reasonable anticipation of performing Services under the Facilities Maintenance Plan as previously approved by ATCLLC, and which could not reasonably have been mitigated by Utility Contractor, shall be borne by ATCLLC. Services performed pursuant to ATCLLC change orders shall be subject to all applicable terms and conditions of this Agreement. (d) The Facilities Maintenance Plan shall avoid, if possible, scheduling Maintenance Services during anticipated peak usage of the Transmission System. 4.7 Budget. (a) As soon as possible before the anticipated date for transfer of the Transmission Facilities from Utility Contractor to ATCLLC, and thereafter at least 60 days before the beginning of each quarter throughout the term of this Agreement, Utility Contractor shall submit in writing to ATCLLC, for ATCLLC's review and approval, a budget for the first quarter of the 12 month planning period, and a good faith cost estimate for the work ATCLLC proposes to have performed during the balance of the 12 month period covered by the Facilities Maintenance Plan or updated Facilities Maintenance Plan for that 12 month period ("Budget"). The Budget prepared by Utility Contractor shall reflect full utilization of Baseline Resource Hours and the Baseline Maintenance Budget. (b) The Budget shall include the information, and follow the format used by Utility Contractor in its budget associated with its existing plans for the initial 12 month period with such modification as ATCLLC may reasonably require, including coordinating the Budget with procedures for centralized ATCLLC cost accounting and billing. (c) ATCLLC shall review, consult with Utility Contractor about work force and materials availability, and revise, as it deems appropriate, approve and return the Budget to Utility Contractor within 30 days of its submittal. During the term of the Budget, ATCLLC may at each quarterly review, in response to suggestions made by Utility Contractor or on its own initiative, elect to revise the Budget and the Facilities Maintenance Plan to meet the then current needs of ATCLLC subject to Good Utility Practice and the adequacy obligation set forth in Section 2.7 of the Operating Agreement of ATCLLC and ATCLLC's commitment to fully utilize Baseline Resource Hours and to pay the amount of the Baseline Maintenance Budget. If ATCLLC does elect to revise the Budget and the Facilities Maintenance Plan, ATCLLC shall communicate the changes made to Utility Contractor in writing, in a timely fashion; provided, however, that any costs incurred by Utility Contractor in reasonable anticipation of performing Services under the Budget as previously approved by ATCLLC, and which could not reasonably have been mitigated by Utility Contractor, shall be borne by ATCLLC. 4.8 Reports. (a) As part of the Services, Utility Contractor shall prepare and submit the reports described in this Section. Such reports and data shall be provided to ATCLLC without restriction, and are subject to the confidentiality provisions of Section 15.7 of this Agreement. (b) As part of the Services, Utility Contractor shall prepare, on a quarterly basis within 30 days after the end of the quarter, a summary of the significant maintenance and inspection work performed during the previous quarter. Such report shall include a summary of all material deficiencies in the Transmission Facilities observed or experienced by Utility Contractor, and Utility Contractor's proposals for correcting such deficiencies. (c) As part of the Services, Utility Contractor shall prepare, on a monthly basis within 30 days after the end of the month, a budget variance report setting forth actual and budgeted expenditures for the period and year to date, together with Utility Contractor's explanation of any variance. (d) Utility Contractor shall prepare such other reports, and provide such other information, as ATCLLC may request regarding the operation and maintenance of the Transmission Facilities. 4.9 Training. (a) As part of the Services, Utility Contractor shall train its employees and agents appropriately to carry out its responsibilities to ATCLLC under this Agreement. Upon request, Utility Contractor shall provide ATCLLC the training materials, and the course materials used by the Utility Contractor in any training programs conducted pursuant to this Section. (b) As part of the Services, Utility Contractor shall provide training sessions to familiarize ATCLLC employees or agents with the operation and maintenance of the Transmission Facilities and the Services provided hereunder. Utility Contractor shall provide such training sessions at such times and locations, to such audiences, and with such content, as may be appropriate and requested by ATCLLC. 4.10 Contracts with Third Parties. ATCLLC acknowledges that Utility Contractor may have entered into contracts with third parties for the maintenance or operation of the Transmission Facilities. ATCLLC further acknowledges that Utility Contractor may wish in the future to enter into contracts with third parties to perform some of the Services. All such third-party contracts shall be subject to the following provisions. (a) Existing contracts. As soon as practicable before the Operations Date, Utility Contractor shall provide ATCLLC, for its review, subject to the confidentiality provisions of Section 15.7, copies of all third-party contracts then currently in effect and under which the amounts payable are expected to exceed $100,000 annually, for Services covered by this Agreement. During the term of this Agreement, Utility Contractor shall not modify any of these third-party contracts without the prior written approval of ATCLLC, which approval ATCLLC shall not unreasonably withhold or delay. (b) Future Contracts. Utility Contractor may enter into contracts with qualified third parties for the provision of Services, provided that Utility Contractor obtains ATCLLC's prior written approval of all proposed contractors and contracts under which the amounts payable are reasonably expected to exceed $100,000 annually, which approval ATCLLC shall not unreasonably withhold or delay. (c) Utility Contractor may not split any contracts to avoid the $100,000 approval threshold. (d) Contract Invoices. Utility Contractor shall pass all invoices it receives for third-party contract work used to provide Services under this Agreement directly through to ATCLLC, with no additional charges or markups, except as may be specifically authorized under this Agreement. 5. RESPONSIBILITIES OF ATCLLC During the term of this Agreement, ATCLLC shall, at its cost and expense, and in a manner consistent with Good Utility Practice, perform or provide the following at the times required to support the provision of the Services: (a) ATCLLC shall develop and maintain policies and procedures necessary for maintenance of reliable, cost effective transmission service and maximizing the useful life of the Transmission System, and shall implement those policies through the establishment of the Facilities Maintenance Plan and its directives to Utility Contractor. (b) ATCLLC shall provide Utility Contractor with all necessary access to the Transmission Facilities and ATCLLC properties upon which such Transmission Facilities are located. (c) ATCLLC shall, with the concurrence and assistance of Utility Contractor as may be necessary or appropriate, procure and maintain in effect all permits, certificates and licenses needed by the owner of the Transmission Facilities for the operation and maintenance of such Transmission Facilities. (d) ATCLLC shall prepare and submit to Utility Contractor, review with Utility Contractor, revise, approve and update Facilities Maintenance Plans, as described in Section 4.6 hereof. ATCLLC shall review, revise and approve Budgets, as described in Section 4.7 hereof. All such Facilities Maintenance Plans, revisions to Facilities Maintenance Plans, Budgets, and revisions to Budgets shall be reasonable, consistent with Good Utility Practice, in accordance with the adequacy language contained in Section 2.7 of the Operating Agreement of ATCLLC, and subject to ATCLLC's commitment to fully utilize Baseline Resource Hours and the Baseline Maintenance Budget. Approvals of Facilities Maintenance Plans and Annual Budgets shall not be unreasonably withheld or delayed. (e) ATCLLC shall provide training sessions to familiarize Utility Contractor personnel with the processes and procedures relating to the Services that are developed by ATCLLC during the term of this Agreement for application by ATCLLC throughout the ATCLLC Transmission System. (f) ATCLLC shall provide Utility Contractor with such other information, oversight and direction reasonably required by Utility Contractor to fulfill Utility Contractor's responsibilities under this Agreement. 6. COMPENSATION OF UTILITY CONTRACTOR 6.1 Compensation for Operation Services and Maintenance Services. As full and complete compensation for Utility Contractor's provision of Operation Services and Maintenance Services, ATCLLC shall pay Utility Contractor all of the reasonable direct and indirect costs incurred by Utility Contractor in performing such Services. Direct and indirect costs include but are not limited to labor costs with loadings, which shall include labor costs for tasks such as recording costs and invoicing ATCLLC and the cost of materials and supplies; return of and on the cost of property employed; and payments to contractors, plus all overheads directly associated with any and all of these costs. 6.2 Methods of Calculating the Compensation Due. The methods and procedures for determining, recording, allocating, billing and auditing of Utility Contractor's costs is set forth in Schedule 1 hereto. 6.3 Minimum Compensation for Maintenance Services. (a) Utility Contractor and ATCLLC shall in connection with the preparation of the initial Facilities Maintenance Plan determine the Maintenance Resource Budget. (b) The Parties shall identify that portion of the Maintenance Resource Budget that is attributable to Maintenance Resource Hours. (c) Section 6.1 notwithstanding, as minimum compensation for the performance of the Maintenance Services by Utility Contractor under this Agreement, ATCLLC shall annually pay Utility Contractor (i) the amount attributable to unused Baseline Resource Hours as determined pursuant to Section 6.3(d) below; and (ii) the amount of the Baseline Maintenance Budget less any amount that ATCLLC pays for unused Baseline Resource Hours pursuant to Section 6.3(d). (d) ATCLLC agrees to annually utilize all of the Baseline Resource Hours. Utility Contractor agrees to limit the use of subcontractors to the extent that use of subcontractors would result in Baseline Resource Hours not being fully utilized, except as agreed by ATCLLC. If ATCLLC does not fully utilize the Baseline Resource Hours, ATCLLC shall pay Utility Contractor for the unused Baseline Resource Hours, calculated as the product of the number of unused Baseline Resource Hours times an appropriately weighted annual average hourly cost, which shall be calculated as the actual annual charge for Maintenance Services rendered and as determined under Section 6.1, less supplies, materials, and subcontractor payments, divided by the number of hours spent by Utility Contractor's own employees in providing the Maintenance Services. (e) If payments of compensation under Section 6.1 are less than the minimum payments required by Section 6.3(c), ATCLLC shall pay Utility Contractor the difference. (f) Where the total cost of Maintenance Services rendered exceeds the Baseline Maintenance Budget payment, ATCLLC's obligation to pay for unused Baseline Resource Hours is conditioned upon Utility Contractor's compliance with its obligation under Section 6.3(d) to limit the use of subcontractors to the extent that their use would result in underutilization of Baseline Resource Hours. (g) Where the parent of Utility Contractor is a registered holding company under the Public Utility Holding Company Act of 1935, as amended ("PUHCA"), the minimum payment obligation set forth in Section 6.3(c) shall apply only to the extent allowed by PUHCA, or authorized pursuant to an exemption granted thereunder by the Securities and Exchange Commission. (h) To the extent that Force Majeure prevents Utility Contractor from performing Maintenance Services during the calendar year or prevents ATCLLC from taking Maintenance Services during the calendar year, ATCLLC shall receive a ratable credit against its obligation to utilize Baseline Resource Hours and its obligation to pay the amount of the Baseline Maintenance Budget. 6.4 Compensation for Inventory and Storage. (a) Upon cancellation or expiration of this Agreement, ATCLLC agrees to purchase the inventory of materials and supplies under the provisions of Section 3.8 of the Asset Contribution Agreement. (b) ATCLLC shall have the option to lease from Utility Contractor, or rent at cost, the warehouse space and other facilities and systems used by Utility Contractor to maintain and manage such materials and supplies. 6.5 Billing and Payment. Utility Contractor shall provide invoices to ATCLLC each month, setting forth the costs incurred by Utility Contractor during the previous month to provide the Services, and identifying costs accrued for Services by the Utility Contractor during the previous month, which accrued costs will be invoiced at a later date. ATCLLC shall pay each invoice within 15 days of receipt from Utility Contractor. Within 60 days after the end of each calendar year of this Agreement, Utility Contractor shall calculate the amount due under Section 6.3(c) above and shall provide ATCLLC with an invoice reflecting that amount. Billing and payment disputes that cannot be resolved in the normal course of business shall be resolved using the dispute resolution procedures described in Article 8. 6.6 Audits and Adjustments. Utility Contractor shall maintain and retain for such time as ATCLLC may reasonably direct, but not for longer than six years, the books and other records needed to document the costs Utility Contractor incurs as a result of fulfilling its obligations under this Agreement. Utility Contractor shall respond to any reasonable request from ATCLLC for information related to a cost charged by Utility Contractor to ATCLLC by providing ATCLLC the information reasonably needed by ATCLLC to verify the cost in question. From time to time, ATCLLC may conduct, and Utility Contractor shall permit ATCLLC to conduct or cause to be conducted by its authorized agents, at ATCLLC's expense, audits of the books and records of Utility Contractor that relate to the Services provided under this Agreement. Such audits will be conducted at reasonable, mutually agreed upon times, provided that ATCLLC must contest invoices within one year of receipt and must complete any audit relating to a contested invoice within a reasonable period of time thereafter. Any adjustment identified to be made as a result of an audit and that is payable under Section 5 of Schedule 1 shall be made to the billing statement next issued following the conclusion of the audit. 7. OWNERSHIP For the purpose of this Agreement: (a) Rights in ATCLLC Independently Developed Technology: Any Technology prepared, developed or acquired solely by the ATCLLC shall be owned solely by ATCLLC (hereinafter, "ATCLLC Owned Technology"). Except as provided for herein, nothing herein shall imply a license in the ATCLLC Owned Technology. (b) Rights In Utility Contractor Independently Developed Technology: Any Technology prepared, developed or acquired solely by Utility Contractor shall be owned solely by Utility Contractor (hereinafter, "Utility Contractor Owned Technology"). Except as provided for herein, nothing herein shall imply a license in the Utility Contractor Owned Technology. (c) Rights In Jointly Developed Technology: Any Technology jointly prepared, developed or acquired by the ATCLLC and Utility Contractor, shall be jointly owned (hereinafter, "Joint Technology"). The ownership rights granted under this paragraph shall be limited to the Joint Technology only and, except as provided for herein, does not grant any rights, license or otherwise in either the ATCLLC Owned Technology or Utility Contractor Owned Technology that may be necessary to utilize the Joint Technology. (d) Grant Of Rights In ATCLLC Owned Technology: To the extent any ATCLLC Owned Technology is needed by a Utility Contractor in furtherance of performing the Services or any aspect thereof, the ATCLLC hereby grants to Utility Contractor a full and complete, world-wide, royalty-free, fully paid-up, non- exclusive license to use, without the right to grant sublicenses, the ATCLLC Owned Technology. (e) Grant Of Rights In Background Utility Contractor Technology: To the extent that background or underlying technology of Utility Contractor used by Utility Contractor in its performance of Services hereunder is required by ATCLLC to make use of ATCLLC Owned Technology or the Joint Technology in order to operate and maintain the Transmission Facilities, Utility Contractor hereby grants to the ATCLLC a full and complete, world-wide, royalty-free, fully paid-up, non-exclusive license to use the background or underlying technology of the Utility Contractor, for the term of this Agreement and afterwards but only for the purposes and to the extent used during the term of this Agreement, without the right to grant sublicenses. (f) Shared Rights in Joint Technology: The ATCLLC and Utility Contractor shall retain perpetually full and complete rights to (e.g., make, use or sell) the Joint Technology. Neither party may assign or otherwise transfer any rights in the Joint Technology, by license or otherwise, to the detriment of the other. 8. DISPUTE RESOLUTION Any dispute arising out of or in connection with this Agreement shall be resolved according to the dispute resolution procedures set forth in Exhibit B to the Operating Agreement of American Transmission ATCLLC. 9. FORCE MAJEURE (a) Neither Party shall be responsible or liable, or deemed in breach hereof, to the extent the performance of its respective obligations hereunder is prevented or delayed due solely to circumstances beyond the reasonable control and without the fault or negligence of the party experiencing such impediment to performance, including but not limited to acts of God; war; riots; strikes, lockouts or other labor disturbances; labor or material shortages, including unavailability of Utility Contractor resources required for Operation Services or required for fulfillment of the Facilities Maintenance Plan; actions or failures to act on the part of governmental authorities preventing or delaying performance; inability despite due diligence to obtain required licenses; or fire (such causes hereinafter called "Force Majeure"). (b) The Party experiencing the Force Majeure shall exercise due diligence in endeavoring to overcome any Force Majeure impediment to its performance, but settlement of its labor disturbances shall be entirely within its discretion. The Party experiencing the Force Majeure shall promptly give written notification to the other Party. This written notification shall include a full and complete explanation of the Force Majeure and its cause, the status of the Force Majeure, and the actions such Party is taking and proposes to take to overcome the Force Majeure. ATCLLC shall have the right, upon written notice to Utility Contractor, to obtain alternate contractors to perform the Services during any event of Force Majeure that prevents or delays Utility Contractor's performance hereunder if the Force Majeure has or, in ATCLLC's reasonable judgment, threatens to have an adverse effect on ATCLLC's ability to conduct its operations. 10. LIMITATION ON LIABILITY With respect to claims by and between the Parties under this Agreement, the measure of damages at law or in equity in any action or proceeding shall be limited to direct actual damages only, such direct actual damages shall be the sole and exclusive remedy and all other remedies or damages at law or in equity are waived and neither Party shall be liable in statute, contract, in tort (including negligence), strict liability, warranty or under any other legal theory or otherwise to the other Party, its agents, representatives, and/or assigns, for any special, incidental, punitive, exemplary or consequential loss or damage whatsoever, including, but not limited to, loss of profits or revenue on work not performed, for loss of use of or under- utilization of the other Party's facilities, loss of use of revenues, attorneys' fees, litigation costs, or loss of anticipated profits, resulting from either Party's performance or non-performance of an obligation imposed on it by this Agreement, without regard to the cause or causes related thereto, including the negligence of any party. The Parties expressly acknowledge and agree that this limitation shall apply to any claims for indemnification under Article 11 of this Agreement. The provisions of this section shall survive the termination or expiration of this Agreement. 11. INDEMNITY (a) Utility Contractor's Indemnification. Subject to the provisions of Article 10, Utility Contractor shall indemnify, hold harmless and defend ATCLLC, and its officers, directors, employees, affiliates, managers, members, trustees, shareholders, agents, contractors, subcontractors, affiliates' employees, invitees and successors, from and against any and all claims, demands, suits, obligations, payments, liabilities, costs, losses, judgments, damages and expenses (including the reasonable costs and expenses of any and all actions, suits, proceedings, assessments, judgments, settlements, and compromises relating thereto, reasonable attorneys' and expert fees and reasonable disbursements in connection therewith) for damage to property, injury to any person or entity, or death of any individual, including ATCLLC's employees and affiliates' employees, Utility Contractor's employees, or any other third parties, to the extent caused wholly or in part by any act or omission, negligent or otherwise, by Utility Contractor or its officers, directors, employees, agents, contractors, subcontractors and invitees arising out of or connected with Utility Contractor's performance or breach of this Agreement, or the exercise by Utility Contractor of its rights hereunder; provided, however, that the provisions of this Section shall not apply if any such injury, damage or death is held to have been caused by the negligence or intentional wrongdoing of ATCLLC, its agents or employees. In furtherance of the foregoing indemnification and not by way of limitation thereof, Utility Contractor hereby waives any defense it otherwise might have under applicable workers' compensation laws. (b) ATCLLC's Indemnification. Subject to the provisions of Article 10, ATCLLC shall indemnify, hold harmless and defend Utility Contractor, its parent and its officers, directors, employees, affiliates, managers, members, trustees, shareholders, agents, contractors, subcontractors, invitees and successors, from and against any and all claims, demands, suits, obligations, payments, liabilities, costs, losses, judgments, damages and expenses (including the reasonable costs and expenses of any and all actions, suits, proceedings, assessments, judgments, settlements, and compromises relating thereto, reasonable attorneys' and expert fees and reasonable disbursements in connection therewith) for damage to property, injury to any person or entity, or death of any individual, including Utility Contractor's employees and affiliates' employees, ATCLLC's employees, or any other third parties, to the extent caused wholly or in part by any act or omission, negligent or otherwise, by ATCLLC or its officers, directors, employees, agents, contractors, subcontractors and invitees arising out of or connected with ATCLLC's performance or breach of this Agreement, or the exercise by ATCLLC of its rights hereunder; provided, however, that the provisions of this Section shall not apply if any such injury, damage or death is held to have been caused by the negligence or intentional wrongdoing of Utility Contractor, its agents or employees. In furtherance of the foregoing indemnification and not by way of limitation thereof, ATCLLC hereby waives any defense it otherwise might have under applicable workers' compensation laws. (c) Indemnification Procedures. Any Party seeking indemnification under this Agreement shall give the other Party notice of such claim as soon as practicable but in any event on or before the thirtieth (30th) day after the Party's actual knowledge of such claim or action. Such notice shall describe the claim in reasonable detail, and shall indicate the amount (estimated if necessary) of the claim that has been, or may be sustained by, said Party. To the extent that the other Party will have been actually and materially prejudiced as a result of the failure to provide such notice, such notice will be a condition precedent to any liability of the other Party under the provisions for indemnification contained in this Agreement. Neither Party may settle or compromise any claim for which indemnification is sought under this Agreement without the prior consent of the other Party; provided, however, said consent shall not be unreasonably withheld or delayed. Each Party's indemnification obligation will survive expiration, cancellation or early termination of this Agreement. 12. INSURANCE (a) The Parties agree to maintain, at their own cost and expense, general and automobile liability, worker's compensation, and other forms of insurance relating to their operations for the life of this Agreement in the manner, and amounts, at a minimum, as set forth below, (i) Workers' Compensation Insurance in accordance with all applicable state, federal and maritime law, including Employer's Liability Insurance in the amount of $1,000,000 per accident; (ii) Commercial General Liability Insurance, including Contractual Liability Coverage for liabilities assumed under this Agreement, and Personal Injury Coverage in the amount of $25,000,000 per occurrence for bodily injury and property damage. Utility Contractor's policy shall include ATCLLC and ATC Management Inc. as additional insureds and ATCLLC's policy shall include Utility Contractor as an additional insured; (iii) Automobile Liability Insurance for all owned, non-owned, and hired vehicles with bodily injury limits of no less than $5,000,000 per person, $5,000,000 per accident; and property damage limits of no less than $5,000,000 per accident. Utility Contractor's policy shall include ATCLLC and ATC Management Inc. as additional insureds and ATCLLC's policy shall include Utility Contractor as an additional insured; (iv) Where a Party has more than $100 million in assets it may, at its option, self insure all or part of the insurances required in this Article; provided, however, the self-insuring Party agrees that all other provisions of this Article, including, but not limited to, waiver of subrogation, waiver of rights of recourse, and additional insured status, which provide or are intended to provide protection for the other Party and its affiliated and associated companies under this Agreement, shall remain enforceable. A Party's election to self-insure shall not impair, limit, or in any manner result in a reduction of rights and/or benefits otherwise available to the other Party and its affiliated and associated companies through formal insurance policies and endorsements as specified in the above parts of this Article. The self-insuring Party agrees that all amounts of self-insurance, retentions and/or deductibles are the responsibility of and shall be borne by the self-insuring Party. (b) Within fifteen (15) days of the Effective Date, and each anniversary of the Effective Date, during the term of this Agreement, (including any extensions), each Party shall provide to the other Party, properly executed and current certificates of insurance with respect to all insurance policies required to be maintained by such Party under this Agreement. Certificates of insurance shall provide the following information: (i) Name of insurance company, policy number and expiration date; (ii) The coverage required and the limits on each, including the amount of deductibles or self-insured retentions, which shall be for the account of the Party maintaining such policy; (iii) A statement indicating that the other Party shall receive at least thirty (30) days prior written notice of cancellation or expiration of a policy, or reduction of liability limits with respect to a policy; and (iv) A statement identifying and indicating that additional insureds have been named as required by this Agreement. (c) At a Party's request, in addition to the foregoing certifications, the other Party shall deliver to the first Party a copy of applicable sections of each insurance policy. (d) Each Party shall have the right to inspect the original policies of insurance applicable to this Agreement at the other Party's place of business during regular business hours. (e) If any insurance is written on a "claims made" basis, the respective Party shall maintain the coverage for a minimum of seven years after the termination of this Agreement. (f) To the extent permitted by the insurer and commercially reasonable, each Party shall obtain waivers of subrogation in favor of the other Party from any insurer providing coverage that is required to be maintained under this Article 12, except for the coverage required under Section 12(a)(i). A Party shall not be required to obtain a waiver of subrogation if the other Party is not able to obtain a waiver of subrogation from its insurance carrier. 13. SUCCESSORS AND ASSIGNS This Agreement and each and every covenant, term and condition hereof, shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, executors, administrators, successors and permitted assigns. Utility Contractor shall not assign its rights or obligations hereunder without express written approval of ATCLLC, except it may assign its rights or obligations to a purchaser (or an affiliate) who will own all or substantially all of Utility Contractor's distribution assets or equity interests and who shall then be bound by all of the provisions of this Agreement. ATCLLC shall not assign its rights or obligations hereunder without express written approval of Utility Contractor, except it may assign its rights and obligations to a purchaser (or an affiliate) who will own all or substantially all of ATCLLC's transmission assets and who shall then be bound by all of the provisions of this Agreement. 14. NOTICE (a) All certificates or notices required hereunder shall be given in writing and addressed or delivered to the representative(s) specified in this Agreement. Notices shall be deemed received (i) upon delivery, when personally delivered; (ii) upon receipt, when sent via registered or certified mail; (iii) the next business day, when sent via overnight courier; and (iv) upon transmittal, when sent via facsimile. Copies of all general correspondence regarding this Agreement shall also be sent to these representative(s). (b) Notices submitted hereunder shall be directed to the following individuals: Notices to Utility Contractor: Attn: Thomas H. Fehring Corporate Secretary Wisconsin Electric Power Company 231 West Michigan Street P.O. Box 2046 Milwaukee, WI 53201-2046 Notices to ATCLLC: Attn: Walter Woelfle Vice President, Legal and Secretary American Transmission Company, LLC N16 W23217 Stone Ridge Drive P.O. Box 47 Waukesha, WI 53187-0047 All other communications relating to this Agreement should be submitted to: Harry L. Terhune Vice President - Operations American Transmission Company, LLC N16 W23217 Stone Ridge Drive P.O. Box 47 Waukesha, WI 53187-0047 (c) ATCLLC or Utility Contractor may change their respective representative(s) designated to receive notice hereunder by written notice to the other Party. All correspondence and transmittals between the Parties shall be executed pursuant to coordination procedures that shall be developed by the Parties. 15. MISCELLANEOUS 15.1 Compliance with Laws. Throughout the term of this Agreement, each Party shall perform its obligations hereunder in compliance with all present and future federal, state and local statutes, ordinances, rules and regulations, including, but not limited to those pertaining to human safety, protection of property, non-discrimination, and protection of the environment. 15.2 Entire Agreement. This Agreement, together with the Appendices and Exhibits attached hereto, is the entire understanding of the Parties regarding the subject matter hereof, and supersedes all prior oral or written discussions, negotiations and agreements the Parties may have had with respect to the subject matter hereof. 15.3 Counterparts. This Agreement may be executed in any number of counterparts, and each counterpart shall have the same force and effect as the original instrument. 15.4 Amendment. No amendment, modification or waiver of any term hereof shall be effective unless set forth in a writing signed by both ATCLLC and Utility Contractor. 15.5 Survival. All warranties, remedial obligations, indemnities and confidentiality rights and obligations provided for herein shall survive the cancellation, expiration or termination hereof. 15.6 Independent Contractor. Utility Contractor at all times shall be deemed to be an independent contractor and none of its employees or the employees of its sub-contractors shall be considered to be employees of ATCLLC during the term of this Agreement. Utility Contractor shall have no authority to act on behalf of ATCLLC or bind ATCLLC in any manner except as expressly set forth in this Agreement. The Parties acknowledge that neither this Agreement nor any of its provisions are intended to create any partnership or joint venture between the Parties. 15.7 Confidentiality. (a) "Confidential Information", as used in this Section 15.7, shall mean all information or documentation disclosed or made available by either Party to the other, including but not limited to correspondence between the Parties, business plans, financial information, policies and procedures, computer programs, reports and analyses, or other information which a Party in good faith designates as "Trade Secrets" as that term is defined in Wis. Stat. 134.90(1)(c). (b) In consideration of the disclosure by one Party of Confidential Information to the other Party, the Parties agree that each of them shall undertake in good faith to accomplish the following additional actions with respect thereto: (i) to use the Confidential information for the sole purpose of fulfilling the obligations of the Parties pursuant to this Agreement; (ii) to safeguard and hold in strict confidence all Confidential Information, limiting disclosure of Confidential Information to employees, contractors or agents who have a need to know; (iii) to protect Confidential Information from disclosure to anyone not a party to this Agreement without the prior approval of the disclosing Party; and (iv) upon the request of the disclosing Party and in any event upon cancellation or expiration of this Agreement, to return all Confidential Information, or to certify that such Confidential Information has been destroyed. (c) The restrictions of this Section do not apply to any information which is already known by the receiving party, possessed by a third party prior to disclosure, acquired from anyone not a party to this Agreement without restriction, or which is publicly available. (d) Each Party retains all right, title and interest in and to any Confidential Information disclosed by the party hereunder. (e) In the event that either Party is required by applicable law to disclose any Confidential Information of the other Party, such party shall promptly notify the other Party of such requirement and cooperate with the other Party to protect the Confidential Information from any disclosure not required by law. (f) The obligations of this Section shall survive for a period of 3 years following any expiration or cancellation of this Agreement. 15.8 Standards of Conduct. If the performance of this Agreement requires ATCLLC to disclose information about the Transmission System to Utility Contractor, the dissemination of which by Utility Contractor would have been subject to FERC's Standards of Conduct requirements, 18 C.F.R. Part 37, prior to the transfer of the Transmission Facilities, such information shall not be disclosed by Utility Contractor or ATCLLC to any persons that would not have been entitled to receive such information prior to such transfer. 15.9 No Implied Waivers. The failure of a Party to insist upon or enforce strict performance of any of the provisions of this Agreement shall not be construed as a waiver or relinquishment to any extent of such Party's right to assist or rely upon any such provisions, rights and remedies in that or any other instance; rather, the same shall be and remain in full force and effect. 15.10 No Third-Party Beneficiaries. This Agreement is intended to be solely for the benefit of ATCLLC and Utility Contractor and their successors and permitted assigns and is not intended to and shall not confer any rights or benefits on any third party (other than successors and permitted assigns) not a signatory hereto. 15.11 Severability. In the event that any provision of this Agreement is deemed as a matter of law to be unenforceable or null and void, such unenforceable or void portion of such provision shall be deemed severable from this Agreement unless the removal of the unenforceable provision materially alters the obligations of either Party hereunder. Even if there is a material alteration in the remainder of the Agreement, the Agreement shall continue in full force and effect as if such provision was not contained herein., but the Parties shall negotiate in good faith new provisions in relation to the deleted provision that will to the extent practicable restore the benefit of the bargain contained in such provision, and that are consistent with Good Utility Practice and the adequacy obligation set forth in Section 2.7 of the Operating Agreement of ATCLLC. 15.12 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Wisconsin, with the exception of any choice of laws provisions. 15.13 Operation and Prospective Planning. Recognizing that the Parties have to prepare a Facilities Maintenance Plan and Budget prior to the Operations Date, the Parties will operate under the standards of this Agreement to prepare a Facilities Maintenance Plan, calculate Baseline Resource Hours, calculate a Maintenance Response Budget, and develop a Budget adhering as closely as possible to the timetables established for the first year after the Operations Date. 15.14 Headings. The headings set forth herein are inserted for convenience and shall have no effect on the interpretation or construction of this Agreement. 15.15 Affiliate Status of Parties. For purposes of Articles 10, 11, and 12, neither Party shall be treated as an affiliate of the other. IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed by their duly authorized representatives, effective as of the date first written above. AMERICAN TRANSMISSION COMPANY LLC BY______________________________________ TITLE___________________________________ WISCONSIN ELECTRIC POWER COMPANY BY______________________________________ TITLE___________________________________ q:\client\69495\0018\b0036752.doc EXHIBIT A OPERATION SERVICES AND MAINTENANCE SERVICES MAINTENANCE SERVICES MAINTENANCE SERVICES (continued) (a) For Line Equipment Analysis (System (c) For ATCLLC * Inspection * Station Property * aerial/walk/climb/infra-red Grass Maintenance * underground * Station Property Vegetation Control * submarine cable * Station Property * Painting Building Maintenance * Wood Pole * Station Property Inspection/Treatment/Repair Snow Removal * Station Property (some replacements Gravel may be capital in * Station Property nature) Access Maintenance * Line Repair * Station Property (Insulation/Founda Security Checks tion/Hardware/Conductor) * Grounding (d) Miscellaneous * Corrosion Control * Special Maintenance Projects * Maintenance of * Grounding Repair insulating * Radio/TV fluids/gases, pumps, Interference valves and protective * Major Equipment devices) Repair * Right of Way Vegetation Control * Right of Way Access Maintenance * Right of Way Security Checks (b) For Station Equipment * Inspection * Painting/Switches/Bus * Structure/Foundation Repair * Breaker * DC System * Transformer * SF6 Management * Relay Test/Maintenance System (System Protection) * Communications Repair (System OPERATION SERVICES (a) Operations * Inspection * Field Switching * Communications Repair (b) Emergency Response Services * Field Response * Emergency Cleanup Spill Response * Post-Emergency Repair SCHEDULE 1 (ATTACHED TO OPERATION & MAINTENANCE AGREEMENT) 1. General Description. Utility Contractor shall invoice to ATCLLC the actual costs of providing Services for the previous month. The invoice will also identify any costs for Services accrued during the previous month by Utility Contractor with the understanding that these accrued costs will be invoiced for payment at a later date (as they are paid by Utility Contractor). Utility Contractor's invoices to ATCLLC will be in a consistent format and provided monthly together with the Utility Contractor's detailed billing reports supporting the invoice. 2. Methods of Calculating Costs to Be Paid by ATCLLC. (a) Direct Costs. Costs incurred by the Utility Contractor that are solely and directly attributable to Transmission Facilities services shall be directly billed to ATCLLC in full. These directly billed costs shall be recorded as incurred by Utility Contractor to internal bookkeeping accounts designated as transmission billing accounts. The direct cost for materials and supplies shall be their book value. (b) Indirect Costs. Costs incurred by the Utility Contractor for activities that support the entire company or which support Transmission Facilities and services to Transmission Facilities plus other divisions of the company will be identified and a portion of these costs will be charged to ATCLLC. Utility Contractor will identify and aggregate all of these costs into recognizable categories and, in cooperation with ATCLLC, shall develop methods for calculating the portion of each cost category that should be allocated to ATCLLC. The method for determining the share allocable to ATCLLC may vary from cost category to cost category. A document describing the methods for allocating categories of costs to ATCLLC, including any allocation formulas, will be attached to this Schedule 1. (c) Labor Loadings. Loadings that account for pension and employee benefit costs, payroll taxes and costs, and the expense of non-productive time (paid leaves plus, if not a separate cost category, training) shall be added to any direct or indirect labor costs billed to ATCLLC. A document describing the methods Utility Contractor will use to calculate and apply labor loadings will be attached to this Schedule 1. (d) Extraordinary Costs. Subject to Article 4 of the Agreement, costs incurred by Utility Contractor that are unusual, special or extraordinary may require unique treatment. Utility Contractor will notify ATCLLC in advance of incurring such costs whenever possible and as soon as possible after incursion of the cost if advance notice is not possible, but in any event prior to sending ATCLLC an invoice that includes the cost. (e) Utility Contractor's System for Recording Its Costs. Utility Contractor will notify ATCLLC in advance of any changes to its system of recording and tracking its costs that will significantly impact the calculation or appearance of invoices to ATCLLC. Utility Contractor will, at ATCLLC's expense, provide for the transfer to ATCLLC of electronic billing data in a form usable by ATCLLC's electronic systems for recording and tracking costs of the Services. 3. True-ups and Reviews. Amounts that have been billed based on estimates will be adjusted to the Utility Contractor's actual costs after actual costs are known and ATCLLC will pay more or receive a credit, as appropriate, for any true-up. Such true-ups may be performed at any time, but at least one annual true-up will be performed by the Utility Contractor for the previous year before the expiration of the first quarter of the following year. In addition, formulas, procedures and allocations may be revised by either Party if the Party proposing the revision can demonstrate to the other Party that new facts have come to light or that it has discovered or developed an improved formula, procedure or method for accurately determining or invoicing actual costs. Any such revision to a formula, procedure or allocation will not be applied retroactively. Amounts previously billed in error, however, will be corrected in accordance with Section 4 below; error here includes the long or short-term misapplication of an approved formula. Where refunds or additional amounts are owed due to a true-up or correction, the refund or additional amount shall appear on the next monthly billing following identification of the adjustment. 4. Contested Statements. ATCLLC may contest, and Utility Contractor may correct, any particular items included in any Utility Contractor invoice within one year of ATCLLC's receipt of the invoice. This provision does not limit ATCLLC's right to audit Utility Contractor under Section 6.6 of the Agreement. 5. Adjustments. Utility Contractor shall promptly reimburse or credit ATCLLC for any charges that should not have been billed to ATCLLC as provided in the Agreement and which either Party identifies within 12 months of the ATCLLC's receipt of the invoice containing such charges. Such reimbursements shall be set forth in the appropriate section of the invoice. Utility Contractor shall bill ATCLLC for any charges that were not billed but should have been billed to ATCLLC as provided in this Agreement and which either Party identifies within 12 months of the month that the charges were incurred. The amount of any adjustment under this Section shall reflect interest from the date such amounts were due at the published prime interest rate of Firstar Bank on the last business day of the preceding month. _______________________________ * A Transmission Utility that has transferred Transmission Facilities to the American Transmission Company LLC. TRANSITIONAL SERVICES AGREEMENT FOR TRANSMISSION FACILITIES (Transferred Under Wisconsin "Reliability 2000" Legislation) Between American Transmission Company LLC and Wisconsin Electric Power Company Dated as of December 29, 2000 ARTICLE 1 DEFINITIONS AND INTERPRETATION 2 1.1 Definitions, Generally 2 1.2 Special Definitions 2 1.2.1 Administrative Services 3 1.2.2 Budget 3 1.2.3 Day One 3 1.2.4 Day 181 3 1.2.5 Good Utility Practice 3 1.2.6 Key Personnel 3 1.2.7 Party 4 1.2.8 Parties 4 1.2.9 Service Schedules 4 1.2.10 Services 4 1.2.11 System Control Services 4 1.2.12 Transmission Facilities 4 1.2.13 Transmission System 5 ARTICLE 2 TERM 5 2.1 Term of Agreement 5 2.2 Extension 5 ARTICLE 3 REQUIRED REGULATORY APPROVALS 5 ARTICLE 4 GENERAL PROVISIONS REGARDING SERVICES TO BE PROVIDED BY UTILITY CONTRACTOR 6 4.1 Services on Day One 6 4.2 Exclusions of Services on Day One 6 4.3 Exclusion of Services After Day 181 7 4.4 Development of Service Schedules 7 ARTICLE 5 RESPONSIBILITIES OF UTILITY CONTRACTOR 11 5.1 Scope of Services 11 5.2 Performance Standards 11 5.3 Utility Contractor Resources 13 5.4 Budget 14 5.5 Reports 15 5.6 Training 15 5.7 Contracts with Third Parties 16 ARTICLE 6 COMPENSATION OF UTILITY CONTRACTOR 17 6.1 Compensation. 17 6.2 Methods of Calculating the Compensation Due. 17 6.3 Compensation for Inventory and Storage. 17 6.4 Billing and Payment. 18 6.5 Audits and Adjustments. 18 ARTICLE 7 RESPONSIBILITIES OF ATCLLC 19 ARTICLE 8 SERVICES AVAILABLE TO ATCLLC DURING TRANSITION 20 8.1 General 20 8.2 Control Center Services 20 8.3 Real Estate 20 8.4 Project Services 22 8.5 Environmental Services 22 8.6 Supply Chain Services 22 8.7 Engineering Services 23 8.8 Planning Services 23 8.9 Miscellaneous Services 23 ARTICLE 9 SPECIALIZED CONSTRUCTION SERVICES 24 ARTICLE 10 OWNERSHIP 24 ARTICLE 11 DISPUTE RESOLUTION 26 ARTICLE 12 FORCE MAJEURE 26 ARTICLE 13 LIMITATION OF LIABILITY 27 ARTICLE 14 INDEMNITY 27 ARTICLE 15 INSURANCE 30 ARTICLE 16 SUCCESSORS AND ASSIGNS 32 ARTICLE 17 NOTICE 33 ARTICLE 18 MISCELLANEOUS 34 18.1 Compliance with Laws 34 18.2 Entire Agreement 34 18.3 Counterparts 34 18.4 Amendment 34 18.5 Survival 35 18.6 Independent Contractor 35 18.7 Confidentiality 35 18.8 Standards of Conduct 36 18.9 No Implied Waivers 37 18.10 No Third-Party Beneficiaries 37 18.11 Severability 37 18.12 Governing Law 37 18.13 Interpretation. 38 18.14 Headings 38 18.15 Modification of Agreement by Service Schedules 38 18.16 Affiliate Status of Parties 38 TRANSITIONAL SERVICES AGREEMENT FOR TRANSMISSION FACILITIES THIS TRANSITIONAL SERVICES AGREEMENT FOR TRANSMISSION FACILITIES ("Agreement") is entered into as of December 29, 2000 by and between Wisconsin Electric Power Company or WEPCO ("Utility Contractor"), a Wisconsin corporation, and American Transmission Company LLC ("ATCLLC"), a Wisconsin limited liability company (collectively, the "Parties"). Utility Contractor and ATCLLC are referred to individually as a "Party" and collectively as the "Parties." RECITALS WHEREAS, Wisconsin Act 9 ("Reliability 2000 Legislation"), effective October 29, 1999, authorized the organization of a new company to provide electric transmission service; WHEREAS, pursuant to the provisions of the Reliability 2000 Legislation, ATCLLC was organized to provide transmission service; WHEREAS, the Reliability 2000 Legislation authorized electric transmission utilities to transfer their transmission assets to a new company organized to provide transmission service; WHEREAS, WEPCO has agreed to transfer its transmission assets to ATCLLC; WHEREAS, the Parties intend that ATCLLC will commence operation of the Transmission System on January 1, 2001 ("Day One"). WHEREAS, ATCLLC is in the process of searching for and employing personnel needed to staff the functions necessary for its operations from and after Day One, which may include personnel currently employed by Utility Contractor and performing those functions for Utility Contractor. Of necessity, on Day One ATCLLC must obtain services so as to ensure continuation of high quality, reliable service. WHEREAS, the Parties desire to reflect herein their agreement for the provision of certain services. The Parties have also entered into a Forming Party Agreement Regarding System Operating Procedures dealing with the performance of certain functions in operation of the system and a Facilities Operation and Maintenance Agreement ("Facilities O & M Agreement") pursuant to which the Parties have arranged for the provision of Operation and Maintenance Services upon commencement of operations of ATCLLC. WHEREAS, the Parties desire to provide in this Agreement for the provision by Utility Contractor of the services needed on Day One for ATCLLC to provide uninterrupted, reliable, cost effective transmission service. The Parties further desire to commit in this agreement to a cooperative approach to the necessary analysis, coordinated planning, construction, and other measures necessary to meet ATCLLC's needs for a transition from functional control to full control of all aspects of the Transmission System, while accommodating the need of Utility Contractor to plan, supervise and conduct its continuing distribution operations after Day One. NOW, THEREFORE, in consideration of the promises and mutual covenants contained herein, the Parties hereby agree as follows: ARTICLE 1 DEFINITIONS AND INTERPRETATION 1.1 Definitions, Generally Unless defined in Section 1.2 of this Agreement, the definition of each defined term used in this Agreement shall be the same as the definition for that term set forth in the OATT, the Operating Agreement of American Transmission Company, LLC, or the Asset Contribution Agreement between the Parties. 1.2 Special Definitions The following defined terms used in this Agreement shall be defined as set forth below: 1.2.1 Administrative Services "Administrative Services" shall mean those categories and subcategories of Services described in Sections 8.3, 8.5, 8.6, 8.7, 8.8, and 8.9 of this Agreement. 1.2.2 Budget "Budget" shall mean the budget to be prepared by Utility Contractor pursuant to Section 6.3 hereof. 1.2.3 Day One "Day One" shall mean the date on which ATCLLC commences operations, and has the same meaning as the term Operations Date as that term is used in the Operation and Maintenance Agreement between the Parties. 1.2.4 Day 181 "Day 181" shall mean 180 calendar days after Day One. 1.2.5 Good Utility Practice "Good Utility Practice" shall mean any of the practices, methods and acts engaged in or approved by a significant portion of the electric utility industry during the relevant time period, or any of the practices, methods and acts which, in the exercise of reasonable judgment in light of the facts known at the time the decision was made, could have been expected to accomplish the desired result at a reasonable cost consistent with good business practices, reliability, safety and expedition. Good Utility Practice is not intended to be limited to the optimum practice, method or act to the exclusion of all others, but rather is intended to include acceptable practices, methods, or acts generally accepted in the region. 1.2.6 Key Personnel "Key Personnel" shall mean individuals employed by the Utility Contractor in the positions of managers and supervisors and who are designated as the individuals directly responsible for supervising or managing work to be performed or services to be provided under this Agreement. 1.2.7 Party "Party" shall mean either Utility Contractor or ATCLLC. 1.2.8 Parties "Parties" shall mean both Utility Contractor and ATCLLC. 1.2.9 Service Schedules "Service Schedules" shall mean the schedules described in Section 4.4 of this Agreement. 1.2.10 Services "Services" shall mean any combination of the categories and/or sub-categories identified in Article 8 of this Agreement that are provided pursuant to this Agreement or any of the Service Schedules between the Parties. 1.2.11 System Control Services "System Control Services" shall mean those categories and subcategories of Services described in Sections 8.2 and 8.4 of this Agreement. 1.2.12 Transmission Facilities "Transmission Facilities" shall mean the facilities for the transmission of electric energy and ancillary services transferred to ATCLLC by Utility Contractor pursuant to, and identified in, the Asset Contribution Agreement between ATCLLC and WEPCO, dated December 15, 2000, and new facilities constructed by ATCLLC for its Transmission System which ATCLLC and Utility Contractor have agreed will be Transmission Facilities for purposes hereof. 1.2.13 Transmission System "Transmission System" shall mean the system of facilities for the transmission of electric energy and ancillary services owned or controlled by ATCLLC and which are covered by the ATCLLC OATT. ARTICLE 2 TERM 2.1 Term of Agreement Subject to Article 3, this Agreement shall be effective from Day One and shall continue in effect as modified or supplemented by the Service Schedules. This Agreement terminates on the date that the last Service Schedule is terminated or when - in the absence of Service Schedules - the Agreement is terminated under the notice provision set forth in Section 4.4. 2.2 Extension This Agreement may be extended upon the mutual agreement of the Parties, subject to renegotiation (at the option of either Party) of the terms of this Agreement. ARTICLE 3 REQUIRED REGULATORY APPROVALS The effectiveness of this Agreement is hereby expressly conditioned upon the receipt by Utility Contractor and ATCLLC of all permits, regulatory authorizations and regulatory approvals that shall be required by the Parties to enter into and perform their obligations under this Agreement in a form acceptable in the reasonable judgment of the Party affected thereby. ARTICLE 4 GENERAL PROVISIONS REGARDING SERVICES TO BE PROVIDED BY UTILITY CONTRACTOR 4.1 Services on Day One Except to the extent that the Parties agree otherwise and reflect in the Service Schedules contemplated in Section 4.4 below, each of the Services described in detail in Article 8 of this Agreement other than those excluded by ATCLLC pursuant to Section 4.2 and listed on Schedule 4.2 shall be provided to ATCLLC pursuant to this Agreement by Utility Contractor commencing on Day One. Utility Contractor shall continue to provide such Services until either the termination of the Services pursuant to Section 4.4(d), or the date a Service Schedule sets for termination of Services covered by that Service Schedule. Termination of Services under a Service Schedule shall be in accordance with the termination provisions in such Service Schedule. When a Service Schedule terminates, the Agreement terminates as to the Service covered by that Service Schedule. 4.2 Exclusions of Services on Day One (a) Administrative Services. At least 30 days prior to Day One, after consultation with Utility Contractor, ATCLLC shall identify in writing to Utility Contractor each of the Administrative Services that will not be provided by Utility Contractor on Day One. This list shall be attached as Schedule 4.2 to this Agreement. (b) System Control Services. At least 45 days prior to Day One, after consultation with Utility Contractor, ATCLLC shall identify in writing to Utility Contractor those System Control Services which ATCLLC intends and is able to reliably and effectively provide for itself or through a third party consistent with the requirements of the Forming Party Agreement Regarding System Operating Procedures. No later than 15 days prior to Day One, after consultation with ATCLLC, Utility Contractor shall notify ATCLLC in writing whether it agrees that ATCLLC is capable of providing the identified Services consistent with the requirements of the Forming Party Agreement Regarding System Operating Procedures. Such agreement from Utility Contractor shall not be unreasonably withheld or delayed. 4.3 Exclusion of Services After Day 181 Not later than 60 days after Day One, after consultation with Utility Contractor, ATCLLC shall identify in writing which of the Administrative Services it will no longer take from Utility Contractor after Day 181. At this time, ATCLLC shall also identify which of the System Control Services ATCLLC intends to no longer take from Utility Contractor after Day 181 and which ATC intends and is able to reliably and effectively provide after Day 181 for itself or through a third party consistent with the requirements of the Forming Party Agreement Regarding System Operating Procedures. Not later than 90 days after Day One, after consultation with ACTLLC, Utility Contractor shall notify ATCLLC in writing whether it agrees that ATCLLC is capable of providing the identified Services consistent with the requirements of the Forming Party Agreement Regarding System Operating Procedures. Such agreement from Utility Contractor shall not be unreasonably withheld or delayed. ATCLLC's identification of Services under this subsection shall satisfy the Termination notice requirements in Section 4.4(d) as to those Services. 4.4 Development of Service Schedules From and after Day One, the Parties shall, using the process set forth below, work in good faith to develop mutually acceptable Service Schedules for the continuation, reduction or termination of each of the categories of Services described in Article 8 by Utility Contractor and which ATCLLC is taking under this Agreement. That arrangement shall be reflected in one or more of the Service Schedules contemplated in this Article 4.4 and in Article 8. The Parties shall employ the following procedure for developing the Service Schedules: (a) Information and Analysis. As soon as practicable before Day One, Utility Contractor shall provide to ATCLLC sufficient reasonably available information on its staffing and supervision of the Services described in Article 8, a description of all systems employed in performing the Services, and information on plans for staffing and operation of its distribution business to the extent such plans impact its ability to continue to provide the Services described in Article 8. ATCLLC shall provide comparable information regarding its plans and requirements and its analysis of the process for modification and coordination of systems data transfers, software requirements, and like matters. (b) ATCLLC Proposal of Service Schedules. At least 30 days prior to Day 181, on the basis of information exchanged pursuant to Section 4.4(a), ATCLLC shall, for each of the Services it is receiving on Day 181, do one of the following: (i) propose Service Schedules for Utility Contractor's continued provision of some or all such Services after Day 181; (ii) If ATCLLC has been unable to complete the analysis contemplated in Section 4.4(a), it nevertheless may notify Utility Contractor that ATCLLC desires to enter into a Service Schedule for the Service and provide Utility Contractor with a proposal for the Service Schedule no later than 60 days after Day 181. (iii) For an Administrative Service, provide written notice of termination pursuant to Section 4.4(d); (iv) For a System Control Service which ATCLLC is able to provide reliably and effectively for itself or through third parties consistent with the Forming Party Agreement Regarding System Operating Procedures, provide written notice of termination pursuant to Section 4.4(d); or No later than 60 days after Day 181, after consultation with ATCLLC, Utility Contractor shall notify ATCLLC in writing whether it agrees that ATCLLC is capable of providing the System Control Services noticed for termination under (iv) above consistent with the requirements of the Forming Party Agreement Regarding System Operating Procedures. Such agreement from Utility Contractor shall not be unreasonably withheld or delayed. ATCLLC's identification of Services under this subsection shall satisfy the termination notice requirements in Section 4.4(d) as to those Services. (c) Negotiation. Promptly after delivery of proposals for Service Schedules, the Parties shall meet to consider them and shall negotiate in good faith toward adoption of mutually agreeable Service Schedules on the matters addressed in the proposal. (d) Utility Contractor's Termination of Services. If and to the extent that the Parties do not agree on Service Schedules or Agreements covering a matter or matters included in an ATCLLC proposal within 120 days after the delivery of the proposal, or if ATCLLC fails to make a proposal in accordance with this Section 4.4, Utility Contractor, may, as to any Service on which there has been no Service Schedule, notify ATCLLC that after a specified date it will no longer provide the Service. At this time, ATCLLC may, for any Administrative Service for which there has been no Service Schedule, notify Utility Contractor that after a specified date ATCLLC will no longer procure the services from Utility Contractor. (e) ATCLLC Termination of Services. If and to the extent that the Parties do not agree on Service Schedules or Agreements covering a matter or matters included in an ATCLLC proposal within 120 days after the delivery of the proposal, ATCLLC may notify Utility Contractor that after a specified date it will no longer procure any Administrative Service or any System Control Service that ATCLLC intends and is able to reliably and effectively provide for itself or through third parties consistent with the Forming Party Agreement Regarding System Operating Procedures. No later than 30 days after notification under this Section regarding a System Control Service, Utility Contractor shall, after consultation with ATCLLC, notify ATCLLC in writing whether it agrees that ATCLLC is capable of providing the System Control Service consistent with the requirements of the Forming Party Agreement Regarding System Operating Procedures. Such agreement from Utility Contractor shall not be unreasonably withheld or delayed. ATCLLC's identification of Services under this subsection shall satisfy the termination notice requirements in this Section 4.4(d) as to those Services. (f) Sufficiency of Notice. The date specified by Utility Contractor in any notice of termination under Section 4.4(d) or (e) hereof shall be such as will afford ATCLLC a reasonable opportunity to obtain the service from a third party or Parties. The date specified by ATCLLC in any notice of termination under Section 4.4(d) or (e) hereof shall be such as will afford Utility Contractor a reasonable opportunity to redeploy the resources Utility Contractor used to perform any Service discontinued pursuant to this Section. A period of six months shall in any event be deemed a reasonable period for purposes of such notice by either Party. ARTICLE 5 RESPONSIBILITIES OF UTILITY CONTRACTOR 5.1 Scope of Services Utility Contractor shall perform, or cause to be performed, the Services in accordance with the terms, conditions and procedures specified in this Agreement. 5.2 Performance Standards (a) In meeting their responsibilities hereunder, the Parties shall at all times follow Good Utility Practice, the requirements of this Agreement, and all directives and specifications of ATCLLC or its duly authorized designees. (b) Utility Contractor shall provide Services in accordance with ATCLLC direction as necessary to give effect to ATCLLC policies, plans and business decisions, but Utility Contractor shall be responsible for determining the manner of performance and for supervision of the work specified by ATCLLC or its authorized designee. Should Utility Contractors object to following the specifications or directives of ATCLLC on any basis, Utility Contractor shall nonetheless follow such directives and specifications. Where, in the judgment of Utility Contractor, following the specifications or directives of ATCLLC would pose a substantial risk to property or human safety, Utility Contractor shall, where time permits, notify a representative of ATCLLC and seek relief from the specification or directive. Where Utility Contractor does not have time to notify an ATCLLC representative and obtain relief, the Utility Contractor may take reasonable steps to mitigate damage to property or risk to human safety. In any non-emergency case in which Utility Contractor objects to following the directives or specifications of ATCLLC, it shall so notify ATCLLC in writing or confirm oral notice in writing by Key Personnel. Utility Contractor may, where it has given the notice required in this Section, subsequently address its objections under the dispute resolution process set forth in Article 11 of this Agreement. (c) Except as directed by ATCLLC, Utility Contractor shall make good faith efforts to maintain the pre-Agreement quality and timeliness of its performance of the Services in accordance with Good Utility Practice, including priority of work and methods. (d) The Utility Contractor acknowledges that ACTLLC has ultimate responsibility for the Transmission System and has the obligation to manage the Services. To that end, ATCLLC has the right, upon proper notice to Utility Contractor, to secure non- construction Services by adding ATCLLC personnel and/or contractors into project teams and determining the functions such ATCLLC personnel or contractors shall perform. If ATCLLC elects to add personnel or contractors, it shall make appropriate reassignment of responsibility so as to minimize any interference with the management and supervision by Utility Contractor of the work for which Utility Contractor is responsible and ATCLLC shall pay the cost incurred by Utility Contractor resulting from measures reasonably required of it to redeploy resources in response to such ATCLLC direction. (e) Utility Contractor shall not be deemed to have failed to adequately perform a specific Service under this Agreement where (i) Utility Contractor has performed the specific Service in accordance with Good Utility Practice, or any directive, specification, procedure or policy of ATCLLC; or (ii) where its ability to adequately perform a specific Service was constrained by an ATCLLC-imposed budgetary limitation on that specific Service to which limitation Utility Contractor objected in writing, or if orally, confirmed in writing by Key Personnel, at such time as the effect of the budget restraint became known. (f) If ATCLLC discovers that any Services performed fail to conform to this Agreement, Utility Contractor shall, at ATCLLC's option, promptly correct or perform such non-conforming Services so that they conform to this Agreement. Without limiting the generality of this provision, Utility Contractor shall provide the labor, supervision, equipment, tools and materials necessary to effect such remedy. Utility Contractor shall perform its remedial obligations hereunder in a timely manner consistent with ATCLLC's reasonable requirements. If Utility Contractor repeatedly fails, or is unable, to remedy such non-conforming Services during a period consistent with ATCLLC's reasonable requirements, ATCLLC may undertake to remedy the non-conforming Services and in such case Utility Contractor shall reimburse ATCLLC for any reasonable costs incurred thereby. This subsection shall be in addition to any other remedies provided by this Agreement or available at law or equity. (g) In its performance of the Services, Utility Contractor shall undertake its efforts in a fashion which does not unduly favor or discriminate against any distribution system. 5.3 Utility Contractor Resources (a) Utility Contractor shall maintain and manage the organizational and physical resources needed to perform the Services. (b) Utility Contractor shall maintain an organization and personnel, including contractors, capable of performing the Services in a cost effective manner. Qualifications for Key Personnel assigned to manage the performance of Services shall be available to ATCLLC at any reasonable time. ATCLLC shall have the right to interview the Key Personnel proposed by Utility Contractor to manage the performance of Services and to reject such Key Personnel for Good Cause at any time during the term of this Agreement. The Services shall be managed by such parts of Utility Contractor's organization as may be necessary to assure the cost-effective performance of the Services in accordance with this Agreement or any Service Schedule. (c) Utility Contractor shall maintain and manage the equipment, spare parts, materials and supplies needed to perform the Services in a cost-effective manner. 5.4 Budget (a) As soon as possible before Day One, and thereafter at least 60 days before the beginning of each quarter throughout the term of this Agreement, Utility Contractor shall submit in writing to ATCLLC, for ATCLLC's review and approval, a budget for the 6 (six) months beginning with such quarter, and for each month in such 6 (six) month period, setting forth Utility Contractor's proposed expenditures for the Services not excluded by ATCLLC under Sections 4.2 or 4.3, or terminated pursuant to Sections 4.4. (b) The Budget shall include the information, and follow the format used by Utility Contractor in its budget associated with its existing plans for the initial 6 (six) month period with such modifications as ATCLLC may reasonably require or as may be required to coordinate the Budget with procedures for cost accounting and billing set forth in this agreement. The Budget shall describe in adequate detail the estimated expenditures associated with each of the Services ATCLLC is taking under this Agreement for the Budget period. (c) ATCLLC shall review, consult with Utility Contractor about work force and materials availability, and revise, as it deems appropriate, approve and return the Budget to Utility Contractor within 30 days of its submittal. During the term of the Budget ATCLLC may at each quarterly review, in response to suggestions made by Utility Contractor or on its own initiative, elect to revise the Budget to meet the then current needs of ATCLLC subject to any limitation set forth in Article 4 on ATCLLC's discretion to exclude or terminate Utility Contractor's provision of Services. If ATCLLC does elect to revise the Budget, ATCLLC shall communicate the changes made to Utility Contractor in writing, in a timely fashion; provided, however, that any costs incurred by Utility Contractor in reasonable anticipation of performing Services under the budget as previously approved by ATCLLC, and which could not reasonably have been mitigated by Utility Contractor, shall be borne by ATCLLC. 5.5 Reports (a) As part of the Services, Utility Contractor shall prepare and submit the reports described in this Section. Such reports and data shall be provided to ATCLLC without restriction, and are subject to the confidentiality provisions of Section 18.7 of this Agreement. (b) As part of the Services, Utility Contractor shall prepare, on a quarterly basis within 30 days after the end of the quarter, a summary of the Services provided during the previous quarter. Such report shall include a summary of all material deficiencies in the systems, records, or assets that are the subject of the Services, and Utility Contractor's proposals for correcting such deficiencies. (c) As part of the Services, Utility Contractor shall prepare, on a monthly basis within 30 days after the end of the month, a budget variance report setting forth actual and budgeted expenditures for the period and year to date, together with Utility Contractor's explanation of any variance. (d) Utility Contractor shall prepare such other reports, and provide such other information, as ATCLLC may request regarding the Services. 5.6 Training (a) As part of the Services, Utility Contractor shall train its employees and agents appropriately to carry out its responsibilities to ATCLLC under this Agreement. At ATCLLC's expense, Utility Contractor shall provide ATCLLC training materials and course materials used by Utility Contractor in any training programs conducted pursuant to this Section. (b) As part of the Services, Utility Contractor shall provide training sessions to familiarize ATCLLC employees or agents with the Services provided under this Agreement. Utility Contractor shall provide such training sessions at such times and locations, to such audiences, and with such content, as may be appropriate and requested by ATCLLC. 5.7 Contracts with Third Parties ATCLLC acknowledges that Utility Contractor may have entered into contracts with third parties for some or all of the categories of Services described in Article 8. ATCLLC further acknowledges that Utility Contractor may wish in the future to enter into contracts with third parties to perform some of the Services. All such third-party contracts shall be subject to the following provisions. (a) Existing contracts. As soon as practicable before the Operations Date, Utility Contractor shall provide ATCLLC, for its review, subject to the confidentiality provisions of Section 18.7, copies of all third-party contracts then currently in effect and under which the amounts payable are expected to exceed $50,000 annually for Services covered by this Agreement. During the term of this Agreement, Utility Contractor shall not modify any of these third-party contracts without the prior written approval of ATCLLC, which approval ATCLLC shall not unreasonably withhold or delay. (b) Future Contracts. Utility Contractor may enter into contracts with qualified third parties for the provision of Services, provided that Utility Contractor obtains ATCLLC's prior written approval of all proposed contractors and contracts for contracts under which the amounts payable are reasonably expected to exceed $50,000 annually, which approval ATCLLC shall not unreasonably withhold or delay. (c) Utility Contractor may not split any contracts to avoid the $50,000 approval threshold. (d) Contract Invoices. Utility Contractor shall pass all invoices it receives for third-party contract work used to provide Services directly through to ATCLLC, with no additional charges or markups, except as may be authorized under this Agreement. ARTICLE 6 COMPENSATION OF UTILITY CONTRACTOR 6.1 Compensation. As full and complete compensation for Utility Contractor's provision of the Services, ATCLLC shall pay Utility Contractor all of the reasonable direct and indirect costs incurred by Utility Contractor in performing such Services. Direct and indirect costs include but are not limited to labor costs with loadings which shall include labor costs for tasks such as recording costs and invoicing ATCLLC and the cost of materials and supplies; return of and on the cost of property employed; and payments to contractors, plus all overheads directly associated with any and all of these costs. 6.2 Methods of Calculating the Compensation Due. The methods and procedures for determining, recording, allocating, billing and auditing of Utility Contractor's costs is set forth in Schedule 1 hereto. 6.3 Compensation for Inventory and Storage. (a) Upon cancellation or expiration of this Agreement, ATCLLC agrees to purchase the inventory of materials and supplies under the provisions of Section 3.8 of the Asset Contribution Agreement. (b) ATCLLC shall have the option to lease from Utility Contractor, or rent at cost, the warehouse space and other facilities and systems used by Utility Contractor to maintain and manage such materials and supplies. 6.4 Billing and Payment. Utility Contractor shall provide invoices to ATCLLC each month, setting forth the costs incurred by Utility Contractor during the previous month to provide the Services, and identifying costs accrued for Services by the Utility Contractor during the previous month, which accrued costs will be invoiced at a later date. ATCLLC shall pay each invoice within 15 days of receipt from Utility Contractor. Billing and payment disputes that cannot be resolved in the normal course of business shall be resolved using the dispute resolution procedures described in Article 8. 6.5 Audits and Adjustments. Utility Contractor shall maintain and retain for such time as ATCLLC may reasonably direct, but not for longer than six years, the books and other records needed to document the costs Utility Contractor incurs as a result of fulfilling its obligations under this Agreement. Utility Contractor shall respond to any reasonable request from ATCLLC for information related to a cost charged by Utility Contractor to ATCLLC by providing ATCLLC the information reasonably needed by ATCLLC to verify the cost in question. From time to time, ATCLLC may conduct, and Utility Contractor shall permit ATCLLC to conduct or cause to be conducted by its authorized agents, at ATCLLC's expense, audits of the books and records of Utility Contractor that relate to the Services provided under this Agreement. Such audits will be conducted at reasonable, mutually agreed upon times, provided that ATCLLC must contest invoices within one year of receipt and must complete any audit relating to a contested invoice within a reasonable period of time thereafter. Any adjustment identified to be made as a result of an audit and that is payable under Section 5 of Schedule 1 shall be made to the billing statement next issued following the conclusion of the audit. ARTICLE 7 RESPONSIBILITIES OF ATCLLC During the term of this Agreement, ATCLLC shall, at its cost and expense, and in a manner consistent with Good Utility Practice, perform or provide the following at the times required to support the provision of the Services: (a) ATCLLC shall provide Utility Contractor with all necessary access to the Transmission Facilities and ATCLLC properties upon which such Transmission Facilities are located, and records. (b) ATCLLC shall, with the concurrence and assistance of Utility Contractor as may be necessary or appropriate, procure and maintain in effect all permits, certificates and licenses needed by the owner of the Transmission Facilities for provision of the Services. (c) ATCLLC shall review, revise and approve Budgets, as described in Section 5.3 hereof. All Budgets shall be reasonable and consistent with Good Utility Practice, subject to any limitation in Article 4 on ATCLLC's discretion to exclude or terminate Services, and any approvals of Budgets shall not be unreasonably withheld or delayed. (d) ATCLLC shall provide training sessions to familiarize Utility Contractor personnel with the processes and procedures relating to the Services that are developed by ATCLLC during the term of this Agreement for application by ATCLLC throughout the ATCLLC Transmission System. (e) ATCLLC shall provide Utility Contractor with such other information, oversight and direction as is needed by Utility Contractor to fulfill Utility Contractor's responsibilities under this Agreement. ARTICLE 8 SERVICES AVAILABLE TO ATCLLC DURING TRANSITION 8.1 General The categories and subcategories of Services available to ATCLLC under this Agreement include those described in Sections 8.2 to 8.10 below as modified from time to time in accordance with Service Schedules adopted pursuant to this Agreement. 8.2 Control Center Services (a) Control Center Services comprise: (i) Necessary functions for operation of control center facilities and for transmission related system use. (ii) Provision and supervision of control center system operator labor. (iii) Dispatch of field operations personnel. (iv) Necessary functions for restoration/blackstart operations. (b) Transitional Considerations for Development of Service Schedule. (i) Any further terms and conditions governing the provision of Control Center Services shall be set forth in Service Schedule 8.2. (ii) The Parties contemplate that work on preparation of Service Schedule 8.2 will have high priority. 8.3 Real Estate (a) Real Estate Services comprise: (i) Performance of real estate records management functions for the Transmission Facilities, including real estate and but excluding all financial accounting records and reports. (ii) Negotiating, drafting, executing, and maintaining records relating to easements, licenses, permits, etc., for the Transmission Facilities. (iii) Monitoring and taking appropriate action regarding encroachments by or upon Transmission Facilities real estate interests of ATCLLC. (iv) Real estate negotiation, acquisition, and condemnation functions for the Transmission Facilities. (v) Property owner relations functions. (vi) Lease management, billing and collection. (vii) Subject to any other agreement between the Parties, Joint Facility management (CATV), telephone, fiber, etc.) including billing, collection, pole attachment documentation, and make-ready process. (vii) Federal, State and local highway/road use, relocation, reimbursement. (ix) Support for Public Service Commission of Wisconsin proceedings on Certificates of Public Convenience and Necessity and Certificates of Authority, including data gathering, and public meetings. (x) Route planning, siting and selection. (b) Transitional Considerations for Development of Service Schedule. (i) The Utility Contractor shall maintain real estate records as requested by ATCLLC in Utility Contractor's integrated records system. (ii) The nature and pace of the transition will depend on decisions by ATCLLC as to the records system it desires, development of data transfer processes, protocols and software, systems compatibility, and other matters which the Parties have only begun to analyze. 8.4 Project Services (a) Project Services comprise functions necessary for the design, functioning and construction of capital projects, including engineering, protection and control design, procurement and construction. (b) Transitional Considerations for Development of Service Schedule. (i) Service Schedule 8.4 shall list the projects or type of projects for which Utility Contractor has a right or obligation to provide Project Services. (ii) Service Schedule 8.4 or schedules thereto shall specify the specific level of Project Services required for each project. (iii) Service Schedule 8.4 shall specify the period of time during which Utility Contractor will provide Project Services. 8.5 Environmental Services Environmental Services comprise: (a) Functions necessary to support preparation of environmental assessments and species management and for all technical services related to environmental matters not included in the Operations and Maintenance Agreement between the Parties. (b) Agency relations functions with federal, state or local governmental or regulatory bodies having environmental responsibilities. 8.6 Supply Chain Services Supply Chain Services comprise: (a) Sourcing and logistic functions. (b) Inventory and warehousing functions. (c) Contract requirements and legal requirements functions subject to ATCLLC approval. 8.7 Engineering Services Engineering Services comprise: (a) Functions supporting ATCLLC's standards development. (b) Records management functions including as built drawing, CAD services, Storage, reproduction and mapping/GIS. (c) Performance of special studies, as requested. 8.8 Planning Services Planning Services comprise: (a) Functions related to special studies requested by ATCLLC. (b) Functions related to running special software as requested by ATCLLC. 8.9 Miscellaneous Services Miscellaneous Services comprise: (a) Provision of management and professional staff to work under ATCLLC direction as supplemental ATCLLC staff to the extent available from Utility Contractor. (b) Provision of accounting services and associated records management. (c) To the extent not included as part of other Services, Legacy Software Services, including: (i) Functions relating to transferring or obtaining licenses for ATCLLC for software as required. (ii) Functions relating to enhancements to software developed by Utility Contractor in-house as approved by ATCLLC. (iii) Functions relating to management of data base provided for ATCLLC use. (d) Such other Services as may be agreed from time to time. ARTICLE 9 SPECIALIZED CONSTRUCTION SERVICES The Parties recognize that the Utility Contractor may have employees who perform specialized construction services. For the purposes of this Article, specialized construction services mean non-supervisory direct construction work on capital projects. Notwithstanding any provisions to the contrary in this Agreement, ATCLLC agrees to utilize all of the specialized construction services employee time available to ATCLLC for a period of three years and, after three years, to offer to employees who are necessary for these functions employment under conditions which meet the requirements of Wis. Stat. 196.807(3). ARTICLE 10 OWNERSHIP For the purpose of this Agreement: (a) Rights in ATCLLC Independently Developed Technology: Any Technology prepared, developed or acquired solely by the ATCLLC shall be owned solely by ATCLLC (hereinafter, "ATCLLC Owned Technology"). Except as provided for herein, nothing herein shall imply a license in the ATCLLC Owned Technology. (b) Rights In Utility Contractor Independently Developed Technology: Any Technology prepared, developed or acquired solely by Utility Contractor shall be owned solely by Utility Contractor (hereinafter, "Utility Contractor Owned Technology"). Except as provided for herein, nothing herein shall imply a license in the Utility Contractor Owned Technology. (c) Rights In Jointly Developed Technology: Any Technology jointly prepared, developed or acquired by the ATCLLC and Utility Contractor, shall be jointly owned (hereinafter, "Joint Technology"). The ownership rights granted under this paragraph shall be limited to the Joint Technology only and, except as provided for herein, does not grant any rights, license or otherwise in either the ATCLLC Owned Technology or Utility Contractor Owned Technology that may be necessary to utilize the Joint Technology. (d) Grant Of Rights In ATCLLC Owned Technology: To the extent any ATCLLC Owned Technology is needed by a Utility Contractor in furtherance of performing the Services or any aspect thereof, the ATCLLC hereby grants to the Utility Contractor a full and complete, world-wide, royalty-free, fully paid-up, non-exclusive license to use, without the right to grant sublicenses, the ATCLLC Owned Technology. (e) Grant Of Rights In Background Utility Contractor Technology: To the extent that background or underlying technology of Utility Contractor used by Utility Contractor in its performance of Services hereunder is required by ATCLLC to make use of its ATCLLC Owned Technology or the Joint Technology, the Utility Contractor hereby grants to the ATCLLC a full and complete, world-wide, royalty-free, fully paid-up, non-exclusive license to use the background or underlying technology of the Utility Contractor for the term of this Agreement and afterwards but only for the purposes and to the extent during the term of this Agreement without the right to grant sublicenses. (f) Shared Rights in Joint Technology: The ATCLLC and the Utility Contractor shall retain perpetually full and complete rights to (e.g., make, use or sell) the Joint Technology. Neither party may assign or otherwise transfer any rights in the Joint Technology, by license or otherwise, to the detriment of the other. ARTICLE 11 DISPUTE RESOLUTION Any dispute arising out of or in connection with this Agreement shall be resolved according to the dispute resolution procedures set forth in Schedule B of the Operating Agreement of American Transmission ATCLLC. ARTICLE 12 FORCE MAJEURE (a) Neither Party shall be responsible or liable, or deemed in breach hereof, to the extent the performance of its respective obligations hereunder is prevented or delayed due solely to circumstances beyond the reasonable control and without the fault or negligence of the party experiencing such impediment to performance, including but not limited to acts of God; war; riots; strikes, lockouts or other labor disturbances; labor or material shortages; actions or failures to act on the part of governmental authorities preventing or delaying performance; inability despite due diligence to obtain required licenses; or fire (such causes hereinafter called "Force Majeure"). (b) The Party experiencing the Force Majeure shall exercise due diligence in endeavoring to overcome any Force Majeure impediment to its performance, but settlement of its labor disturbances shall be entirely within its discretion. The Party experiencing the Force Majeure shall promptly give written notification to the other Party. This written notification shall include a full and complete explanation of the Force Majeure and its cause, the status of the Force Majeure, and the actions such Party is taking and proposes to take to overcome the Force Majeure. ATCLLC shall have the right, upon written notice to Utility Contractor, to obtain alternate contractors to perform the Services during any event of Force Majeure that prevents or delays Utility Contractor's performance hereunder if the Force Majeure has or, in ATCLLC's reasonable judgment, threatens to have an adverse effect on ATCLLC's ability to conduct its operations. ARTICLE 13 LIMITATION OF LIABILITY With respect to claims by and between the Parties under this Agreement, the measure of damages at law or in equity in any action or proceeding shall be limited to direct actual damages only, such direct actual damages shall be the sole and exclusive remedy and all other remedies or damages at law or in equity are waived and neither Party shall be liable in statute, contract, in tort (including negligence), strict liability, warranty or under any other legal theory or otherwise to the other Party, its agents, representatives, and/or assigns, for any special, incidental, punitive, exemplary or consequential loss or damage whatsoever, including, but not limited to, loss of profits or revenue on work not performed, for loss of use of or under- utilization of the other Party's facilities, loss of use of revenues, attorneys' fees, litigation costs, or loss of anticipated profits, resulting from either Party's performance or non-performance of an obligation imposed on it by this Agreement, without regard to the cause or causes related thereto, including the negligence of any party. The Parties expressly acknowledge and agree that this limitation shall apply to any claims for indemnification under Article 14 of this Agreement. The provisions of this section shall survive the termination or expiration of this Agreement. ARTICLE 14 INDEMNITY (a) Utility Contractor's Indemnification. Subject to the provisions of Article 13, Utility Contractor shall indemnify, hold harmless and defend ATCLLC, and its officers, directors, employees, affiliates, managers, members, trustees, shareholders, agents, contractors, subcontractors, affiliates' employees, invitees and successors, from and against any and all claims, demands, suits, obligations, payments, liabilities, costs, losses, judgments, damages and expenses (including the reasonable costs and expenses of any and all actions, suits, proceedings, assessments, judgments, settlements, and compromises relating thereto, reasonable attorneys' and expert fees and reasonable disbursements in connection therewith) for damage to property, injury to any person or entity, or death of any individual, including ATCLLC's employees and affiliates' employees, Utility Contractor's employees, or any other third parties, to the extent caused wholly or in part by any act or omission, negligent or otherwise, by Utility Contractor or its officers, directors, employees, agents, contractors, subcontractors and invitees arising out of or connected with Utility Contractor's performance or breach of this Agreement, or the exercise by Utility Contractor of its rights hereunder; provided, however, that the provisions of this Section shall not apply if any such injury, death or damage is held to have been caused by the negligence or intentional wrongdoing of ATCLLC, its agents or employees. In furtherance of the foregoing indemnification and not by way of limitation thereof, Utility Contractor hereby waives any defense it otherwise might have under applicable workers' compensation laws. (b) ATCLLC's Indemnification. Subject to the provisions of Article 13, ATCLLC shall indemnify, hold harmless and defend Utility Contractor, its parent and its officers, directors, employees, affiliates, managers, members, trustees, shareholders, agents, contractors, subcontractors, invitees and successors, from and against any and all claims, demands, suits, obligations, payments, liabilities, costs, losses, judgments, damages and expenses (including the reasonable costs and expenses of any and all actions, suits, proceedings, assessments, judgments, settlements, and compromises relating thereto, reasonable attorneys' and expert fees and reasonable disbursements in connection therewith) for damage to property, injury to any person or entity, or death of any individual, including Utility Contractor's employees and affiliates' employees, ATCLLC's employees, or any other third parties, to the extent caused wholly or in part by any act or omission, negligent or otherwise, by ATCLLC or its officers, directors, employees, agents, contractors, subcontractors and invitees arising out of or connected with ATCLLC's performance or breach of this Agreement, or the exercise by ATCLLC of its rights hereunder; provided, however, that the provisions of this Section shall not apply if any such injury, death or damage is held to have been caused by the negligence or intentional wrongdoing of Utility Contractor, its agents or employees. In furtherance of the foregoing indemnification and not by way of limitation thereof, ATCLLC hereby waives any defense it otherwise might have under applicable workers' compensation laws. (c) Indemnification Procedures. Any Party seeking indemnification under this Agreement shall give the other Party notice of such claim as soon as practicable but in any event on or before the thirtieth (30th) day after the Party's actual knowledge of such claim or action. Such notice shall describe the claim in reasonable detail, and shall indicate the amount (estimated if necessary) of the claim that has been, or may be sustained by, said Party. To the extent that the other Party will have been actually and materially prejudiced as a result of the failure to provide such notice, such notice will be a condition precedent to any liability of the other Party under the provisions for indemnification contained in this Agreement. Neither Party may settle or compromise any claim for which indemnification is sought under this Agreement without the prior consent of the other Party; provided, however, said consent shall not be unreasonably withheld or delayed. Each Party's indemnification obligation will survive expiration, cancellation or early termination of this Agreement. ARTICLE 15 INSURANCE (a) The Parties agree to maintain, at their own cost and expense, general and automobile liability, worker's compensation, and other forms of insurance relating to their operations for the life of this Agreement in the manner, and amounts, at a minimum, as set forth below, (i) Workers' Compensation Insurance in accordance with all applicable state, federal and maritime law, including Employer's Liability Insurance in the amount of $1,000,000 per accident; (ii) Commercial General Liability Insurance, including Contractual Liability Coverage for liabilities assumed under this Agreement, and Personal Injury Coverage in the amount of $25,000,000 per occurrence for bodily injury and property damage. Utility Contractor's policy shall include ATCLLC and ATC Management Inc. as additional insureds and ATCLLC's policy shall include Utility Contractor as an additional insured. (iii) Automobile Liability Insurance for all owned, non-owned, and hired vehicles with bodily injury limits of no less than $5,000,000 per person, $5,000,000 per accident; and property damage limits of no less than $5,000,000 per accident. Utility Contractor's policy shall include ATCLLC and ATC Management Inc. as additional insureds and ATCLLC's policy shall include Utility Contractor as an additional insured. (iv) Where a Party has more than $100 million in assets it may, at its option, self insure all or part of the insurances required in this Article; provided, however, the self-insuring Party agrees that all other provisions of this Article, including, but not limited to, waiver of subrogation, waiver of rights of recourse, and additional insured status, which provide or are intended to provide protection for the other Party and its affiliated and associated companies under this Agreement, shall remain enforceable. A Party's election to self-insure shall not impair, limit, or in any manner result in a reduction of rights and/or benefits otherwise available to the other Party and its affiliated and associated companies through formal insurance policies and endorsements as specified in the above parts of this Article. The self-insuring Party agrees that all amounts of self-insurance, retentions and/or deductibles are the responsibility of and shall be borne by the self-insuring Party. (b) Within fifteen (15) days of the Effective Date, and each anniversary of the Effective Date, during the term of this Agreement, (including any extensions), each Party shall provide to the other Party, properly executed and current certificates of insurance with respect to all insurance policies required to be maintained by such Party under this Agreement. Certificates of insurance shall provide the following information: (i) Name of insurance company, policy number and expiration date; (ii) The coverage required and the limits on each, including the amount of deductibles or self-insured retentions, which shall be for the account of the Party maintaining such policy; (iii) A statement indicating that the other Party shall receive at least thirty (30) days prior written notice of cancellation or expiration of a policy, or reduction of liability limits with respect to a policy; and (iv) A statement identifying and indicating that additional insureds have been named as required by this Agreement. (c) At a Party's request, in addition to the foregoing certifications, the other Party shall deliver to the first Party a copy of applicable sections of each insurance policy. (d) Each Party shall have the right to inspect the original policies of insurance applicable to this Agreement at the other Party's place of business during regular business hours. (e) If any insurance is written on a "claims made" basis, the respective Party shall maintain the coverage for a minimum of seven years after the termination of this Agreement. (f) To the extent permitted by the insurer and commercially reasonable, each Party shall obtain waivers of subrogation in favor of the other Party from any insurer providing coverage that is required to be maintained under this Article 15, except for the coverage required under Section 15(a)(i). A Party shall not be required to obtain a waiver of subrogation if the other Party is not able to obtain a waiver of subrogation from its insurance carrier. ARTICLE 16 SUCCESSORS AND ASSIGNS This Agreement and each and every covenant, term and condition hereof, shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, executors, administrators, successors and permitted assigns. Utility Contractor shall not assign its rights or obligations hereunder without express written approval of ACTLLC, except it may assign its rights or obligations to a purchaser (or an affiliate) who will own all or substantially all of Utility Contractor's distribution assets or equity interests and who shall then be bound by all of the provisions of this Agreement. ATCLLC shall not assign its rights or obligations hereunder without express written approval of Utility Contractor, except it may assign its rights and obligations to a purchaser (or an affiliate) who will own all or substantially all of ATCLLC's transmission assets and who shall then be bound by all of the provisions of this Agreement. ARTICLE 17 NOTICE (a) All certificates or notices required hereunder shall be given in writing and addressed or delivered to the representative(s) specified in this Agreement. Notices shall be deemed received (i) upon delivery, when personally delivered; (ii) upon receipt, when sent via registered or certified mail; (iii) the next business day, when sent via overnight courier; and (iv) upon transmittal, when sent via facsimile. Copies of all general correspondence regarding this Agreement shall also be sent to these representative(s). (b) Notices submitted hereunder shall be directed to the following individuals: Notices to Utility Contractor: Attn: Thomas H. Fehring Corporate Secretary Wisconsin Electric Power Company 231 West Michigan Street P.O. Box 2046 Milwaukee, WI 53201-2046 Notices to ATCLLC: Attn: Walter Woelfle Vice President, Legal and Secretary American Transmission Company, LLC N16 W23217 Stone Ridge Drive P.O. Box 47 Waukesha, WI 53187-0047 All other communications relating to this Agreement should be submitted to: Harry L. Terhune Vice President - Operations American Transmission Company, LLC N16 W23217 Stone Ridge Drive P.O. Box 47 Waukesha, WI 53187-0047 (c) ATCLLC or Utility Contractor may change their respective representative(s) designated to receive notice hereunder by written notice to the other Party. All correspondence and transmittals between the parties shall be executed pursuant to coordination procedures that shall be developed by the parties. ARTICLE 18 MISCELLANEOUS 18.1 Compliance with Laws Throughout the term of this Agreement, each Party shall perform its obligations hereunder in compliance with all present and future federal, state and local statutes, ordinances, rules and regulations, including, but not limited to those pertaining to human safety, protection of property, non-discrimination, and protection of the environment. 18.2 Entire Agreement This Agreement, together with any Service Schedules, Exhibits, and Schedules attached hereto, is the entire understanding of the Parties regarding the subject matter hereof, and supersedes all prior oral or written discussions, negotiations and agreements the Parties may have had with respect to the subject matter hereof. 18.3 Counterparts This Agreement may be executed in any number of counterparts, and each counterpart shall have the same force and effect as the original instrument. 18.4 Amendment No amendment, modification or waiver of any term hereof shall be effective unless set forth in a writing signed by both ATCLLC and Utility Contractor. 18.5 Survival All warranties, remedial obligations, indemnities and confidentiality rights and obligations provided for herein shall survive the cancellation, expiration or termination hereof. 18.6 Independent Contractor Utility Contractor at all times shall be deemed to be an independent contractor and none of its employees or the employees of its contractors shall be considered to be employees of ATCLLC during the term of this Agreement. Utility Contractor shall have no authority to act on behalf of ATCLLC or bind ATCLLC in any manner except as expressly set forth in this Agreement. The Parties acknowledge that neither this Agreement nor any of its provisions are intended to create any partnership or joint venture between the Parties. 18.7 Confidentiality (a) "Confidential Information", as used in this Section 18.7, shall mean all information or documentation disclosed or made available by either Party to the other, including but not limited to correspondence between the Parties, business plans, financial information, policies and procedures, computer programs, reports and analyses, or other information which a Party in good faith designates as "Trade Secrets" as that term is defined in Wis. Stat. 134.90(1)(c). (b) In consideration of the disclosure by one Party of Confidential Information to the other Party, the Parties agree that each of them shall undertake in good faith to accomplish the following additional actions with respect thereto: (i) to use the Confidential information for the sole purpose of fulfilling the obligations of the Parties pursuant to this Agreement; (ii) to safeguard and hold in strict confidence all Confidential Information, limiting disclosure of Confidential Information to employees, contractors or agents who have a need to know; (iii) to protect Confidential Information from disclosure to anyone not a party to this Agreement without the prior approval of the disclosing Party; and (iv) upon the request of the disclosing Party and in any event upon cancellation or expiration of this Agreement, to return all Confidential Information, or to certify that such Confidential Information has been destroyed. (c) The restrictions of this Section do not apply to any information which is already known by the receiving party, possessed by a third party prior to disclosure, acquired from anyone not a party to this Agreement without restriction, or which is publicly available. (d) Each Party retains all right, title and interest in and to any Confidential Information disclosed by the party hereunder. (e) In the event that either Party is required by applicable law to disclose any Confidential Information of the other Party, such party shall promptly notify the other Party of such requirement and cooperate with the other Party to protect the Confidential Information from any disclosure not required by law. (f) The obligations of this Section shall survive for a period of 3 years following any expiration or cancellation of this Agreement. 18.8 Standards of Conduct If the performance of this Agreement requires ATCLLC to disclose information about the Transmission System to Utility Contractor, the dissemination of which by Utility Contractor would have been subject to FERC's Standards of Conduct requirements, 18 C.F.R. Part 37, prior to the transfer of the Transmission Facilities, such information shall not be disclosed by Utility Contractor or ATCLLC to any persons that would not have been entitled to receive such information prior to such transfer. 18.9 No Implied Waivers The failure of a Party to insist upon or enforce strict performance of any of the provisions of this Agreement shall not be construed as a waiver or relinquishment to any extent of such Party's right to assist or rely upon any such provisions, rights and remedies in that or any other instance; rather, the same shall be and remain in full force and effect. 18.10 No Third-Party Beneficiaries This Agreement is intended to be solely for the benefit of ATCLLC and Utility Contractor and their successors and permitted assigns and is not intended to and shall not confer any rights or benefits on any third party (other than successors and permitted assigns) not a signatory hereto. 18.11 Severability In the event that any provision of this Agreement is deemed as a matter of law to be unenforceable or null and void, such unenforceable or void portion of such provision shall be deemed severable from this Agreement unless the removal of the unenforceable provision materially alters the obligations of either Party hereunder. Even if there is a material alteration in the remainder of the Agreement, the Agreement shall continue in full force and effect as if such provision was not contained herein., but the Parties shall negotiate in good faith new provisions in relation to the deleted provision that will to the extent practicable restore the benefit of the bargain contained in such provision, and that are consistent with Good Utility Practice. 18.12 Governing Law This Agreement shall be governed by and construed in accordance with the laws of the State of Wisconsin, with the exception of any choice of laws provisions. 18.13 Interpretation. If there is any inconsistency between this Agreement and the Operating Agreement of ATCLLC or the Asset Contribution Agreement, that other agreement shall prevail to the extent of the inconsistency. 18.14 Headings The headings set forth herein are inserted for convenience and shall have no effect on the interpretation or construction of this Agreement. 18.15 Modification of Agreement by Service Schedules Service Schedules are intended to specify further terms and conditions of Utility Contractor's provision of Services. Such agreements may modify or supercede the terms and conditions of this Agreement only to the extent that the Parties obtain any required PSCW approval under Wis. Stat. 196.52. 18.16 Affiliate Status of Parties For purposes of Articles 13, 14, and 15, neither Party shall be treated as an affiliate of the other. IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed by their duly authorized representatives, effective as of the date first written above. AMERICAN TRANSMISSION COMPANY, LLC BY /s/Harry Terhune ------------------------- TITLE Vice President Operations WISCONSIN ELECTRIC POWER COMPANY BY /s/Charles Cole ----------------------- TITLE Vice President - Distribution Operations SCHEDULE 1 (ATTACHED TO TRANSITIONAL SERVICES AGREEMENT) 1. General Description. Utility Contractor shall invoice to ATCLLC the actual costs of providing Services for the previous month. The invoice will also identify any costs for Services accrued during the previous month by Utility Contractor with the understanding that these accrued costs will be invoiced for payment at a later date (as they are paid by Utility Contractor). Utility Contractor's invoices to ATCLLC will be in a consistent format and provided monthly together with the Utility Contractor's detailed billing reports supporting the invoice. 2. Methods of Calculating Costs to Be Paid by ATCLLC. (a) Direct Costs. Costs incurred by the Utility Contractor that are solely and directly attributable to the Services shall be directly billed to ATCLLC in full. These directly billed costs shall be recorded as incurred by Utility Contractor to internal bookkeeping accounts designated as transmission billing accounts. The direct cost for materials and supplies shall be their book value. b) Indirect Costs. Costs incurred by the Utility Contractor for activities that support the entire company or which support the Services plus other divisions of the company will be identified and a portion of these costs will be allocated to ATCLLC. Utility Contractor will identify and aggregate all of these costs into recognizable categories and, in cooperation with ATCLLC, shall develop methods for calculating the portion of each cost category that should be allocated to ATCLLC. The method for determining the share allocable to ATCLLC may vary from cost category to cost category. A document describing the methods for allocating categories of costs to ATCLLC, including any allocation formulas, will be attached to this Schedule 1. (c) Labor Loadings. Loadings that account for pension and employee benefit costs, payroll taxes and costs, and the expense of non-productive time (paid leaves plus, if not a separate cost category, training) shall be added to any direct or indirect labor costs billed to ATCLLC. A document describing the methods Utility Contractor will use to calculate and apply labor loadings will be attached to this Schedule 1. (d) Extraordinary Costs. Subject to Article 5 of the Agreement, costs incurred by Utility Contractor that are unusual, special or extraordinary may require unique treatment. Utility Contractor will notify ATCLLC in advance of incurring such costs whenever possible and as soon as possible after incursion of the cost if advance notice is not possible, but in any event prior to sending ATCLLC an invoice that includes the cost. (e) Utility Contractor's System for Recording Its Costs. Utility Contractor will notify ATCLLC in advance of any changes to its system of recording and tracking its costs that will significantly impact the calculation or appearance of invoices to ATCLLC. Utility Contractor will, at ATCLLC's expense, provide for the transfer to ATCLLC of electronic billing data in a form usable by ATCLLC's electronic systems for recording and tracking costs of the Services. 3. True-ups and Reviews. Amounts that have been billed based on estimates will be adjusted to the Utility Contractor's actual costs after actual costs are known and ATCLLC will pay more or receive a credit, as appropriate, for any true-up. Such true-ups may be performed at any time, but at least one annual true-up will be performed by the Utility Contractor for the previous year before the expiration of the first quarter of the following year. In addition, formulas, procedures and allocations may be revised by either Party if the Party proposing the revision can demonstrate to the other Party that new facts have come to light or that it has discovered or developed an improved formula, procedure or method for accurately determining or invoicing actual costs. Any such revision to a formula, procedure or allocation will not be applied retroactively. Amounts previously billed in error, however, will be corrected in accordance with Section 4 below; error here includes the long or short-term misapplication of an approved formula. Where refunds or additional amounts are owed due to a true-up or correction, the refund or additional amount shall appear on the next monthly billing following identification of the adjustment. 4. Contested Statements. ATCLLC may contest, and Utility Contractor may correct, any particular items included in any Utility Contractor invoice within one year of ATCLLC's receipt of the invoice. This provision does not limit ATCLLC's right to audit Utility Contractor under Section 6.5 of the Agreement. 5. Adjustments. Utility Contractor shall promptly reimburse or credit ATCLLC for any charges that should not have been billed to ATCLLC as provided in the Agreement and which either Party identifies within 12 months of ATCLLC's receipt of the invoice containing such charges. Such reimbursements shall be set forth in the appropriate section of the invoice. Utility Contractor shall bill ATCLLC for any charges that were not billed but should have been billed to ATCLLC as provided in this Agreement, and which either Party identifies within 12 months of the month that the charges were incurred. The amount of any adjustment under this Section shall reflect interest from the date such amounts were due at the published prime interest rate of Firstar Bank on the last business day of the preceding month. EX-10.33 8 0008.txt SERVICE CONTRACT BETWEEN WE AND ATC Exhibit 10.33 OPERATION AND MAINTENANCE AGREEMENT FOR TRANSMISSION FACILITIES (Transferred Under Wisconsin "Reliability 2000" Legislation) Between American Transmission Company LLC and Wisconsin Electric Power Company * Dated as of December 29, 2000 1. DEFINITIONS AND INTERPRETATION 3 1.1 Definitions, Generally. 3 1.2 Special Definitions. 3 1.2.1 Baseline Maintenance Budget. 3 1.2.2 Baseline Resource Hours. 3 1.2.3 Emergency Response Services. 3 1.2.4 Facilities Maintenance Plan. 3 1.2.5 Good Cause. 4 1.2.6 Good Utility Practice. 4 1.2.7 Key Personnel. 4 1.2.8 Maintenance Resource Budget. 4 1.2.9 Maintenance Resource Hours. 5 1.2.10 Maintenance Services. 5 1.2.11 Operations Date. 5 1.2.12 Operation Services. 5 1.2.13 Party. 5 1.2.14 Parties. 6 1.2.15 Services. 6 1.2.16 Technology. 6 1.2.17 Transmission Facilities. 6 1.2.18 Transmission System. 7 2. TERM 7 2.1 Term of Agreement. 7 2.2 Extension. 7 3. REQUIRED REGULATORY APPROVALS 7 4. RESPONSIBILITIES OF UTILITY CONTRACTOR 7 4.1 Scope of Services. 7 4.2 Performance Standards. 8 4.3 Operation Services. 10 4.4 Maintenance Services. 12 4.5 Utility Contractor Resources. 16 4.6 Facilities Maintenance Plan. 17 4.7 Budget. 19 4.8 Reports. 20 4.9 Training. 20 4.10 Contracts with Third Parties. 21 5. RESPONSIBILITIES OF ATCLLC 22 6. COMPENSATION OF UTILITY CONTRACTOR 23 6.1 Compensation for Operation Services and Maintenance Services. 23 6.2 Methods of Calculating the Compensation Due. 23 6.3 Minimum Compensation for Maintenance Services. 24 6.4 Compensation for Inventory and Storage. 25 6.5 Billing and Payment. 26 6.6 Audits and Adjustments. 26 7. OWNERSHIP 27 8. DISPUTE RESOLUTION 28 9. FORCE MAJEURE 28 10. LIMITATION ON LIABILITY 29 11. INDEMNITY 30 12. INSURANCE 32 13. SUCCESSORS AND ASSIGNS 34 14. NOTICE 35 15. MISCELLANEOUS 36 15.1 Compliance with Laws. 36 15.2 Entire Agreement. 36 15.3 Counterparts. 36 15.4 Amendment. 37 15.5 Survival. 37 15.6 Independent Contractor. 37 15.7 Confidentiality. 37 15.8 Standards of Conduct. 38 15.9 No Implied Waivers. 39 15.10 No Third-Party Beneficiaries. 39 15.11 Severability. 39 15.12 Governing Law. 40 15.13 Operation and Prospective Planning. 40 15.14 Headings. 40 15.15 Affiliate Status of Parties. 40 OPERATION AND MAINTENANCE AGREEMENT FOR TRANSMISSION FACILITIES THIS OPERATION AND MAINTENANCE AGREEMENT FOR TRANSMISSION FACILITIES ("Agreement") is entered into as of December 29, 2000 by and between Wisconsin Electric Power Company or WEPCO ("Utility Contractor"), a Wisconsin corporation, and American Transmission Company LLC ("ATCLLC"), a Wisconsin limited liability company (Utility Contractor and ATCLLC are individually referred to as "Party" and collectively as "the Parties"). RECITALS WHEREAS, Wisconsin Act 9 ("Reliability 2000 Legislation"), effective October 29, 1999, authorized the organization of a new company to provide electric transmission service; WHEREAS, pursuant to the provisions of the Reliability 2000 Legislation, ATCLLC was organized to provide transmission service; WHEREAS, the Reliability 2000 Legislation authorized electric transmission utilities to transfer their transmission assets to a new company organized to provide transmission service; WHEREAS, WEPCO has agreed to transfer its transmission assets to ATCLLC; WHEREAS, the Reliability 2000 Legislation requires ATCLLC to contract with each utility that has transferred transmission facilities to the new company for the utility to provide reasonable and cost-effective operation and maintenance services to ATCLLC for a period of three years after ATCLLC commences operations; WHEREAS, Utility Contractor and ATCLLC each desire to use this Agreement to satisfy said requirement of the Reliability 2000 Legislation. WHEREAS, in furtherance of said requirement of the Reliability 2000 Legislation, the Parties desire to reflect herein their agreement for the provision of Operation Services and Maintenance Services as defined in this Agreement. The Parties have also entered into a Forming Party Agreement Regarding Operating Principles dealing with the performance of certain functions in operation of the Transmission System and a Transitional Services Agreement pursuant to which the Parties have arranged for the provision of additional services upon commencement of operations by ATCLLC and over a transitional period. WHEREAS, since the Parties intend that Utility Contractor will commit resources to performance of the services contemplated hereunder and that ATCLLC will develop the nature and level of maintenance activity to be performed in accordance with the procedures, and subject to the standards of, this Agreement, the Parties have provided that ATCLLC will commit to pay for a certain level of activity in any event. To minimize the possibility that changes in ATCLLC's maintenance plans will result in incurrence of this fixed cost obligation, the Parties have further agreed that ATCLLC may, subject to certain conditions, including compliance with applicable labor agreements, use the services of Utility Contractor elsewhere on its system. For convenience, the Parties have expressed the foregoing commitment as an obligation to use an annual minimum of 85% of the number of hours of Utility Contractor's own labor used in a representative year for Transmission Facilities maintenance, to pay the direct costs of such Utility Contractor's own labor at an agreed upon rate per hour, and all associated overheads, and to pay an annual minimum of 85% of the annual expenditure of Utility Contractor for Transmission Facilities maintenance in a representative year. NOW, THEREFORE, in consideration of the promises and mutual covenants contained herein, the Parties hereby agree as follows: 1. DEFINITIONS AND INTERPRETATION 1.1 Definitions, Generally. Unless defined in Section 1.2 of this Agreement, the definition of each defined term used in this Agreement shall be the same as the definition for that term set forth in the OATT, the Operating Agreement of ATCLLC, or the Asset Contribution Agreement between the Parties. 1.2 Special Definitions. The following capitalized terms used in this Agreement shall be defined as set forth below: 1.2.1 Baseline Maintenance Budget. "Baseline Maintenance Budget" shall mean 85% of the Maintenance Resource Budget. 1.2.2 Baseline Resource Hours. "Baseline Resource Hours" shall mean eighty-five percent (85%) of Maintenance Resource Hours. 1.2.3 Emergency Response Services. "Emergency Response Services" shall have the definition provided in Section 4.3 of this Agreement and includes those Services identified on Exhibit A to this Agreement as "Emergency Response Services." 1.2.4 Facilities Maintenance Plan. "Facilities Maintenance Plan" shall mean the plan for the provision of Maintenance Services as defined in Section 4.6 of this Agreement. 1.2.5 Good Cause. "Good Cause" shall mean (i) misconduct that is or could be materially detrimental to the Utility Contractor or ATCLLC, (ii) breach of a material provision of any agreement to which the Utility Contractor is a party; (iii) the commission of one or more acts which constitute an indictable crime under United States Federal, state, or local law, or (iv) the failure to substantially perform work- related duties. 1.2.6 Good Utility Practice. "Good Utility Practice" shall mean any of the practices, methods and acts engaged in or approved by a significant portion of the electric utility industry during the relevant time period, or any of the practices, methods and acts which, in the exercise of reasonable judgment in light of the facts known at the time the decision was made, could have been expected to accomplish the desired result at a reasonable cost consistent with good business practices, reliability, safety and expedition. Good Utility Practice is not intended to be limited to the optimum practice, method or act to the exclusion of all others, but rather is intended to include acceptable practices, methods, or acts generally accepted in the region. 1.2.7 Key Personnel. "Key Personnel" shall mean individuals employed by the Utility Contractor in the positions of managers and supervisors and who are designated as the individuals directly responsible for supervising or managing work to be performed or services to be provided under this Agreement. 1.2.8 Maintenance Resource Budget. "Maintenance Resource Budget" shall mean the total Transmission Facilities maintenance costs established consistent with Schedule 1 of this Agreement, of Utility Contractor for the Transmission Facilities for a year representative of normal conditions, which representative year shall be based upon a normalized average of such costs over the past five years or the projected 1/1/2001 Transmission Facilities maintenance budget of Utility Contractor, as agreed by the Parties. 1.2.9 Maintenance Resource Hours. "Maintenance Resource Hours" is an annual unit of measurement that shall mean the number of hours of transmission maintenance work performed by Utility Contractor's own employees on the Transmission Facilities in a year representative of normal conditions, which representative year shall be based upon an average of such hours over the past five years or as otherwise agreed by the Parties. Maintenance Resource Hours does not include any work performed by Utility Contractor's supervisory or management employees covered in overhead, or by Utility Contractor's subcontractors. 1.2.10 Maintenance Services. "Maintenance Services" shall mean those Services identified on Exhibit A to this Agreement as "Maintenance Services and as further defined in Section 4.4." 1.2.11 Operations Date. "Operations Date" shall mean January 1, 2001 or such later date on which ATCLLC receives the necessary approvals, and commences operations. 1.2.12 Operation Services. "Operation Services" shall mean those Services identified on Exhibit A to this Agreement as "Operation Services" and "Emergency Response Services," and as further defined in Sections 4.3(a) and (b). 1.2.13 Party. "Party" shall mean either Utility Contractor or ATCLLC. 1.2.14 Parties. "Parties" shall mean both Utility Contractor and ATCLLC. 1.2.15 Services. "Services" shall mean all Operation Services and Maintenance Services. 1.2.16 Technology. "Technology" shall mean any ideas, know-how, inventions, developments, discoveries, trade secrets, processes, technical information, and improvements relating in any way to the Services, including without limitations, machines, manufactures, methods, techniques, systems, computer software and documentation, data and information (including, but not limited to, maintenance records, reports, training materials, findings, charts, tables and diagrams) (irrespective of whether in human or machine- readable form), works of authorship, and products, whether or not patentable, copyrightable, or susceptible to any other form of protection and whether or not reduced to practice, and whether or not described in writing. 1.2.17 Transmission Facilities. "Transmission Facilities" shall mean the facilities for the transmission of electric energy and ancillary services transferred to ATCLLC by Utility Contractor pursuant to, and identified in, the Asset Contribution Agreement between ATCLLC and WEPCO, dated December 15, 2000, and new facilities constructed or acquired by ATCLLC to the extent ATCLLC requests that Utility Contractor provide Services for such facilities and to the extent Utility Contractor agrees to provide such Services. 1.2.18 Transmission System. "Transmission System" shall mean the system of facilities for the transmission of electric energy and ancillary services owned or controlled by ATCLLC and which are covered by the ATCLLC OATT. 2. TERM 2.1 Term of Agreement. Subject to Article 3, this Agreement shall be effective from the date of its execution or the Operations Date, whichever is earlier, and shall continue in effect for an initial term through the day before the third anniversary of the Operations Date. 2.2 Extension. This Agreement shall automatically renew for subsequent one year terms unless sooner terminated in accordance with the terms of this Agreement or either Party provides written notice of its intent not to renew at least one year prior to the end of the then-current term. 3. REQUIRED REGULATORY APPROVALS The effectiveness of this Agreement is hereby expressly conditioned upon the receipt by Utility Contractor and ATCLLC of all permits, regulatory authorizations and regulatory approvals that shall be required by the Parties to enter into and perform their obligations under this Agreement in a form acceptable in the reasonable judgment of the Party affected thereby. 4. RESPONSIBILITIES OF UTILITY CONTRACTOR 4.1 Scope of Services. (a) Utility Contractor shall perform, or cause to be performed, the Services in accordance with the terms, conditions and procedures specified in this Agreement. (b) Except as specifically provided in this Agreement, Utility Contractor shall be the exclusive provider of the Services to the Transmission Facilities during the term of this Agreement. (c) ATCLLC shall have the right to direct Utility Contractor to provide any Operation Services, including Emergency Response Services, that may be necessary or appropriate, in accordance with Good Utility Practice, for the operation of any of the Transmission Facilities. (d) Utility Contractor shall provide Maintenance Services for the Transmission Facilities subject to any limitations on Utility Contractor's obligation or right to provide such services which are contained in this Agreement. 4.2 Performance Standards. (a) In meeting their responsibilities hereunder, the Parties shall at all times follow Good Utility Practice, the adequacy obligation set forth in Section 2.7 of the Operating Agreement of ATCLLC, and the requirements of this Agreement. (b) Utility Contractor shall provide Services in accordance with ATCLLC direction as necessary to give effect to ATCLLC policies, plans and business decisions but Utility Contractor shall be responsible for determining the manner of performance and for supervision of the work specified by ATCLLC or its duly authorized designee. With respect to performance of Operation Services, should Utility Contractor object to following the specifications or directives of ATCLLC on any basis, Utility Contractor shall nonetheless follow such directives and specifications. Where, in the judgment of Utility Contractor, following the specifications or directives of ATCLLC would pose a substantial risk to property or human safety, Utility Contractor shall, where time permits, notify a representative of ATCLLC and seek relief from the specification or directive. Where Utility Contractor does not have time to notify an ATCLLC representative and obtain relief, the Utility Contractor may take reasonable steps to mitigate damage to property or risk to human safety. In any non-emergency case in which Utility Contractor objects to following the directives or specifications of ATCLLC, its Key Personnel shall so notify ATCLLC in writing or confirm oral notice in writing. Utility Contractor may, where it has given the notice required in this Section, subsequently address its objections under the dispute resolution process set forth in Article 8 of this Agreement. (c) Except as directed by ATCLLC and/or the Facilities Maintenance Plan, Utility Contractor shall make good faith efforts to maintain the pre-Agreement quality and timeliness of its performance of the Services in accordance with Good Utility Practice, including priority of work, maintenance intervals, and methods. (d) In providing the Operation Services, and in implementing the Facilities Maintenance Plan, Utility Contractor shall, except as directed by ATCLLC and/or provided in Facilities Maintenance Plans, continue to seek to preserve the useful life of the Transmission Facilities. (e) Except as otherwise directed by ATCLLC or as provided in the Facilities Maintenance Plan, the Budget, or prescribed by Good Utility Practice, Utility Contractor shall maintain and operate the Transmission Facilities (i) in accordance with standards and procedures necessary to preserve coverages under all insurance policies applicable to the Transmission Facilities; (ii) in accordance with the procedures required to preserve all applicable manufacturers' warranties; and (iii) with best efforts to leave any portion of the Transmission Facilities on which work is performed in good repair and reliable working order on completion of the work. (f) Utility Contractor shall not be deemed to have failed to adequately perform a specific Service under this Agreement where (i) Utility Contractor has performed the specific Service in accordance with Good Utility Practice, the Facilities Maintenance Plan, or any directive, specification, procedure or policy of ATCLLC; or (ii) where its ability to adequately perform a specific Service was constrained by an ATCLLC-imposed budgetary limitation on that specific Service to which limitation Utility Contractor objected in writing, or if orally, confirmed in writing by Key Personnel, at such time as the effect of the budget restraint became known. (g) If ATCLLC discovers that any Services performed fail to conform to this Agreement, Utility Contractor shall, at ATCLLC's option, promptly correct or re-perform such non-conforming Services so that they conform to this Agreement. Without limiting the generality of this provision, Utility Contractor shall provide the labor, engineering, supervision, equipment, tools and materials necessary to effect such remedy. Utility Contractor shall perform its remedial obligations hereunder in a timely manner consistent with ATCLLC's reasonable requirements. If Utility Contractor repeatedly fails, or is unable, to remedy such non-conforming Services during a period consistent with ATCLLC's reasonable requirements, ATCLLC may undertake to remedy the non-conforming Services and in such case Utility Contractor shall reimburse ATCLLC for any reasonable costs incurred thereby. This subsection shall be in addition to any other remedies provided by this Agreement or available at law or equity. (h) In its performance of Emergency Response Services, Utility Contractor shall undertake service restoration efforts in a fashion which does not unduly favor or discriminate against any distribution system. 4.3 Operation Services. (a) Operations Services. Utility Contractor shall perform all of ATCLLC's requirements for Operation Services identified in Exhibit A as specified and directed by ATCLLC. Exclusive of Emergency Response Services, which are addressed separately below, Operation Services consist of the following: (i) field switching of transmission equipment, (ii) investigating system anomalies and performing other field operational activities necessary or appropriate for the operation of the Transmission System. Utility Contractor shall perform these switching and related activities using its employees who typically perform such functions. (b) Emergency Response Services. Utility Contractor shall perform, or cause to be performed, all of ATCLLC's requirements for Emergency Response Services. Emergency Response Services shall mean all services needed for emergency response, repairs and reporting related to the Transmission Facilities, including those items designated on Exhibit A as Emergency Response Services. Utility Contractor shall maintain an organization and personnel sufficient for 24- hours per day, seven days per week provision of Emergency Response Services to ATCLLC. Communications between ATCLLC and Utility Contractor concerning Emergency Response Services shall be made using the method or methods appropriate under the circumstances at the time the communication takes place. In carrying out such Services: (1) Utility Contractor shall make timely reports to ATCLLC Operation Centers of the impact of anticipated and actual weather and emergency conditions on the Transmission Facilities, including regular updates as to the actions taken by Utility Contractor in response thereto. (2) Utility Contractor shall work closely with ATCLLC to coordinate communications with customers, public agencies and the media about emergency conditions and service restoration efforts. (3) Utility Contractor shall take prompt and timely action to prevent or minimize damage to Transmission Facilities, and to facilitate their restoration to service, in a weather or other emergency. Utility Contractor shall seek prior approval of such actions by ATCLLC if practicable. Such prior approval may be in the form of an emergency response plan agreed to by ATCLLC and Utility Contractor. (4) Unless otherwise directed by ATCLLC, Utility Contractor shall repair and replace damaged Transmission Facilities, and promptly restore the Transmission Facilities to pre-emergency conditions. (5) If ATCLLC reasonably believes that Utility Contractor either lacks, or will be unable or unwilling to deploy, sufficient resources to promptly restore Transmission Facilities to their pre-emergency condition or to promptly facilitate their restoration to service, ATCLLC may, notwithstanding Section 4.1(b), provide such resources itself or through third parties, consistent with Good Utility Practice. In such event, and to the extent available, Utility Contractor shall provide the necessary equipment, spare parts, materials and supplies to ATCLLC or its contractors as requested by ATCLLC. 4.4 Maintenance Services. (a) General. Except as expressly provided in this Agreement, Utility Contractor shall perform, or cause to be performed, all Maintenance Services as described in Exhibit A to this Agreement and in each Quarterly update of the Facilities Maintenance Plan. In accordance with each Facilities Maintenance Plan, the work shall include: (1) periodic inspection, testing and monitoring; (2) scheduling and execution of preventive and corrective maintenance; (3) scheduling and execution of outages needed to perform preventive and corrective maintenance; (4) compiling and maintaining records, reports and data bases related to preventive and corrective maintenance activities; (5) ensuring compliance with quality assurance policies and procedures of ATCLLC, consistent with Good Utility Practice; and (6) forestry work or other work for the maintenance of Transmission Facilities rights-of-way or easements. (b) Unscheduled Maintenance. (1) Utility Contractor shall perform unscheduled maintenance on the Transmission Facilities when such maintenance is required by Good Utility Practice. For substantial unscheduled maintenance that is not covered in the Facilities Maintenance Plan, Utility Contractor shall first provide ATCLLC with a description of the work that Utility Contractor proposes to perform, the resources needed to carry out the work, a schedule for the work, and an estimate of the cost of the work to be performed. Utility Contractor shall proceed with substantial unscheduled maintenance only after receiving approval from ATCLLC, which approval may be given orally if promptly confirmed in writing. For purposes of this paragraph, substantial means having a cost, as determined in Article 6 of this Agreement, of more than $2,500. (c) Limits on Obligation or Right to Take or Provide Maintenance Services. (1) Utility Contractor shall not be required to perform Maintenance Services during any year, the cost of which exceeds 115% of the Maintenance Resource Budget or to use its own employees in excess of 115% of the number of Maintenance Resource Hours. (2) ATCLLC may provide, either itself or through third parties, up to 5% of the Baseline Maintenance Budget for the Transmission Facilities, provided such Maintenance Services are not typically performed by Utility Contractor's non- supervisory employees. (3) Utility Contractor and ATCLLC shall use reasonable good faith efforts to identify Resource Hours in excess of 115% of Baseline Maintenance Hours which Utility Contractor may have available to perform Maintenance Services ("Additional Resource Hours"). To the extent such Additional Resource Hours are identified, ATCLLC, if it needs or desires more Maintenance Services than could be obtained using 115% of the Baseline Maintenance Hours, shall first request Utility Contractor to provide such additional Maintenance Services. Utility Contractor shall respond to ATCLLC's request for such additional Maintenance Services as soon as reasonably possible but within seven days. (4) Use of Utility Contractor's Employees for Maintenance Services on the Transmission System: If at any point in time in a given calendar year ATCLLC reasonably believes it may not, during the course of that calendar year, request an amount of Maintenance Services from Utility Contractor sufficient to exhaust the Baseline Resource Hours or Baseline Maintenance Budget for work on the Transmission Facilities, ATCLLC may direct Utility Contractor to perform Maintenance Services on other transmission facilities owned by ATCLLC and Utility Contractor shall perform such Services using either Utility Contractor's own employees or subcontractors, provided that: (i) Such employees are otherwise typically assigned to perform Maintenance Services; (ii) Such employees are qualified to perform Maintenance Services on such transmission facilities; (iii) the provisions of any applicable labor agreement are not violated; (iv) subcontractors are not used to perform the Services unless and until Baseline Resource Hours are exhausted; and (v) performance by subcontractors is allowed under the relevant subcontract. Utility Contractor shall not enter into any labor contract or subcontract for any of the Services during the term of this Agreement that would limit ATCLLC's use of Utility Contractor's own employees or subcontractors under this Section 4.4(c). (5) ATCLLC Use of Other Utilities to Perform Maintenance Services: Utility Contractor agrees that ATCLLC may direct any other utility which has contributed or will contribute transmission facilities to ATCLLC (a "Contributing Utility") to perform Maintenance Services on the Transmission Facilities using Contributing Utility's employees or subcontractor if each of the following conditions is satisfied: (i) ATCLLC reasonably believes that the amount of Maintenance Services it will request Utility Contractor to perform during the year will equal or exceed either the Baseline Resource Hours in the case of using Utility Contractor's own employees or the Baseline Maintenance Budget in the case of using Utility Contractor's subcontractors; (ii) The amount of Maintenance Services ATCLLC will request a Contributing Utility to perform under an Operation and Maintenance Agreement relating to transmission facilities that it contributed to ATCLLC will be less than the Baseline Resource Hours or the Baseline Maintenance Budget provided for in that Operation and Maintenance Agreement; (iii) The Contributing Utility's employees are (A) typically assigned to perform Maintenance Services, and (B) qualified to perform Maintenance Services on the Transmission Facilities; and further provided that the provisions of any applicable labor agreement would not be violated by Contributing Utility's performance of services on the Transmission Facilities. (iv) The provisions of any applicable subcontract between Contributing Utility and subcontractor would not be violated. (v) Subcontractors are not used to perform the services unless and until Utility Contractor's Baseline Resource Hours are exhausted. 4.5 Utility Contractor Resources. (a) Utility Contractor shall maintain and manage the organizational and physical resources needed to continue to perform the Services . (b) Utility Contractor shall maintain an organization and personnel, including contractors, capable of performing the Services in a cost effective manner. Qualifications for Key Personnel assigned to manage the performance of Services shall be available to ATCLLC at any reasonable time. ATCLLC shall have the right to interview the Key Personnel proposed by Utility Contractor to manage the performance of Services and to reject such Key Personnel for Good Cause at any time during the term of this Agreement. (c) Utility Contractor shall maintain and manage the equipment, spare parts, materials and supplies needed to perform the Services as required by this Agreement. 4.6 Facilities Maintenance Plan. (a) As soon as reasonably possible before the anticipated date for transfer of the Transmission Facilities from Utility Contractor to ATCLLC, and thereafter at least 90 days before the beginning of each quarter throughout the term of this Agreement, ATCLLC will submit in writing to Utility Contractor, for Utility Contractor's review and comment, a Facilities Maintenance Plan for the 12 month planning period beginning with such quarter, and for each month in such planning period, describing ATCLLC's updated proposed plan for the operation and maintenance of the Transmission Facilities. It is agreed however that ATCLLC shall use Utility Contractor's Facilities Maintenance Plan and Budget for the first 12 month period, subject to quarterly updates and revisions as provided herein. (b) The Facilities Maintenance Plan shall include the information, and follow the format, specified by ATCLLC. The Facilities Maintenance Plan shall, consistent with Good Utility Practice and the adequacy standard set forth in Section 2.7 of the Operating Agreement of ATCLLC, describe the Maintenance Services that ATCLLC expects Utility Contractor to perform for the first quarter of the 12 month planning period, and shall include a good faith estimate of the work ATCLLC proposes to have performed during the balance of the 12 month period covered by the plan, and the scheduled outages associated with these activities. The Facilities Management Plan shall provide for full utilization of Baseline Resource Hours and Baseline Maintenance Budget and shall include sufficient detail to permit Utility Contractor to plan the work, prepare the Budget, and have available the necessary parts, materials, and supplies to perform the Maintenance Services. (c) Utility Contractor shall review, and recommend revisions as it deems appropriate and are consistent with Good Utility Practice, and return the Facilities Maintenance Plan to ATCLLC within 30 days after its submittal. ATCLLC, may, after review and consultation with Utility Contractor with respect to work force and material availability issues, revise the plan, provided that any such revisions are consistent with the responsibilities of the Parties, and approve and return the plan to Utility Contractor within 30 days prior to the start of the next quarter. ATCLLC may at any time, in response to suggestions made by Utility Contractor or on its own initiative, elect to revise the Facilities Maintenance Plan to meet the then current needs of ATCLLC provided that such revisions are consistent with the responsibilities of the Parties under this Agreement, including ATCLLC's commitment to fully utilize Baseline Resource Hours and its commitment to pay the Baseline Maintenance Budget. If ATCLLC does so elect to revise the Facilities Maintenance Plan, ATCLLC shall notify Utility Contractor with a change order in a timely fashion consistent with the circumstances, and if such notification is given orally, ATCLLC shall promptly confirm it in writing or via fax or electronic medium; provided, however, that any costs incurred by Utility Contractor in reasonable anticipation of performing Services under the Facilities Maintenance Plan as previously approved by ATCLLC, and which could not reasonably have been mitigated by Utility Contractor, shall be borne by ATCLLC. Services performed pursuant to ATCLLC change orders shall be subject to all applicable terms and conditions of this Agreement. (d) The Facilities Maintenance Plan shall avoid, if possible, scheduling Maintenance Services during anticipated peak usage of the Transmission System. 4.7 Budget. (a) As soon as possible before the anticipated date for transfer of the Transmission Facilities from Utility Contractor to ATCLLC, and thereafter at least 60 days before the beginning of each quarter throughout the term of this Agreement, Utility Contractor shall submit in writing to ATCLLC, for ATCLLC's review and approval, a budget for the first quarter of the 12 month planning period, and a good faith cost estimate for the work ATCLLC proposes to have performed during the balance of the 12 month period covered by the Facilities Maintenance Plan or updated Facilities Maintenance Plan for that 12 month period ("Budget"). The Budget prepared by Utility Contractor shall reflect full utilization of Baseline Resource Hours and the Baseline Maintenance Budget. (b) The Budget shall include the information, and follow the format used by Utility Contractor in its budget associated with its existing plans for the initial 12 month period with such modification as ATCLLC may reasonably require, including coordinating the Budget with procedures for centralized ATCLLC cost accounting and billing. (c) ATCLLC shall review, consult with Utility Contractor about work force and materials availability, and revise, as it deems appropriate, approve and return the Budget to Utility Contractor within 30 days of its submittal. During the term of the Budget, ATCLLC may at each quarterly review, in response to suggestions made by Utility Contractor or on its own initiative, elect to revise the Budget and the Facilities Maintenance Plan to meet the then current needs of ATCLLC subject to Good Utility Practice and the adequacy obligation set forth in Section 2.7 of the Operating Agreement of ATCLLC and ATCLLC's commitment to fully utilize Baseline Resource Hours and to pay the amount of the Baseline Maintenance Budget. If ATCLLC does elect to revise the Budget and the Facilities Maintenance Plan, ATCLLC shall communicate the changes made to Utility Contractor in writing, in a timely fashion; provided, however, that any costs incurred by Utility Contractor in reasonable anticipation of performing Services under the Budget as previously approved by ATCLLC, and which could not reasonably have been mitigated by Utility Contractor, shall be borne by ATCLLC. 4.8 Reports. (a) As part of the Services, Utility Contractor shall prepare and submit the reports described in this Section. Such reports and data shall be provided to ATCLLC without restriction, and are subject to the confidentiality provisions of Section 15.7 of this Agreement. (b) As part of the Services, Utility Contractor shall prepare, on a quarterly basis within 30 days after the end of the quarter, a summary of the significant maintenance and inspection work performed during the previous quarter. Such report shall include a summary of all material deficiencies in the Transmission Facilities observed or experienced by Utility Contractor, and Utility Contractor's proposals for correcting such deficiencies. (c) As part of the Services, Utility Contractor shall prepare, on a monthly basis within 30 days after the end of the month, a budget variance report setting forth actual and budgeted expenditures for the period and year to date, together with Utility Contractor's explanation of any variance. (d) Utility Contractor shall prepare such other reports, and provide such other information, as ATCLLC may request regarding the operation and maintenance of the Transmission Facilities. 4.9 Training. (a) As part of the Services, Utility Contractor shall train its employees and agents appropriately to carry out its responsibilities to ATCLLC under this Agreement. Upon request, Utility Contractor shall provide ATCLLC the training materials, and the course materials used by the Utility Contractor in any training programs conducted pursuant to this Section. (b) As part of the Services, Utility Contractor shall provide training sessions to familiarize ATCLLC employees or agents with the operation and maintenance of the Transmission Facilities and the Services provided hereunder. Utility Contractor shall provide such training sessions at such times and locations, to such audiences, and with such content, as may be appropriate and requested by ATCLLC. 4.10 Contracts with Third Parties. ATCLLC acknowledges that Utility Contractor may have entered into contracts with third parties for the maintenance or operation of the Transmission Facilities. ATCLLC further acknowledges that Utility Contractor may wish in the future to enter into contracts with third parties to perform some of the Services. All such third-party contracts shall be subject to the following provisions. (a) Existing contracts. As soon as practicable before the Operations Date, Utility Contractor shall provide ATCLLC, for its review, subject to the confidentiality provisions of Section 15.7, copies of all third-party contracts then currently in effect and under which the amounts payable are expected to exceed $100,000 annually, for Services covered by this Agreement. During the term of this Agreement, Utility Contractor shall not modify any of these third-party contracts without the prior written approval of ATCLLC, which approval ATCLLC shall not unreasonably withhold or delay. (b) Future Contracts. Utility Contractor may enter into contracts with qualified third parties for the provision of Services, provided that Utility Contractor obtains ATCLLC's prior written approval of all proposed contractors and contracts under which the amounts payable are reasonably expected to exceed $100,000 annually, which approval ATCLLC shall not unreasonably withhold or delay. (c) Utility Contractor may not split any contracts to avoid the $100,000 approval threshold. (d) Contract Invoices. Utility Contractor shall pass all invoices it receives for third-party contract work used to provide Services under this Agreement directly through to ATCLLC, with no additional charges or markups, except as may be specifically authorized under this Agreement. 5. RESPONSIBILITIES OF ATCLLC During the term of this Agreement, ATCLLC shall, at its cost and expense, and in a manner consistent with Good Utility Practice, perform or provide the following at the times required to support the provision of the Services: (a) ATCLLC shall develop and maintain policies and procedures necessary for maintenance of reliable, cost effective transmission service and maximizing the useful life of the Transmission System, and shall implement those policies through the establishment of the Facilities Maintenance Plan and its directives to Utility Contractor. (b) ATCLLC shall provide Utility Contractor with all necessary access to the Transmission Facilities and ATCLLC properties upon which such Transmission Facilities are located. (c) ATCLLC shall, with the concurrence and assistance of Utility Contractor as may be necessary or appropriate, procure and maintain in effect all permits, certificates and licenses needed by the owner of the Transmission Facilities for the operation and maintenance of such Transmission Facilities. (d) ATCLLC shall prepare and submit to Utility Contractor, review with Utility Contractor, revise, approve and update Facilities Maintenance Plans, as described in Section 4.6 hereof. ATCLLC shall review, revise and approve Budgets, as described in Section 4.7 hereof. All such Facilities Maintenance Plans, revisions to Facilities Maintenance Plans, Budgets, and revisions to Budgets shall be reasonable, consistent with Good Utility Practice, in accordance with the adequacy language contained in Section 2.7 of the Operating Agreement of ATCLLC, and subject to ATCLLC's commitment to fully utilize Baseline Resource Hours and the Baseline Maintenance Budget. Approvals of Facilities Maintenance Plans and Annual Budgets shall not be unreasonably withheld or delayed. (e) ATCLLC shall provide training sessions to familiarize Utility Contractor personnel with the processes and procedures relating to the Services that are developed by ATCLLC during the term of this Agreement for application by ATCLLC throughout the ATCLLC Transmission System. (f) ATCLLC shall provide Utility Contractor with such other information, oversight and direction reasonably required by Utility Contractor to fulfill Utility Contractor's responsibilities under this Agreement. 6. COMPENSATION OF UTILITY CONTRACTOR 6.1 Compensation for Operation Services and Maintenance Services. As full and complete compensation for Utility Contractor's provision of Operation Services and Maintenance Services, ATCLLC shall pay Utility Contractor all of the reasonable direct and indirect costs incurred by Utility Contractor in performing such Services. Direct and indirect costs include but are not limited to labor costs with loadings, which shall include labor costs for tasks such as recording costs and invoicing ATCLLC and the cost of materials and supplies; return of and on the cost of property employed; and payments to contractors, plus all overheads directly associated with any and all of these costs. 6.2 Methods of Calculating the Compensation Due. The methods and procedures for determining, recording, allocating, billing and auditing of Utility Contractor's costs is set forth in Schedule 1 hereto. 6.3 Minimum Compensation for Maintenance Services. (a) Utility Contractor and ATCLLC shall in connection with the preparation of the initial Facilities Maintenance Plan determine the Maintenance Resource Budget. (b) The Parties shall identify that portion of the Maintenance Resource Budget that is attributable to Maintenance Resource Hours. (c) Section 6.1 notwithstanding, as minimum compensation for the performance of the Maintenance Services by Utility Contractor under this Agreement, ATCLLC shall annually pay Utility Contractor (i) the amount attributable to unused Baseline Resource Hours as determined pursuant to Section 6.3(d) below; and (ii) the amount of the Baseline Maintenance Budget less any amount that ATCLLC pays for unused Baseline Resource Hours pursuant to Section 6.3(d). (d) ATCLLC agrees to annually utilize all of the Baseline Resource Hours. Utility Contractor agrees to limit the use of subcontractors to the extent that use of subcontractors would result in Baseline Resource Hours not being fully utilized, except as agreed by ATCLLC. If ATCLLC does not fully utilize the Baseline Resource Hours, ATCLLC shall pay Utility Contractor for the unused Baseline Resource Hours, calculated as the product of the number of unused Baseline Resource Hours times an appropriately weighted annual average hourly cost, which shall be calculated as the actual annual charge for Maintenance Services rendered and as determined under Section 6.1, less supplies, materials, and subcontractor payments, divided by the number of hours spent by Utility Contractor's own employees in providing the Maintenance Services. (e) If payments of compensation under Section 6.1 are less than the minimum payments required by Section 6.3(c), ATCLLC shall pay Utility Contractor the difference. (f) Where the total cost of Maintenance Services rendered exceeds the Baseline Maintenance Budget payment, ATCLLC's obligation to pay for unused Baseline Resource Hours is conditioned upon Utility Contractor's compliance with its obligation under Section 6.3(d) to limit the use of subcontractors to the extent that their use would result in underutilization of Baseline Resource Hours. (g) Where the parent of Utility Contractor is a registered holding company under the Public Utility Holding Company Act of 1935, as amended ("PUHCA"), the minimum payment obligation set forth in Section 6.3(c) shall apply only to the extent allowed by PUHCA, or authorized pursuant to an exemption granted thereunder by the Securities and Exchange Commission. (h) To the extent that Force Majeure prevents Utility Contractor from performing Maintenance Services during the calendar year or prevents ATCLLC from taking Maintenance Services during the calendar year, ATCLLC shall receive a ratable credit against its obligation to utilize Baseline Resource Hours and its obligation to pay the amount of the Baseline Maintenance Budget. 6.4 Compensation for Inventory and Storage. (a) Upon cancellation or expiration of this Agreement, ATCLLC agrees to purchase the inventory of materials and supplies under the provisions of Section 3.8 of the Asset Contribution Agreement. (b) ATCLLC shall have the option to lease from Utility Contractor, or rent at cost, the warehouse space and other facilities and systems used by Utility Contractor to maintain and manage such materials and supplies. 6.5 Billing and Payment. Utility Contractor shall provide invoices to ATCLLC each month, setting forth the costs incurred by Utility Contractor during the previous month to provide the Services, and identifying costs accrued for Services by the Utility Contractor during the previous month, which accrued costs will be invoiced at a later date. ATCLLC shall pay each invoice within 15 days of receipt from Utility Contractor. Within 60 days after the end of each calendar year of this Agreement, Utility Contractor shall calculate the amount due under Section 6.3(c) above and shall provide ATCLLC with an invoice reflecting that amount. Billing and payment disputes that cannot be resolved in the normal course of business shall be resolved using the dispute resolution procedures described in Article 8. 6.6 Audits and Adjustments. Utility Contractor shall maintain and retain for such time as ATCLLC may reasonably direct, but not for longer than six years, the books and other records needed to document the costs Utility Contractor incurs as a result of fulfilling its obligations under this Agreement. Utility Contractor shall respond to any reasonable request from ATCLLC for information related to a cost charged by Utility Contractor to ATCLLC by providing ATCLLC the information reasonably needed by ATCLLC to verify the cost in question. From time to time, ATCLLC may conduct, and Utility Contractor shall permit ATCLLC to conduct or cause to be conducted by its authorized agents, at ATCLLC's expense, audits of the books and records of Utility Contractor that relate to the Services provided under this Agreement. Such audits will be conducted at reasonable, mutually agreed upon times, provided that ATCLLC must contest invoices within one year of receipt and must complete any audit relating to a contested invoice within a reasonable period of time thereafter. Any adjustment identified to be made as a result of an audit and that is payable under Section 5 of Schedule 1 shall be made to the billing statement next issued following the conclusion of the audit. 7. OWNERSHIP For the purpose of this Agreement: (a) Rights in ATCLLC Independently Developed Technology: Any Technology prepared, developed or acquired solely by the ATCLLC shall be owned solely by ATCLLC (hereinafter, "ATCLLC Owned Technology"). Except as provided for herein, nothing herein shall imply a license in the ATCLLC Owned Technology. (b) Rights In Utility Contractor Independently Developed Technology: Any Technology prepared, developed or acquired solely by Utility Contractor shall be owned solely by Utility Contractor (hereinafter, "Utility Contractor Owned Technology"). Except as provided for herein, nothing herein shall imply a license in the Utility Contractor Owned Technology. (c) Rights In Jointly Developed Technology: Any Technology jointly prepared, developed or acquired by the ATCLLC and Utility Contractor, shall be jointly owned (hereinafter, "Joint Technology"). The ownership rights granted under this paragraph shall be limited to the Joint Technology only and, except as provided for herein, does not grant any rights, license or otherwise in either the ATCLLC Owned Technology or Utility Contractor Owned Technology that may be necessary to utilize the Joint Technology. (d) Grant Of Rights In ATCLLC Owned Technology: To the extent any ATCLLC Owned Technology is needed by a Utility Contractor in furtherance of performing the Services or any aspect thereof, the ATCLLC hereby grants to Utility Contractor a full and complete, world-wide, royalty-free, fully paid-up, non- exclusive license to use, without the right to grant sublicenses, the ATCLLC Owned Technology. (e) Grant Of Rights In Background Utility Contractor Technology: To the extent that background or underlying technology of Utility Contractor used by Utility Contractor in its performance of Services hereunder is required by ATCLLC to make use of ATCLLC Owned Technology or the Joint Technology in order to operate and maintain the Transmission Facilities, Utility Contractor hereby grants to the ATCLLC a full and complete, world-wide, royalty-free, fully paid-up, non-exclusive license to use the background or underlying technology of the Utility Contractor, for the term of this Agreement and afterwards but only for the purposes and to the extent used during the term of this Agreement, without the right to grant sublicenses. (f) Shared Rights in Joint Technology: The ATCLLC and Utility Contractor shall retain perpetually full and complete rights to (e.g., make, use or sell) the Joint Technology. Neither party may assign or otherwise transfer any rights in the Joint Technology, by license or otherwise, to the detriment of the other. 8. DISPUTE RESOLUTION Any dispute arising out of or in connection with this Agreement shall be resolved according to the dispute resolution procedures set forth in Exhibit B to the Operating Agreement of American Transmission ATCLLC. 9. FORCE MAJEURE (a) Neither Party shall be responsible or liable, or deemed in breach hereof, to the extent the performance of its respective obligations hereunder is prevented or delayed due solely to circumstances beyond the reasonable control and without the fault or negligence of the party experiencing such impediment to performance, including but not limited to acts of God; war; riots; strikes, lockouts or other labor disturbances; labor or material shortages, including unavailability of Utility Contractor resources required for Operation Services or required for fulfillment of the Facilities Maintenance Plan; actions or failures to act on the part of governmental authorities preventing or delaying performance; inability despite due diligence to obtain required licenses; or fire (such causes hereinafter called "Force Majeure"). (b) The Party experiencing the Force Majeure shall exercise due diligence in endeavoring to overcome any Force Majeure impediment to its performance, but settlement of its labor disturbances shall be entirely within its discretion. The Party experiencing the Force Majeure shall promptly give written notification to the other Party. This written notification shall include a full and complete explanation of the Force Majeure and its cause, the status of the Force Majeure, and the actions such Party is taking and proposes to take to overcome the Force Majeure. ATCLLC shall have the right, upon written notice to Utility Contractor, to obtain alternate contractors to perform the Services during any event of Force Majeure that prevents or delays Utility Contractor's performance hereunder if the Force Majeure has or, in ATCLLC's reasonable judgment, threatens to have an adverse effect on ATCLLC's ability to conduct its operations. 10. LIMITATION ON LIABILITY With respect to claims by and between the Parties under this Agreement, the measure of damages at law or in equity in any action or proceeding shall be limited to direct actual damages only, such direct actual damages shall be the sole and exclusive remedy and all other remedies or damages at law or in equity are waived and neither Party shall be liable in statute, contract, in tort (including negligence), strict liability, warranty or under any other legal theory or otherwise to the other Party, its agents, representatives, and/or assigns, for any special, incidental, punitive, exemplary or consequential loss or damage whatsoever, including, but not limited to, loss of profits or revenue on work not performed, for loss of use of or under- utilization of the other Party's facilities, loss of use of revenues, attorneys' fees, litigation costs, or loss of anticipated profits, resulting from either Party's performance or non-performance of an obligation imposed on it by this Agreement, without regard to the cause or causes related thereto, including the negligence of any party. The Parties expressly acknowledge and agree that this limitation shall apply to any claims for indemnification under Article 11 of this Agreement. The provisions of this section shall survive the termination or expiration of this Agreement. 11. INDEMNITY (a) Utility Contractor's Indemnification. Subject to the provisions of Article 10, Utility Contractor shall indemnify, hold harmless and defend ATCLLC, and its officers, directors, employees, affiliates, managers, members, trustees, shareholders, agents, contractors, subcontractors, affiliates' employees, invitees and successors, from and against any and all claims, demands, suits, obligations, payments, liabilities, costs, losses, judgments, damages and expenses (including the reasonable costs and expenses of any and all actions, suits, proceedings, assessments, judgments, settlements, and compromises relating thereto, reasonable attorneys' and expert fees and reasonable disbursements in connection therewith) for damage to property, injury to any person or entity, or death of any individual, including ATCLLC's employees and affiliates' employees, Utility Contractor's employees, or any other third parties, to the extent caused wholly or in part by any act or omission, negligent or otherwise, by Utility Contractor or its officers, directors, employees, agents, contractors, subcontractors and invitees arising out of or connected with Utility Contractor's performance or breach of this Agreement, or the exercise by Utility Contractor of its rights hereunder; provided, however, that the provisions of this Section shall not apply if any such injury, damage or death is held to have been caused by the negligence or intentional wrongdoing of ATCLLC, its agents or employees. In furtherance of the foregoing indemnification and not by way of limitation thereof, Utility Contractor hereby waives any defense it otherwise might have under applicable workers' compensation laws. (b) ATCLLC's Indemnification. Subject to the provisions of Article 10, ATCLLC shall indemnify, hold harmless and defend Utility Contractor, its parent and its officers, directors, employees, affiliates, managers, members, trustees, shareholders, agents, contractors, subcontractors, invitees and successors, from and against any and all claims, demands, suits, obligations, payments, liabilities, costs, losses, judgments, damages and expenses (including the reasonable costs and expenses of any and all actions, suits, proceedings, assessments, judgments, settlements, and compromises relating thereto, reasonable attorneys' and expert fees and reasonable disbursements in connection therewith) for damage to property, injury to any person or entity, or death of any individual, including Utility Contractor's employees and affiliates' employees, ATCLLC's employees, or any other third parties, to the extent caused wholly or in part by any act or omission, negligent or otherwise, by ATCLLC or its officers, directors, employees, agents, contractors, subcontractors and invitees arising out of or connected with ATCLLC's performance or breach of this Agreement, or the exercise by ATCLLC of its rights hereunder; provided, however, that the provisions of this Section shall not apply if any such injury, damage or death is held to have been caused by the negligence or intentional wrongdoing of Utility Contractor, its agents or employees. In furtherance of the foregoing indemnification and not by way of limitation thereof, ATCLLC hereby waives any defense it otherwise might have under applicable workers' compensation laws. (c) Indemnification Procedures. Any Party seeking indemnification under this Agreement shall give the other Party notice of such claim as soon as practicable but in any event on or before the thirtieth (30th) day after the Party's actual knowledge of such claim or action. Such notice shall describe the claim in reasonable detail, and shall indicate the amount (estimated if necessary) of the claim that has been, or may be sustained by, said Party. To the extent that the other Party will have been actually and materially prejudiced as a result of the failure to provide such notice, such notice will be a condition precedent to any liability of the other Party under the provisions for indemnification contained in this Agreement. Neither Party may settle or compromise any claim for which indemnification is sought under this Agreement without the prior consent of the other Party; provided, however, said consent shall not be unreasonably withheld or delayed. Each Party's indemnification obligation will survive expiration, cancellation or early termination of this Agreement. 12. INSURANCE (a) The Parties agree to maintain, at their own cost and expense, general and automobile liability, worker's compensation, and other forms of insurance relating to their operations for the life of this Agreement in the manner, and amounts, at a minimum, as set forth below, (i) Workers' Compensation Insurance in accordance with all applicable state, federal and maritime law, including Employer's Liability Insurance in the amount of $1,000,000 per accident; (ii) Commercial General Liability Insurance, including Contractual Liability Coverage for liabilities assumed under this Agreement, and Personal Injury Coverage in the amount of $25,000,000 per occurrence for bodily injury and property damage. Utility Contractor's policy shall include ATCLLC and ATC Management Inc. as additional insureds and ATCLLC's policy shall include Utility Contractor as an additional insured; (iii) Automobile Liability Insurance for all owned, non-owned, and hired vehicles with bodily injury limits of no less than $5,000,000 per person, $5,000,000 per accident; and property damage limits of no less than $5,000,000 per accident. Utility Contractor's policy shall include ATCLLC and ATC Management Inc. as additional insureds and ATCLLC's policy shall include Utility Contractor as an additional insured; (iv) Where a Party has more than $100 million in assets it may, at its option, self insure all or part of the insurances required in this Article; provided, however, the self-insuring Party agrees that all other provisions of this Article, including, but not limited to, waiver of subrogation, waiver of rights of recourse, and additional insured status, which provide or are intended to provide protection for the other Party and its affiliated and associated companies under this Agreement, shall remain enforceable. A Party's election to self-insure shall not impair, limit, or in any manner result in a reduction of rights and/or benefits otherwise available to the other Party and its affiliated and associated companies through formal insurance policies and endorsements as specified in the above parts of this Article. The self-insuring Party agrees that all amounts of self-insurance, retentions and/or deductibles are the responsibility of and shall be borne by the self-insuring Party. (b) Within fifteen (15) days of the Effective Date, and each anniversary of the Effective Date, during the term of this Agreement, (including any extensions), each Party shall provide to the other Party, properly executed and current certificates of insurance with respect to all insurance policies required to be maintained by such Party under this Agreement. Certificates of insurance shall provide the following information: (i) Name of insurance company, policy number and expiration date; (ii) The coverage required and the limits on each, including the amount of deductibles or self-insured retentions, which shall be for the account of the Party maintaining such policy; (iii) A statement indicating that the other Party shall receive at least thirty (30) days prior written notice of cancellation or expiration of a policy, or reduction of liability limits with respect to a policy; and (iv) A statement identifying and indicating that additional insureds have been named as required by this Agreement. (c) At a Party's request, in addition to the foregoing certifications, the other Party shall deliver to the first Party a copy of applicable sections of each insurance policy. (d) Each Party shall have the right to inspect the original policies of insurance applicable to this Agreement at the other Party's place of business during regular business hours. (e) If any insurance is written on a "claims made" basis, the respective Party shall maintain the coverage for a minimum of seven years after the termination of this Agreement. (f) To the extent permitted by the insurer and commercially reasonable, each Party shall obtain waivers of subrogation in favor of the other Party from any insurer providing coverage that is required to be maintained under this Article 12, except for the coverage required under Section 12(a)(i). A Party shall not be required to obtain a waiver of subrogation if the other Party is not able to obtain a waiver of subrogation from its insurance carrier. 13. SUCCESSORS AND ASSIGNS This Agreement and each and every covenant, term and condition hereof, shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, executors, administrators, successors and permitted assigns. Utility Contractor shall not assign its rights or obligations hereunder without express written approval of ATCLLC, except it may assign its rights or obligations to a purchaser (or an affiliate) who will own all or substantially all of Utility Contractor's distribution assets or equity interests and who shall then be bound by all of the provisions of this Agreement. ATCLLC shall not assign its rights or obligations hereunder without express written approval of Utility Contractor, except it may assign its rights and obligations to a purchaser (or an affiliate) who will own all or substantially all of ATCLLC's transmission assets and who shall then be bound by all of the provisions of this Agreement. 14. NOTICE (a) All certificates or notices required hereunder shall be given in writing and addressed or delivered to the representative(s) specified in this Agreement. Notices shall be deemed received (i) upon delivery, when personally delivered; (ii) upon receipt, when sent via registered or certified mail; (iii) the next business day, when sent via overnight courier; and (iv) upon transmittal, when sent via facsimile. Copies of all general correspondence regarding this Agreement shall also be sent to these representative(s). (b) Notices submitted hereunder shall be directed to the following individuals: Notices to Utility Contractor: Attn: Thomas H. Fehring Corporate Secretary Wisconsin Electric Power Company 231 West Michigan Street P.O. Box 2046 Milwaukee, WI 53201-2046 Notices to ATCLLC: Attn: Walter Woelfle Vice President, Legal and Secretary American Transmission Company, LLC N16 W23217 Stone Ridge Drive P.O. Box 47 Waukesha, WI 53187-0047 All other communications relating to this Agreement should be submitted to: Harry L. Terhune Vice President - Operations American Transmission Company, LLC N16 W23217 Stone Ridge Drive P.O. Box 47 Waukesha, WI 53187-0047 (c) ATCLLC or Utility Contractor may change their respective representative(s) designated to receive notice hereunder by written notice to the other Party. All correspondence and transmittals between the Parties shall be executed pursuant to coordination procedures that shall be developed by the Parties. 15. MISCELLANEOUS 15.1 Compliance with Laws. Throughout the term of this Agreement, each Party shall perform its obligations hereunder in compliance with all present and future federal, state and local statutes, ordinances, rules and regulations, including, but not limited to those pertaining to human safety, protection of property, non-discrimination, and protection of the environment. 15.2 Entire Agreement. This Agreement, together with the Appendices and Exhibits attached hereto, is the entire understanding of the Parties regarding the subject matter hereof, and supersedes all prior oral or written discussions, negotiations and agreements the Parties may have had with respect to the subject matter hereof. 15.3 Counterparts. This Agreement may be executed in any number of counterparts, and each counterpart shall have the same force and effect as the original instrument. 15.4 Amendment. No amendment, modification or waiver of any term hereof shall be effective unless set forth in a writing signed by both ATCLLC and Utility Contractor. 15.5 Survival. All warranties, remedial obligations, indemnities and confidentiality rights and obligations provided for herein shall survive the cancellation, expiration or termination hereof. 15.6 Independent Contractor. Utility Contractor at all times shall be deemed to be an independent contractor and none of its employees or the employees of its sub-contractors shall be considered to be employees of ATCLLC during the term of this Agreement. Utility Contractor shall have no authority to act on behalf of ATCLLC or bind ATCLLC in any manner except as expressly set forth in this Agreement. The Parties acknowledge that neither this Agreement nor any of its provisions are intended to create any partnership or joint venture between the Parties. 15.7 Confidentiality. (a) "Confidential Information", as used in this Section 15.7, shall mean all information or documentation disclosed or made available by either Party to the other, including but not limited to correspondence between the Parties, business plans, financial information, policies and procedures, computer programs, reports and analyses, or other information which a Party in good faith designates as "Trade Secrets" as that term is defined in Wis. Stat. 134.90(1)(c). (b) In consideration of the disclosure by one Party of Confidential Information to the other Party, the Parties agree that each of them shall undertake in good faith to accomplish the following additional actions with respect thereto: (i) to use the Confidential information for the sole purpose of fulfilling the obligations of the Parties pursuant to this Agreement; (ii) to safeguard and hold in strict confidence all Confidential Information, limiting disclosure of Confidential Information to employees, contractors or agents who have a need to know; (iii) to protect Confidential Information from disclosure to anyone not a party to this Agreement without the prior approval of the disclosing Party; and (iv) upon the request of the disclosing Party and in any event upon cancellation or expiration of this Agreement, to return all Confidential Information, or to certify that such Confidential Information has been destroyed. (c) The restrictions of this Section do not apply to any information which is already known by the receiving party, possessed by a third party prior to disclosure, acquired from anyone not a party to this Agreement without restriction, or which is publicly available. (d) Each Party retains all right, title and interest in and to any Confidential Information disclosed by the party hereunder. (e) In the event that either Party is required by applicable law to disclose any Confidential Information of the other Party, such party shall promptly notify the other Party of such requirement and cooperate with the other Party to protect the Confidential Information from any disclosure not required by law. (f) The obligations of this Section shall survive for a period of 3 years following any expiration or cancellation of this Agreement. 15.8 Standards of Conduct. If the performance of this Agreement requires ATCLLC to disclose information about the Transmission System to Utility Contractor, the dissemination of which by Utility Contractor would have been subject to FERC's Standards of Conduct requirements, 18 C.F.R. Part 37, prior to the transfer of the Transmission Facilities, such information shall not be disclosed by Utility Contractor or ATCLLC to any persons that would not have been entitled to receive such information prior to such transfer. 15.9 No Implied Waivers. The failure of a Party to insist upon or enforce strict performance of any of the provisions of this Agreement shall not be construed as a waiver or relinquishment to any extent of such Party's right to assist or rely upon any such provisions, rights and remedies in that or any other instance; rather, the same shall be and remain in full force and effect. 15.10 No Third-Party Beneficiaries. This Agreement is intended to be solely for the benefit of ATCLLC and Utility Contractor and their successors and permitted assigns and is not intended to and shall not confer any rights or benefits on any third party (other than successors and permitted assigns) not a signatory hereto. 15.11 Severability. In the event that any provision of this Agreement is deemed as a matter of law to be unenforceable or null and void, such unenforceable or void portion of such provision shall be deemed severable from this Agreement unless the removal of the unenforceable provision materially alters the obligations of either Party hereunder. Even if there is a material alteration in the remainder of the Agreement, the Agreement shall continue in full force and effect as if such provision was not contained herein., but the Parties shall negotiate in good faith new provisions in relation to the deleted provision that will to the extent practicable restore the benefit of the bargain contained in such provision, and that are consistent with Good Utility Practice and the adequacy obligation set forth in Section 2.7 of the Operating Agreement of ATCLLC. 15.12 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Wisconsin, with the exception of any choice of laws provisions. 15.13 Operation and Prospective Planning. Recognizing that the Parties have to prepare a Facilities Maintenance Plan and Budget prior to the Operations Date, the Parties will operate under the standards of this Agreement to prepare a Facilities Maintenance Plan, calculate Baseline Resource Hours, calculate a Maintenance Response Budget, and develop a Budget adhering as closely as possible to the timetables established for the first year after the Operations Date. 15.14 Headings. The headings set forth herein are inserted for convenience and shall have no effect on the interpretation or construction of this Agreement. 15.15 Affiliate Status of Parties. For purposes of Articles 10, 11, and 12, neither Party shall be treated as an affiliate of the other. IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed by their duly authorized representatives, effective as of the date first written above. AMERICAN TRANSMISSION COMPANY LLC BY______________________________________ TITLE___________________________________ WISCONSIN ELECTRIC POWER COMPANY BY______________________________________ TITLE___________________________________ EXHIBIT A OPERATION SERVICES AND MAINTENANCE SERVICES MAINTENANCE SERVICES MAINTENANCE SERVICES (continued) (a) For Line Equipment Analysis (System (c) For ATCLLC * Inspection * Station Property * aerial/walk/climb/infra-red Grass Maintenance * underground * Station Property Vegetation Control * submarine cable * Station Property * Painting Building Maintenance * Wood Pole * Station Property Inspection/Treatment/Repair Snow Removal * Station Property (some replacements Gravel may be capital in * Station Property nature) Access Maintenance * Line Repair * Station Property (Insulation/Founda Security Checks tion/Hardware/Conductor) * Grounding (d) Miscellaneous * Corrosion Control * Special Maintenance Projects * Maintenance of * Grounding Repair insulating * Radio/TV fluids/gases, pumps, Interference valves and protective * Major Equipment devices) Repair * Right of Way Vegetation Control * Right of Way Access Maintenance * Right of Way Security Checks (b) For Station Equipment * Inspection * Painting/Switches/Bus * Structure/Foundation Repair * Breaker * DC System * Transformer * SF6 Management * Relay Test/Maintenance System (System Protection) * Communications Repair (System OPERATION SERVICES (a) Operations * Inspection * Field Switching * Communications Repair (b) Emergency Response Services * Field Response * Emergency Cleanup Spill Response * Post-Emergency Repair SCHEDULE 1 (ATTACHED TO OPERATION & MAINTENANCE AGREEMENT) 1. General Description. Utility Contractor shall invoice to ATCLLC the actual costs of providing Services for the previous month. The invoice will also identify any costs for Services accrued during the previous month by Utility Contractor with the understanding that these accrued costs will be invoiced for payment at a later date (as they are paid by Utility Contractor). Utility Contractor's invoices to ATCLLC will be in a consistent format and provided monthly together with the Utility Contractor's detailed billing reports supporting the invoice. 2. Methods of Calculating Costs to Be Paid by ATCLLC. (a) Direct Costs. Costs incurred by the Utility Contractor that are solely and directly attributable to Transmission Facilities services shall be directly billed to ATCLLC in full. These directly billed costs shall be recorded as incurred by Utility Contractor to internal bookkeeping accounts designated as transmission billing accounts. The direct cost for materials and supplies shall be their book value. (b) Indirect Costs. Costs incurred by the Utility Contractor for activities that support the entire company or which support Transmission Facilities and services to Transmission Facilities plus other divisions of the company will be identified and a portion of these costs will be charged to ATCLLC. Utility Contractor will identify and aggregate all of these costs into recognizable categories and, in cooperation with ATCLLC, shall develop methods for calculating the portion of each cost category that should be allocated to ATCLLC. The method for determining the share allocable to ATCLLC may vary from cost category to cost category. A document describing the methods for allocating categories of costs to ATCLLC, including any allocation formulas, will be attached to this Schedule 1. (c) Labor Loadings. Loadings that account for pension and employee benefit costs, payroll taxes and costs, and the expense of non-productive time (paid leaves plus, if not a separate cost category, training) shall be added to any direct or indirect labor costs billed to ATCLLC. A document describing the methods Utility Contractor will use to calculate and apply labor loadings will be attached to this Schedule 1. (d) Extraordinary Costs. Subject to Article 4 of the Agreement, costs incurred by Utility Contractor that are unusual, special or extraordinary may require unique treatment. Utility Contractor will notify ATCLLC in advance of incurring such costs whenever possible and as soon as possible after incursion of the cost if advance notice is not possible, but in any event prior to sending ATCLLC an invoice that includes the cost. (e) Utility Contractor's System for Recording Its Costs. Utility Contractor will notify ATCLLC in advance of any changes to its system of recording and tracking its costs that will significantly impact the calculation or appearance of invoices to ATCLLC. Utility Contractor will, at ATCLLC's expense, provide for the transfer to ATCLLC of electronic billing data in a form usable by ATCLLC's electronic systems for recording and tracking costs of the Services. 3. True-ups and Reviews. Amounts that have been billed based on estimates will be adjusted to the Utility Contractor's actual costs after actual costs are known and ATCLLC will pay more or receive a credit, as appropriate, for any true-up. Such true-ups may be performed at any time, but at least one annual true-up will be performed by the Utility Contractor for the previous year before the expiration of the first quarter of the following year. In addition, formulas, procedures and allocations may be revised by either Party if the Party proposing the revision can demonstrate to the other Party that new facts have come to light or that it has discovered or developed an improved formula, procedure or method for accurately determining or invoicing actual costs. Any such revision to a formula, procedure or allocation will not be applied retroactively. Amounts previously billed in error, however, will be corrected in accordance with Section 4 below; error here includes the long or short-term misapplication of an approved formula. Where refunds or additional amounts are owed due to a true-up or correction, the refund or additional amount shall appear on the next monthly billing following identification of the adjustment. 4. Contested Statements. ATCLLC may contest, and Utility Contractor may correct, any particular items included in any Utility Contractor invoice within one year of ATCLLC's receipt of the invoice. This provision does not limit ATCLLC's right to audit Utility Contractor under Section 6.6 of the Agreement. 5. Adjustments. Utility Contractor shall promptly reimburse or credit ATCLLC for any charges that should not have been billed to ATCLLC as provided in the Agreement and which either Party identifies within 12 months of the ATCLLC's receipt of the invoice containing such charges. Such reimbursements shall be set forth in the appropriate section of the invoice. Utility Contractor shall bill ATCLLC for any charges that were not billed but should have been billed to ATCLLC as provided in this Agreement and which either Party identifies within 12 months of the month that the charges were incurred. The amount of any adjustment under this Section shall reflect interest from the date such amounts were due at the published prime interest rate of Firstar Bank on the last business day of the preceding month. _______________________________ * A Transmission Utility that has transferred Transmission Facilities to the American Transmission Company LLC. TRANSITIONAL SERVICES AGREEMENT FOR TRANSMISSION FACILITIES (Transferred Under Wisconsin "Reliability 2000" Legislation) Between American Transmission Company LLC and Wisconsin Electric Power Company Dated as of December 29, 2000 ARTICLE 1 DEFINITIONS AND INTERPRETATION 2 1.1 Definitions, Generally 2 1.2 Special Definitions 2 1.2.1 Administrative Services 3 1.2.2 Budget 3 1.2.3 Day One 3 1.2.4 Day 181 3 1.2.5 Good Utility Practice 3 1.2.6 Key Personnel 3 1.2.7 Party 4 1.2.8 Parties 4 1.2.9 Service Schedules 4 1.2.10 Services 4 1.2.11 System Control Services 4 1.2.12 Transmission Facilities 4 1.2.13 Transmission System 5 ARTICLE 2 TERM 5 2.1 Term of Agreement 5 2.2 Extension 5 ARTICLE 3 REQUIRED REGULATORY APPROVALS 5 ARTICLE 4 GENERAL PROVISIONS REGARDING SERVICES TO BE PROVIDED BY UTILITY CONTRACTOR 6 4.1 Services on Day One 6 4.2 Exclusions of Services on Day One 6 4.3 Exclusion of Services After Day 181 7 4.4 Development of Service Schedules 7 ARTICLE 5 RESPONSIBILITIES OF UTILITY CONTRACTOR 11 5.1 Scope of Services 11 5.2 Performance Standards 11 5.3 Utility Contractor Resources 13 5.4 Budget 14 5.5 Reports 15 5.6 Training 15 5.7 Contracts with Third Parties 16 ARTICLE 6 COMPENSATION OF UTILITY CONTRACTOR 17 6.1 Compensation. 17 6.2 Methods of Calculating the Compensation Due. 17 6.3 Compensation for Inventory and Storage. 17 6.4 Billing and Payment. 18 6.5 Audits and Adjustments. 18 ARTICLE 7 RESPONSIBILITIES OF ATCLLC 19 ARTICLE 8 SERVICES AVAILABLE TO ATCLLC DURING TRANSITION 20 8.1 General 20 8.2 Control Center Services 20 8.3 Real Estate 20 8.4 Project Services 22 8.5 Environmental Services 22 8.6 Supply Chain Services 22 8.7 Engineering Services 23 8.8 Planning Services 23 8.9 Miscellaneous Services 23 ARTICLE 9 SPECIALIZED CONSTRUCTION SERVICES 24 ARTICLE 10 OWNERSHIP 24 ARTICLE 11 DISPUTE RESOLUTION 26 ARTICLE 12 FORCE MAJEURE 26 ARTICLE 13 LIMITATION OF LIABILITY 27 ARTICLE 14 INDEMNITY 27 ARTICLE 15 INSURANCE 30 ARTICLE 16 SUCCESSORS AND ASSIGNS 32 ARTICLE 17 NOTICE 33 ARTICLE 18 MISCELLANEOUS 34 18.1 Compliance with Laws 34 18.2 Entire Agreement 34 18.3 Counterparts 34 18.4 Amendment 34 18.5 Survival 35 18.6 Independent Contractor 35 18.7 Confidentiality 35 18.8 Standards of Conduct 36 18.9 No Implied Waivers 37 18.10 No Third-Party Beneficiaries 37 18.11 Severability 37 18.12 Governing Law 37 18.13 Interpretation. 38 18.14 Headings 38 18.15 Modification of Agreement by Service Schedules 38 18.16 Affiliate Status of Parties 38 TRANSITIONAL SERVICES AGREEMENT FOR TRANSMISSION FACILITIES THIS TRANSITIONAL SERVICES AGREEMENT FOR TRANSMISSION FACILITIES ("Agreement") is entered into as of December 29, 2000 by and between Wisconsin Electric Power Company or WEPCO ("Utility Contractor"), a Wisconsin corporation, and American Transmission Company LLC ("ATCLLC"), a Wisconsin limited liability company (collectively, the "Parties"). Utility Contractor and ATCLLC are referred to individually as a "Party" and collectively as the "Parties." RECITALS WHEREAS, Wisconsin Act 9 ("Reliability 2000 Legislation"), effective October 29, 1999, authorized the organization of a new company to provide electric transmission service; WHEREAS, pursuant to the provisions of the Reliability 2000 Legislation, ATCLLC was organized to provide transmission service; WHEREAS, the Reliability 2000 Legislation authorized electric transmission utilities to transfer their transmission assets to a new company organized to provide transmission service; WHEREAS, WEPCO has agreed to transfer its transmission assets to ATCLLC; WHEREAS, the Parties intend that ATCLLC will commence operation of the Transmission System on January 1, 2001 ("Day One"). WHEREAS, ATCLLC is in the process of searching for and employing personnel needed to staff the functions necessary for its operations from and after Day One, which may include personnel currently employed by Utility Contractor and performing those functions for Utility Contractor. Of necessity, on Day One ATCLLC must obtain services so as to ensure continuation of high quality, reliable service. WHEREAS, the Parties desire to reflect herein their agreement for the provision of certain services. The Parties have also entered into a Forming Party Agreement Regarding System Operating Procedures dealing with the performance of certain functions in operation of the system and a Facilities Operation and Maintenance Agreement ("Facilities O & M Agreement") pursuant to which the Parties have arranged for the provision of Operation and Maintenance Services upon commencement of operations of ATCLLC. WHEREAS, the Parties desire to provide in this Agreement for the provision by Utility Contractor of the services needed on Day One for ATCLLC to provide uninterrupted, reliable, cost effective transmission service. The Parties further desire to commit in this agreement to a cooperative approach to the necessary analysis, coordinated planning, construction, and other measures necessary to meet ATCLLC's needs for a transition from functional control to full control of all aspects of the Transmission System, while accommodating the need of Utility Contractor to plan, supervise and conduct its continuing distribution operations after Day One. NOW, THEREFORE, in consideration of the promises and mutual covenants contained herein, the Parties hereby agree as follows: ARTICLE 1 DEFINITIONS AND INTERPRETATION 1.1 Definitions, Generally Unless defined in Section 1.2 of this Agreement, the definition of each defined term used in this Agreement shall be the same as the definition for that term set forth in the OATT, the Operating Agreement of American Transmission Company, LLC, or the Asset Contribution Agreement between the Parties. 1.2 Special Definitions The following defined terms used in this Agreement shall be defined as set forth below: 1.2.1 Administrative Services "Administrative Services" shall mean those categories and subcategories of Services described in Sections 8.3, 8.5, 8.6, 8.7, 8.8, and 8.9 of this Agreement. 1.2.2 Budget "Budget" shall mean the budget to be prepared by Utility Contractor pursuant to Section 6.3 hereof. 1.2.3 Day One "Day One" shall mean the date on which ATCLLC commences operations, and has the same meaning as the term Operations Date as that term is used in the Operation and Maintenance Agreement between the Parties. 1.2.4 Day 181 "Day 181" shall mean 180 calendar days after Day One. 1.2.5 Good Utility Practice "Good Utility Practice" shall mean any of the practices, methods and acts engaged in or approved by a significant portion of the electric utility industry during the relevant time period, or any of the practices, methods and acts which, in the exercise of reasonable judgment in light of the facts known at the time the decision was made, could have been expected to accomplish the desired result at a reasonable cost consistent with good business practices, reliability, safety and expedition. Good Utility Practice is not intended to be limited to the optimum practice, method or act to the exclusion of all others, but rather is intended to include acceptable practices, methods, or acts generally accepted in the region. 1.2.6 Key Personnel "Key Personnel" shall mean individuals employed by the Utility Contractor in the positions of managers and supervisors and who are designated as the individuals directly responsible for supervising or managing work to be performed or services to be provided under this Agreement. 1.2.7 Party "Party" shall mean either Utility Contractor or ATCLLC. 1.2.8 Parties "Parties" shall mean both Utility Contractor and ATCLLC. 1.2.9 Service Schedules "Service Schedules" shall mean the schedules described in Section 4.4 of this Agreement. 1.2.10 Services "Services" shall mean any combination of the categories and/or sub-categories identified in Article 8 of this Agreement that are provided pursuant to this Agreement or any of the Service Schedules between the Parties. 1.2.11 System Control Services "System Control Services" shall mean those categories and subcategories of Services described in Sections 8.2 and 8.4 of this Agreement. 1.2.12 Transmission Facilities "Transmission Facilities" shall mean the facilities for the transmission of electric energy and ancillary services transferred to ATCLLC by Utility Contractor pursuant to, and identified in, the Asset Contribution Agreement between ATCLLC and WEPCO, dated December 15, 2000, and new facilities constructed by ATCLLC for its Transmission System which ATCLLC and Utility Contractor have agreed will be Transmission Facilities for purposes hereof. 1.2.13 Transmission System "Transmission System" shall mean the system of facilities for the transmission of electric energy and ancillary services owned or controlled by ATCLLC and which are covered by the ATCLLC OATT. ARTICLE 2 TERM 2.1 Term of Agreement Subject to Article 3, this Agreement shall be effective from Day One and shall continue in effect as modified or supplemented by the Service Schedules. This Agreement terminates on the date that the last Service Schedule is terminated or when - in the absence of Service Schedules - the Agreement is terminated under the notice provision set forth in Section 4.4. 2.2 Extension This Agreement may be extended upon the mutual agreement of the Parties, subject to renegotiation (at the option of either Party) of the terms of this Agreement. ARTICLE 3 REQUIRED REGULATORY APPROVALS The effectiveness of this Agreement is hereby expressly conditioned upon the receipt by Utility Contractor and ATCLLC of all permits, regulatory authorizations and regulatory approvals that shall be required by the Parties to enter into and perform their obligations under this Agreement in a form acceptable in the reasonable judgment of the Party affected thereby. ARTICLE 4 GENERAL PROVISIONS REGARDING SERVICES TO BE PROVIDED BY UTILITY CONTRACTOR 4.1 Services on Day One Except to the extent that the Parties agree otherwise and reflect in the Service Schedules contemplated in Section 4.4 below, each of the Services described in detail in Article 8 of this Agreement other than those excluded by ATCLLC pursuant to Section 4.2 and listed on Schedule 4.2 shall be provided to ATCLLC pursuant to this Agreement by Utility Contractor commencing on Day One. Utility Contractor shall continue to provide such Services until either the termination of the Services pursuant to Section 4.4(d), or the date a Service Schedule sets for termination of Services covered by that Service Schedule. Termination of Services under a Service Schedule shall be in accordance with the termination provisions in such Service Schedule. When a Service Schedule terminates, the Agreement terminates as to the Service covered by that Service Schedule. 4.2 Exclusions of Services on Day One (a) Administrative Services. At least 30 days prior to Day One, after consultation with Utility Contractor, ATCLLC shall identify in writing to Utility Contractor each of the Administrative Services that will not be provided by Utility Contractor on Day One. This list shall be attached as Schedule 4.2 to this Agreement. (b) System Control Services. At least 45 days prior to Day One, after consultation with Utility Contractor, ATCLLC shall identify in writing to Utility Contractor those System Control Services which ATCLLC intends and is able to reliably and effectively provide for itself or through a third party consistent with the requirements of the Forming Party Agreement Regarding System Operating Procedures. No later than 15 days prior to Day One, after consultation with ATCLLC, Utility Contractor shall notify ATCLLC in writing whether it agrees that ATCLLC is capable of providing the identified Services consistent with the requirements of the Forming Party Agreement Regarding System Operating Procedures. Such agreement from Utility Contractor shall not be unreasonably withheld or delayed. 4.3 Exclusion of Services After Day 181 Not later than 60 days after Day One, after consultation with Utility Contractor, ATCLLC shall identify in writing which of the Administrative Services it will no longer take from Utility Contractor after Day 181. At this time, ATCLLC shall also identify which of the System Control Services ATCLLC intends to no longer take from Utility Contractor after Day 181 and which ATC intends and is able to reliably and effectively provide after Day 181 for itself or through a third party consistent with the requirements of the Forming Party Agreement Regarding System Operating Procedures. Not later than 90 days after Day One, after consultation with ACTLLC, Utility Contractor shall notify ATCLLC in writing whether it agrees that ATCLLC is capable of providing the identified Services consistent with the requirements of the Forming Party Agreement Regarding System Operating Procedures. Such agreement from Utility Contractor shall not be unreasonably withheld or delayed. ATCLLC's identification of Services under this subsection shall satisfy the Termination notice requirements in Section 4.4(d) as to those Services. 4.4 Development of Service Schedules From and after Day One, the Parties shall, using the process set forth below, work in good faith to develop mutually acceptable Service Schedules for the continuation, reduction or termination of each of the categories of Services described in Article 8 by Utility Contractor and which ATCLLC is taking under this Agreement. That arrangement shall be reflected in one or more of the Service Schedules contemplated in this Article 4.4 and in Article 8. The Parties shall employ the following procedure for developing the Service Schedules: (a) Information and Analysis. As soon as practicable before Day One, Utility Contractor shall provide to ATCLLC sufficient reasonably available information on its staffing and supervision of the Services described in Article 8, a description of all systems employed in performing the Services, and information on plans for staffing and operation of its distribution business to the extent such plans impact its ability to continue to provide the Services described in Article 8. ATCLLC shall provide comparable information regarding its plans and requirements and its analysis of the process for modification and coordination of systems data transfers, software requirements, and like matters. (b) ATCLLC Proposal of Service Schedules. At least 30 days prior to Day 181, on the basis of information exchanged pursuant to Section 4.4(a), ATCLLC shall, for each of the Services it is receiving on Day 181, do one of the following: (i) propose Service Schedules for Utility Contractor's continued provision of some or all such Services after Day 181; (ii) If ATCLLC has been unable to complete the analysis contemplated in Section 4.4(a), it nevertheless may notify Utility Contractor that ATCLLC desires to enter into a Service Schedule for the Service and provide Utility Contractor with a proposal for the Service Schedule no later than 60 days after Day 181. (iii) For an Administrative Service, provide written notice of termination pursuant to Section 4.4(d); (iv) For a System Control Service which ATCLLC is able to provide reliably and effectively for itself or through third parties consistent with the Forming Party Agreement Regarding System Operating Procedures, provide written notice of termination pursuant to Section 4.4(d); or No later than 60 days after Day 181, after consultation with ATCLLC, Utility Contractor shall notify ATCLLC in writing whether it agrees that ATCLLC is capable of providing the System Control Services noticed for termination under (iv) above consistent with the requirements of the Forming Party Agreement Regarding System Operating Procedures. Such agreement from Utility Contractor shall not be unreasonably withheld or delayed. ATCLLC's identification of Services under this subsection shall satisfy the termination notice requirements in Section 4.4(d) as to those Services. (c) Negotiation. Promptly after delivery of proposals for Service Schedules, the Parties shall meet to consider them and shall negotiate in good faith toward adoption of mutually agreeable Service Schedules on the matters addressed in the proposal. (d) Utility Contractor's Termination of Services. If and to the extent that the Parties do not agree on Service Schedules or Agreements covering a matter or matters included in an ATCLLC proposal within 120 days after the delivery of the proposal, or if ATCLLC fails to make a proposal in accordance with this Section 4.4, Utility Contractor, may, as to any Service on which there has been no Service Schedule, notify ATCLLC that after a specified date it will no longer provide the Service. At this time, ATCLLC may, for any Administrative Service for which there has been no Service Schedule, notify Utility Contractor that after a specified date ATCLLC will no longer procure the services from Utility Contractor. (e) ATCLLC Termination of Services. If and to the extent that the Parties do not agree on Service Schedules or Agreements covering a matter or matters included in an ATCLLC proposal within 120 days after the delivery of the proposal, ATCLLC may notify Utility Contractor that after a specified date it will no longer procure any Administrative Service or any System Control Service that ATCLLC intends and is able to reliably and effectively provide for itself or through third parties consistent with the Forming Party Agreement Regarding System Operating Procedures. No later than 30 days after notification under this Section regarding a System Control Service, Utility Contractor shall, after consultation with ATCLLC, notify ATCLLC in writing whether it agrees that ATCLLC is capable of providing the System Control Service consistent with the requirements of the Forming Party Agreement Regarding System Operating Procedures. Such agreement from Utility Contractor shall not be unreasonably withheld or delayed. ATCLLC's identification of Services under this subsection shall satisfy the termination notice requirements in this Section 4.4(d) as to those Services. (f) Sufficiency of Notice. The date specified by Utility Contractor in any notice of termination under Section 4.4(d) or (e) hereof shall be such as will afford ATCLLC a reasonable opportunity to obtain the service from a third party or Parties. The date specified by ATCLLC in any notice of termination under Section 4.4(d) or (e) hereof shall be such as will afford Utility Contractor a reasonable opportunity to redeploy the resources Utility Contractor used to perform any Service discontinued pursuant to this Section. A period of six months shall in any event be deemed a reasonable period for purposes of such notice by either Party. ARTICLE 5 RESPONSIBILITIES OF UTILITY CONTRACTOR 5.1 Scope of Services Utility Contractor shall perform, or cause to be performed, the Services in accordance with the terms, conditions and procedures specified in this Agreement. 5.2 Performance Standards (a) In meeting their responsibilities hereunder, the Parties shall at all times follow Good Utility Practice, the requirements of this Agreement, and all directives and specifications of ATCLLC or its duly authorized designees. (b) Utility Contractor shall provide Services in accordance with ATCLLC direction as necessary to give effect to ATCLLC policies, plans and business decisions, but Utility Contractor shall be responsible for determining the manner of performance and for supervision of the work specified by ATCLLC or its authorized designee. Should Utility Contractors object to following the specifications or directives of ATCLLC on any basis, Utility Contractor shall nonetheless follow such directives and specifications. Where, in the judgment of Utility Contractor, following the specifications or directives of ATCLLC would pose a substantial risk to property or human safety, Utility Contractor shall, where time permits, notify a representative of ATCLLC and seek relief from the specification or directive. Where Utility Contractor does not have time to notify an ATCLLC representative and obtain relief, the Utility Contractor may take reasonable steps to mitigate damage to property or risk to human safety. In any non-emergency case in which Utility Contractor objects to following the directives or specifications of ATCLLC, it shall so notify ATCLLC in writing or confirm oral notice in writing by Key Personnel. Utility Contractor may, where it has given the notice required in this Section, subsequently address its objections under the dispute resolution process set forth in Article 11 of this Agreement. (c) Except as directed by ATCLLC, Utility Contractor shall make good faith efforts to maintain the pre-Agreement quality and timeliness of its performance of the Services in accordance with Good Utility Practice, including priority of work and methods. (d) The Utility Contractor acknowledges that ACTLLC has ultimate responsibility for the Transmission System and has the obligation to manage the Services. To that end, ATCLLC has the right, upon proper notice to Utility Contractor, to secure non- construction Services by adding ATCLLC personnel and/or contractors into project teams and determining the functions such ATCLLC personnel or contractors shall perform. If ATCLLC elects to add personnel or contractors, it shall make appropriate reassignment of responsibility so as to minimize any interference with the management and supervision by Utility Contractor of the work for which Utility Contractor is responsible and ATCLLC shall pay the cost incurred by Utility Contractor resulting from measures reasonably required of it to redeploy resources in response to such ATCLLC direction. (e) Utility Contractor shall not be deemed to have failed to adequately perform a specific Service under this Agreement where (i) Utility Contractor has performed the specific Service in accordance with Good Utility Practice, or any directive, specification, procedure or policy of ATCLLC; or (ii) where its ability to adequately perform a specific Service was constrained by an ATCLLC-imposed budgetary limitation on that specific Service to which limitation Utility Contractor objected in writing, or if orally, confirmed in writing by Key Personnel, at such time as the effect of the budget restraint became known. (f) If ATCLLC discovers that any Services performed fail to conform to this Agreement, Utility Contractor shall, at ATCLLC's option, promptly correct or perform such non-conforming Services so that they conform to this Agreement. Without limiting the generality of this provision, Utility Contractor shall provide the labor, supervision, equipment, tools and materials necessary to effect such remedy. Utility Contractor shall perform its remedial obligations hereunder in a timely manner consistent with ATCLLC's reasonable requirements. If Utility Contractor repeatedly fails, or is unable, to remedy such non-conforming Services during a period consistent with ATCLLC's reasonable requirements, ATCLLC may undertake to remedy the non-conforming Services and in such case Utility Contractor shall reimburse ATCLLC for any reasonable costs incurred thereby. This subsection shall be in addition to any other remedies provided by this Agreement or available at law or equity. (g) In its performance of the Services, Utility Contractor shall undertake its efforts in a fashion which does not unduly favor or discriminate against any distribution system. 5.3 Utility Contractor Resources (a) Utility Contractor shall maintain and manage the organizational and physical resources needed to perform the Services. (b) Utility Contractor shall maintain an organization and personnel, including contractors, capable of performing the Services in a cost effective manner. Qualifications for Key Personnel assigned to manage the performance of Services shall be available to ATCLLC at any reasonable time. ATCLLC shall have the right to interview the Key Personnel proposed by Utility Contractor to manage the performance of Services and to reject such Key Personnel for Good Cause at any time during the term of this Agreement. The Services shall be managed by such parts of Utility Contractor's organization as may be necessary to assure the cost-effective performance of the Services in accordance with this Agreement or any Service Schedule. (c) Utility Contractor shall maintain and manage the equipment, spare parts, materials and supplies needed to perform the Services in a cost-effective manner. 5.4 Budget (a) As soon as possible before Day One, and thereafter at least 60 days before the beginning of each quarter throughout the term of this Agreement, Utility Contractor shall submit in writing to ATCLLC, for ATCLLC's review and approval, a budget for the 6 (six) months beginning with such quarter, and for each month in such 6 (six) month period, setting forth Utility Contractor's proposed expenditures for the Services not excluded by ATCLLC under Sections 4.2 or 4.3, or terminated pursuant to Sections 4.4. (b) The Budget shall include the information, and follow the format used by Utility Contractor in its budget associated with its existing plans for the initial 6 (six) month period with such modifications as ATCLLC may reasonably require or as may be required to coordinate the Budget with procedures for cost accounting and billing set forth in this agreement. The Budget shall describe in adequate detail the estimated expenditures associated with each of the Services ATCLLC is taking under this Agreement for the Budget period. (c) ATCLLC shall review, consult with Utility Contractor about work force and materials availability, and revise, as it deems appropriate, approve and return the Budget to Utility Contractor within 30 days of its submittal. During the term of the Budget ATCLLC may at each quarterly review, in response to suggestions made by Utility Contractor or on its own initiative, elect to revise the Budget to meet the then current needs of ATCLLC subject to any limitation set forth in Article 4 on ATCLLC's discretion to exclude or terminate Utility Contractor's provision of Services. If ATCLLC does elect to revise the Budget, ATCLLC shall communicate the changes made to Utility Contractor in writing, in a timely fashion; provided, however, that any costs incurred by Utility Contractor in reasonable anticipation of performing Services under the budget as previously approved by ATCLLC, and which could not reasonably have been mitigated by Utility Contractor, shall be borne by ATCLLC. 5.5 Reports (a) As part of the Services, Utility Contractor shall prepare and submit the reports described in this Section. Such reports and data shall be provided to ATCLLC without restriction, and are subject to the confidentiality provisions of Section 18.7 of this Agreement. (b) As part of the Services, Utility Contractor shall prepare, on a quarterly basis within 30 days after the end of the quarter, a summary of the Services provided during the previous quarter. Such report shall include a summary of all material deficiencies in the systems, records, or assets that are the subject of the Services, and Utility Contractor's proposals for correcting such deficiencies. (c) As part of the Services, Utility Contractor shall prepare, on a monthly basis within 30 days after the end of the month, a budget variance report setting forth actual and budgeted expenditures for the period and year to date, together with Utility Contractor's explanation of any variance. (d) Utility Contractor shall prepare such other reports, and provide such other information, as ATCLLC may request regarding the Services. 5.6 Training (a) As part of the Services, Utility Contractor shall train its employees and agents appropriately to carry out its responsibilities to ATCLLC under this Agreement. At ATCLLC's expense, Utility Contractor shall provide ATCLLC training materials and course materials used by Utility Contractor in any training programs conducted pursuant to this Section. (b) As part of the Services, Utility Contractor shall provide training sessions to familiarize ATCLLC employees or agents with the Services provided under this Agreement. Utility Contractor shall provide such training sessions at such times and locations, to such audiences, and with such content, as may be appropriate and requested by ATCLLC. 5.7 Contracts with Third Parties ATCLLC acknowledges that Utility Contractor may have entered into contracts with third parties for some or all of the categories of Services described in Article 8. ATCLLC further acknowledges that Utility Contractor may wish in the future to enter into contracts with third parties to perform some of the Services. All such third-party contracts shall be subject to the following provisions. (a) Existing contracts. As soon as practicable before the Operations Date, Utility Contractor shall provide ATCLLC, for its review, subject to the confidentiality provisions of Section 18.7, copies of all third-party contracts then currently in effect and under which the amounts payable are expected to exceed $50,000 annually for Services covered by this Agreement. During the term of this Agreement, Utility Contractor shall not modify any of these third-party contracts without the prior written approval of ATCLLC, which approval ATCLLC shall not unreasonably withhold or delay. (b) Future Contracts. Utility Contractor may enter into contracts with qualified third parties for the provision of Services, provided that Utility Contractor obtains ATCLLC's prior written approval of all proposed contractors and contracts for contracts under which the amounts payable are reasonably expected to exceed $50,000 annually, which approval ATCLLC shall not unreasonably withhold or delay. (c) Utility Contractor may not split any contracts to avoid the $50,000 approval threshold. (d) Contract Invoices. Utility Contractor shall pass all invoices it receives for third-party contract work used to provide Services directly through to ATCLLC, with no additional charges or markups, except as may be authorized under this Agreement. ARTICLE 6 COMPENSATION OF UTILITY CONTRACTOR 6.1 Compensation. As full and complete compensation for Utility Contractor's provision of the Services, ATCLLC shall pay Utility Contractor all of the reasonable direct and indirect costs incurred by Utility Contractor in performing such Services. Direct and indirect costs include but are not limited to labor costs with loadings which shall include labor costs for tasks such as recording costs and invoicing ATCLLC and the cost of materials and supplies; return of and on the cost of property employed; and payments to contractors, plus all overheads directly associated with any and all of these costs. 6.2 Methods of Calculating the Compensation Due. The methods and procedures for determining, recording, allocating, billing and auditing of Utility Contractor's costs is set forth in Schedule 1 hereto. 6.3 Compensation for Inventory and Storage. (a) Upon cancellation or expiration of this Agreement, ATCLLC agrees to purchase the inventory of materials and supplies under the provisions of Section 3.8 of the Asset Contribution Agreement. (b) ATCLLC shall have the option to lease from Utility Contractor, or rent at cost, the warehouse space and other facilities and systems used by Utility Contractor to maintain and manage such materials and supplies. 6.4 Billing and Payment. Utility Contractor shall provide invoices to ATCLLC each month, setting forth the costs incurred by Utility Contractor during the previous month to provide the Services, and identifying costs accrued for Services by the Utility Contractor during the previous month, which accrued costs will be invoiced at a later date. ATCLLC shall pay each invoice within 15 days of receipt from Utility Contractor. Billing and payment disputes that cannot be resolved in the normal course of business shall be resolved using the dispute resolution procedures described in Article 8. 6.5 Audits and Adjustments. Utility Contractor shall maintain and retain for such time as ATCLLC may reasonably direct, but not for longer than six years, the books and other records needed to document the costs Utility Contractor incurs as a result of fulfilling its obligations under this Agreement. Utility Contractor shall respond to any reasonable request from ATCLLC for information related to a cost charged by Utility Contractor to ATCLLC by providing ATCLLC the information reasonably needed by ATCLLC to verify the cost in question. From time to time, ATCLLC may conduct, and Utility Contractor shall permit ATCLLC to conduct or cause to be conducted by its authorized agents, at ATCLLC's expense, audits of the books and records of Utility Contractor that relate to the Services provided under this Agreement. Such audits will be conducted at reasonable, mutually agreed upon times, provided that ATCLLC must contest invoices within one year of receipt and must complete any audit relating to a contested invoice within a reasonable period of time thereafter. Any adjustment identified to be made as a result of an audit and that is payable under Section 5 of Schedule 1 shall be made to the billing statement next issued following the conclusion of the audit. ARTICLE 7 RESPONSIBILITIES OF ATCLLC During the term of this Agreement, ATCLLC shall, at its cost and expense, and in a manner consistent with Good Utility Practice, perform or provide the following at the times required to support the provision of the Services: (a) ATCLLC shall provide Utility Contractor with all necessary access to the Transmission Facilities and ATCLLC properties upon which such Transmission Facilities are located, and records. (b) ATCLLC shall, with the concurrence and assistance of Utility Contractor as may be necessary or appropriate, procure and maintain in effect all permits, certificates and licenses needed by the owner of the Transmission Facilities for provision of the Services. (c) ATCLLC shall review, revise and approve Budgets, as described in Section 5.3 hereof. All Budgets shall be reasonable and consistent with Good Utility Practice, subject to any limitation in Article 4 on ATCLLC's discretion to exclude or terminate Services, and any approvals of Budgets shall not be unreasonably withheld or delayed. (d) ATCLLC shall provide training sessions to familiarize Utility Contractor personnel with the processes and procedures relating to the Services that are developed by ATCLLC during the term of this Agreement for application by ATCLLC throughout the ATCLLC Transmission System. (e) ATCLLC shall provide Utility Contractor with such other information, oversight and direction as is needed by Utility Contractor to fulfill Utility Contractor's responsibilities under this Agreement. ARTICLE 8 SERVICES AVAILABLE TO ATCLLC DURING TRANSITION 8.1 General The categories and subcategories of Services available to ATCLLC under this Agreement include those described in Sections 8.2 to 8.10 below as modified from time to time in accordance with Service Schedules adopted pursuant to this Agreement. 8.2 Control Center Services (a) Control Center Services comprise: (i) Necessary functions for operation of control center facilities and for transmission related system use. (ii) Provision and supervision of control center system operator labor. (iii) Dispatch of field operations personnel. (iv) Necessary functions for restoration/blackstart operations. (b) Transitional Considerations for Development of Service Schedule. (i) Any further terms and conditions governing the provision of Control Center Services shall be set forth in Service Schedule 8.2. (ii) The Parties contemplate that work on preparation of Service Schedule 8.2 will have high priority. 8.3 Real Estate (a) Real Estate Services comprise: (i) Performance of real estate records management functions for the Transmission Facilities, including real estate and but excluding all financial accounting records and reports. (ii) Negotiating, drafting, executing, and maintaining records relating to easements, licenses, permits, etc., for the Transmission Facilities. (iii) Monitoring and taking appropriate action regarding encroachments by or upon Transmission Facilities real estate interests of ATCLLC. (iv) Real estate negotiation, acquisition, and condemnation functions for the Transmission Facilities. (v) Property owner relations functions. (vi) Lease management, billing and collection. (vii) Subject to any other agreement between the Parties, Joint Facility management (CATV), telephone, fiber, etc.) including billing, collection, pole attachment documentation, and make-ready process. (vii) Federal, State and local highway/road use, relocation, reimbursement. (ix) Support for Public Service Commission of Wisconsin proceedings on Certificates of Public Convenience and Necessity and Certificates of Authority, including data gathering, and public meetings. (x) Route planning, siting and selection. (b) Transitional Considerations for Development of Service Schedule. (i) The Utility Contractor shall maintain real estate records as requested by ATCLLC in Utility Contractor's integrated records system. (ii) The nature and pace of the transition will depend on decisions by ATCLLC as to the records system it desires, development of data transfer processes, protocols and software, systems compatibility, and other matters which the Parties have only begun to analyze. 8.4 Project Services (a) Project Services comprise functions necessary for the design, functioning and construction of capital projects, including engineering, protection and control design, procurement and construction. (b) Transitional Considerations for Development of Service Schedule. (i) Service Schedule 8.4 shall list the projects or type of projects for which Utility Contractor has a right or obligation to provide Project Services. (ii) Service Schedule 8.4 or schedules thereto shall specify the specific level of Project Services required for each project. (iii) Service Schedule 8.4 shall specify the period of time during which Utility Contractor will provide Project Services. 8.5 Environmental Services Environmental Services comprise: (a) Functions necessary to support preparation of environmental assessments and species management and for all technical services related to environmental matters not included in the Operations and Maintenance Agreement between the Parties. (b) Agency relations functions with federal, state or local governmental or regulatory bodies having environmental responsibilities. 8.6 Supply Chain Services Supply Chain Services comprise: (a) Sourcing and logistic functions. (b) Inventory and warehousing functions. (c) Contract requirements and legal requirements functions subject to ATCLLC approval. 8.7 Engineering Services Engineering Services comprise: (a) Functions supporting ATCLLC's standards development. (b) Records management functions including as built drawing, CAD services, Storage, reproduction and mapping/GIS. (c) Performance of special studies, as requested. 8.8 Planning Services Planning Services comprise: (a) Functions related to special studies requested by ATCLLC. (b) Functions related to running special software as requested by ATCLLC. 8.9 Miscellaneous Services Miscellaneous Services comprise: (a) Provision of management and professional staff to work under ATCLLC direction as supplemental ATCLLC staff to the extent available from Utility Contractor. (b) Provision of accounting services and associated records management. (c) To the extent not included as part of other Services, Legacy Software Services, including: (i) Functions relating to transferring or obtaining licenses for ATCLLC for software as required. (ii) Functions relating to enhancements to software developed by Utility Contractor in-house as approved by ATCLLC. (iii) Functions relating to management of data base provided for ATCLLC use. (d) Such other Services as may be agreed from time to time. ARTICLE 9 SPECIALIZED CONSTRUCTION SERVICES The Parties recognize that the Utility Contractor may have employees who perform specialized construction services. For the purposes of this Article, specialized construction services mean non-supervisory direct construction work on capital projects. Notwithstanding any provisions to the contrary in this Agreement, ATCLLC agrees to utilize all of the specialized construction services employee time available to ATCLLC for a period of three years and, after three years, to offer to employees who are necessary for these functions employment under conditions which meet the requirements of Wis. Stat. 196.807(3). ARTICLE 10 OWNERSHIP For the purpose of this Agreement: (a) Rights in ATCLLC Independently Developed Technology: Any Technology prepared, developed or acquired solely by the ATCLLC shall be owned solely by ATCLLC (hereinafter, "ATCLLC Owned Technology"). Except as provided for herein, nothing herein shall imply a license in the ATCLLC Owned Technology. (b) Rights In Utility Contractor Independently Developed Technology: Any Technology prepared, developed or acquired solely by Utility Contractor shall be owned solely by Utility Contractor (hereinafter, "Utility Contractor Owned Technology"). Except as provided for herein, nothing herein shall imply a license in the Utility Contractor Owned Technology. (c) Rights In Jointly Developed Technology: Any Technology jointly prepared, developed or acquired by the ATCLLC and Utility Contractor, shall be jointly owned (hereinafter, "Joint Technology"). The ownership rights granted under this paragraph shall be limited to the Joint Technology only and, except as provided for herein, does not grant any rights, license or otherwise in either the ATCLLC Owned Technology or Utility Contractor Owned Technology that may be necessary to utilize the Joint Technology. (d) Grant Of Rights In ATCLLC Owned Technology: To the extent any ATCLLC Owned Technology is needed by a Utility Contractor in furtherance of performing the Services or any aspect thereof, the ATCLLC hereby grants to the Utility Contractor a full and complete, world-wide, royalty-free, fully paid-up, non-exclusive license to use, without the right to grant sublicenses, the ATCLLC Owned Technology. (e) Grant Of Rights In Background Utility Contractor Technology: To the extent that background or underlying technology of Utility Contractor used by Utility Contractor in its performance of Services hereunder is required by ATCLLC to make use of its ATCLLC Owned Technology or the Joint Technology, the Utility Contractor hereby grants to the ATCLLC a full and complete, world-wide, royalty-free, fully paid-up, non-exclusive license to use the background or underlying technology of the Utility Contractor for the term of this Agreement and afterwards but only for the purposes and to the extent during the term of this Agreement without the right to grant sublicenses. (f) Shared Rights in Joint Technology: The ATCLLC and the Utility Contractor shall retain perpetually full and complete rights to (e.g., make, use or sell) the Joint Technology. Neither party may assign or otherwise transfer any rights in the Joint Technology, by license or otherwise, to the detriment of the other. ARTICLE 11 DISPUTE RESOLUTION Any dispute arising out of or in connection with this Agreement shall be resolved according to the dispute resolution procedures set forth in Schedule B of the Operating Agreement of American Transmission ATCLLC. ARTICLE 12 FORCE MAJEURE (a) Neither Party shall be responsible or liable, or deemed in breach hereof, to the extent the performance of its respective obligations hereunder is prevented or delayed due solely to circumstances beyond the reasonable control and without the fault or negligence of the party experiencing such impediment to performance, including but not limited to acts of God; war; riots; strikes, lockouts or other labor disturbances; labor or material shortages; actions or failures to act on the part of governmental authorities preventing or delaying performance; inability despite due diligence to obtain required licenses; or fire (such causes hereinafter called "Force Majeure"). (b) The Party experiencing the Force Majeure shall exercise due diligence in endeavoring to overcome any Force Majeure impediment to its performance, but settlement of its labor disturbances shall be entirely within its discretion. The Party experiencing the Force Majeure shall promptly give written notification to the other Party. This written notification shall include a full and complete explanation of the Force Majeure and its cause, the status of the Force Majeure, and the actions such Party is taking and proposes to take to overcome the Force Majeure. ATCLLC shall have the right, upon written notice to Utility Contractor, to obtain alternate contractors to perform the Services during any event of Force Majeure that prevents or delays Utility Contractor's performance hereunder if the Force Majeure has or, in ATCLLC's reasonable judgment, threatens to have an adverse effect on ATCLLC's ability to conduct its operations. ARTICLE 13 LIMITATION OF LIABILITY With respect to claims by and between the Parties under this Agreement, the measure of damages at law or in equity in any action or proceeding shall be limited to direct actual damages only, such direct actual damages shall be the sole and exclusive remedy and all other remedies or damages at law or in equity are waived and neither Party shall be liable in statute, contract, in tort (including negligence), strict liability, warranty or under any other legal theory or otherwise to the other Party, its agents, representatives, and/or assigns, for any special, incidental, punitive, exemplary or consequential loss or damage whatsoever, including, but not limited to, loss of profits or revenue on work not performed, for loss of use of or under- utilization of the other Party's facilities, loss of use of revenues, attorneys' fees, litigation costs, or loss of anticipated profits, resulting from either Party's performance or non-performance of an obligation imposed on it by this Agreement, without regard to the cause or causes related thereto, including the negligence of any party. The Parties expressly acknowledge and agree that this limitation shall apply to any claims for indemnification under Article 14 of this Agreement. The provisions of this section shall survive the termination or expiration of this Agreement. ARTICLE 14 INDEMNITY (a) Utility Contractor's Indemnification. Subject to the provisions of Article 13, Utility Contractor shall indemnify, hold harmless and defend ATCLLC, and its officers, directors, employees, affiliates, managers, members, trustees, shareholders, agents, contractors, subcontractors, affiliates' employees, invitees and successors, from and against any and all claims, demands, suits, obligations, payments, liabilities, costs, losses, judgments, damages and expenses (including the reasonable costs and expenses of any and all actions, suits, proceedings, assessments, judgments, settlements, and compromises relating thereto, reasonable attorneys' and expert fees and reasonable disbursements in connection therewith) for damage to property, injury to any person or entity, or death of any individual, including ATCLLC's employees and affiliates' employees, Utility Contractor's employees, or any other third parties, to the extent caused wholly or in part by any act or omission, negligent or otherwise, by Utility Contractor or its officers, directors, employees, agents, contractors, subcontractors and invitees arising out of or connected with Utility Contractor's performance or breach of this Agreement, or the exercise by Utility Contractor of its rights hereunder; provided, however, that the provisions of this Section shall not apply if any such injury, death or damage is held to have been caused by the negligence or intentional wrongdoing of ATCLLC, its agents or employees. In furtherance of the foregoing indemnification and not by way of limitation thereof, Utility Contractor hereby waives any defense it otherwise might have under applicable workers' compensation laws. (b) ATCLLC's Indemnification. Subject to the provisions of Article 13, ATCLLC shall indemnify, hold harmless and defend Utility Contractor, its parent and its officers, directors, employees, affiliates, managers, members, trustees, shareholders, agents, contractors, subcontractors, invitees and successors, from and against any and all claims, demands, suits, obligations, payments, liabilities, costs, losses, judgments, damages and expenses (including the reasonable costs and expenses of any and all actions, suits, proceedings, assessments, judgments, settlements, and compromises relating thereto, reasonable attorneys' and expert fees and reasonable disbursements in connection therewith) for damage to property, injury to any person or entity, or death of any individual, including Utility Contractor's employees and affiliates' employees, ATCLLC's employees, or any other third parties, to the extent caused wholly or in part by any act or omission, negligent or otherwise, by ATCLLC or its officers, directors, employees, agents, contractors, subcontractors and invitees arising out of or connected with ATCLLC's performance or breach of this Agreement, or the exercise by ATCLLC of its rights hereunder; provided, however, that the provisions of this Section shall not apply if any such injury, death or damage is held to have been caused by the negligence or intentional wrongdoing of Utility Contractor, its agents or employees. In furtherance of the foregoing indemnification and not by way of limitation thereof, ATCLLC hereby waives any defense it otherwise might have under applicable workers' compensation laws. (c) Indemnification Procedures. Any Party seeking indemnification under this Agreement shall give the other Party notice of such claim as soon as practicable but in any event on or before the thirtieth (30th) day after the Party's actual knowledge of such claim or action. Such notice shall describe the claim in reasonable detail, and shall indicate the amount (estimated if necessary) of the claim that has been, or may be sustained by, said Party. To the extent that the other Party will have been actually and materially prejudiced as a result of the failure to provide such notice, such notice will be a condition precedent to any liability of the other Party under the provisions for indemnification contained in this Agreement. Neither Party may settle or compromise any claim for which indemnification is sought under this Agreement without the prior consent of the other Party; provided, however, said consent shall not be unreasonably withheld or delayed. Each Party's indemnification obligation will survive expiration, cancellation or early termination of this Agreement. ARTICLE 15 INSURANCE (a) The Parties agree to maintain, at their own cost and expense, general and automobile liability, worker's compensation, and other forms of insurance relating to their operations for the life of this Agreement in the manner, and amounts, at a minimum, as set forth below, (i) Workers' Compensation Insurance in accordance with all applicable state, federal and maritime law, including Employer's Liability Insurance in the amount of $1,000,000 per accident; (ii) Commercial General Liability Insurance, including Contractual Liability Coverage for liabilities assumed under this Agreement, and Personal Injury Coverage in the amount of $25,000,000 per occurrence for bodily injury and property damage. Utility Contractor's policy shall include ATCLLC and ATC Management Inc. as additional insureds and ATCLLC's policy shall include Utility Contractor as an additional insured. (iii) Automobile Liability Insurance for all owned, non-owned, and hired vehicles with bodily injury limits of no less than $5,000,000 per person, $5,000,000 per accident; and property damage limits of no less than $5,000,000 per accident. Utility Contractor's policy shall include ATCLLC and ATC Management Inc. as additional insureds and ATCLLC's policy shall include Utility Contractor as an additional insured. (iv) Where a Party has more than $100 million in assets it may, at its option, self insure all or part of the insurances required in this Article; provided, however, the self-insuring Party agrees that all other provisions of this Article, including, but not limited to, waiver of subrogation, waiver of rights of recourse, and additional insured status, which provide or are intended to provide protection for the other Party and its affiliated and associated companies under this Agreement, shall remain enforceable. A Party's election to self-insure shall not impair, limit, or in any manner result in a reduction of rights and/or benefits otherwise available to the other Party and its affiliated and associated companies through formal insurance policies and endorsements as specified in the above parts of this Article. The self-insuring Party agrees that all amounts of self-insurance, retentions and/or deductibles are the responsibility of and shall be borne by the self-insuring Party. (b) Within fifteen (15) days of the Effective Date, and each anniversary of the Effective Date, during the term of this Agreement, (including any extensions), each Party shall provide to the other Party, properly executed and current certificates of insurance with respect to all insurance policies required to be maintained by such Party under this Agreement. Certificates of insurance shall provide the following information: (i) Name of insurance company, policy number and expiration date; (ii) The coverage required and the limits on each, including the amount of deductibles or self-insured retentions, which shall be for the account of the Party maintaining such policy; (iii) A statement indicating that the other Party shall receive at least thirty (30) days prior written notice of cancellation or expiration of a policy, or reduction of liability limits with respect to a policy; and (iv) A statement identifying and indicating that additional insureds have been named as required by this Agreement. (c) At a Party's request, in addition to the foregoing certifications, the other Party shall deliver to the first Party a copy of applicable sections of each insurance policy. (d) Each Party shall have the right to inspect the original policies of insurance applicable to this Agreement at the other Party's place of business during regular business hours. (e) If any insurance is written on a "claims made" basis, the respective Party shall maintain the coverage for a minimum of seven years after the termination of this Agreement. (f) To the extent permitted by the insurer and commercially reasonable, each Party shall obtain waivers of subrogation in favor of the other Party from any insurer providing coverage that is required to be maintained under this Article 15, except for the coverage required under Section 15(a)(i). A Party shall not be required to obtain a waiver of subrogation if the other Party is not able to obtain a waiver of subrogation from its insurance carrier. ARTICLE 16 SUCCESSORS AND ASSIGNS This Agreement and each and every covenant, term and condition hereof, shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, executors, administrators, successors and permitted assigns. Utility Contractor shall not assign its rights or obligations hereunder without express written approval of ACTLLC, except it may assign its rights or obligations to a purchaser (or an affiliate) who will own all or substantially all of Utility Contractor's distribution assets or equity interests and who shall then be bound by all of the provisions of this Agreement. ATCLLC shall not assign its rights or obligations hereunder without express written approval of Utility Contractor, except it may assign its rights and obligations to a purchaser (or an affiliate) who will own all or substantially all of ATCLLC's transmission assets and who shall then be bound by all of the provisions of this Agreement. ARTICLE 17 NOTICE (a) All certificates or notices required hereunder shall be given in writing and addressed or delivered to the representative(s) specified in this Agreement. Notices shall be deemed received (i) upon delivery, when personally delivered; (ii) upon receipt, when sent via registered or certified mail; (iii) the next business day, when sent via overnight courier; and (iv) upon transmittal, when sent via facsimile. Copies of all general correspondence regarding this Agreement shall also be sent to these representative(s). (b) Notices submitted hereunder shall be directed to the following individuals: Notices to Utility Contractor: Attn: Thomas H. Fehring Corporate Secretary Wisconsin Electric Power Company 231 West Michigan Street P.O. Box 2046 Milwaukee, WI 53201-2046 Notices to ATCLLC: Attn: Walter Woelfle Vice President, Legal and Secretary American Transmission Company, LLC N16 W23217 Stone Ridge Drive P.O. Box 47 Waukesha, WI 53187-0047 All other communications relating to this Agreement should be submitted to: Harry L. Terhune Vice President - Operations American Transmission Company, LLC N16 W23217 Stone Ridge Drive P.O. Box 47 Waukesha, WI 53187-0047 (c) ATCLLC or Utility Contractor may change their respective representative(s) designated to receive notice hereunder by written notice to the other Party. All correspondence and transmittals between the parties shall be executed pursuant to coordination procedures that shall be developed by the parties. ARTICLE 18 MISCELLANEOUS 18.1 Compliance with Laws Throughout the term of this Agreement, each Party shall perform its obligations hereunder in compliance with all present and future federal, state and local statutes, ordinances, rules and regulations, including, but not limited to those pertaining to human safety, protection of property, non-discrimination, and protection of the environment. 18.2 Entire Agreement This Agreement, together with any Service Schedules, Exhibits, and Schedules attached hereto, is the entire understanding of the Parties regarding the subject matter hereof, and supersedes all prior oral or written discussions, negotiations and agreements the Parties may have had with respect to the subject matter hereof. 18.3 Counterparts This Agreement may be executed in any number of counterparts, and each counterpart shall have the same force and effect as the original instrument. 18.4 Amendment No amendment, modification or waiver of any term hereof shall be effective unless set forth in a writing signed by both ATCLLC and Utility Contractor. 18.5 Survival All warranties, remedial obligations, indemnities and confidentiality rights and obligations provided for herein shall survive the cancellation, expiration or termination hereof. 18.6 Independent Contractor Utility Contractor at all times shall be deemed to be an independent contractor and none of its employees or the employees of its contractors shall be considered to be employees of ATCLLC during the term of this Agreement. Utility Contractor shall have no authority to act on behalf of ATCLLC or bind ATCLLC in any manner except as expressly set forth in this Agreement. The Parties acknowledge that neither this Agreement nor any of its provisions are intended to create any partnership or joint venture between the Parties. 18.7 Confidentiality (a) "Confidential Information", as used in this Section 18.7, shall mean all information or documentation disclosed or made available by either Party to the other, including but not limited to correspondence between the Parties, business plans, financial information, policies and procedures, computer programs, reports and analyses, or other information which a Party in good faith designates as "Trade Secrets" as that term is defined in Wis. Stat. 134.90(1)(c). (b) In consideration of the disclosure by one Party of Confidential Information to the other Party, the Parties agree that each of them shall undertake in good faith to accomplish the following additional actions with respect thereto: (i) to use the Confidential information for the sole purpose of fulfilling the obligations of the Parties pursuant to this Agreement; (ii) to safeguard and hold in strict confidence all Confidential Information, limiting disclosure of Confidential Information to employees, contractors or agents who have a need to know; (iii) to protect Confidential Information from disclosure to anyone not a party to this Agreement without the prior approval of the disclosing Party; and (iv) upon the request of the disclosing Party and in any event upon cancellation or expiration of this Agreement, to return all Confidential Information, or to certify that such Confidential Information has been destroyed. (c) The restrictions of this Section do not apply to any information which is already known by the receiving party, possessed by a third party prior to disclosure, acquired from anyone not a party to this Agreement without restriction, or which is publicly available. (d) Each Party retains all right, title and interest in and to any Confidential Information disclosed by the party hereunder. (e) In the event that either Party is required by applicable law to disclose any Confidential Information of the other Party, such party shall promptly notify the other Party of such requirement and cooperate with the other Party to protect the Confidential Information from any disclosure not required by law. (f) The obligations of this Section shall survive for a period of 3 years following any expiration or cancellation of this Agreement. 18.8 Standards of Conduct If the performance of this Agreement requires ATCLLC to disclose information about the Transmission System to Utility Contractor, the dissemination of which by Utility Contractor would have been subject to FERC's Standards of Conduct requirements, 18 C.F.R. Part 37, prior to the transfer of the Transmission Facilities, such information shall not be disclosed by Utility Contractor or ATCLLC to any persons that would not have been entitled to receive such information prior to such transfer. 18.9 No Implied Waivers The failure of a Party to insist upon or enforce strict performance of any of the provisions of this Agreement shall not be construed as a waiver or relinquishment to any extent of such Party's right to assist or rely upon any such provisions, rights and remedies in that or any other instance; rather, the same shall be and remain in full force and effect. 18.10 No Third-Party Beneficiaries This Agreement is intended to be solely for the benefit of ATCLLC and Utility Contractor and their successors and permitted assigns and is not intended to and shall not confer any rights or benefits on any third party (other than successors and permitted assigns) not a signatory hereto. 18.11 Severability In the event that any provision of this Agreement is deemed as a matter of law to be unenforceable or null and void, such unenforceable or void portion of such provision shall be deemed severable from this Agreement unless the removal of the unenforceable provision materially alters the obligations of either Party hereunder. Even if there is a material alteration in the remainder of the Agreement, the Agreement shall continue in full force and effect as if such provision was not contained herein., but the Parties shall negotiate in good faith new provisions in relation to the deleted provision that will to the extent practicable restore the benefit of the bargain contained in such provision, and that are consistent with Good Utility Practice. 18.12 Governing Law This Agreement shall be governed by and construed in accordance with the laws of the State of Wisconsin, with the exception of any choice of laws provisions. 18.13 Interpretation. If there is any inconsistency between this Agreement and the Operating Agreement of ATCLLC or the Asset Contribution Agreement, that other agreement shall prevail to the extent of the inconsistency. 18.14 Headings The headings set forth herein are inserted for convenience and shall have no effect on the interpretation or construction of this Agreement. 18.15 Modification of Agreement by Service Schedules Service Schedules are intended to specify further terms and conditions of Utility Contractor's provision of Services. Such agreements may modify or supercede the terms and conditions of this Agreement only to the extent that the Parties obtain any required PSCW approval under Wis. Stat. 196.52. 18.16 Affiliate Status of Parties For purposes of Articles 13, 14, and 15, neither Party shall be treated as an affiliate of the other. IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed by their duly authorized representatives, effective as of the date first written above. AMERICAN TRANSMISSION COMPANY, LLC BY /s/Harry Terhune ------------------------- TITLE Vice President Operations WISCONSIN ELECTRIC POWER COMPANY BY /s/Charles Cole ----------------------- TITLE Vice President - Distribution Operations SCHEDULE 1 (ATTACHED TO TRANSITIONAL SERVICES AGREEMENT) 1. General Description. Utility Contractor shall invoice to ATCLLC the actual costs of providing Services for the previous month. The invoice will also identify any costs for Services accrued during the previous month by Utility Contractor with the understanding that these accrued costs will be invoiced for payment at a later date (as they are paid by Utility Contractor). Utility Contractor's invoices to ATCLLC will be in a consistent format and provided monthly together with the Utility Contractor's detailed billing reports supporting the invoice. 2. Methods of Calculating Costs to Be Paid by ATCLLC. (a) Direct Costs. Costs incurred by the Utility Contractor that are solely and directly attributable to the Services shall be directly billed to ATCLLC in full. These directly billed costs shall be recorded as incurred by Utility Contractor to internal bookkeeping accounts designated as transmission billing accounts. The direct cost for materials and supplies shall be their book value. b) Indirect Costs. Costs incurred by the Utility Contractor for activities that support the entire company or which support the Services plus other divisions of the company will be identified and a portion of these costs will be allocated to ATCLLC. Utility Contractor will identify and aggregate all of these costs into recognizable categories and, in cooperation with ATCLLC, shall develop methods for calculating the portion of each cost category that should be allocated to ATCLLC. The method for determining the share allocable to ATCLLC may vary from cost category to cost category. A document describing the methods for allocating categories of costs to ATCLLC, including any allocation formulas, will be attached to this Schedule 1. (c) Labor Loadings. Loadings that account for pension and employee benefit costs, payroll taxes and costs, and the expense of non-productive time (paid leaves plus, if not a separate cost category, training) shall be added to any direct or indirect labor costs billed to ATCLLC. A document describing the methods Utility Contractor will use to calculate and apply labor loadings will be attached to this Schedule 1. (d) Extraordinary Costs. Subject to Article 5 of the Agreement, costs incurred by Utility Contractor that are unusual, special or extraordinary may require unique treatment. Utility Contractor will notify ATCLLC in advance of incurring such costs whenever possible and as soon as possible after incursion of the cost if advance notice is not possible, but in any event prior to sending ATCLLC an invoice that includes the cost. (e) Utility Contractor's System for Recording Its Costs. Utility Contractor will notify ATCLLC in advance of any changes to its system of recording and tracking its costs that will significantly impact the calculation or appearance of invoices to ATCLLC. Utility Contractor will, at ATCLLC's expense, provide for the transfer to ATCLLC of electronic billing data in a form usable by ATCLLC's electronic systems for recording and tracking costs of the Services. 3. True-ups and Reviews. Amounts that have been billed based on estimates will be adjusted to the Utility Contractor's actual costs after actual costs are known and ATCLLC will pay more or receive a credit, as appropriate, for any true-up. Such true-ups may be performed at any time, but at least one annual true-up will be performed by the Utility Contractor for the previous year before the expiration of the first quarter of the following year. In addition, formulas, procedures and allocations may be revised by either Party if the Party proposing the revision can demonstrate to the other Party that new facts have come to light or that it has discovered or developed an improved formula, procedure or method for accurately determining or invoicing actual costs. Any such revision to a formula, procedure or allocation will not be applied retroactively. Amounts previously billed in error, however, will be corrected in accordance with Section 4 below; error here includes the long or short-term misapplication of an approved formula. Where refunds or additional amounts are owed due to a true-up or correction, the refund or additional amount shall appear on the next monthly billing following identification of the adjustment. 4. Contested Statements. ATCLLC may contest, and Utility Contractor may correct, any particular items included in any Utility Contractor invoice within one year of ATCLLC's receipt of the invoice. This provision does not limit ATCLLC's right to audit Utility Contractor under Section 6.5 of the Agreement. 5. Adjustments. Utility Contractor shall promptly reimburse or credit ATCLLC for any charges that should not have been billed to ATCLLC as provided in the Agreement and which either Party identifies within 12 months of ATCLLC's receipt of the invoice containing such charges. Such reimbursements shall be set forth in the appropriate section of the invoice. Utility Contractor shall bill ATCLLC for any charges that were not billed but should have been billed to ATCLLC as provided in this Agreement, and which either Party identifies within 12 months of the month that the charges were incurred. The amount of any adjustment under this Section shall reflect interest from the date such amounts were due at the published prime interest rate of Firstar Bank on the last business day of the preceding month. EX-21.1 9 0009.txt WEC SUBSIDIARIES OF REGISTRANT
Exhibit 21.1 WISCONSIN ENERGY CORPORATION SUBSIDIARIES AS OF DECEMBER 31, 2000 The following table includes the subsidiaries of Wisconsin Energy Corporation, a diversified holding company incorporated in the state of Wisconsin, as well as the percent of ownership, as of December 31, 2000: State of Incorporation Percent Subsidiary (a) or Organization Ownership -------------- --------------- --------- Wisconsin Electric Power Company Wisconsin 100% ATC Management Inc. Wisconsin 33.33% American Transmission Company LLC WIsconsin 25% WICOR, Inc. Wisconsin 100% Wisconsin Gas Company Wisconsin 100% WICOR Energy Services Company Wisconsin 100% Fieldtech, Inc. Wisconsin 100% WICOR Industries, Inc. Wisconsin 100% Sta-Rite Industries, Inc. Wisconsin 100% Hypro Corporation Delaware 100% SHURflo Pump Manufacturing Co. California 100% Guardian Pipeline, L.L.C. Delaware 33.33% Edison Sault Electric Company Michigan 100% Wisvest Corporation Wisconsin 100% Androscoggin Energy LLC Delaware 49.5% CET Two, LLC Delaware 90% Calumet Energy Team, LLC Delaware 100% Griffin Energy Marketing, LLC Wisconsin 100% Kaztex Energy Management, Inc. Wisconsin 49.5% Wisvest-Connecticut, LLC Connecticut 100% Minergy Wisconsin 100% GlassPack, LLC Wisconsin 100% Minergy Detroit, LLC Wisconsin 100% Minergy Neenah, LLC Wisconsin 100% Wispark LLC Wisconsin 100% Northern Tree Service, Inc. Michigan 100% Wisconsin Energy Capital Corporation Wisconsin 100% WEC Nuclear Corporation Wisconsin 100% Nuclear Management Company, LLC Wisconsin 25% Witech Corporation Wisconsin 100% WEC International, Inc. Delaware 100% Badger Service Company Wisconsin 100% WEC Capital Trust I Delaware 100% (a) Omits the names of certain subsidiaries, which if considered in the aggregate as a single subsidiary, would not constitute a "significant subsidiary" as of December 31, 2000.
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