10-K

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, 2006

Commission File Number	Registrant; State of Incorporation Address; and Telephone Number	IRS Employer Identification No.
001-09057	WISCONSIN ENERGY CORPORATION (A Wisconsin Corporation) 231 West Michigan Street P.O. Box 1331 Milwaukee, WI 53201 (414) 221-2345	39-1391525

Securities Registered Pursuant to Section 12(b) of the Act:

Title of Each Class	Name of Each Exchange on Which Registered
Common Stock, $.01 Par Value	New York Stock Exchange

Securities Registered Pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  x    No  ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.    Yes  ¨    No  x

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 (Section 229.405 of this Chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in the definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  x    Accelerated filer  ¨    Non-accelerated filer  ¨.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The aggregate market value of the common stock of Wisconsin Energy Corporation held by non-affiliates was approximately $4.7 billion based upon the reported closing price of such securities as of June 30, 2006.

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date (January 31, 2007):

Common Stock, $.01 Par Value, 116,951,992 shares outstanding

Documents Incorporated by Reference

Portions of Wisconsin Energy Corporation’s definitive Proxy Statement on Schedule 14A for its Annual Meeting of Stockholders, to be held on May 3, 2007, are incorporated by reference into Part III hereof.

2006 Form 10-K

WISCONSIN ENERGY CORPORATION

FORM 10-K REPORT FOR THE YEAR ENDED DECEMBER 31, 2006

TABLE OF CONTENTS

Item		Page
	PART I
1.	Business	9
1A.	Risk Factors	27
1B.	Unresolved Staff Comments	32
2.	Properties	33
3.	Legal Proceedings	34
4.	Submission of Matters to a Vote of Security Holders	36
	Executive Officers of the Registrant	36
	PART II
5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	37
6.	Selected Financial Data	39
7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	40
7A.	Quantitative and Qualitative Disclosures About Market Risk	81
8.	Financial Statements and Supplementary Data	82
9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	125
9A.	Controls and Procedures	125
9B.	Other Information	126
	PART III
10.	Directors, Executive Officers and Corporate Governance of the Registrant	126
11.	Executive Compensation	126
12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	127
13.	Certain Relationships and Related Transactions, and Director Independence	127
14.	Principal Accountant Fees and Services	127
	PART IV
15.	Exhibits and Financial Statement Schedules	128

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2006 Form 10-K

TABLE OF CONTENTS – (Cont’d)

Item		Page
	Schedule I - Condensed Parent Company Financial Statements	129
	Schedule II - Valuation and Qualifying Accounts	135
	Signatures	136
	Exhibit Index	E-1

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2006 Form 10-K

DEFINITION OF ABBREVIATIONS AND INDUSTRY TERMS

The abbreviations and terms set forth below are used throughout this report and have the meanings assigned to them below.

Wisconsin Energy Subsidiaries and Affiliates

Primary Subsidiaries
Edison Sault	Edison Sault Electric Company
We Power	W.E. Power, LLC
Wisconsin Electric	Wisconsin Electric Power Company
Wisconsin Gas	Wisconsin Gas LLC
Significant Assets
OC 1	Oak Creek expansion Unit 1
OC 2	Oak Creek expansion Unit 2
Point Beach	Point Beach Nuclear Plant
PWGS	Port Washington Generating Station
PWGS 1	Port Washington Generating Station Unit 1
PWGS 2	Port Washington Generating Station Unit 2
Other Affiliates
ATC	American Transmission Company LLC
Calumet	Calumet Energy
Guardian	Guardian Pipeline L.L.C.
Minergy	Minergy Corp.
Minergy Neenah	Minergy Neenah, LLC
NMC	Nuclear Management Company, LLC
WECC	Wisconsin Energy Capital Corporation
WICOR	Wicor, Inc.
Wispark	Wispark LLC
Wisvest	Wisvest Corporation
Federal and State Regulatory Agencies
DOA	Wisconsin Department of Administration
DOE	United States Department of Energy
EPA	United States Environmental Protection Agency
FAA	Federal Aviation Administration
FERC	Federal Energy Regulatory Commission
IRS	Internal Revenue Service
MPSC	Michigan Public Service Commission
NRC	United States Nuclear Regulatory Commission
PSCW	Public Service Commission of Wisconsin
SEC	Securities and Exchange Commission
WDNR	Wisconsin Department of Natural Resources
Environmental Terms
Act 141	2005 Wisconsin Act 141
Air Permit	Air Pollution Control Construction Permit
BART	Best Available Retrofit Technology
BTA	Best Technology Available
CAIR	Clean Air Interstate Rule
CAMR	Clean Air Mercury Rule
CAVR	Clean Air Visibility Rule
CERCLA	Comprehensive Environmental Response, Compensation and Liability Act

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2006 Form 10-K

DEFINITION OF ABBREVIATIONS AND INDUSTRY TERMS

The abbreviations and terms set forth below are used throughout this report and have the meanings assigned to them below.

CO2	Carbon Dioxide
CWA	Clean Water Act
NAAQS	National Ambient Air Quality Standard
NOx	Nitrogen Oxide
PM 2.5	Fine Particulate Matter
RI/FS	Remedial Investigation and Feasibility Study
SO2	Sulfur Dioxide
WPDES	Wisconsin Pollution Discharge Elimination System
Other Terms and Abbreviations
Compensation Committee	Compensation Committee of the Board of Directors
CPCN	Certificate of Public Convenience and Necessity
D&D Fund	Uranium Enrichment Decontamination and Decommissioning Fund
Energy Policy Act	Energy Policy Act of 2005
FPL	FPL Group, Inc.
FTRs	Financial Transmission Rights
GCRM	Gas Cost Recovery Mechanism
GDP	Gross Domestic Product
LLC	Limited Liability Company
LMP	Locational Marginal Price
LSEs	Load Serving Entities
MAIN	Mid-America Interconnected Network, Inc.
MISO	Midwest Independent Transmission System Operator, Inc.
MISO Midwest Market	MISO bid-based energy market
Moody’s	Moody’s Investor Service
NEIL	Nuclear Electric Insurance Limited
PJM	PJM Interconnection, L.L.C.
PTF	Power the Future
PUHCA 1935	Public Utility Holding Company Act of 1935, as amended
PUHCA 2005	Public Utility Holding Company Act of 2005
RTO	Regional Transmission Organizations
S&P	Standard & Poors Corporation
Yellowcake	Uranium Concentrate
Measurements
Btu	British thermal unit(s)
Dth	Dekatherm(s) (One Dth equals one million Btu)
kW	Kilowatt(s) (One kW equals one thousand watts)
kWh	Kilowatt-hour(s)
MW	Megawatt(s) (One MW equals one million watts)
MWh	Megawatt-hour(s)
Watt	A measure of power production or usage
Accounting Terms
AFUDC	Allowance for Funds Used During Construction
APB	Accounting Principles Board
ARO	Asset Retirement Obligation
CWIP	Construction Work in Progress
FASB	Financial Accounting Standards Board
FIN	FASB Interpretation

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2006 Form 10-K

DEFINITION OF ABBREVIATIONS AND INDUSTRY TERMS

The abbreviations and terms set forth below are used throughout this report and have the meanings assigned to them below.

FSP	FASB Staff Position
GAAP	Generally Accepted Accounting Principles
NOLs	Net Operating Loss Carryforwards
OPEB	Other Post-Retirement Employee Benefits
PCAOB	Public Company Accounting Oversight Board
SAB	Staff Accounting Bulletin
SFAS	Statement of Financial Accounting Standards
Accounting Pronouncements
FIN 46	Consolidation of Variable Interest Entities
FIN 46R	Consolidation of Variable Interest Entities (Revised 2003)
FIN 47	Accounting for Conditional Asset Retirement Obligations
FIN 48	Accounting for Uncertainty in Income Taxes
FSP SFAS 106-2	Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003
FSP FIN 46R-6	Determining the Variability to Be Considered in Applying FIN 46R
SAB 108	Process of Quantifying Financial Statement Misstatements
SFAS 34	Capitalization of Interest Cost
SFAS 71	Accounting for the Effects of Certain Types of Regulation
SFAS 87	Employers’ Accounting for Pensions
SFAS 88	Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits
SFAS 106	Employers’ Accounting for Postretirement Benefits Other Than Pensions
SFAS 109	Accounting for Income Taxes
SFAS 115	Accounting for Certain Investments in Debt and Equity Securities
SFAS 123	Accounting for Stock-Based Compensation
SFAS 123R	Share-Based Payment (Revised 2004)
SFAS 132R	Employers’ Disclosures about Pensions and Other Postretirement Benefits (Revised 2003)
SFAS 133	Accounting for Derivative Instruments and Hedging Activities
SFAS 142	Goodwill and Other Intangible Assets
SFAS 143	Accounting for Asset Retirement Obligations
SFAS 144	Accounting for the Impairment or Disposal of Long-Lived Assets
SFAS 148	Accounting for Stock-Based Compensation - Transition and Disclosure
SFAS 149	Amendment of SFAS 133 on Derivative Instruments and Hedging Activities
SFAS 157	Fair Value Measurements
SFAS 158	Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans

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2006 Form 10-K

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

Certain statements contained in this report and other documents or oral presentations are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based upon management’s current expectations and are subject to risks and uncertainties that could cause our actual results to differ materially from those contemplated in the statements. Readers are cautioned not to place undue reliance on these forward-looking statements. Forward-looking statements include, among other things, statements concerning management’s expectations and projections regarding completion of construction projects, regulatory matters, fuel costs, sources of electric energy supply, the proposed sale of Point Beach, coal and gas deliveries, remediation costs, environmental and other capital expenditures, liquidity and capital resources and other matters. In some cases, forward-looking statements may be identified by reference to a future period or periods or by the use of forward-looking terminology such as “anticipates,” “believes,” “estimates,” “expects,” “forecasts,” “intends,” “may,” “objectives,” “plans,” “possible,” “potential,” “projects” or similar terms or variations of these terms.

Actual results may differ materially from those set forth in forward-looking statements. In addition to the assumptions and other factors referred to specifically in connection with these statements, factors that could cause our actual results to differ materially from those contemplated in any forward-looking statements or otherwise affect our future results of operations and financial condition include, among others, the following:

• Factors affecting utility operations such as unusual weather conditions; catastrophic weather-related or terrorism-related damage; availability of electric generating facilities; unscheduled generation outages, or unplanned maintenance or repairs; unanticipated events causing scheduled generation outages to last longer than expected; unanticipated changes in fossil fuel, nuclear fuel, purchased power, coal supply, 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 or distribution system operation and/or administration initiatives; recovery of costs of previous investments made under traditional regulation; recovery of costs associated with adoption of changed accounting standards; required changes in facilities or operations to reduce the risks or impacts of potential terrorist activities; required approvals for new construction; changes in the United States Nuclear Regulatory Commission’s regulations related to Point Beach Nuclear Plant or a permanent repository for used nuclear fuel; changes in the regulations of the United States Environmental Protection Agency as well as the Wisconsin Department of Natural Resources, the Michigan Department of Natural Resources or the Michigan Department of Environmental Quality, including but not limited to regulations relating to the release of emissions from fossil-fueled power plants such as carbon dioxide, sulfur dioxide, nitrogen oxide, small particulates or mercury, water quality and lead paint; and regulations relating to the intake and discharge of water; the siting approval process for new generation and transmission facilities; recovery of costs associated with implementation of a bid-based energy market; or changes in the regulations from the Wisconsin Department of Natural Resources related to the siting approval process for new pipeline construction.

• The changing 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.

• Unanticipated operational and/or financial consequences related to implementation of the Midwest Independent Transmission System Operator, Inc. bid-based energy market that started in April 2005.

• Consolidation of the industry as a result of the combination and acquisition of utilities in the Midwest, nationally and globally as a result of the repeal of the Public Utility Holding Company Act of 1935 or otherwise.

• Factors related to the proposed sale of our Point Beach Nuclear Plant including receipt of the necessary approvals by various regulatory agencies, including the United States Nuclear Regulatory Commission, the Public Service Commission of Wisconsin, the Michigan Public Service Commission and the Federal Energy

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2006 Form 10-K

Regulatory Commission, for the transaction; and our ability to retain the assets for the benefit of customers in the non-qualified decommissioning trust.

• Factors which impede execution of our Power the Future strategy, including receipt of necessary state and federal regulatory approvals, timely and successful resolution of legal challenges, local opposition to siting of new generating facilities, construction risks, including the adverse interpretation or enforcement of permit conditions by the permitting agencies, and obtaining the investment capital from outside sources necessary to implement the strategy.

• Restrictions imposed by various financing arrangements and regulatory requirements on the ability of our subsidiaries to transfer funds to us 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.

• Factors affecting the availability or cost of capital such as: changes in interest rates and other general capital market conditions; our capitalization structure; market perceptions of the utility industry, us or any of our 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; changes in the Price-Anderson Act; changes in environmental laws and regulations; or changes in allocation of energy assistance, including state public benefits funds.

• Implementation of the Energy Policy Act of 2005 and the effect of state level proceedings and the development of regulations by federal and other agencies, including the Federal Energy Regulatory Commission.

• Authoritative generally accepted accounting principle or policy changes from such standard setting bodies as the Financial Accounting Standards Board, the Securities and Exchange Commission and the Public Company Accounting Oversight Board.

• Unanticipated technological developments that result in competitive disadvantages and create the potential for impairment of existing assets.

• Possible risks associated with non-utility operations and investments, 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; and risks associated with minority investments, where there is a limited ability to control the development, management or operation of the project.

• Legislative or regulatory restrictions or caps on non-utility acquisitions, investments or projects, including the State of Wisconsin’s public utility holding company law.

• Other business or investment considerations that may be disclosed from time to time in our Securities and Exchange Commission filings or in other publicly disseminated written documents.

We expressly disclaim any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

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2006 Form 10-K

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. We maintain our principal executive offices in Milwaukee, Wisconsin. Unless qualified by their context when used in this document, the terms Wisconsin Energy, the Company, our, us or we refer to the holding company and all of its subsidiaries.

We conduct our operations primarily in two operating segments: a utility energy segment and a non-utility energy segment. Our primary subsidiaries are Wisconsin Electric, Wisconsin Gas and We Power.

Utility Energy Segment: Our utility energy segment consists of: Wisconsin Electric, Wisconsin Gas and Edison Sault. We serve approximately 1,125,200 electric customers in Wisconsin and the Upper Peninsula of Michigan. We have approximately 1,041,400 gas customers in Wisconsin, 460 steam customers in metro Milwaukee, Wisconsin, and 3,000 water customers in suburban Milwaukee, Wisconsin. Wisconsin Electric and Wisconsin Gas operate under the trade name of “We Energies”.

Non-Utility Energy Segment: Our non-utility energy segment consists primarily of We Power. We Power was formed in 2001 to design, construct, own and lease to Wisconsin Electric the new generating capacity included in our PTF strategy. See Item 7 for more information on PTF.

Discontinued Operations: Effective September 27, 2006, we sold 100% of our membership interests in Minergy Neenah. Previously Minergy Neenah operations were included in Corporate and Other. We sold our Calumet facility, which was part of our non-utility energy segment, effective May 31, 2005. Effective July 31, 2004, we sold our manufacturing segment.

PTF Strategy: In September 2000, we announced our PTF strategy to improve the supply and reliability of electricity in Wisconsin. As part of our PTF strategy, we are: (1) investing in new natural gas-fired and coal-fired electric generating facilities, (2) upgrading Wisconsin Electric’s existing electric generating facilities and (3) investing in upgrades of our existing energy distribution system. Also, as part of this strategy, we announced and began implementing plans to divest non-core assets and operations in our non-utility energy segment and to reduce our real estate operations. Additional information concerning PTF may be found below under Non-Utility Energy Segment, as well as in Item 7.

For further financial information about our business segments, see Results of Operations in Item 7 and Note Q — Segment Reporting in the Notes to Consolidated Financial Statements in Item 8.

Our annual and periodical filings to the SEC are available, free of charge, through our Internet website www.wisconsinenergy.com. These documents are available as soon as reasonably practicable after such materials are filed (or furnished) with the SEC.

UTILITY ENERGY SEGMENT

ELECTRIC UTILITY OPERATIONS

Our electric utility operations consist of the electric operations of Wisconsin Electric and Edison Sault. Wisconsin Electric, which is the largest electric utility in the State of Wisconsin, generates and distributes electric energy in a territory in southeastern (including the metropolitan Milwaukee area), east central and northern Wisconsin and in the Upper Peninsula of Michigan. Edison Sault generates and distributes electric energy in a territory in the eastern Upper Peninsula of Michigan.

Effective April 1, 2005, Wisconsin Electric and Edison Sault began to participate in the MISO Midwest Market which changed how our generating units are dispatched and how we buy and sell power. For further information, see Factors Affecting Results, Liquidity and Capital Resources in Item 7.

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2006 Form 10-K

ITEM 1. BUSINESS - (Cont’d)

Electric Sales

Our electric energy sales to all classes of customers, excluding intercompany sales between Edison Sault and Wisconsin Electric, totaled approximately 31.9 million MWh during 2006 and approximately 32.5 million MWh during 2005. Edison Sault did not have any significant MWh sales during 2005 and 2006 to Wisconsin Electric. Approximately 0.4 million MWh sales of Wisconsin Electric during 2005 and 2006 were to Edison Sault. We had approximately 1,125,200 electric customers at December 31, 2006 and 1,115,300 electric customers at December 31, 2005.

Wisconsin Electric: Wisconsin Electric is authorized to provide retail electric service in designated territories in the State of Wisconsin, as established by indeterminate permits, CPCNs 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 within the MISO Midwest Market.

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 Sales Growth: We presently anticipate total retail and municipal electric kWh sales of our utility energy segment will grow at an annual rate of 1% to 1.5% over the next five years. This estimate excludes the mine contract (see Legal Matters under Factors Affecting Results, Liquidity and Capital Resources in Item 7), and assumes moderate growth in the economy of our electric utility service territories and normal weather. We also anticipate that our peak electric demand will grow at a rate of 1.5% to 2.0% over the next five years.

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 and machinery production, as well as to large retail chains. Edison Sault provides electric service to industrial accounts in the paper, crude oil pipeline and limestone quarry industries, as well as to several state and federal government facilities.

Our largest retail electric customers are two iron ore mines located in the Upper Peninsula of Michigan. Wisconsin Electric currently has special negotiated power-sales contracts with these mines that expire in December 2007. The combined electric energy sales to the two mines accounted for 6.2% and 7.1% of our total electric utility energy sales during 2006 and 2005, respectively. In 2005, the mines notified us that they were disputing certain billings and they have placed the disputed amounts in escrow. We have notified the mines that we believe that they have failed to comply with certain notification provisions related to annual production as specified within the contract. Arbitration hearings related to this matter are scheduled for August 2007. Although it is currently uncertain, we anticipate that we will provide power to the mines under the terms of one or more regulated tariffs to be approved by the MPSC beginning January 1, 2008. For further information, see Legal Matters under Factors Affecting Results, Liquidity and Capital Resources in Item 7.

Sales to Wholesale Customers: During 2006, Wisconsin Electric sold wholesale electric energy to two municipally owned systems, two rural cooperatives and one municipal joint action agency located in the states of Wisconsin and Michigan. Wholesale electric energy sales by Wisconsin Electric were also made to 34 other public utilities and power marketers throughout the region under rates approved by FERC. Edison Sault sold wholesale electric energy to one rural cooperative during 2006. Wholesale sales accounted for approximately 9.7% of our total electric energy sales and 5.1% of total electric operating revenues during 2006, compared with 8.8% of total electric energy sales and 4.9% of total electric operating revenues during 2005.

Electric System Reliability Matters: Electric energy sales are impacted by seasonal factors and varying weather conditions from year-to-year. As a summer peaking utility, we reached our all-time electric peak demand obligation of 6,505 MW on July 31, 2006. The summer period is the most relevant period for capacity planning purposes for us as a result of cooling load. Prior to 2006, Wisconsin Electric was a member of the MAIN reliability council, whose guidelines required a minimum 14% planning reserve margin for the short-term (up to one year ahead). Effective January 1, 2006, Wisconsin Electric became a member of ReliabilityFirst Corporation, a successor council encompassing most of the East Central Area Reliability Council and Mid-Atlantic Area Council and a portion of MAIN. ReliabilityFirst Corporation has not yet established guidelines in this area but members are expected to adhere to the guidelines of their predecessor councils until new guidelines are established. Wisconsin Electric must also adhere to PSCW guidelines requiring an 18% planning reserve margin and we expect to be in compliance with

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2006 Form 10-K

ITEM 1. BUSINESS - (Cont’d)

ReliabilityFirst Corporation guidelines when they are established. The MPSC has not established guidelines in this area.

We had adequate capacity to meet all of our firm electric load obligations during 2006 and expect to have adequate capacity to meet all of our firm obligations during 2007. For additional information, see Factors Affecting Results, Liquidity and Capital Resources in Item 7.

Electric Supply

The table below indicates our sources of electric energy supply as a percentage of sales, for the three years ended December 31, 2006, as well as an estimate for 2007. This information excludes any impact of the proposed sale of Point Beach.

	Estimate		Actual
	2007		2006		2005		2004
Coal	59.9	%	54.7	%	57.6	%	60.8	%
Nuclear	24.5	%	25.3	%	20.0	%	23.7	%
Hydroelectric	1.7	%	1.4	%	1.6	%	1.7	%
Natural gas	6.6	%	4.1	%	2.9	%	0.2	%
Net Generation	92.7	%	85.5	%	82.1	%	86.4	%
Purchased Power	7.3	%	14.5	%	17.9	%	13.6	%
Total	100.0	%	100.0	%	100.0	%	100.0	%

Our PTF strategy, which is discussed further in Item 7, includes the addition of 2,320 MW of generating capacity through 2010. Our PTF strategy includes two 545 MW natural gas units at an existing site in Port Washington, Wisconsin. The first unit, which has a current dependable capability of 575 MW, was placed into service in July 2005. The second unit is expected to be placed in service in 2008. We have begun construction of two 615 MW coal units (of which we will own approximately a 515 MW share of each unit) in Oak Creek, Wisconsin adjacent to the site of Wisconsin Electric’s existing Oak Creek Power Plant. We anticipate that the first coal unit will be placed in service in 2009, followed by the second unit in 2010.

We believe that our PTF strategy will allow us to better manage the mix of fuels used to generate electricity for our customers. We believe that it is in the best interests of our customers to provide a diverse fuel mix that is expected to maintain a stable, reliable and affordable energy supply in our service territory.

Our net generation, including PWGS 1, totaled 28.9 million MWh during 2006 compared with 28.2 million MWh during 2005 and 29.2 million MWh during 2004. Net generation as a percent of our total electric energy supply increased in 2006 due to the availability of the PWGS 1 for the entire year and one fewer scheduled nuclear outage in 2006 versus 2005.

Our average fuel and purchased power costs per MWh by fuel type for the years ended December 31 are shown below.

	2006		2005		2004
Coal	$	18.30	$	14.74	$	14.18
Nuclear	$	5.23	$	5.06	$	4.68
Natural Gas - Combined Cycle	$	66.30	$	84.77		—
Natural Gas - Peaking Units	$	136.24	$	125.67	$	95.16
Purchased Power	$	47.67	$	53.59	$	36.17

We use natural gas to fuel our peaking units that are designed to run for short durations. The PWGS natural gas-fired units that are part of the PTF strategy are combined cycle facilities that are designed to run for longer durations and at a lower operating cost as compared to a peaking unit.

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ITEM 1. BUSINESS - (Cont’d)

Historically, the fuel costs for coal and nuclear generation have been under long-term contracts, which helped with price stability. In 2006, we entered into new coal contracts to replace certain contracts that expired during 2006. Coal and associated transportation services have seen greater volatility in pricing than typically experienced in these markets due to increases in the domestic and world-wide demand for coal and the impacts of higher diesel costs in the last three years which has been reflected in the form of fuel surcharges on rail transportation. Coal price increases in 2006 were more pronounced due to the expiration of certain favorable long-term contracts at the end of 2005. Based on current market conditions, we expect our coal and transportation costs to continue to increase, but at a more modest rate than we experienced in 2006.

The costs for natural gas and purchased power, which is primarily natural gas-fired, are more volatile and have experienced significant increases since 2002. Natural gas costs have increased significantly because the supply of natural gas in recent years has not kept pace with the demand for natural gas. Beginning in late 2003 and concurrent with the approval of the PSCW, we established a hedging program to help manage our natural gas price risk. This hedging program is generally implemented on an 18 month forward-looking basis. Proceeds related to the natural gas hedging program are reflected in the 2006, 2005 and 2004 average costs of natural gas and purchased power shown above.

Our installed capacity by fuel type for the years ended December 31, is shown below.

	Dependable Capability in MW (a)
	2006	2005	2004
Coal	3,334	3,334	3,334
Nuclear	1,036	1,036	1,036
Natural Gas/Oil (b)	1,755	1,713	1,168
Hydro	84	84	84
Total	6,209	6,167	5,622

(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. The values were established by test and may change slightly from year to year.

(b) Approximately 50% of the Natural Gas/Oil units are dual fueled. The dual fuel facilities generally burn oil only if natural gas is not available due to constraints on the natural gas pipeline and/or at the local gas distribution company that delivers gas to the plants. The increase in 2006 primarily reflects a 30 MW increase in dependable capability at PWGS 1, which was added in 2005, from the 545 MW guaranteed capacity required under the lease.

Coal-Fired Generation

Coal Supply: We diversify the coal supply for our power plants by purchasing coal from mines in northern and central Appalachia as well as from various western mines. During 2007, 96.2% of our projected coal requirements of 12.2 million tons will be under contracts which are not tied to 2007 market pricing fluctuations. We do not anticipate any problem in procuring our remaining 2007 coal requirements. Our coal-fired generation consists of six operating plants with a dependable capability of approximately 3,334 MW.

Following is a summary of the annual tonnage amounts for our principal long-term coal contracts by the month and year in which the contracts expire.

Contract Expiration Date	Annual Tonnage
	(Thousands)
Dec. 2007	0.1
Dec. 2008	4,850.0
Dec. 2009	6,500.0

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2006 Form 10-K

ITEM 1. BUSINESS - (Cont’d)

Coal Deliveries: Approximately 85.7% of our 2007 coal requirements are expected to be delivered by Wisconsin Electric-owned or leased unit trains. The unit trains will transport coal for the Oak Creek, Pleasant Prairie and Edgewater Power Plants from Wyoming mines. Coal from Central Appalachia and Colorado mines is also transported via rail to Lake Erie or Lake Michigan transfer docks and delivered to the Valley and Milwaukee County Power Plants. 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 Appalachia 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: Wisconsin Electric owns two 518 MW electric generating units at Point Beach in Two Rivers, Wisconsin. The operating licenses for Point Beach will expire in October 2030 for Unit 1 and in March 2033 for Unit 2. In December 2006, we announced that Wisconsin Electric had reached a definitive agreement to sell Point Beach to an affiliate of FPL. Under the agreement, FPL will purchase the plant, its nuclear fuel and associated inventories for approximately $998 million, subject to closing price adjustments, and it will also assume the obligation to decommission the plant. We also entered into a long-term power purchase agreement to purchase all of the existing capacity and energy of the plant, which will become effective upon closing of the sale. This transaction is subject to regulatory review and approval and we anticipate it will close during the third quarter of 2007. If and when the sale is completed (or earlier if an interim operating agreement with FPL is activated by us), Point Beach’s operating licenses would transfer from NMC to FPL. Until the transaction is completed, 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 additional information concerning Point Beach, see Factors Affecting Results, Liquidity and Capital Resources — Nuclear Operations in Item 7 and Note I — Nuclear Operations in the Notes to Consolidated Financial Statements in Item 8.

Nuclear Management Company: NMC, owned by our affiliate, WEC Nuclear Corporation and the affiliates of two other unaffiliated investor-owned utilities in the region, operates Point Beach. NMC currently operates six nuclear generating units at four sites in the states of Wisconsin, Minnesota and Michigan with a total combined generating capacity of approximately 3,500 MW. One of the other two unaffiliated investor-owned utilities has announced the planned sale of their unit.

Nuclear Fuel Supply: Wisconsin Electric purchases Yellowcake and contracts for its conversion, enrichment and fabrication. There have been numerous events in the nuclear fuel supply market that have affected the price of uranium concentrates, conversion service and enrichment services. The price of the fuel commodities has risen steadily since the fourth quarter of 2003 and we anticipate that the price will continue to rise due to current demand exceeding current supply. NMC is continually monitoring the nuclear fuel commodities market to assess current and future commodity pricing and adjusting purchasing strategies to address changes in the market conditions. Wisconsin Electric maintains title to the nuclear fuel until fabricated fuel assemblies are delivered to Point Beach; it is then sold to and leased back from the Wisconsin Electric Fuel Trust. For further information concerning this nuclear fuel lease, see Note K — Long-Term Debt in the Notes to Consolidated Financial Statements in Item 8.

Uranium Requirements: Wisconsin Electric requires approximately 400,000 to 450,000 pounds of Yellowcake to refuel a generating unit at Point Beach. Point Beach has staggered 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, which supplies 100% of the annual requirements through 2009. Contract negotiations through NMC are currently underway that would supply approximately 60% of the Point Beach requirements from 2010 to 2016.

Conversion: Wisconsin Electric had conversion services supply from a share of an NMC fleet contract for conversion services and four spot purchase contracts to meet 100% of its conversion requirements for 2006. In

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ITEM 1. BUSINESS - (Cont’d)

2006, an additional NMC fleet contract for conversion services was signed to supply approximately 100% of the Point Beach requirements through 2010 and approximately 10% of the 2011 requirements.

Enrichment: Wisconsin Electric effectively has three contracts through NMC that provide for 100% of the required enrichment services for Point Beach through the year 2009 and approximately 70% of the enrichment services requirements through 2013.

Fabrication: Fabrication of fuel assemblies from enriched uranium for Point Beach is covered under a contract with Westinghouse Electric Company, LLC. The current contract for fabrication services is through 2010 for Unit 1 and 2013 for Unit 2.

Used Nuclear Fuel Storage & Disposal: For information concerning used nuclear fuel storage and disposal issues, see Factors Affecting Results, Liquidity and Capital Resources in Item 7.

Nuclear Decommissioning: Wisconsin Electric provides for costs associated with the eventual decommissioning of Point Beach through the use of external trust funds. Payments to these funds, together with investment results, brought the balance in the funds at December 31, 2006 to approximately $881.6 million. For additional information regarding decommissioning, including the impact of the proposed sale of Point Beach, see Factors Affecting Results, Liquidity and Capital Resources — Nuclear Operations in Item 7 and Note I — Nuclear Operations in the Notes to Consolidated Financial Statements in Item 8.

Nuclear Plant Insurance: For information regarding nuclear plant insurance, see Note I — Nuclear Operations in the Notes to Consolidated Financial Statements in Item 8.

Natural Gas-Fired Generation

Our natural gas-fired generation consists of five operating plants with a dependable capability of approximately 1,475 MW at December 31, 2006. In July 2005, we added PWGS 1, a natural gas-fired unit with a dependable capability of 575 MW. A second 545 MW unit at PWGS is expected to come on line in 2008.

We purchase natural gas for these plants on the spot market from gas marketers, utilities and producers and we arrange for transportation of the natural gas to our plants. We have firm and interruptible transportation, balancing and storage agreements intended to support the plants’ variable usage.

The PSCW has approved a program that allows us to hedge up to 75% of our estimated gas usage for electric generation in order to help manage our natural gas price risk. The costs of this program are included in our fuel and purchased power costs.

Oil-Fired Generation

Fuel oil is used for the combustion turbines at the Point Beach and Germantown Power Plants units 1-4. It is also used for boiler ignition and flame stabilization at the Presque Isle Power Plant. Our oil-fired generation has a dependable capability of approximately 280 MW at December 31, 2006. The natural gas facilities generally burn oil only if natural gas is not available due to constraints on the natural gas pipeline and/or at the local gas distribution company that delivers gas to the plants. Fuel oil requirements are purchased under agreements with suppliers.

Hydroelectric Generation

Wisconsin Electric: Wisconsin Electric’s hydroelectric generating system consists of thirteen operating plants with a total installed capacity of approximately 88 MW and a dependable capability of approximately 57 MW at December 31, 2006. Of these thirteen plants, twelve plants (86 MW of installed capacity) have long-term licenses from FERC. The thirteenth plant, with an installed generating capacity of approximately 2 MW, does not require a license.

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ITEM 1. BUSINESS - (Cont’d)

Edison Sault: Edison Sault’s primary source of generation is its hydroelectric generating plant located on the St. Mary’s River in Sault Ste. Marie, Michigan. The hydroelectric generating plant has a total dependable capability of approximately 27 MW. The water for this facility is leased under a contract with the United States Army 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 2025 by providing at least a five-year termination notice. No such notice can be given prior to December 31, 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.

Hydroelectric generation is also purchased by Edison Sault under contract from the United States Army Corps of Engineers’ hydroelectric generating plant located within the Soo Locks complex on the St. Marys River in Sault Ste. Marie, Michigan. This 17 MW contract has tenure to November 1, 2040 and cannot be terminated by the United States government prior to November 1, 2030.

Purchase Power Commitments

We enter into short and long-term purchase power commitments to meet a portion of our anticipated electric energy supply needs. The following table identifies our purchase power commitments at December 31, 2006 with unaffiliated parties for the next five years:

Year	MW Under Purchase Power Commitments
2007	1,148
2008	698
2009	580
2010	580
2011	550

The majority of these purchase power commitments are tolling arrangements whereby we are responsible for the procurement, delivery and cost of natural gas fuel related to specific units identified in the contracts. A small amount of these purchases are tied to the costs of natural gas.

We have entered into a long-term power purchase agreement with FPL that is contingent upon the sale of Point Beach. This agreement allows us to receive all the existing capacity and energy of the Point Beach units. We will have the unilateral option, subject to PSCW direction, to select a term for the power purchase agreement of either (i) an estimated 23 years for Unit 1 and 26 years for Unit 2, or (ii) 16 years for Unit 1 and 17 years for Unit 2. This agreement is subject to approval by various regulatory authorities.

Electric Transmission and Energy Markets

American Transmission Company: ATC owns, maintains, monitors and operates electric utility transmission in Wisconsin, Michigan and Illinois. ATC’s sole business is to provide reliable, economic electric transmission service to all customers in a fair and equitable manner. ATC 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. ATC is regulated by FERC for all rate terms and conditions of service and is a transmission-owning member of MISO. As of February 1, 2002, operational control of ATC’s transmission system was transferred to MISO, and Wisconsin Electric and Edison Sault are non-transmission owning members and customers of MISO.

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ITEM 1. BUSINESS - (Cont’d)

We owned approximately 29.4% and 33.5% of ATC as of December 31, 2006 and 2005. Our ownership has decreased from December 31, 2005 as other owners have invested additional equity in ATC related to specific, large construction projects subject to their contractual rights.

MISO: In connection with its status as a FERC approved RTO, MISO developed a bid-based energy market, the MISO Midwest Market, which was implemented on April 1, 2005. For further information on MISO and the MISO Midwest Market, see Factors Affecting Results, Liquidity and Capital Resources in Item 7.

Renewable Electric Energy

Our PTF strategy includes a commitment to significantly increase the amount of renewable energy generation we utilize. In addition, Wisconsin Electric has an “Energy For Tomorrow^®” renewable energy program to provide our customers the opportunity to purchase energy from renewable resources. In March 2006, Wisconsin enacted new public benefits legislation, Act 141. Act 141 changes the renewable energy requirements for utilities. Act 141 requires Wisconsin utilities to provide 2% more of their total retail energy from renewable resources than their current levels by 2010, and 6% more renewable energy than their current levels by 2015. Act 141 establishes a statewide goal that 10% of all electricity in Wisconsin be generated by renewable resources by December 31, 2015. For further information on Act 141 and current renewable projects, see Factors Affecting Results, Liquidity and Capital Resources — Utility Rates and Regulatory Matters - Renewables, Efficiency and Conservation and Utility Rates and Regulatory Matters - Wind Generation in Item 7.

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ITEM 1. BUSINESS - (Cont’d)

Electric Utility Operating Statistics

The following table shows certain electric utility operating statistics from 2002 to 2006 for electric operating revenues, MWh sales and customer data.

SELECTED CONSOLIDATED ELECTRIC UTILITY OPERATING DATA
Year Ended December 31	2006		2005		2004		2003		2002
Operating Revenues (Millions)
Residential	$	883.2	$	827.6	$	731.3	$	715.5	$	703.0
Small Commercial/Industrial		814.8		746.1		668.0		642.0		606.3
Large Commercial/Industrial		647.5		602.4		549.9		519.3		483.1
Other - Retail/Municipal		97.3		112.6		90.7		84.9		77.7
Resale - Utilities		51.2		21.3		24.6		24.0		18.1
Other Operating Revenues		35.4		39.7		34.5		27.9		22.6
Total Operating Revenues	$	2,529.4	$	2,349.7	$	2,099.0	$	2,013.6	$	1,910.8
MWh Sales (Thousands)
Residential		8,322.7		8,562.7		8,053.9		8,099.3		8,310.9
Small Commercial/Industrial		9,142.2		9,192.7		8,840.4		8,740.6		8,719.5
Large Commercial/Industrial		11,173.1		11,687.5		11,686.4		11,401.8		11,129.6
Other - Retail/Municipal		2,227.5		2,713.6		2,405.5		2,225.9		2,051.9
Resale - Utilities		1,025.7		313.7		662.2		715.8		650.7
Total Sales		31,891.2		32,470.2		31,648.4		31,183.4		30,862.6
Customers - End of Year (Thousands)
Residential		1,009.7		1,001.7		992.3		980.5		969.4
Small Commercial/Industrial		112.3		110.5		108.7		106.9		106.2
Large Commercial/Industrial		0.7		0.7		0.7		0.7		0.7
Other		2.5		2.4		2.4		2.4		2.4
Total Customers		1,125.2		1,115.3		1,104.1		1,090.5		1,078.7
Customers - Average (Thousands)		1,120.5		1,109.7		1,096.8		1,083.1		1,072.6
Degree Days (a)
Heating (6,663 Normal)		6,043		6,628		6,663		7,063		6,551
Cooling (716 Normal)		723		949		442		606		897

(a) As measured at Mitchell International Airport in Milwaukee, Wisconsin. Normal degree days are based upon a 20-year moving average.

GAS UTILITY OPERATIONS

Our gas utility operations consist of Wisconsin Gas and 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, CPCNs, 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 including the City of Milwaukee. Wisconsin Electric’s gas utility operates in three distinct service areas: west and south of the City of Milwaukee, the Appleton area and areas within Iron and Vilas Counties, Wisconsin.

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ITEM 1. BUSINESS - (Cont’d)

Gas Deliveries

Our gas utility business is highly seasonal due to the heating requirements of residential and commercial customers. Annual gas sales are also impacted by the variability of winter temperatures.

Total gas therms delivered, including customer-owned transported gas, were approximately 2,028.9 million therms during 2006, a 6.5% decrease compared with 2005. At December 31, 2006, we were transporting gas for approximately 1,400 customers who purchased gas directly from other suppliers. Transported gas accounted for approximately 42% of the total volumes delivered during 2006, 41% during 2005, and 37% during 2004. We had approximately 1,041,400 gas customers at December 31, 2006, an increase of approximately 1.1% since December 31, 2005.

Our maximum daily send-out during 2006 was 1,406,429 Dth on February 18, 2006. A Dth is equivalent to ten therms or one million Btu.

Sales to Large Gas Customers: We provide gas utility service to a diversified base of industrial customers who are largely within our electric service territory. Major industries served include the paper, food products and fabricated metal products industries. Fuel used for Wisconsin Electric’s electric energy supply represents our largest transportation customer.

Gas Deliveries Growth: We currently forecast total retail therm deliveries (excluding natural gas deliveries for generation) to stay flat over the five-year period ending December 31, 2011 as new customer additions are expected to be offset by a reduction in the average use per customer. This forecast reflects a current year normalized sales level and assumes moderate growth in the economy of our gas utility service territories and normal weather.

Competition

Competition in varying degrees exists between natural gas and other forms of energy available to consumers. Many of our large commercial and industrial customers are dual-fuel customers that are equipped to switch between natural gas and alternate fuels. We are allowed to offer lower-priced gas sales and transportation services to dual fuel customers. Under gas transportation agreements, customers purchase gas directly from gas marketers and arrange with interstate pipelines and us to have the gas transported to their facilities. We earn substantially the same margin (difference between revenue and cost of gas) whether we sell and transport gas to customers or only transport their gas.

Our ability to maintain our share of the industrial dual-fuel market (the market that is equipped to use gas or other fuels) depends on our success and the success of third-party gas marketers in obtaining long-term and short-term supplies of natural gas at competitive prices compared to other sources and 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. While the gas utility distribution function is expected to remain a highly regulated, monopoly function, the sales of the natural gas commodity and related services are expected to remain subject to competition from third parties. 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 we begin to face competition for the sale of gas to our smaller firm customers.

Gas Supply, Pipeline Capacity and Storage

We have been able to meet our contractual obligations with both our suppliers and our customers despite periods of severe cold and unseasonably warm weather.

Pipeline Capacity and Storage: The 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. We have contracted for long-term firm capacity from each of these areas. This strategy reflects management’s belief that overall supply

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ITEM 1. BUSINESS - (Cont’d)

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, we have also contracted for substantial underground storage capacity, primarily in Michigan. Storage capacity enables us to manage significant changes in daily demand and to optimize our overall gas supply and capacity costs. We generally inject gas into storage during the spring and summer months and withdraw it in the winter months. As a result, we 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 us to reduce our overall costs. In 2006, we entered into gas purchase contracts which allow us to reduce gas inventory while maintaining supply to meet daily and seasonal demands.

We also maintain storage in the Southeast production areas, as well as in our market area. This storage capacity is designed to deliver gas when other supplies cannot be delivered during extremely cold weather in the producing areas. We hold firm daily transportation and storage capacity entitlements from pipelines and other service providers under long-term contracts.

Term Gas Supply: We have contracts for firm supplies with terms in excess of 30 days with suppliers for gas acquired in the Joliet, Illinois market hub and in the three producing areas discussed above. The pricing of the term contracts is based upon first of the month indices. Combined with our storage capability, management believes that the volume of gas under contract is sufficient to meet our 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, like 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 GCRMs pursuant to which the companies have an opportunity to share in the cost savings. See Factors Affecting Results, Liquidity and Capital Resources — Utility Rates and Regulatory Matters in Item 7 for information on the GCRMs. During 2006, we continued our active participation in the capacity release market.

Spot Market Gas Supply: We expect to continue to make gas purchases in the 30-day spot market as price and other circumstances dictate. We have supply relationships with a number of sellers from whom we purchase spot gas.

Hedging Gas Supply Prices: We have PSCW approval to hedge (i) up to 45% of planned flowing gas supply using NYMEX based natural gas options, (ii) up to 15% of planned flowing gas supply using NYMEX based natural gas future contracts and (iii) up to 35% of planned storage withdrawals using NYMEX based natural gas options. Those approvals allow both Wisconsin Electric and Wisconsin Gas to pass 100% of the hedging costs (premiums and brokerage fees) and proceeds (gains and losses) through their respective purchase gas adjustment mechanisms. Hedge targets (volumes) are provided annually to the PSCW as part of each company’s five-year gas supply plan filing.

To the extent that opportunities develop and our physical supply operating plans will support them, we also have PSCW approval to utilize NYMEX based natural gas derivatives to capture favorable forward market price differentials. That approval provides for 100% of the related proceeds to accrue to the companies’ GCRMS.

Guardian Pipeline: Prior to April 2006, we had a one-third interest in Guardian. Guardian owns an interstate natural gas pipeline that runs from the Joliet, Illinois area to southeastern Wisconsin. In April 2006, we sold our one-third interest in Guardian to an unaffiliated entity. During 2006, Guardian announced a plan to extend their pipeline by approximately 110 miles from southeastern Wisconsin to Green Bay, Wisconsin. We have committed to purchase approximately 292,000 Dth per day of capacity on this extension through October 2023. In addition, we have extended our commitment to purchase 650,000 Dth per day of capacity on the original pipeline until December 2022. In October 2006, in connection with the Guardian extension, we filed applications with the PSCW to construct approximately 27 miles of pipeline laterals to connect our gas distribution system to the proposed Guardian extension. The Guardian extension is projected to be operational in November 2008.

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2006 Form 10-K

ITEM 1. BUSINESS - (Cont’d)

Gas Utility Operating Statistics

The following table shows certain gas utility operating statistics from 2002 to 2006 for gas operating revenues, therms delivered and customer data.

SELECTED CONSOLIDATED GAS UTILITY OPERATING DATA
Year Ended December 31	2006		2005			2004			2003		2002
Operating Revenues (Millions)
Residential	$	862.4	$	898.9		$	798.6		$	769.3	$	591.0
Commercial/Industrial		443.8		465.4			396.5			386.0		279.7
Interruptible		17.0		20.4			17.0			16.9		12.6
Total Retail Gas Sales		1,323.2		1,384.7			1,212.1			1,172.2		883.3
Transported Gas		47.8		46.3			41.4			36.6		39.4
Other Operating Revenues		48.9		(13.5	)		(1.1	)		17.3		(4.6	)
Total Operating Revenues	$	1,419.9	$	1,417.5		$	1,252.4		$	1,226.1	$	918.1
Therms Delivered (Millions)
Residential		727.9		791.0			809.9			853.7		817.1
Commercial/Industrial		435.9		460.7			464.0			492.5		463.1
Interruptible		21.3		23.4			24.7			27.5		29.4
Total Retail Gas Sales		1,185.1		1,275.1			1,298.6			1,373.7		1,309.6
Transported Gas		843.8		893.7			769.5			797.5		811.7
Total Therms Delivered		2,028.9		2,168.8			2,068.1			2,171.2		2,121.3
Customers - End of Year (Thousands)
Residential		951.0		940.7			927.4			912.0		896.8
Commercial/Industrial		88.9		87.5			85.9			84.7		83.8
Interruptible		0.1		0.1			0.1			0.1		0.1
Transported Gas		1.4		1.4			1.4			1.4		1.4
Total Customers		1,041.4		1,029.7			1,014.8			998.2		982.1
Customers - Average (Thousands)		1,033.3		1,019.8			1,003.5			986.7		973.2
Degree Days (a)
Heating (6,663 Normal)		6,043		6,628			6,663			7,063		6,551

(a) As measured at Mitchell International Airport in Milwaukee, Wisconsin. Normal degree days are based upon a 20-year moving average.

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 2006, the steam utility had $27.2 million of operating revenues from the sale of 2,812 million pounds of

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ITEM 1. BUSINESS - (Cont’d)

steam compared with $23.5 million of operating revenues from the sale of 2,908 million pounds of steam during 2005. As of December 31, 2006 and 2005, steam was used by approximately 460 customers for processing, space heating, domestic hot water and humidification.

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, 2006, the water utility served approximately 3,000 water customers in the suburban Milwaukee area compared with approximately 2,800 customers at December 31, 2005. Wisconsin Gas also provides contract services to local municipalities and businesses within its service territory for water system repair and maintenance. During 2006, the water utility had $2.5 million of operating revenues compared with $2.3 million of operating revenues during 2005.

UTILITY RATE MATTERS

See Factors Affecting Results, Liquidity and Capital Resources — Utility Rates and Regulatory Matters in Item 7.

NON-UTILITY ENERGY SEGMENT

Our non-utility energy segment is involved primarily in the design and construction of new generating capacity under our PTF strategy.

During 2000, we performed a comprehensive review of our existing portfolio of businesses and began implementing a strategy of divesting many of our non-utility energy segment businesses. Since 2000, we have sold our interest in many of our non-utility energy assets with proceeds from these sales totaling approximately $616.8 million. As we implement our PTF strategy, we expect to grow the non-utility energy segment within the State of Wisconsin through the construction of new generating units by our subsidiary We Power.

We Power

We Power, through wholly owned subsidiaries, plans to design and construct, in the State of Wisconsin, an additional 1,775 MW of new generating capacity proposed as part of our PTF strategy, in addition to the 575 MW of current dependable capacity at PWGS 1 that was put into service in July 2005. In November 2005, two unaffiliated entities purchased an ownership interest of approximately 17% or 200 MW of capacity in the two coal units that are being constructed in Oak Creek, Wisconsin. Similar to the generating capacity at PWGS 1, We Power will own the remaining 1,575 MW of generating capacity currently being constructed and lease this capacity to Wisconsin Electric. At December 31, 2006, we had approximately $888.5 million of CWIP for the PTF units currently under construction. For further information about our PTF strategy, see Factors Affecting Results, Liquidity and Capital Resources —Power the Future in Item 7.

Wisvest Corporation

Wisvest was originally formed to develop, own and operate electric generating facilities and to invest in other energy-related entities. As a result of the change in corporate strategy to focus on our PTF strategy, Wisvest has discontinued its development activity. For the year ended December 31, 2006, Wisvest had $10.0 million of operating revenues from continuing operations compared with $9.5 million of operating revenues from continuing operations during 2005. We have divested substantially all of Wisvest’s assets. As of December 31, 2006, Wisvest’s sole operating asset and investment is Wisvest Thermal Energy Services, which provides chilled water services to the Milwaukee Regional Medical Center.

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ITEM 1. BUSINESS - (Cont’d)

OTHER NON-UTILITY OPERATIONS

Minergy Corp.

Minergy is engaged in the development and marketing of proprietary technologies designed to convert high volume industrial and municipal wastes into renewable energy and value-added products. Minergy’s strategic focus is to license that technology and sell equipment to domestic and foreign operators or industrial/municipal users through its patented GlassPack^® process and Glass Furnace technology as a component of larger scale waste processing solutions. We believe this licensing and equipment sale strategy will allow Minergy to recognize the economic benefits of its technology with limited capital requirements. In September 2006, we sold 100% of our membership interest in Minergy Neenah. The primary assets of Minergy Neenah were the Glass Aggregate plant and related operating contracts. For additional information on the sale of Minergy Neenah see Factors Affecting Results, Liquidity and Capital Resources in Item 7 and Note D — Asset Sales, Divestitures and Discontinued Operations in the Notes to Consolidated Financial Statements in Item 8. Minergy’s primary operation and investment at December 31, 2006 is GlassPack, LLC.

GlassPack, LLC: The GlassPack^® and Glass Furnace processes are vitrification technologies that convert various biosolids and industrial wastes into renewable energy and reusable glass aggregate thus reducing dependence on fossil fuels and risks of environmental liabilities. The first commercial GlassPack^® facility has been constructed in Zion, Illinois by the North Shore Sanitary District. The facility began operations in 2006 and is being operated by Minergy pursuant to an operations and maintenance agreement. Minergy is also pursuing other domestic and foreign GlassPack^® and Glass Furnace installations through equipment sales and licensing agreements.

Wispark LLC

Wispark develops and invests in real estate. From September 30, 2000 through December 31, 2006, Wispark has reduced its overall holdings from $373.1 million to $61.5 million. During the twelve months ended December 31, 2006, Wispark had $1.1 million of consolidated operating revenues compared with $18.6 million during 2005.

Wispark has developed several business parks primarily in southeastern Wisconsin. Wispark’s flagship development, the 1,600-acre LakeView Corporate Park located near Kenosha, Wisconsin is home to approximately 80 companies located in almost 10 million square feet of buildings that have been developed on property in excess of 965 acres. Many out-of-state firms have located in this park, creating a significant number of new jobs and growth in electricity and natural gas revenues.

In December 2004, Wispark entered into a joint venture with a major industrial development company whereby Wispark contributed land in its LakeView and GrandView Corporate parks valued at approximately $40.0 million to the joint venture in return for approximately $20.8 million in cash, future development fees and a 36% interest in the joint venture, which includes land contributed by our joint venture partner.

Other Non-Utility Subsidiaries

Other non-utility subsidiaries primarily include:

Wisconsin Energy Capital Corporation: WECC engages in investing and financing activities. Activities include advances to affiliated companies and investments in partnerships that developed low- and moderate-income housing projects.

WEC Nuclear Corporation: WEC Nuclear Corporation has a 33.3% ownership interest in NMC. As discussed above, in December 2006, we announced that we had reached a definitive agreement to sell Point Beach to an affiliate of FPL. If and when the sale is completed (or earlier if an interim operating agreement with FPL is activated by us), NMC would transfer Point Beach’s operating licenses to the buyer and we would withdraw from NMC and terminate our relationship with it. We would have to pay a termination fee of approximately $12 million to withdraw from NMC and we would have to write-off our investment in NMC that is approximately $5 million at December 31, 2006.

22 Wisconsin Energy Corporation

2006 Form 10-K

ITEM 1. BUSINESS - (Cont’d)

REGULATION

Wisconsin Energy Corporation

Wisconsin Energy was an exempt holding company by order of the SEC under Section 3(a)(1) of PUHCA 1935, and, accordingly, was exempt from that law’s provisions other than with respect to certain acquisitions of securities of a public utility. In August 2005, President Bush signed into law the Energy Policy Act. The Energy Policy Act repealed PUHCA 1935 and enacted PUHCA 2005, transferring jurisdiction over holding companies from the SEC to FERC. Wisconsin Energy was required to notify FERC of its status as a holding company and to seek from FERC the exempt status similar to that held under PUHCA 1935. In March 2006, Wisconsin Energy filed with FERC notification of its status as a holding company as required and a request for exempt status similar to that held under PUHCA 1935. In June 2006, Wisconsin Energy received notice from FERC confirming its status as a holding company as required under FERC regulations implementing PUCHA 2005 and granting exempt status similar to that held under PUHCA 1935.

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, we remain subject to certain restrictions that have the potential of limiting our 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, like Minergy’s, 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. As a result of these exemptions, our non-utility assets are significantly below the non-utility asset cap as of December 31, 2006.

Under our PTF strategy, the cost of constructing new generating facilities to be owned by We Power qualifies as energy projects under the amended non-utility asset cap and therefore would be entirely exempt from the definition of “non-utility” property for this purpose. The remaining cost of our PTF plan represents investments in new and existing energy distribution system assets and upgrades to existing generation assets and has no impact on the amount of non-utility assets under the non-utility asset cap test.

Utility Energy Segment

Wisconsin Electric was an exempt holding company under Section 3(a) (1) of PUHCA 1935 and Rule 2 thereunder and, accordingly, was exempt from that law’s provisions other than with respect to certain acquisitions of securities of a public utility. Due to the Energy Policy Act’s enactment of PUHCA 2005 as noted above, Wisconsin Electric was also required to notify FERC of its status as a holding company by reason of its ownership interest in ATC and to seek from FERC the exempt status similar to that held under PUHCA 1935. In March 2006, Wisconsin Electric filed with FERC notification of its status as a holding company as required under FERC regulations implementing PUCHA 2005 and a request for exempt status similar to that held under PUHCA 1935. In June 2006, Wisconsin Electric received notice from FERC confirming its status as a holding company as required under FERC regulations implementing PUCHA 2005 and granting exempt status similar to that held under PUHCA 1935. For information on how rates are set for our regulated entities see Utility Rates and Regulatory Matters in Item 7.

Wisconsin Electric and Edison Sault are subject to the Energy Policy Act and the corresponding regulations developed by certain federal agencies. The Energy Policy Act, among other things, repeals PUHCA 1935 making electric utility industry consolidation more possible, authorizes FERC to review proposed mergers and the acquisition of generation facilities, changes FERC regulatory scheme applicable to qualifying co-generation facilities and modifies certain other aspects of energy regulations and Federal tax policies applicable to Wisconsin Electric and Edison Sault. Additionally, the Energy Policy Act created an Electric Reliability Organization to be overseen by FERC, which will establish mandatory electric reliability standards, replacing the current voluntary standards developed by the North American Electric Reliability Corporation, and will have the authority to levy monetary sanctions for failure to comply with the new standards.

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 certain new

23 Wisconsin Energy Corporation

2006 Form 10-K

ITEM 1. BUSINESS - (Cont’d)

facilities, transactions with affiliates, billing practices and various other matters. Wisconsin Electric is subject to regulation of the PSCW as to certain levels of short-term debt obligations. Wisconsin Electric and Edison Sault are both subject to the regulation of the MPSC 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 and Edison Sault’s hydroelectric facilities are regulated by FERC. Wisconsin Electric and Edison Sault are subject to regulation of FERC with respect to wholesale power service and accounting. Edison Sault is subject to regulation of FERC with respect to the issuance of certain securities.

The following table compares the source of our utility energy segment operating revenues by regulatory jurisdiction for each of the three years in the period ended December 31, 2006.

	2006				2005				2004
	Amount		Percent		Amount		Percent		Amount		Percent
	(Millions of Dollars)
Wisconsin - Retail
Electric	$	2,222.4	55.9	%	$	2,049.7	54.0	%	$	1,830.6	54.2	%
Gas		1,419.9	35.7	%		1,417.5	37.4	%		1,252.4	37.1	%
Steam and Water		29.7	0.7	%		25.8	0.7	%		24.0	0.7	%
Total		3,672.0	92.3	%		3,493.0	92.1	%		3,107.0	92.0	%
Michigan - Retail
Electric		177.8	4.5	%		184.1	4.9	%		170.2	5.0	%
FERC - Wholesale
Electric		129.2	3.2	%		115.9	3.0	%		98.2	3.0	%
Total Utility Operating Revenues	$	3,979.0	100.0	%	$	3,793.0	100.0	%	$	3,375.4	100.0	%

For information concerning the 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.

Operation and construction relating to Point Beach are subject to regulation by the NRC. 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. The operations of Wisconsin Electric, Wisconsin Gas and Edison Sault are also subject to regulations, where applicable, of the EPA, the WDNR, the Michigan Department of Natural Resources and the Michigan Department of Environmental Quality.

Public Benefits and Renewables

In March 2006, Wisconsin enacted new public benefits legislation, Act 141. Act 141 changes the renewable energy requirements for utilities. Act 141 requires Wisconsin utilities to provide 2% more of their total retail energy from renewable resources than their current levels by 2010, and 6% more renewable energy than their current levels by 2015. Act 141 also redirects the administration of energy efficiency, conservation and renewable programs from the DOA back to the utilities and/or contracted third parties. In addition, Act 141 requires that 1.2% of utilities’ annual operating revenues be used to fund these programs. For additional information on Act 141 and current renewable projects see Factors Affecting Results, Liquidity and Capital Resources — Utility Rates and Regulatory Matters - Renewables, Efficiency and Conservation and Utility Rates and Regulatory Matters - Wind Generation in Item 7.

Non-Utility Energy Segment

We Power is a holding company subsidiary of Wisconsin Energy and was formed to design, construct, own and lease the new generating capacity in our PTF strategy. We Power owns the interests in the companies constructing this new generating capacity (collectively, the We Power project companies). When complete, these facilities will be leased on a long-term basis to Wisconsin Electric. We Power has received determinations from FERC that upon the transfer of the facilities by lease to Wisconsin Electric, the We Power project companies will not be deemed public utilities under the Federal Power Act and thus will not be subject to FERC’s jurisdiction.

24 Wisconsin Energy Corporation

2006 Form 10-K

ITEM 1. BUSINESS - (Cont’d)

In 2005, President Bush signed into law the Energy Policy Act. The Energy Policy Act and corresponding rules developed by FERC require us to seek FERC authorization to allow Wisconsin Electric to lease from We Power the three PTF units that are currently being constructed by We Power. In November 2006, Wisconsin Energy, Wisconsin Electric and We Power filed a joint application for FERC authorization to transfer the generating assets and limited interconnection facilities of PWGS 2 and OC Units 1 and 2 through lease arrangements between We Power and Wisconsin Electric. We received approval from FERC on this application in December 2006. We were not required to request similar approval for the PWGS 1 lease between We Power and Wisconsin Electric as this unit was in service prior to the enactment of the Energy Policy Act.

In addition, for a short period prior to the transfer of each generation unit to Wisconsin Electric, We Power will be engaged in the sale of test power, a FERC jurisdictional transaction. We Power received approval from FERC for the sale of test power to Wisconsin Electric from PWGS 1, and for the transfer of any FERC jurisdictional facilities at Port Washington to Wisconsin Electric and/or ATC. In July 2005, PWGS 1 became operational and the sale of test power ceased. Under Wisconsin law, We Power is not a “public utility.” Environmental permits necessary for operating the facilities are the responsibility of the operating entity, Wisconsin Electric.

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. For discussion of additional environmental issues, see Environmental Matters in Item 3. For further information concerning air and water quality standards and rulemaking initiated by the EPA, including estimated costs of compliance, see Factors Affecting Results, Liquidity and Capital Resources in Item 7.

Utility Energy Segment: Compliance with federal, state and local environmental protection requirements resulted in capital expenditures by Wisconsin Electric of approximately $79 million in 2006 compared with $153 million in 2005. Expenditures incurred during 2006 primarily included costs associated with the installation of pollution abatement facilities at Wisconsin Electric’s power plants. These expenditures are expected to approximate $39 million during 2007, reflecting NO_x, SO₂ and other pollution control equipment needed to comply with various rules promulgated by the EPA.

Operation, maintenance and depreciation expenses for fly ash removal equipment and other environmental protection systems are estimated to have been approximately $49 million during 2006 and $40 million during 2005.

Solid Waste Landfills

We provide 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. Currently there are no active cases.

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 we have 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 S — Commitments and Contingencies in the Notes to Consolidated Financial Statements in Item 8. Sites currently undergoing remediation and/or monitoring include the following:

Lakeside Property: During 2001, Wisconsin Electric completed an 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. Excavation and utilization of residual coal at the site, slope stabilization and cover construction have been completed. Currently, discussions are taking place with neighbors and other interested parties to determine the ultimate use of the remediated property and some other adjacent land also owned by Wisconsin Electric.

25 Wisconsin Energy Corporation

2006 Form 10-K

ITEM 1. BUSINESS - (Cont’d)

Oak Creek North Landfill: Groundwater impairments 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. The approved remediation plan was coordinated with activities associated with the construction of the new units. Currently there is a temporary cap installed and being used as laydown area and parking. When construction activities are completed, a permanent cap will be installed.

Manufactured Gas Plant Sites

We are reviewing and addressing environmental conditions at a number of former manufactured gas plant sites. See Note S — Commitments and Contingencies in the Notes to Consolidated Financial Statements in Item 8.

Air Quality

See Factors Affecting Results, Liquidity and Capital Resources — Environmental Matters in Item 7 for additional information concerning Air Quality.

Clean Water Act

See Factors Affecting Results, Liquidity and Capital Resources — Environmental Matters in Item 7 for additional information concerning the CWA.

OTHER

Research and Development: We had immaterial research and development expenditures in the last three years, primarily for improvement of service and abatement of air and water pollution by our electric utility operations. Research and development activities include work done by employees, consultants and contractors, plus sponsorship of research by industry associations.

Employees: At December 31, 2006, we had the following number of employees:

	Total Employees	Represented Employees
Utility Energy Segment
Wisconsin Electric	4,597	3,170
Wisconsin Gas	572	433
Edison Sault	60	42
Total	5,229	3,645
Non-Utility Energy Segment	43	—
Other	31	—
Total Employees	5,303	3,645

26 Wisconsin Energy Corporation

2006 Form 10-K

ITEM 1. BUSINESS - (Cont’d)

The employees represented under labor agreements were with the following bargaining units as of December 31, 2006.

	Number of Employees	Expiration Date of Current Labor Agreement
Wisconsin Electric
Local 2150 of International Brotherhood of Electrical Workers	2,337	August 15, 2007
Local 317 of International Union of Operating Engineers (a)	456	September 30, 2006
Local 12005 of United Steel Workers of America (b)	165	November 1, 2008
Local 510 of International Brotherhood of Electrical Workers	161	April 30, 2007
Local 2-0111 of Paper, Allied- Industrial Chemical & Energy Workers International Union (b)	51	November 3, 2008
Total Wisconsin Electric	3,170
Wisconsin Gas
Local 2150 of International Brotherhood of Electrical Workers	105	August 15, 2007
Local 2-0018 of Paper, Allied- Industrial Chemical & Energy Workers International Union (b)	152	December 31, 2010
Local 2-0018-1 of Paper, Allied- Industrial Chemical & Energy Workers International Union (b)	168	December 31, 2010
Local 2-0018-2 of Paper, Allied- Industrial Chemical & Energy Workers International Union (b)	8	February 29, 2008
Total Wisconsin Gas	433
Edison Sault
Local 13547 of United Steel Workers of America	42	October 22, 2007
Total Edison Sault	42
Total Employees	3,645

(a) Labor agreement was effective October 1, 2003 through September 30, 2006. It remains in effect since settlement has not yet been reached as of December 31, 2006.

(b) Effective January 1, 2006, these bargaining units became a part of Local 2006. These former locals are now individual bargaining units of Local 2006.

ITEM 1A. RISK FACTORS

Our business is significantly impacted by governmental regulation.

We are subject to significant state, local and federal governmental regulation. We are subject to the regulation of the PSCW as to retail electric, gas and steam rates in the State of Wisconsin, standards of service, issuance of securities, short-term debt obligations, construction of certain new facilities, transactions with affiliates, billing practices and various other matters. In addition, we are subject to the regulation of the MPSC as to the various matters associated

27 Wisconsin Energy Corporation

2006 Form 10-K

ITEM 1A. RISK FACTORS - (Cont’d)

with retail electric service in the State of Michigan, except as to issuance of securities, construction of certain new facilities, levels of short-term debt obligations and advance approval of transactions with affiliates. Further, our hydroelectric facilities are regulated by FERC, and FERC also regulates our wholesale power service practices. Our significant level of regulation imposes restrictions on our operations and causes us to incur substantial compliance costs.

We are obligated in good faith to comply with all applicable governmental rules and regulations. If it is determined that we failed to comply with any applicable rules or regulations, whether through new interpretations or applications of the regulations or otherwise, we may be liable for customer refunds, penalties or other amounts, which could materially adversely effect our results of operations and financial condition.

We estimate that within our regulated energy segment, approximately 88% of our electric revenues are regulated by the PSCW, 7% are regulated by the MPSC and the balance of our electric revenues is regulated by FERC. All of our natural gas revenues are regulated by the PSCW.

Our ability to obtain rate adjustments in the future is dependent upon regulatory action and there can be no assurance that we will be able to obtain rate adjustments in the future that will allow us to recover our prudent costs and expenses and to maintain our current authorized rates of return.

Factors beyond our control could adversely affect project costs and completion of the natural gas-fired and coal-fired generating units we are constructing as part of our PTF strategy.

Under our PTF strategy, we expect to meet a significant portion of our future generation needs through the construction of two 545 MW natural gas-fired generating units at PWGS and two 615 MW coal-fired generating units to be located adjacent to our existing Oak Creek Power Plant. PWGS 1 was placed in service in July 2005 and has a current dependable capability of 575 MW. A second 545 MW natural gas-fired generating unit is currently being constructed.

Large construction projects of this type are subject to usual construction risks over which we will have limited or no control and which might adversely affect project costs and completion time. These risks include, but are not limited to, shortages of, the inability to obtain or the cost of labor or materials, the inability of the general contractor or subcontractors to perform under their contracts, strikes, adverse weather conditions, the inability to obtain necessary permits in a timely manner and changes in applicable law or regulations, adverse interpretation or enforcement of permit conditions, laws and regulations by the permitting agencies, governmental actions and events in the global economy.

If final costs for the construction of the PWGS units exceed the fixed costs allowed in the PSCW order, absent a finding by the PSCW of extraordinary circumstances, such as force majeure conditions, this excess will not adjust the amount of the lease payments recovered from Wisconsin Electric. If final costs of the Oak Creek expansion are within 5% of the targeted cost, and the additional costs are deemed prudent by the PSCW, the final lease payments for the Oak Creek expansion recovered from Wisconsin Electric would be adjusted to reflect the actual construction costs. Costs above the 5% cap would not be included in lease payments or recovered from customers absent a finding by the PSCW of extraordinary circumstances, such as force majeure conditions.

As required by the Energy Policy Act, FERC developed new rules to implement certain provisions of the Energy Policy Act. Pursuant to these new rules, Wisconsin Electric requested FERC authorization in November 2006 to lease from We Power the three PTF units that are currently being constructed by We Power. We received authorization from FERC for these leases in December 2006.

We face significant costs of compliance with existing and future environmental regulations.

We are subject to extensive environmental regulations affecting our past, present and future operations relating to, among other things, air emissions such as carbon dioxide, sulfur dioxide, nitrogen oxide, small particulates and mercury, water discharges, management of hazardous and solid waste (including polychlorinated biphenyls (PCBs)) and removal of degraded lead paint. We incur significant expenditures in complying with these environmental requirements, including expenditures for the installation of pollution control equipment, environmental monitoring, emissions fees and permits at all of our facilities.

28 Wisconsin Energy Corporation

2006 Form 10-K

ITEM 1A. RISK FACTORS - (Cont’d)

Existing environmental regulations may be revised or new laws or regulations may be adopted which could result in significant additional expenditures, operating restrictions on our facilities and increased compliance costs. The operation of emission control equipment to meet emission limits and further regulations on our intake and discharge of water could increase our operating costs and could reduce the generating capacity of our power plants. In the event we are not able to recover all of our environmental expenditures from our customers in the future, our results of operations could be adversely affected.

Our electric and gas utility businesses are also subject to significant liabilities related to the investigation and remediation of environmental contamination at our current and former facilities, as well as at third-party owned sites. Due to the potential for imposition of stricter standards and greater regulation in the future and the possibility that other potentially responsible parties may not be financially able to contribute to cleanup costs, conditions may change or additional contamination may be discovered, our remediation costs could increase, and the timing of our capital and/or operating expenditures in the future may accelerate.

In addition, we may also be responsible for liabilities associated with the environmental condition of the facilities that we have previously owned and operated, regardless of whether the liabilities arose before, during or after the time we owned or operated the facilities. If we fail to comply with environmental laws and regulations or cause harm to the environment or persons, even if caused by factors beyond our control, that failure or harm may result in the assessment of civil or criminal penalties and damages against us. The incurrence of a material environmental liability could have a significant adverse effect on our results of operations and financial condition.

Ownership and operation of nuclear generating units involve inherent risks that may result in substantial costs and liabilities.

We own two 518 MW nuclear electric generating units at Point Beach. The units are operated by NMC, a joint venture of Wisconsin Energy and affiliates of other unaffiliated utilities. During 2006, our nuclear generating units provided approximately 25.3% of our net electric energy supply. In December 2006, we announced that we had reached a definitive agreement to sell our nuclear plant to an affiliate of FPL. This transaction is subject to regulatory review and approval and we anticipate it will close during the third quarter of 2007. Until the transaction is approved, 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.

Our nuclear facilities are subject to environmental, health and financial risks, including: handling of nuclear materials, on-site storage of spent nuclear fuel and the current lack of a long-term solution for disposal of materials; mechanical or structural problems; lapses in maintenance procedures; human errors in the operation of the reactors or safety systems; limitations on the amounts and types of insurance coverage commercially available; the continued ability of NMC to effectively manage and operate our nuclear facilities; and uncertainties regarding our ability to maintain adequate reserves for decommissioning the units. While we have no reason to anticipate a serious nuclear incident at our units, if an incident were to occur, it could result in substantial costs to us that may significantly exceed the amount of our insurance coverage and reserves.

The NRC has broad authority to impose licensing and safety related requirements for the operation of nuclear generating facilities. In the event of non-compliance, the NRC has the authority to impose fines or shut down a unit, or both, until compliance is achieved. Further, in the event of a major incident at a nuclear facility anywhere in the world, the NRC could limit or prohibit the operation or licensing of any domestic nuclear unit.

As a result of the September 11, 2001 terrorist attacks, the NRC and the industry have been strengthening security at nuclear power plants. Increased security measures and other safety requirements could require us to make substantial capital expenditures at our nuclear generating units.

Acts of terrorism could materially adversely affect our financial condition and results of operations.

Our electric generation and gas transportation facilities, including our nuclear facilities and the facilities of third parties on which we rely, could be targets of terrorist activities. A terrorist attack on our facilities could result in a full or partial disruption of our ability to generate, transmit, transport or distribute electricity or natural gas or cause environmental repercussions. Any operational disruption or environmental repercussions could result in a significant decrease in our revenues or significant reconstruction or remediation costs, which could materially adversely affect our results of operations and financial condition.

29 Wisconsin Energy Corporation

2006 Form 10-K

ITEM 1A. RISK FACTORS - (Cont’d)

Energy sales are impacted by seasonal factors and varying weather conditions from year-to-year.

Our electric and gas utility businesses are generally seasonal businesses. Demand for electricity is greater in the summer and winter months associated with cooling and heating. In addition, demand for natural gas peaks in the winter heating season. As a result, our overall results in the future may fluctuate substantially on a seasonal basis. In addition, we have historically had lower revenues and net income when weather conditions are milder. Our rates in Wisconsin are set by the PSCW based on estimated temperatures which approximate 20-year averages. Mild temperatures during the summer cooling season and during the winter heating season will negatively impact the results of operations and cash flows of our electric utility business. In addition, mild temperatures during the winter heating season negatively impact the results of operations and cash flows of our gas utility business.

Higher natural gas costs may negatively impact our electric and gas utility operations.

Significant increases in the cost of natural gas affect our electric and gas utility operations. Natural gas costs have increased significantly because the supply of natural 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. We expect that demand for natural gas will remain high into the foreseeable future and that significant price relief will not occur until additional natural gas reserves are developed.

Wisconsin Electric’s electric operations burn natural gas in several of its peaking power plants and in the leased PWGS 1 and as a supplemental fuel at several coal-fired plants, and in many instances the cost of purchased power is tied to the cost of natural gas. In addition, higher natural gas costs also can have the effect of increasing demand for other sources of fuel thereby increasing the costs of these fuels as well.

In addition, higher natural gas costs increase our working capital requirements. As a result of GCRMs, our gas distribution business receives dollar for dollar pass through of the cost of natural gas. However, increased natural gas costs increase the risk that customers will switch to alternative sources of fuel or reduce their usage, which could reduce future gas margins. In addition, higher natural gas costs combined with slower economic conditions also exposes us to greater risks of accounts receivable write-offs as more customers are unable to pay their bills.

We may not be able to obtain an adequate supply of coal, which could limit our ability to operate our facilities.

We are dependent on coal for much of our electric generating capacity. While we have coal supply and transportation contracts in place, there can be no assurance that the counterparties to these agreements will fulfill their obligations to supply coal to us. The suppliers under these agreements may experience financial or operational problems that inhibit their ability to fulfill their obligations to us. In addition, suppliers under these agreements may not be required to supply coal to us under certain circumstances, such as in the event of a natural disaster. If we are unable to obtain our coal requirements under our coal supply and transportation contracts, we may be required to purchase coal at higher prices, or we may be forced to obtain additional MWh purchases through other potentially higher cost generating resources in the MISO Midwest Market. Higher costs to obtain coal increase our working capital requirements.

Our financial performance may be adversely affected if we are unable to successfully operate our facilities.

Our financial performance depends on the successful operation of our electric generating and gas distribution facilities. Operation of these facilities involves many risks, including: operator error and breakdown or failure of equipment processes; fuel supply interruptions; labor disputes; operating limitations that may be imposed by environmental or other regulatory requirements; or catastrophic events such as fires, earthquakes, explosions, floods or other similar occurrences. Unplanned generation outages can result in additional maintenance expenses as well as incremental replacement power costs.

We are exposed to risks related to general economic conditions in our service territories.

Our electric and gas utility businesses are impacted by the economic cycles of the customers we serve. In the event regional economic conditions decline, we may experience reduced demand for electricity or natural gas that could result in decreased earnings and cash flow. In addition, regional economic conditions also impact our collections of accounts receivable.

30 Wisconsin Energy Corporation

2006 Form 10-K

ITEM 1A. RISK FACTORS - (Cont’d)

Our business is dependent on our ability to successfully access capital markets.

We rely on access to short-term and long-term capital markets to support our capital expenditures and other capital requirements, including expenditures for our utility infrastructure and to comply with future regulatory requirements. We have historically secured funds from a variety of sources, including the issuance of short-term and long-term debt securities, preferred stock and common stock. Successful implementation of our long-term business strategies is dependent upon our ability to access the capital markets under competitive terms and rates. If our access to the capital markets were limited due to a ratings downgrade, prevailing market conditions or other factors, our results of operations and financial condition could be materially adversely affected.

We are a holding company and are subject to restrictions on our ability to pay dividends.

Wisconsin Energy is a holding company and has no significant operations of its own. Accordingly, our ability to meet our financial obligations and pay dividends on our common stock is dependent upon the ability of our subsidiaries to pay amounts to us, whether through dividends or other payments. The ability of our subsidiaries to pay amounts to us will depend on the earnings, cash flows, capital requirements and general financial condition of our subsidiaries and on regulatory limitations. Our subsidiaries have dividend payment restrictions based on the terms of their outstanding preferred stock and regulatory limitations applicable to them. In addition, each of Wisconsin Energy, Wisconsin Electric and Wisconsin Gas bank back-up credit facilities have specified total funded debt to capitalization ratios that must be maintained.

Provisions of the Wisconsin Utility Holding Company Act limit our ability to invest in non-utility businesses and could deter takeover attempts by a potential purchaser of our common stock that would be willing to pay a premium for our common stock.

Under the Wisconsin Utility Holding Company Act, we remain subject to certain restrictions that have the potential of limiting our diversification into non-utility businesses. Under the 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.

In addition, this act precludes the acquisition of 10% or more of the voting shares of a holding company of a Wisconsin public utility unless the PSCW has first determined that the acquisition is in the best interests of utility customers, investors and the public. This provision and other requirements of this act may delay or reduce the likelihood of a sale or change of control of Wisconsin Energy. As a result, you may be deprived of opportunities to sell some or all of your shares of our common stock at prices that represent a premium over market prices.

Governmental agencies could modify our permits, authorizations or licenses.

Wisconsin Electric, Wisconsin Gas and Edison Sault are required to comply with the terms of various permits, authorizations and licenses. These permits, authorizations and licenses may be revoked or modified by the agencies that granted them if facts develop that differ significantly from the facts assumed when they were issued. In addition, discharge permits and other approvals and licenses are often granted for a term that is less than the expected life of the associated facility. Licenses and permits may require periodic renewal, which may result in additional requirements being imposed by the granting agency.

Also, if we are unable to obtain, renew or comply with these governmental permits, authorizations or licenses, or if we are unable to recover any increased costs of complying with additional license requirements or any other associated costs in our rates in a timely manner, our results of operations and financial condition could be materially adversely affected.

Restructuring in the regulated energy industry could have a negative impact on our business.

The regulated energy industry continues to experience significant structural changes. Increased competition in the retail and wholesale markets, which may result from restructuring efforts, could have a significant adverse financial impact on us. It is uncertain when retail access might be implemented in Wisconsin; however, Michigan has adopted retail choice which potentially affects our Michigan operations. Under retail access legislation, customers are permitted to choose their own electric generation supplier. All Michigan electric customers were able to choose their electric generation supplier beginning in January 2002. Although competition and customer switching to

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2006 Form 10-K

ITEM 1A. RISK FACTORS - (Cont’d)

alternative suppliers in our service territories in Michigan has been limited, the additional competitive pressures resulting from retail access could lead to a loss of customers and our incurring stranded costs.

FERC continues to support the existing RTOs that affect the structure of the wholesale market within those RTOs. In connection with its status as a FERC approved RTO, MISO implemented the MISO Midwest Market on April 1, 2005. The MISO Midwest Market rules require that all market participants submit day-ahead and/or real-time bids and offers for energy at locations across the MISO region. MISO then calculates the most efficient solution for all of the bids and offers made into the market that day and establishes a LMP that reflects the market price for energy. As a participant in the MISO Midwest Market, we are required to follow MISO’s instructions when dispatching generating units to support MISO’s responsibility for maintaining stability of the transmission system.

Additionally, the MISO Midwest Market subjects us to additional costs primarily associated with constraints in the transmission system. MISO implemented the LMP system, a market-based platform for valuing transmission congestion. The LMP system includes the ability to mitigate or eliminate congestion charges through the use of FTRs. FTRs are allocated to market participants by MISO for a twelve month period. There can be no assurance that we will be granted an adequate level of FTRs in the future to avoid material unhedged congestion charges. As allowed by the PSCW, unhedged congestion charges are deferred and we expect to recover these costs in future rates, subject to review and approval of the PSCW.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

32 Wisconsin Energy Corporation

2006 Form 10-K

ITEM 2. PROPERTIES

We own our principal properties outright, 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.

As of December 31, 2006, we owned or leased the following generating stations with dependable capabilities during 2006 as indicated.

Name	Fuel	No. of Generating Units	Dependable Capability in MW (a) July
Steam Plants
Point Beach	Nuclear	2	1,026
Oak Creek	Coal	4	1,135
Presque Isle	Coal	9	618
Pleasant Prairie	Coal	2	1,224
Valley	Coal	2	267
Edgewater 5 (b)	Coal	1	105
Milwaukee County	Coal	3	10
Total Steam Plants		23	4,385
Hydro Plants (14 in number)		107	81
Port Washington Generating Station (c)	Gas	1	575
Germantown Combustion Turbines	Gas/Oil	5	345
Concord Combustion Turbines	Gas/Oil	4	388
Paris Combustion Turbines	Gas/Oil	4	400
Other Combustion Turbines & Diesel	Gas/Oil	6	43
Total System		150	6,217

(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. We are a summer peaking electric utility. The values were established by test and may change slightly from year to year.

(b) We have a 25% interest in Edgewater 5 Generating Unit, which is operated by Alliant Energy Corp, an unaffiliated utility.

(c) Effective July 2005, Wisconsin Electric began leasing PWGS 1, a natural gas-fired generation unit with 575 MW of dependable capability, from We Power under a 25 year lease.

We have a power purchase contract with an unaffiliated independent power producer. The contract is for 236 MW of firm capacity from a gas-fired cogeneration facility that expires in 2022.

As of December 31, 2006, we operated approximately 23,304 pole-miles of overhead distribution lines and 22,440 miles of underground distribution cable, as well as approximately 387 distribution substations and 287,958 line transformers. We own various office buildings and service centers throughout our electric utility service areas.

As of December 31, 2006, our gas distribution system included approximately 19,900 miles of distribution and transmission mains connected at 179 gate stations to the pipeline transmission systems of ANR Pipeline Company, Guardian, Natural Gas Pipeline Company of America, Northern Natural Pipeline Company, Great Lakes Transmission Company, Viking Gas Transmission and Michigan Consolidated Gas Company. We have liquefied natural gas storage plants which convert and store, in liquefied form, natural gas received during periods of low consumption. The liquefied natural gas storage plants have a send-out capability of 73,600 Dth per day. We also have propane air systems for peaking purposes. These propane air systems will provide approximately 4,400 Dth per day of supply to the system. Our gas distribution system consists almost entirely of plastic and coated steel pipe. We also own office buildings, gas regulating and metering stations and major service centers, including garage and warehouse facilities, in certain communities in which we serve. Where distribution lines and services and gas

33 Wisconsin Energy Corporation

2006 Form 10-K

ITEM 2. PROPERTIES - (Cont’d)

distribution mains and services occupy private property, we have in some, but not all instances obtained consents, permits or easements for these installations from the apparent owners or those in possession of those properties, generally without an examination of ownership records or title.

As of December 31, 2006, 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, 9 miles of walkable tunnels and other pressure regulating equipment.

We Power: We Power completed construction of the first natural gas unit, PWGS 1, in July 2005. PWGS 1 has a current dependable capability of 575 MW. Construction of a second 545 MW natural gas unit at PWGS has begun. We Power also received authorization from the PSCW to build two 615 MW coal plants (of which we will own approximately a 515 MW share of each unit) adjacent to the site of Wisconsin Electric’s existing Oak Creek Power Plant. Construction commenced at this site in June 2005. For information about PTF, see Factors Affecting Results, Liquidity and Capital Resources — Power the Future in Item 7.

Wisvest Corporation: Wisvest owns a chilled water production and distribution facility located in Milwaukee County, Wisconsin.

Wispark LLC: As of December 31, 2006, Wispark properties, owned in full or through minority interests in joint ventures, included the following commercial and industrial parks in the State of Wisconsin: LakeView Corporate Park and PrairieWood Corporate Park in Kenosha County; and GrandView Business Park in Racine County. Wispark owns other properties located in Wisconsin Electric’s service territories that are held for future development or sale. Wispark is a minority owner in an industrial park located in Gurnee, Illinois. Wispark sold a number of other property holdings during 2006, including two low-income housing developments owned jointly with WECC.

Minergy Corp.: Minergy owns a GlassPack^® facility in Winneconne, Wisconsin. In September 2006, Minergy sold its Minergy Neenah facility. For additional information on the sale of Minergy Neenah, see Note D — Asset Sales, Divestitures and Discontinued Operations in the Notes to Consolidated Financial Statements in Item 8.

Wisconsin Energy Capital Corporation: WECC, in combination with Wispark, owns a low-income housing development located in Neenah, Wisconsin. WECC had other investments, which were sold during 2006.

ITEM 3. LEGAL PROCEEDINGS

In addition to those legal proceedings discussed below, we are currently, and from time to time, subject to claims and suits arising in the ordinary course of business. Although the results of these other legal proceedings cannot be predicted with certainty, management believes, after consultation with legal counsel, that the ultimate resolution of these proceedings will not have a material adverse effect on our financial statements.

ENVIRONMENTAL MATTERS

We are subject to federal, state and certain local laws and regulations governing the environmental aspects of our operations. Management believes that, perhaps with immaterial exceptions, our existing facilities are in compliance with applicable environmental requirements.

EPA Information Requests: Wisconsin Electric and Wisconsin Gas responded to an EPA request for information pursuant to CERCLA Section 104(e) for the Solvay Coke and Gas Site located in Milwaukee, Wisconsin. All potentially responsive records and corporate legal files have been reviewed and responsive information was provided in October 2004. A predecessor company of Wisconsin Electric owned a parcel of property that is within the property boundaries of the site. A predecessor company of Wisconsin Gas had a customer and corporate relationship with the entity that owned and operated the site, Milwaukee Solvay Coke Company. In July 2005, Wisconsin Gas received a general notice letter from the EPA identifying Wisconsin Gas as a potentially responsible party under CERCLA. In April 2006, we received a special notice letter from the EPA identifying both Wisconsin Gas and Wisconsin Electric as potentially responsible parties and commencing a negotiation period with the EPA and other parties regarding the conduct of a RI/FS and reimbursement of the EPA’s costs. Wisconsin Electric and

34 Wisconsin Energy Corporation

2006 Form 10-K

ITEM 3. LEGAL PROCEEDINGS - (Cont’d)

Wisconsin Gas, along with other parties, have entered into an Administrative Settlement Agreement and Order with the EPA to perform the RI/FS and reimburse the EPA’s oversight costs. The parties anticipate that investigation activities will commence in 2007. Neither Wisconsin Electric nor Wisconsin Gas admits to any liability for the site, waives any liability defenses, or commits to perform future site remedial activities at this time through the Settlement Agreement. The companies’ share of the costs to perform the RI/FS and reimburse the EPA’s oversight costs, as well as potential future remediation cost estimates and reserves, are included in the estimated manufactured gas plant values reported in Note S — Commitments and Contingencies in the Notes to Consolidated Financial Statements in Item 8.

See Environmental Compliance in Item 1 and Environmental Matters, Manufactured Gas Plant Sites, Ash Landfill Sites and EPA - Proposed Consent Decree in Note S — Commitments and Contingencies in the Notes to Consolidated Financial Statements which are 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.

UTILITY RATE MATTERS

See Factors Affecting Results, Liquidity and Capital Resources — Utility Rates and Regulatory Matters and Power the Future in Item 7 for information concerning rate matters in the jurisdictions where Wisconsin Electric, Wisconsin Gas and Edison Sault do business.

OTHER MATTERS

Used Nuclear Fuel Storage and Removal: See Factors Affecting Results, Liquidity and Capital Resources — Nuclear Operations in Item 7 for information concerning the DOE’s breach of contract with Wisconsin Electric that required the DOE to begin permanently removing used nuclear fuel from Point Beach by January 31, 1998.

Stray Voltage: 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 to livestock allegedly caused by stray voltage resulting from the operation of its electrical system.

On February 26, 2004, a Wisconsin jury awarded $850,000 to a dairy farmer who alleged that Wisconsin Electric’s distribution system caused damages to his livestock. Wisconsin Electric appealed this decision. In April 2006, the Wisconsin Court of Appeals affirmed the jury’s verdict against Wisconsin Electric. Wisconsin Electric paid $1.3 million with interest and costs to the plaintiffs in this suit.

In May 2005, a stray voltage lawsuit was filed against Wisconsin Electric. We do not believe the lawsuit has merit and we will vigorously defend the case. The trial for this matter is scheduled to begin in April 2007. This claim against Wisconsin Electric is not expected to have a material adverse effect on our financial condition or results of operations.

Even though any claims which may be made against Wisconsin Electric with respect to stray voltage and ground currents are not expected to have a material adverse effect on its financial condition, we continue to evaluate various options and strategies to mitigate this risk. For additional information, see Factors Affecting Results, Liquidity and Capital Resources — Legal Matters in Item 7.

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 applicable legal requirements and standards. Currently, there are no cases pending or threatened against Wisconsin Electric or Edison Sault with respect to damage caused by electromagnetic fields.

For information regarding additional legal matters, see Factors Affecting Results, Liquidity and Capital Resources — Legal Matters in Item 7.

35 Wisconsin Energy Corporation

2006 Form 10-K

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of our security holders during the fourth quarter of 2006.

EXECUTIVE OFFICERS OF THE REGISTRANT

The names, ages at December 31, 2006 and positions of our executive officers 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. Reference to Wisconsin Gas LLC includes the time spent with the company prior to its conversion from a corporation to an LLC.

Gale E. Klappa. Age 56.

• Wisconsin Energy Corporation – Chairman of the Board and Chief Executive Officer since May 2004. President since April 2003.

• Wisconsin Electric Power Company – Chairman of the Board since May 2004. President and Chief Executive Officer since August 2003.

• Wisconsin Gas LLC – Chairman of the Board since May 2004. President and Chief Executive Officer since August 2003.

• The Southern Company – Executive Vice President, Chief Financial Officer and Treasurer from March 2001 to April 2003. Chief Strategic Officer from October 1999 to March 2001. The Southern Company is a public utility holding company serving the southeastern United States.

• Director of Wisconsin Energy Corporation, Wisconsin Electric Power Company and Wisconsin Gas LLC since 2003.

Charles R. Cole. Age 60.

• Wisconsin Electric Power Company – Senior Vice President since 2001.

• Wisconsin Gas LLC – Senior Vice President since July 2004.

Stephen P. Dickson. Age 46.

• Wisconsin Energy Corporation – Vice President since 2005. Controller since 2000.

• Wisconsin Electric Power Company – Vice President since 2005. Controller since 2000.

• Wisconsin Gas LLC – Vice President since 2005. Controller since 1998.

James C. Fleming. Age 61.

• Wisconsin Energy Corporation – General Counsel since March 2006. Executive Vice President since January 2006.

• Wisconsin Electric Power Company – General Counsel since March 2006. Executive Vice President since January 2006.

• Wisconsin Gas LLC – General Counsel since March 2006. Executive Vice President since January 2006.

• Southern Company Services, Inc. – Vice President and Associate General Counsel from 1998 to December 2005. Southern Company Services is an affiliate of The Southern Company, a public utility holding company serving the southeastern United States.

Frederick D. Kuester. Age 56.

• Wisconsin Energy Corporation – Executive Vice President since May 2004.

• Wisconsin Electric Power Company – Executive Vice President since May 2004. Chief Operating Officer since October 2003.

• Wisconsin Gas LLC – Executive Vice President since May 2004.

• Mirant Corporation – Senior Vice President - International from 2001 to October 2003 and Chief Executive Officer of Mirant Asia-Pacific Limited from 1999 to October 2003. Mirant is a multi-national energy company that produces and sells electricity. Mirant Corporation and certain of its subsidiaries voluntarily filed for bankruptcy in July 2003. Other than certain Canadian subsidiaries, none of Mirant’s international subsidiaries filed for bankruptcy.

36 Wisconsin Energy Corporation

2006 Form 10-K

EXECUTIVE OFFICERS OF THE REGISTRANT - (Cont’d)

Allen L. Leverett. Age 40.

• Wisconsin Energy Corporation – Executive Vice President since May 2004. Chief Financial Officer since July 2003.

• Wisconsin Electric Power Company – Executive Vice President since May 2004. Chief Financial Officer since July 2003.

• Wisconsin Gas LLC – Executive Vice President since May 2004. Chief Financial Officer since July 2003.

• Georgia Power Company – Executive Vice President, Chief Financial Officer and Treasurer from May 2002 to July 2003. Assistant Treasurer from 2000 to 2002. Georgia Power Company is a utility affiliate of The Southern Company, a public utility holding company serving the southeastern United States.

• Southern Company Services, Inc. – Vice President and Treasurer from 2000 to 2002. Southern Company Services is also an affiliate of The Southern Company.

Kristine Rappé. Age 50.

• Wisconsin Energy Corporation – Senior Vice President and Chief Administrative Officer since May 2004. Corporate Secretary from 2001 to August 2004. Vice President from 2003 to April 2004.

• Wisconsin Electric Power Company – Senior Vice President and Chief Administrative Officer since May 2004. Corporate Secretary from 2001 to August 2004. Vice President from 2001 to April 2004.

• Wisconsin Gas LLC – Senior Vice President and Chief Administrative Officer since May 2004. Corporate Secretary from 2001 to August 2004. Vice President from 2001 to April 2004.

Larry Salustro. Age 59.

• Wisconsin Energy Corporation – Executive Vice President since May 2004. General Counsel from 2000 to March 2006. Senior Vice President from 2000 to April 2004.

• Wisconsin Electric Power Company – Executive Vice President since May 2004. General Counsel from 2000 to March 2006. Senior Vice President from 2000 to April 2004.

• Wisconsin Gas LLC – Executive Vice President since May 2004. General Counsel from 2000 to March 2006. Senior Vice President from 2000 to April 2004.

Certain executive officers also hold offices in our non-utility subsidiaries.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

NUMBER OF COMMON STOCKHOLDERS

As of December 31, 2006, based upon the number of Wisconsin Energy Corporation stockholder accounts (including accounts in our dividend reinvestment and stock purchase plan), we had approximately 54,000 registered stockholders.

COMMON STOCK LISTING AND TRADING

Our 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.

37 Wisconsin Energy Corporation

2006 Form 10-K

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES (Cont’d)

DIVIDENDS AND COMMON STOCK PRICES

Common Stock Dividends of Wisconsin Energy: Cash dividends on our common stock, as declared by the Board of Directors, are normally paid on or about the first day of March, June, September and December of each year. We review our 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. For information regarding restrictions on the ability of our subsidiaries to pay us dividends see Note J — Common Equity in the Notes to Consolidated Financial Statements in Item 8.

On January 18, 2007, our Board of Directors announced that it increased our common stock quarterly dividend rate by 8.7%, to $0.25 per share. With the increase, the new dividend is equivalent to an annual rate of $1.00 per share. The Board has established a goal of increasing the annual dividend at a rate of approximately half of the expected rate of growth in earnings per share, subject to the factors referred to above.

Range of Wisconsin Energy Common Stock Prices and Dividends:

	2006						2005
Quarter	High		Low		Dividend		High		Low		Dividend
First	$	42.35	$	38.92	$	0.23	$	36.12	$	33.35	$	0.22
Second	$	40.91	$	38.16		0.23	$	39.31	$	34.20		0.22
Third	$	43.79	$	39.75		0.23	$	40.48	$	37.32		0.22
Fourth	$	48.70	$	43.25		0.23	$	40.83	$	36.49		0.22
Year	$	48.70	$	38.16	$	0.92	$	40.83	$	33.35	$	0.88

ISSUER PURCHASES OF EQUITY SECURITIES

2006	Total Number of Shares Purchased (a)	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
					(Millions of Dollars)
October 1- October 31	885	$	44.66	—	—
November 1- November 30	5,864	$	39.42	—	—
December 1- December 31	719	$	40.23	—	—
Total	7,468	$	40.12	—	—

(a) This table does not include shares purchased by independent agents to satisfy obligations under our employee benefit plans and stock purchase and dividend reinvestment plan. All shares reported during the quarter were surrendered by employees to satisfy tax withholding obligations upon vesting of restricted stock.

38 Wisconsin Energy Corporation

2006 Form 10-K

ITEM 6. SELECTED FINANCIAL DATA

WISCONSIN ENERGY CORPORATION

CONSOLIDATED SELECTED FINANCIAL AND STATISTICAL DATA

Financial	2006			2005			2004		2003		2002
Year Ended December 31
Net income - Continuing Operations (Millions)	$	312.5		$	303.6		$	219.6	$	201.3	$	135.9
Earnings per share - Continuing Operations
Basic	$	2.67		$	2.59		$	1.87	$	1.72	$	1.18
Diluted	$	2.64		$	2.56		$	1.84	$	1.70	$	1.17
Dividends per share of common stock	$	0.92		$	0.88		$	0.83	$	0.80	$	0.80
Common Stock Price - High During Year	$	48.70		$	40.83		$	34.60	$	33.68	$	26.48
Common Stock Price - Low During Year	$	38.16		$	33.35		$	29.50	$	22.56	$	20.17
Operating revenues (Millions)
Utility energy	$	3,979.0		$	3,793.0		$	3,375.4	$	3,263.9	$	2,852.1
Non-utility energy		69.1			40.0			19.9		12.3		165.0
Other including eliminations		(51.7	)		(17.5	)		10.8		5.9		15.6
Total operating revenues	$	3,996.4		$	3,815.5		$	3,406.1	$	3,282.1	$	3,032.7
At December 31 (Millions)
Total assets	$	11,130.2		$	10,462.0		$	9,565.4	$	10,014.5	$	9,465.9
Long-term debt (including current maturities), capital lease obligations and mandatorily redeemable trust preferred securities	$	3,370.1		$	3,527.0		$	3,340.5	$	3,736.7	$	3,266.6

CONSOLIDATED SELECTED QUARTERLY FINANCIAL DATA (Unaudited)

	(Millions of Dollars, Except Per Share Amounts) (a)
	March					June
Three Months Ended	2006		2005			2006			2005
Operating revenues	$	1,247.0	$	1,094.7		$	814.4		$	788.5
Operating income		191.6		166.8			107.1			89.9
Income from Continuing Operations		104.4		90.0			59.7			56.8
Income (loss) from Discontinued Operations		1.3		(0.1	)		3.2			5.2
Total Net Income	$	105.7	$	89.9		$	62.9		$	62.0
Earnings per share of common stock (basic) (b)
Continuing operations	$	0.89	$	0.77		$	0.51		$	0.49
Discontinued operations		0.01		—			0.03			0.04
Total earnings per share (basic)	$	0.90	$	0.77		$	0.54		$	0.53
Earnings per share of common stock (diluted) (b)
Continuing operations	$	0.88	$	0.76		$	0.50		$	0.48
Discontinued operations		0.01		—			0.03			0.04
Total earnings per share (diluted)	$	0.89	$	0.76		$	0.53		$	0.52
	September					December
Three Months Ended	2006		2005			2006			2005
Operating revenues	$	839.8	$	797.3		$	1,095.2		$	1,135.0
Operating income		131.2		128.4			138.6			177.8
Income from Continuing Operations		70.8		65.8			77.6			91.0
Income (loss) from Discontinued Operations		—		0.4			(0.6	)		(0.4	)
Total Net Income	$	70.8	$	66.2		$	77.0		$	90.6
Earnings per share of common stock (basic) (b)
Continuing operations	$	0.61	$	0.57		$	0.66		$	0.77
Discontinued operations		—		—			—			—
Total earnings per share (basic)	$	0.61	$	0.57		$	0.66		$	0.77
Earnings per share of common stock (diluted) (b)
Continuing operations	$	0.60	$	0.56		$	0.65		$	0.77
Discontinued operations		—		—			—			—
Total earnings per share (diluted)	$	0.60	$	0.56		$	0.65		$	0.77

(a) 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.

(b) Quarterly earnings per share may not total to the amounts reported for the year since the computation is based on the weighted average common shares outstanding during each quarter.

39 Wisconsin Energy Corporation

2006 Form 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

CORPORATE DEVELOPMENTS

INTRODUCTION

Wisconsin Energy Corporation is a diversified holding company with subsidiaries primarily in a utility energy segment and a non-utility energy segment. Unless qualified by their context, when used in this document the terms Wisconsin Energy, the Company, our, us or we refer to the holding company and all of our subsidiaries.

Our utility energy segment, consisting of Wisconsin Electric and Wisconsin Gas, both doing business under the trade name of “We Energies”, and Edison Sault, is engaged primarily in the business of generating electricity and distributing electricity and natural gas in Wisconsin and the Upper Peninsula of Michigan. Our non-utility energy segment primarily consists of We Power. We Power is principally engaged in the engineering, construction and development of electric power generating facilities for long-term lease to Wisconsin Electric.

CORPORATE STRATEGY

Business Opportunities

We seek to increase stockholder value by leveraging on our core competencies. Our key corporate strategy, announced in September 2000, is PTF. This strategy is designed to address Wisconsin’s growing electric supply needs by increasing the electric generating capacity in the state while maintaining a fuel-diverse, reasonably priced electric supply. It is also designed to improve the delivery of energy within our distribution systems to meet increasing customer demands and to support our commitment to improved environmental performance. Our PTF strategy, which is discussed further below, is having and is expected to continue to have a significant impact on our utility and non-utility energy segments. In July 2005, the first of four new electric generating units under our PTF strategy was placed into service. Construction on the remaining three units is underway. Since 2000, we have been selling our non-core assets to direct more attention to the utility business and to finance PTF while reducing our debt leverage.

Proposed Sale of Point Beach: In February 2006, we announced that we were undertaking a formal review regarding our options for the ownership and operation of Point Beach. These options included (1) continued operation by NMC, (2) having a third party other than NMC operate the plant, (3) a return to in-house operations by Wisconsin Electric, (4) sale of the plant and (5) a partial sale of the plant with us retaining a minority interest in the Plant. Under this fifth option, the new majority owner would operate the plant. After a thorough review of the various options, we concluded that a full sale of the plant was in our best interest and in the best interest of our customers.

In December 2006, we announced that Wisconsin Electric had signed a definitive agreement with an affiliate of FPL to sell Point Beach for approximately $998 million, subject to closing price adjustments. Under the terms of the sale, the buyer would assume the obligation to decommission the plant, and we would transfer assets in a qualified trust for decommissioning. We would retain assets in a non-qualified decommissioning trust. Wisconsin Electric also entered into a long-term power purchase agreement to purchase all of the existing capacity and energy of the plant. This long-term power purchase agreement will become effective upon the closing of the sale. If and when the sale is completed (or earlier if an interim operating agreement with FPL is activated by us), NMC would transfer Point Beach’s operating licenses to FPL and our relationship with NMC would be terminated. The sale of the plant and the long-term power purchase agreement are subject to review and approval by various regulatory agencies including the NRC, PSCW, MPSC and FERC. We anticipate closing the sale during the third quarter of 2007.

We, along with FPL, have made a request to the IRS for a Private Letter Ruling (PLR) related to the transfer of the qualified decommissioning trust assets. We are requesting permission to withdraw excess funds from the qualified trust without receiving unfavorable tax treatment. If we receive a favorable PLR, we would use the excess funds for the direct benefit of our customers. If we do not receive a favorable PLR, then the purchase price would be adjusted

40 Wisconsin Energy Corporation

2006 Form 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Cont’d)

upward by approximately $50 million based on information as of December 31, 2006. We are unable to predict how or even if the IRS may rule on our request for a PLR.

If the sale is approved, we expect to receive after-tax cash proceeds exceeding $1.0 billion from the sale and the liquidation of the decommissioning trust assets. The net sales proceeds are expected to exceed our cost in the nuclear plant, and, absent regulatory treatment, we would expect to record a gain on the sale. However, we have made a filing with PSCW to defer any gain (net of transaction related costs) as a regulatory liability that would be applied to the benefit of our customers in future rate proceedings. As such, we do not expect the sale of the plant, if approved, to have a material impact on our 2007 earnings.

Utility Energy Segment: Our utility energy segment strives to provide reasonably priced energy delivered at high levels of customer service and reliability. We expect our prices to be established by our regulatory bodies under traditional rate based, cost of service methodologies. We continue to gain efficiencies and improve the effectiveness of our service deliveries through the combined support operations of our electric and gas businesses. We work to obtain a reliable, reasonably-priced supply of electricity through plants that we operate and various long-term supply contracts.

Non-Utility Energy Segment: Our primary focus in this segment is to improve the supply of electric generation in Wisconsin. We Power was formed to design, construct, own and lease new generation assets under the PTF strategy.

Power the Future Strategy: In February 2001, we filed a petition with the PSCW that would allow us to begin implementing our 10-year PTF strategy to improve the supply and reliability of electricity in Wisconsin. PTF is intended to meet a growing demand for electricity and ensure a diverse fuel mix while keeping electricity prices reasonable. Under PTF, we plan to add new coal-fired and natural gas-fired generating capacity to the state’s power portfolio which would allow us to maintain approximately the same fuel mix as exists today. PWGS 1 and 2 and OC 1 and 2 have a total output of 2,320 MW, of which we expect to own 2,120 MW. As part of our PTF strategy, we plan to (1) invest approximately $2.6 billion in 2,120 MW of new natural gas-fired and coal-fired generating capacity at existing sites; (2) upgrade our existing electric generating facilities; and (3) invest in upgrades of our existing energy distribution system.

Subsequent to our February 2001 filing, the state legislature amended several laws, making changes which were critical to the implementation of PTF. In October 2001, the PSCW issued a declaratory ruling finding, among other things, that it was prudent to proceed with PTF and for us to incur the associated pre-certification expenses. However, individual expenses are subject to review by the PSCW in order to be recovered.

In November 2001, we created We Power to design, construct, own and lease the new generating capacity. Wisconsin Electric will lease each new generating facility from We Power as well as operate and maintain the new plants under 25- to 30-year lease agreements approved by the PSCW. Based upon the structure of the leases, we expect to recover the investments in We Power’s new facilities over the initial lease term. At the end of the leases, Wisconsin Electric will have the right to acquire the plants outright at market value or to renew the leases. Wisconsin Electric expects that payments under the plant leases will be recoverable in rates under the provisions of the Wisconsin Leased Generation Law.

Under our PTF strategy, we expect to meet a significant portion of our future generation needs through We Power’s construction of the PWGS units and the Oak Creek expansion.

As of December 31, 2006, we:

• Received approval from the PSCW to build two 545 MW natural gas-fired intermediate load units in Port Washington, Wisconsin (PWGS 1 and PWGS 2). PWGS 1 was placed into service in July 2005 and is fully operational. PWGS 1 was completed within the PSCW approved cost parameters.

• Completed site preparation for PWGS 2 in early 2006, and procured all of the major components for PWGS 2. Construction is underway and PWGS 2 is expected to be operational in 2008.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Cont’d)

• Received approval from the PSCW to build two 615 MW coal-fired base load units (OC 1 and OC 2) adjacent to the site of our existing Oak Creek Power Plant in Oak Creek, Wisconsin (the Oak Creek expansion), with OC 1 expected to be in service in 2009 and OC 2 in 2010. The CPCN was granted contingent upon our obtaining the necessary environmental permits. We have received all permits necessary to commence construction. In June 2005, construction commenced at the site.

• Completed the planned sale of approximately a 17% ownership interest in the Oak Creek expansion to two co-owners in November 2005.

• Received approval from the PSCW for various leases between We Power and Wisconsin Electric.

We expect to finance the majority of our PTF strategy with internally generated cash and debt financings. We expect our debt to total capital ratio, as measured by the debt rating agencies will not exceed 61.5% through our PTF construction period. We currently do not plan to issue any new common equity as part of our PTF program.

Our primary risks under PTF are construction risks associated with the schedule and costs for both our Oak Creek expansion and PWGS 2; continuing legal challenges to permits obtained and changes in applicable laws or regulations; adverse interpretation or enforcement of permit conditions, laws and regulations by the permitting agencies; the inability to obtain necessary operating permits in a timely manner; obtaining the investment capital from outside sources necessary to implement the strategy; governmental actions; and events in the global economy.

For further information concerning PTF capital requirements, see Liquidity and Capital Resources below. You can find additional information regarding risks associated with the PTF strategy, as well as the regulatory process and specific regulatory approvals, in Factors Affecting Results, Liquidity and Capital Resources below.

Divestiture of Assets

Our PTF strategy led to a decision to divest non-core businesses. These non-core businesses primarily included non-utility generation assets located outside of Wisconsin and a substantial amount of Wispark’s real estate portfolio, as well as our manufacturing business. In addition, in 2001 we contributed our transmission assets to ATC and received cash proceeds of $119.8 million and an economic interest in ATC. Since 2000, we have received total proceeds of approximately $2.2 billion from the divestiture of assets as follows:

Proceeds from divestitures:	2000 -2006
(Millions of Dollars)
Manufacturing	$	857.0
Non-Utility Energy		616.8
Real Estate		462.2
Transmission		119.8
Guardian		38.5
Other		77.3
Total	$	2,171.6

42 Wisconsin Energy Corporation

2006 Form 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Cont’d)

RESULTS OF OPERATIONS

CONSOLIDATED EARNINGS

The following table compares our operating income by business segment and our net income for 2006, 2005 and 2004.

Wisconsin Energy Corporation	2006			2005		2004
	(Millions of Dollars)
Utility Energy	$	532.8		$	542.4	$	528.6
Non-Utility Energy		43.1			19.5		4.6
Corporate and Other		(7.4	)		1.0		(3.2	)
Total Operating Income		568.5			562.9		530.0
Equity in Earnings of Transmission Affiliate		38.6			34.6		30.1
Other Income and Deductions, net		53.1			28.7		(14.3	)
Interest Expense		172.7			173.4		193.4
Income From Continuing Operations Before Income Taxes		487.5			452.8		352.4
Income Taxes		175.0			149.2		132.8
Income From Continuing Operations		312.5			303.6		219.6
Income From Discontinued Operations, Net of Tax (a)		3.9			5.1		86.8
Net Income	$	316.4		$	308.7	$	306.4
Diluted Earnings Per Share
Continuing Operation	$	2.64		$	2.56	$	1.84
Discontinued Operations		0.03			0.05		0.73
Total Diluted Earnings Per Share	$	2.67		$	2.61	$	2.57

(a) Income from Discontinued Operations, Net of Tax includes: (1) Minergy Neenah, which we sold effective September 27, 2006, (2) the manufacturing segment, which we sold effective July 31, 2004 and (3) Calumet which we sold effective May 31, 2005. All periods reported in this table reflect these items as discontinued operations.

The following table identifies significant items that are included in our Diluted Earnings per Share from Continuing Operations.

	(Expense) Benefit
	2006		2005		2004
Reduction of Tax Valuation Allowances	$	0.05	$	0.14	$	—
Voluntary Severance Program	$	—	$	—	($	0.16	)
Debt Redemption Costs	$	—	$	—	($	0.13	)

An analysis of contributions to operating income by segment and a more detailed analysis of results in 2006, 2005, and 2004 follow.

UTILITY ENERGY SEGMENT CONTRIBUTION TO OPERATING INCOME

2006 vs. 2005: Our utility energy segment contributed $532.8 million of operating income during 2006 compared with $542.4 million of operating income during 2005. During 2006, we experienced mild weather, which reduced electric and gas sales. In addition, operation and maintenance expenses increased due to the timing of scheduled outages and maintenance projects at our coal units. However, these items were largely offset by improved recovery of fuel costs, only one scheduled refueling outage at Point Beach and increased gas margins.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Cont’d)

2005 vs. 2004: Our utility energy segment contributed $542.4 million of operating income during 2005 compared with $528.6 million of operating income during 2004. This increase primarily reflects favorable weather during the summer of 2005 and increased gas margins. Also, during 2004 we recorded severance costs under a voluntary severance program. The year to year increase in operating income was partially offset by an increase in our net under-recovered fuel position and higher operation and maintenance expenses during 2005. We had two scheduled refueling outages at our nuclear plant in 2005 in comparison to one scheduled refueling outage in 2004.

The following table summarizes our utility energy segment’s operating income during 2006, 2005 and 2004.

Utility Energy Segment	2006		2005		2004
	(Millions of Dollars)
Operating Revenues
Electric	$	2,529.4	$	2,349.7	$	2,099.0
Gas		1,419.9		1,417.5		1,252.4
Other		29.7		25.8		24.0
Total Operating Revenues		3,979.0		3,793.0		3,375.4
Fuel and Purchased Power		806.2		780.8		591.7
Cost of Gas Sold		1,018.3		1,047.3		890.9
Gross Margin		2,154.5		1,964.9		1,892.8
Other Operating Expenses
Other Operation and Maintenance		1,211.1		1,010.4		963.0
Depreciation, Decommissioning and Amortization		314.0		324.1		315.5
Property and Revenue Taxes		96.6		88.0		85.7
Operating Income	$	532.8	$	542.4	$	528.6

44 Wisconsin Energy Corporation

2006 Form 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Cont’d)

Electric Utility Gross Margin

The following table compares our electric utility gross margin during 2006 with similar information for 2005 and 2004, including a summary of electric operating revenues and electric sales by customer class.

	Electric Revenues and Gross Margin						Electric MWh Sales
Electric Utility Operations	2006		2005		2004		2006	2005	2004
	(Millions of Dollars)						(Thousands, Except Degree Days)
Customer Class
Residential	$	883.2	$	827.6	$	731.3	8,322.7	8,562.7	8,053.9
Small Commercial/Industrial		814.8		746.1		668.0	9,142.2	9,192.7	8,840.4
Large Commercial/Industrial		647.5		602.4		549.9	11,173.1	11,687.5	11,686.4
Other-Retail/Municipal		97.3		112.6		90.7	2,227.5	2,713.6	2,405.5
Resale-Utilities		51.2		21.3		24.6	1,025.7	313.7	662.2
Other Operating Revenues		35.4		39.7		34.5	—	—	—
Total Electric Operating Revenues	$	2,529.4	$	2,349.7	$	2,099.0	31,891.2	32,470.2	31,648.4
Fuel and Purchased Power
Fuel		487.9		432.7		334.7
Purchased Power		309.8		340.3		250.3
Total Fuel and Purchased Power		797.7		773.0		585.0
Total Electric Gross Margin	$	1,731.7	$	1,576.7	$	1,514.0
Weather — Degree Days (a)
Heating (6,663 Normal)							6,043	6,628	6,663
Cooling (716 Normal)							723	949	442

(a) As measured at Mitchell International Airport in Milwaukee, Wisconsin. Normal degree days are based upon a twenty-year moving average.

Electric Utility Revenues and Sales

2006 vs. 2005: Our electric utility operating revenues increased by $179.7 million, or 7.6%, when compared to 2005. We estimate that revenues in 2006 were $213.3 million higher than 2005 due to pricing increases that we received in January 2006 and during 2005. The most significant pricing increases authorized by the PSCW related to the recovery of higher fuel costs, costs associated with the new plants under our PTF strategy and increased transmission costs.

Our electric utility operating revenues are expected to increase in 2007 primarily due to the impact of a full year of the January 2006 Wisconsin retail pricing increase and the expected implementation of increased wholesale rates, as well as the impacts of our fuel adjustment clause that are tied to our fuel and purchase power costs. During 2006, we reserved approximately $38 million of revenues associated with favorable recoveries of fuel and purchase power. For more information on the pricing increases and the fuel cost adjustment clause, see Utility Rates and Regulatory Matters in Factors Affecting Results, Liquidity and Capital Resources.

Our electric sales volumes decreased by 1.8% in 2006 as compared to 2005 due to mild weather and lower commercial and industrial sales, offset by an increase in sales for resale. Residential sales volumes decreased 2.8% due largely to weather. In 2006, heating degree days decreased approximately 8.8% compared to 2005, and cooling degree days decreased approximately 23.8%. We estimate that the weather had an unfavorable impact on operating revenues of approximately $46.5 million when compared to the prior year. Total sales volumes to commercial/industrial customers decreased 2.7% between the comparative periods. Sales volumes to commercial/industrial customers, excluding our largest customers, two iron ore mines, decreased 1.4%. Sales volumes in the Other Retail/Municipal class decreased approximately 18% compared to the prior year due, in part, to the expiration of a wholesale contract on December 31, 2005. The increase in sales volumes to other utilities is

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Cont’d)

attributed to the availability of PWGS 1 for all of 2006, which provided additional generation capacity. PWGS 1 was not operational until the third quarter of 2005. Under the Wisconsin fuel rules, sales to other utilities reduce fuel costs charged to customers.

2005 vs. 2004: During 2005, our total electric utility operating revenues increased by $250.7 million or 11.9% when compared with 2004 primarily due to favorable weather during the summer of 2005 and pricing increases.

During 2005, we estimate that pricing increases contributed an additional $145.8 million of revenues than in 2004. The most significant impact to rates was a March 2005 interim order received by Wisconsin Electric from the PSCW authorizing an annualized increase in electric rates of approximately $114.9 million due to the increased costs of fuel and purchased power. In November 2005, Wisconsin Electric received the final rate order, which authorized an additional $7.7 million of annual revenues. Additional orders impacting rates in 2005 were the May 2004 and May 2005 orders received by Wisconsin Electric from the PSCW authorizing annualized increases in electric rates of approximately $59.0 million and $59.7 million, respectively, primarily to cover construction costs associated with our PTF strategy.

Total electric sales increased by 2.6% between 2005 and 2004. Residential sales volumes increased 6.3% due to the favorable summer weather in 2005. Total sales volumes to commercial/industrial customers increased 1.7% between comparative periods. Sales volumes to commercial/industrial customers, excluding our largest customers, two iron ore mines, increased 2.3% due to the favorable weather during the summer of 2005. We estimate that weather increased our electric revenues by approximately $68.8 million during 2005 as compared to the prior year. As measured by cooling degree days, 2005 was 114.7% warmer than in 2004.

Sales volumes in the Resale-Utilities class decreased 52.6% primarily due to the reduced availability of base-load capacity for sale at competitive prices as a result of limited fuel supplies and outages. Sales volumes to municipal utilities, the Other Retail/Municipal customer class, increased 12.8% between the periods due to higher off-peak demand from lower margin municipal wholesale power customers.

Electric Fuel and Purchased Power Expenses

2006 vs. 2005: Our fuel and purchased power expenses increased by $24.7 million, or approximately 3.2%, when compared to 2005. Our average cost of fuel and purchased power increased from $23.80 per MWh in 2005 to $25.01 per MWh in 2006. The largest factor for the higher cost per MWh was a 24.2% increase in the per MWh cost of coal-fired generation, which includes coal and related transportation costs, between the comparative periods. This increase was partially offset by increased generation from Point Beach and a decrease in the average costs of purchased power and fuel for our natural gas-fired units.

Our electric fuel and purchased power expenses in 2007 are expected to be impacted by the duration of the scheduled nuclear refueling outage in the first quarter of 2007; the timing and completion of the proposed sale of Point Beach; the price of purchased power; the increased cost of coal and related transportation; and changes in electric sales.

2005 vs. 2004: Gross fuel and purchased power costs for our electric utilities increased by a total of $260.8 million during 2005 when compared with 2004. During 2005, we deferred $72.8 million of fuel and purchased power costs which resulted in a net increase of fuel and purchased power expense of $188.0 million or 32.1% during 2005 when compared to 2004. The increase in fuel and purchased power expense was driven by a 2.6% increase in MWh sales and an increase in our average cost of fuel and purchased power from $18.48 per MWh in 2004 to $23.80 per MWh in 2005, or 28.8% between the comparative periods.

The increase in our average cost of fuel and purchased power was due primarily to (1) the reduced availability of nuclear generation due to scheduled refueling outages, (2) higher natural gas prices that increased the cost of power supplied by natural gas, (3) the impact of the implementation of the MISO Midwest Market in April 2005 and (4) limitations on coal supplies due to transportation shortfalls.

During 2005, we had two scheduled refueling outages at our nuclear plant and in 2004 we had one scheduled refueling outage. As a result, we had approximately 1,145,000 fewer MWh of nuclear generation in 2005. Our average fuel cost for nuclear generation is approximately $5 per MWh, while the average energy cost for purchased

46 Wisconsin Energy Corporation

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Cont’d)

power was approximately $55 per MWh. We estimate that the reduction in nuclear generation resulted in approximately $57 million of increased fuel and purchased power costs in 2005 as compared to 2004. During the 2005 outages we replaced both reactor vessel heads resulting in longer outages. This work, along with other planned maintenance, lasted longer than originally expected due to delays. For more information regarding the scheduled refueling outages, see Factors Affecting Results, Liquidity and Capital Resources — Nuclear Operations.

In 2005, we experienced significant increases in the cost of natural gas used in our own generating assets and in the price of purchased energy which is highly influenced by the price of natural gas. This increase was most significant in the last six months of 2005 due to market related factors including the hurricanes in the Gulf of Mexico. The average combined cost per MWh of purchased energy and natural gas fired units in 2005 was 47.7% higher than in 2004, increasing total cost by approximately $77.2 million.

In April 2005, we began participating in the MISO Midwest Market which fundamentally changed the way we dispatch our generating units and obtain purchased energy. As part of this new market, we are subject to new types of charges which, among other things, recognize the cost of transmission congestion, MWh losses and other costs associated with operating the generating units in an uneconomic fashion to support the MISO Midwest Market service territory. The State of Wisconsin has a constrained transmission system and we believe these constraints result in higher costs for us than in other parts of the MISO Midwest Market service territory. The incremental costs associated with the MISO Midwest Market charges identified above were approximately $28 million in 2005. For more information regarding MISO and the MISO Midwest Market, see Factors Affecting Results, Liquidity and Capital Resources — Industry Restructuring and Competition — Electric Transmission and Energy Markets.

Our 2005 operations were also adversely impacted by limitations on deliveries of coal supply due to the failure of our primary rail delivery supplier to deliver contracted quantities of coal to our units. The largest limitation was related to critical rail track maintenance in the Powder River basin. This, in turn, resulted in reduced coal deliveries of the coal which primarily serves our Oak Creek and Pleasant Prairie generating units from June through December 2005. In response to the reduced deliveries, we reduced generating output of these units during off-peak periods when replacement power prices were lower, purchased more expensive replacement power and took measures to purchase and transport higher cost coal in place of contracted supplies when it made economic sense to do so. We estimate that this increased our costs by approximately $52 million in 2005. For additional information on the decreased coal deliveries, see Factors Affecting Results, Liquidity and Capital Resources — Market Risks and Other Significant Risks — Commodity Prices.

Under the State of Wisconsin fuel rules, we are allowed to request recovery in fuel revenues if our projected fuel and purchased power costs exceed bands established by the PSCW. In March 2005, we received a rate order that allowed us to increase our annual revenues by $114.9 million (final order received in November 2005 for an annual increase of $122.6 million) due to increased fuel and purchased power costs. As provided under the Wisconsin rules, we are also allowed to request deferral for the costs associated with adverse events which materially impact fuel and purchased power costs which were not anticipated, or for which costs could not be reasonably estimated at the time of the fuel recovery request for consideration in future rate proceedings. During 2005, we deferred approximately $72.8 million of fuel and purchased power costs due to the extended outage at Point Beach Unit 2, the coal delivery problems and increased costs associated with the MISO Midwest Market. During 2005, we estimate that we under-recovered fuel and purchased power costs by $108.4 million before these deferred items. Adjusted for the allowed deferrals, our net under-recovered fuel and purchased power costs were approximately $35.6 million.

47 Wisconsin Energy Corporation

2006 Form 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Cont’d)

Gas Utility Revenues, Gross Margin and Therm Deliveries

The following table compares our total gas utility operating revenues and gross margin (total gas utility operating revenues less cost of gas sold) during 2006, 2005 and 2004.

Gas Utility Operations	2006		2005		2004
	(Millions of Dollars)
Operating Revenues	$	1,419.9	$	1,417.5	$	1,252.4
Cost of Gas Sold		1,018.3		1,047.3		890.9
Gross Margin	$	401.6	$	370.2	$	361.5

We believe gross margin is a better performance indicator than revenues because changes in the cost of gas sold flow through to revenue under GCRMs. The following table compares our gas utility gross margin and therm deliveries by customer class during 2006, 2005 and 2004.

	Gross Margin						Therm Deliveries
Gas Utility Operations	2006		2005		2004		2006	2005	2004
	(Millions of Dollars)						(Millions, Except Degree Days)
Customer Class
Residential	$	255.0	$	240.5	$	238.0	727.9	791.0	809.9
Commercial/Industrial		86.0		72.9		71.9	435.9	460.7	464.0
Interruptible		2.0		1.8		1.8	21.3	23.4	24.7
Total Gas Sold		343.0		315.2		311.7	1,185.1	1,275.1	1,298.6
Transported Gas		51.3		48.5		43.8	843.8	893.7	769.5
Other Operating		7.3		6.5		6.0	—	—	—
Total	$	401.6	$	370.2	$	361.5	2,028.9	2,168.8	2,068.1
Weather - Degree Days (a)
Heating (6,663 Normal)							6,043	6,628	6,663

(a) As measured at Mitchell International Airport in Milwaukee, Wisconsin. Normal degree days are based upon a twenty-year moving average.

2006 vs. 2005: Gas utility gross margin increased by $31.4 million or 8.5% between the comparative periods. The increase in gross margin is due, in part, to pricing increases that were granted by the PSCW and implemented in January 2006. The gas pricing increases were primarily granted to recover higher operating costs, including bad debt expenses. We estimate that our gross margin increased between the comparative periods by approximately $53.4 million due to these pricing increases.

The pricing increases were partially offset by a decline in gas sales volumes that was driven by mild winter weather and by lower customer usage. Temperatures (as measured by heating degree days) were approximately 8.8% warmer in 2006 as compared to 2005. The mild winter weather reduced customer demand for heating. We estimate that the weather decreased our gross margin by approximately $21.0 million between the comparative periods. We continue to see a reduction in normalized use of gas per customer which we believe is caused by high natural gas prices and the continued improvements in energy efficient appliances. During 2006, we estimate this reduction in normalized use decreased our gross margin by approximately $4.9 million. The decrease in volume of transport gas sales was due in part to fuel switching during months where gas commodity prices were high during 2006. Residential therm deliveries decreased 8.0% as compared to 2005, due to warmer weather and a decrease in use per customer that was driven in part by high commodity prices.

48 Wisconsin Energy Corporation

2006 Form 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Cont’d)

The gas utility gross margins are expected to increase in 2007 primarily due to the impact of a full year of the January 2006 pricing increases. In addition, 2007 gross margins will be impacted by weather and customer demand. For more information on the pricing increases, see Utility Rates and Regulatory Matters in Factors Affecting Results, Liquidity and Capital Resources below.

2005 vs. 2004: Gas utility gross margin increased by $8.7 million or 2.4% between the comparative periods. This increase reflects $6.5 million of price increases which reflects the full year’s impact of a $25.9 million annual rate increase, which became effective in March 2004. Total therm deliveries were 4.9% higher during 2005 primarily due to increased transport gas deliveries of 124.2 million therms. Transport volumes increased between the comparative periods due to a higher amount of electric generation from natural gas within our service territory. A portion of these sales are eliminated in consolidation. Our margins on these transport gas volumes are significantly lower than our margins for retail gas sales. The price increases and increased transport volumes were offset, in part, by a decrease in residential therm deliveries. Residential therm deliveries decreased 2.3% as compared to 2004, due to slightly warmer weather and a decrease in use per customer that was driven in part by higher commodity prices. As measured by heating degree days, 2005 was less than 1% warmer than 2004.

Other Operation and Maintenance Expenses

2006 vs. 2005: Our other operation and maintenance expenses increased by $200.7 million, or 19.9%, when compared to 2005. As discussed above, we received pricing increases in January 2006 to cover increased costs. The increases in other operation and maintenance expenses that relate to the pricing increases include higher PTF lease costs of $85.4 million, increased transmission expenses of $62.7 million, increased renewable energy and energy efficiency program expenses of $10.6 million and increased bad debt expenses of $13.7 million. Other operation and maintenance expenses increased approximately $34.7 million due to PWGS 1 operating costs and the timing of scheduled outages and maintenance projects at our coal plants. In 2005, we received approximately $10.0 million as a settlement to resolve a vender dispute, reducing other operation and maintenance expense in 2005. These increases were partially offset by decreased nuclear operating and maintenance expense. In 2006, we had only one scheduled nuclear refueling outage as compared to two scheduled refueling outages in 2005, which resulted in approximately a $10.9 million decrease in nuclear operation and maintenance expenses between the comparative periods. In addition, the elimination of seams elimination transmission charges, effective March 31, 2006, resulted in reduced costs of approximately $9.5 million for 2006. For further information on seams elimination charges, see Electric Transmission in Factors Affecting Results, Liquidity and Capital Resources below.

Our utility operation and maintenance expenses are expected to increase in 2007 as a result of increased amortizations related to the impact of the 2006 pricing increases. In addition, operation and maintenance expenses are influenced by wage inflation, employee benefit costs and the length of plant outages.

2005 vs. 2004: Other operation and maintenance expenses increased by $47.4 million or 4.9% during 2005 compared with 2004. The most significant changes in our operation and maintenance expense related to increased lease costs and increased nuclear outage costs. Partially offsetting these increases was a charge in 2004 for severance costs related to the voluntary severance program and lower employee costs in 2005 due to fewer employees.

The largest operations and maintenance increase for the utility energy segment related to $50.0 million of costs that we recognized under lease agreements between We Power and Wisconsin Electric in connection with our PTF strategy.

In addition to the increased lease costs, our nuclear operating and maintenance expense increased approximately $11.0 million due to two scheduled refueling outages in 2005 where we also replaced the reactor vessel heads. In 2004, we had one scheduled refueling outage. This increase was partially offset by a $10.0 million settlement we received to resolve a vendor dispute.

Additionally, in 2004 we recognized $28.2 million of severance related costs due to the voluntary severance program that was implemented in the second half of 2004. In 2005, we had approximately 210 fewer employees, which reduced operation and maintenance costs by $12.9 million.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Cont’d)

Benefit costs increased $7.0 million between the comparative periods due to increased pension and medical costs. In October 2005, we announced that we were offering to our retirees a Medicare Advantage program as an option within our existing post-retirement medical and drug plans.

Depreciation, Decommissioning and Amortization Expense

2006 vs. 2005: Depreciation, decommissioning and amortization expenses decreased by $10.1 million or 3.1% when compared to 2005. In January 2006, we implemented new depreciation rates approved by the PSCW which reduced annual depreciation expenses. We estimate that the new rates reduced annual depreciation expense by approximately $17 million, which was offset, in part, by net plant additions in 2006. We expect Depreciation, decommissioning and amortization expenses in 2007 to increase as a result of an overall increase in utility plant assets in service.

2005 vs. 2004: Depreciation, decommissioning and amortization expense increased by $8.6 million in 2005 as compared to 2004. This increase was primarily due to increased depreciable plant balances.

NON-UTILITY ENERGY SEGMENT CONTRIBUTION TO OPERATING INCOME

The most significant subsidiary included in this segment is We Power, which constructs and owns power plants associated with our PTF strategy and leases them to Wisconsin Electric. This segment reflects revenues billed under the PWGS 1 lease and the depreciation expense related to PWGS 1.

The following table compares our non-utility energy segment’s operating income during 2006, 2005 and 2004.

Non-Utility Energy Segment	2006		2005		2004
	(Millions of Dollars)
Operating Revenues	$	69.1	$	40.0	$	19.9
Other Operating Expenses
Other Operation and Maintenance		14.4		14.4		12.9
Depreciation, Decommissioning and Amortization		11.2		5.9		1.4
Property and Revenue Taxes		0.4		0.2		1.0
Operating Income	$	43.1	$	19.5	$	4.6

Note: The PTF lease revenues and lease costs recorded by the non-utility and utility energy segments are eliminated in consolidation.

2006 vs. 2005: Our non-utility energy segment contributed $43.1 million of operating income in 2006 compared to operating income of $19.5 million in 2005. This increase in operating income primarily reflects a full year of operating income from PWGS 1 in 2006, which was placed in service in July 2005. There were no earnings associated with this unit in the first six months of 2005.

Our non-utility energy segment is expected to generate operating income in 2007 that is comparable to 2006 as both years will include 12 months of operations of PWGS 1.

2005 vs. 2004: Our non-utility energy segment had operating income of $19.5 million during 2005 compared with $4.6 million during 2004. The increase in operating income between the comparative periods is primarily due to PWGS 1 commencing service in

July 2005. This unit had operating income of $18.9 million during its six months of operation in 2005.

50 Wisconsin Energy Corporation

2006 Form 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Cont’d)

CORPORATE AND OTHER CONTRIBUTION TO OPERATING INCOME

2006 vs. 2005: Corporate and other affiliates had an operating loss of $7.4 million in 2006 compared with operating income of $1.0 million in 2005. The operating loss in 2006 is attributable to lower operating earnings at Wispark. In the foreseeable future, we expect to have slight operating losses as we have minimal business operations in this segment.

2005 vs. 2004: Corporate and other affiliates had operating income of $1.0 million in 2005 compared with an operating loss of $3.2 million in 2004. The improved results reflect increased earnings from Wispark.

CONSOLIDATED OTHER INCOME AND DEDUCTIONS, NET

The following table identifies the components of consolidated other income and deductions, net during 2006, 2005 and 2004.

Other Income and Deductions, Net	2006		2005			2004
	(Millions of Dollars)
Capitalized Carrying Costs	$	25.0	$	20.4		$	12.7
AFUDC - Equity		14.6		9.2			2.8
Gross Receipts Tax Recovery		4.0		2.6			1.5
Gain on Sale of Guardian Investment		2.8		—			—
Debt Redemption Costs		—		—			(22.9	)
Other, net		6.7		(3.5	)		(8.4	)
Total Other Income and Deductions, Net	$	53.1	$	28.7		($	14.3	)

2006 vs. 2005: Other income and deductions, net increased by $24.4 million when compared to 2005. The largest increases relate to increased AFUDC - Equity of $5.4 million, capitalized carrying costs of $4.6 million and the pre-tax gain on the sale of our investment in Guardian of $2.8 million. For further information on the sale of Guardian, see Other Matters in Factors Affecting Results, Liquidity and Capital Resources. In 2007, we expect a reduction in AFUDC - Equity as we placed in service the new scrubber at our Pleasant Prairie Power Plant in the fourth quarter of 2006. The scrubber was installed as part of our EPA consent decree spending. For further information on the consent decree with the EPA, see Note S — Commitments and Contingencies in the Notes to Consolidated Financial Statements.

2005 vs. 2004: Other income and deductions, net increased by $43.0 million in 2005 compared to 2004. In 2004, we recognized $22.9 million of debt redemption costs associated with the early redemption of approximately $500 million of long-term debt. Similar debt redemption costs were not incurred in 2005. We recognized higher capitalized carrying costs of $7.7 million. The AFUDC - Equity increased $6.4 million in 2005 due to a higher average balance of AFUDC qualifying utility construction projects in 2005.

CONSOLIDATED INTEREST EXPENSE

Interest Expense	2006		2005		2004
	(Millions of Dollars)
Gross Interest Costs	$	212.6	$	202.1	$	215.5
Less: Capitalized Interest		39.9		28.7		22.1
Interest Expense	$	172.7	$	173.4	$	193.4

51 Wisconsin Energy Corporation

2006 Form 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Cont’d)

2006 vs. 2005: Interest expense decreased by $0.7 million in 2006 when compared with 2005. Our gross interest costs increased by $10.5 million primarily due to increased debt levels; however, our capitalized interest increased by $11.2 million due to higher CWIP balances. In addition, in 2005 we expensed approximately $6.2 million related to the amortization of costs associated with prior debt redemptions. These costs were fully amortized as of July 2005; therefore, there was no similar expense in 2006.

We expect total interest expense in 2007 to increase due to increased debt levels to fund our planned construction activity; however, these increases are mitigated by increases in our capitalized interest. To the extent that we incur debt associated with CWIP, we capitalize the interest costs in accordance with our accounting policies.

2005 vs. 2004: Total interest expense decreased by $20.0 million in 2005 compared with 2004. The decrease in interest expense primarily reflects lower average debt levels in 2005 as compared to 2004. During 2004, we reduced debt levels by $654.2 million primarily with proceeds from the sale of our manufacturing segment. However, due to the increased construction activity our 2005 year end debt balances increased by $291.9 million.

CONSOLIDATED INCOME TAXES

2006 vs. 2005: Our effective tax rate applicable to continuing operations was 35.9% in 2006 compared to 33.0% in 2005. In 2006 and 2005, we reversed $5.8 million and $16.3 million, respectively, of valuation allowance associated with state net operating loss carry forwards as we concluded that it was more likely than not that we would realize these benefits. Excluding these items, our 2006 and 2005 effective tax rate was 37.1% and 36.6%, respectively. For further information see Note H — Income Taxes in the Notes to Consolidated Financial Statements. We expect our 2007 annual effective tax rate to range between 38% and 39%.

2005 vs. 2004: Our effective tax rate applicable to continuing operations was 33.0% in 2005 compared to 37.7% in 2004. In 2005, we reversed $16.3 million of valuation allowances associated with state net operating loss carry forwards as we concluded that it was more likely than not that we would realize these benefits. Excluding this item, our effective tax rate was 36.6%. For further information see Note H — Income Taxes in the Notes to Consolidated Financial Statements.

DISCONTINUED OPERATIONS

Our discontinued operations include our Minergy Neenah facility which was sold in September 2006, our Calumet facility which was sold in May 2005 and our manufacturing operations which were sold in July 2004.

The following table identifies the primary components of net income from discontinued operations during 2006, 2005 and 2004.

Discontinued Operations	2006		2005		2004
	(Millions of Dollars)
Manufacturing	$	2.4	$	—	$	184.2
Non-Utility and Other		1.5		5.1		(97.4	)
Income from Discontinued Operations, Net of Tax	$	3.9	$	5.1	$	86.8

Our 2006 earnings from discontinued operations reflect a loss on the sale of Minergy Neenah, the 2006 operations of the plant and income of approximately $2.4 million related to the favorable resolution of tax liabilities.

Our 2005 earnings from discontinued operations reflect a gain on the sale of the Calumet facility, the favorable resolution of liabilities at Calumet and a downward adjustment to the carrying value of Minergy Neenah.

52 Wisconsin Energy Corporation

2006 Form 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Cont’d)

Our 2004 earnings from discontinued operations reflect an after-tax gain of $152.3 million on the sale of our manufacturing business. Our 2004 earnings from discontinued operations also reflect impairment charges of $79.3 million after-tax related to Calumet and $17.6 million after-tax related to Minergy Neenah.

See Note D — Asset Sales, Divestitures and Discontinued Operations in the Notes to Consolidated Financial Statements for further information regarding the transactions described above.

LIQUIDITY AND CAPITAL RESOURCES

CASH FLOWS

The following table summarizes our cash flows during 2006, 2005 and 2004:

Wisconsin Energy Corporation	2006			2005			2004
	(Millions of Dollars)
Cash Provided by (Used in)
Operating Activities	$	729.8		$	576.9		$	599.0
Investing Activities	($	939.3	)	($	697.1	)	$	242.8
Financing Activities	$	173.3		$	157.8		($	834.3	)

Operating Activities

Cash provided by operating activities for 2006 totaled $729.8 million, which is a $152.9 million improvement over 2005. There were two primary areas that drove this improvement in operating cash flows. During 2006, we estimate that our collections of fuel costs improved by nearly $95 million as we had favorable collections in 2006 and unfavorable recoveries and fuel cost deferrals in 2005. The other primary area related to the working capital requirements related to gas in storage. During 2006, we entered into certain contracts that reduced our need to inject gas in storage. In addition, lower gas commodity prices, offset by less withdrawals due to weather, have lowered working capital requirements between the comparative periods. We estimate that these items reduced our cash needs for gas in storage by approximately $77.0 million. Partially offsetting these items was an increase of cash taxes of approximately $107 million due to higher taxable earnings.

Cash provided by operating activities decreased to $576.9 million during 2005 compared with $599.0 million during 2004. This decline reflected increased working capital needs for our utility business and an increase in deferred costs, offset in part by lower cash taxes and increased cash earnings. During 2005, we experienced significant increases in natural gas costs which increased our working capital requirements for natural gas in storage. The increased natural gas costs also led to an increase in accounts receivable as the cost of gas is recovered dollar for dollar in our natural gas revenues. During 2005, we also experienced increased deferred costs related to transmission costs and deferred fuel. During 2005, our cash taxes were lower than 2004 due to the ability to realize tax benefits on the sale of non-utility assets and accelerated tax depreciation on PWGS 1.

Investing Activities

During 2006, net cash outflows from investing activities were $939.3 million compared with net cash outflows of $697.1 million in 2005. This increase is primarily associated with the increased capital expenditures as construction progresses on our new generating plants. During 2006, we had significant capital expenditures related to the Oak Creek expansion and PWGS 2.

During 2005, we had $697.1 million of net cash outflows from investing activities. In 2004, we had net cash inflows from investing activities of $242.8 million. In 2005, capital expenditures increased related to our PTF strategy at We Power and for compliance with the consent decree entered into with the EPA. See Factors Affecting Results, Liquidity and Capital Resources — Environmental Matters. In addition, expenditures associated with nuclear fuel purchases were higher during 2005. In 2004, we recognized proceeds of $857.0 million from the sale of our manufacturing segment.

53 Wisconsin Energy Corporation

2006 Form 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Cont’d)

The following table identifies capital expenditures by year:

Capital Expenditures	2006		2005		2004
	(Millions of Dollars)
Utility Energy	$	459.9	$	458.6	$	426.5
We Power		466.1		276.4		190.4
Other		2.7		10.1		19.6
Total Capital Expenditures	$	928.7	$	745.1	$	636.5

In connection with our growth strategy, which was announced in 2000, we have been focusing on divesting non-core assets and investing in core regulated assets. The sale of assets is a significant component of our investing activities. From 2000 through 2006, we have received approximately $2.2 billion of cash proceeds from the divestiture of assets. In 2007, if we are able to close on the sale of Point Beach, we expect to receive an additional $1 billion of after-tax cash proceeds. However, except for the potential sale of Point Beach, we do not expect to have a significant level of asset sales in the future.

The following table identifies cash proceeds from asset sales.

Asset Sales	2006		2005		2004
	(Millions of Dollars)
Guardian	$	38.5	$	—	$	—
Real Estate		20.1		54.5		38.7
Wisvest		—		37.1		—
We Power		—		34.6		—
Manufacturing		—		—		857.0
Other		43.8		7.6		3.9
Total Asset Sales	$	102.4	$	133.8	$	899.6

Financing Activities

The following table summarizes our cash flows from financing activities:

	2006			2005			2004
	(Millions of Dollars)
Increase (Reduction) Debt	$	299.7		$	291.9		($	654.2	)
Dividends on Common Stock		(107.6	)		(102.9	)		(97.8	)
Common Stock, net		(21.2	)		(28.1	)		(81.8	)
Other		2.4			(3.1	)		(0.5	)
Cash Provided by (Used in) Financing	$	173.3		$	157.8		($	834.3	)

During 2006, cash provided by financing activities was $173.3 million compared to $157.8 million in 2005. Wisconsin Energy retired at the scheduled maturity date $250.0 million of 5.875% Notes due April 1, 2006. Short-term debt was issued to retire those notes. During 2006, short-term debt increased approximately $455.6 million. In November 2006, Wisconsin Electric issued $300 million of 5.70% Debentures due December 1, 2036. The net proceeds from the sale were used to retire Wisconsin Electric’s $200 million of 6-5/8% Debentures due November 15, 2006 at their scheduled maturity and to repay outstanding commercial paper incurred for working capital requirements.

54 Wisconsin Energy Corporation

2006 Form 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Cont’d)

In July 2005, PWGS issued $155.0 million of 4.91% senior notes in a private placement. The senior notes have a mortgage style repayment feature and have an average life approximating 15 years. The final payment is due July 15, 2030. Proceeds from the sale of the senior notes were used primarily to repay short-term debt incurred during construction at PWGS. For further information, see Note K — Long-Term Debt in the Notes to Consolidated Financial Statements.

Wisconsin Gas retired at the scheduled maturity date $65 million of 6-3/8% Notes due November 1, 2005. In November 2005, Wisconsin Gas issued $90 million of 5.90% Debentures due December 1, 2035. The proceeds from the sale were used to repay a portion of our outstanding commercial paper. The commercial paper was incurred to both retire the $65 million of 6-3/8% Notes and for working capital requirements.

During 2004, the proceeds from asset sales as well as improved cash flows from operations allowed us to retire $654.2 million of debt, including $200 million of 6.85% Trust Preferred Securities and $300 million of 5.875% senior notes due April 1, 2006.

No new shares of Wisconsin Energy’s common stock were issued in 2006 and 2005. During January and February 2004, we issued approximately 0.2 million new shares of common stock in connection with our dividend reinvestment plan and various employee benefit plans and we received payments aggregating $4.8 million. In February 2004, we announced that we did not expect to issue new shares under these programs; rather we instructed the independent plan agents to begin purchasing the shares in the open market in lieu of issuing new shares. During 2006, 2005 and 2004, our plan agents purchased 1.1 million shares at a cost of $48.0 million, 2.0 million shares at a cost of $75.1 million and 3.2 million shares at a cost of $102.3 million, respectively, to fulfill exercised stock options and restricted stock awards. In 2006, 2005, and 2004 we received proceeds of $26.8 million, $47.0 million and $66.1 million related to the exercise of stock options. Prior to February 2004, we issued new shares to fulfill these obligations.

In September 2000, the Board of Directors amended the common stock repurchase program to authorize us to purchase up to $400 million of our shares of common stock in the open market. This program expired in December 2004. In March 2004, we announced that under this plan we would resume purchasing approximately $50 million of our common shares in the open market with the proceeds from the sale of the manufacturing business, which was effective July 31, 2004. During 2004, we purchased approximately 1.6 million shares of common stock for $50.4 million under this plan. We ceased repurchasing shares in October 2004. Over the life of the plan we repurchased and retired 14.9 million shares at a cost of $344.0 million.

CAPITAL RESOURCES AND REQUIREMENTS

In December 2006, we announced that Wisconsin Electric had reached an agreement to sell Point Beach to an affiliate of FPL. If the sale is completed, we expect to receive over $1 billion of after-tax proceeds from the sale and liquidation of decommissioning trust assets. In the short-term, these proceeds would be used to reduce outstanding debt or temporarily invested in short term securities. However, as discussed in Corporate Developments - Corporate Strategy, we have filed an application with the PSCW that outlines our intention to use the gain (net of transaction related costs) on the proceeds for the benefit of our customers as decided by our regulators in future rate proceedings. As such, if the Point Beach sale is approved, we believe that the cash proceeds, after transaction costs and return of invested capital, that will result from the sale will replace revenues that we would have received in future rate proceedings.

In 2000, we announced a growth strategy which, among other things, called for us to sell non-core assets and reduce our debt levels. Our debt to total capital ratio has decreased from 68.3% at September 30, 2000 to 59.5% at December 31, 2006 due primarily to asset sales. Over the next several years, we expect to have some limited asset sales, but at levels significantly lower than the previous seven year level.

Capital Resources

We anticipate meeting our capital requirements during 2007 and the next several years primarily through internally generated funds and short-term borrowings, supplemented by the issuance of intermediate or long-term debt or other

55 Wisconsin Energy Corporation

2006 Form 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Cont’d)

capital market (other than common stock) securities depending on market conditions and other factors. During 2007, Wisconsin Energy may issue up to $600 million of debt or debt-like securities depending on market conditions and other factors.

We have access to capital markets and have been able to generate funds internally and externally to meet our capital requirements. Our ability to attract the necessary financial capital at reasonable terms is critical to our overall strategic plan. We believe that we have adequate capacity to fund our operations for the foreseeable future through our borrowing arrangements and internally generated cash.

In March 2004, the Governor of Wisconsin signed into law a measure that gives utilities the ability to securitize the portion of customer bills that recovers the cost of certain investments intended to improve the environment. We evaluated the possible issuance of environmental trust bonds for some time. However, after extensive evaluation and analysis, we will not be pursuing an issuance of environmental trust bonds.

Wisconsin Energy, Wisconsin Electric and Wisconsin Gas credit agreements provide liquidity support for each company’s obligations with respect to commercial paper and for general corporate purposes.

As of December 31, 2006, we had approximately $1.7 billion of available unused lines under our bank back-up credit facilities on a consolidated basis and approximately $911.9 million of total consolidated short-term debt outstanding.

We review our bank back-up credit facility needs on an ongoing basis and expect to be able to maintain adequate credit facilities to support our operations. The following table summarizes such facilities at December 31, 2006.

Company	Total Facility	Letters of Credit	Credit Available	Facility Expiration	Facility Term
	(Millions of Dollars)
Wisconsin Energy	$900.0	$  1.5	$898.5	April 2011	5 year
Wisconsin Electric	$500.0	$14.1	$485.9	March 2011	5 year
Wisconsin Gas	$300.0	$ —	$300.0	March 2011	5 year

On March 30, 2006, Wisconsin Electric entered into an unsecured five year $500 million bank back-up credit facility to replace a $250 million three year credit facility with an expiration date of June 2007 and a $125 million three year credit facility with an expiration date of November 2007. This new facility will expire in March 2011.

On March 30, 2006, Wisconsin Gas entered into an unsecured five year $300 million bank back-up credit facility to replace a $200 million three year credit facility with an expiration date of June 2007. This new facility will expire in March 2011.

On April 6, 2006, Wisconsin Energy entered into an unsecured five year $900 million bank back-up credit facility to replace a $300 million credit facility that would have expired on April 8, 2006 and a $300 million credit facility with an expiration date of June 2007. This new credit facility will expire in April 2011.

Each of these facilities has a renewal provision for two one-year extensions, subject to lender approval.

56 Wisconsin Energy Corporation

2006 Form 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Cont’d)

The following table shows our consolidated capitalization structure at December 31:

Capitalization Structure	2006				2005
	(Millions of Dollars)
Common Equity	$	2,889.0	40.1	%	$	2,680.1	40.0	%
Preferred Stock of Subsidiary		30.4	0.4	%		30.4	0.5	%
Long-Term Debt (including current maturities)		3,370.1	46.8	%		3,527.0	52.7	%
Short-Term Debt		911.9	12.7	%		456.3	6.8	%
Total	$	7,201.4	100.0	%	$	6,693.8	100.0	%
Ratio of Debt to Total Capital			59.5	%			59.5	%

As described in Note J — Common Equity, in the Notes to Consolidated Financial Statements, certain restrictions exist on the ability of our subsidiaries to transfer funds to us. We do not expect these restrictions to have any material effect on our operations or ability to meet our cash obligations.

Access to capital markets at a reasonable cost is determined in large part by credit quality. The following table summarizes the ratings of our debt securities and the debt securities and preferred stock of our subsidiaries by S&P, Moody’s and Fitch as of December 31, 2006.

	S&P	Moody’s	Fitch
Wisconsin Energy
Commercial Paper	A-2	P-2	F2
Unsecured Senior Debt	BBB+	A3	A-
Wisconsin Electric
Commercial Paper	A-2	P-1	F1
Secured Senior Debt	A-	Aa3	AA-
Unsecured Debt	A-	A1	A+
Preferred Stock	BBB	A3	A
Wisconsin Gas
Commercial Paper	A-2	P-1	F1
Unsecured Senior Debt	A-	A1	A+
Wisconsin Energy Capital Corporation
Unsecured Debt	BBB+	A3	A-

On June 15, 2006, Fitch affirmed the security ratings of Wisconsin Energy, Wisconsin Electric, Wisconsin Gas and Wisconsin Energy Capital Corporation and changed the security ratings outlook for Wisconsin Energy and Wisconsin Energy Capital Corporation from stable to negative. The security ratings outlooks assigned by Fitch for Wisconsin Electric and Wisconsin Gas are stable.

On June 8, 2006, S&P affirmed the security ratings and ratings outlook of Wisconsin Energy, Wisconsin Electric and Wisconsin Gas. The security ratings outlooks assigned by S&P for Wisconsin Energy, Wisconsin Electric, Wisconsin Gas and Wisconsin Energy Capital Corporation are negative.

The security rating outlooks assigned by Moody’s for Wisconsin Energy, Wisconsin Electric, Wisconsin Gas and Wisconsin Energy Capital Corporation are all stable. In February 2004, Moody’s changed the rating outlook for Wisconsin Energy and Wisconsin Energy Capital Corporation from negative to stable.

57 Wisconsin Energy Corporation

2006 Form 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Cont’d)

We believe these security ratings should provide a significant degree of flexibility in obtaining funds on competitive terms. However, these security ratings reflect the views of the rating agencies only. 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. Any rating can be revised upward or downward or withdrawn at any time by a rating agency if it decides that the circumstances warrant the change. Each rating should be evaluated independently of any other rating.

Capital Requirements

Our current estimated 2007, 2008 and 2009 capital expenditures, excluding the purchase of nuclear fuel, are as follows:

Capital Expenditures	Actual 2006		Estimated 2007		Estimated 2008		Estimated 2009
	(Millions of Dollars)
Utility Energy	$	459.9	$	661.0	$	551.0	$	587.0
We Power		466.1		701.0		475.0		216.0
Other		2.7		9.0		4.0		5.0
Total	$	928.7	$	1,371.0	$	1,030.0	$	808.0

Due to changing environmental and other regulations such as air quality standards and electric reliability initiatives that impact our utility energy segments future long-term capital requirements may vary from recent capital requirements.

Our capital requirements include the construction of the PTF units. Through December 31, 2006, we have expended approximately $1.2 billion of the approximately $2.6 billion in capital we estimate will be required to construct the 2,120 MW of new natural gas-fired and coal-fired generating capacity. We anticipate that the PTF units will be completed by 2010.

We expect the capital requirements to support our investment in new generation under PTF to come from a combination of internal and external sources. We Power, a non-utility subsidiary, is constructing the new generating plants, which will be leased to Wisconsin Electric under 25-30 year lease agreements. We expect that Wisconsin Electric will recover the lease payments in its utility rates.

In June 2005, we purchased the development rights to two wind farm projects from Navitas Energy Inc. We plan to develop the wind sites and construct wind turbines with a combined generating capability between 130 and 200 MW. We estimate that the capital cost of the project, excluding AFUDC, will be up to $360 million. We anticipate the cost to build the wind farm projects would be recovered in Wisconsin Electric’s rates. We expect the turbines to be placed in service in 2008 dependent upon the availability of wind turbines and the receipt of necessary regulatory approvals. For additional information on Wind Generation see Utility Rates and Regulatory Matters - Wind Generation below.

Investments in Outside Trusts: We have funded our pension obligations, certain other post-retirement obligations and future nuclear obligations in outside trusts. Collectively, these trusts had investments that exceeded $2.1 billion as of December 31, 2006. These trusts hold investments that are subject to the volatility of the stock market and interest rates. For further information see Note I — Nuclear Operations and Note O — Benefits in the Notes to Consolidated Financial Statements.

Off-Balance Sheet Arrangements: We are a party to various financial instruments with off-balance sheet risk as a part of our normal course of business, including financial guarantees and letters of credit which support construction projects, commodity contracts and other payment obligations. We believe that these agreements do not have, and are not reasonably likely to have, a current or future effect on our financial condition, changes in financial condition,

58 Wisconsin Energy Corporation

2006 Form 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Cont’d)

revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to our investors. For further information, see Note P — Guarantees in the Notes to Consolidated Financial Statements.

We have identified three tolling and purchased power agreements with third parties but have been unable to determine if we are the primary beneficiary of any of these three variable interest entities as defined by FIN 46. As a result, we do not consolidate these entities. Instead, we account for one of these contracts as a capital lease and for the other two contracts as operating leases as reflected in the table below. We have included our contractual obligations under all three of these contracts in our Contractual Obligations/Commercial Commitments disclosure that follows. For additional information, see Note G — Variable Interest Entities in the Notes to Consolidated Financial Statements.

Contractual Obligations/Commercial Commitments: We have the following contractual obligations and other commercial commitments as of December 31, 2006:

	Payments Due by Period
Contractual Obligations (a)	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
	(Millions of Dollars)
Long-Term Debt Obligations (b)	$	6,125.6	$	442.4	$	708.9	$	735.3	$	4,239.0
Capital Lease Obligations (c)		547.9		61.7		108.5		82.5		295.2
Operating Lease Obligations (d)		183.9		51.6		58.2		41.2		32.9
Purchase Obligations (e)		3,293.6		1,099.4		1,458.8		300.1		435.3
Other Long-Term Liabilities (f)		84.4		82.2		1.4		0.8		—
Total Contractual Obligations	$	10,235.4	$	1,737.3	$	2,335.8	$	1,159.9	$	5,002.4

(a) The amounts included in the table are calculated using current market prices, forward curves and other estimates. Contracts with multiple unknown variables have been omitted from the analysis. The table excludes the long-term power purchase commitment which is contingent upon the sale of Point Beach.

(b) Principal and interest payments on our Long-Term Debt and the Long-Term Debt of our affiliates (excluding capital lease obligations).

(c) Capital Lease Obligations of Wisconsin Electric for nuclear fuel lease and purchase power commitments.

(d) Operating Lease Obligations for purchase power commitments and vehicle and rail car leases for Wisconsin Energy and affiliates.

(e) Purchase Obligations under various contracts for the procurement of fuel, power, gas supply and associated transportation related to utility operations and for construction, information technology and other services for utility and We Power operations.

(f) Other Long-Term Liabilities includes the expected 2007 supplemental executive retirement plan obligation and the 2007 non-discretionary pension contribution. For additional information on employer contributions to our benefit plans see Note O — Benefits in the Notes to Consolidated Financial Statements.

Obligations for utility operations by our utility affiliates have historically been included as part of the rate making process and therefore are generally recoverable from customers. For a discussion of 2007, 2008 and 2009 estimated capital expenditures, see Capital Requirements above.

59 Wisconsin Energy Corporation

2006 Form 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Cont’d)

FACTORS AFFECTING RESULTS, LIQUIDITY AND CAPITAL RESOURCES

MARKET RISKS AND OTHER SIGNIFICANT RISKS

We are exposed to market and other significant risks as a result of the nature of our businesses and the environment in which those businesses operate. These risks, described in further detail below, include but are not limited to:

Large Construction Projects: In December 2002, the PSCW issued a written order granting a CPCN to commence construction of the PWGS consisting of two 545 MW natural gas-fired combined cycle generating units on the site of Wisconsin Electric’s existing Port Washington Power Plant. The order approved key financial terms of the leased generation contracts including fixed construction costs of PWGS 1 at $309.6 million and PWGS 2 at $280.3 million (2001 dollars), respectively, subject to escalation at the GDP inflation rate, force majeure, excused events and event of loss provisions. For additional information, see Power the Future — Port Washington.

In addition, in November 2003, the PSCW issued a written order granting a CPCN to commence construction of two 615 MW super critical pulverized coal generating units adjacent to the site of Wisconsin Electric’s existing plant. The order approves key financial terms of the leased generation contracts including a target construction cost of the Oak Creek expansion of $2.191 billion, plus, subject to PSCW approval, cost over-runs of up to 5%, costs attributable to force majeure events, excused events and event of loss provisions. For additional information, see Power the Future — Oak Creek Expansion.

Large construction projects of this type are subject to usual construction risks over which we will have limited or no control and which might adversely affect project costs and completion time. These risks include, but are not limited to, shortages of, the inability to obtain or the cost of labor or materials, the inability of the general contractor or subcontractors to perform under their contracts, strikes, adverse weather conditions, continuing legal challenges to permits obtained, changes in applicable laws or regulations, adverse interpretation or enforcement of permit conditions, laws and regulations by the permitting agencies, the inability to obtain necessary operating permits in a timely manner, governmental actions and events in the global economy.

If final costs for the construction of PWGS exceed the fixed costs allowed in the PSCW order, absent a finding by the PSCW of extraordinary circumstances such as force majeure conditions, this excess will not adjust the amount of the lease payments recovered from Wisconsin Electric. If final costs of the Oak Creek expansion are within 5% of the target cost, and the additional costs are deemed to be prudent by the PSCW, the final lease payments for the Oak Creek expansion recovered from Wisconsin Electric would be adjusted to reflect the actual construction costs. Costs above the 5% cap would not be included in lease payments or recovered from customers absent a finding by the PSCW of extraordinary circumstances such as force majeure conditions.

Regulatory Recovery: The electric operations of Wisconsin Electric burn natural gas in its leased power plants, in several of its peaking power plants and as a supplemental fuel at several coal-fired plants. In addition, the cost of purchased power is generally tied to the cost of natural gas. Wisconsin Electric bears regulatory risk for the recovery of these fuel and purchased power costs when these costs are higher than the base rate established in its rate structure. For further information on the recovery of fuel and purchase power costs see Commodity Prices.

Our utility energy segment accounts for its regulated operations in accordance with SFAS 71. Our rates are determined by regulatory authorities. Our primary regulator is the PSCW. SFAS 71 allows regulated entities to defer certain costs that would otherwise be charged to expense, if the regulated entity believes the recovery of these costs is probable. We record regulatory assets pursuant to specific orders or by a generic order issued by our regulators, and recovery of these deferred costs in future rates is subject to the review and approval of those regulators. We assume the risks and benefits of ultimate recovery of these items in future rates. If the recovery of these costs is not approved by our regulators, the costs are charged to income in the current period. We expect to recover our outstanding regulatory assets in rates over a period of no longer than 20 years. Regulators can impose liabilities on a prospective basis for amounts previously collected from customers and for amounts that are expected to be refunded to customers. Under SFAS 71, we record these items as regulatory liabilities.

Commodity Prices: In the normal course of providing energy, we are subject to market fluctuations of the costs of coal, natural gas and the cost of purchased power. We manage our fuel and gas supply costs through a portfolio of

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short- and long-term procurement contracts with various suppliers for the purchase of coal, uranium, natural gas and fuel oil. In addition, we manage the risk of price volatility by utilizing gas hedging programs.

Wisconsin’s retail electric fuel cost adjustment procedure mitigates some of Wisconsin Electric’s risk of electric fuel cost fluctuation. 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 prospectively. For 2007, we will operate under a traditional fuel cost adjustment clause in the Wisconsin retail jurisdiction whereby fuel revenues may be adjusted prospectively if fuel and purchased power costs fall outside a pre-established annual band of plus or minus 2%. For information regarding the 2006 fuel rules, see Utility Rates and Regulatory Matters.

The PSCW has authorized dollar for dollar recovery for the majority of natural gas costs for our gas utility operations through gas cost recovery mechanisms, which mitigates most of the risk of gas cost variations. For information concerning the electric utility fuel cost adjustment procedure and the natural gas utilities’ GCRMs, see Utility Rates and Regulatory Matters.

Natural Gas Costs: Significant increases in the cost of natural gas affect our electric and gas utility operations. Natural gas costs have increased significantly because the supply of natural gas in recent years has not kept pace with the demand for natural gas. We expect 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.

Higher natural gas costs increase our working capital requirements and result in higher gross receipts taxes in the State of Wisconsin. Higher natural gas costs combined with slower economic conditions also expose us to greater risks of accounts receivable write-offs as more customers are unable to pay their bills. Because federal and state energy assistance dollars have not kept pace with rising natural gas costs over the recent year, our risks related to bad debt expenses have increased.

In February 2005, the PSCW authorized the use of the escrow method of accounting for bad debt costs allowing for deferral of Wisconsin residential bad debt expense that exceed amounts allowed in rates. In 2004 and 2003, we had approval from the PSCW to defer residential bad debt net write-offs that exceed amounts allowed in rates.

As a result of GCRMs, our gas distribution subsidiaries receive dollar for dollar recovery on 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.

Weather: Our Wisconsin utility rates are set by the PSCW based upon estimated temperatures which approximate 20-year averages. Wisconsin Electric’s electric revenues are unfavorably sensitive to below normal temperatures during the summer cooling season, and to some extent, to above normal temperatures during the winter heating season. Our gas revenues are unfavorably sensitive to above normal temperatures during the winter heating season. A summary of actual weather information in the utility segment’s service territory during 2006, 2005 and 2004, as measured by degree-days, may be found above in Results of Operations.

Interest Rate: We have various short-term borrowing arrangements to provide working capital and general corporate funds. We also have variable rate long-term debt outstanding at December 31, 2006. Borrowing levels under these arrangements vary from period to period depending upon capital investments and other factors. Future short-term interest expense and payments will reflect both future short-term interest rates and borrowing levels.

We performed an interest rate sensitivity analysis at December 31, 2006 of our outstanding portfolio of $911.9 million of short-term debt with a weighted average interest rate of 5.37% and $179.0 million of variable-rate long-term debt with a weighted average interest rate of 3.97%. A one-percentage point change in interest rates would cause our annual interest expense to increase or decrease by approximately $9.1 million before taxes from short-term borrowings and $1.8 million before taxes from variable rate long-term debt outstanding.

Marketable Securities Return: We fund our pension, OPEB and nuclear decommissioning obligations through various trust funds, which in turn invest in debt and equity securities. Changes in the market prices of these assets can affect future pension, other post-retirement benefit and nuclear decommissioning expenses. Additionally, future contributions can also be affected by changes in the market price of trust fund assets. We expect that the risk of

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expense and contribution variations as a result of changes in the market price of trust fund assets would be mitigated in part through future rate actions by our various utility regulators. Through December 31, 2005, we were operating under a PSCW-ordered, qualified five-year rate restriction period. For further information about the rate restriction, see Utility Rates and Regulatory Matters.

At December 31, 2006, we held 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	$1,057.7
Nuclear decommissioning trust funds	$   881.6
Other post-retirement benefits trust funds	$   203.7

Fiduciary oversight of the pension and other post-retirement plan trust fund investments is the responsibility of an Investment Trust Policy Committee. Qualified external investment managers are engaged to manage the investments. Asset/liability studies are periodically conducted with the assistance of an outside investment advisor. The current study for the pension fund projects long-term annualized returns of approximately 8.5%.

Fiduciary oversight for the nuclear decommissioning trust fund investments is also the responsibility of the Investment Trust Policy Committee. Qualified external investment managers are also engaged to manage these investments. Asset/liability studies are periodically conducted with the assistance of an outside investment advisor, subject to additional constraints established by the PSCW. The current study projects long-term, annualized returns of approximately 9%. Current PSCW constraints allow a maximum allocation of 65% in equities.

Wisconsin Electric insures various property and outage risks through NEIL. Annually, NEIL reviews its underwriting and investment results and determines the feasibility of granting a distribution to policyholders. Adverse loss experience, rising reinsurance costs or impaired investment results at NEIL could result in increased costs or decreased distributions to Wisconsin Electric.

Credit Ratings: We do not have any credit agreements that would require material changes in payment schedules or terminations as a result of a credit rating downgrade. We do have certain agreements in the form of commodity and energy services contracts and employee benefit plans that could require, in the event of a credit rating change to below investment grade, a termination payment if collateral is not provided or an accelerated payment. At December 31, 2006, we estimate that the potential payments under these agreements that could result from credit rating downgrades totaled approximately $71.2 million.

Economic Conditions: We are exposed to market risks in the regional midwest economy for our utility energy segment.

Inflation: We continue to monitor the impact of inflation, especially with respect to the rising costs of medical plans, in order to minimize its effects in future years through pricing strategies, productivity improvements and cost reductions. Except for continuance of an increasing trend in the inflation of medical costs and the impacts on our medical and post-retirement benefit plans, we have expectations of low-to-moderate inflation. We do not believe the impact of general inflation will have a material effect on our future results of operations.

For additional information concerning risk factors, including market risks, see the Cautionary Statement Regarding Forward-Looking Information at the beginning of this report and Risk Factors above.

POWER THE FUTURE

Under our PTF strategy, we expect to meet a significant portion of our future generation needs through the construction of the PWGS and the Oak Creek expansion by We Power. We Power will lease the new plants to

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Wisconsin Electric under long-term leases, and we expect Wisconsin Electric to recover the lease payments in its electric rates.

The PTF units include PWGS 1, PWGS 2, OC 1 and OC 2. The following table identifies certain key items related to the units:

Unit Name	Expected In Service	Authorized Cash Costs (a)
PWGS 1	July 2005 (Actual)	$    333 million (Actual)
PWGS 2	Summer 2008	$    329 million
OC 1	Summer 2009	$ 1,300 million
OC 2	Summer 2010	$    640 million

(a) Authorized cash costs represent the PSCW approved costs and the increases for factors such as inflation as identified in the PSCW approved lease terms for PWGS 2, and adjusted for our ownership percentages in the case of OC 1 and OC 2.

The lease payments are based on the cash costs authorized by our primary regulator. Under the lease terms, our return is calculated using a 12.7% return on equity and the equity ratio is assumed to be 53% for the PWGS Units and 55% for the OC Units. The interest component of the return is determined up to 180 days prior to the date that the units are placed in service.

Power the Future - Port Washington

Background: In December 2002, the PSCW issued a written order (the Port Order) granting Wisconsin Energy, Wisconsin Electric and We Power a CPCN to commence construction of the PWGS consisting of two 545 MW natural gas-fired combined cycle generating units on the site of Wisconsin Electric’s existing Port Washington Power Plant. The Port Order also authorized Wisconsin Gas to proceed with the construction of a connecting natural gas lateral, which was completed in December 2004, and it authorized ATC to construct transmission system upgrades to serve PWGS 1 and PWGS 2. PWGS 1 was completed in July 2005 and placed into service at that time. PWGS 1 was completed within the PSCW approved cost parameters. In October 2003, we received approval from FERC to transfer by long-term lease certain associated FERC jurisdictional transmission related assets from We Power to Wisconsin Electric. Construction of PWGS 2 is well underway. Site preparation, including removal of the old coal units at the site, was completed in early 2006, and all of the major components have been procured. The unit is expected to begin commercial operation in time for the peak summer season in 2008.

Lease Terms: The PSCW approved the lease agreements and related documents under which Wisconsin Electric will staff, operate and maintain PWGS 1 and PWGS 2. Key terms of the leased generation contracts include:

• Initial lease term of 25 years with the potential for subsequent renewals at reduced rates;

• Cost recovery over a 25 year period on a mortgage basis amortization schedule;

• Imputed capital structure of 53% equity, 47% debt;

• Authorized rate of return of 12.7% after tax on equity;

• Fixed construction cost of PWGS 1 and PWGS 2 at $309.6 million and $280.3 million (2001 dollars) subject to escalation at the GDP inflation rate;

• Recovery of carrying costs during construction; and

• Ongoing PSCW supervisory authority over those lease terms and conditions specifically identified in the Port Order, which do not include the key financial terms.

In January 2003, Wisconsin Electric filed a request with the PSCW to defer costs for recovery in future rates. The PSCW approved the request in an open meeting in April 2003. We Power began collecting certain costs from Wisconsin Electric in the third quarter of 2003 as provided for in lease generation contracts that were signed in May 2003. We defer the lease costs on our balance sheet, and we amortize the costs to expense as we recover the costs in rates.

Legal and Regulatory Matters: There are currently no legal challenges to the construction of PWGS and all construction permits have been received for PWGS 1 and PWGS 2. As a result of the enactment of the Energy Policy Act, FERC, through an amendment to Section 203 of the Federal Power Act, has been given jurisdiction over

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the acquisition of generation (which includes leasing generation), an activity that previously was not subject to FERC’s jurisdiction. Under FERC’s rules implementing the Energy Policy Act, Wisconsin Energy, Wisconsin Electric and We Power filed a joint application for FERC authorization to transfer the generating assets and limited interconnection facilities of PWGS 2 through a lease arrangement between We Power and Wisconsin Electric. We received approval from FERC for this asset transfer in December 2006.

Power the Future - Oak Creek Expansion

Background: In November 2003, the PSCW issued an order (the Oak Creek Order) granting Wisconsin Energy, Wisconsin Electric and We Power a CPCN to commence construction of two 615 MW coal-fired units (the Oak Creek expansion) to be located adjacent to the site of Wisconsin Electric’s existing Oak Creek Power Plant. We anticipate OC 1 will be operational in 2009 and OC 2 will be operational in 2010. The Oak Creek Order concluded, among other things, that there was a need for additional electric generation for Southeastern Wisconsin and that a diversity of fuel sources best serves the interests of the State. The total cost for the two units was set at $2.191 billion, and the order provided for recovery of excess costs of up to 5% of the total project, subject to a prudence review by the PSCW. The CPCN was granted contingent upon us obtaining the necessary environmental permits. All necessary permits have been received at this time. In June 2005, construction commenced at the site.

In November 2005, we completed the sale of approximately a 17% interest in the project to two unaffiliated entities, who will share ratably in the construction costs.

Lease Terms: In October 2004, the PSCW approved the lease generation contracts between Wisconsin Electric and We Power for the Oak Creek expansion. Key terms of the leased generation contracts include:

• Initial lease term of 30 years with the potential for subsequent renewals at reduced rates;

• Cost recovery over a 30 year period on a mortgage basis amortization schedule with the potential for subsequent renewals at reduced rates;

• Imputed capital structure of 55% equity, 45% debt;

• Authorized rate of return of 12.7% after tax on equity;

• Recovery of carrying costs during construction; and

• Ongoing PSCW supervisory authority over those lease terms and conditions specifically identified in the Oak Creek Order, which do not include the key financial terms.

Legal and Regulatory Matters: The CPCN granted for the construction of the Oak Creek expansion was the subject of a number of legal challenges by third parties; these legal challenges were resolved in June 2005. We have received all permits necessary to commence construction. Certain of these permits continue to be contested, but remain in effect unless and until overturned by a reviewing court or administrative law judge. The major permits are discussed below.

The WDNR issued a Chapter 30 permit for wetlands and waterways alterations and construction on the bed of Lake Michigan for the construction of the Oak Creek expansion. The permit has been the subject of appeals since 2003. The final appeal was resolved by the Wisconsin Court of Appeals in February 2006, and the period for appeal of that decision to the Wisconsin Supreme Court has expired.

We applied to the WDNR to modify the existing WPDES permit that is required for operation of the water intake and discharge system for the planned Oak Creek expansion and existing Oak Creek generating units. In March 2005, the WDNR determined that the proposed cooling water intake structure and water discharge system meets regulatory requirements and reissued the WPDES permit with specific limitations and conditions. The opponents filed a petition for judicial review in Dane County Circuit Court and a request for a contested case proceeding with the WDNR. In September 2005, the judicial review petition was dismissed by agreement of the parties. The WDNR granted a contested case hearing that was held in March 2006. The administrative law judge upheld the issuance of the permit in a decision issued in July 2006. In August 2006, the opponents filed for judicial review of the administrative law judge’s decision upholding the issuance of the permit. Briefing was completed in December 2006. However, based on the federal court decision discussed below, the opponents filed a motion on January 26, 2007 requesting supplemental briefing. In a telephone conference on February 2, 2007, the Court said that additional briefing was not necessary, but that it might request oral argument before issuing its decision regarding review of the permit. We anticipate a decision in the case in 2007.

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On January 26, 2007, the Federal Court of Appeals for the Second Circuit, issued a decision in Riverkeeper, Inc. v. EPA, Nos. 04-6692-ag(L) et al. (2d Cir. 2007) relating to the 316(b) rules for cooling water intake systems for existing large utility plants. The Second Circuit Court found certain portions of the rule impermissible and remanded several parts of the rule to the EPA for further consideration or potential additional rulemaking. The WPDES permit for our Oak Creek expansion and existing Oak Creek generating units is a state permit, issued by WDNR with concurrence of EPA. Based on our review of the Second Circuit decision, we do not believe the decision invalidates the WPDES permit for Oak Creek. However, we cannot predict what, if any, impact the decision may have on the court’s decision in the Dane County Circuit Court case.

In May 2005, we received the Army Corps of Engineers federal permit necessary for the construction of the Oak Creek expansion. Opponents may appeal the permit in federal court.

In addition, as a result of the enactment of the Energy Policy Act, FERC, through an amendment to Section 203 of the Federal Power Act, has been given jurisdiction over the acquisition of generation (which includes leasing generation), an activity that previously was not subject to FERC’s jurisdiction. Under FERC’s rules implementing the Energy Policy Act, Wisconsin Energy, Wisconsin Electric and We Power filed a joint application for FERC authorization to transfer the generating assets and limited interconnection facilities of OC 1 and OC 2 through a lease arrangement between We Power and Wisconsin Electric. We received approval from FERC on these leases in December 2006.

UTILITY RATES AND REGULATORY MATTERS

The PSCW regulates our retail electric, natural gas, steam and water rates in the State of Wisconsin, while FERC regulates our wholesale power, electric transmission and interstate gas transportation service rates. The MPSC regulates our retail electric rates in the State of Michigan. Within our regulated segment, we estimate that approximately 88% of our electric revenues are regulated by the PSCW, 7% are regulated by the MPSC and the balance of our electric revenues are regulated by FERC. All of our natural gas revenues are regulated by the PSCW. Orders from the PSCW can be viewed at http://psc.wi.gov/ and orders from the MPSC can be viewed at www.michigan.gov/mpsc/.

Overview: For the period from March 2000 until December 31, 2005, the rates of Wisconsin Electric and Wisconsin Gas were governed by an order from the PSCW in connection with the approval of the WICOR acquisition. Under this order, Wisconsin Electric and Wisconsin Gas were restricted from increasing Wisconsin rates for a five year period ending December 31, 2005, with certain limited exceptions.

The table below summarizes the anticipated annualized revenue impact of the recent Wisconsin Electric rate changes.

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Service - Wisconsin Electric	Incremental Annualized Revenue Increase		Percent Change in Rates		Effective Date
	(Millions)		(%)
Fuel Electric, Michigan	$	3.4	7.5	%	January 1, 2007
Retail electric, Wisconsin	$	222.0	10.6	%	January 26, 2006
Retail gas, Wisconsin	$	21.4	2.9	%	January 26, 2006
Retail steam, Wisconsin (a)	$	7.8	31.5	%	January 26, 2006
Fuel electric, Michigan	$	2.7	5.9	%	January 1, 2006
Fuel electric, Wisconsin (b)	$	7.7	0.3	%	November 24, 2005
Fuel electric, Michigan	$	2.5	5.8	%	November 1, 2005
Retail electric, Wisconsin	$	59.7	3.1	%	May 19, 2005
Retail steam, Wisconsin	$	0.5	3.6	%	May 19, 2005
Fuel electric, Wisconsin (b)	$	114.9	5.9	%	March 18, 2005
Fuel electric, Michigan	$	3.4	8.0	%	January 1, 2005
Fuel electric, Michigan	$	1.3	3.1	%	October 1, 2004
Retail steam, Wisconsin	$	0.5	3.4	%	May 5, 2004
Retail electric, Wisconsin (c)	$	59.0	3.3	%	May 5, 2004
Fuel electric, Michigan	$	3.3	7.6	%	January 1, 2004

(a) In January 2006, the PSCW issued a final order authorizing an increase in steam rates of $7.8 million over the two year period of 2006 and 2007.

(b) In November 2005, the PSCW issued a final order authorizing a fuel surcharge for $7.7 million of additional fuel costs. In March 2005, the PSCW issued an interim order authorizing a fuel surcharge for $114.9 million that was effective until the November 2005 final order was issued by the PSCW. The final November 2005 order for $122.6 million superseded the March 2005 interim order.

(c) In May 2004, the PSCW issued a final order authorizing an increase in electric rates for costs associated with the PWGS under construction and increased costs associated with low-income energy assistance.

2006 Pricing: In January 2006, Wisconsin Electric received an order from the PSCW that allowed it to increase annual electric revenues by approximately $222.0 million or 10.6% to recover increased costs associated with investments in our PTF units, transmission services and fuel and purchased power, as well as costs associated with additional sources of renewable energy. The rate increase was based on an authorized return on equity of 11.2%. The order also required Wisconsin Electric to refund to customers, with interest, any fuel revenues that it receives that are in excess of fuel and purchased power costs that it incurs, as defined by the Wisconsin fuel rules. The original order stipulated that any refund would also include interest at short-term rates. This refund provision does not extend past December 31, 2006.

During 2006, we experienced lower than expected fuel and purchased power costs. In September 2006, we requested and received approval from the PSCW to refund favorable fuel recoveries including accrued interest at a short-term rate. In addition, in September 2006 the PSCW determined that if the total recoveries for 2006 exceeded $36 million, interest on the amount in excess of $36 million would be paid at the rate of 11.2%, our authorized return on equity rather than at short-term rates as originally set forth in the order. During October 2006, we refunded $28.7 million including interest to Wisconsin retail customers as a credit on their bill and we received approval from the PSCW to refund an additional $10 million, including interest in the first quarter of 2007.

For 2007, Wisconsin Electric expects to operate under a traditional fuel cost adjustment clause in the Wisconsin retail jurisdiction whereby fuel revenues may be adjusted prospectively if fuel and purchased power costs fall outside a pre-established annual band of plus or minus 2%.

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Our gas operations went through a traditional rate proceeding whereby the revenues were set to recover projected costs and to provide a return on rate base. The January 2006 order provided for increases in gas revenues totaling $60.1 million ($21.4 million or 2.9% for Wisconsin Electric gas operations and $38.7 million or 3.7% for Wisconsin Gas gas operations). The rate increases were based on an authorized return on equity of 11.2% for the gas operations of both Wisconsin Electric and Wisconsin Gas.

The steam rate proceeding was a traditional rate proceeding. The January 2006 order provided for an increase in steam rates of $7.8 million or 31.5% to be phased in over a two year period beginning in 2006. The rate increase was based on an authorized return on equity of 11.2%.

2004 Wisconsin Gas Pricing: In March 2004, the PSCW approved an annual rate increase of $25.9 million related to increased costs associated with the construction of the Ixonia lateral and for increased costs associated with low-income energy assistance.

2008 Pricing: We anticipate filing rate cases for Wisconsin Electric and Wisconsin Gas in May 2007 for new rates effective in January 2008.

Limited Rate Adjustment Requests

2005 Fuel Recovery Filing: In February 2005, Wisconsin Electric filed an application with the PSCW for an increase in electric rates in the amount of $114.9 million due to the increased costs of fuel and purchased power as a result of customer growth and the increase in the reliance upon natural gas as a fuel source. We received approval for the increase in fuel recoveries on an interim basis in March 2005. In November 2005, we received the final rate order, which authorized an additional $7.7 million in rate increases, for a total increase of $122.6 million (6.2%). In December 2005, two parties filed suit against the PSCW in Dane County Circuit Court challenging the PSCW’s decision to allow fuel cost recovery, while allowing us to keep the savings that resulted from the WICOR acquisition. As a condition of the PSCW approval of the WICOR acquisition, Wisconsin Electric and Wisconsin Gas were restricted from increasing Wisconsin rates for a five year period ending December 31, 2005, with certain limited exceptions, but we were allowed to keep the savings generated from the merger. In July 2006, the Dane County Circuit Court affirmed the PSCW’s decision. In August 2006, the opponents appealed this decision to the Wisconsin Court of Appeals. We anticipate a decision from the Wisconsin Court of Appeals in 2007.

2005 Revenue Deficiencies: In May 2004, Wisconsin Electric filed an application with the PSCW for an increase in electric and steam rates for anticipated 2005 revenue deficiencies associated with (1) costs for the new PWGS and the Oak Creek expansion being constructed as part of our PTF strategy, (2) costs associated with our energy efficiency procurement plan and (3) costs associated with making changes to our steam utility systems as part of the reconstruction of the Marquette Interchange highway project in downtown Milwaukee, Wisconsin. The filing identified anticipated revenue deficiencies in 2005 attributable to Wisconsin in the amount of $84.8 million (4.5%) for the electric operations of Wisconsin Electric and $0.5 million (3.6%) for Wisconsin Electric’s steam operations. In January 2005, as a result of the litigation involving our Oak Creek expansion, we amended this filing to reduce the total revenue request to $52.4 million. In May 2005, the PSCW issued its final written order implementing an annualized increase in electric rates of $59.7 million (3.1%) and an increase of $0.5 million (3.6%) in steam rates.

Other Utility Rate Matters

Electric Transmission Cost Recovery: Wisconsin Electric divested of its transmission assets with the formation of ATC in January 2001. We now procure transmission service from ATC at FERC approved tariff rates. In connection with the formation of the ATC, our transmission costs have escalated due to the socialization of costs within the ATC and increased transmission infrastructure requirements in the state. In 2002, in connection with the increased costs experienced by our customers, the PSCW issued an order which allowed the deferral of transmission costs in excess of amounts imbedded in rates. We are allowed to earn a return on the unrecovered transmission costs at our weighted average cost of capital. As of December 31, 2006, we have deferred $192.2 million of unrecovered transmission costs. In January 2006, our rates were increased by approximately $67.5 million annually to recover transmission costs that were not currently in rates. We will continue to accrue carrying costs on the unrecovered balances.

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Fuel Cost Adjustment Procedure: Within the State of Wisconsin, Wisconsin Electric operates under a fuel cost adjustment clause for fuel and purchased power costs associated with the generation and delivery of electricity and purchase power contracts. Imbedded within its base rates is an amount to recover fuel costs. Under the current fuel rules, no adjustments are made to rates as long as fuel and purchased power costs are expected to be within a band of the costs imbedded in current rates for the twelve month period ending December 31. If, however, annual fuel costs are expected to fall outside of the band, and actual costs fall outside of established fuel bands, then we may file for a change in fuel recoveries on a prospective basis. For 2006, the upper band was 2%. As discussed above, during 2006, we experienced lower than expected fuel and purchased power costs. In September 2006, we requested and received approval from the PSCW to refund favorable fuel recoveries including accrued interest at short-term rates. Approximately $28.7 million, including interest, in refunds were issued as a credit on customer bills in October 2006. We had favorable fuel recoveries of approximately $37.4 million, excluding interest, for 2006. We received approval from the PSCW to refund an additional $10 million, including interest, during the first quarter of 2007. In September 2006, the PSCW determined that if the total favorable recoveries for 2006 exceeded $36 million, interest on the favorable recoveries in excess of $36 million will be paid at the rate of 11.2%, our authorized return on equity, rather than at short-term rates as originally set forth in the order. For 2007, the band is plus or minus 2%.

In June 2006, the PSCW opened a docket (01-AC-224) in which it was looking into revising the current fuel rules (Chapter PSC 116). In February 2007, five Wisconsin utilities regulated by the fuel rules, including Wisconsin Electric, filed a joint proposal to modify the existing rules in this docket. The proposal recommends modifying the rules to allow for escrow accounting for fuel costs outside a plus or minus 1% annual band width of fuel costs allowed in rates. It further recommends that the escrow balance be trued-up annually following the end of each calendar year. We are unable to predict if or when the PSCW will make any changes to the existing fuel rules.

Edison Sault and Wisconsin Electric’s operations in Michigan operate under a Power Supply Cost Recovery mechanism which generally allows for the recovery of fuel and purchase power costs on a dollar for dollar basis.

Gas Cost Recovery Mechanism: Our natural gas operations operate under a GCRM as approved by the PSCW. Generally, the GCRM allows for a dollar for dollar recovery of gas costs. There is an incentive mechanism under the GCRM which allows for increased revenues if we acquire gas lower than benchmarks approved by the PSCW. During 2006 and 2005, no additional revenues were earned under the incentive portion of the GCRM and $0.2 million of additional revenues were earned in 2004 under the GCRM.

Bad Debt Costs: In 2004, due to a combination of unusually high natural gas prices, a soft economy within our utility service territories, and limited governmental assistance available to low-income customers, we saw a significant increase in residential uncollectible accounts receivable. These factors led us to request and receive letters from the PSCW which allowed us to defer the costs of residential bad debts to the extent that the costs exceeded the amounts allowed in rates. As a result of these letters from the PSCW, we deferred approximately $21.2 million in 2004 related to bad debt costs.

In January 2006, the PSCW issued an order approving the amortization over the next five years of the bad debts deferred in 2004 for our gas operations. The bad debts deferred in 2004 related to electric operations will be considered for recovery in future rates, subject to audit and approval of the PSCW.

In December 2004, we filed with the PSCW a request to implement a pilot program, which, among other things, is designed to better match our collection efforts with the ability of low income customers to pay their bills. Included in this filing was a request to implement escrow accounting for all residential bad debt costs. In February 2005, the PSCW approved our pilot program and our request for the use of escrow accounting. The final decision was received in March 2005. The escrow method of accounting for bad debt costs allows for deferral of Wisconsin residential bad debt expense that exceed amounts allowed in rates. As a result of this approval from the PSCW, we escrowed approximately $3.7 million in 2006 and $17.2 million in 2005 related to bad debt costs. These amounts were not addressed in the January 2006 rate order, and will therefore be considered for recovery in future rates, subject to audit and approval of the PSCW. We will continue following the escrow method of accounting for bad debts as approved in the March 2005 PSCW order.

MISO Midwest Market: In January 2005, we requested deferral accounting treatment from the PSCW for certain incremental costs or benefits that may occur due to the implementation on April 1, 2005 of the MISO Midwest

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Market. We received approval for this accounting treatment in March 2005. Additionally, in March 2005 we submitted a joint proposal to the PSCW with other utilities requesting escrow accounting treatment for the MISO Midwest Market costs until each utility’s first rate case following April 1, 2008. The purpose of the March 2005 request for escrow accounting was to provide clarification on costs not included in the March 2005 approval for deferral accounting treatment. The PSCW approved deferral treatment for these costs in June 2006. For additional information see Industry Restructuring and Competition — Electric Transmission and Energy Markets — MISO.

Wholesale Electric Rates: On August 1, 2006, Wisconsin Electric filed a wholesale rate case with FERC. The filing requests an annual increase in rates of approximately $16.7 million applicable to four existing wholesale electric customers. In November 2006, FERC accepted the rate filing subject to refund with interest; however, the rates have not yet been approved. Three of the existing customer’s rates are effective January 1, 2007 and the remaining $16.5 million for the largest wholesale customers’ rates will be effective May 1, 2007. The rates are subject to refund and hearing and settlement procedures.

Depreciation Rates: In January 2005, Wisconsin Electric and Wisconsin Gas filed a joint application with the PSCW for certification of depreciation rates for specific classes of utility plant assets. In November 2005, we received notice from the PSCW that the proposed estimated lives, net salvage values and depreciation rates were approved and became effective January 1, 2006. For more information, see Note A — Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements.

Nuclear Refueling Outages - 2005: In May 2005, we requested and received approval from the PSCW to defer replacement power costs incurred after May 30, 2005 due to the longer-than-expected outage at Point Beach Unit 2. We deferred $22.1 million of incremental purchased power costs related to the extended outage.

Renewables, Efficiency and Conservation: In March 2006, Wisconsin enacted new public benefits legislation, Act 141. This legislation changes the renewable energy requirements for utilities. Act 141 requires Wisconsin utilities to provide 2% more of their total retail energy from renewable resources than their current levels by 2010, and 6% more renewable energy than their current levels by 2015. Act 141 establishes a statewide goal that 10% of all electricity in Wisconsin be generated by renewable resources by December 31, 2015. Assuming the bulk of additional renewables is wind turbines, Wisconsin Electric must obtain approximately 210 MW of additional renewable capacity by 2010 and another approximately 610 MW of additional renewable capacity by 2015 to meet the retail energy delivered requirements. We have already started development of additional sources of renewable energy to comply with commitments made as part of our PTF initiative which will assist us in complying with Act 141. See Wind Generation discussion below.

Act 141 allows the PSCW to delay a utility’s implementation of the renewable portfolio standard if it finds that achieving the renewable requirement would be too expensive or would lessen reliability, or that new renewable projects could not be permitted on a timely basis or could not be served by adequate transmission facilities. The previous law did not include similar provisions. Act 141 provides that if a utility is in compliance with the renewable energy and energy efficiency requirements as determined by the PSCW, then the utility is considered in compliance with the Energy Priorities law. Prior to Act 141, there had been no agreement on how to determine compliance with the Energy Priorities law, which provides that it is the policy of the PSCW, to the extent it is cost-effective and technically feasible, to consider the following options in the listed order when reviewing energy-related applications: (1) energy conservation and efficiency, (2) noncombustible renewable energy resources, (3) combustible renewable energy resources, (4) natural gas, (5) oil or low sulfur coal and (6) high sulfur coal and other carbon-based fuels.

We are evaluating the requirements of Act 141. Additionally, the details of the new requirements are subject to administrative rulemaking that could take until March 2007 to complete.

Act 141 also redirects the administration of energy efficiency, conservation and renewable programs from the DOA back to the utilities and/or contracted third parties. In addition, the law requires that 1.2% of utilities’ operating revenues be set aside for these programs. We do not expect the impact of this action to be material as the 1.2% approximates the amounts currently in our rates for these matters. The effective date of this action is July 1, 2007. The PSCW is expected to develop implementation plans over the upcoming months.

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Wind Generation: In June 2005, we purchased the development rights to two wind farm projects (Blue Sky Green Field) from Navitas Energy Inc. We plan to develop the wind sites and construct wind turbines with a combined generating capacity of between approximately 130 and 200 MW. We filed for approval of a CPCN with the PSCW in March 2006. A prehearing conference was held in September 2006. In addition, our direct testimony was filed in September 2006. Staff and intervenor testimony was filed in October 2006 and rebuttal testimony by all parties was filed in November 2006. Hearings were held at the end of November 2006. In February 2007, the PSCW issued a written notice approving the CPCN. In addition to the CPCN approval, we are working to secure any additional permits necessary to commence construction. In early 2006, the United States Congress directed the Department of Defense and the Department of Homeland Security to investigate possible conflicts between military radar and wind turbine installations. In November 2006, we received confirmation that Blue Sky Green Field poses no such conflict, and to date the FAA has issued all requested permits for Blue Sky Green Field.

We estimate that the capital cost of the project, excluding AFUDC, will be up to $360 million. The demand for wind turbine equipment has been strong, pushing off equipment deliveries to dates later than originally anticipated. We currently expect the turbines to be placed in service by the end of 2008, dependent upon the availability of wind turbines and the receipt of necessary regulatory approvals.

ELECTRIC SYSTEM RELIABILITY

In response to customer demand for higher quality power required by modern equipment, we are evaluating and updating our electric distribution system. We are taking steps to reduce the likelihood of outages by upgrading substations and rebuilding lines to upgrade voltages and reliability. These improvements, along with better technology for analysis of our existing system, better resource management to speed restoration and improved customer communication, are near-term efforts to enhance our current electric distribution infrastructure. For the long-term, we have developed a distribution system asset management strategy that requires increased levels of automation of both substations and line equipment to consistently provide the level of reliability needed for a digital economy.

We had adequate capacity to meet all of our firm electric load obligations during 2006. All of our generating plants performed well during the warmest periods of the summer and all power purchase commitments under firm contract were received. During this period, public appeals for conservation were not required; however, pursuant to MISO’s orders, we did interrupt or curtail service to non-firm customers who participate in load management programs in exchange for discounted rates.

We expect to have adequate capacity to meet all of our firm load obligations during 2007. However, extremely hot weather, unexpected equipment failure or unavailability could require us to call upon load management procedures during 2007 as we have in past years.

ENVIRONMENTAL MATTERS

Consistent with other companies in the energy industry, we face significant ongoing environmental compliance and remediation challenges related to current and past operations. Specific environmental issues affecting our utility and non-utility energy segments include but are not limited to (1) air emissions such as CO_2, SO₂, NO_x, 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 Point Beach.

We are currently pursuing a proactive strategy to manage our environmental issues including (1) substituting new and cleaner generating facilities for older facilities as part of our PTF strategy, (2) developing additional sources of renewable electric energy supply, (3) water quality matters such as discharge limits and cooling water requirements, (4) adding emission control equipment to existing facilities to comply with new ambient air quality standards and federal clean air rules, (5) entering into agreements with the WDNR and EPA to reduce emissions of SO₂ and NO_x by more than 65% and mercury by 50% by 2013 from our coal-fired power plants in Wisconsin and Michigan, (6) evaluating and implementing improvements to our cooling water intake systems, (7) recycling of ash from coal-fired generating units and (8) the clean-up of former manufactured gas plant sites. The capital cost of implementing the EPA consent decree is estimated to be approximately $1 billion over the 10 years ending 2013. These costs are

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principally associated with the installation of air quality controls on Pleasant Prairie Units 1 and 2 and Oak Creek Units 5-8. Through December 31, 2006, we have spent approximately $355.0 million associated with implementing the EPA agreement. For further information concerning the consent decree, see Note S — Commitments and Contingencies in the Notes to Consolidated Financial Statements in this report. For further information concerning disposal of used nuclear fuel and nuclear power plant decommissioning, see Nuclear Operations below and Note I — Nuclear Operations in the Notes to Consolidated Financial Statements in this report, respectively.

National Ambient Air Quality Standards: In 2000 and 2001, Michigan and Wisconsin finalized state rules implementing phased emission reductions required to meet the NAAQS for 1-hour ozone. In 2004, the EPA began implementing NAAQS for 8-hour ozone and PM _2.5. The states are currently developing rules to implement the new standards. Although specific emission control requirements are not yet defined, we believe that the revised standards will likely require significant reductions in SO₂ and NO_x emissions from coal-fired generating facilities. We expect that reductions needed to achieve compliance with the 8-hour ozone attainment standard will be implemented in stages. Reductions associated with the fine particulate matter standards are expected to be implemented in stages after the year 2010 and extending to the year 2017. We are currently unable to predict the impact that the revised air quality standards might have on the operations of our existing coal-fired generating facilities until the states develop rules and submit State Implementation Plans (SIP) to the EPA to demonstrate how they intend to comply with the 8-hour ozone and fine particulate matter NAAQS.

8-hour Ozone Standard: In April 2004, the EPA designated 10 counties in Southeastern Wisconsin as nonattainment areas for the 8-hour ozone NAAQS. States are required to develop and submit SIPs to the EPA by June 2007 to demonstrate how they intend to comply with the 8-hour ozone NAAQS. We expect that reductions needed to achieve compliance with the 8-hour ozone attainment standard will be implemented in stages and that some or all of these reductions will be accomplished through implementation of the CAIR. See below for further information regarding CAIR. We believe that compliance with the NO_x emission reductions requirements under the agreements with the WDNR and EPA will substantially mitigate costs to comply with the EPA’s 8-hour ozone NAAQS. However, the timing of the requirements may be impacted by requiring earlier installation of NO_x controls at some units, depending on how the states implement the rules.

PM_2.5Standard: In December 2004, the EPA designated PM _2.5 non-attainment areas in the country. All counties in the State of Wisconsin and all counties in the Upper Peninsula of Michigan were designated as in attainment with the standard. It is unknown at this time whether Wisconsin or Michigan will require additional emission reductions as part of state or regional implementation of the PM_2.5 standard and what impact those requirements would have on operation of our existing coal-fired generation facilities.

Clean Air Interstate Rule: The EPA issued the final CAIR regulation in March 2005 to facilitate the states in meeting the 8-hour ozone and PM _2.5 standards by addressing the regional transport of SO₂ and NO_x. CAIR requires NO_x and SO₂ emission reductions in two phases from electric generating units located in a 28-state region within the eastern United States. Wisconsin and Michigan are affected states under CAIR. The phase 1 compliance deadline is January 1, 2009 for NO_x and January 1, 2010 for SO₂, and the phase 2 compliance deadline is January 1, 2015 for both NO_x and SO₂. Overall, the CAIR is expected to result in a 70% reduction in SO₂ emissions and a 65% reduction in NO_x emissions from 2002 emission levels. The states are required to develop and submit implementation plans by no later than March 2007. In Wisconsin, a final CAIR rule has been approved by the WDNR and is proceeding through the administrative process. Although the impacts are uncertain until the states’ implementation plans are in place, we believe that compliance with the NO_x and SO₂ emission reductions requirements under the agreements with the WDNR and EPA will substantially mitigate costs to comply with the CAIR rule.

Clean Air Mercury Rule: The EPA issued the final CAMR in March 2005 following the agency’s 2000 regulatory determination that utility mercury emissions should be regulated. CAMR limits mercury emissions from new and existing coal-fired power plants, and caps utility mercury emission in two phases, applicable in 2010 and 2018. The caps limit emissions at approximately 20% and ultimately 70% below today’s utility mercury levels. The states were required to develop and submit implementation plans by November 2006, but neither state has finalized its plan yet. Until those plans are in place, it is not possible to estimate the final impact of the CAMR, but additional expenditures are anticipated in order to meet both phases of the federal rule. Because the technology is under

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development, it is difficult to estimate the cost. We believe the range of possible expenditures could be approximately $50 million to $200 million. The construction air permit issued for the Oak Creek expansion is not impacted by the new rule.

The federal rule is being challenged by a number of states including Wisconsin and Michigan. Depending on the litigation, the timing for compliance may be affected.

The WDNR independently developed mercury emission control rules that affect electric utilities in Wisconsin and issued state-only mercury control rules in October 2004. The rules explicitly recognize an underlying state statutory restriction that state regulations cannot be more stringent than those included in any federal program. The rules state that the WDNR must adopt state rule changes within 18 months of publication of any federal rules. State rules are to be changed to be consistent with, and no more restrictive than, any federal rules. It is not possible to determine if there will be requirements in addition to CAMR until a rule is in place or the existing rule is set aside. Because the 18 month deadline has passed, we are reviewing our options.

Clean Air Visibility Rule: The EPA issued the CAVR in June 2005 to address regional haze, or regionally-impaired visibility caused by multiple sources over a wide area. The rule defines BART requirements for electric generating units and how BART will be addressed in the 28 states subject to EPA’s CAIR. Under CAVR, states are required to identify certain industrial facilities and power plants that affect visibility in the nation’s 156 Class I protected areas. States then determine the types of emission controls that those facilities must use to control their emissions. The pollutants from power plants that reduce visibility include particulate matter or compounds that contribute to fine particulate formation, NO_x, SO₂ and ammonia. States must submit plans to implement CAVR to the EPA by December 2007. The reductions associated with the state plans are scheduled to begin to take effect in 2014 with full implementation before 2018. We are currently unable to predict the impact that CAVR might have on the operations of our existing coal-fired generating facilities until the states develop rules and submit implementation plans to the EPA.

Clean Water Act: Section 316(b) of the CWA requires that the location, design, construction and capacity of cooling water intake structures reflect the BTA for minimizing adverse environmental impact. This law dates back to 1972; however, prior to September 2004, there were no federal rules that defined precisely how states and EPA regions determined that an existing intake met BTA requirements. This rule established, for the first time, national performance standards and compliance alternatives for existing facilities that are designed to minimize the potential adverse environmental impacts to aquatic organisms associated with water withdrawals from cooling water intakes. Costs associated with implementation of the rule for Wisconsin Electric’s Oak Creek Power Plant, We Power’s Oak Creek expansion and PWGS have been included in project costs. Studies to determine what costs, if any, that may be associated with Wisconsin Electric’s other existing facilities are expected to take place over the next two years.

On January 26, 2007, the Federal Court of Appeals for the Second Circuit issued a decision concerning the 316(b) rule for existing facilities (Riverkeeper, Inc. v. EPA, Nos. 04-6692-ag(L) (2d Cir. 2007)). The Second Circuit Court found certain portions of the rule impermissible and remanded several parts of the rule to the EPA for further consideration or potential additional rulemaking. Until such time as the EPA completes those actions, we cannot predict what impact the changes, if any, to the rule may have on our facilities.

Manufactured Gas Plant Sites: We are voluntarily reviewing and addressing environmental conditions at a number of former manufactured gas plant sites. For further information, see Note S — Commitments and Contingencies in the Notes to Consolidated Financial Statements.

Ash Landfill Sites: We aggressively seek environmentally acceptable, beneficial uses for our combustion byproducts. For further information, see Note S — Commitments and Contingencies in the Notes to Consolidated Financial Statements.

EPA—Proposed Consent Decree: Wisconsin Electric entered into a proposed consent decree with the EPA to address all matters relating to information requests received from the EPA pursuant to Section 114(a) of the Clean Air Act. For further information, see Note S — Commitments and Contingencies in the Notes to Consolidated Financial Statements.

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Greenhouse Gases: There have been international efforts seeking legally binding reductions in emissions of greenhouse gases, principally CO₂, including the United Nations Framework Convention on Climate Change held in Kyoto, Japan. While the Bush Administration has not supported U.S. ratification of the Kyoto Protocol or other legislation requiring reductions in CO₂, in 2002, the Bush Administration announced a goal of reducing the greenhouse gas intensity of the U.S. economy by 18% by 2012. In addition, in December 2004, the DOE announced the Climate VISION program in furtherance of reduced greenhouse gas emissions. We continue to take voluntary measures to reduce our emissions of greenhouse gases. However, legislative proposals that would impose mandatory restrictions on CO₂ continue to be considered in Congress. The impact of any future legislation that would require reductions in greenhouse gases cannot be assessed at this time.

We continue to support flexible, market-based strategies to curb greenhouse gas emissions. These strategies include emissions trading, joint implementation projects and credit for early actions. We also support a voluntary approach that encourages technology development and transfer and includes all sectors of the economy and all significant global emitters.

Our emissions in future years will continue to be influenced by several actions completed, planned or underway as part of the PTF strategy, including:

• Repowering the Port Washington Power Plant from coal to natural gas combined cycle units.

• Adding coal-fired units using state-of-the-art technology as part of the Oak Creek expansion.

• Increasing investment in energy efficiency and conservation.

• Maintaining and increasing non-emitting generation by potentially adding approximately 130 to 200 MW of wind capacity and increasing customer participation in the Energy for Tomorrow ^® renewable energy program.

• Successful renewal of the Point Beach units’ operating licenses.

LEGAL MATTERS

Arbitration Proceedings: Our largest electric customers, two iron ore mines, operate in the Upper Peninsula of Michigan. The mines represent approximately 6% to 7% of our annual electric sales; however, the earnings are insignificant to us. The mines have special negotiated contracts that expire in December 2007. The contracts have price caps for approximately 80% of the energy sales. We do not recognize revenue on amounts billed that exceed the price caps.

The incremental power costs in the Upper Peninsula of Michigan are now determined by MISO. In April 2005, we began to bill the mines the incremental power costs as quantified by the MISO Midwest Market. The mines have notified us that they are disputing these billings and a portion of these disputed amounts have been deposited in escrow. In September 2005, the mines notified us that they filed for formal arbitration related to the contracts. We have notified the mines that we believe that they have failed to comply with certain notification provisions related to annual production as specified within the contracts. The arbitration hearings previously scheduled for October 2006 have been postponed and rescheduled for the third quarter of 2007 and we anticipate a decision in the fourth quarter of 2007. As of December 31, 2006, the mines have placed $29.3 million in escrow. As of December 31, 2005, the mines had placed $70.6 million in escrow. The decrease in the escrow balance relates to amounts that we refunded without interest for the amounts billed in 2005 that exceeded the price caps. At this time, we are unable to predict the outcome of the formal arbitration process, but we believe that it will not have a material adverse impact on our financial condition or results of operations.

Although it is currently uncertain, we anticipate that we will provide power to the mines under the terms of one or more regulated tariffs to be approved by the MPSC beginning January 1, 2008.

Stray Voltage: On July 11, 1996, the PSCW issued a 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 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.

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In recent years, dairy farmers have commenced actions or made claims against Wisconsin Electric for loss of milk production and other damages to livestock allegedly caused by stray voltage, and more recently, ground currents resulting from the operation of its electrical system, even though that electrical system has been operated within the parameters of the PSCW’s order. In 2003, the Wisconsin Supreme Court upheld a Court of Appeals’ affirmance of a jury verdict against Wisconsin Electric, awarding $1.2 million to the plaintiffs in a stray voltage lawsuit. The Supreme Court rejected the argument that if a utility company’s measurement of stray voltage is below the PSCW “level of concern,” that utility could not be found negligent in stray voltage cases. Additionally, the Court held that the PSCW regulations regarding stray voltage were only minimum standards to be considered by a jury in stray voltage litigation.

As a result of this case, claims by dairy farmers for livestock damage have been based upon ground currents with levels measuring less than the PSCW level of concern. Even though the claims which have been made against Wisconsin Electric with respect to stray voltage and ground currents are not expected to have a material adverse effect on its financial statements, we continue to evaluate various options and strategies to mitigate this risk.

NUCLEAR OPERATIONS

Point Beach Nuclear Plant: Wisconsin Electric owns two 518 MW electric generating units (Unit 1 and Unit 2) at Point Beach in Two Rivers, Wisconsin. Point Beach is operated by NMC, a joint venture of the Company and affiliates of other unaffiliated utilities. During 2006, 2005 and 2004, Point Beach provided approximately 25.3%, 20.0% and 23.7%, respectively, of Wisconsin Electric’s net electric energy supply.

Each unit at Point Beach has a scheduled refueling outage approximately every 18 months. A refueling outage is scheduled for first quarter 2007. In the fourth quarter of 2006, Unit 2 had a scheduled refueling outage. In 2005, Unit 2 had a scheduled refueling outage over the second and third quarters, and Unit 1 had a scheduled refueling outage over the third and fourth quarters. During the 2005 scheduled refueling outages we replaced the reactor vessel heads at each unit. As expected, this work, along with other planned maintenance, resulted in longer than normal outages. During scheduled refueling outages, we incur significant operations and maintenance costs for work performed during the outages and we incur costs associated with replacement power. See Results of Operations for further discussion regarding the costs associated with nuclear outages. In 2004, Unit 1 had a scheduled refueling outage in the second quarter.

In December 2005, the NRC approved the request of NMC and Wisconsin Electric for license renewal. The new operating licenses expire in October 2030 for Unit 1 and March 2033 for Unit 2.

In February 2006, we announced that we were undertaking a formal review during 2006 regarding our options for the ownership and operation of Point Beach. At December 31, 2006, NMC operated six nuclear generating units. In addition, another owner has announced the planned sale of its unit. This sale would further reduce the size of the fleet operated by NMC. Given these changes, we believed it was prudent to evaluate a range of options for Point Beach. The options that we evaluated included: (1) continued operation by NMC, (2) continued operation by a third party operator other than NMC, (3) a return to in-house operation of the plant by Wisconsin Electric, (4) a sale of the Point Beach facility and (5) a partial sale of the plant with us retaining a minority interest in the Plant. Under this fifth option, the new majority owner would operate the plant. As part of our continuing review, we invited qualified third parties to tour Point Beach and review the data necessary to submit a bid to operate the plant or purchase all or part of the plant and operate it. We evaluated the bids received in comparison to continued operation of Point Beach by NMC or Wisconsin Electric. In December 2006, we announced that we had reached a definitive agreement to sell Point Beach to an affiliate of FPL. If and when the sale is completed (or earlier if an interim operating agreement with FPL is activated by us) NMC would transfer Point Beach’s operating licenses to the buyer and we would withdraw from NMC and our relationship with NMC would be terminated. We would be required to pay a termination fee of approximately $12 million to withdraw from NMC and write-off our investment in NMC which is approximately $5 million at December 31, 2006. We also entered into a long-term power purchase agreement to purchase all of the existing capacity and energy of the plant, which will become effective upon the closing of the sale. Wisconsin Electric will have the unilateral option, subject to PSCW direction, to select a term for the power purchase agreement of either (i) an estimated 23 years for Unit 1 and 26 years for Unit 2, or (ii) 16 years for Unit 1 and 17 years for Unit 2. The sale of the plant and the long-term power purchase agreement are subject to review and approval by various regulatory agencies including the NRC, the PSCW, the MPSC and FERC. We have submitted a

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request to the PSCW to defer any gain (net of transaction related costs) as a regulatory liability that would be applied to the benefit of our customers in future rate proceedings.

In July 2000, our 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 could add approximately 90 MW of electrical output to Point Beach. In February 2003, Point Beach completed an equipment upgrade which resulted in a capacity increase of 7 MW per generating unit. If the proposed sale of Point Beach is completed, the uprate will be the responsibility of the new owner, FPL. In light of this, both companies are currently evaluating the timing for implementation of the power uprate project.

During 2002 and 2003, the NRC issued Final Significance Determination letters for two red (high safety significance) inspection findings regarding problems identified by Point Beach with the performance of the auxiliary feedwater system recirculation lines. During 2003, the NRC conducted a three-phase supplemental inspection of Point Beach in accordance with NRC Inspection Procedure 95003 to review corrective actions for the findings as well as the effectiveness of the corrective action, emergency preparedness and engineering programs.

The inspection results were presented at a public meeting in December 2003, and documented in a February 2004 NRC letter to NMC. The NRC determined that the plant is being operated in a manner that ensures public safety but also identified several performance issues in the areas of problem identification and resolution, emergency preparedness, electrical design basis calculation control and engineering-operations communication.

NMC responded to the supplemental inspection in February 2004 with specific commitments to address the NRC concerns, including revision of the Point Beach Excellence Plan. We were assessed a fine of $60,000 related to issues identified with our emergency preparedness. NRC reviewed the adequacy of the revised Excellence Plan and its implementation, and NMC received a confirmatory action letter in April 2004. Since then, the NRC has conducted numerous inspections and completed reviews of activities and meetings, noting the overall results were satisfactory. As a result, in the fourth quarter of 2006, the NRC closed the confirmatory action letter and concluded that the red findings received in 2002 and 2003 will no longer be considered in the NRC’s assessment process. Point Beach will now receive routine baseline inspection by the NRC.

As a result of the September 11, 2001 terrorist attacks, the NRC and the industry have been strengthening security at nuclear power plants. Security at Point Beach remains at a high level, with limited access to the site continuing. Point Beach has responded to the NRC’s February 2002 Order for interim safeguards and security compensatory measures. Point Beach has also responded to NRC orders regarding security of independent spent fuel storage installations, design basis threat and security officer training and work hours.

Used Nuclear Fuel Storage and Disposal: Wisconsin Electric is authorized by the PSCW to load and store sufficient dry fuel storage containers to allow Point Beach Units 1 and 2 to operate to the end of their original operating licenses, but not to exceed the original 48-canister capacity of the dry fuel storage facility. The original operating licenses were set to expire in October 2010 for Unit 1 and in March 2013 for Unit 2 before they were renewed and extended by the NRC in December 2005.

Temporary storage alternatives at Point Beach are necessary until the DOE takes ownership of and permanently removes the used fuel as mandated by the Nuclear Waste Policy Act of 1982, as amended in 1987. The Nuclear Waste Policy Act established the Nuclear Waste Fund which is composed of payments made by the generators and owners of such waste and fuel. Effective January 31, 1998, the DOE 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 $215.2 million into the Nuclear Waste Fund over the life of Point Beach.

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 DOE’s failure to begin performance by January 31, 1998 constituted a breach of 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 DOE in the Court of Federal Claims. In October 2004, the Court of Federal Claims granted Wisconsin Electric’s motion for summary judgment on liability. The Court has subsequently scheduled a trial to determine damages for September 2007. Wisconsin Electric has incurred substantial damages to date and damages continue to accrue. We are seeking

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Cont’d)

recovery of our damages in this lawsuit and we expect that any recoveries would be considered in setting future rates.

In July 2002, the President signed a resolution which allowed the DOE to begin preparation of the application to the NRC for a license to design and build a spent fuel repository in Yucca Mountain, Nevada. In July 2006, the DOE announced plans to submit a license application to the NRC for a nuclear waste repository at Yucca Mountain no later than June 30, 2008. The DOE also announced that if the requested legislative changes are enacted, the repository would be able to accept spent nuclear fuel starting in early 2017. It is not possible, at this time, to predict with certainty when the DOE will actually begin accepting used nuclear fuel.

INDUSTRY RESTRUCTURING AND COMPETITION

Electric Utility Industry

The regulated energy industry continues to experience significant changes. FERC continues to support large RTOs, which will affect the structure of the wholesale market. To this end, the MISO implemented a bid-based market, the MISO Midwest Market, including the use of LMP to value electric transmission congestion and losses. The MISO Midwest Market commenced operation on April 1, 2005. Increased competition in the retail and wholesale markets, which may result from restructuring efforts, could have a significant and adverse financial impact on us. It is uncertain when retail access might be implemented in Wisconsin; however, Michigan has adopted retail choice which potentially affects our Michigan operations. In August 2005, President Bush signed into law the Energy Policy Act, which impacts the electric utility industry. (See Other Matters below for additional information on the Energy Policy Act). In addition, major issues in industry restructuring, implementation of RTO markets and market power mitigation received substantial attention in 2006 and prior years. We continue to focus on infrastructure issues through our PTF growth strategy.

Restructuring in Wisconsin: Electric utility revenues in Wisconsin are regulated by the PSCW. Due to many factors, including relatively competitive electric rates charged by the state’s electric utilities, the PSCW has been focused in recent years on electric reliability infrastructure issues for the State of Wisconsin. These issues include:

• 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;

• Improvements to existing and addition of new electric transmission lines in the state; and

• Addition of renewable generation.

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: Electric utility revenues are regulated by the MPSC. In June 2000, the Governor of Michigan signed the “Customer Choice and Electric Reliability Act” into law empowering the MPSC to implement electric retail access in Michigan. The new law provides that as of January 1, 2002, all Michigan retail customers of investor-owned utilities have the ability to choose their electric power producer.

As of January 1, 2002, our Michigan retail customers were allowed to remain with their regulated utility at regulated rates or choose an alternative electric supplier to provide power supply service. We have maintained our generation capacity and distribution assets and provide regulated service as we have in the past. We continue providing distribution and customer service functions regardless of the customer’s power supplier.

Competition and customer switching to alternative suppliers in the companies’ service territories in Michigan has been limited. With the exception of two general inquiries, no alternate supplier activity has occurred in our service territories in Michigan, reflecting the small market area, our competitive regulated power supply prices and a lack of interest in general in the Upper Peninsula of Michigan as a market for alternative electric suppliers.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Cont’d)

Restructuring in Illinois: In 1999, the State of Illinois passed legislation that introduced retail electric choice for large customers and introduced choice for all retail customers in May 2002. This legislation has not had, and is not expected to have a material impact on Wisconsin Electric’s business. Wisconsin Electric had one wholesale customer in Illinois, the City of Geneva, whose contract expired on December 31, 2005.

Electric Transmission and Energy Markets

ATC: ATC is regulated by FERC for all rate terms and conditions of service and is a transmission-owning member of MISO. As of February 1, 2002, operational control of ATC’s transmission system was transferred to MISO, and Wisconsin Electric and Edison Sault became non-transmission owning members and customers of MISO.

MISO: In connection with its status as a FERC approved RTO, MISO implemented a bid-based energy market, the MISO Midwest Market, which commenced operations on April 1, 2005. As part of this energy market, the MISO developed a market-based platform for valuing transmission congestion and losses premised upon the LMP system that has been implemented in certain northeastern and mid-Atlantic states. The LMP system includes the ability to mitigate or eliminate congestion costs through the use of FTRs. FTRs are allocated to market participants by MISO. A new allocation of FTRs was completed for the period of June 1, 2006 through May 31, 2007. We were granted substantially all of the FTRs that we were permitted to request during the allocation process. Previously, our unhedged congestion costs had not been explicitly identified and were embedded in our fuel and purchased power expenses. Due to certain changes in the units that MISO is dispatching, our unhedged congestion costs increased in 2006. These incremental congestion charges are deferred as approved by the PSCW, and we expect to recover these costs in future rates, subject to review and approval by the PSCW.

MISO deferred the costs to develop and start-up its energy market (new software systems and personnel). Now that the market is operational, the development and start-up costs are charged to MISO market participants, including Wisconsin Electric and Edison Sault.

To mitigate the risks of this new bid-based energy market, we requested deferral accounting treatment from the PSCW in January 2005 for certain incremental costs or benefits that may occur due to the implementation of the MISO Midwest Market. Our request excluded LMP energy costs because these costs are subject to recovery under the Wisconsin Fuel Cost Adjustment Procedure. In March 2005, the PSCW accepted our request. We submitted another joint proposal with other utilities in March 2005, requesting escrow accounting treatment for MISO Midwest Market costs until each utility’s first rate case following April 1, 2008. The purpose of the March 2005 request for escrow accounting was to provide clarification on costs not included in the March 2005 approval for deferral accounting treatment. The PSCW approved deferral treatment for these costs in June 2006.

In MISO, base transmission costs are currently being paid by LSE’s located in the service territories of each MISO transmission owner. The current license plate transmission rate design is scheduled to be replaced on February 1, 2008. A filing delineating a new rate design, or substantiation for maintaining the existing rate design is due at FERC by August 1, 2007. At this time, we are not able to determine the impact of this rate design change on our transmission costs. FERC also ordered a seams elimination charge to be paid by MISO LSE’s from December 1, 2004 until March 31, 2006, to compensate transmission owners for the loss of revenues resulting from the joining of a RTO and/or FERC’s elimination of through and out transmission charges between the MISO and PJM. FERC ordered that certain existing transmission transactions continue to pay for through and out service from December 1, 2004 until March 31, 2006. The details of the seams elimination charge and the quantification of the existing transaction charge are the subject of a hearing process initiated by FERC in a February 2005 order. In January 2006, Wisconsin Electric along with certain other parties to the proceeding, submitted an offer of settlement to the presiding administrative law judge that resolved all issues set for hearing that impact Wisconsin Electric with regard to the continued payment of through and out transmission charges as well as the seams elimination charge. The administrative law judge certified the settlement to FERC, and FERC approved the settlement in April 2006.

In April 2006, FERC issued an order determining that MISO had not applied its energy markets tariff correctly in the assessment of Revenue Sufficiency Guarantee charges. FERC ordered MISO to resettle all affected transactions retroactive to April 1, 2005. In October 2006, we received a ruling from FERC. Since the ruling, FERC’s order has been challenged by MISO and numerous other market participants. Any resettlement associated with the order is expected in 2007 and early 2008. Due to the complexity of the order, we are unable to precisely determine the

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2006 Form 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Cont’d)

overall financial implication to us. However, we do not believe that the result will have a material impact on our results of operations.

MISO is in the process of developing a market for two ancillary services, regulation reserves and contingency reserves. The MISO ancillary services market is currently proposed to begin in 2008. We currently self-provide both regulation reserves and contingency reserves. In the MISO ancillary services market, we expect that we will buy/sell regulation and contingency reserves from/to the market. The MISO ancillary services market is expected to reduce overall ancillary services costs in the MISO footprint. We anticipate achieving a net reduction in fuel costs, but are unable to determine the amount of savings we will realize at this time. The MISO ancillary services market is expected to also enable MISO to assume significant balancing area responsibilities such as frequency control and disturbance control.

Natural Gas Utility Industry

Restructuring in Wisconsin: The PSCW previously 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 PSCW 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, we are unable to predict the impact of potential future deregulation on our results of operations or financial position.

OTHER MATTERS

Energy Policy Act: In August 2005, President Bush signed into law the Energy Policy Act. Among other things, the Energy Policy Act includes tax subsidies for electric utilities and the repeal of PUHCA 1935. The Energy Policy Act also amends federal energy laws and provides FERC with new oversight responsibilities for the electric utility industry. Implementation of the Energy Policy Act requires the development of regulations by federal agencies, including FERC. As noted above, the Energy Policy Act and corresponding rules required us to seek FERC authorization to allow Wisconsin Electric to lease from We Power the three PTF units that are currently being constructed by We Power. We received approval of these leases from FERC in December 2006. Additionally, the Energy Policy Act repealed PUHCA 1935 and enacted PUHCA 2005, transferring jurisdiction over holding companies from the SEC to FERC. Wisconsin Energy and Wisconsin Electric were exempt holding companies under PUHCA 1935, and, accordingly, were exempt from that law’s provisions other than with respect to certain acquisitions of securities of a public utility. In March 2006, Wisconsin Energy and Wisconsin Electric each filed with FERC notification of its status as a holding company as required under FERC regulations implementing PUHCA 2005 and a request for exempt status similar to that held under PUHCA 1935. In June 2006, Wisconsin Energy and Wisconsin Electric received notice from FERC confirming their status as holding companies as required under FERC regulations implementing PUHCA 2005 and granting exempt status similar to that held under PUHCA 1935. As federal agencies continue to develop new rules to implement the Energy Policy Act, we expect additional impacts on Wisconsin Energy and its subsidiaries in the future.

Pension Reform: In August 2006, President Bush signed the Pension Protection Act of 2006. We are currently evaluating the Pension Protection Act of 2006, but we do not anticipate it will have a material impact on our results of operations or cash flows from operating activities.

Guardian: In April 2006, we sold our one-third interest in Guardian to an affiliate of Northern Border Partners, L.P. for approximately $38.5 million. The sale generated an after-tax gain of approximately $1.7 million. Guardian owns an interstate natural gas pipeline from the Joliet, Illinois market hub to southeastern Wisconsin that is designed to serve the growing demand for natural gas in Wisconsin and Northern Illinois. Guardian Pipeline began commercial operation in early December 2002. We have committed to purchase 650,000 Dth (approximately 87% of the pipeline’s total capacity) per day of capacity on the pipeline over a long-term contract that expires in December 2022.

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2006 Form 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Cont’d)

ACCOUNTING DEVELOPMENTS

New Pronouncements: See Note B — Recent Accounting Pronouncements in the Notes to Consolidated Financial Statements in this report for information on new accounting pronouncements.

CRITICAL ACCOUNTING ESTIMATES

Preparation of financial statements and related disclosures in compliance with GAAP requires the application of appropriate technical accounting rules and guidance, as well as the use of estimates. The application of these policies necessarily involves judgments regarding future events, including the likelihood of success of particular projects, legal and regulatory challenges and anticipated recovery of costs. These judgments, in and of themselves, could materially impact the financial statements and disclosures based on varying assumptions. In addition, the financial and operating environment also may have a significant effect, not only on the operation of our business, but on our results reported through the application of accounting measures used in preparing the financial statements and related disclosures, even if the nature of the accounting policies applied have not changed.

The following is a list of accounting policies that are most significant to the portrayal of our financial condition and results of operations and that require management’s most difficult, subjective or complex judgments.

Regulatory Accounting: Our 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. Under SFAS 71, the actions of our regulators may allow us to defer costs that non-regulated entities would expense. The actions of our regulators may also require us to accrue liabilities that non-regulated companies would not. As of December 31, 2006, we had $1,091.0 million in regulatory assets and $1,472.1 million in regulatory liabilities. In the future, if we move to market based rates or if the actions of our regulators change we may conclude that we are unable to follow SFAS 71. In this situation, continued deferral of certain regulatory asset and liability amounts on the utilities’ books, as allowed under SFAS 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. We continually review the applicability of SFAS 71 and have determined that it is currently appropriate to continue following SFAS 71. In addition, each quarter we perform a review of our regulatory assets and our regulatory environment and we evaluate whether we believe that it is probable that we will recover the regulatory assets in future rates. See Note C — Regulatory Assets and Liabilities in the Notes to Consolidated Financial Statements for additional information.

Pension and Other Post-retirement Benefits: Our reported costs of providing non-contributory defined pension benefits (described in Note O — Benefits in the Notes to Consolidated Financial Statements) are dependent upon numerous factors resulting from actual plan experience and assumptions of future experience. Pension costs are impacted by actual employee demographics (including age, compensation levels and employment periods), the level of contributions made to plans and earnings on plan assets. Changes made to the provisions of the plans may also impact current and future pension costs. Pension costs may also be significantly affected by changes in key actuarial assumptions, including anticipated rates of return on plan assets and the discount rates used in determining the projected benefit obligation and pension costs.

In accordance with SFAS 87 and SFAS 158, changes in pension obligations associated with these factors may not be immediately recognized as pension costs on the income statement, but generally are recognized in future years over the remaining average service period of plan participants. As such, significant portions of pension costs recorded in any period may not reflect the actual level of cash benefits provided to plan participants.

The following chart reflects pension plan sensitivities associated with changes in certain actuarial assumptions by the indicated percentage. Each sensitivity reflects a change to the given assumption, holding all other assumptions constant.

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2006 Form 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Cont’d)

Pension Plan Actuarial Assumption	Impact on Annual Cost
	(Millions of Dollars)
0.5% decrease in discount rate	$7.3
0.5% decrease in expected rate of return on plan assets	$4.8

In addition to pension plans, we maintain other post-retirement benefit plans which provide health and life insurance benefits for retired employees (described in Note O — Benefits in the Notes to Consolidated Financial Statements). We account for these plans in accordance with SFAS 106. Our reported costs of providing these post-retirement benefits are dependent upon numerous factors resulting from actual plan experience including employee demographics (age and compensation levels), our contributions to the plans, earnings on plan assets and health care cost trends. Changes made to the provisions of the plans may also impact current and future post-retirement benefit costs. Other post-retirement benefit costs may also be significantly affected by changes in key actuarial assumptions, including anticipated rates of return on plan assets and the discount rates used in determining the post-retirement benefit obligation and post-retirement costs. Our other post-retirement benefit plan assets are primarily made up of equity and fixed income investments. Fluctuations in actual equity market returns, as well as changes in general interest rates, may result in increased or decreased other post-retirement costs in future periods. Similar to accounting for pension plans, the regulators of our utility segment have adopted SFAS 106 for rate making purposes.

The following chart reflects other post-retirement benefit plan sensitivities associated with changes in certain actuarial assumptions by the indicated percentage. Each sensitivity reflects a change to the given assumption, holding all other assumptions constant.

OPEB Plans Actuarial Assumption	Impact on Reported Annual Cost
	(Millions of Dollars)
0.5% decrease in discount rate	$2.1
0.5% decrease in health care cost trend rate	($2.8	)
0.5% decrease in expected rate of return on plan assets	$0.9

Unbilled Revenues: We record utility operating revenues when energy is delivered to our customers. However, the determination of energy sales to individual customers is based upon the reading of their meters, which occurs on a systematic basis throughout the month. At the end of each month, amounts of energy delivered to customers since the date of their last meter reading are estimated and corresponding unbilled revenues are calculated. This unbilled revenue is estimated each month based upon actual generation and throughput volumes, recorded sales, estimated customer usage by class, weather factors, estimated line losses and applicable customer rates. Significant fluctuations in energy demand for the unbilled period or changes in the composition of customer classes could impact the accuracy of the unbilled revenue estimate. Total utility operating revenues during 2006 of $3,979.0 million included accrued utility revenues of $257.8 million as of December 31, 2006.

Asset Retirement Obligations: We account for legal liabilities for asset retirements at fair value in the period in which they are incurred according to the provisions of SFAS 143 and FIN 47. SFAS 143 applies primarily to decommissioning costs for Point Beach included in our utility energy segment. Using a discounted future cash flow methodology, our estimated nuclear asset retirement obligation was approximately $325.6 million at December 31, 2006. As it relates to our operations, FIN 47 applies primarily to asbestos removal costs. At December 31, 2006, we recorded an obligation of $39.6 million related to asbestos.

Calculation of the nuclear decommissioning asset retirement obligation is based upon projected decommissioning costs calculated by an independent decommissioning consulting firm, as well as several significant assumptions including the timing of future cash flows, future inflation rates and the discount rate applied to future cash flows. Assuming the following changes in key assumptions and holding all other assumptions constant, we estimate that our nuclear asset retirement obligation at December 31, 2006 would have changed by the following amounts:

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Cont’d)

Change in Assumption	Change in Liability
	(Millions of Dollars)
1% increase in inflation rate	$106.7
1% decrease in inflation rate	($79.8	)

We were unable to identify a viable market for or third party who would be willing to assume this liability. Accordingly, we have used a market-risk premium of zero when measuring our nuclear asset retirement obligation. We estimate that for each 1% increment that would be included as a market-risk premium, our nuclear asset retirement obligation would increase by approximately $3.3 million.

For additional information concerning SFAS 143 and our estimated nuclear asset retirement obligation, see Note F — Asset Retirement Obligations and Note I — Nuclear Operations in the Notes to Consolidated Financial Statements.

Deferred Tax Assets Valuation Allowance: We record deferred tax asset valuation allowances in accordance with SFAS 109. As of December 31, 2006, we had approximately $3.4 million of valuation allowances that relate to state NOLs of various non-utility subsidiaries. These NOLs begin to expire in 2008 and it is not likely that we will be able to utilize them.

During 2006 and 2005, we reduced our valuation allowances by $5.8 million and $16.3 million respectively, as we were able to conclude that it was likely that we would be able to realize certain state NOLs recorded at certain of the non-utility subsidiaries in 2006 and at the Parent company in 2005. The 2005 conclusion was based on the favorable decision by the Supreme Court of Wisconsin in June 2005 that allowed the construction of the Oak Creek expansion as part of our PTF plan.

The PTF generating units will be owned by our subsidiaries organized as LLCs. Once the plants become operational, taxable income or loss of the LLCs will flow through to and be reported in the separate state income tax return of the Parent. As a result, the Parent no longer expects to generate large state taxable losses if all plants are in service. During 2005, the first of the four generating units was put into service. The determination of future state taxable income of the Parent is a significant estimate. Factors affecting the estimate include the amounts spent and timing for construction of the PTF generating units, the amount of debt and interest expense at the Parent and the consideration of available tax planning strategies.

If we would conclude in a future period that it was more likely than not that some or all of the remaining state NOLs would be realized before expiration, GAAP would require that we reverse the related valuation allowance in that period. Any change to the allowance, as a result of a change in judgment about the realization of deferred tax assets, is reported as an increase or decrease in income.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

See Factors Affecting Results, Liquidity and Capital Resources — Market Risks and Other Significant Risks in Item 7. 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.

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2006 Form 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

WISCONSIN ENERGY CORPORATION

CONSOLIDATED INCOME STATEMENTS

Year Ended December 31

	2006		2005		2004
	(Millions of Dollars, Except Per Share Amounts)
Operating Revenues	$	3,996.4	$	3,815.5	$	3,406.1
Operating Expenses
Fuel and purchased power		802.0		776.7		591.7
Cost of gas sold		1,018.3		1,047.3		890.9
Other operation and maintenance		1,183.7		1,007.9		986.7
Depreciation, decommissioning and amortization		326.4		332.0		319.5
Property and revenue taxes		97.5		88.7		87.3
Total Operating Expenses		3,427.9		3,252.6		2,876.1
Operating Income		568.5		562.9		530.0
Equity in Earnings of Transmission Affiliate		38.6		34.6		30.1
Other Income and Deductions, net		53.1		28.7		(14.3	)
Interest Expense		172.7		173.4		193.4
Income from Continuing Operations Before Income Taxes		487.5		452.8		352.4
Income Taxes		175.0		149.2		132.8
Income from Continuing Operations		312.5		303.6		219.6
Income from Discontinued
Operations, Net of Tax		3.9		5.1		86.8
Net Income	$	316.4	$	308.7	$	306.4
Earnings Per Share (Basic)
Continuing Operations	$	2.67	$	2.59	$	1.87
Discontinued Operations		0.03		0.05		0.73
Total Earnings Per Share (Basic)	$	2.70	$	2.64	$	2.60
Earnings Per Share (Diluted)
Continuing Operations	$	2.64	$	2.56	$	1.84
Discontinued Operations		0.03		0.05		0.73
Total Earnings Per Share (Diluted)	$	2.67	$	2.61	$	2.57
Weighted Average Common Shares Outstanding (Millions)
Basic		117.0		117.0		117.7
Diluted		118.4		118.4		119.1

The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.

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2006 Form 10-K

WISCONSIN ENERGY CORPORATION

CONSOLIDATED BALANCE SHEETS

December 31

ASSETS
	2006			2005
	(Millions of Dollars)
Property, Plant and Equipment
In service	$	9,265.4		$	8,849.6
Accumulated depreciation		(3,423.7	)		(3,288.5	)
		5,841.7			5,561.1
Construction work in progress		992.4			596.6
Leased facilities, net		87.5			93.2
Nuclear fuel, net		130.9			112.0
Net Property, Plant and Equipment		7,052.5			6,362.9
Investments
Nuclear decommissioning trust fund		881.6			782.1
Equity investment in transmission affiliate		228.5			205.8
Other		54.7			92.1
Total Investments		1,164.8			1,080.0
Current Assets
Cash and cash equivalents		37.0			73.2
Accounts receivable, net of allowance for doubtful accounts of $35.1 and $36.6		379.3			441.8
Accrued revenues		257.8			262.9
Materials, supplies and inventories		417.2			451.6
Prepayments and other		136.7			147.5
Total Current Assets		1,228.0			1,377.0
Deferred Charges and Other Assets
Regulatory assets		1,091.0			1,025.6
Goodwill, net		441.9			441.9
Other		152.0			174.6
Total Deferred Charges and Other Assets		1,684.9			1,642.1
Total Assets	$	11,130.2		$	10,462.0

The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.

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2006 Form 10-K

WISCONSIN ENERGY CORPORATION

CONSOLIDATED BALANCE SHEETS

December 31

CAPITALIZATION AND LIABILITIES
	2006		2005
	(Millions of Dollars)
Capitalization
Common equity	$	2,889.0	$	2,680.1
Preferred stock of subsidiary		30.4		30.4
Long-term debt		3,073.4		3,031.0
Total Capitalization		5,992.8		5,741.5
Current Liabilities
Long-term debt due currently		296.7		496.0
Short-term debt		911.9		456.3
Accounts payable		404.5		418.1
Payroll and vacation accrued		79.3		75.2
Accrued taxes		56.6		31.0
Accrued interest		25.3		28.2
Other		113.7		142.0
Total Current Liabilities		1,888.0		1,646.8
Deferred Credits and Other Liabilities
Regulatory liabilities		1,472.1		1,373.2
Asset retirement obligations		371.7		355.5
Deferred income taxes - long-term		572.9		593.7
Accumulated deferred investment tax credits		52.0		56.3
Pension liability		195.9		274.4
Other long-term liabilities		584.8		420.6
Total Deferred Credits and Other Liabilities		3,249.4		3,073.7
Commitments and Contingencies (Note S)
Total Capitalization and Liabilities	$	11,130.2	$	10,462.0

The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.

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2006 Form 10-K

WISCONSIN ENERGY CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

Year Ended December 31

	2006			2005			2004
	(Millions of Dollars)
Operating Activities
Net income	$	316.4		$	308.7		$	306.4
Reconciliation to cash
Depreciation, decommissioning and amortization		336.8			350.0			352.6
Nuclear fuel expense amortization		28.7			23.0			24.0
Equity in earnings of transmission affiliate		(38.6	)		(34.6	)		(30.1	)
Distributions from transmission affiliate		30.4			27.0			23.2
Deferred income taxes and investment tax credits, net		(54.0	)		63.4			6.5
Deferred revenue		80.3			54.7			44.8
Change in - Accounts receivable and accrued revenues		61.2			(124.6	)		(48.9	)
Inventories		34.4			(48.5	)		(20.4	)
Other current assets		(26.5	)		6.5			(20.0	)
Accounts payable		(36.3	)		93.4			37.6
Accrued income taxes, net		50.2			6.1			(8.5	)
Deferred costs, net		(29.1	)		(132.6	)		(36.3	)
Other current liabilities and other		(24.1	)		(15.6	)		(31.9	)
Cash Provided by Operating Activities		729.8			576.9			599.0
Investing Activities
Capital expenditures		(928.7	)		(745.1	)		(636.5	)
Investment in transmission affiliate		(14.6	)		(10.5	)		(26.4	)
Proceeds from asset sales, net		102.4			133.8			899.6
Nuclear fuel		(47.7	)		(49.7	)		(30.0	)
Nuclear decommissioning funding		(17.6	)		(17.6	)		(17.6	)
Proceeds from investments within nuclear decommissioning trust		530.7			435.7			327.2
Purchases of investments within nuclear decommissioning trust		(530.7	)		(435.7	)		(327.2	)
Cash from discontinued operations		—			—			32.4
Other		(33.1	)		(8.0	)		21.3
Cash (Used in) Provided by Investing Activities		(939.3	)		(697.1	)		242.8
Financing Activities
Exercise of stock options		26.8			47.0			70.9
Purchase of common stock		(48.0	)		(75.1	)		(152.7	)
Dividends paid on common stock		(107.6	)		(102.9	)		(97.8	)
Issuance of long-term debt		337.9			285.8			397.0
Retirement of long-term debt		(493.8	)		(112.2	)		(798.4	)
Change in short-term debt		455.6			118.3			(252.8	)
Other, net		2.4			(3.1	)		(0.5	)
Cash Provided by (Used in) Financing Activities		173.3			157.8			(834.3	)
Change in Cash and Cash Equivalents		(36.2	)		37.6			7.5
Cash and Cash Equivalents at Beginning of Year		73.2			35.6			28.1
Cash and Cash Equivalents at End of Year	$	37.0		$	73.2		$	35.6
Discontinued Operations:
Cash Provided by Operating Activities	$	0.2		$	2.1		$	36.6
Cash Used in Investing Activities		(0.2	)		(2.1	)		(41.0	)
Cash Used in Financing Activities		—			—			(2.0	)
Change in Cash classified as held for sale	$	—		$	—		$	(6.4	)
Supplemental Information - Cash Paid For
Interest (net of amount capitalized)	$	183.4		$	162.3		$	192.6
Income taxes (net of refunds)	$	154.2		$	47.5		$	100.0

The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.

85 Wisconsin Energy Corporation

2006 Form 10-K

WISCONSIN ENERGY CORPORATION

CONSOLIDATED STATEMENTS OF COMMON EQUITY

	Common Stock		Other Paid In Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Unearned Compensation			Stock Options Exercisable			Total
	(Millions of Dollars)
Balance - December 31, 2003	$	1.2	$	841.8		$	1,510.1		$	3.1		$	(4.7	)	$	7.2		$	2,358.7
Net income							306.4												306.4
Other comprehensive income
Foreign currency translation										(8.6	)								(8.6	)
Minimum pension liability										(3.7	)								(3.7	)
Hedging, net										1.8									1.8
Comprehensive income		—		—			306.4			(10.5	)		—			—			295.9
Common stock cash dividends of $0.83 per share							(97.8	)											(97.8	)
Common stock issued				70.9															70.9
Repurchase of common stock				(152.7	)														(152.7	)
Restricted stock and performance share awards				5.9									(6.5	)					(0.6	)
Amortization and forfeiture of performance shares and restricted stock				(0.9	)								3.6						2.7
Stock options exercised				4.8												(4.8	)		—
Tax benefit from exercise of stock options				15.3															15.3
Balance - December 31, 2004		1.2		785.1			1,718.7			(7.4	)		(7.6	)		2.4			2,492.4
Net income							308.7												308.7
Other comprehensive income
Minimum pension liability										(4.1	)								(4.1	)
Comprehensive income		—		—			308.7			(4.1	)		—			—			304.6
Common stock cash dividends of $0.88 per share							(102.9	)											(102.9	)
Common stock issued				47.0															47.0
Repurchase of common stock				(75.1	)														(75.1	)
Restricted stock and performance share awards				0.9									(1.5	)					(0.6	)
Amortization and forfeiture of performance shares and restricted stock				—									3.7						3.7
Tax benefit from exercise of stock options				11.1															11.1
Other				1.3												(1.4	)		(0.1	)
Balance - December 31, 2005		1.2		770.3			1,924.5			(11.5	)		(5.4	)		1.0			2,680.1
Net income							316.4												316.4
Other comprehensive income
Minimum pension liability										2.5									2.5
Hedging, net										0.4									0.4
Comprehensive income		—		—			316.4			2.9			—			—			319.3
Common stock cash dividends of $0.92 per share							(107.6	)											(107.6	)
Common stock issued				26.8															26.8
Repurchase of common stock				(48.0	)														(48.0	)
Tax benefit from exercise of stock options				8.4															8.4
Stock-based compensation and awards of restricted stock				9.8															9.8
Modification of performance share awards				(6.3	)														(6.3	)
Reclassification of unearned compensation to Other Paid In Capital upon the adoption of SFAS 123R - Note J				(5.4	)								5.4						—
Adoption of SFAS 158										7.0									7.0
Other				(0.1	)											(0.4	)		(0.5	)
Balance - December 31, 2006	$	1.2	$	755.5		$	2,133.3		$	(1.6	)		$—		$	0.6		$	2,889.0

The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.

86 Wisconsin Energy Corporation

2006 Form 10-K

WISCONSIN ENERGY CORPORATION

CONSOLIDATED STATEMENTS OF CAPITALIZATION

December 31

	2006			2005
	(Millions of Dollars)
Common Equity (See Consolidated Statements of Common Equity)
Common stock - $.01 par value; authorized 325,000,000 shares; outstanding - 116,969,063 and 116,980,775 shares	$	1.2		$	1.2
Other paid in capital		755.5			770.3
Retained earnings		2,133.3			1,924.5
Accumulated other comprehensive (loss)		(1.6	)		(11.5	)
Unearned compensation - restricted stock and performance share awards		—			(5.4	)
Stock options exercisable		0.6			1.0
Total Common Equity		2,889.0			2,680.1
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		—			—
Total Preferred Stock		30.4			30.4
Long-Term Debt
Debentures (unsecured)
6-5/8% due 2006		—			200.0
9.47% due 2006		—			0.7
3.50% due 2007		250.0			250.0
4.50% due 2013		300.0			300.0
6.60% due 2013		45.0			45.0
5.20% due 2015		125.0			125.0
6-1/2% due 2028		150.0			150.0
5.625% due 2033		335.0			335.0
5.90% due 2035		90.0			90.0
5.70% due 2036		300.0			—
6-7/8% due 2095		100.0			100.0
Notes (secured, nonrecourse)
6.36% effective rate due 2006		—			1.1
7.25% variable rate due 2006 (b)		—			9.3
2% stated rate due 2011		0.2			1.2
5.55% variable rate due 2028 (a)		14.6			15.1
4.81% effective rate due 2030		2.0			2.0
4.91% due 2007-2030		150.4			153.7

The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.

87 Wisconsin Energy Corporation

2006 Form 10-K

WISCONSIN ENERGY CORPORATION

CONSOLIDATED STATEMENTS OF CAPITALIZATION - (Cont'd)

December 31

	2006			2005
	(Millions of Dollars)
Long-Term Debt - (Cont'd)
Notes (unsecured)
3.55% variable rate due 2006 (b)	$	—		$	1.0
5.875% due 2006		—			250.0
6.36% effective rate due 2006		—			1.2
7.75% due 2007-2008		0.6			0.8
5.50% due 2008		300.0			300.0
6.21% due 2008		20.0			20.0
6.48% due 2008		25.4			25.4
5-1/2% due 2009		50.0			50.0
6.25% due 2010		10.0			—
6.50% due 2011		450.0			450.0
6.51% due 2013		30.0			30.0
4.08% variable rate due 2015 (a)		17.4			17.4
3.80% variable rate due 2016 (a)		67.0			67.0
6.94% due 2028		50.0			50.0
3.80% variable rate due 2030 (a)		80.0			80.0
6.20% due 2033		200.0			200.0
Obligations under capital leases		231.4			230.8
Unamortized discount, net and other		(23.9	)		(24.7	)
Long-term debt due currently		(296.7	)		(496.0	)
Total Long-Term Debt		3,073.4			3,031.0
Total Capitalization	$	5,992.8		$	5,741.5

(a) Variable interest rate as of December 31, 2006.

(b) Variable interest rate as of December 31, 2005.

The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.

88 Wisconsin Energy Corporation

2006 Form 10-K

WISCONSIN ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

General: Our consolidated financial statements include the accounts of Wisconsin Energy Corporation (Wisconsin Energy, the Company, our, we or us), a diversified holding company, as well as our principal subsidiaries in the following operating segments:

• Utility Energy Segment — Consisting of Wisconsin Electric, Wisconsin Gas and Edison Sault; engaged primarily in the generation of electricity and the distribution of electricity and natural gas; and

• Non-Utility Energy Segment — Consisting primarily of We Power; engaged principally in the design, development, construction and ownership of electric power generating facilities for long-term lease to Wisconsin Electric.

Our Corporate and Other segment primarily includes Wispark, which develops and invests in real estate. We have eliminated all significant intercompany transactions and balances from the consolidated financial statements.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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: We have reclassified certain prior year financial statement amounts to conform to their current year presentation. These reclassifications had no effect on total assets, net income or earnings per share.

Our Consolidated Statements of Cash Flows has been modified to present separately cash flows from continuing operations and cash flows from discontinued operations. Previously, we presented cash flows from continuing operations on our Consolidated Statements of Cash Flows and cash flows from discontinued operations were presented separately in the notes to the Financial Statements.

Revenues: We recognize energy revenues on the accrual basis and include estimated amounts for services rendered but not billed.

Our retail electric rates in Wisconsin are established by the PSCW and include base amounts for fuel and purchase power costs. The electric fuel rules in Wisconsin allow us to request rate increases if fuel and purchased power costs exceed bands established by the PSCW. In a rate order issued in January 2006, the PSCW approved a plan to refund any over-collected fuel on an annual basis for 2006. For 2007, the band is plus or minus 2%.

Our retail gas rates include monthly adjustments which permit the recovery or refund of actual purchased gas costs. We defer any difference between actual gas costs incurred (adjusted for a sharing mechanism) and costs recovered through rates as a current asset or liability. The deferred balance is returned to or recovered from customers at intervals throughout the year.

Accounting for MISO Energy Transactions: MISO implemented the MISO Midwest Market on April 1, 2005. The MISO Midwest Market operates under both day-ahead and real-time markets. We record energy transactions in the MISO on a net basis for each hour.

89 Wisconsin Energy Corporation

2006 Form 10-K

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Cont'd)

Other Income and Deductions, Net: We recorded the following items in Other Income and Deductions, net for the years ended December 31:

Other Income and Deductions, net	2006	2005		2004
	(Millions of Dollars)
Capitalized Carrying Costs	$25.0	$20.4		$12.7
AFUDC - Equity	14.6	9.2		2.8
Gross Receipts Tax Recovery	4.0	2.6		1.5
Gain on Sale of Guardian Investment	2.8	—		—
Debt Redemption Costs	—	—		(22.9	)
Other, net	6.7	(3.5	)	(8.4	)
Total Other Income and Deductions, net	$53.1	$28.7		($14.3	)

Property and Depreciation: We record property, plant and equipment at cost. Cost includes material, labor, overheads and capitalized interest. Utility property also includes AFUDC - Equity. Additions to and significant replacements of property are charged to property, plant and equipment at cost; minor items are charged to maintenance expense. The cost of depreciable utility property less salvage value is charged to accumulated depreciation when property is retired.

We had the following property in service by segment at December 31:

Property In Service	2006		2005
	(Millions of Dollars)
Utility Energy	$	8,781.5	$	8,311.0
Non-Utility Energy		389.5		389.0
Other		94.4		149.6
Total	$	9,265.4	$	8,849.6

We include capitalized software costs associated with our utility energy segment under the caption “Property, Plant and Equipment” on the Consolidated Balance Sheets. As of December 31, 2006 and 2005, the net book value of regulated capitalized software totaled $17.8 million and $22.3 million, respectively. The net book value of other capitalized software was approximately $1.7 million and $2.4 million as of December 31, 2006 and 2005, respectively. The estimated useful life of our capitalized software is 5 years.

Our utility depreciation rates are certified by the state regulatory commissions and include estimates for salvage value and removal costs. Depreciation as a percent of average depreciable utility plant was 3.7% in 2006, 3.9% in 2005 and 4.0% in 2004. Nuclear plant decommissioning costs are accrued and included in depreciation expense (see Note I). The decline in depreciation as a percent of average depreciable utility plant was due to new depreciation rates approved by the PSCW, which became effective January 1, 2006.

For assets other than our regulated assets, we accrue depreciation expense at straight-line rates over the estimated useful lives of the assets. Estimated useful lives for non-regulated assets are 3 to 40 years for furniture and equipment, 2 to 5 years for software and 30 to 40 years for buildings.

Our regulated utilities collect in their rates amounts representing future removal costs for many assets that do not have an associated ARO. We record a regulatory liability on our balance sheet for the estimated amounts we have collected in rates for future removal costs less amounts we have spent in removal activities. This regulatory liability was $630.6 million as of December 31, 2006 and $604.2 million as of December 31, 2005.

90 Wisconsin Energy Corporation

2006 Form 10-K

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Cont'd)

We recorded the following CWIP by segment at December 31:

	2006		2005
	(Millions of Dollars)
Utility Energy	$	103.5	$	237.7
Non-Utility Energy		865.9		354.5
Other		23.0		4.4
Total	$	992.4	$	596.6

Allowance For Funds Used During Construction - Regulated: AFUDC is included in utility plant accounts and represents the cost of borrowed funds (AFUDC - Debt) used during plant construction and a return on stockholders’ capital (AFUDC - Equity) used for construction purposes. AFUDC - debt is recorded as a reduction of interest expense and AFUDC - Equity is recorded in Other Income, net.

During 2006, Wisconsin Electric accrued AFUDC at a rate of 8.94%, as authorized by the PSCW. During 2005 and 2004, the authorized rate was 10.18%. Wisconsin Electric accrues AFUDC on all electric utility NO_x, SO₂ and particulates remediation projects. Wisconsin Electric’s rates were set to provide a full return on electric safety and reliability projects so AFUDC is not accrued on these projects. Wisconsin Electric accrued AFUDC on 50% of the remaining electric, gas and steam projects in CWIP and rates were set assuming that 50% of the CWIP balances were included in rate base.

During 2006, Wisconsin Gas accrued AFUDC at a rate of 11.31%, as authorized by the PSCW. During 2005 and 2004, the authorized rate was 10.32%. Wisconsin Gas accrued AFUDC on specific large construction projects during 2005 and 2004. During 2006, Wisconsin Gas accrued AFUDC on 50% of CWIP balances.

Our regulated segment recorded the following AFUDC for the years ended December 31:

	2006		2005		2004
	(Millions of Dollars)
AFUDC - Debt	$	5.2	$	4.6	$	1.5
AFUDC - Equity	$	14.5	$	9.2	$	2.8

Capitalized Interest and Carrying Costs - Non-Regulated Energy: As part of the construction of the power plants under our PTF program, we capitalize interest during construction in accordance with SFAS 34. Under the lease agreements associated with our PTF power plants, we are able to collect from utility customers the carrying costs associated with the construction of these power plants. We defer these carrying costs collected on our balance sheet and they will be amortized to revenue over the individual lease term. For further information on the accounting for capitalized interest and deferred carrying costs associated with the construction of our PTF power plants, see Note E.

Earnings Per Common Share: We compute basic earnings per common share by dividing our net income by the weighted average number of common shares outstanding. Diluted earnings per common share reflect the potential reduction in earnings per common share that could occur when potentially dilutive common shares are added to common shares outstanding.

We derive our potentially dilutive common shares by calculating the number of shares issuable relating to stock options utilizing the treasury stock method. The future issuance of shares underlying the outstanding stock options depends on whether the exercise prices of the stock options are less than the average market price of the common shares for the respective periods. Shares that are anti-dilutive are not included in the calculation.

91 Wisconsin Energy Corporation

2006 Form 10-K

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Cont'd)

Materials, Supplies and Inventories: Our inventory at December 31 consists of:

Materials, Supplies and Inventories	2006		2005
	(Millions of Dollars)
Fossil Fuel	$	121.0	$	90.4
Natural Gas in Storage		188.6		265.5
Materials and Supplies		107.6		95.7
Total	$	417.2	$	451.6

Substantially all fossil fuel, materials and supplies and natural gas in storage inventories are recorded using the weighted-average method of accounting.

Regulatory Accounting: Our utility energy segment accounts for its regulated operations in accordance with SFAS 71. This statement sets forth the application of GAAP 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 rate making 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. We defer all of our regulatory assets pursuant to specific orders or by a generic order issued by our primary regulator. 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). We expect to recover our outstanding regulatory assets in rates over a period of no longer than 20 years. For further information, see Note C.

Derivative Financial Instruments: We have derivative physical and financial instruments as defined by SFAS 133 which we report at fair value. However, our use of financial instruments is limited. For further information, see Note J.

Cash and Cash Equivalents: Cash and cash equivalents include marketable debt securities acquired three months or less from maturity.

We have nuclear decommissioning trusts that hold investments in debt and equity securities. All assets within the nuclear decommissioning trusts are restricted to nuclear decommissioning activities as set forth by regulations promulgated by the IRS and by the PSCW. The accompanying Consolidated Statements of Cash Flows includes proceeds from investments within the nuclear decommissioning trusts and purchases of investments within the nuclear decommissioning trusts.

Margin Accounts: Cash deposited in brokerage accounts for margin requirements is recorded in Other Current Assets on our Consolidated Balance Sheets.

Asset Retirement Obligations: We adopted SFAS 143 effective January 1, 2003. We adopted FIN 47 effective December 31, 2005. FIN 47 defines the term conditional ARO as used in SFAS 143. As defined in FIN 47, a conditional ARO refers to a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the entity. Consistent with SFAS 143, we record a liability at fair value for a legal ARO in the period in which it is incurred. When a new legal obligation is recorded, we capitalize the costs of the liability by increasing the carrying amount of the related long-lived asset. We accrete the liability to its present value each period and depreciate the capitalized cost over the useful life of the related asset. At the end of the asset’s useful life, we settle the obligation for its recorded amount or incur a gain or loss. As it relates to our regulated operations, we apply SFAS 71 and recognize regulatory assets or liabilities for the timing differences between when we recover legal AROs in rates and when we would recognize these costs under SFAS 143. For further information, see Note F.

92 Wisconsin Energy Corporation

2006 Form 10-K

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Cont'd)

Goodwill and Intangible Assets: We account for goodwill and other intangible assets following SFAS 142, effective January 1, 2002. As of December 31, 2006 and 2005, we had $441.9 million of goodwill recorded at the utility energy segment, which related to our acquisition of Wisconsin Gas in 2000.

Under SFAS 142, goodwill and other intangibles with indefinite lives are not subject to amortization. However, goodwill and other intangibles are subject to fair value-based rules for measuring impairment, and resulting write-downs, if any, are to be reflected in operating expense. We assess the fair value of our SFAS 142 reporting unit by considering future discounted cash flows, a comparison of fair value based on public company trading multiples, and merger and acquisition transaction multiples for similar companies. This evaluation utilizes the information available under the circumstances, including reasonable and supportable assumptions and projections. We perform our annual impairment test for the reporting unit as of August 31. There was no impairment to the recorded goodwill balance as of our annual 2006 impairment test date for our reporting unit.

Impairment or Disposal of Long Lived Assets: We carry property, equipment and goodwill related to businesses held for sale at the lower of cost or estimated fair value less costs to sell. As of December 31, 2006, we had no assets classified as Held for Sale. Consistent with SFAS 144, long-lived assets are tested for recoverability whenever events or changes in circumstances indicate that their carrying value may not be recoverable from the use and eventual disposition of the asset based on the remaining useful life. An impairment loss is recognized when the carrying amount of an asset is not recoverable and exceeds the fair value of the asset. The carrying amount of an asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. An impairment loss is measured as the excess of the carrying amount of the asset in comparison to the fair value of the asset. For further information, see Note D.

Investments: We account for investments in other affiliated companies in which we do not maintain control using the equity method. As of December 31, 2006 and 2005, we had a total ownership interest of approximately 29.4% and 33.5%, in ATC. We are represented by one out of ten ATC board members, each of whom has one vote. Due to the voting requirements, no individual member has more than 10% of the voting control. For further information regarding such investments, see Note R.

Income Taxes: We follow the liability method in accounting for income taxes as prescribed by SFAS 109. SFAS 109 requires the recording of deferred assets and liabilities to recognize the expected future tax consequences of events that have been reflected in our financial statements or tax returns and the adjustment of deferred tax balances to reflect tax rate changes. We are required to assess the likelihood that our deferred tax assets would expire before being realized. We have established a valuation allowance against certain deferred tax assets. GAAP requires that, if we conclude in a future period that it is more likely than not that some or all of the deferred tax assets would be realized before expiration, we reverse the related valuation allowance in that period. Any change to the allowance, as a result of a change in judgment about the realization of deferred tax assets, is reported in income tax expense.

Tax credits associated with regulated operations are deferred and amortized over the life of the assets. We file a consolidated Federal income tax return. Accordingly, we allocate Federal current tax expense benefits and credits to our subsidiaries based on their separate tax computations. For further information, see Note H.

We recognize interest and penalties accrued related to unrecognized tax benefits in Income Taxes in our Consolidated Income Statements, as well as Regulatory Assets or Regulatory Liabilities in our Consolidated Balance Sheets.

We collect sales and use taxes from our customers and remit these taxes to governmental authorities. These taxes are recorded in our Consolidated Income Statements on a net basis.

Stock Options: Effective January 1, 2006, we adopted SFAS 123R, using the modified prospective method. We use a binomial pricing model to estimate the fair value of stock options granted subsequent to December 31, 2005. Prior to January 1, 2006, we accounted for share based compensation under APB 25, Accounting for Stock Issued to Employees, and we disclosed the pro forma impact of share based compensation expense under SFAS 123. Historically, all stock options have been granted with an exercise price equal to the fair market value of the common stock on the date of grant and expire no later than ten years from the grant date. Accordingly, no compensation expense was recognized in connection with option grants. All options granted subsequent to December 31, 2004 vest on a cliff-basis after a three year period. Prior to January 1, 2006, we reported benefits of tax deductions in

93 Wisconsin Energy Corporation

2006 Form 10-K

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Cont'd)

excess of recognized compensation costs as operating cash flows. SFAS 123R requires that excess tax benefits be reported as a financing cash inflow rather than as an operating cash inflow. In addition, we previously recorded unearned stock-based compensation for non-vested restricted stock and performance share awards as “unearned compensation” in our Consolidated Statements of Common Equity. For further discussion of this new standard and the impacts to our Consolidated Financial Statements, see Note J.

We previously adopted the disclosure provisions of SFAS 123 as amended by SFAS 148. The fair value of our stock options at date of grant for 2006 was calculated using a binomial option-pricing model. For 2005 and 2004, the fair value of options at the date of grant was estimated using the Black-Scholes option-pricing model with the following weighted average assumptions:

	Binomial	Black-Scholes
	2006	2005			2004
Risk free interest rate	4.3% -4.4%		4.4	%		4.6	%
Dividend yield	2.4%		2.5	%		2.5	%
Expected volatility	17.0% -20.0%		19.0	%		23.1	%
Expected life (years)	6.3		10.0			10.0
Pro forma weighted average fair value of our stock options granted	$7.55	$	8.32		$	9.45

As described more fully in the following table, our diluted earnings would have been reduced by $0.02 and $0.24 per share, respectively, had we expensed the 2005 and 2004 grants for stock-based compensation plans under SFAS 123. In 2004, the pro forma expense increased, in part, due to the effect of accelerating the vesting of stock options, which resulted in a pro forma expense of $0.16 per share. For further information regarding equity based compensation, see Note J.

	2005		2004
	(Millions of Dollars, Except per share amounts)
Net Income - as reported	$	308.7	$	306.4
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects		2.3		2.5
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		4.5		31.5
Net Income - Pro forma	$	306.5	$	277.4
Basic Earnings Per Common Share
As reported	$	2.64	$	2.60
Pro forma	$	2.62	$	2.36
Diluted Earnings Per Common Share
As reported	$	2.61	$	2.57
Pro forma	$	2.59	$	2.33

Nuclear Fuel Amortization: We amortize our nuclear fuel inventory to fuel expense as the power is generated, generally over a period of 60 months.

94 Wisconsin Energy Corporation

2006 Form 10-K

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Cont'd)

B — RECENT ACCOUNTING PRONOUNCEMENTS

Share Based Compensation: In December 2004, the FASB issued SFAS 123R. In March 2005, the SEC issued SAB 107 regarding the SEC’s interpretation of SFAS 123R and the valuation of share-based payment for public companies. This statement requires that the compensation costs relating to such transactions be recognized in the consolidated income statement. We adopted SFAS 123R and SAB 107 effective January 1, 2006 using the modified prospective method. For additional information, see Note J.

Implicit Variable Interests: In April 2006, the FASB issued FSP FIN 46R-6. FSP FIN 46R-6 addresses the requirement to determine the variability to be considered in applying FIN 46R-6 based on an analysis of the design of the entity. As required, we adopted FSP FIN 46R-6 effective July 1, 2006 for any new arrangements entered into after the effective date. For further information, see Note G.

Uncertainty in Income Taxes: In July 2006, the FASB issued FIN 48, an interpretation of SFAS 109. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in the enterprise’s financial statements in accordance with SFAS 109. We adopted FIN 48 effective January 1, 2007. For further information, see Note H.

Fair Value Measurements: In September 2006, the FASB issued SFAS 157. SFAS 157 provides guidance for using fair value to measure assets and liabilities. SFAS 157 defines fair value, provides a framework for measuring fair value and expands disclosures related to fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. We are currently evaluating the provisions of SFAS 157 and we expect to adopt SFAS 157 on January 1, 2008.

Pension and Other Post-retirement Plans: In September 2006, the FASB issued SFAS 158, an amendment of SFAS 87, 88, 106 and 132R. SFAS 158 requires recognition of the overfunded or underfunded status of a defined benefit post-retirement plan as an asset or liability on the balance sheet and recognition of changes in that funded status in the year in which the changes occur through comprehensive income. SFAS 158 also requires an employer to measure the funded status of a plan as of the date of its year end balance sheet. We adopted SFAS 158 as of December 31, 2006. For further information, see Note O.

Financial Statement Errors: In September 2006, the SEC staff issued SAB 108. SAB 108 addresses the diversity in practice by registrants when quantifying the effect of an error on the financial statements. SAB 108 provides guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements. We adopted the provisions of SAB 108 effective December 31, 2006. The adoption of SAB 108 did not have any financial impact on our consolidated financial statements.

C — REGULATORY ASSETS AND LIABILITIES

Our utility energy segment accounts for its regulated operations in accordance with SFAS 71.

Our primary regulator considers our regulatory assets and liabilities in two categories, escrowed and deferred. In escrow accounting we expense amounts that are included in rates. If actual costs exceed, or are less than the amounts that are allowed in rates, the difference in cost is escrowed on the balance sheet as a regulatory asset or regulatory liability and the escrowed balance is considered in setting future rates. Under deferred cost accounting, we defer amounts to our balance sheet based upon specific orders or correspondence with our primary regulator. These deferred costs will be considered in future rate setting proceedings. As of December 31, 2006, we had approximately $55.0 million of net regulatory assets that were not earning a return.

95 Wisconsin Energy Corporation

2006 Form 10-K

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Cont'd)

Our regulatory assets and liabilities as of December 31 consist of:

	2006		2005
	(Millions of Dollars)
Regulatory Assets
Deferred unrecognized pension costs (see Note O)	$	357.2	$	377.2
Escrowed electric transmission costs		192.2		169.4
Deferred income tax related		98.3		96.6
Deferred fuel related costs		79.1		72.8
Deferred plant related - capital lease (see Note K)		71.8		67.0
Deferred unrecognized OPEB costs (see Note O)		70.5		17.3
Deferred environmental costs		68.2		64.2
Escrowed bad debt costs		57.0		58.1
Escrowed unrecovered plant costs		31.6		56.5
Other, net		65.1		46.5
Total long-term regulatory assets	$	1,091.0	$	1,025.6
Regulatory Liabilities
Deferred cost of removal obligations (see Notes F and I)	$	630.6	$	604.2
Deferred asset retirement obligations (see Notes F and I)		537.1		475.3
Deferred pension benefit		62.3		71.0
Deferred income tax related		95.4		103.8
Other, net		146.7		118.9
Total long-term regulatory liabilities	$	1,472.1	$	1,373.2
Net long-term regulatory liabilities	$	381.1	$	347.6

As of December 31, 2005, we recorded a minimum pension liability to reflect the funded status of our pension plans (see Note O). Under SFAS 158, which we adopted effective December 31, 2006, we have concluded that substantially all of the unrecognized costs resulting from the recognition of the funded status of our pension and OPEB plans qualify as a regulatory asset.

Our regulated subsidiaries record deferred regulatory assets and liabilities representing the future expected impact of deferred taxes on utility revenues (see Note A).

In October 2002, the PSCW issued an order authorizing Wisconsin Electric to implement a surcharge for recovery of annual electric transmission costs projected through 2005. In addition, the PSCW order authorized escrow accounting treatment for transmission costs.

As of December 31, 2006, we have deferred $79.1 million of fuel related costs. The majority of these deferred costs were incurred in 2005 as a result of an extended outage at Point Beach, increased costs associated with reduced coal deliveries due to a railroad transportation problem and increased costs associated with the MISO Midwest Market.

Consistent with a generic order from and past rate-making practices of the PSCW, we defer as a regulatory asset costs associated with the remediation of former manufactured gas plant sites. As of December 31, 2006, we have recorded $68.2 million of environmental costs associated with manufactured gas plant sites as a regulatory asset, including $37.7 million of deferrals for actual remediation costs incurred and a $30.5 million accrual for estimated future site remediation (See Note S). In addition, we have deferred $8.8 million of insurance recoveries associated with the environmental costs as regulatory liabilities. We included total actual remediation costs incurred net of the related insurance recoveries in our 2006 rate case. We began amortizing these costs upon receiving PSCW approval in January 2006. The amortization period for these costs is five years.

As part of our PTF strategy, the PSCW approved the retirement and removal of the Port Washington Power Plant coal units to make way for construction of gas-fired facilities. In a September 27, 2003 order, the PSCW authorized transferring the undepreciated costs and related removal amounts to a regulatory asset account. The escrowed unrecovered plant costs totaled $31.6 million at December 31, 2006.

96 Wisconsin Energy Corporation

2006 Form 10-K

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Cont'd)

As of December 31, 2006, we have $57.0 million of escrowed bad debt costs. In 2005 and 2004, the PSCW approved our request to account for residential bad debt costs on an escrow basis at Wisconsin Gas and Wisconsin Electric whereby they defer actual bad debt write-offs that exceed amounts allowed in rates, and that treatment continued through 2006.

In connection with the WICOR acquisition, we recorded the funded status of the Wisconsin Gas pension and post-retirement medical plans at fair value at the acquisition date. Due to the expected regulatory treatment of these items, we record a regulatory liability (Deferred pension) that is being amortized over an average remaining service life of 15 years ending 2015.

D — ASSET SALES, DIVESTITURES AND DISCONTINUED OPERATIONS

Minergy Neenah: Effective September 27, 2006, we sold 100% of the membership interest in Minergy Neenah to a third party. The primary assets of Minergy Neenah were a Glass Aggregate plant and related operating contracts. The plant recycled paper sludge from area paper mills into renewable energy and glass aggregate using our patented Glass Aggregate technology. The largest source of revenue for Minergy Neenah had been a long-term steam contract with an adjacent paper mill. The mill was permanently closed as of June 30, 2006. Pursuant to the steam contract, the mill owner paid Minergy Neenah a contract termination payment. In the third quarter of 2006, we received gross proceeds from the sale of the plant and the contract termination totaling $12.2 million and we recorded a net loss of $0.4 million that is included in Income from Discontinued Operations, net of tax. Previously, in the third quarter of 2004, we concluded the asset was impaired and recorded a non-cash asset valuation charge of $27.0 million ($17.6 million after tax).

Wisvest - Calumet: Effective May 31, 2005, we sold our Calumet facility for approximately $37.0 million in cash to Tenaska Power Fund, L.P. The primary assets of Calumet were a 308 MW natural gas-fired peaking power facility in Chicago, Illinois and related operating contracts. The transaction generated an after tax gain of approximately $4.7 million upon closing and generated approximately $32.0 million in cash tax benefits. In the third quarter of 2004, we concluded that this asset was impaired and recorded a non-cash asset valuation charge of $122.0 million ($79.3 million after tax).

Manufacturing Segment: Effective July 31, 2004, we sold WICOR, Inc. to Pentair, Inc. and received cash proceeds of $857 million, and Pentair, Inc. assumed approximately $25 million of third party debt.

WICOR’s only asset at the time of the sale consisted of its interest in WICOR Industries. As a condition of the sale, WICOR transferred its ownership of Wisconsin Gas to Wisconsin Energy through a stock redemption. Prior to the transaction, Wisconsin Gas converted from a corporation to a limited liability company (collectively the “Wisconsin Gas transfer”). We expect the final determination of cash taxes to be approximately $105 million as a result of the stock redemption described above. However, we also expect to receive future tax deductions from a step-up in the tax basis of the Wisconsin Gas assets as a result of the Wisconsin Gas transfer. We therefore expect that substantially all of the cash taxes paid on the stock redemption will be recovered as deferred income tax assets through future deductions.

In accordance with SFAS 144, we have reclassified the assets and liabilities of Minergy Neenah as Assets held for sale in the accompanying Consolidated Balance Sheets. Total assets held for sale for Minergy Neenah were $17.4 million at December 31, 2005. In addition, we have recorded the operating results of Minergy Neenah, Calumet and the Manufacturing Segment as Income from Discontinued Operations, Net of Tax in the accompanying Consolidated Income Statements for the years ended December 31, 2006, 2005 and 2004. Previously, Minergy Neenah’s results were included in corporate and other and the Calumet operations were included in the non-utility energy segment. See below for a summary of the components of Discontinued Operations in our Consolidated Income Statements.

97 Wisconsin Energy Corporation

2006 Form 10-K

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Cont’d)

	Year End December 31
	2006 (a)			2005 (b)			2004 (c)
	(Millions of Dollars)
Operating Revenues
Manufacturing Segment	$	—		$	—		$	481.0
Calumet		—			2.3			5.2
Minergy Neenah		14.3			18.1			19.8
Total	$	14.3		$	20.4		$	506.0
Income (Loss) Before Income Taxes
Manufacturing Segment	$	—		$	—		$	50.9
Calumet		—			0.4			(125.0	)
Minergy Neenah		2.4			(6.4	)		(24.9	)
Total	$	2.4		($	6.0	)	($	99.0	)
Gain (Loss) on Sale—After-Tax
Manufacturing Segment	$	2.4		$	—		$	152.3
Calumet		—			4.7			—
Minergy Neenah (d)		(0.4	)		—			—
Total	$	2.0		$	4.7		$	152.3

(a) Includes the results of Minergy through September 27, 2006.

(b) Includes the results of Calumet through May 31, 2005.

(c) Includes the results of our manufacturing segment through July 31, 2004.

(d) In the third quarter of 2006, we received gross proceeds from the sale of the plant and the contract termination totaling $12.2 million, and we recorded a net loss of $0.4 million that is included in Income from Discontinued Operations, net of tax.

E—ACCOUNTING AND REPORTING FOR POWER THE FUTURE GENERATING UNITS

Background: As part of our PTF strategy, our non-utility subsidiary, We Power, is building four new generating units that will be leased to our utility subsidiary, Wisconsin Electric, under long-term leases that have been approved by the PSCW, our primary regulator. The leases are designed to recover the capital costs of the plant including a return. The first of the four generating units was placed in service in July 2005 and is being leased to Wisconsin Electric. Wisconsin Electric will be responsible for all of the operating costs, including fuel, of the PTF units once they are placed in service and we anticipate that we will recover the operating costs of these plants in rates. The accompanying consolidated financial statements eliminate all intercompany transactions between We Power and Wisconsin Electric, and reflect the cash inflows from Wisconsin Electric customers and the cash outflows to our vendors and suppliers. The PTF units include PWGS 1, PWGS 2, OC 1 and OC 2.

During Construction: Under the terms of each lease, we collect in current rates amounts representing our pre-tax cost of capital (debt and equity) associated with capital expenditures for the PTF units. Our pre-tax cost of capital is approximately 14%. The carrying costs that we collect in rates are recorded as deferred revenue, and they will be amortized to revenue over the term of each lease, once the respective unit is placed into service. During the construction of the PTF units, we capitalize interest costs at an overall weighted-average pre-tax cost of interest of approximately 6%. Capitalized interest is included in the total cost of the PTF units.

98 Wisconsin Energy Corporation

2006 Form 10-K

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Cont’d)

Cash Flows: The following table identifies key pre-tax cash outflows and inflows related to the construction of our PTF units for the twelve months ended December 31, 2006 and 2005 and compares it to total WEC.

Capital Expenditures (Millions of Dollars)									Total
	PWGS 1		PWGS 2		OC 1		OC 2		PTF		WEC
2006	$	—	$	121.3	$	268.0	$	76.8	$	466.1	$	928.7
2005	$	52.6	$	45.6	$	141.1	$	37.1	$	276.4	$	745.1
Capitalized Interest (Millions of Dollars)									Total
	PWGS 1		PWGS 2		OC 1		OC 2		PTF		WEC
2006	$	—	$	8.3	$	19.3	$	6.8	$	34.4	$	39.9
2005	$	10.8	$	2.8	$	7.7	$	3.0	$	24.3	$	28.7
Deferred Revenue (Millions of Dollars)									Total
	PWGS 1		PWGS 2		OC 1		OC 2		PTF		WEC
2006	$	—	$	19.1	$	45.3	$	15.9	$	80.3	$	80.3
2005	$	23.9	$	6.3	$	17.6	$	6.9	$	54.7	$	54.7

Balance Sheet: As noted above, we collect in current rates carrying costs that are calculated based on the cash expenditures included in CWIP multiplied by our pre-tax cost of capital (approximately 14%). The carrying costs are recorded as deferred revenue and included in Other long-term liabilities. Our total CWIP balance includes cash expenditures, capitalized interest and accruals. The following table identifies key amounts related to our PTF units that are recorded on our balance sheet as of December 31, 2006 and 2005:

	CWIP - Cash Expenditures (Millions of Dollars)								Total
	PWGS 1		PWGS 2		OC 1		OC 2		PTF
December 31, 2006	$	—	$	196.2	$	487.7	$	152.6	$	836.5
December 31, 2005	$	—	$	67.5	$	198.9	$	74.9	$	341.3

	Total CWIP (Millions of Dollars)								Total
	PWGS 1		PWGS 2		OC 1		OC 2		PTF		WEC
December 31, 2006	$	—	$	207.7	$	517.3	$	163.5	$	888.5	$	992.4
December 31, 2005	$	—	$	70.7	$	209.2	$	78.9	$	358.8	$	596.6
	Net Plant in Service (Millions of Dollars)								Total
	PWGS 1		PWGS 2		OC 1		OC 2		PTF		WEC
December 31, 2006	$	350.1	$	—	$	—	$	—	$	350.1	$	5,841.7
December 31, 2005	$	359.9	$	—	$	—	$	—	$	359.9	$	5,561.1
	Deferred Revenue Included in Other Long-term Liabilities (Millions of Dollars)								Total
	PWGS 1		PWGS 2		OC 1		OC 2		PTF		WEC
December 31, 2006	$	68.3	$	27.5	$	66.0	$	24.4	$	186.2	$	186.2
December 31, 2005	$	71.2	$	8.5	$	20.6	$	8.5	$	108.8	$	108.8

Income Statement: Once the PTF units are placed in service, we will recover in rates the lease costs which reflect the authorized cash construction cost of the units plus a return. The authorized cash costs are established by the PSCW. The authorized cash costs exclude capitalized interest since carrying costs are recovered during the construction of the units. The lease payments are expected to be levelized, except that OC 1 and OC 2 will be recovered on a levelized basis that has a one time 10.6% escalation after the first 5 years of the leases. The leases

99 Wisconsin Energy Corporation

2006 Form 10-K

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Cont’d)

established a set return on equity component of 12.7% after tax. The interest component of the return is determined up to 180 days prior to the date that the units are placed in service.

We recognize revenues related to the lease payments that are included in our rates. In addition, our revenues will include the amortization of the deferred revenues that reflect the carrying costs that are collected during construction. The deferred revenue will be amortized on a straight line basis over the lease term. We will depreciate the units on a straight line basis over their expected service life.

In July 2005, PWGS 1 was placed in service. This asset had a cost of approximately $364.3 million which included approximately $31.1 million of capitalized interest. The asset is being depreciated over its estimated useful life of approximately 37 years. The cost of the plant, plus a return, is expected to be recovered through Wisconsin Electric’s rates over a 25 year period at an annual amount of approximately $48 million.

F — ASSET RETIREMENT OBLIGATIONS

The following table presents the change in our asset retirement obligations during 2006.

	Balance at December 31, 2005	Liabilities Incurred	Liabilities Settled		Accretion	Balance at December 31, 2006
	(Millions of Dollars)
Asset Retirement Obligations	$355.5	$  —	($2.1	)	$18.3	$371.7

SFAS 143 primarily applies to the future decommissioning costs for Point Beach. Prior to January 2003, we recorded a long-term liability for accrued nuclear decommissioning costs. See Note I for further information about the nuclear decommissioning of Point Beach, including our investments in nuclear decommissioning trusts that are restricted to nuclear decommissioning.

In March 2005, the FASB issued FIN 47. FIN 47 defines a conditional asset retirement obligation as a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the entity. We adopted FIN 47 effective December 31, 2005. At adoption, we recorded additional asset retirement obligations related to asbestos removal costs.

The adoption of FIN 47 had no impact on our net income in 2006 or 2005. As it relates to our regulated operations, we apply SFAS 71 and recognize regulatory assets or liabilities for the timing differences between when we recover legal asset retirement obligations in rates and when we would recognize these costs under FIN 47. This treatment is consistent with the adoption of SFAS 143 for our regulated operations.

G — VARIABLE INTEREST ENTITIES

Under FIN 46 and FIN 46R, the primary beneficiary of a variable interest entity must consolidate the related assets and liabilities.

We continue to evaluate our tolling and purchased power agreements with third parties on a quarterly basis. After making an exhaustive effort, we concluded that for three of these agreements, we are unable to obtain the information necessary to determine whether these entities are variable interest entities. Pursuant to the terms of two of the three agreements, we deliver fuel to the entity’s facilities and receive electric power. We pay the entity a “toll” to convert our fuel into the electric energy. The output of the facility is available for us to dispatch during the term of the respective agreement. In the other agreement, we have rights to the firm capacity of the entity’s facility. We have approximately $603.0 million of required payments over the remaining term of these three agreements,

100 Wisconsin Energy Corporation

2006 Form 10-K

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Cont’d)

which expire over the next 16 years. We believe the required payments will continue to be recoverable in rates. We account for one of these agreements as a capital lease.

In April 2006, the FASB issued FSP FIN 46R-6. As required, we adopted FSP FIN 46R-6 effective July 1, 2006 for any new arrangements entered into after the effective date. Although the adoption of FSP FIN 46R-6 did not have a material financial impact in the current period, we currently are unable to determine the potential impact in future periods.

H — INCOME TAXES

The following table is a summary of income tax expense for each of the years ended December 31:

Income Taxes	2006			2005			2004
	(Millions of Dollars)
Current tax expense	$	229.0		$	63.7		$	126.3
Deferred income taxes, net		(49.7	)		90.2			11.3
Investment tax credit, net		(4.3	)		(4.7	)		(4.8	)
Total Income Tax Expense	$	175.0		$	149.2		$	132.8

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 as a result of the following:

	2006					2005					2004
Income Tax Expense	Amount			Effective Tax Rate		Amount			Effective Tax Rate		Amount			Effective Tax Rate
	(Millions of Dollars)
Expected tax at statutory federal tax rates	$	170.6		35.0	%	$	158.5		35.0	%	$	123.4		35.0	%
State income taxes net of federal tax benefit		24.1		4.9	%		21.2		4.7	%		20.2		5.7	%
Reversal of valuation allowances		(5.8	)	(1.1	%)		(16.3	)	(3.6	%)		—		—	%
Investment tax credit restored		(4.3	)	(0.9	%)		(4.7	)	(1.0	%)		(4.8	)	(1.4	%)
Other, net		(9.6	)	(2.0	%)		(9.5	)	(2.1	%)		(6.0	)	(1.6	%)
Total Income Tax Expense	$	175.0		35.9	%	$	149.2		33.0	%	$	132.8		37.7	%

101 Wisconsin Energy Corporation

2006 Form 10-K

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Cont’d)

The components of SFAS 109 deferred income taxes classified as net current liabilities and net long-term liabilities at December 31 are as follows:

	2006			2005
	(Millions of Dollars)
Deferred Tax Assets
Current
Employee benefits and compensation	$	13.9		$	13.8
Recoverable gas costs		9.0			3.3
Other		3.8			5.8
Total Current Deferred Tax Assets	$	26.7		$	22.9
Non-current
Employee benefits and compensation	$	110.4		$	117.3
Decommissioning trust		98.1			85.8
Construction advances		84.8			71.6
Property-related		73.2			45.5
Deferred revenues		84.4			28.4
State NOL’s		29.2			28.0
Valuation allowance		(3.4	)		(11.8	)
Emission allowances		19.0			18.4
Other		38.3			34.9
Total Non-current Deferred Tax Assets	$	534.0		$	418.1
Total Deferred Tax Assets	$	560.7		$	441.0
Deferred Tax Liabilities
Current
Prepaid items	$	39.1		$	33.2
Uncollectible account expense		9.1			8.8
Total Current Deferred Tax Liabilities	$	48.2		$	42.0
Non-current
Property-related	$	848.5		$	792.0
Employee benefits and compensation		71.8			68.8
Deferred transmission costs		76.5			64.6
Investment in transmission affiliate		44.3			40.4
Other		65.8			46.0
Total Non-current Deferred Tax Liabilities	$	1,106.9		$	1,011.8
Total Deferred Tax Liabilities	$	1,155.1		$	1,053.8
Consolidated Balance Sheet Presentation	2006			2005
Current Deferred Tax Asset (Liability)	($	21.5	)	($	19.1	)
Non-current Deferred Tax Asset (Liability)	($	572.9	)	($	593.7	)

Consistent with ratemaking treatment, deferred taxes are offset in the above table for temporary differences which have related regulatory assets or liabilities.

As of December 31, 2006 and 2005, we had recorded $3.4 million and $11.8 million of valuation allowances primarily related to the uncertainty of our ability to benefit from state loss carryforwards in the future. In connection with the favorable decision by the Supreme Court of Wisconsin in June 2005 to uphold the CPCN granted by the PSCW for the construction of the Oak Creek expansion, we have concluded that it is more likely than not that we will be able to utilize certain tax benefits associated with state net operating losses of the Parent that have been carried forward from prior years. As such, in 2006 and 2005 we reversed $5.8 million and $16.3 million of

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Cont’d)

valuation allowances associated with the state tax net operating losses that have been carried forward to future years. The remaining state loss carryforwards begin to expire in 2008 and have been reduced by a valuation allowance.

In July 2006, the FASB issued FIN 48, an interpretation of SFAS 109. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in the enterprise’s financial statements in accordance with SFAS 109. FIN 48 provides clarification on the accounting for income taxes by setting forth a minimum recognition threshold an uncertain tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on de-recognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. We adopted FIN 48 effective January 1, 2007. As a result of the adoption of FIN 48, we estimate that the cumulative effect on retained earnings is immaterial.

I — NUCLEAR OPERATIONS

Point Beach Nuclear Plant: We own two 518 MW electric generating units at Point Beach in Two Rivers, Wisconsin. NMC operates the units on our behalf. The units were placed in service in the early 1970’s and the original operating licenses were effective through 2010 and 2013. In December 2005, the NRC renewed the operating licenses through October 2030 for Unit 1 and March 2033 for Unit 2.

Proposed Sale of Point Beach: In December 2006, we announced that Wisconsin Electric signed a definitive agreement with an affiliate of FPL to sell Point Beach for approximately $998 million, subject to closing price adjustments. Under the terms of the sale, the buyer would assume the obligation to decommission the plant, and we would transfer assets in a qualified trust for decommissioning. We would retain assets in a non-qualified decommissioning trust. Wisconsin Electric also entered into a long-term power purchase agreement to purchase all of the existing capacity and energy of the plant, which will become effective upon closing of the sale. Wisconsin Electric will have the unilateral option, subject to PSCW direction, to select a term for the power purchase agreement of either (i) an estimated 23 years for Unit 1 and 26 years for Unit 2, or (ii) 16 years for Unit 1 and 17 years for Unit 2. The sale of the plant and the long-term power purchase agreement are subject to review and approval by various regulatory agencies including the NRC, PSCW, MPSC and FERC. We anticipate closing the sale during the third quarter of 2007. We have submitted a request to the PSCW to defer any gain (net of transaction related costs) as a regulatory liability that would be applied to the benefit of our customers in future rate proceedings.

Nuclear Insurance: The Price-Anderson Act currently limits the total public liability for damages arising from a nuclear incident at a nuclear power plant to approximately $10.8 billion, of which $300 million is covered by liability insurance purchased from private sources. The remaining $10.5 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 $100.6 million per reactor with a limit of $15 million per reactor within one calendar year. We have two reactors. We are obligated to pay our proportionate share of any such assessment as long as we own Point Beach.

Wisconsin Electric, through its membership in NEIL, carries decontamination, property damage and decommissioning shortfall insurance covering losses of up to $2.1 billion at Point Beach. Under policies issued by NEIL, the insured member may be liable for a retrospective premium in the event of catastrophic losses exceeding the full financial resources of NEIL. Wisconsin Electric’s maximum retrospective liability under the above policies is $17.8 million.

Wisconsin Electric also maintains insurance with NEIL through which it can recover up to $3.5 million per week, subject to a total limit of $490 million, during any prolonged outage at Point Beach caused by accidental property damage. Wisconsin Electric’s maximum retrospective liability under this policy is $9.8 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: We record decommissioning expense in amounts equal to the amounts collected in rates and funded to the external trusts. Nuclear decommissioning costs are accrued over the expected service lives

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of the nuclear generating units and are included in electric rates. Decommissioning funding was $17.6 million for each of the years ended 2006, 2005 and 2004. As of December 31, 2006, our non-qualified investments were $303.7 million and our qualified investments were $577.9 million. We had the following investments in Nuclear Decommissioning Trusts, stated at fair value as of December 31, 2006 and 2005:

	2006		2005
	(Millions of Dollars)
Funding and Realized Earnings	$	607.2	$	566.6
Unrealized Gains		274.4		215.5
Total Investments	$	881.6	$	782.1

As of December 31, 2006, approximately 66.5% of the trust funds were invested in equity securities and 33.5% were invested in debt securities. In accordance with SFAS 115 Wisconsin Electric’s debt and equity security investments in the trusts are classified as available for sale. Gains and losses on the fund are determined on the basis of specific identification; net unrealized gains on the fund are recorded as part of the fund. Our investments in the trusts are recorded at fair value and we are allowed regulatory treatment for the fair value adjustment. Realized gains and losses for the years ended December 31, 2006 and 2005 were as follows:

	2006			2005
	(Millions of Dollars)
Realized Gains	$	21.2		$	19.1
Realized (Losses)		(10.6	)		(9.1	)
Net Realized Gain	$	10.6		$	10.0

Total gains and total losses by security type for the years ended December 31, 2006 and 2005 were as follows:

December 31, 2006	Total Gains	Total (Losses)		Net Gain (Loss)
Debt	$1.4	($5.2	)	($3.8	)
Equity	296.5	(7.7	)	288.8
Total	$297.9	($12.9	)	$285.0

December 31, 2005	Total Gains	Total (Losses)		Net Gain (Loss)
Debt	$2.1	($5.0	)	($2.9	)
Equity	236.5	(8.1	)	228.4
Total	$238.6	($13.1	)	$225.5

The contractual maturities of debt securities at December 31, 2006 are as follows: $14.8 million in 2007; $52.0 million in 2008-2011; $97.9 million in 2012-2016; and $125.2 million thereafter.

The PSCW requires us to perform periodic Decommissioning Cost Studies to evaluate the funded status of our Nuclear Decommissioning Trusts as compared with the estimated costs to perform the decommissioning work. In June 2005, we filed a new Decommissioning Cost Study with the PSCW. The study was performed by an outside consultant and it included several assumptions as to the timing and scope of the decommissioning work. This study estimated that the cost to decommission the plant would be $712.5 million in 2004 dollars. A prior study had estimated the cost to be $1.1 billion in 2003 dollars. The reduction in the estimated cost to decommission the plant was driven by several factors, including the timing and the scope of the work to be performed.

The June 2005 Decommissioning Cost Study was also used to estimate our ARO for nuclear decommissioning. We record an ARO for future decommissioning costs based upon the net present value of the expected cash flows

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Cont’d)

associated with our legal obligation to decommission our plants. Under SFAS 143, certain costs included in the June 2005 Decommissioning Cost Study that related to fuel management and non-nuclear demolition were excluded from the ARO calculation. Using the June 2005 study, our estimated costs for decommissioning, following SFAS 143, were $473.2 million. Our ARO for nuclear decommissioning as of December 31, 2006 was $325.6 million.

We recover decommissioning costs in our regulated rates. We have established a regulatory liability to reflect the difference between nuclear decommissioning costs recovered in rates and cumulative investment gains (our nuclear decommissioning trust investments) in comparison to the ARO for nuclear decommissioning that is calculated under SFAS 143. For further information on AROs, see Note F.

The ultimate timing and amount of future cash flows associated with nuclear decommissioning is dependent upon many significant variables including the scope of work involved, the ability to relicense the plants in the future, future inflation rates and discount rates. Because of our announced agreement to sell Point Beach to an affiliate of FPL, we do not expect to remain obligated to decommission Point Beach if the sale is consummated. However, if that sale is not completed, based on the license renewal received by the NRC in December 2005, we do not expect to make any significant nuclear decommissioning expenditures before the year 2030.

Decontamination and Decommissioning Fund: The Energy Policy Act of 1992 established a D&D Fund for the DOE’s nuclear fuel enrichment facilities. Deposits to the D&D Fund are derived in part from special assessments on utilities using enrichment services. In October 2006, a final payment was made to the DOE. As a result, a liability no longer exists for this fund. The deferred regulatory asset will be amortized to nuclear fuel expense and included in utility rates through September 2007.

J — COMMON EQUITY

Share-Based Compensation Plans: We have a plan that was approved by stockholders that enables us to provide a long-term incentive through equity interests in Wisconsin Energy, to outside directors, selected officers and key employees of the Company. The plan provides for the granting of stock options, stock appreciation rights, restricted stock awards and performance shares. Awards may be paid in common stock, cash or a combination thereof. All share-based compensation is fulfilled by purchases on the open market and do not dilute shareholders’ ownership.

The following is a summary of our stock options issued through December 31, 2006:

	2006				2005				2004
Stock Options	Number of Options		Weighted- Average Exercise Price		Number of Options		Weighted- Average Exercise Price		Number of Options		Weighted- Average Exercise Price
Outstanding at January 1	7,569,619		$	28.10	8,290,311		$	25.88	9,823,935		$	22.87
Granted	1,304,275		$	39.50	1,328,966		$	34.20	1,844,765		$	33.44
Exercised	(1,111,807	)	$	24.34	(2,044,145	)	$	23.05	(3,249,688	)	$	20.97
Forfeited	(40,261	)	$	36.93	(5,513	)	$	32.47	(128,701	)	$	28.21
Outstanding at December 31	7,721,826		$	30.52	7,569,619		$	28.10	8,290,311		$	25.88
Exercisable at December 31	5,133,977		$	27.36	6,209,466		$	26.82	8,090,987		$	25.99

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Cont’d)

The following table summarizes information about stock options outstanding at December 31, 2006:

Range of Exercise Prices	Options Outstanding				Options Exercisable
		Weighted-Average				Weighted-Average
	Number	Exercise Price		Remaining Contractual Life (years)	Number	Exercise Price		Remaining Contractual Life (years)
$11.58 to $23.05	1,564,474	$	21.40	4.4	1,564,474	$	21.40	4.4
$25.31 to $31.07	1,907,679	$	26.90	5.4	1,898,794	$	26.91	5.4
$33.44 to $42.56	4,249,673	$	35.50	7.9	1,670,709	$	33.45	7.0
	7,721,826	$	30.52	6.6	5,133,977	$	27.36	5.6

Aggregate Intrinsic Value (Millions)	Options Outstanding	Options Exercisable
December 31, 2006	$130.8	$103.2

In January 2007, the Compensation Committee awarded 1,371,590 non-qualified stock options at the average market price of $47.76 to our officers and key employees under its normal schedule of awarding long-term incentive compensation.

We utilize the straight-line attribution method for recognizing stock-based compensation expense under SFAS 123R. We recorded compensation expense, net of tax, for stock option awards made to our officers and other key employees of $4.6 million ($0.04 per share) for the twelve months ended December 31, 2006.

The aggregate intrinsic value of stock options exercised during the twelve months ended December 31, 2006 was approximately $21.1 million. Tax benefits associated with our stock option awards for the twelve months ended December 31, 2006 were $8.4 million.

The exercise price of a stock option under the plan 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. In December 2004, the Compensation Committee approved the acceleration of vesting of all unvested options awarded to officers and other key employees in 2002, 2003 and 2004. In addition, the Compensation Committee determined that future option grants would be non-qualified stock options and they would vest on a cliff-basis after a three year period. The stock options that were granted prior to 2005 generally vest on a straight line basis over a four year period. Generally, options expire no later than ten years from the date of grant. In 2004, we recorded a $0.4 million charge, net of tax, in connection with the accelerated vesting of unvested stock options. For further information regarding the accounting changes related to stock based compensation, see Note A and Note B.

On December 31, 2005, the value of our non-vested stock options outstanding was $11.3 million, or $8.30 per share on a weighted average grant date fair value basis. On December 31, 2006 the value of our non-vested stock options outstanding was $20.5 million or $7.94 per share on a weighted average grant date fair value basis. During the year, 36,318 stock options vested and 40,261 stock options were forfeited on a weighted average grant date fair value of $6.71 and $7.99, respectively.

As of December 31, 2006, total compensation costs related to non-vested stock options not yet recognized was approximately $9.1 million, which is expected to be recognized over the next 19 months on a weighted-average basis.

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The Compensation Committee has also approved restricted stock grants to certain key employees and directors. The following restricted stock activity occurred during 2006, 2005 and 2004:

	2006				2005				2004
Restricted Shares	Number of Shares		Weighted- Average Market Price		Number of Shares		Weighted- Average Market Price		Number of Shares		Weighted- Average Market Price
Outstanding at January 1	193,657				221,363				294,920
Granted	18,152		$	39.97	18,137		$	34.33	16,570		$	33.36
Released	(27,144	)	$	28.68	(45,843	)	$	27.77	(90,127	)	$	22.87
Outstanding at December 31	184,665				193,657				221,363

Recipients of the restricted shares, who have the right to vote the shares and to receive dividends, are not required to provide consideration to us other than rendering service. Forfeiture provisions on the restricted stock generally expire 10 years after award grant subject to an accelerated expiration schedule for some of the shares based on the achievement of certain financial performance goals.

We record the market value of the restricted stock awards on the date of grant and then we charge their value to expense over the vesting period of the awards. We also adjust expense for acceleration of vesting due to achievement of performance goals. We recorded compensation expense, net of tax, for restricted stock awards made to our employees and directors of $0.7 million for the twelve months ended December 31, 2006. The impact was less than $0.01 per share for the twelve months ended December 31, 2006. Tax benefits realized for our restricted stock awards were $0.5 million for the twelve months ended December 31, 2006. As of December 31, 2006, total compensation cost related to non-vested restricted stock awards not yet recognized was approximately $2.6 million, which is expected to be recognized over the next 52 months on a weighted-average basis.

In January 2004, the Compensation Committee granted 159,159 performance shares to our officers and other key employees. In January 2007, 2006 and 2005 the Compensation Committee granted 136,905, 150,281 and 101,834 performance units to officers and other key employees under the Wisconsin Energy Performance Unit Plan. Under the grants, the ultimate number of units which will be awarded is dependent upon the achievement of certain financial performance of our stock over a three year period. Under the terms of the award, participants may earn between 0% and 175% of the base performance award. We are accruing compensation costs over the three year period based on our estimate of the final expected value of the award. In July 2006, the Compensation Committee amended the terms of the performance shares to allow the recipients of 2004 grants to receive cash or common stock upon settlement. During the third quarter of 2006, we transferred $6.3 million from Common Equity to Other Liabilities to reflect participant elections to take cash under this amendment. The 2005, 2006 and 2007 grants will be settled in cash. We recorded compensation expense, net of tax, for performance awards made to our employees of $4.3 million ($0.04 per share) for the twelve months ended December 31, 2006. We have not realized any tax benefits associated with our performance awards during the twelve months ended December 31, 2006. As of December 31, 2006, total compensation cost related to non-vested performance awards not yet recognized was approximately $6.4 million, which is expected to be recognized over the next 21 months on a weighted-average basis. The final value of the 2004 performance share award was approximately $7.2 million, which was paid to our officers and key employees in January 2007.

Common Stock Activity: In September 2000, the Board of Directors amended the common stock repurchase plan to authorize us to purchase up to $400 million of our shares of common stock in the open market. In 2004, we purchased and retired approximately 1.6 million shares of common stock for $50.4 million. The repurchase plan expired on December 31, 2004. Over the life of the repurchase plan we purchased and retired approximately 14.9 million shares of common stock for $344.0 million.

No new shares of common stock were issued in 2006 and 2005. Prior to February 2004, we issued shares of our common stock to fulfill obligations under various employee benefit plans and the dividend reinvestment plan. We received proceeds of approximately $4.8 million during 2004, related to these share issuances. In February 2004, we announced that we did not expect to issue new shares under these programs; rather we instructed the independent

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Cont’d)

plan agents to begin purchasing the shares in the open market in lieu of issuing new shares. During 2006 and 2005, our plan agents purchased 1.1 million shares at a cost of $48.0 million and 2.0 million shares at a cost of $75.1 million, respectively, to fulfill exercised stock options and restricted stock awards. In 2006 and 2005, we received proceeds of $26.8 million and $47.0 million, respectively, related to the exercise of stock options.

Restrictions: Wisconsin Energy’s ability as a holding company to pay common dividends primarily depends on the availability of funds received from our principal utility subsidiaries, Wisconsin Electric and Wisconsin Gas. Various financing arrangements and regulatory requirements impose certain restrictions on the ability of our principal utility subsidiaries to transfer funds to Wisconsin Energy in the form of cash dividends, loans or advances. In addition, under Wisconsin law, Wisconsin Electric and Wisconsin Gas are prohibited from loaning funds, either directly or indirectly, to Wisconsin Energy.

The Wisconsin Electric January 2006 rate order from the PSCW requires Wisconsin Electric to maintain a capital structure (i.e., the percentage by which each of common stock, preferred stock and debt constitute the total capital invested in the utility), which has a common equity ratio range of between 48.5% and 53.5% (including certain off-balance sheet obligations and capitalized leases, but excluding the PWGS 1 capitalized lease). The Wisconsin Gas January 2006 rate order established a test year average common equity ratio of 50.2%. Previously in a June 2004 decision, the PSCW determined that both Wisconsin Electric and Wisconsin Gas must obtain specific approval to pay dividends that exceed normal levels as long as any tax issue or appeals related to the sale of the manufacturing business and/or the conversion of Wisconsin Gas to a limited liability company remain outstanding. The PSCW may modify such provisions by a future order.

Wisconsin Electric may not pay common dividends to Wisconsin Energy under Wisconsin Electric’s Restated Articles of Incorporation if any dividends on Wisconsin Electric’s outstanding preferred stock have not been paid. In addition, pursuant to the terms of Wisconsin Electric’s 3.60% Serial Preferred Stock, Wisconsin Electric’s ability to declare common dividends would be limited to 75% or 50% of net income during a twelve month period if Wisconsin Electric’s common stock equity to total capitalization, as defined, is less than 25% and 20%, respectively.

As of December 31, 2006, the restricted net assets of consolidated and unconsolidated subsidiaries and our equity in undistributed earnings of 50 percent or less owned investees accounted for by the equity method total approximately $2.6 billion. This amount exceeds 25 percent of our consolidated net assets as of December 31, 2006.

See Note L for discussion of certain financial covenants related to the bank back-up credit agreements of Wisconsin Energy, Wisconsin Electric and Wisconsin Gas.

We do not believe that these restrictions will materially affect our operations or limit any dividend payments in the foreseeable future.

K — LONG-TERM DEBT

Debentures and Notes: As of December 31, 2006, the maturities and sinking fund requirements of our long-term debt outstanding (excluding obligations under capital leases) were as follows:

	(Millions of Dollars)
2007	$	268.3
2008		349.5
2009		53.9
2010		14.1
2011		454.3
Thereafter		2,022.5
Total	$	3,162.6

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Cont’d)

We amortize debt premiums, discounts and debt issuance costs over the lives of the debt and we include the costs in interest expense.

In November 2006, Wisconsin Electric issued $300 million of 5.70% Debentures due December 1, 2036. The securities were issued under an existing $665 million shelf registration statement filed with the SEC. The net proceeds from the sale were used to retire Wisconsin Electric’s $200 million of 6-5/8% Debentures due November 15, 2006 at their scheduled maturity and to repay outstanding commercial paper incurred for working capital requirements.

Wisconsin Energy retired at the scheduled maturity date $250.0 million of 5.875% Notes due April 1, 2006. Short-term debt was issued to retire these notes.

In July 2005, PWGS issued $155 million of 4.91% senior notes in a private placement. The senior notes have a mortgage style repayment feature with monthly payments of approximately $0.9 million including principal and interest. The final payment is due July 15, 2030. The senior notes are secured by a collateral assignment of the leases between PWGS and Wisconsin Electric relating to the first PWGS gas unit that went into service in July 2005.

Wisconsin Gas retired at the scheduled maturity date $65 million of 6-3/8% Notes due November 1, 2005. In November 2005, Wisconsin Gas issued $90 million of 5.90% Debentures due December 1, 2035. The securities were issued under shelf registration statements filed with the SEC. The proceeds from the sale were used to repay a portion of our outstanding commercial paper. The commercial paper was incurred to both retire the $65 million of 6-3/8% Notes and for working capital requirements.

Obligations Under Capital Leases: In 1997, Wisconsin Electric entered into a 25-year power purchase contract with an unaffiliated independent power producer. The contract, for 236 MW 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. We account for this contract as a capital lease and recorded the leased facility and corresponding obligation under the capital lease at the estimated fair value of the plant’s electric generating facilities. We are amortizing the leased facility on a straight-line basis over the original 25-year term of the contract.

We treat the long-term power purchase contract as an operating lease for rate-making purposes and we record our minimum lease payments as purchased power expense on the Consolidated Income Statements. We paid a total of $26.1 million, $25.2 million and $24.3 million in minimum lease payments during 2006, 2005, and 2004, respectively. We record the difference between the minimum lease payments and the sum of imputed interest and amortization costs calculated under capital lease accounting as a deferred regulatory asset on our Consolidated Balance Sheets (see Regulatory Assets—Deferred plant related — capital lease in Note C). Due to the timing and the amounts of the minimum lease payments, we expect the regulatory asset to increase to approximately $78.5 million by the year 2009 at which time the regulatory asset will be reduced to zero over the remaining life of the contract. The total obligation under the capital lease was $159.4 million at December 31, 2006 and will decrease to zero over the remaining life of the contract.

Wisconsin Electric also has a nuclear fuel leasing arrangement with Wisconsin Electric Fuel Trust (Trust) which is treated as a capital lease. We lease and amortize the nuclear fuel to fuel expense as power is generated, generally over a period of 60 months. Lease payments include charges for the cost of fuel burned, financing costs and management fees. In the event that 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 that finance the investment in nuclear fuel. We recorded $4.2 million, $1.7 million and $1.4 million of interest expense on the nuclear fuel lease in fuel expense during 2006, 2005 and 2004, respectively.

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Following is a summary of our capitalized leased facilities and nuclear fuel as of December 31.

Capital Lease Assets	2006			2005
	(Millions of Dollars)
Leased Facilities
Long-term purchase power commitment	$	140.3		$	140.3
Accumulated amortization		(52.8	)		(47.1	)
Total Leased Facilities	$	87.5		$	93.2
Nuclear Fuel
Under capital lease	$	136.0		$	125.6
Accumulated amortization		(70.4	)		(60.2	)
In process/stock		65.3			46.6
Total Nuclear Fuel	$	130.9		$	112.0

Future minimum lease payments under our capital leases and the present value of our net minimum lease payments as of December 31, 2006 are as follows:

Capital Lease Obligations	Purchase Power Commitment			Nuclear Fuel Lease			Total
	(Millions of Dollars)
2007	$	32.4		$	29.2		$	61.6
2008		33.6			24.6			58.2
2009		34.9			15.4			50.3
2010		36.2			5.9			42.1
2011		37.5			2.9			40.4
Thereafter		295.3			—			295.3
Total Minimum Lease Payments		469.9			78.0			547.9
Less: Estimated Executory Costs		(103.8	)		—			(103.8	)
Net Minimum Lease Payments		366.1			78.0			444.1
Less: Interest		(206.7	)		(6.0	)		(212.7	)
Present Value of Net
Minimum Lease Payments		159.4			72.0			231.4
Less: Due Currently		(2.0	)		(26.4	)		(28.4	)
	$	157.4		$	45.6		$	203.0

L — SHORT-TERM DEBT

Short-term notes payable balances and their corresponding weighted-average interest rates as of December 31 consist of:

	2006				2005
Short-Term Debt	Balance		Interest Rate		Balance		Interest Rate
	(Millions of Dollars, except for percentages)
Commercial paper	$	911.9	5.37	%	$	456.3	4.39	%

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Cont’d)

On December 31, 2006, we had approximately $1.7 billion of available unused lines under our bank back-up credit facilities on a consolidated basis. Our bank back-up credit facilities expire in March 2011 and April 2011.

The following information relates to Short-Term Debt for the years ending December 31, 2006 and 2005:

	2006		2005
	(Millions of Dollars, except for percentages)
Maximum Short-Term Debt Outstanding	$943.7		$464.2
Average Short-Term Debt Outstanding	$549.8		$222.8
Weighted Average Interest Rate	5.13	%	3.20	%

Wisconsin Energy, Wisconsin Electric and Wisconsin Gas have entered into various bank back-up credit agreements to maintain short-term credit liquidity which, among other terms, require the companies to maintain, subject to certain exclusions, a minimum total funded debt to capitalization ratio of less than 70%, 65% and 65%, respectively.

The Wisconsin Energy, Wisconsin Electric and Wisconsin Gas bank back-up credit agreements contain customary covenants, including certain limitations on the respective companies’ ability to sell assets. The credit agreements also contain customary events of default, including payment defaults, material inaccuracy of representations and warranties, covenant defaults, bankruptcy proceedings, certain judgments, ERISA defaults and change of control. In addition, pursuant to the terms of Wisconsin Energy’s credit agreement, Wisconsin Energy must ensure that certain of its subsidiaries comply with many of the covenants contained therein.

At December 31, 2006, we were in compliance with all covenants.

M — DERIVATIVE INSTRUMENTS

We follow SFAS 133 as amended by SFAS 149, which 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. For most energy related physical and financial contracts in our regulated operations that qualify as derivatives under SFAS 133, the PSCW allows the effects of the fair market value accounting to be offset to regulatory assets and liabilities. As of December 31, 2006, we recognized $36.6 million in regulatory assets related to derivatives in comparison to $4.8 million at December 31, 2005.

We had a limited number of financial contracts that are defined as derivatives under SFAS 133 and qualify for cash flow hedge accounting. These contracts were utilized to manage the cost of gas for utility operations. In addition, these contracts were utilized in 2004 and the first half of 2005, for gas used in testing a new generating unit under construction. Changes in the fair market values of these instruments were recorded in Accumulated Other Comprehensive Income. At the date the underlying transaction occurs, the amounts in Accumulated Other Comprehensive Income for utility operations were reported in earnings and amounts related to the new generating unit were capitalized.

For the year ended December 31, 2005 the amount of hedge ineffectiveness was immaterial. We did not exclude any components of derivative gains or losses from the assessment of hedge effectiveness.

For the years ended December 31, 2006, 2005 and 2004, we reclassified $0.4 million, $0.6 million and $0.8 million in treasury lock agreement settlement payments deferred in Accumulated Other Comprehensive Income as an increase to Interest Expense. We estimate that during the next twelve months, $0.4 million will be reclassified from Accumulated Other Comprehensive Income as a reduction in earnings.

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In addition, during 2004, in conjunction with the redemption of $300 million of Wisconsin Energy 5.875% senior notes due April 1, 2006, $0.6 million of a treasury lock agreement settlement payment previously deferred in Accumulated Other Comprehensive Income was reclassified to Other Income and Deductions, Net.

N — FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amount and estimated fair value of certain of our recorded financial instruments as of December 31 are as follows:

	2006				2005
Financial Instruments	Carrying Amount		Fair Value		Carrying Amount		Fair Value
	(Millions of Dollars)
Nuclear decommissioning assets	$	881.6	$	881.6	$	782.1	$	782.1
Preferred stock, no redemption required	$	30.4	$	22.6	$	30.4	$	22.6
Long-term debt including current portion	$	3,162.6	$	3,172.1	$	3,320.9	$	3,386.2

The carrying value of cash and cash equivalents, net accounts receivable, accounts payable and short-term borrowings approximates fair value due to the short term nature of these instruments. The nuclear decommissioning assets are carried at fair value as reported by the trustee (see Note I). The fair value of our preferred stock is estimated based upon the quoted market value for the same or similar issues. The fair value of our 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. The fair values of derivative financial instruments and associated margin accounts are equal to their carrying values as of December 31, 2006.

O — BENEFITS

Pensions and Other Post-retirement Benefits: We have noncontributory defined benefit pension plans that cover substantially all of our employees. The plans provide defined benefits based upon years of service and final average salary. In October 2006, we announced that we were making a change to pension benefits for new management employees hired subsequent to October 2006 and for those represented employees whose unions have adopted this plan. The retirement benefit for new employees is an enhanced 401(k) plan. Existing employee’s pension benefits are unchanged. Our 2007 combined pension and savings plan costs are not expected to be materially affected as a result of this change to the plan.

We also have OPEB plans covering substantially all of our employees. The health care plans are contributory with participants’ contributions adjusted annually; the life insurance plans are noncontributory. The accounting for the health care plans anticipates future cost-sharing changes to the written plans that are consistent with our expressed intent to maintain the current cost sharing levels. The post-retirement health care plans include a limit on our share of costs for recent and future retirees. We use a year end measurement date for all of our pension and OPEB plans.

In September 2006, the FASB issued SFAS 158, which requires employers to recognize all obligations related to their pension and OPEB plans and to quantify the funded status of the pension and OPEB plans as an asset or liability on their statement of financial position. In addition, SFAS 158 requires employers to measure the funded status of their plans as of the date of their year-end statement of financial position.

We adopted SFAS 158 prospectively on December 31, 2006, and will continue to use a year end measurement date for all of our pension and OPEB plans. Prior to the issuance of SFAS 158, we recorded a minimum pension liability

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to reflect the funded status of our pension plans. Due to the regulatory nature of our business, we have concluded that substantially all of the unrecognized costs resulting from the recognition of the funded status of our pension and OPEB plans qualify as a regulatory asset.

The following table shows the incremental effect of applying SFAS 158 on individual line items in our year-end statement of financial position and compares prior year-end balances:

	December 31, 2006
	Before SFAS 158			Impact			As Reported		December 31, 2005
	(Millions of Dollars)								(Millions of Dollars)
Regulatory Asset - Pension	$	280.1		$	77.1		$	357.2	$377.2
Regulatory Asset - OPEB	$	14.6		$	55.9		$	70.5	$  17.3
Other Deferred Charges - Pension	$	30.5		$	(30.5	)	$	—	$  32.4
Other Deferred Charges - OPEB	$	40.8		$	(26.1	)	$	14.7	$  53.5
Pension Liability	$	161.0		$	34.9		$	195.9	$274.4
OPEB Liability	$	114.2		$	29.8		$	144.0	$129.9
Other Comprehensive Income	$	(11.7	)	$	11.7		$	—	$ (15.9	)

The following table presents additional details about our pension and OPEB plans.

	Pension						OPEB
Status of Benefit Plans	2006			2005			2006			2005
	(Millions of Dollars)
Change in Benefit Obligation
Benefit Obligation at January 1	$	1,299.7		$	1,205.0		$	331.9		$	395.5
Service cost		33.8			33.3			12.3			13.6
Interest cost		69.6			69.7			17.9			21.0
Plan amendments		3.6			3.3			—			(85.5	)
Actuarial loss (gain)		(51.5	)		79.6			(18.0	)		4.1
Benefits paid		(101.6	)		(91.2	)		(12.1	)		(16.8	)
Federal Subsidy on benefits paid		N/A			N/A			0.9			N/A
Benefit Obligation at December 31	$	1,253.6		$	1,299.7		$	332.9		$	331.9
Change in Plan Assets
Fair Value at January 1	$	976.9		$	998.5		$	186.0		$	183.6
Actual earnings on plan assets		121.5			65.4			14.7			6.9
Employer contributions		60.9			4.2			15.1			12.3
Benefits paid		(101.6	)		(91.2	)		(12.1	)		(16.8	)
Fair Value at December 31	$	1,057.7		$	976.9		$	203.7		$	186.0
Funded Status of Plans
Funded status at December 31	($	195.9	)	($	322.8	)	($	129.3	)	($	145.9	)
Unrecognized (1)
Net actuarial loss		N/A			441.7			N/A			134.1
Prior service cost		N/A			32.2			N/A			(67.0	)
Net transition (asset) obligation		N/A			—			N/A			2.4
Net Asset (Accrued Benefit Cost)	($	195.9	)	$	151.1		($	129.3	)	($	76.4	)

(1) After adoption of SFAS 158 on December 31, 2006, these amounts are recorded and this reconciliation is no longer needed.

113 Wisconsin Energy Corporation

2006 Form 10-K

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Cont’d)

The accumulated benefit obligation for all defined benefit plans was $1,218.7 million and $1,251.6 million as of December 31, 2006 and 2005, respectively.

Information for pension plans with an accumulated benefit obligation in excess of the fair value of assets is as follows:

	2006		2005
	(Millions of Dollars)
Projected benefit obligation	$	1,253.6	$	1,299.7
Accumulated benefit obligation	$	1,218.7	$	1,251.6
Fair value of plan assets	$	1,057.7	$	976.9

The components of net periodic pension and OPEB costs are:

Benefit Plan Cost Components	Pension									OPEB
	2006			2005			2004			2006			2005			2004
	(Millions of Dollars)
Net Periodic Benefit Cost
Service cost	$	33.8		$	33.3		$	30.2		$	12.3		$	13.6		$	12.0
Interest cost		69.6			69.7			69.1			17.9			21.0			21.8
Expected return on plan assets		(81.6	)		(87.6	)		(85.6	)		(14.9	)		(15.4	)		(14.1	)
Amortization of:
Transition (asset) obligation		—			—			(2.3	)		0.3			1.3			1.6
Prior service cost		5.4			5.2			4.8			(13.4	)		(2.8	)		0.7
Actuarial loss		23.4			20.6			15.0			8.8			7.7			6.6
Net Periodic Benefit Cost	$	50.6		$	41.2		$	31.2		$	11.0		$	25.4		$	28.6
Weighted-Average assumptions used to determine benefit obligations at Dec. 31
Discount rate		5.75	%		5.50	%		5.75	%		5.75	%		5.50	%		5.75	%
Rate of compensation increase		4.5 to			4.5 to			4.0 to			4.5 to			4.5 to			4.0 to
		5.0			5.0			5.0			5.0			5.0			5.0
Weighted-Average assumptions used to determine net cost for year ended Dec. 31
Discount rate		5.50	%		5.75	%		6.25	%		5.50	%		5.75	%		6.25	%
Expected return on plan assets		8.5			9.0			9.0			8.5			9.0			9.0
Rate of compensation increase		4.5 to 5.0			4.0 to 5.0			4.0 to 5.0			4.5 to 5.0			4.0 to 5.0			4.0 to 5.0
Assumed health care cost trend rates at Dec. 31
Health care cost trend rate assumed for next year (Pre 65 / Post 65)											9/11			10			10
Rate that the cost trend rate gradually adjusts to											5			5			5
Year that the rate reaches the rate it is assumed to remain at											2011			2011			2010

The expected long-term rate of return on plan assets was 8.5% in 2006 and 9% in 2005 and 2004. This return expectation on plan assets was determined by reviewing actual pension historical returns as well as calculating expected total trust returns using the weighted average of long-term market returns for each of the asset categories utilized in the pension fund.

Other Post-retirement Benefits Plans: We use various Employees’ Benefit Trusts to fund a major portion of OPEB. The majority of the trusts’ assets are mutual funds or commingled indexed funds.

114 Wisconsin Energy Corporation

2006 Form 10-K

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Cont’d)

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
Post-retirement benefit obligation	$26.5	($22.4	)
Total of service and interest cost components	$  3.8	($  3.1	)

In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (Act) was signed into law. The Act introduced a prescription drug benefit program under Medicare as well as a federal subsidy to sponsors of retiree health care benefit plans. In 2004, the FASB issued FSP SFAS 106-2.

In 2004, in accordance with FSP SFAS 106-2, we chose to recognize the effects of the Act retroactively effective January 1, 2004. Calculated actuarially, the Act resulted in a reduction of $24.1 million in our benefit obligation. In addition, we recorded a reduction to SFAS 106 expense of $4.7 million in 2004. In January 2005, the Centers for Medicare & Medicaid Services released final regulations to implement the new prescription drug benefit under Part D of Medicare. It was determined that our employer sponsored plans met these regulations and that the previously determined actuarial measurements do not need to be revised.

In October 2005, we announced that we were offering to our retirees a Medicare Advantage program as an option within our existing post-retirement medical and drug plans. The Medicare Advantage program is part of the Act, and offers post-65 medical and drug benefits through private insurance carriers. The Medicare Advantage program is expected to reduce the cost of post-65 medical and drug costs for our retirees and the Company. Due to this change, we remeasured the fair value of our OPEB plans in the fourth quarter of 2005 in accordance with SFAS 106. In 2005, the impact of this remeasurement and the FSP SFAS 106-2 benefit was approximately a $4.4 million reduction to SFAS 106 expense.

Plan Assets: In our opinion, current pension trust assets and amounts which are expected to be contributed to the trusts in the future will be adequate to meet pension payment obligations to current and future retirees. Our pension plans asset allocation at December 31, 2006 and 2005, and our target allocation for 2007, by asset category, are as follows:

Asset Category	Target Allocation 2007		Actual Allocation
			2006		2005
Equity Securities	65	%	61	%	65	%
Debt Securities	35	%	39	%	35	%
Total	100	%	100	%	100	%

Our OPEB plans asset allocation at December 31, 2006 and 2005, and our target allocation for 2007, by asset category, are as follows.

Asset Category	Target Allocation 2007		Actual Allocation
			2006		2005
Equity Securities	54	%	45	%	45	%
Debt Securities	46	%	54	%	54	%
Other	—	%	1	%	1	%
Total	100	%	100	%	100	%

Our common stock is not included in equity securities. Investment managers are specifically prohibited from investing in our securities or any affiliate of ours except if part of a commingled fund or index fund.

115 Wisconsin Energy Corporation

2006 Form 10-K

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Cont’d)

The target asset allocations were established by our Investment Trust Policy Committee, which oversees investment matters related to all of our funded benefit plans. The asset allocations are monitored by the Investment Trust Policy Committee.

Cash Flows:

Employer Contributions	Pension		OPEB
	(Millions of Dollars)
2004	$	77.5	$	19.4
2005	$	4.2	$	12.3
2006	$	60.9	$	15.1

Based on our PSCW approved funding policy and current IRS funding requirements, we expect to contribute $38.3 million to fund pension benefits and $12.5 million to fund OPEB plans in 2007. Of the $38.3 million expected to be contributed to fund pension benefits in 2007, we estimate $33.0 million will be for our qualified pension plans. We contributed $55.4 million to our qualified pension plans during 2006. We did not make a contribution to our qualified pension plan during 2005.

The entire contribution to the OPEB plans during 2006 was discretionary as the plans are not subject to any minimum regulatory funding requirements.

The following table identifies our expected benefit payments over the next 10 years.

Year	Pension		Gross OPEB		Expected Medicare Part D Subsidy
	(Millions of Dollars)
2007	$	81.5	$	22.2	($	1.2	)
2008	$	87.3	$	21.6	($	1.0	)
2009	$	91.1	$	19.4	$	—
2010	$	93.2	$	19.5	$	—
2011	$	104.9	$	20.0	$	—
2012-2016	$	530.3	$	120.1	$	—

Savings Plans: We sponsor savings plans which allow employees to contribute a portion of their pre-tax and or after-tax income in accordance with plan-specified guidelines. Under these plans we expensed matching contributions of $10.4 million, $10.7 million and $10.5 million during 2006, 2005 and 2004, respectively.

Severance Plans: In 2004, we incurred $30.5 million ($18.3 million after-tax) of severance costs. The majority of the severance costs related to an enhanced severance package offered to selected management employees of Wisconsin Energy and its subsidiaries who voluntarily resigned in the fourth quarter of 2004. The program was enacted to help reduce the upward pressure on operating expenses.

Approximately 200 employees received severance benefits during 2004. At December 31, 2004, we accrued $6.6 million for severance benefits. As of December 31, 2006, all of the severance related benefits were paid.

P — GUARANTEES

We enter into various guarantees to provide financial and performance assurance to third parties on behalf of our affiliates. As of December 31, 2006, we had the following guarantees:

116 Wisconsin Energy Corporation

2006 Form 10-K

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Cont’d)

	Maximum Potential Future Payments	Outstanding at Dec 31, 2006	Liability Recorded at Dec 31, 2006
	(Millions of Dollars)
Wisconsin Energy
Non-Utility Energy	$    —	$  —	$—
Other	6.9	6.9	—
Wisconsin Electric	235.2	0.1	—
Subsidiary	11.4	11.0	0.9
Total	$253.5	$18.0	$0.9

A non-utility energy segment guarantee in support of Wisvest-Connecticut, which we sold in December 2002 to PSEG, provides financial assurance for potential obligations relating to environmental remediation under the original purchase agreement for Wisvest-Connecticut with United Illuminating. The potential obligations for environmental remediation, which are unlimited, are reimbursable by PSEG under the terms of the sale agreement in the event that we are required to perform under the guarantee.

Other guarantees support obligations of our affiliates to third parties under loan agreements and surety bonds. In the event our affiliates fail to perform, we would be responsible for the obligations.

Wisconsin Electric guarantees the potential retrospective premiums that could be assessed under Wisconsin Electric’s nuclear insurance program (see Note I).

Subsidiary guarantees support loan obligations and surety bonds between our affiliates and third parties. In the event our affiliates fail to perform, our subsidiary would be responsible for the obligations.

Postemployment benefits: Postemployment benefits provided to former or inactive employees are recognized when an event occurs. The estimated liability, excluding severance benefits, for such benefits was $13.0 million as of December 31, 2006.

Q — SEGMENT REPORTING

Our reportable operating segments at December 31, 2006 include a utility energy segment and a non-utility energy segment. In July 2004, our manufacturing segment was sold to Pentair, Inc. We have organized our reportable operating segments based in part upon the regulatory environment in which our 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.

Our utility energy segment primarily includes our electric and natural gas utility operations. Our electric utility operation engages in the generation, distribution and sale of electric energy in southeastern (including metropolitan Milwaukee), east central and northern Wisconsin and in the Upper Peninsula of Michigan. Our natural gas utility operation is engaged in the purchase, distribution and sale of natural gas to retail customers and the transportation of customer-owned natural gas throughout Wisconsin. Our non-utility energy segment derives its revenues primarily from the ownership of electric power generating facilities for long-term lease to Wisconsin Electric and economic interests in other energy-related entities.

Summarized financial information concerning our reportable operating segments for each of the years ended December 31, 2006, 2005 and 2004, is shown in the following table. The segment information below includes non-cash impairment charges of $149.0 million ($96.9 million after tax or $0.81 per share) in 2004, which are now included in income from discontinued operations as the sale of these businesses was announced or completed in 2005. These impairment charges are primarily related to the non-utility energy segment (see Note D). Substantially all of our long-lived assets and operations are domestic.

117 Wisconsin Energy Corporation

2006 Form 10-K

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Cont’d)

	Reportable Operating Segments						Corporate (b) & Other (c) & Reconciling Eliminations(d)			Total Consolidated
	Energy				Manufacturing (b)
Year Ended	Utility		Non-Utility(a)
	(Millions of Dollars)
December 31, 2006
Operating Revenues (d)	$	3,979.0	$	69.1	$	—	($	51.7	)	$	3,996.4
Depreciation, Decommissioning and Amortization	$	314.0	$	11.2	$	—	$	1.2		$	326.4
Operating Income (Loss)	$	532.8	$	43.1	$	—	($	7.4	)	$	568.5
Equity in Earnings of Unconsolidated Affiliates	$	38.6	$	—	$	—	$	4.5		$	43.1
Interest Expense	$	108.0	$	14.8	$	—	$	49.9		$	172.7
Income Tax Expense (Benefit)	$	192.3	$	11.7	$	—	($	29.0	)	$	175.0
Income from Discontinued Operations, Net of Tax	$	—	$	—	$	2.4	$	1.5		$	3.9
Net Income (Loss)	$	315.2	$	18.3	$	—	($	17.1	)	$	316.4
Capital Expenditures	$	459.9	$	468.6	$	—	$	0.2		$	928.7
Total Assets	$	10,133.9	$	1,265.2	$	—	($	268.9	)	$	11,130.2
December 31, 2005
Operating Revenues (d)	$	3,793.0	$	40.0	$	—	($	17.5	)	$	3,815.5
Depreciation, Decommissioning and Amortization	$	324.1	$	5.9	$	—	$	2.0		$	332.0
Operating Income	$	542.4	$	19.5	$	—	$	1.0		$	562.9
Equity in Earnings (Losses) of Unconsolidated Affiliates	$	34.6	$	—	$	—	($	0.6	)	$	34.0
Interest Expense	$	106.1	$	14.4	$	—	$	52.9		$	173.4
Income Tax Expense (Benefit)	$	184.9	$	4.5	$	—	($	40.2	)	$	149.2
Income from Discontinued Operations, Net of Tax	$	—	$	5.0	$	—	$	0.1		$	5.1
Net Income (Loss)	$	314.2	$	6.7	$	—	($	12.2	)	$	308.7
Capital Expenditures	$	458.6	$	276.6	$	—	$	9.9		$	745.1
Total Assets	$	9,601.6	$	749.5	$	—	$	110.9		$	10,462.0

118 Wisconsin Energy Corporation

2006 Form 10-K

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Cont’d)

	Reportable Operating Segments								Corporate (b) & Other (c) & Reconciling Eliminations(d)			Total Consolidated
	Energy					Manufacturing (b)
Year Ended	Utility		Non-Utility(a)
	(Millions of Dollars)
December 31, 2004
Operating Revenues (d)	$	3,375.4	$	19.9		$	—		$	10.8		$	3,406.1
Depreciation, Decommissioning and Amortization	$	315.5	$	1.4		$	—		$	2.6		$	319.5
Operating Income (Loss)	$	528.6	$	4.6		($	3.0	)	($	0.2	)	$	530.0
Equity in Earnings of Unconsolidated Affiliates	$	30.1	$	—		$	—		$	0.8		$	30.9
Interest Expense	$	108.6	$	14.6		$	9.9		$	60.3		$	193.4
Income Tax Expense	$	174.5	($	4.3	)	($	5.0	)	($	32.4	)	$	132.8
Income (Loss) from Discontinued Operations, Net of Tax	$	—	($	81.2	)	$	31.9		$	136.1		$	86.8
Net Income (Loss)	$	283.9	($	86.6	)	$	26.6		$	82.5		$	306.4
Capital Expenditures	$	426.5	$	191.0		$	—		$	19.0		$	636.5
Total Assets	$	8,775.3	$	506.8		$	—		$	283.3		$	9,565.4

(a) The non-utility energy segment includes discontinued operations for the Calumet operations. The sale of Calumet was completed effective May 31, 2005. In 2005, Calumet is reported as discontinued operations for the five months ended May 31, 2005. The after tax gain of $4.7 million recorded for the sale is included in Income from Discontinued Operations, Net of Tax. Certain overheads reported for Calumet continued to exist following the sale and are reported in continuing operations. Certain other costs are directly attributable to the discontinued operations. Total assets in the non-utility segment include the assets held for sale of Calumet of $29.8 million at December 31, 2004.

(b) The sale of our manufacturing segment was completed effective July 31, 2004. The financial information presented for the manufacturing segment in 2004 is for the seven months ended July 31, 2004. The gain on the sale of the manufacturing segment and a 2006 tax adjustment are reflected in Corporate and Other. Certain corporate overheads reported in the manufacturing segment continue to exist following the sale and are reported in continuing operations. Certain other corporate costs are directly attributable to the discontinued operations.

(c) Other includes all other non-utility activities, primarily non-utility real estate investment and development by Wispark, non-utility investment in renewable energy and recycling technologies by Minergy as well as interest on corporate debt and in 2004, the gain on the sale of the manufacturing segment. Other also includes the discontinued operations for Minergy Neenah. Effective September 27, 2006, we sold 100% of the membership interest in Minergy Neenah. The sale transaction is included in Income from Discontinued Operations, Net of Tax. Certain overheads reported for Minergy Neenah continue to exist following the sale and are reported in continuing operations. Certain other costs are directly attributable to the discontinued operations. Total assets in other includes: Minergy Neenah assets held for sale of $17.4 million and $24.4 million at December 31, 2005 and 2004, respectively.

(d) An elimination for intersegment revenues is included in Operating Revenues of $64.1 million, $36.3 million and $6.8 million for 2006, 2005 and 2004, respectively.

R — RELATED PARTIES

We receive and/or provide certain services to other associated companies in which we have an equity investment.

American Transmission Company LLC: As of December 31, 2006, we have a 29.4% interest in ATC. We pay ATC for transmission and other related services it provides. In addition, we provide a variety of operational, maintenance and project management work for ATC, which are reimbursed to us by ATC. Under our PTF plan, we are required to pay the cost of needed transmission infrastructure upgrades. ATC will reimburse us for these costs when the units are placed into service. At December 31, 2006 and 2005, we had a receivable of $27.2 million and $19.4 million, respectively, for these items.

119 Wisconsin Energy Corporation

2006 Form 10-K

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Cont’d)

Guardian: In April 2006, we sold our one third ownership interest in Guardian. As such, the tables below reflect activity through April 2006 with respect to Guardian. We have committed to purchase 650,000 Dth per day of capacity (approximately 87% of the pipeline’s total capacity) under the terms of a 10 year transportation agreement expiring December 2022.

Nuclear Management Company: At December 31, 2006, NMC, which operates Point Beach, was owned by our affiliate, WEC Nuclear Corporation, and the affiliates of two other unaffiliated investor-owned utilities in the region. Wisconsin Electric pays NMC a plant operating charge. In December 2006, we announced our intention to sell Point Beach to an affiliate of FPL. If and when the sale is completed (or earlier if an interim operating agreement with FPL is activated by us), the operating licenses for Point Beach will transfer from NMC to the buyer and our relationship with NMC will be terminated.

We provided and received services from the following associated companies during 2006, 2005 and 2004:

Equity Investee	2006		2005		2004
	(Millions of Dollars)
Services Provided
-ATC	$	16.6	$	20.9	$	21.6
Services Received
-ATC	$	149.4	$	130.1	$	115.5
-NMC	$	65.2	$	61.2	$	58.1
-Guardian	$	11.8	$	34.0	$	33.6

At December 31, 2006 and 2005 our consolidated balance sheets included receivable and payable balances with the following associated companies:

Equity Investee	2006		2005
	(Millions of Dollars)
Services Provided
-ATC	$	1.2	$	1.3
Services Received
-ATC	$	12.5	$	10.6
-NMC	$	5.7	$	2.5
-Guardian	$	—	$	3.0

S — COMMITMENTS AND CONTINGENCIES

Capital Expenditures: We have made certain commitments in connection with 2007 capital expenditures. During 2007, we estimate that total capital expenditures will be approximately $1.4 billion.

Operating Leases: We enter into long-term purchase power contracts to meet a portion of our anticipated increase in future electric energy supply needs. These contracts expire at various times through 2013. Certain of these contracts were deemed to qualify as operating leases. In addition, we have various other operating leases including leases for vehicles and coal cars.

120 Wisconsin Energy Corporation

2006 Form 10-K

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Cont’d)

Future minimum payments for the next five years and thereafter for our operating lease contracts are as follows:

	(Millions of Dollars)
2007	$  51.6
2008	35.7
2009	22.5
2010	20.5
2011	20.7
Thereafter	32.9
Total	$183.9

Divested Assets: Pursuant to the terms of the sale agreement for Minergy Neenah, we have agreed to customary indemnification provisions related to post-closing obligations and other matters. Our maximum aggregate exposure under the indemnification provisions is $0.3 million.

Pursuant to the terms of the sale agreement for Calumet, Wisvest has agreed to customary indemnification provisions related to environmental conditions and other matters. Except for retention of the full exposure to indemnify Tenaska for environmental claims related to certain property no longer leased or owned by Wisvest or any of its subsidiaries, Wisvest’s maximum aggregate exposure under the indemnification provisions is $35 million. Pursuant to the terms of the agreement, we have guaranteed post-closing obligations under the agreement, including indemnity obligations.

Pursuant to the terms of the sales agreement for WICOR Wisconsin Energy agreed to customary indemnification provisions related to certain environmental, asbestos, and product liability matters associated with the manufacturing business. In addition, the amount of cash taxes and future deferred income tax benefits are subject to a number of factors including appraisals of the fair value of Wisconsin Gas assets and applicable tax laws. Any changes in the estimates of taxes and indemnification matters will be recorded as an adjustment to the gain on sale and reported in discontinued operations in the period the adjustment is determined. We have established reserves related to these customary indemnification and tax matters.

Environmental Matters: We periodically review our exposure for environmental remediation costs as evidence becomes available indicating that our liability has changed. Given current information, including the following, we believe 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 our financial position or results of operations.

We have a program of comprehensive environmental remediation planning for former manufactured gas plant sites and coal-ash disposal sites. We perform ongoing assessments of manufactured gas plant sites and related disposal sites used by Wisconsin Electric and Wisconsin Gas, and coal ash disposal/landfill sites used by Wisconsin Electric, as discussed below. We are working with the WDNR in our investigation and remediation planning. At this time, we cannot estimate future remediation costs associated with these sites beyond those described below.

Manufactured Gas Plant Sites: We have identified several sites at which Wisconsin Electric, Wisconsin Gas, or a predecessor company historically owned or operated a manufactured gas plant. We have substantially completed planned remediation activities at some of those sites and certain other sites are subject to ongoing monitoring. Remediation at additional sites is currently being performed, and other sites are being investigated or monitored. We have also identified other sites that may have been impacted by historical manufactured gas plant activities. Based upon ongoing analysis, we estimate that the future costs for detailed site investigation and future remediation costs may range from $25 to $50 million over the next ten years. This estimate is dependent upon several variables including, among other things, the extent of remediation, changes in technology and changes in regulation. As of December 31, 2006, we have established reserves of $30.5 million related to future remediation costs.

The PSCW has allowed Wisconsin utilities, including Wisconsin Electric and Wisconsin Gas, to defer the costs spent on the remediation of manufactured gas plant sites, and has allowed for these costs to be recovered in rates over five years. Accordingly, we have recorded a regulatory asset for remediation costs.

121 Wisconsin Energy Corporation

2006 Form 10-K

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Cont’d)

Ash Landfill Sites: Wisconsin Electric aggressively seeks environmentally acceptable, beneficial uses for its coal combustion by-products. However, these coal-ash by-products have been, and to a small 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 monitoring or adjusting. 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 recovered under the fuel clause for Wisconsin Electric and are expensed as incurred. During 2006, 2005 and 2004, Wisconsin Electric incurred $0.5 million, $0.1 million and $1.8 million, respectively, in coal-ash remediation expenses. As of December 31, 2006, we have no reserves established related to ash landfill sites.

EPA - Proposed Consent Decree: In April 2003, Wisconsin Electric and the EPA announced that a consent decree had been reached that resolved all issues related to a request for information that had been issued by the EPA. Under the consent decree, Wisconsin Electric agreed to significantly reduce its air emissions from its coal-fired generating facilities. The reductions are expected to be achieved by 2013 through a combination of installing new pollution control equipment, upgrading existing equipment and retiring certain older units. Through December 31, 2006, we have spent approximately $355.0 million associated with implementing the EPA agreement and the ultimate capital cost of implementing this agreement is estimated to be $1 billion through the year 2013.

The consent decree, amended to include the State of Michigan, has been filed with a federal court for approval. Various intervenor groups have commented on the consent decree and we believe that the briefings and subsequent discovery is complete. At this time, we are unable to predict the timing or the ultimate resolution of the federal court’s consideration; however, we do not believe that the ultimate resolution of this matter will have a material impact on our financial position or results of operations.

122 Wisconsin Energy Corporation

2006 Form 10-K

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of Wisconsin Energy Corporation:

We have audited the accompanying consolidated balance sheets and consolidated statements of capitalization of Wisconsin Energy Corporation and subsidiaries (the “Company”) as of December 31, 2006 and 2005, and the related consolidated statements of income, common equity, and cash flows for each of the three years in the period ended December 31, 2006. Our audits also included the financial statement schedules listed in the Index at Item 15(a)(2). These financial statements and the financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2006 and 2005, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2006, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 22, 2007 expressed an unqualified opinion on management’s assessment of the effectiveness of the Company’s internal control over financial reporting and an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

/s/DELOITTE & TOUCHE LLP

Deloitte & Touche LLP

Milwaukee, Wisconsin

February 22, 2007

123 Wisconsin Energy Corporation

2006 Form 10-K

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of Wisconsin Energy Corporation:

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that Wisconsin Energy Corporation and subsidiaries (the “Company”) maintained effective internal control over financial reporting as of December 31, 2006, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedules as of and for the year ended December 31, 2006 of the Company and our report dated February 22, 2007 expressed an unqualified opinion on those financial statements and financial statement schedules.

/s/DELOITTE & TOUCHE LLP

Deloitte & Touche LLP

Milwaukee, Wisconsin

February 22, 2007

124 Wisconsin Energy Corporation

2006 Form 10-K

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of the end of the period covered by this report. Based upon such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, our disclosure controls and procedures are effective (i) in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by us in the reports that we file or submit under the Exchange Act and (ii) to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of Wisconsin Energy Corporation’s and subsidiaries internal control over financial reporting based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on its evaluation under the framework in Internal Control—Integrated Framework, our management concluded that Wisconsin Energy Corporation’s and subsidiaries internal control over financial reporting was effective as of December 31, 2006.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of the effectiveness of internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Deloitte & Touche LLP, an independent registered public accounting firm, as auditors of our financial statements has issued an attestation report on management’s assessment of the effectiveness of Wisconsin Energy Corporation’s and subsidiaries internal control over financial reporting as of December 31, 2006. Deloitte & Touche’s report is included in this report.

Changes in Internal Control Over Financial Reporting

There has not been any change in our internal control over financial reporting during the fourth quarter of 2006 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

125 Wisconsin Energy Corporation

2006 Form 10-K

ITEM 9B. OTHER INFORMATION

Larry Salustro, Executive Vice President of Wisconsin Energy, Wisconsin Electric and Wisconsin Gas, retired effective February 28, 2007. In connection with Mr. Salustro’s retirement and in consideration of his exemplary service to all three companies, on February 26, 2007, the Compensation Committee approved the acceleration of vesting of all unvested stock options awarded to Mr. Salustro, consisting of 324,000 options.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE OF THE REGISTRANT

The information under “Proposal 1: Election of Directors - Terms Expiring in 2008”, “Section 16(a) Beneficial Ownership Reporting Compliance”, “Corporate Governance - Frequently Asked Questions: What is the process used to identify director nominees and how do I recommend a nominee to the Corporate Governance Committee?”, “Corporate Governance - Frequently Asked Questions: Are the Audit and Oversight, Corporate Governance and Compensation Committees comprised solely of independent directors?”, “Corporate Governance - Frequently Asked Questions: Are all the members of the audit committee financially literate and does the committee have an audit committee financial expert?” and “Committees of the Board of Directors - Audit and Oversight” in our definitive Proxy Statement on Schedule 14A to be filed with the SEC for our Annual Meeting of Stockholders to be held May 3, 2007 (the “2007 Annual Meeting Proxy Statement”) is incorporated herein by reference. Also see “Executive Officers of the Registrant” in Part I of this report.

We have adopted a written code of ethics, referred to as our Code of Business Conduct, that all of our directors, executive officers and employees, including the principal executive officer, principal financial officer and principal accounting officer, must comply with. We have posted our Code of Business Conduct on our Internet website, www.wisconsinenergy.com. We have not provided any waiver to the Code for any director, executive officer or other employee. Any amendments to, or waivers for directors and executive officers from, the Code of Business Conduct will be disclosed on our website or in a current report on Form 8-K.

Our Internet website, www.wisconsinenergy.com, also contains our Corporate Governance Guidelines and the charters of our Audit and Oversight, Corporate Governance and Compensation Committees.

Our Code of Business Conduct, Corporate Governance Guidelines and committee charters are also available without charge to any stockholder of record or beneficial owner of our common stock by writing to the corporate secretary, Anne K. Klisurich, at our principal business office, 231 West Michigan Street, P.O. Box 1331, Milwaukee, Wisconsin 53201.

ITEM 11. EXECUTIVE COMPENSATION

The information under “COMPENSATION, DISCUSSION AND ANALYSIS”, ”EXECUTIVE OFFICERS’ COMPENSATION”, ”DIRECTOR COMPENSATION”, “Committees of the Board of Directors - Compensation” and “COMPENSATION COMMITTEE REPORT” in the 2007 Annual Meeting Proxy Statement is incorporated herein by reference.

126 Wisconsin Energy Corporation

2006 Form 10-K

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The security ownership information called for by Item 12 of Form 10-K is incorporated herein by reference to this information included under “WEC Common Stock Ownership” in the 2007 Annual Meeting Proxy Statement.

EQUITY COMPENSATION PLAN INFORMATION

The following table sets forth information about our equity compensation plans as of December 31, 2006.

Plan Category	(a)		(b)		(c)
	Number of securities to be issued upon exercise of outstanding options, warrants and rights		Weighted-average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
Equity compensation plans approved by security holders	7,604,029	(1)	$	30.73	5,657,348
Equity compensation plans not approved by security holders	—			—	—
Total (2)	7,604,029		$	30.73	5,657,348

(1) Represents options to purchase our common stock granted under our 1993 Omnibus Stock Incentive Plan, as amended.

(2) Also outstanding were options to purchase 117,797 shares of our common stock at a weighted average exercise price of $16.82 per share granted under the stock option plans of WICOR and assumed in connection with the acquisition of WICOR in April 2000. No further awards were or will be made under the WICOR stock option plans.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

The information under “Corporate Governance - Frequently Asked Questions: Who are the independent directors?”, “Corporate Governance - Frequently Asked Questions: What are the Board’s standards of independence” and “CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS” in the 2007 Annual Meeting Proxy Statement is incorporated herein by reference. A full description of the guidelines our Board uses to determine director independence is located in Appendix A of our Corporate Governance Guidelines, which can be found on our website, www.wisconsinenergy.com.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information regarding the fees paid to, and services performed by, our independent auditors and the pre-approval policy of our audit and oversight committee under “Independent Auditors’ Fees and Services” in the 2007 Annual Meeting Proxy Statement is incorporated herein by reference.

127 Wisconsin Energy Corporation

2006 Form 10-K

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)1. FINANCIAL STATEMENTS AND REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM INCLUDED IN PART II OF THIS REPORT

Consolidated Income Statements for the three years ended December 31, 2006.

Consolidated Balance Sheets at December 31, 2006 and 2005.

Consolidated Statements of Cash Flows for the three years ended December 31, 2006.

Consolidated Statements of Common Equity for the three years ended December 31, 2006.

Consolidated Statements of Capitalization at December 31, 2006 and 2005.

Notes to Consolidated Financial Statements.

Reports of Independent Registered Public Accounting Firm.

2. FINANCIAL STATEMENT SCHEDULES INCLUDED IN PART IV OF THIS REPORT

Schedule I Condensed Parent Company Financial Statements, including Income Statements and Cash Flows for the three years ended December 31, 2006 and Balance Sheets at December 31, 2006 and 2005. Schedule II, Valuation and Qualifying Accounts, for the three years ended December 31, 2006. 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.

128 Wisconsin Energy Corporation

2006 Form 10-K

WISCONSIN ENERGY CORPORATION

INCOME STATEMENTS

(Parent Company Only)

SCHEDULE I — CONDENSED PARENT COMPANY

FINANCIAL STATEMENTS

	Year Ended December 31
	2006			2005			2004
	(Millions of Dollars)
Other Income, Net	$	25.5		$	20.6		$	3.5
Corporate Expense		7.5			6.1			6.9
Financing Costs		65.5			65.4			89.2
Loss before Taxes		(47.5	)		(50.9	)		(92.6	)
Income Tax Benefit		21.5			36.9			33.2
Loss after Taxes		(26.0	)		(14.0	)		(59.4	)
Equity in Subsidiaries’ Continuing Operations		338.5			317.6			279.0
Income from Continuing Operations		312.5			303.6			219.6
Income from Discontinued Operations including Equity in Subsidiaries’ Discontinued Operations		3.9			5.1			86.8
Net Income	$	316.4		$	308.7		$	306.4

See accompanying notes to condensed parent company financial statements.

129 Wisconsin Energy Corporation

2006 Form 10-K

WISCONSIN ENERGY CORPORATION

STATEMENTS OF CASH FLOWS

(Parent Company Only)

SCHEDULE I - CONDENSED PARENT COMPANY

FINANCIAL STATEMENTS - (Cont’d)

	Year Ended December 31
	2006			2005			2004
	(Millions of Dollars)
Operating Activities
Net income	$	316.4		$	308.7		$	306.4
Equity in subsidiaries’ earnings		(340.0	)		(318.2	)		(360.6	)
Dividends from subsidiaries		276.6			187.6			189.3
Deferred income taxes, net		4.8			(26.4	)		(102.4	)
Reconciliation to cash
Accrued income taxes, net		(68.8	)		34.0			30.5
Change in - Other current assets		—			—			(50.3	)
Change in - Other current liabilities		(3.6	)		(0.8	)		(38.9	)
Change in - Accounts Receivable		(26.7	)		109.8			3.3
Other		8.0			16.1			5.4
Cash Provided by (Used In) Operating Activities		166.7			310.8			(17.3	)
Investing Activities
Proceeds from asset sales, net		38.5			—			856.9
Change in notes receivable from associated companies		1.0			1.0			100.1
Capital contributions to associated companies		(447.6	)		(84.0	)		(195.0	)
Other		(18.7	)		(10.9	)		73.1
Cash (Used In) Provided by Investing Activities		(426.8	)		(93.9	)		835.1
Financing Activities
Issuance of common stock and exercise of stock options		26.8			47.0			70.9
Repurchase of common stock		(48.0	)		(75.1	)		(152.7	)
Dividends paid on common stock		(107.6	)		(102.9	)		(97.8	)
Issuance of long-term debt		10.0			—			—
Retirement of long-term debt		(250.0	)		—			(506.2	)
Change in short-term debt		573.9			(44.5	)		(132.4	)
Other		13.2			0.4			0.4
Cash Provided by (Used In) Financing Activities		218.3			(175.1	)		(817.8	)
Change in Cash and Cash Equivalents		(41.8	)		41.8			—
Cash and Cash Equivalents at Beginning of Year		42.8			1.0			1.0
Cash and Cash Equivalents at End of Year	$	1.0		$	42.8		$	1.0
Cash Paid For
Interest (net of amount capitalized)	$	62.4		$	60.9		$	85.1
Income taxes (net of refunds)	$	32.0		($	57.0	)	$	99.4

See accompanying notes to condensed parent company financial statements.

130 Wisconsin Energy Corporation

2006 Form 10-K

WISCONSIN ENERGY CORPORATION

BALANCE SHEETS

(Parent Company Only)

SCHEDULE I - CONDENSED PARENT COMPANY

FINANCIAL STATEMENTS - (Cont’d)

	December 31
	2006		2005
	(Millions of Dollars)
Assets
Current Assets
Cash and cash equivalents	$	1.0	$	42.8
Accounts and notes receivable from associated companies		224.0		196.1
Prepaid taxes		85.1		16.7
Other		0.4		1.7
Total Current Assets		310.5		257.3
Property and Investments
Investment in subsidiary companies		4,127.5		3,594.5
Other		26.8		43.6
Total Property and Investments		4,154.3		3,638.1
Deferred Charges
Deferred regulatory assets		1.7		127.0
Other		115.1		82.9
Total Deferred Charges		116.8		209.9
Total Assets	$	4,581.6	$	4,105.3
Liabilities and Equity
Current Liabilities
Long-term debt due currently	$	—	$	250.0
Short-term debt		573.9		—
Other		48.9		37.8
Total Current Liabilities		622.8		287.8
Long-Term Debt		954.4		943.4
Long-Term Liabilities
Pension liability		3.2		130.8
Other		112.2		63.2
Total Long-Term Liabilities		115.4		194.0
Total Stockholder’s Equity		2,889.0		2,680.1
Total Liabilities and Equity	$	4,581.6	$	4,105.3

See accompanying notes to condensed parent company financial statements.

131 Wisconsin Energy Corporation

2006 Form 10-K

WISCONSIN ENERGY CORPORATION

NOTES TO FINANCIAL STATEMENTS

(Parent Company Only)

SCHEDULE I - CONDENSED PARENT COMPANY

FINANCIAL STATEMENTS - (Cont’d)

1. The consolidated financial statements of Wisconsin Energy Corporation reflect certain businesses as discontinued operations. The related assets for these discontinued operations are recorded as assets held for sale in the consolidated financial statements. For Parent Company only presentation, the investments in discontinued operations are recorded in Investment in subsidiary companies. In the Wisconsin Energy Corporation consolidated financial statements, we have reported assets held for sale of zero and $17.4 million as of December 31, 2006 and 2005, respectively. The condensed Parent Company income statements and cash flow statements report the earnings of these businesses as discontinued operations. For Parent Company only presentation, investment in subsidiaries are accounted for using the equity method. 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. Wisconsin Energy’s ability as a holding company to pay common dividends primarily depends on the availability of funds received from the Parent Company’s principal utility subsidiaries, Wisconsin Electric and Wisconsin Gas. Various financing arrangements and regulatory requirements impose certain restrictions on the ability of the Parent Company’s principal utility subsidiaries to transfer funds to the Parent Company in the form of cash dividends or advances. In addition, under Wisconsin law, Wisconsin Electric and Wisconsin Gas are prohibited from loaning funds, either directly or indirectly, to the Parent Company.

Wisconsin Energy does not believe that these restrictions will materially affect the Parent Company’s operations or limit any dividend payments in the foreseeable future.

3. In September 2004, the Parent Company used cash proceeds from the sale of WICOR Industries for the redemption of $300 million of Wisconsin Energy 5.875% senior notes due April 1, 2006. In September 2004, the Parent Company recorded $17.0 million of costs associated with this early redemption, which are included in Other Income, net for the year ended December 31, 2004.

4. The assets, obligations and components of the Parent Company’s pension costs are allocated by Wisconsin Energy’s actuary to each of the participating companies as if each participating company had its own plan. In September 2006, the FASB issued SFAS 158 which requires employers to recognize all obligations related to their pension plan and to quantify the funded status of the pension plan as an asset or liability on their statement of financial position. In addition, SFAS 158 requires employers to measure the funded status of their plan as of the date of their year-end statement of financial position.

Wisconsin Energy adopted SFAS 158 prospectively on December 31, 2006, and will continue to use a year end measurement date for its pension plan. Due to the regulatory nature of its business, Wisconsin Energy has concluded that substantially all of the unrecognized pension costs resulting from the recognition of the funded status of its pension plan qualify as a regulatory asset.

Prior to the issuance of SFAS 158, the Parent Company recorded a minimum pension liability to reflect the funded status of the unallocated portion of its pension liability. Upon adoption of SFAS 158, the unallocated portion of its pension liability and the associated regulatory asset are recorded by the respective subsidiaries of Wisconsin Energy. As of December 31, 2006 the Parent Company recorded a pension liability of $3.2 million and a regulatory asset of $1.7 million to reflect the funded status of the pension plan under SFAS 158. As of December 31, 2005, the Parent Company recorded a pension liability of $130.8 million and a regulatory asset of $127.0 million under SFAS 132.

132 Wisconsin Energy Corporation

2006 Form 10-K

SCHEDULE I - CONDENSED PARENT COMPANY FINANCIAL STATEMENTS - (Cont'd)

5. As of December 31, 2006, the maturities of the Parent Company long-term debt outstanding were as follows:

	(Millions of Dollars)
2007	$   —
2008	300.0
2009	—
2010	10.0
2011	450.0
Thereafter	200.0
Total	$960.0

Wisconsin Energy amortizes debt premiums, discounts and debt issuance costs over the lives of the debt and includes the costs in interest expense.

Wisconsin Energy retired at the scheduled maturity date $250.0 million of 5.875% Notes due April 1, 2006. Short-term debt was issued to retire these notes.

Wisconsin Energy has entered into a bank back-up credit agreement to maintain short-term liquidity which, among other terms, requires the Company to maintain, subject to certain exclusions, a minimum total funded debt to capitalization ratio of less than 70%.

Wisconsin Energy’s bank back-up credit agreement contains customary covenants, including certain limitations on its ability to sell assets. The credit agreement also contains customary events of default, including payment defaults, material inaccuracy of representations and warranties, covenant defaults, bankruptcy proceedings, certain judgments, ERISA defaults and change of control. In addition, pursuant to the terms of its credit agreement, Wisconsin Energy must ensure that certain of its subsidiaries comply with many of the covenants contained therein.

At December 31, 2006, Wisconsin Energy was in compliance with all covenants.

6. Wisconsin Energy and certain of its subsidiaries enter into various guarantees to provide financial and performance assurance to third parties on behalf of affiliates. As of December 31, 2006, Wisconsin Energy had the following guarantees:

	Maximum Potential Future Payments	Outstanding at Dec 31, 2006	Liability Recorded at Dec 31, 2006
	(Millions of Dollars)
Wisconsin Energy Guarantees
Utility	$    8.7	$    8.7	$—
Non-Utility Energy	546.4	396.8	—
Other	7.2	7.0	—
Total	$562.3	$412.5	$—
Letters of Credit	$1.5	$0.2	$—

Utility guarantees support obligations of the utility segment under surety bonds and worker’s compensation.

Wisconsin Energy’s guarantees in support of our Non-Utility Energy segment guaranty performance and payment obligations of We Power and Wisvest. A guarantee in support of Wisvest-Connecticut which we sold in December 2002 to PSEG provides financial assurance for potential obligations relating to environmental

133 Wisconsin Energy Corporation

2006 Form 10-K

SCHEDULE I - CONDENSED PARENT COMPANY FINANCIAL STATEMENTS - (Cont'd)

remediation under the original purchase agreement with United Illuminating. The potential obligations for environmental remediation, which are unlimited, are reimbursable by PSEG under the terms of the sale agreement in the event that Wisconsin Energy is required to perform under the guarantee. Guarantees also support obligations to third parties under the agreement with PSEG for the sale of Wisvest - Connecticut and post-closing obligations including indemnity obligations related to environmental condition and other matters under the Calumet facility sale agreement which was effective May 31, 2005. Wisconsin Energy’s maximum aggregate exposure under the indemnification provisions of the Calumet facility sale agreement, except for retention of the full exposure to indemnify for environmental claims related to certain property no longer leased or owned by Wisconsin Energy or its subsidiaries, is $35 million.

The guarantees which support We Power are for obligations under purchase, construction and lease agreements with the utility segment and third parties.

Wisconsin Energy also has another guarantee to support an environmental indemnification, which is unlimited, associated with the Minergy Neenah plant and indemnifications related to the post-closing obligations under the Minergy Neenah sale agreement, which was effective September 7, 2006.

Wisconsin Energy’s other guarantees also support obligations to third parties under purchase and loan agreements and surety bonds. In the event the guarantee fails to perform, Wisconsin Energy would be responsible for the obligations.

134 Wisconsin Energy Corporation

2006 Form 10-K

SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS

Allowance for Doubtful Accounts	Balance at Beginning of the Period		Expense		Deferral		Net Write-offs			Balance at End of the Period
	(Millions of Dollars)
December 31, 2006	$	36.6	$	36.5	$	3.7	($	41.7	)	$	35.1
December 31, 2005	$	40.1	$	26.8	$	17.2	($	47.5	)	$	36.6
December 31, 2004	$	51.1	$	18.0	$	21.2	($	50.2	)	$	40.1

135 Wisconsin Energy Corporation

2006 Form 10-K

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, thereunto duly authorized.

		WISCONSIN ENERGY CORPORATION
	By	/s/ GALE E. KLAPPA
Date: February 28, 2007		Gale E. Klappa, 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 dates indicated.

/s/ GALE E. KLAPPA	February 28, 2007
Gale E. Klappa, Chairman of the Board, President and Chief
Executive Officer and Director — Principal Executive Officer
/s/ ALLEN L. LEVERETT	February 28, 2007
Allen L. Leverett, Executive Vice President and Chief
Financial Officer — Principal Financial Officer
/s/ STEPHEN P. DICKSON	February 28, 2007
Stephen P. Dickson, Vice President and Controller — Principal Accounting Officer
/s/ JOHN F. AHEARNE	February 28, 2007
John F. Ahearne, Director
/s/ JOHN F. BERGSTROM	February 28, 2007
John F. Bergstrom, Director
/s/ BARBARA L. BOWLES	February 28, 2007
Barbara L. Bowles, Director
/s/ PATRICIA W. CHADWICK	February 28, 2007
Patricia W. Chadwick, Director
/s/ ROBERT A. CORNOG	February 28, 2007
Robert A. Cornog, Director
/s/ CURT S. CULVER	February 28, 2007
Curt S. Culver, Director
/s/ THOMAS J. FISCHER	February 28, 2007
Thomas J. Fischer, Director
/s/ ULICE PAYNE, JR.	February 28, 2007
Ulice Payne, Jr., Director
/s/ FREDERICK P. STRATTON, JR.	February 28, 2007
Frederick P. Stratton, Jr., Director

136 Wisconsin Energy Corporation

2006 Form 10-K

WISCONSIN ENERGY CORPORATION

(Commission File No. 001-09057)

EXHIBIT INDEX

to

Annual Report on Form 10-K

For the year ended December 31, 2006

The following exhibits are filed or furnished with or incorporated by reference in the report with respect to Wisconsin Energy Corporation. (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	Asset Sale Agreement by and among Wisconsin Electric Power Company, FPL Energy Point Beach, LLC, as Buyer, and FPL Group Capital Inc., as Buyer’s Parent, dated December 19, 2006.
3	Articles of Incorporation and By-laws
	3.1*	Restated Articles of Incorporation of Wisconsin Energy Corporation, as amended and restated effective June 12, 1995. (Exhibit (3)-1 to Wisconsin Energy Corporation’s 6/30/95 Form 10-Q.)
	3.2*	Bylaws of Wisconsin Energy Corporation, as amended to May 5, 2005. (Exhibit 3.2(b) to Wisconsin Energy Corporation’s 12/31/04 Form 10-K).
4	Instruments defining the rights of security holders, including indentures
	4.1*	Reference is made to Article III of the Restated Articles of Incorporation and the Bylaws of Wisconsin Energy Corporation. (Exhibits 3.1 and 3.2 herein.)
	Indentures and Securities Resolutions:
	4.2*	Indenture for Debt Securities of Wisconsin Electric (the “Wisconsin Electric Indenture”), dated December 1, 1995. (Exhibit (4)-1 under File No. 1-1245, Wisconsin Electric’s 12/31/95 Form 10-K.)
	4.3*	Securities Resolution No. 1 of Wisconsin Electric under the Wisconsin Electric Indenture, dated December 5, 1995. (Exhibit (4)-2 under File No. 1-1245, Wisconsin Electric’s 12/31/95 Form 10-K.)
	4.4*	Securities Resolution No. 2 of Wisconsin Electric under the Wisconsin Electric Indenture, dated November 12, 1996. (Exhibit 4.44 to Wisconsin Energy Corporation’s 12/31/96 Form 10-K.)
	4.5*	Securities Resolution No. 3 of Wisconsin Electric under the Wisconsin Electric Indenture, dated May 27, 1998. (Exhibit (4)-1 under File No. 1-1245, Wisconsin Electric’s 06/30/98 Form 10-Q.)

E-1 Wisconsin Energy Corporation

2006 Form 10-K

EXHIBIT INDEX - (Cont’d)

Number	Exhibit
	4.6*	Securities Resolution No. 4 of Wisconsin Electric under the Wisconsin Electric Indenture, dated November 30, 1999. (Exhibit 4.46 under File No. 1-1245, Wisconsin Energy Corporation’s/Wisconsin Electric’s 12/31/99 Form 10-K.)
	4.7*	Securities Resolution No. 5 of Wisconsin Electric under the Wisconsin Electric Indenture, dated as of May 1, 2003. (Exhibit 4.47 filed with Post-Effective Amendment No. 1 to Wisconsin Electric’s Registration Statement on Form S-3 (File No. 333-101054), filed May 6, 2003.)
	4.8*	Securities Resolution No. 6 of Wisconsin Electric under the Wisconsin Electric Indenture, dated as of November 17, 2004. (Exhibit 4.48 filed with Post-Effective Amendment No. 1 to Wisconsin Electric’s Registration Statement on Form S-3 (File No. 333-113414), filed November 23, 2004.)
	4.9*	Securities Resolution No. 7 of Wisconsin Electric under the Wisconsin Electric Indenture, dated as of November 2, 2006. (Exhibit 4.1 to Wisconsin Electric’s Form 8-K, dated November 2, 2006.)
	4.10*	Indenture for Debt Securities of Wisconsin Energy (the “Wisconsin Energy Indenture”), dated as of March 15, 1999. (Exhibit 4.46 to Wisconsin Energy Corporation’s 03/25/99 Form 8-K.)
	4.11*	Securities Resolution No. 1 of Wisconsin Energy under the Wisconsin Energy Indenture, dated as of March 16, 1999. (Exhibit 4.47 to Wisconsin Energy Corporation’s 03/25/99 Form 8-K.)
	4.12*	Securities Resolution No. 2 of Wisconsin Energy under the Wisconsin Energy Indenture, dated as of March 23, 2001. (Exhibit 4.1 to Wisconsin Energy Corporation’s 03/31/01 Form 10-Q.)
	4.13*	Securities Resolution No. 3 of Wisconsin Energy under the Wisconsin Energy Indenture, dated as of November 13, 2001. (Exhibit 4.52 to Wisconsin Energy Corporation’s 12/31/01 Form 10-K.)
	4.14*	Securities Resolution No. 4 of Wisconsin Energy under the Wisconsin Energy Indenture, dated as of March 17, 2003. (Exhibit 4.12 filed with Post-Effective Amendment No. 1 to Wisconsin Energy Corporation’s Registration Statement on Form S-3 (File No. 333-69592), filed March 20, 2003.)
		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*	Stock Purchase Agreement among Pentair, Inc., WICOR, Inc. and Wisconsin Energy Corporation, dated February 3, 2004 (“Stock Purchase Agreement”). (Exhibit 2.1 to Wisconsin Energy Corporation’s 06/30/04 Form 10-Q.)

E-2 Wisconsin Energy Corporation

2006 Form 10-K

EXHIBIT INDEX - (Cont’d)

Number	Exhibit
	10.2*	Amendment to the Stock Purchase Agreement dated July 28, 2004. (Exhibit 2.2 to Wisconsin Energy Corporation’s 06/30/04 Form 10-Q.)
	10.3*	Membership Interest Purchase Agreement between CET Two, LLC and Tenaska Power Fund L.P., dated as of March 24, 2005 (the “Membership Purchase Agreement”). (Exhibit 10.1 to Wisconsin Energy Corporation’s 03/31/05 Form 10-Q.)
	10.4*	First Amendment to the Membership Purchase Agreement dated as of May 31, 2005. (Exhibit 10.1 to Wisconsin Energy Corporation’s 06/30/05 Form 10-Q.)
	10.5*	Credit Agreement, dated as of April 6, 2006, among Wisconsin Energy Corporation, as Borrower, the Lenders identified therein, and JPMorgan Chase Bank, N.A., as Administrative Agent and Fronting Bank. (Exhibit 10.1 to Wisconsin Energy Corporation’s 03/31/06 Form 10-Q.)
	10.6*	Credit Agreement, dated as of March 30, 2006, among Wisconsin Electric Power Company, as Borrower, the Lenders identified therein, and U.S. Bank National Association, as Administrative Agent and Fronting Bank. (Exhibit 10.2 to Wisconsin Energy Corporation’s 03/31/06 Form 10-Q.)
	10.7*	Credit Agreement, dated as of March 30, 2006, among Wisconsin Gas LLC, as Borrower, the Lenders identified therein, Citibank, N.A., as Administrative Agent, and U.S. Bank National Association, as Fronting Bank. (Exhibit 10.3 to Wisconsin Energy Corporation’s 03/31/06 Form 10-Q.)
	10.8*	Supplemental Executive Retirement Plan of Wisconsin Energy Corporation, as amended and restated as of April 1, 2004. (Exhibit 10.4 to Wisconsin Energy Corporation’s 06/30/04 Form 10-Q.)** See Note.
	10.9*	Service Agreement, dated April 25, 2000, between Wisconsin Electric Power Company and Wisconsin Gas Company (n/k/a Wisconsin Gas LLC). (Exhibit 10.32 to Wisconsin Energy Corporation’s 12/31/00 Form 10-K.)
	10.10*	Executive Deferred Compensation Plan of Wisconsin Energy Corporation, as amended and restated as of July 23, 2004 (including amendments approved effective as of November 2, 2005). (Exhibit 10.2 to Wisconsin Energy Corporation’s 09/30/05 Form 10-Q.)** See Note.
	10.11*	Directors’ Deferred Compensation Plan of Wisconsin Energy Corporation, as amended and restated as of May 1, 2004. (Exhibit 10.3 to Wisconsin Energy Corporation’s 06/30/04 Form 10-Q.) ** See Note.
	10.12*	Amended and Restated Wisconsin Energy Corporation Special Executive Severance Policy, effective as of April 26, 2000. (Exhibit 10.3 to Wisconsin Energy Corporation’s 03/31/00 Form 10-Q.)** See Note.
	10.13*	Short-Term Performance Plan of Wisconsin Energy Corporation effective January 1, 1992, as amended and restated as of August 15, 2000. (Exhibit 10.12 to Wisconsin Energy Corporation’s 12/31/00 Form 10-K.)** See Note.

E-3 Wisconsin Energy Corporation

2006 Form 10-K

EXHIBIT INDEX - (Cont’d)

Number	Exhibit
	10.14*	Amended and Restated Wisconsin Energy Corporation Executive Severance Policy, effective as of April 26, 2000. (Exhibit 10.4 to Wisconsin Energy Corporation’s 03/31/00 Form 10-Q.)** See Note.
	10.15*	Service Agreement, dated December 29, 2000, between Wisconsin Electric Power Company and American Transmission Company LLC. (Exhibit 10.33 to Wisconsin Energy Corporation’s 12/31/00 Form 10-K.)
	10.16*	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. (Exhibit 10.2 to Wisconsin Energy Corporation’s 12/31/00 Form 10-K.)** See Note.
	10.17	Base Salaries of Named Executive Officers of the Registrant.** See Note.
	10.18*	Employment arrangement with Charles R. Cole, effective August 1, 1999. (Exhibit 10.3 to Wisconsin Energy Corporation’s 12/31/00 Form 10-K.)** See Note.
	10.19*	Employment arrangement with Larry Salustro, effective December 12, 1997. (Exhibit 10.7 to Wisconsin Energy Corporation’s 12/31/00 Form 10-K.)** See Note.
	10.20*	Affiliated Interest Agreement (Service Agreement), dated December 12, 2002, by and among Wisconsin Energy Corporation and its affiliates. (Exhibit 10.14 to Wisconsin Energy Corporation’s 12/31/02 Form 10-K.)
	10.21*	Amended and Restated Senior Officer Employment and Non-Compete Agreement between Wisconsin Energy Corporation and Gale E. Klappa, effective October 22, 2003, amended as of December 3, 2003. (Exhibit 10.21 to Wisconsin Energy Corporation’s 12/31/03 Form 10-K.)** See Note.
	10.22*	Senior Officer Employment and Non-Compete Agreement between Wisconsin Energy Corporation and Allen L. Leverett, effective July 1, 2003. (Exhibit 10.3 to Wisconsin Energy Corporation’s 06/30/03 Form 10-Q.)** See Note.
	10.23*	Senior Officer Employment and Non-Compete Agreement between Wisconsin Energy Corporation and Rick Kuester, effective October 13, 2003. (Exhibit 10.3 to Wisconsin Energy Corporation’s 09/30/03 Form 10-Q.)** See Note.
	10.24*	Letter Agreement by and between Wisconsin Energy Corporation and James C. Fleming, dated as of November 23, 2005, which became effective January 3, 2006. (Exhibit 10.31 to Wisconsin Energy Corporation’s 12/31/05 Form 10-K.)** See Note.
	10.25*	Senior Officer, Change in Control, Severance and Non-Compete Agreement between Wisconsin Energy Corporation and Kristine A. Rappé, dated as of July 28, 2005. (Exhibit 10.1 to Wisconsin Energy Corporation’s 09/30/05 Form 10-Q).** See Note.
	10.26*	Supplemental Pension Benefit agreement between Wisconsin Energy Corporation and Stephen Dickson, effective May 23, 2001. (Exhibit 10.1 to Wisconsin Energy Corporation’s 06/30/01 Form 10-Q.)** See Note.

E-4 Wisconsin Energy Corporation

2006 Form 10-K

Number	Exhibit
	10.27*	Forms of Stock Option Agreements under 1993 Omnibus Stock Incentive Plan. (Exhibit 10.5 to Wisconsin Energy Corporation’s 12/31/95 Form 10-K. Updated as Exhibit 10.1(a) and 10.1(b) to Wisconsin Energy Corporation’s 03/31/00 Form 10-Q.)** See Note.
	10.28*	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 and option awards. (Exhibit 10.11 to Wisconsin Energy Corporation’s 12/31/98 Form 10-K.)** See Note.
	10.29*	Form of Nonstatutory Stock Option Agreement under the WICOR, Inc. 1994 Long-Term Performance Plan. (Exhibit 4.2 to WICOR, Inc.’s Registration Statement on Form S-8 (Reg. No. 33-55755).)** See Note.
	10.30*	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 Corporation’s Registration Statement on Form S-8 (Reg. No. 333-35798).)** See Note.
	10.31*	WICOR, Inc. 1992 Director Stock Option Plan, as amended. (Exhibit 10.3 to WICOR, Inc.’s 12/31/98 Form 10-K (File No. 001-07951).)** See Note.
	10.32*	Form of Director Nonstatutory Stock Option Agreement under the WICOR, Inc. 1992 Director Stock Option Plan. (Exhibit 4.2 to WICOR, Inc.’s Registration Statement on Form S-8 (Reg. No. 33-67132).)** See Note.
	10.33*	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 Corporation’s Registration Statement on Form S-8 (Reg. No. 333-35798).)** See Note.
	10.34*	2001 Revised forms of award agreements under 1993 Omnibus Stock Incentive Plan, as amended, for restricted stock awards, incentive stock option awards and non-qualified stock option awards. (Exhibit 10.3 to Wisconsin Energy Corporation’s 03/31/01 Form 10-Q.)** See Note.
	10.35*	1993 Omnibus Stock Incentive Plan, as amended and restated, as approved by the stockholders at the 2001 annual meeting of stockholders. (Appendix A to Wisconsin Energy Corporation’s Proxy Statement dated March 20, 2001 for the 2001 annual meeting of stockholders.)** See Note.
	10.36*	2005 Terms and Conditions Governing Non-Qualified Stock Option Award under 1993 Omnibus Stock Incentive Plan, as amended. (Exhibit 10.1 to Wisconsin Energy Corporation’s 12/28/04 Form 8-K.)** See Note.
	10.37*	Wisconsin Gas Company (n/k/a Wisconsin Gas LLC) Supplemental Retirement Income Program. (Exhibit 10.8 to Wisconsin Gas Company’s 12/31/98 Form 10-K (File No. 001-07530).)** See Note.
	10.38*	WICOR, Inc. 1994 Long-Term Performance Plan, as amended. (Exhibit 10.1 to WICOR, Inc.’s 06/30/98 Form 10-Q (File No. 001-07951).)** See Note.

E-5 Wisconsin Energy Corporation

2006 Form 10-K

EXHIBIT INDEX - (Cont’d)

Number	Exhibit
	10.39*	Form of Performance Share Agreement under 1993 Omnibus Stock Incentive Plan, as amended. (Exhibit 10.42 to Wisconsin Energy Corporation’s 12/31/03 Form 10-K.)** See Note.
	10.40*	Wisconsin Energy Corporation Performance Unit Plan. (Exhibit 10.1 to Wisconsin Energy Corporation’s 12/06/04 Form 8-K.)** See Note.
	10.41*	Form of Award of Performance Units under the Wisconsin Energy Corporation Performance Unit Plan. (Exhibit 10.2 to Wisconsin Energy Corporation’s 12/06/04 Form 8-K.)** See Note.
	10.42*	Port Washington I Facility Lease Agreement between Port Washington Generating Station, LLC, as Lessor, and Wisconsin Electric Power Company, as Lessee, dated as of May 28, 2003. (Exhibit 10.7 to Wisconsin Electric Power Company’s 06/30/03 Form 10-Q (File No. 001-01245).)
	10.43*	Port Washington II Facility Lease Agreement between Port Washington Generating Station, LLC, as Lessor, and Wisconsin Electric Power Company, as Lessee, dated as of May 28, 2003. (Exhibit 10.8 to Wisconsin Electric Power Company’s 06/30/03 Form 10-Q (File No. 001-01245).)
	10.44*	Elm Road I Facility Lease Agreement between Elm Road Generating Station Supercritical, LLC, as Lessor, and Wisconsin Electric Power Company, as Lessee, dated as of November 9, 2004. (Exhibit 10.56 to Wisconsin Energy Corporation’s 12/31/04 Form 10-K.)
	10.45*	Elm Road II Facility Lease Agreement between Elm Road Generating Station Supercritical, LLC, as Lessor, and Wisconsin Electric Power Company, as Lessee, dated as of November 9, 2004. (Exhibit 10.57 to Wisconsin Energy Corporation’s 12/31/04 Form 10-K.)
	10.46	Wisconsin Electric Power Company has entered into two power purchase agreements in connection with the sale of Point Beach, both of which are listed below, and has the unilateral option subject to PSCW direction, to select which agreement becomes effective.
	10.46(a)	Point Beach Nuclear Plant Power Purchase Agreement between FPL Energy Point Beach, LLC and Wisconsin Electric Power Company, dated as of December 19, 2006.***
	10.46(b)	Point Beach Nuclear Plant Power Purchase Agreement between FPL Energy Point Beach, LLC and Wisconsin Electric Power Company, dated as of December 19, 2006.***

Note: Two asterisks (**) identify management contracts and executive compensation plans or arrangements required to be filed as exhibits pursuant to Item 15(b) of Form 10-K.

*** Wisconsin Energy has requested confidential treatment of certain portions of these documents pursuant to an application for confidential treatment sent to the SEC. Wisconsin Energy has omitted such portions from this filing and filed them separately with the SEC.

E-6 Wisconsin Energy Corporation

2006 Form 10-K

EXHIBIT INDEX - (Cont’d)

Number	Exhibit
21	Subsidiaries of the registrant
	21.1	Subsidiaries of Wisconsin Energy Corporation.
23	Consents of experts and counsel
	23.1	Deloitte & Touche LLP — Milwaukee, WI, Consent of Independent Registered Public Accounting Firm.
31	Rule 13a-14(a) / 15d-14(a) Certifications
	31.1	Certification Pursuant to Rule 13a-14(a) or 15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	31.2	Certification Pursuant to Rule 13a-14(a) or 15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32	Section 1350 Certifications
	32.1	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	32.2	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

E-7 Wisconsin Energy Corporation

EX-2.1

Exhibit 2.1

CONFIDENTIAL

ASSET SALE AGREEMENT

by and among

WISCONSIN ELECTRIC POWER COMPANY,

FPL ENERGY POINT BEACH, LLC, AS BUYER

and

FPL GROUP CAPITAL, INC., AS BUYER’S PARENT

DECEMBER 19, 2006

TABLE OF CONTENTS

	ARTICLE I
	DEFINITIONS
Section 1.1	Certain Defined Terms	6
Section 1.2	Terms Generally	24
	ARTICLE II
	PURCHASE AND SALE
Section 2.1	Purchase and Sale	25
Section 2.2	Assumption and Exclusion of Liabilities	29
Section 2.3	Purchase Price; Purchase Price Adjustment; Allocation of Purchase Price	34
Section 2.4	Proration	39
Section 2.5	Closing	40
Section 2.6	Closing Deliveries by Seller	40
Section 2.7	Closing Deliveries by Buyer	41
	ARTICLE III
	REPRESENTATIONS AND WARRANTIES OF SELLER
Section 3.1	Organization	42
Section 3.2	Authority Relative to this Agreement	42
Section 3.3	Consents and Approvals; No Violation	43
Section 3.4	Reports	43
Section 3.5	Title and Related Matters	44
Section 3.6	Insurance	44
Section 3.7	Environmental Matters	45
Section 3.8	Labor Matters	46
Section 3.9	ERISA; Benefit Plans	46
Section 3.10	Certain Contracts and Arrangements	47
Section 3.11	Legal Proceedings	48
Section 3.12	Permits	48
Section 3.13	NRC Licenses	48
Section 3.14	Regulation as a Utility	49
Section 3.15	Tax Matters	49
Section 3.16	Qualified Decommissioning Fund	49
Section 3.17	Intellectual Property	51
Section 3.18	Undisclosed Liabilities	51
Section 3.19	Complete Copies	51
Section 3.20	Zoning Classification	52
Section 3.21	Sufficiency of Purchased Assets	52
Section 3.22	Brokerage Fees and Commissions	52
Section 3.23	Disclaimer	52

	ARTICLE IV
	REPRESENTATIONS AND WARRANTIES OF BUYER
Section 4.1	Organization; Qualification	53
Section 4.2	Authority Relative to this Agreement	53
Section 4.3	Consents and Approvals; No Violation	54
Section 4.4	Availability of Funds	54
Section 4.5	Legal Proceedings	55
Section 4.6	WARN Act	55
Section 4.7	Transfer of Assets of Qualified Decommissioning Fund	55
Section 4.8	Foreign Ownership or Control	55
Section 4.9	Permit Qualifications	55
Section 4.10	Brokerage Fees and Commissions	55
	ARTICLE V
	COVENANTS OF THE PARTIES
Section 5.1	Conduct of Business Relating to the Point Beach Assets	56
Section 5.2	Access to Information	59
Section 5.3	Expenses	61
Section 5.4	Further Assurances; Cooperation	62
Section 5.5	Public Statements	63
Section 5.6	Consents and Approvals	64
Section 5.7	Tax Matters	67
Section 5.8	Advice of Changes	69
Section 5.9	Employees	69
Section 5.10	Qualified Decommissioning Fund	75
Section 5.11	Spent Nuclear Fuel Fees	76
Section 5.12	Department of Energy Decontamination and Decommissioning Fees	77
Section 5.13	Cooperation Relating to Insurance and Price-Anderson Act	77
Section 5.14	Release of Seller	78
Section 5.15	Private Letter Rulings	78
Section 5.16	NRC Commitments	79
Section 5.17	Decommissioning	79
Section 5.18	Nuclear Insurance Policies	80
Section 5.19	No Transport or Storage of Waste	81
Section 5.20	Buyer’s Parent Guaranty	81
Section 5.21	Subsequent Sale of Point Beach or Buyer	81
Section 5.22	Intercompany Transactions	81
Section 5.23	Information	82
Section 5.24	Risk of Loss	82
Section 5.25	Monthly Net Capability	83
Section 5.26	Power Purchase Agreement	83

2

	ARTICLE VI
	CONDITIONS TO CLOSING
Section 6.1	Conditions to Obligations of Each Party	83
Section 6.2	Conditions to Obligations of Buyer	84
Section 6.3	Conditions to Obligations of Seller	84
	ARTICLE VII
	SURVIVAL AND INDEMNIFICATION
Section 7.1	Survival	85
Section 7.2	Indemnification	85
Section 7.3	Limitations on Indemnification	86
Section 7.4	Claims for Indemnification	87
Section 7.5	Insurance Offset	88
Section 7.6	Exclusivity	88
	ARTICLE VIII
	TERMINATION
Section 8.1	Termination	89
Section 8.2	Effect of Termination	89
Section 8.3	Waiver	90
	ARTICLE IX
	MISCELLANEOUS PROVISIONS
Section 9.1	Notices	90
Section 9.2	Acknowledgement; Independent Due Diligence	91
Section 9.3	Governing Law	91
Section 9.4	Jurisdiction; WAIVER OF JURY TRIAL	92
Section 9.5	Specific Performance	92
Section 9.6	Change in Law	93
Section 9.7	No Joint Venture	93
Section 9.8	Bulk Sales Laws	93
Section 9.9	Entire Agreement	93
Section 9.10	Schedules and Exhibits	93
Section 9.11	Severability	93
Section 9.12	Succession and Assignment; Third Party Beneficiaries	93
Section 9.13	Amendment and Modification	94
Section 9.14	Counterparts	94

EXHIBITS

Exhibit A	Transitional Advisory Support Services Agreement
Exhibit B	Interim Operating Agreement

3

Exhibit C1	Power Purchase Agreement (16/17 Year Option)
Exhibit C2	Power Purchase Agreement (Life of License Option)
Exhibit D	Buyer’s Parent Guaranty
Exhibit E	Form of Assumption Agreement
Exhibit F	Form of Bill of Sale and Assignment
Exhibit G	Form of Deed
Exhibit H	Form of Generation Development Option
Exhibit I	Form of Seller’s Right of First Refusal
Exhibit J	Form of Seller’s FIRPTA Certificate
Exhibit K	Form of Title Commitment

SCHEDULES

Schedule 2.1(a)(i)	Land Comprising the Site
Schedule 2.1(a)(iii)	Tangible Personal Property
Schedule 2.1(a)(v)	Transferable Permits
Schedule 2.1(a)(xiii)	Radio Licenses
Schedule 2.1(a)(xvii)	Emergency Warning Assets
Schedule 2.1(b)(xiv)	Excluded Agreements
Schedule 2.3(b)(i)(5)	Low Level Waste Disposal
Schedule 5.4(f)	Buyer’s Thermal Power Uprate Project
Schedule 5.9(a)(i)	Employees to be Offered Employment by Buyer
Seller Disclosure Schedule	Seller Representations and Warranties
Buyer Disclosure Schedule	Buyer Representations and Warranties

4

ASSET SALE AGREEMENT

This Asset Sale Agreement, dated as of December 19, 2006 (this “Agreement”), by and between Wisconsin Electric Power Company, a Wisconsin corporation (“Seller”) and wholly owned subsidiary of Wisconsin Energy Corporation, a Wisconsin corporation, FPL Energy Point Beach, LLC, a Wisconsin limited liability company (“Buyer”), and FPL Group Capital, Inc., a Florida corporation and the parent company of Buyer (“Buyer’s Parent”). Seller, Buyer and Buyer’s Parent are referred to individually as a “Party” and collectively as the “Parties.”

W I T N E S S E T H:

WHEREAS, Seller owns the Point Beach Nuclear Plant (“Point Beach”), located near Two Rivers, Wisconsin, and certain facilities and other assets associated therewith and ancillary thereto, in accordance with the NRC Licenses;

WHEREAS, as agent for Seller, Nuclear Management Company, LLC, a Wisconsin limited liability company (“NMC”), has operational responsibility with respect to Point Beach pursuant to (i) a Nuclear Power Plant Operating Services Agreement, dated as of November 23, 1999, by and between Seller and NMC (the “NPPOSA”) and (ii) the NRC Licenses;

WHEREAS, Seller desires to sell to Buyer, and Buyer desires to purchase from Seller, all of Seller’s right, title and interest in and to the Point Beach Assets, upon the terms and subject to the conditions set forth herein;

WHEREAS, Seller desires to assign to Buyer, and Buyer desires to assume from Seller, the Assumed Liabilities, upon the terms and subject to the conditions set forth herein;

WHEREAS, concurrently with the execution of this Agreement, Seller and Buyer have executed the Transitional Advisory Support Services Agreement, the Interim Operating Agreement and the Power Purchase Agreement, each attached hereto as Exhibit A, Exhibit B and Exhibit C, respectively;

WHEREAS, the Parties desire that Buyer’s Parent support certain of the obligations of Buyer hereunder; and

WHEREAS, concurrently with the execution of this Agreement, Buyer’s Parent has executed the Buyer’s Parent Guaranty, attached hereto as Exhibit D.

NOW, THEREFORE, in consideration of the premises and the mutual representations, warranties, covenants and agreements set forth herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties, intending to be legally bound hereby, agree as follows:

5

ARTICLE I

DEFINITIONS

Section 1.1 Certain Defined Terms. As used in this Agreement, the following terms have the meanings specified in this Section 1.1.

“Additional Requested Rulings” has the meaning set forth in Section 5.15.

“Affiliate” has the meaning set forth in Rule 12b-2 under the Exchange Act.

“Agreement” has the meaning set forth in the preamble.

“Allocation” has the meaning set forth in Section 2.3(c)(ii).

“Ancillary Agreements” means the Bill of Sale and Assignment, the Assumption Agreement, the Buyer’s Parent Guaranty, the Deed, Seller’s Right of First Refusal, the Generation Development Option, the Transitional Advisory Support Services Agreement, the Interim Operating Agreement and the Power Purchase Agreement.

“ANI” means American Nuclear Insurers.

“Antitrust Agency” has the meaning set forth in Section 5.6(a).

“Assumed Liabilities” has the meaning set forth in Section 2.2(a).

“Assumption Agreement” means the Assumption Agreement between Seller and Buyer, in the form of Exhibit E hereto.

“ATC” means American Transmission Company, LLC, a Wisconsin limited liability company.

“ATC Easement” means the Substation, Transmission Line and Access Easements, granted by Seller to ATC as of January 1, 2001.

“Atomic Energy Act” means the Atomic Energy Act of 1954.

“Basic Requested Rulings” has the meaning set forth in Section 5.15.

“Basket” has the meaning set forth in Section 7.3(b).

“Benefit Plans” has the meaning set forth in Section 3.9(a).

“Bill of Sale and Assignment” means the Bill of Sale and Assignment, in the form of Exhibit F hereto.

“Business Books and Records” has the meaning set forth in Section 2.1(a)(vi).

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“Business Day” means any day other than Saturday, Sunday and any day on which banking institutions in the State of Wisconsin are authorized by Law or other Governmental Order to close.

“Buyer” has the meaning set forth in the preamble.

“Buyer Benefit Plans” has the meaning set forth in Section 5.9(b).

“Buyer Disclosure Schedule” means the Buyer Disclosure Schedule delivered by Buyer to Seller on the date hereof.

“Buyer Indemnified Party” means Buyer and each of Buyer’s officers, directors, employees, agents, representatives and Affiliates.

“Buyer Material Adverse Effect” has the meaning set forth in Section 4.3(a).

“Buyer’s Parent” has the meaning set forth in the preamble.

“Buyer’s Parent Guaranty” means the guaranty executed by Buyer’s Parent for the benefit of Seller, attached hereto as Exhibit D.

“Buyer’s Required Regulatory Approvals” means, collectively, the declarations, filings and registrations with, notices to, and authorizations, consents and approvals of all Governmental Authorities necessary for Buyer to execute and deliver this Agreement and the Ancillary Agreements, as applicable, and for Buyer to consummate the transactions contemplated hereby and thereby and listed in Section 4.3(b) of the Buyer Disclosure Schedule.

“Byproduct Material” means any radioactive material (other than Special Nuclear Material) yielded in, or made radioactive by, exposure to the radiation incident to the process of producing or utilizing Special Nuclear Material.

“Capital Budget” means the budget established for capital projects for the Point Beach Assets as set forth on Section 5.1(a) of the Seller Disclosure Schedule, as such budget may be amended by agreement of the Parties.

“Capital Expenditures” has the meaning set forth in Section 2.3(b)(i)(4).

“Claim” has the meaning set forth in Section 7.4(a).

“Claim Notice” means written notification of a Claim, specifying the nature of and basis for such Claim, together with the amount or, if not then reasonably determinable, the estimated amount, determined in good faith, of the Loss arising from such Claim, and such other information as the Indemnifying Party shall reasonably request.

“Closing” has the meaning set forth in Section 2.5.

“Closing Date” has the meaning set forth in Section 2.5.

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“Closing Payment” has the meaning set forth in Section 2.3(b)(ii).

“COBRA” means the Consolidated Omnibus Budget Reconciliation Act of 1985 and the rules and regulations promulgated thereunder.

“Code” means the Internal Revenue Code of 1986.

“Collective Bargaining Agreements” means (a) that certain Agreement between Seller, Wisconsin Gas Company, LLC and Local Union No. 2150, IBEW, AFL-CIO, dated September 17, 2004 to August 15, 2007, (b) that certain Agreement between NMC and Local Union No. 2150 IBEW, AFL-CIO – Point Beach Nuclear Plant Planners, Schedulers, and QC Inspectors, dated April 11, 2006 to August 1, 2009, (c) that certain Agreement between NMC and Local Union 2150 IBEW, AFL-CIO – Training, RP and Chemistry Exempt Bargaining Units, dated March 24, 2006 to June 1, 2009, and (d) that certain Agreement between NMC and Local Union 2150 IBEW, AFL-CIO, dated August 25, 2004 to July 31, 2007, or any amendment to or replacement of any of (a) through (d), provided that such amendment or replacement has been negotiated, executed and delivered in accordance with the final provision of Section 5.1(a) of this Agreement.

“Confidentiality Agreement” means the confidentiality agreement, dated July 5, 2006, between Concentric Energy Advisors, Inc. and FPL Energy, LLC.

“CT” means the existing No. 2 fuel oil-fired combustion turbine generator located at the Facilities site.

“Decommission” or “Decommissioning” means to completely retire and remove the Facilities from service and to restore the Site, as well as any planning and administrative activities incidental thereto, including but not limited to (a) the dismantlement and removal of the Facilities and any reduction or removal of radioactivity at the Site to a level that permits termination of the NRC Licenses and unrestricted use of the Site, (b) all other activities necessary for the retirement, dismantlement, decontamination and/or storage of the Facilities to comply with all applicable Laws, including the applicable requirements of the Environmental Protection Agency, Atomic Energy Act, the NRC’s rules, regulations, orders and pronouncements thereunder, and the orders of the PSCW and (c) once the Site is no longer utilized either for power generation of any kind or for the storage of Spent Nuclear Fuel or other Nuclear Material, restoration of the Site to an appropriately graded and vegetated condition, including the replacement of locally-indigenous trees, plants, shrubs, and grasses to conform substantially with the surrounding environs, as appropriate for the intended use of the Site and property thereon. Site restoration shall include removal and disposal of components and materials meeting NRC release criteria, demolition and removal of decontaminated structures to an approximate depth of three feet below grade, and backfilling the Site with clean material, grading and landscaping. The Parties understand and agree that SAFSTOR in accordance with NRC regulations and guidance is a permissible method of decommissioning, provided the decommissioning is completed in accordance with NRC regulations.

“Decommissioning Target” means either (i) in the event that the Additional Requested Rulings described in Section 5.15(b) are obtained prior to the

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Closing Date, the greater of (w) an amount equal to Three Hundred Sixty Million Dollars ($360,000,000) which amount shall be increased by five and a half percent (5.5%) per annum, which shall be compounded daily on and after August 31, 2007 through and including the Closing Date, (x) the amount specified in the Additional Requested Rulings, (y) the minimum amount sufficient to comply with all NRC regulations, orders or directives regarding the adequacy of Decommissioning funding or (z) the amount required by the PSCW, which in no event shall be greater than the amount specified in the immediately following clause (ii); or (ii) in the event that the Additional Requested Rulings described in Section 5.15(b) are not obtained prior to the Closing Date, the fair market value of all of the assets in Seller’s Qualified Decommissioning Fund on the Closing Date.

“Deed” means a special warranty deed conveying the Real Property to Buyer, in the form of Exhibit G hereto.

“Department of Energy” means the United States Department of Energy.

“Department of Energy Claim” means the action previously commenced by Seller for damages through December 31, 2005, resulting from the Department of Energy’s failure to commence the removal, transportation, acceptance or any delay in accepting Spent Nuclear Fuel for disposal pursuant to the Standard Spent Fuel Disposal Contract and the Nuclear Waste Policy Act.

“Department of Energy Decommissioning and Decontamination Fees” means all fees related to the Department of Energy’s Special Assessment of utilities for the Uranium Enrichment Decontamination and Decommissioning Funds pursuant to Sections 1801, 1802 and 1803 of the Atomic Energy Act and the Department of Energy’s implementing regulations at 10 C.F.R. Part 766, applicable to separative work units purchased from the Department of Energy in order to decontaminate and decommission the Department of Energy’s gaseous diffusion enrichment facilities.

“Department of Energy Post-Closing Claim” has the meaning set forth in Section 5.11(b).

“Department of Energy Potential Claim” means a potential action to be commenced by Seller, in its sole discretion, for damages resulting from the Department of Energy’s failure to commence the removal, transportation, acceptance or any delay in accepting Spent Nuclear Fuel for disposal pursuant to the Standard Spent Fuel Disposal Contract and the Nuclear Waste Policy Act, and attributable to the period commencing on January 1, 2006 and ending on the Closing Date.

“Department of Justice” means the United States Department of Justice.

“Dominion Lease” means the lease, dated February 20, 2006, between Dominion Energy Kewaunee, Inc., a Wisconsin corporation, and NMC, as agent for Seller, with respect to Seller’s backup emergency operations facility and joint public information center.

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“Downgrade Event” means any period of time when Buyer’s Parent’s unsecured, senior long-term debt obligations (not supported by third-party credit enhancements) are rated below Baa3 by Moody’s Investment Services, Inc. or rated below BBB- by Standard & Poor’s Rating Group.

“Easements” means, with respect to the Point Beach Assets, the easements, licenses and access rights granted by the appropriate party by or pursuant to the Generation-Transmission Interconnection Agreement, the Deed, the ATC Easement, the Generation Development Option, or the Farmland Leases, including easements authorizing access, use, maintenance, construction, repair, replacement and other activities by the parties thereto.

“Encumbrances” means any mortgages, pledges, liens, security interests, conditional and installment sale agreements, activity and use limitations, conservation easements, deed restrictions, easements, encumbrances and charges of any kind.

“Energy Reorganization Act” means the Energy Reorganization Act of 1974.

“ENTOMB” means a method of decommissioning in which radioactive contaminants are encased in a structurally long-lived material, and such entombment structure is appropriately maintained and continued surveillance is carried out until the radioactivity decays to a level permitting decommissioning and ultimate unrestricted release of the property.

“Environment” means all soil, real property, air, water (including surface waters, streams, ponds, drainage basins and wetlands), groundwater, water body sediments, drinking water supply, stream sediments or land, including land surface or subsurface strata, including all fish, plant, wildlife, and other biota and any other environmental medium or natural resource.

“Environmental Claim” means any and all written claims alleging potential Liability, administrative or judicial actions, suits, orders, liens, notices alleging Liability, notices of violation, investigations which have been disclosed in writing to Seller or NMC, complaints, requests for information relating to the Release or threatened Release into the Environment of Hazardous Substances, proceedings, or other written communication, whether criminal or civil, pursuant to or relating to any applicable Environmental Law by any Governmental Authority based upon, alleging, asserting, or claiming any actual or potential (a) violation of, or Liability under any Environmental Law, (b) violation of any Environmental Permit, or (c) Liability for investigatory costs, cleanup costs, removal costs, remedial costs, response costs, monitoring costs, natural resource damages, property damage, personal injury, fines, or penalties arising out of, based on, resulting from, or related to the presence, Release, or threatened Release into the Environment of any Hazardous Substances at any location related to the Point Beach Assets, including, but not limited to, any off-Site location to which Hazardous Substances, or materials containing Hazardous Substances, were sent.

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“Environmental Clean-up Site” means any location which is listed or formally proposed for listing on the National Priorities List, the Comprehensive Environmental Response, Compensation and Liability Act Information System, or on any similar state list of sites requiring investigation or cleanup, or which is the subject of any action, suit, proceeding or investigation which has been disclosed in writing to Seller for any alleged violation of any Environmental Law, or at which there has been a Release, or, to the Knowledge of Seller, a threatened Release, of a Hazardous Substance.

“Environmental Laws” means all Laws regarding pollution or protection of the Environment, the conservation and management of land, natural resources and wildlife or human health or the Occupational Safety and Health Act (only as it relates to Hazardous Substances), including Laws regarding Releases or threatened Releases of Hazardous Substances or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, Release, transport, disposal or handling of Hazardous Substances. “Environmental Laws” include the Comprehensive Environmental Response, Compensation, and Liability Act (42 U.S.C. §§ 9601 et seq.), the Hazardous Materials Transportation Act (49 U.S.C. §§ 1801 et seq.), the Resource Conservation and Recovery Act (42 U.S.C. §§ 6901 et seq.), the Federal Water Pollution Control Act (33 U.S.C. §§ 1251 et seq.), the Clean Air Act (42 U.S.C. §§ 7401 et seq.), the Toxic Substances Control Act (15 U.S.C. §§ 2601 et seq.), the Oil Pollution Act (33 U.S.C. §§ 2701 et seq.), the Emergency Planning and Community Right-to-Know Act (42 U.S.C. §§ 11001 et seq.), the Occupational Safety and Health Act (29 U.S.C. §§ 651 et seq.) only as it relates to Hazardous Substances. Notwithstanding the foregoing, “Environmental Laws” do not include Nuclear Laws.

“Environmental Permit” means any federal, state or local permits, licenses, approvals, consents, registrations or authorizations required by any Governmental Authority under or in connection with any Environmental Law including any and all orders, consent orders or binding agreements issued or entered into by a Governmental Authority under any applicable Environmental Law.

“ERISA” means the Employee Retirement Income Security Act of 1974 and the applicable rules and regulations promulgated thereunder.

“ERISA Affiliate” has the meaning set forth in Section 2.2(b)(vii).

“Estimated Adjustments” has the meaning set forth in Section 2.3(b)(ii).

“Estimated Allocation” has the meaning set forth in Section 2.3(c)(i).

“Estimated Closing Statement” has the meaning set forth in Section 2.3(b)(ii).

“Excess Qualified Decommissioning Fund Assets” has the meaning set forth in Section 5.10(b).

“Exchange Act” means the Securities Exchange Act of 1934, including the rules and regulations promulgated thereunder.

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“Excluded Assets” has the meaning set forth in Section 2.1(b).

“Excluded Liabilities” has the meaning set forth in Section 2.2(b).

“Exempt Wholesale Generator” means an exempt wholesale generator as defined in the FERC regulations at 18 C.F.R. § 366.

“Facilities” means the plant, facilities, equipment, supplies and improvements which are included in the Point Beach Assets.

“Farmland Leases” means the leases between Seller and certain local farmers for such farmers’ use of defined portions of the Site.

“FCC” means the United States Federal Communications Commission.

“Federal Power Act” means the Federal Power Act.

“Federal Trade Commission” means the United States Federal Trade Commission.

“FERC” means the United States Federal Energy Regulatory Commission.

“Final Determination” has the meaning set forth in section 1313(a) of the Code (or any similar provision of state or local law).

“FIRPTA Certificate” has the meaning set forth in Section 2.6(h).

“Fuel Contracts” has the meaning set forth in Section 3.10(a)(ii).

“GAAP” means United States generally accepted accounting principles.

“Generation Development Option” means the option granted to Seller by Buyer, in the form of Exhibit H hereto.

“Generation-Transmission Interconnection Agreement” means the Generation-Transmission Interconnection Agreement, dated as of November 1, 2000, between ATC and Seller, as revised by the Second Revision issued on January 2, 2002.

“Governmental Authority” means any United States federal, state or local government, or governmental, regulatory, or administrative authority, agency or commission or any court, tribunal, or judicial or arbitral body.

“Governmental Order” means any order, writ, judgment, injunction, decree, stipulation, determination or award entered by or with any Governmental Authority.

“Greater Than Class C Waste” means radioactive waste that contains a radionuclide whose concentration exceeds the value in Table 1 or Table 2 of 10 C.F.R. § 61.55, and therefore is currently not generally acceptable for disposal at existing (near surface) low level radioactive waste disposal facilities.

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“Hazardous Substances” means (a) any petroleum, asbestos, and urea formaldehyde foam insulation and transformers or other equipment that contains polychlorinated biphenyls; and (b) any chemicals, materials or substances defined as or included in the definition of “hazardous substances,” “hazardous wastes,” “hazardous materials,” “hazardous constituents,” “restricted hazardous materials,” “extremely hazardous substances,” “toxic substances,” “contaminants,” “pollutants,” “toxic pollutants” or “hazardous air pollutants” or words of similar meaning and regulatory effect under any applicable Environmental Law; excluding, however, any Nuclear Material.

“High Level Waste” means (a) irradiated nuclear reactor fuel, (b) liquid wastes resulting from the operation of the first cycle solvent extraction system, or its equivalent, and the concentrated wastes from subsequent extraction cycles, or their equivalent, in a facility for reprocessing irradiated reactor fuel, (c) solids into which such liquid wastes have been converted, or (d) any other material containing radioactive nuclides in concentrations or quantities that exceed NRC requirements for classification as Low Level Waste.

“High Level Waste Repository” means a facility which is designed, constructed and operated by or on behalf of the Department of Energy for the storage and disposal of Spent Nuclear Fuel in accordance with the requirements set forth in the Nuclear Waste Policy Act or subsequent legislation.

“HSR Act” means the Hart-Scott-Rodino Antitrust Improvements Act of 1976.

“Income Tax” means any Tax (a) based upon, measured by or calculated with respect to net income, profits or receipts (including capital gains Taxes and minimum Taxes), or (b) based upon, measured by or calculated with respect to multiple bases (including corporate franchise Taxes) if one or more of the bases on which such Tax may be based, measured by or calculated with respect to, is described in clause (a), in each case together with any interest, penalties or additions to such Tax.

“Indemnified Party” means any Person asserting a claim for indemnification under any provision of Article VII.

“Indemnifying Party” means any Person against whom a claim for indemnification is being asserted under any provision of Article VII.

“Independent Accounting Firm” means an independent accounting firm of national reputation that has not provided services to Seller, Buyer or their respective Affiliates during the two (2) years prior to its engagement pursuant to this Agreement and is mutually appointed by Seller and Buyer.

“Independent Appraiser” means such independent engineering firm or appraiser of national reputation as is mutually appointed by Seller and Buyer.

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“Independent Contractors” means all independent contractors providing security-related, maintenance and other services at the Facilities pursuant to the contracts with Seller or NMC that are listed on Section 3.8(c) of the Seller Disclosure Schedule.

“Initial Transfer Amount” has the meaning set forth in Section 5.9(e)(ii).

“Inland Tower” means the tower located off-Site (approximately eight miles inland) that comprises one of the three towers in Seller’s meteorological monitoring system.

“Intellectual Property” means all intellectual property rights owned or licensed by Seller, including patents and patent rights, trademarks and trademark rights, service marks and service mark rights, trade names, copyrights and copyright rights, and trade secrets and all pending applications and registrations for any of the foregoing and rights in software, firmware, specifications, designs, drawings, process technology, data, technical information and other proprietary information owned or licensed by Seller in the operation of the Point Beach Assets as presently conducted.

“Interim Operating Agreement” means the Interim Operating Agreement attached hereto as Exhibit B, between Seller and Buyer.

“IRS” means the United States Internal Revenue Service.

“Knowledge” means, with respect to any Person, the actual knowledge (after reasonable inquiry, including, in the case of Seller, reasonable inquiry of the appropriate officers and managers of NMC) of such Person or its officers or managers (and, in the case of Buyer, also includes the officers or managers of Buyer’s Parent) who are charged with responsibility for the particular function relating to the specific matter of the inquiry.

“Law” means all laws, rules, regulations, codes, statutes, ordinances, treaties and Governmental Orders.

“Liability” means any liability or obligation (whether known or unknown, whether asserted or unasserted, whether absolute or contingent, whether accrued or unaccrued, whether liquidated or unliquidated, and whether due or to become due) other than any liability for Taxes.

“Loss” means any and all damages, fines, penalties, deficiencies, losses and expenses (including interest, court costs, reasonable fees of attorneys, accountants and other experts or other reasonable expenses of litigation or other proceedings or of any claim, default or assessment and specifically excluding any consequential damages or loss of profits).

“Low Level Waste” means radioactive material that (a) is neither Spent Nuclear Fuel, nor byproduct material (as defined in Section 11e.(2) of the Atomic Energy Act) and (b) the NRC, consistent with existing Law and in accordance with clause (a), classifies as low-level radioactive waste.

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“Material Adverse Effect” means any change in, or effect on, the business, financial condition or operations of the Point Beach Assets, taken as a whole, that is or likely would be materially adverse to the long-term value of the Point Beach Assets, taken as a whole, (i) on or prior to the Closing Date or (ii) likely would occur within one (1) year following the Closing Date. Notwithstanding the foregoing, a “Material Adverse Effect” shall not include (A) any change (or changes taken together) generally affecting the international, national, regional or local electric industry, the nuclear power industry, including changes in local wholesale or retail markets for electric power or Nuclear Fuel, or national, regional or local electric transmission systems or operations thereof, (B) any change (or changes taken together) generally applicable to United States or global economic conditions, (C) any change in any Law generally applicable to similarly situated Persons, (D) any change in the application or enforcement of any Law by any Governmental Authority with respect to the Facilities or to similarly situated Persons, unless such change in application or enforcement prohibits consummation of the transactions contemplated by this Agreement, (E) any changes resulting from or associated with acts of war or terrorism or changes imposed by a Governmental Authority associated with additional security to address concerns of terrorism, (F) any change or effect resulting from the execution of this Agreement or the Ancillary Agreements, the consummation of the transactions contemplated hereby or thereby or the public announcement hereof, (G) any change or effect resulting from a breach by Buyer or any of its Affiliates of the Transitional Advisory Support Services Agreement or the Interim Operating Agreement, (H) any change or effect resulting from the failure of Buyer to consent to any of the actions proscribed by Section 5.1 or (I) any change or effect resulting from action or inaction by a Governmental Authority, including with respect to an independent system operator or retail access in Wisconsin.

“MPSC” means Michigan Public Service Commission.

“NEIL” means Nuclear Electric Insurance Limited.

“NMC” has the meaning set forth in the recitals.

“NMC Assets” means all tangible assets, if any, used primarily in the maintenance or operation of Point Beach and owned by NMC.

“NMC Intellectual Property” means the intellectual property rights owned or licensed by NMC for the software set forth Section 5.4(d) of the Seller Disclosure Schedule.

“NMC Bargaining Unit Employee” means an employee of NMC or an Affiliate of NMC who receives an IRS Form W-2 from NMC or an Affiliate of NMC, who is employed as of the Closing Date, who is employed at Point Beach or whose work responsibilities involve principally the operation of any of the Point Beach Assets, and who is covered by a Collective Bargaining Agreement. “NMC Bargaining Unit Employees” shall include such employees who are actively at work or those employees who are absent from active service due to illness or authorized leave of absence and those on active military duty.

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“NMC Bargaining Unit Transferred Employee” has the meaning set forth in Section 5.9(a)(i).

“Non-Bargaining Unit Employee” means an employee of Seller, NMC or an Affiliate of Seller or NMC, who receives an IRS Form W-2 from Seller, NMC or an Affiliate of Seller or NMC, who is employed as of the Closing Date, who is employed at Point Beach or whose work responsibilities involve principally the operation of any of the Point Beach Assets, other than any employee who is covered by a Collective Bargaining Agreement. “Non-Bargaining Unit Employees” shall include such employees who are actively at work or those employees who are absent from active service due to illness or authorized leave of absence and those on active military duty.

“Non-Bargaining Unit Transferred Employee” has the meaning set forth in Section 5.9(a)(i).

“Non-Nuclear Fuel Inventories” means materials, spare parts, consumable supplies, diesel and other fuel supplies (other than Nuclear Fuel) and chemical and gas inventories relating to the operation of the Facilities located at, or in transit to, the Facilities and spare parts located off-Site.

“Non-Material Contracts” means those contracts, agreements, purchase orders, personal property leases or other commitments incidental to the operation or maintenance of the Point Beach Assets that have been entered into by Seller in the ordinary course of business prior to the Closing which either (i) are terminable, without penalty or any other termination related Liability, upon notice of 90 days or less by Seller or (ii) require the payment or delivery of goods or services with a value of less than Two Hundred Fifty Thousand Dollars ($250,000) per annum in the case of any individual contract, agreement, lease or other commitment.

“NPPOSA” has the meaning set forth in the recitals.

“NRC” means the United States Nuclear Regulatory Commission.

“NRC Commitments” means all written regulatory commitments identified as such by Seller to the NRC.

“NRC Licenses” means Operating License No. DPR-24 and Operating License No. DPR-27, including Technical Specifications and amendments thereto as issued from time to time by the NRC, on the basis of which Seller is authorized to possess the Facilities and Nuclear Material and NMC is authorized to use, possess and operate the Facilities and Nuclear Material prior to the Closing Date, and on the basis of which Buyer will be authorized to use, possess and operate the Facilities and Nuclear Material after the Closing Date and, pursuant to the Interim Operating Agreement, prior to the Closing Date.

“Nuclear Fuel” means all nuclear fuel assemblies in the Facilities’ reactors on the Closing Date and any irradiated fuel assemblies that have been temporarily removed from the Facilities’ reactors as of the Closing Date and are capable of

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reinsertion into the Facilities’ reactors without modification or additional cost, and all unirradiated fuel assemblies awaiting insertion into the Facilities’ reactors, as well as all nuclear fuel constituents (including uranium in any form and separative work units) in any stage of the fuel cycle that are in process of production, conversion, enrichment or fabrication for use in the Facilities and which are owned by Seller, or in which Seller has any right, title or interest, on the Closing Date.

“Nuclear Fuel Inventories” means Nuclear Fuel or alternative fuel inventories relating to the operation of the Facilities located at, or in transit to, or being held by third parties on behalf of, the Facilities and any related spare parts located off-Site.

“Nuclear Insurance Policies” means all nuclear insurance policies carried by or for the benefit of Seller with respect to the ownership, operation or maintenance of the Facilities, including all nuclear liability, property damage, decontamination, decommissioning and business interruption policies in respect thereof. Without limiting the generality of the foregoing, the term “Nuclear Insurance Policies” includes all policies issued or administered by ANI or NEIL.

“Nuclear Laws” means all Laws relating to the regulation of nuclear power plants, Source Material, Byproduct Material and Special Nuclear Materials; the regulation of Low Level Waste and Spent Nuclear Fuel; the transportation and storage of Nuclear Materials; the regulation of Safeguards Information; the regulation of Nuclear Fuel; the enrichment of uranium; the disposal and storage of Spent Nuclear Fuel; contracts for and payments into the Nuclear Waste Fund; and as applicable, the antitrust laws and the Federal Trade Commission Act to specified activities or proposed activities of certain licensees of commercial nuclear reactors, but shall not include Environmental Laws. “Nuclear Laws” include the Atomic Energy Act of 1954 (42 U.S.C. §§ 2011 et seq.), the Price-Anderson Act (Section 170 of the Atomic Energy Act of 1954); the Energy Reorganization Act of 1974 (42 U.S.C. §§ 5801 et seq.); Convention on the Physical Protection of Nuclear Material Implementation Act of 1982 (Public Law 97-351; 96 Stat. 1663); the Foreign Assistance Act of 1961 (22 U.S.C. § 2429 et seq.); the Nuclear Non-Proliferation Act of 1978 (22 U.S.C. § 3201); the Low-Level Radioactive Waste Policy Act (42 U.S.C. §§ 2021b et seq.); the Nuclear Waste Policy Act (42 U.S.C. §§ 10101 et seq.); the Low-Level Radioactive Waste Policy Amendments Act of 1985 (42 U.S.C. §§ 2021d, 471); the Energy Policy Act of 1992 (4 U.S.C. §§ 13201 et seq.); the Energy Policy Act of 2005; the provisions of 10 CFR § 73.21, and any state or local Law analogous to the foregoing.

“Nuclear Material” means Source Material, Special Nuclear Material, Low Level Waste, Greater Than Class C Waste, High Level Waste, Byproduct Material and Spent Nuclear Fuel.

“Nuclear Waste Fund” means the fund established by Section 302(c) of the Nuclear Waste Policy Act in which the Spent Nuclear Fuel Fees to be used for the design, construction and operation of a High Level Waste Repository and other activities related to the storage and disposal of Spent Nuclear Fuel is deposited.

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“Nuclear Waste Policy Act” means the Nuclear Waste Policy Act of 1982.

“Observers” has the meaning set forth in Section 5.1(c).

“Owned Intellectual Property” has the meaning set forth in Section 3.17.

“Party” has the meaning set forth in the preamble.

“PBGC” means the Pension Benefit Guaranty Corporation established by ERISA.

“Pension Plan Employees” has the meaning set forth in Section 5.9(e)(i).

“Permits” has the meaning set forth in Section 3.12(a).

“Permitted Encumbrances” means: (i) the Easements; (ii) those exceptions to title to the Point Beach Assets listed on Section 3.5(d) of the Seller Disclosure Schedule with respect to Real Property; (iii) statutory liens for Taxes or other governmental charges or assessments not yet due or delinquent or the validity of which are being contested in good faith; (iv) mechanics’, materialmen’s, carriers’, workers’, repairers’ and other similar liens arising or incurred in the ordinary course of business which do not individually or in the aggregate exceed $1,000,000; (v) zoning, entitlement, conservation restriction and other land use and environmental regulations imposed by Governmental Authorities; (vi) easements, restrictions, covenants and other matters of record, and the covenants and restrictions set forth in this Agreement or in any of the Ancillary Agreements; and (vii) such other liens, imperfections in or failures of title, easements, leases, licenses, restrictions, activity and use limitations, conservation easements, encumbrances and encroachments, as do not, individually or in the aggregate, materially detract from the value of the Point Beach Assets as such assets are currently used or materially interfere with the present use or operation of the Point Beach Assets or have a Material Adverse Effect.

“Permitted Hire Date” has the meaning set forth in Section 5.9(c).

“Person” means any individual, partnership, limited liability company, joint venture, corporation, trust, unincorporated organization, association, or governmental entity or any political subdivision, department or agency thereof.

“Plans” has the meaning set forth in Section 2.2(b)(vii).

“Point Beach” has the meaning set forth in the recitals.

“Point Beach Assets” has the meaning set forth in Section 2.1(a).

“Point Beach Defined Benefit Plan” has the meaning set forth in Section 5.9(e)(i).

“Point Beach Retiree Coverages” has the meaning set forth in Section 5.9(b).

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“Post-Closing Adjustment” has the meaning set forth in Section 2.3(b)(iii).

“Post-Closing Decommissioning Trust Agreement” means the decommissioning trust agreement between Buyer and the Trustee pursuant to which any assets of the Qualified Decommissioning Fund to be transferred by Seller at Closing pursuant to Section 5.10 hereof will be held in trust.

“Post-Closing Statement” has the meaning set forth in Section 2.3(b)(iii).

“Power Purchase Agreement” means the Power Purchase Agreement between Seller and Buyer attached as Exhibit C1 or Exhibit C2 hereto, as applicable.

“Price-Anderson Act” means Section 170 of the Atomic Energy Act and related provisions of Section 11 of the Atomic Energy Act.

“Proposed Post-Closing Adjustment” has the meaning set forth in Section 2.3(b)(iii).

“Proprietary Information” (i) with respect to information provided by Seller to Buyer, has the meaning set forth in the Confidentiality Agreement and (ii) with respect to information provided by Buyer to Seller, means information relating to the financing or operation and maintenance, actual or proposed, of the Point Beach Assets and any financial, operational or other information concerning Buyer or its Affiliates or their respective assets and properties furnished by Buyer or its Representatives to Seller or its Representatives, whether furnished before or after the date hereof, whether oral or written, and regardless of the manner in which it is furnished; but does not include information which (a) is or becomes generally available to the public other than as a result of a disclosure by Seller or its Representatives, (b) was available to Seller or its Representatives on a non-confidential basis prior to its disclosure by Buyer or its Representatives or (c) becomes available on a non-confidential basis from a person other than Buyer or its Representatives who is not otherwise bound by a confidentiality agreement with Buyer or its Representatives, or is otherwise not under any obligation to Buyer or its Representatives not to transmit the information to Seller or its Representatives.

“Prudent Utility Practices” means any of the practices, methods and activities generally accepted in the electric utility industry in the United States of America as good practices applicable to nuclear generating facilities of similar design, size and capacity or any of the practices, methods or activities which, in the exercise of reasonable judgment by a prudent nuclear operator in light of the facts known at the time the decision was made (other than the fact that such operator is in the process of selling the Facilities), could have been expected to accomplish the desired result at a reasonable cost consistent with good business practices, reliability, safety, expedition and applicable Laws including Nuclear Laws and Laws relating to the protection of public health and safety. “Prudent Utility Practices” is not intended to be limited to the optimal practices, methods or acts to the exclusion of all others, but rather to be practices, methods or acts generally accepted in the electric utility industry in the United States.

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“PSCW” means the Public Service Commission of Wisconsin.

“Purchase Price” has the meaning set forth in Section 2.3(a).

“Qualified Decommissioning Fund” means, with respect to Seller, Seller’s external trust funds for purposes of Decommissioning that meet the requirements of Code Section 468A and Treas. Reg. § 1.468A-5 and are maintained by Seller with respect to the Facilities prior to Closing pursuant to Seller’s Decommissioning Trust Agreement and, with respect to Buyer, Buyer’s external trust funds for purposes of Decommissioning that meet the requirements of Code Section 468A and Treas. Reg. § 1.468A-6(b)(2) and are maintained by Buyer after the Closing pursuant to the Post-Closing Decommissioning Trust Agreement.

“Real Property” has the meaning set forth in Section 2.1(a)(i).

“Release” means any actual or, to the Knowledge of Seller, threatened spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, dumping or disposing of a Hazardous Substance into the Environment or within any building, structure, facility or fixture; provided, however, that “Release” shall not include any release that is permissible under applicable Environmental Laws or Environmental Permits.

“Remediation” means action of any kind required by any applicable Law or order of a Governmental Authority to address a Release, the threat of a Release or the presence of Hazardous Substances at the Site or an off-Site location including any or all of the following activities to the extent they relate to or arise from the presence of a Hazardous Substance at the Site or an off-Site location: (a) monitoring, investigation, assessment, treatment, cleanup, containment, removal, mitigation, response or restoration work; (b) obtaining any permits, consents, approvals or authorizations of any Governmental Authority necessary to conduct any such activity; (c) preparing and implementing any plans or studies for any such activity; (d) obtaining a written notice from a Governmental Authority with jurisdiction over the Site or an off-Site location under Environmental Laws that no material additional work is required by such Governmental Authority; (e) the use, implementation, application, installation, operation or maintenance of remedial action on the Site or an off-Site location, remedial technologies applied to the surface or subsurface soils, excavation and off-Site treatment or disposal of soils, systems for long term treatment of surface water or ground water, engineering controls or institutional controls; and (f) any other activities required under Environmental Laws to address the presence or Release of Hazardous Substances at the Site or an off-Site location.

“Replacement Defined Benefit Plan” has the meaning set forth in Section 5.9(e)(i).

“Replacement Retiree Coverages” has the meaning set forth in Section 5.9(b).

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“Representatives” of a Party means the Party and its Affiliates and their respective directors, officers, employees, agents, partners, advisors (including accountants, counsel, environmental consultants, financial advisors and other authorized representatives) and parents and other controlling Persons.

“Requested Rulings” has the meaning set forth in Section 5.15.

“Safeguards Information” means information that is required to be protected under the terms of 10 C.F.R. § 73.21.

“SAFSTOR” means a method of decommissioning in which a nuclear facility is placed and maintained in such condition that such facility can be safely stored and subsequently decontaminated to levels that permit release for unrestricted use.

“SEC” means the United States Securities and Exchange Commission.

“Securities Act” means the Securities Act of 1933, including the rules and regulations promulgated thereunder.

“Seller” has the meaning set forth in the preamble.

“Seller Bargaining Unit Employee” means an employee of Seller or an Affiliate of Seller who receives an IRS Form W-2 from Seller or an Affiliate of Seller, who is employed as of the Closing Date, who is employed at Point Beach or whose work responsibilities involve principally the operation of any of the Point Beach Assets, and who is covered by a Collective Bargaining Agreement. “Seller Bargaining Unit Employees” shall include such employees who are actively at work or those employees who are absent from active service due to illness or authorized leave of absence and those on active military duty.

“Seller Bargaining Unit Transferred Employee” has the meaning set forth in Section 5.9(a)(i).

“Seller Disclosure Schedule” means the Seller Disclosure Schedule delivered by Seller to Buyer on the date hereof.

“Seller Indemnified Party” means Seller and each of Seller’s officers, directors, employees, agents, representatives and Affiliates.

“Seller’s Agents” has the meaning set forth in Section 5.1(c).

“Seller’s Agreements” has the meaning set forth in Section 3.10(a)(i).

“Seller’s Decommissioning Trust Agreement” means the Amended and Restated Decommissioning Trust Agreement, dated December 19, 2003, by and between Seller and The Northern Trust Company, an Illinois corporation, as Trustee.

“Seller’s Required Regulatory Approvals” means, collectively, the declarations, filings and registrations with, notices to, and authorizations, consents and

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approvals of all Governmental Authorities necessary for Seller to execute and deliver this Agreement and the Ancillary Agreements, as applicable, and for Seller to consummate the transactions contemplated hereby and thereby and listed in Section 3.3(b) of the Seller Disclosure Schedule.

“Seller’s Right of First Refusal” means the Right of First Refusal granted to Seller by Buyer, in the form of Exhibit I hereto.

“Senior Financial Officer” means, with respect to Buyer or an Affiliate of Buyer, a senior financial officer of such entity with financial and accounting expertise reasonably satisfactory to Seller.

“Site” means the parcels of land included in the Real Property, including the surface and subsurface elements and the soils and groundwater present at the Site. Any references to items “at the Site” shall include all items at, in, on, upon, over, across, under, and within the Site.

“Source Material” means: (1) uranium, thorium, or any combination thereof, in any physical or chemical form, or (2) ores which contain by weight one-twentieth of one percent (0.05%) or more of uranium, thorium, or any combination thereof. “Source Material” does not include Special Nuclear Material.

“Special Nuclear Material” means plutonium, uranium-233, uranium enriched in the isotope-233 or in the isotope-235, and any other material that the NRC determines to be “Special Nuclear Material” but does not include Source Material. “Special Nuclear Material” also refers to any material artificially enriched by any of the above-listed materials or isotopes but does not include Source Material.

“Spent Nuclear Fuel” means fuel that has been permanently withdrawn from a nuclear reactor following irradiation, and has not been chemically separated into its constituent elements by reprocessing. Spent Nuclear Fuel includes the Special Nuclear Material, Byproduct Material, Source Material, Greater Than Class C Waste, and other radioactive materials associated with Nuclear Fuel assemblies.

“Spent Nuclear Fuel Fees” means those fees assessed on electricity generated at Point Beach and sold pursuant to the Standard Spent Fuel Disposal Contract, as provided in Section 302 of the Nuclear Waste Policy Act and 10 C.F.R. Part 961.

“Standard Spent Fuel Disposal Contract” means the Contract for Disposal of Spent Nuclear Fuel and/or High Level Radioactive Waste, No. DE-CR01-83NE44425, dated April 7, 1983, entered into between Seller and the United States of America, represented by the Department of Energy, which shall be deemed a Seller’s Agreement under this Agreement.

“Tangible Personal Property” has the meaning set forth in Section 2.1(a)(iii).

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“Tax” means all taxes, charges, fees, levies, penalties or other assessments imposed by any federal, state, local, provincial or foreign taxing authority, including but not limited to, income, gross receipts, excise, real or personal property, sales, transfer, customs, duties, franchise, payroll, withholding, social security, receipts, license, stamp, occupation, employment, or other taxes, including any interest, penalties or additions attributable thereto, and any payments to any state, local, provincial or foreign taxing authorities in lieu of any such taxes, charges, fees, levies or assessments.

“Tax Return” means any return, report, information return, declaration, claim for refund or other document (including any schedule or related or supporting information) required to be supplied to any Governmental Authority with respect to Taxes including amendments thereto, including any information return filed by a tax exempt organization and any return filed by a nuclear decommissioning trust.

“Termination Date” has the meaning set forth in Section 8.1(b).

“Title Commitment” means a title insurance commitment substantially in the form attached hereto as Exhibit K.

“Total Transfer Amount” has the meaning set forth in Section 5.9(e)(iii).

“Transferable Permits” means those Permits and Environmental Permits identified on Schedule 2.1(a)(v).

“Transferred Employee Records” means all records related to Transferred Employees, including the following information: (i) skill and development training, (ii) seniority histories, (iii) salary and benefit information, (iv) Occupational, Safety and Health Administration reports, (v) active medical restriction forms, (vi) fitness for duty, (vii) disciplinary actions, (viii) job performance appraisals and/or evaluations, (ix) employment applications, (x) bonuses, (xi) job history, (xii) access authorization records, (xiii) radiation exposure records, (xiv) direct deposit financial institution data and (xv) accrued and unused sick or vacation leave.

“Transferred Employees” has the meaning set forth in Section 5.9(a)(i).

“Transfer Taxes” means any real property transfer, sales, use, value added, stamp, documentary, recording, registration, conveyance, stock transfer, intangible property transfer, personal property transfer, gross receipts, registration, duty, securities transactions or similar fees or Taxes or governmental charges (together with any interest or penalty, addition to Tax or additional amount imposed) as levied by any Governmental Authority in connection with the transactions contemplated by this Agreement, including any payments made in lieu of any such Taxes or governmental charges which become payable in connection with the transactions contemplated by this Agreement.

“Transition Committee” has the meaning set forth in Section 5.1(b).

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“Transitional Advisory Support Services Agreement” means the Transitional Advisory Support Services Agreement attached hereto as Exhibit A, between Seller and Buyer.

“Transmission and Switchyard Facilities” has the meaning set forth in Section 2.1(b)(i).

“True-Up Amount” has the meaning set forth in Section 5.9(e)(iii).

“Trustee” means, with respect to Seller prior to the Closing, the trustee of the Qualified Decommissioning Fund appointed by Seller pursuant to Seller’s Decommissioning Trust Agreement and, with respect to Buyer after the Closing, the trustee appointed pursuant to the Post-Closing Decommissioning Trust Agreement.

“WARN Act” means the Worker Adjustment and Retraining Notification Act of 1988.

“WARN Certificate” has the meaning set forth in Section 5.9(g)(i).

Section 1.2 Terms Generally. Unless otherwise required by the context in which any term appears:

(a) Capitalized terms used in this Agreement shall have the meanings specified in this Article I.

(b) The singular shall include the plural, the plural shall include the singular, and the masculine shall include the feminine and neuter.

(c) References to “Articles”, “Sections”, “Schedules” or “Exhibits” shall be to articles, sections, schedules or exhibits of or to this Agreement, and references to “paragraphs” or “clauses” shall be to separate paragraphs or clauses of the section or subsection in which the reference occurs.

(d) The words “herein,” “hereof” and “hereunder” shall refer to this Agreement as a whole and not to any particular section or subsection of this Agreement; and the words “include,” “includes” or “including” shall mean “including, without limitation.”

(e) The term “day” shall mean a calendar day, commencing at 12:00 a.m. (Central Time). The term “week” shall mean any seven consecutive day period commencing on a Sunday, and the term “month” shall mean a calendar month; provided, that when a period measured in months commences on a date other than the first day of a month, the period shall run from the date on which it starts to the corresponding date in the next month and, as appropriate, to succeeding months thereafter. Whenever an event is to be performed or a payment is to be made by a particular date and the date in question falls on a day which is not a Business Day, the event shall be performed, or the payment shall be made, on the next succeeding Business Day; provided, however, that all calculations shall be made regardless of whether any given day is a Business Day and whether or not any given period ends on a Business Day.

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(f) All references to a particular entity shall include such entity’s successors and permitted assigns unless otherwise specifically provided herein.

(g) All references herein to any Law or to any contract or other agreement shall be to such Law, contract or other agreement as amended, supplemented or modified from time to time unless otherwise specifically provided herein.

ARTICLE II

PURCHASE AND SALE

Section 2.1 Purchase and Sale.

(a) Upon the terms and subject to the conditions of this Agreement, at or prior to the Closing, Seller shall sell, assign, transfer, convey and deliver to Buyer, and Buyer shall purchase, assume and accept from Seller, all of Seller’s right, title and interest in and to all of the assets, wherever located, primarily used in, or primarily relating to, the ownership, maintenance or operation of Point Beach, other than the Excluded Assets (the assets to be purchased by Buyer being referred to as the “Point Beach Assets”), including the following:

(i) The land described on Schedule 2.1(a)(i) (which land comprises the Site), together with all buildings, facilities, fixtures and other improvements thereon, including the Facilities (but excluding any personal property of Seller thereon) and the Inland Tower and all Seller’s rights arising out of the ownership thereof or appurtenances thereto, including all related easements and rights of ingress and egress and the water intake and discharge structures (collectively, the “Real Property”);

(ii) All Nuclear Material, Nuclear Fuel Inventories and Non-Nuclear Fuel Inventories that are owned by Seller (or in which Seller has any right, title or interest) on the Closing Date, wherever located;

(iii) All machinery, mobile or otherwise, equipment (including computer hardware and software and transferable rights thereto and communications equipment), vehicles, tools, spare parts, materials, works in progress, furniture and furnishings and other items of personal property owned by Seller and used primarily in connection with the ownership, maintenance or operation of the Facilities, including the items of personal property listed on Schedule 2.1(a)(iii) (collectively, the “Tangible Personal Property”);

(iv) Subject to Section 5.4(d), all rights of Seller under the Fuel Contracts, the Non-Material Contracts, the Farmland Leases, the ATC Easement, the Dominion Lease, the Generation-Transmission Interconnection Agreement and the Seller’s Agreements that have not been identified on Schedule 2.1(b)(xiv) as Excluded Assets;

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(v) All Transferable Permits which are set forth on Schedule 2.1(a)(v);

(vi) All books, operating records, licensing records, quality assurance records, purchasing records, and equipment repair, maintenance or service records relating primarily to the design, construction, licensing or operation of the Facilities, operating, safety and maintenance manuals, inspection reports, environmental assessments, environmental reports made to Governmental Authorities and records maintained in compliance with Environmental Laws and regulations, engineering design plans, documents, blueprints and as built plans, specifications, procedures and other similar items of Seller, wherever located, relating primarily to the Facilities, whether existing in hard copy or magnetic or electronic form, subject to the right of Seller to retain copies of such records for its use and subject to the obligation of Buyer to preserve such records and make such records available to Seller as reasonably necessary for Seller’s reasonable and lawful purposes following the Closing Date (collectively, the “Business Books and Records”);

(vii) All unexpired, transferable warranties and guarantees from third parties with respect to any item of Real Property or Tangible Personal Property;

(viii) The name “Point Beach Nuclear Plant” or “Point Beach” as used as a designation attached to or associated with the Facilities and any derivative tradenames, trademarks, servicemarks, or logos;

(ix) The Intellectual Property listed on Section 3.17 of the Seller Disclosure Schedule;

(x) All meters owned by Seller that are located at the Site;

(xi) Subject to Section 5.10 and Section 5.15, the assets comprising Seller’s Qualified Decommissioning Fund, including all profits, dividends, income, interest and earnings accrued thereon, together with all related tax, accounting and other records for such assets, including all decommissioning studies, analyses, cost estimates and any information relating to the Tax basis of the such assets;

(xii) To the extent transferable, all Nuclear Insurance Policies with ANI and associated rights relating to the Facilities, excluding premium refunds described in Section 2.1(b)(iv);

(xiii) The radio licenses set forth on Schedule 2.1(a)(xiii);

(xiv) Subject to Buyer’s obligations under Section 7.2(a), the rights of Seller in and to any causes of action, claims (including rights under insurance policies to proceeds, refunds or distributions thereunder paid after the Closing Date with respect to periods after the Closing Date) and defenses against

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third parties (including indemnification and contribution) relating to any Assumed Liabilities; provided, that Seller will retain the right to prosecute the Department of Energy Claim and the Department of Energy Potential Claim;

(xv) The Transferred Employee Records, to the extent permitted by Law, subject to the right of Seller to retain copies of such records for its reasonable and lawful use and subject to the obligation of Buyer to preserve such records and make such records available to Seller as reasonably necessary for Seller’s reasonable and lawful purposes following the Closing Date;

(xvi) All assignable right, title and interest of Seller to the NRC Licenses;

(xvii) All rights of Seller in property, assets, leases and agreements used or usable in providing emergency warning or associated with emergency preparedness as set forth on Schedule 2.1(a)(xvii);

(xviii) The pension assets described in and subject to Section 5.9(e);

(xix) The NMC Intellectual Property and the NMC Assets (it being understood that Seller’s obligation to convey such assets shall be limited to the covenants contained in Section 5.4(d) and Section 5.4(g)); and

(xx) All other assets and properties of every kind and description and wherever located, owned by Seller and primarily used in, or primarily related to, the Point Beach Assets.

(b) Notwithstanding anything to the contrary contained in this Agreement, Seller shall not sell, assign, transfer, convey or deliver to Buyer, and Buyer shall not purchase and accept, and the Point Beach Assets shall not include, any of Seller’s right, title and interest in and to any of the following assets (the “Excluded Assets”):

(i) The transmission and switchyard facilities owned by ATC (the “Transmission and Switchyard Facilities”);

(ii) All of the assets of Seller comprising any fund relating to Decommissioning other than Seller’s Qualified Decommissioning Fund;

(iii) Certificates of deposit, shares of stock, securities, bonds, debentures, evidences of indebtedness, and interests in joint ventures, partnerships, limited liability companies and other entities relating to the Facilities or the Site, including Seller’s equity interest in NMC, except such assets comprising the Qualified Decommissioning Fund or assets transferred pursuant to Section 5.10;

(iv) All rights to premium refunds and distributions made on or after the Closing with respect to periods on or prior to the Closing under

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Nuclear Insurance Policies of Seller with ANI, including any rights to receive premium refunds, distributions and continuity credits with respect to periods prior to the Closing pursuant to the ANI nuclear industry credit rating plan;

(v) Seller’s policyholder interest under its Nuclear Insurance Policies with NEIL, including rights to any premium refunds or other distributions made on or after the Closing;

(vi) All cash, cash equivalents, bank deposits, accounts and notes receivable (trade or otherwise), and any income, sales, payroll or other receivables relating to Taxes, in each case relating to the Point Beach Assets, except to the extent such assets are included in Seller’s Qualified Decommissioning Fund (subject to Section 5.10 and Section 5.15);

(vii) All assets relating to the Benefit Plans, whether or not held in trust, except as provided in Section 5.9(e);

(viii) The rights of Seller and its Affiliates to the names “Wisconsin Electric Power Company,” “Wisconsin Energy Corporation” or “We Energies” or any related or similar trade names, trademarks, service marks, corporate names or logos, or any part, derivative or combination thereof;

(ix) All tariffs, agreements and arrangements to which Seller is a party or has an interest for the purchase or sale of electric capacity or energy or for the purchase or sale of transmission or ancillary services;

(x) Other than those provided for in Section 2.1(a)(xiv), the rights of Seller in and to any causes of action, claims and defenses against third parties (including indemnification and contribution) arising out of or relating to (i) any Real Property or Tangible Personal Property, Permits, Taxes, the Seller’s Agreements, Fuel Contracts or the Non-Material Contracts, if any, including any claims for refunds (including refunds of previously paid Department of Energy Decommissioning and Decontamination Fees), prepayments, offsets, recoupment, insurance proceeds, condemnation awards, judgments and the like, whether received as payment or credit against future liabilities, relating specifically to the Point Beach Assets and to the extent relating to any period prior to the Closing, (ii) the Excluded Assets, or (iii) the Excluded Liabilities;

(xi) All personnel records of Seller, NMC and their respective Affiliates relating to the Facilities or the Site, except, to the extent permitted by applicable Law, the Transferred Employee Records;

(xii) Any and all of Seller’s rights in any contract representing an intercompany transaction between Seller and an Affiliate of Seller, whether or not such transaction relates to the provision of goods and services, payment arrangements, intercompany charges or balances, or the like;

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(xiii) To the extent not otherwise provided for in this Section 2.1(b), any refund or credit (i) related to Taxes paid by Seller with respect to periods (or portions thereof) that end on or prior to the Closing Date in respect of the Point Beach Assets, whether such refund is received as a payment or as a credit against future Taxes, or (ii) arising under any agreement which is included in the Point Beach Assets and relates to a period (or portion thereof) ending on or prior to the Closing Date;

(xiv) All rights of Seller under those contracts, agreements, purchase orders, personal property leases and other commitments set forth on Schedule 2.1(b)(xiv);

(xv) All books, operating records, licensing records, quality assurance records, purchasing records, and equipment repair, maintenance or service records relating exclusively to the Excluded Assets or the Excluded Liabilities, and operating, safety and maintenance manuals, inspection reports, environmental assessments, engineering design plans, documents, blueprints and as built plans, specifications, procedures and other similar items of Seller, wherever located, relating exclusively to the Excluded Assets or the Excluded Liabilities, whether existing in hard copy or magnetic or electronic form;

(xvi) The minute books from meetings of the board of directors and stockholder of Seller, the stock records and corporate seal of Seller and the Tax Returns and records relating to Taxes of Seller;

(xvii) All rights of Seller under this Agreement and the Ancillary Agreements;

(xviii) Other than the NMC Intellectual Property and the NMC Assets, all other tangible and intangible assets used in the maintenance or operation of Point Beach and owned by NMC; and

(xix) All other assets and properties of every kind and description and wherever located, directly or indirectly, owned or held for use by Seller and its Affiliates and not primarily used in, or primarily related to, the Point Beach Assets.

Section 2.2 Assumption and Exclusion of Liabilities.

(a) Assumed Liabilities. Except as expressly provided in Section 2.2(b), upon the terms and subject to the conditions set forth in this Agreement, Buyer shall, on the Closing Date, assume, agree to pay, perform and discharge when due any and all, and indemnify and hold Seller harmless from and against any and all Losses attributable to, liabilities of Seller relating to the Point Beach Assets, including the following liabilities (the “Assumed Liabilities”):

(i) All Liabilities of Seller arising on or after the Closing Date with respect to the ownership, operation, use or maintenance of the Point

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Beach Assets, and all Liabilities of Seller arising on or after the Closing Date under the Seller’s Agreements, the Fuel Contracts, the Dominion Lease, the Farmland Leases, the Non-Material Contracts, the Generation-Transmission Interconnection Agreement and the Transferable Permits in accordance with the terms thereof, including all Liabilities of Seller arising on or after the Closing Date relating to the contracts, licenses, agreements and personal property leases entered into with respect to the Point Beach Assets after the date hereof consistent with the terms of this Agreement, except to the extent such Liabilities, but for a breach or default by Seller or a related waiver or extension, would have been paid, performed or otherwise discharged on or prior to the Closing Date or to the extent the same arise out of any such breach or default or out of any event which after the giving of notice or the passage of time would constitute a default by Seller;

(ii) All Liabilities of Seller and NMC under the employment agreements listed on Section 3.8(b) of the Seller Disclosure Schedule arising on or after the Closing Date;

(iii) All Liabilities of Seller and NMC under the Collective Bargaining Agreements arising on or after the Closing Date;

(iv) All Liabilities of Seller and NMC under Seller’s and NMC’s agreements with contractors providing for security-related and other services by Independent Contractors at the Facilities, which agreements are listed on Section 3.8(c) of the Seller Disclosure Schedule arising on or after the Closing Date;

(v) All Liabilities of Seller and NMC with respect to the Transferred Employees and Independent Contractors, including all Liabilities relating to personal injury, discrimination, harassment, retaliation, wrongful discharge, unfair labor practice, or constructive termination of any individual, or similar claim or cause of action attributable to any actions or inaction of Buyer on or after the Closing Date;

(vi) All Liabilities of Seller under or related to Environmental Laws, Environmental Permits, Nuclear Laws or the common law with respect to the Site, including, all Liabilities for the off-Site transportation, off-Site disposal, off-Site storage and off-Site Release of Hazardous Substances prior to the Closing Date; provided, that Buyer does not assume any Liability for the off-Site transportation, off-Site disposal or off-Site Release of Nuclear Material prior to the Closing Date; provided, further, that for purposes of this Section 2.2, “off-Site” does not include any location adjoining the Site to which Nuclear Material disposed of or Released at the Site have migrated;

(vii) All Liabilities associated with or arising from the Point Beach Assets in respect of Taxes for which Buyer is liable pursuant to Section 2.4 or Section 5.7;

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(viii) All Liabilities with respect to Transferred Employees for which Buyer is responsible pursuant to Section 5.9;

(ix) With respect to the Point Beach Assets, all Liabilities for any Taxes (i) that may be imposed by any Governmental Authority on the ownership, sale, operation or use of the Point Beach Assets on or after the Closing Date and that relate to periods on or after such Closing Date or (ii) that relate to or arise from the Point Beach Assets with respect to taxable periods (or portions thereof) beginning on or after the Closing Date (except for any Income Taxes imposed upon Seller arising from the sale of the Point Beach Assets, any Taxes imposed upon Seller or Seller’s Qualified Decommissioning Fund as a result of the transactions contemplated by this Agreement, any Income Taxes attributable to income actually received and retained by Seller and any Taxes imposed upon Seller under Section 5.7);

(x) All Liabilities of Seller to Decommission the Facilities and the Site and to dispose of Nuclear Material located at, in, on or under the Site on or after the Closing Date;

(xi) All Liabilities for Department of Energy Decommissioning and Decontamination Fees relating to the Facilities and the Site incurred on or after the Closing Date;

(xii) All Liabilities of Seller associated with (i) the Nuclear Fuel from and after the Closing Date and (ii) the management, storage, removal, transportation and disposal on and after the Closing Date of all Spent Nuclear Fuel and other Nuclear Material located at or associated with Point Beach;

(xiii) All obligations of Seller arising on or after the Closing Date to pay to ANI any additional premiums due to audit assessments performed on or after the Closing Date;

(xiv) All Liabilities of Seller arising under or relating to Nuclear Laws or relating to any claim in respect of Nuclear Fuel or Nuclear Materials arising out of the ownership or operation of the Point Beach Assets on or after the Closing Date, including any and all Liabilities to third parties (including employees) for personal injury, property damage or tort, or similar causes of action arising out of the ownership, maintenance or operation of the Point Beach Assets on or after the Closing Date, including Liabilities arising out of or resulting from an “extraordinary nuclear occurrence,” a “nuclear incident” or a “precautionary evacuation” (as such terms are defined in the Atomic Energy Act) at the Site, or any other licensed nuclear reactor site in the United States, or in the course of the transportation of radioactive materials to or from the Site or any other site on or after the Closing Date, including Liability for any deferred premiums assessed in connection with such an extraordinary nuclear occurrence, nuclear incident or precautionary evacuation under any applicable NRC or industry retrospective rating plan or insurance policy, including any mutual insurance pools established

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in compliance with the requirements imposed under Section 170 of the Atomic Energy Act, 10 C.F.R. Part 140, and 10 C.F.R. § 50.54(w);

(xv) Third party Liabilities of Seller for any claims arising as a result of or in connection with loss of life or injury to persons or damage to property prior to, on or after the Closing Date caused (or allegedly caused) by the presence, Release or threatened Release of Hazardous Substances at, adjacent to or migrating from the Site prior to, on or after the Closing Date;

(xvi) Any Liability of Seller for any Price-Anderson Act secondary financial protection retrospective premium obligation for (i) nuclear worker Liability attributable to employment on or after the Closing Date or (ii) any third-party Liability arising out of any nuclear incident on or after the Closing Date;

(xvii) Except as otherwise expressly provided herein, Liabilities of Buyer to the extent arising from the execution, delivery or performance of this Agreement and the transactions contemplated hereby; and

(xviii) All other Liabilities of Seller relating to the Point Beach Assets, the Facilities or the Site, except to the extent that such Liabilities constitute Excluded Liabilities;

provided, that, if the Effective Date (as defined in the Interim Operating Agreement) of the Interim Operating Agreement shall occur prior to the Closing Date, the Liabilities set forth in Sections 2.2(a)(ii), (iii), (v) and (viii) as they pertain to the NMC Bargaining Unit Transferred Employees and NMC employees that are Non-Bargaining Unit Transferred Employees shall apply at the time of the Effective Date (other than any such Liabilities under Sections 5.9(e)(ii), (iii), (iv), (v) and (vi) hereof), with the term “Effective Date” replacing the term “Closing Date” in the provisions of Sections 2.2(a)(ii), (iii), (v) and (viii) for such transfer and assumption of Liabilities.

(b) Excluded Liabilities. Buyer shall not assume or be liable for the following Liabilities of Seller (the “Excluded Liabilities”):

(i) Any Liabilities of Seller in respect of any Excluded Assets or other assets of Seller which are not Point Beach Assets;

(ii) Any Liabilities of Seller for Taxes (i) attributable to the ownership, sale, operation, maintenance or use of the Point Beach Assets (including any withholding Taxes imposed on Seller with respect to the Transferred Employees) for taxable periods, or portions thereof, ending before the Closing Date, except for Taxes for which Buyer is liable pursuant to Section 2.4 or Section 5.7 hereof, and (ii) imposed on Seller or Seller’s Qualified Decommissioning Fund as a result of the transactions contemplated by this Agreement;

(iii) Any Liabilities of Seller arising under the NPPOSA, and any Liabilities of Seller arising under the Transitional Advisory Support

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Services Agreement, the Interim Operating Agreement, the Generation-Transmission Interconnection Agreement, the Seller’s Agreements, the Fuel Contracts, the Transferable Permits, the Dominion Lease, the Farmland Leases or the Non-Material Contracts prior to the Closing Date;

(iv) Any Liabilities of Seller for any monetary fines or penalties imposed by a Governmental Authority, and investigatory, legal or similar costs incurred by Buyer resulting from Buyer’s defense of such action, with respect to the Point Beach Assets and accrued or imposed for events that occurred prior to the Closing Date;

(v) Subject to Section 2.4, any payment obligations of Seller for goods delivered or services rendered prior to the Closing Date, including, but not limited to, rental or lease payments due and owing prior to the Closing Date pursuant to any leases relating to Tangible Personal Property;

(vi) Any Liabilities arising prior to the Closing Date relating to Seller’s operations on, or usage of, the Easements, including Liabilities arising as a result of or in connection with loss of life, injury to persons or property or damage to natural resources, but only to the extent caused by Seller;

(vii) Subject to Section 5.9 under which certain Benefit Plan Liabilities are assumed by Buyer, any Liabilities of Seller or NMC relating to any Benefit Plan, any employee benefit plan as defined in Section 3(3) of ERISA, or any other plan, program, arrangement or policy established or maintained in whole or in part by Seller or NMC or by any trade or business (whether or not incorporated) which is or ever has been under common control, or which is or ever has been treated as a single employer, with Seller or NMC under Section 414(b), (c), (m) or (o) of the Code (“ERISA Affiliate”) or to which Seller, NMC or any ERISA Affiliate contributes or contributed, including any multiemployer plan contributed to by Seller, NMC or any ERISA Affiliate or to which Seller, NMC or any ERISA Affiliate is or was obligated to contribute (the “Plans”), including, but not limited to any such Liability of Seller (i) for the termination or discontinuance of, or Seller’s, NMC’s or an ERISA Affiliate’s withdrawal from, any such Plan, (ii) relating to benefits payable under any Plans, (iii) relating to the PBGC under Title IV of ERISA, (iv) relating to a multi-employer plan, (v) with respect to noncompliance with the notice requirements of COBRA, (vi) with respect to any noncompliance with ERISA or any other applicable Laws, and (vii) with respect to any suit, proceeding or claim which is brought against Buyer, any Plan or any fiduciary or former fiduciary of, any of the Plans;

(viii) Any Liabilities of Seller or NMC relating to the failure to hire, the employment or services or termination of employment or services of any individual, including wages, compensation, benefits, affirmative action, personal injury, discrimination, harassment, retaliation, constructive termination, wrongful discharge, unfair labor practices, or constructive termination by Seller or NMC of any individual, or any similar or related claim or cause of action

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attributable to any actions or inactions by Seller or NMC prior to the Closing Date with respect to the Point Beach Assets, the Transferred Employees, Independent Contractors, applicants, and any other individuals who are determined by a court or by a Governmental Authority to have been applicants or employees of Seller or NMC or any Affiliate of Seller or NMC, or that are filed with or pending before any court, administrative agency or arbitrator prior to the Closing Date, provided that neither Seller nor NMC will have any Liability for similar actions or inactions by Buyer or any successor thereto on or after the Closing Date;

(ix) All Spent Nuclear Fuel Fees and any other fees associated with electricity generated at Point Beach and sold on or prior to the Closing Date;

(x) All Liabilities of Seller for the off-Site transportation, off-Site disposal, off-Site storage and off-Site Release of Nuclear Material prior to the Closing Date; provided, that, for purposes of this Section 2.2, “off-Site” does not include any location adjoining the Site to which Nuclear Material disposed of or Released at the Site have migrated;

(xi) Except as otherwise provided in this Agreement, any Taxes incurred by Seller’s Qualified Decommissioning Fund for taxable periods, or portions thereof, ending on or prior to the Closing Date;

(xii) Any Liability for a Third Party Claim against Seller and relating to the Point Beach Assets for personal injury, death or property damage (except for personal injury, death or property damage relating to Liabilities from Environmental Laws) suffered by such third party arising from the use or ownership of the Point Beach Assets prior to the Closing Date, but only to the extent directly resulting from the negligent acts or omissions of Seller;

(xiii) Except as otherwise expressly provided herein, Liabilities of Seller to the extent arising from the execution, delivery or performance of this Agreement and the transactions contemplated hereby; and

(xiv) Any other Liabilities expressly allocated to or retained by Seller in this Agreement.

Section 2.3 Purchase Price; Purchase Price Adjustment; Allocation of Purchase Price.

(a) Payment of Purchase Price. Buyer shall pay in consideration for the Point Beach Assets the aggregate amount of Nine Hundred Ninety-Eight Million Dollars ($998,000,000) (the “Purchase Price”), subject to adjustment pursuant to Section 2.3(b), by wire transfer of immediately available funds to an account or accounts designated by Seller, at the Closing as provided in Section 2.7.

(b) Purchase Price Adjustment.

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(i) Subject to Sections 2.3(b)(ii) and Section 2.3(b)(iii), at the Closing, the Purchase Price shall be adjusted on a dollar-for-dollar basis, without duplication, to account for the items set forth in this Section 2.3(b):

(1) The Purchase Price shall be adjusted to account for the items prorated as of the Closing Date pursuant to Section 2.4.

(2) The Purchase Price shall be (A) increased if and to the extent that the net book value of the Nuclear Fuel owned by Seller as of the Closing Date is greater than One Hundred Thirty-Six Million One Hundred Thousand Dollars ($136,100,000), and (B) decreased if and to the extent that net book value of the Nuclear Fuel owned by Seller as of the Closing Date is less than One Hundred Thirty-Six Million One Hundred Thousand Dollars ($136,100,000) (all calculations are to be consistent with Seller’s past practices).

(3) The Purchase Price shall be (A) increased if and to the extent that the book value of the Non-Nuclear Fuel Inventories on the Closing Date is greater than Twenty-Four Million Dollars ($24,000,000), and (B) decreased if and to the extent that the book value of the Non-Nuclear Fuel Inventories on the Closing Date is less than Twenty-Four Million Dollars ($24,000,000) (all references to book value are deemed to mean book value calculated in accordance with GAAP consistent with Seller’s past practice);

(4) The Purchase Price shall be increased by the amount of any and all expenditures made with respect to the Facilities or the Site between the date hereof and the Closing Date for capital additions to or replacements of property, plant and equipment and other expenditures or repairs on property, plant and equipment relating to the Facilities or the Site that are capitalized by Seller in accordance with its normal accounting policies; provided, that such expenditures (A) are described on a project-by-project basis in the Capital Budget as set forth on Section 5.1(a) of the Seller Disclosure Schedule and the amount or projected amount to complete each project does not exceed the budgeted amount by more than ten percent (10%), (B) are necessary to comply with applicable Laws, NRC Licenses, NRC Commitments or Permits, (C) have been approved by Buyer in writing, or (D) are made in accordance with Prudent Utility Practices and do not exceed Three Million Dollars ($3,000,000) in the aggregate (collectively, the “Capital Expenditures”). Nothing in this paragraph shall be construed to limit Seller’s rights and obligations to make all Capital Expenditures necessary to comply with the NRC Licenses, the NRC Commitments and other Permits.

(5) If the projected cost to dispose of the Low Level Waste at the Facilities as of the Closing Date (as calculated in

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accordance with Schedule 2.3(b)(i)(5)) is greater than Eight Million Eight Hundred Thousand Dollars ($8,800,000), the Purchase Price shall be adjusted downward by every dollar that the cost of such Low Level Waste disposal is greater than Eight Million Eight Hundred Thousand Dollars ($8,800,000). Conversely, if the projected cost to dispose of the Low Level Waste at the Facilities as of the Closing Date (as calculated in accordance with Schedule 2.3(b)(i)(5)) is less than Eight Million Eight Hundred Thousand Dollars ($8,800,000), the Purchase Price shall be adjusted upward by every dollar that the cost of such Low Level Waste disposal is less than Eight Million Eight Hundred Thousand Dollars ($8,800,000).

(6) In the event that the Additional Requested Rulings described in Section 5.15(b) are not obtained from the IRS prior to the Closing Date, the Purchase Price shall be increased in an amount equal to the product of 0.25 multiplied by the difference between (a) the Decommissioning Target and (b) Three Hundred Sixty Million Dollars ($360,000,000) which amount shall be increased by five and a half percent (5.5%) per annum, which shall be compounded daily on and after August 31, 2007 through and including the Closing Date; provided, that such difference is a positive amount.

(7) The Purchase Price shall be adjusted as provided in Section 5.7(c) hereof.

(8) The Purchase Price shall be adjusted as provided in Section 5.9(h) hereof.

(9) The Purchase Price shall be adjusted as provided in Section 5.10(e) hereof.

(10) If Closing has not occurred on or before September 30, 2007, the Purchase Price shall be adjusted downward in the amount of Two Hundred Thousand Dollars ($200,000) for each day that Closing does not occur after September 30, 2007 and on or before October 30, 2007. If Closing has not occurred on or before October 30, 2007, the Purchase Price shall be adjusted downward in the amount of One Hundred Thousand Dollars ($100,000) for each day that Closing does not occur after October 30, 2007.

(11) If Closing occurs after July 1, 2007 and on or before August 30, 2007, the Purchase Price shall be adjusted upward in the amount of Two Hundred Fifty Thousand Dollars ($250,000) for each day that Closing occurs prior to August 31, 2007.

(12) The Purchase Price shall be adjusted as provided in Section 5.25.

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(ii) No less than ten (10) Business Days prior to the Closing Date, Seller shall prepare in good faith and deliver or make available to Buyer an estimated closing statement (the “Estimated Closing Statement”) that shall set forth Seller’s estimate of all estimated adjustments to the Purchase Price required by Section 2.3(b)(i) (the “Estimated Adjustments”). Seller shall cooperate with Buyer and provide Buyer and its Representatives reasonable access to all information used to calculate the Estimated Adjustments. Within five (5) Business Days after the delivery of the Estimated Closing Statement by Seller to Buyer, Buyer may object in good faith to any Estimated Adjustment in writing, setting forth in detail a description of the basis for the objection and the amount of the subject Estimated Adjustments as determined by Buyer. If Buyer objects to an Estimated Adjustment, the Parties shall attempt to resolve their differences by negotiation. If and to the extent the Parties are able to do so prior to the Closing Date (or if Buyer does not object to any of the Estimated Adjustments), the Purchase Price shall be adjusted for the Closing by the amount of the Estimated Adjustments not in dispute. The Purchase Price, as so adjusted at Closing by the undisputed Estimated Adjustments, but not including any adjustment pursuant to Section 2.3(b)(i)(7), is referred to herein as the “Closing Payment.” The Closing Payment shall be paid by Buyer to Seller at the Closing. The disputed Estimated Adjustments shall be resolved in accordance with the provisions of Section 2.3(b)(iii) and paid as part of any Post-Closing Adjustment to the extent required by Section 2.3(b)(iii).

(iii) Within sixty (60) Business Days after the Closing Date, Seller shall prepare and deliver or make available to Buyer a final closing statement (the “Post-Closing Statement”) that shall set forth all adjustments to the Purchase Price required by Section 2.3(b)(i) and any disputed Estimated Adjustments pursuant to Section 2.3(b)(ii) (the “Proposed Post-Closing Adjustment”) and all work papers detailing such adjustments. Within thirty (30) days after the delivery of the Post-Closing Statement by Seller to Buyer, Buyer may object to the Proposed Post-Closing Adjustment in writing, setting forth in detail a description of the basis for the objection and the amount of the subject Proposed Post-Closing Adjustment as determined by Buyer. Seller and Buyer agree to cooperate with one another to provide one another with the information used to prepare the Post-Closing Statement and information relating thereto. If Buyer objects to the Proposed Post-Closing Adjustment, the Parties shall attempt to resolve such dispute by negotiation. If the Parties are unable to resolve such dispute within thirty (30) days after any objection by Buyer, the Parties shall appoint the Independent Accounting Firm, which shall, at Seller’s and Buyer’s joint expense, review the Proposed Post-Closing Adjustment and determine the appropriate adjustment to the Purchase Price, if any, within thirty (30) days after such appointment. The Parties agree to cooperate with the Independent Accounting Firm and provide it with such information as it reasonably requests to enable it to make such determination. The Independent Accounting Firm shall act as an expert and not as an arbitrator and shall make findings only with respect to the remaining disputes so submitted to it (and not by independent review). The finding of such Independent Accounting Firm shall be binding on the Parties hereto. Upon

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determination of the appropriate adjustment (the “Post-Closing Adjustment”) by agreement of the Parties or by binding determination of the Independent Accounting Firm, the Party owing the difference shall deliver such amount to the other Party no later than two (2) Business Days after such determination, in immediately available funds or in any other manner as reasonably requested by the payee.

(c) Allocation of Purchase Price.

(i) At least forty-five (45) days prior to the Closing Date, Buyer and Seller shall jointly agree to an estimated allocation among the Point Beach Assets of the sum of the Purchase Price and the Assumed Liabilities that is consistent with the allocation methodology provided by Section 1060 of the Code and the regulations promulgated thereunder (the “Estimated Allocation”); provided, however, that if Buyer and Seller cannot mutually agree on an Estimated Allocation by such date, then Buyer shall determine the Estimated Allocation for Transfer Tax, bulk sale filings and for all other Closing document purposes.

(ii) Within ninety (90) days prior to the extended due date for Tax Returns for the taxable year in which the Closing occurs, Buyer and Seller shall jointly agree to an allocation among the Point Beach Assets of the sum of the Purchase Price (including any adjustments thereto) and the Assumed Liabilities (together with any other relevant items) that is consistent with the allocation methodology provided by Section 1060 of the Code and the regulations promulgated thereunder (the “Allocation”); provided, however, that if Buyer and Seller cannot mutually agree on an Estimated Allocation by such date then the dispute between Buyer and Seller shall be decided by the Independent Appraiser whose decision as to the disputed item shall be final and binding upon Buyer and Seller.

(iii) Except to the extent required to comply with a Final Determination, Buyer and Seller (to the extent Seller is required to make any such reports) shall report the transactions contemplated by this Agreement for all Tax purposes in a manner consistent with the Allocation. Buyer and Seller shall not take any position in any Tax Return, Tax proceeding or audit that is inconsistent with the Allocation without the consent of the other Party. To the extent such filings are required, Buyer and Seller agree to file IRS Form 8594 (Asset Acquisition Statement under Section 1060 of the Code), and all federal, state, local and foreign Tax Returns, in accordance with the Allocation. Subsequent to the preparation of the Estimated Allocation and the Allocation as provided in Section 2.3(c)(i) and Section 2.3(c)(ii), respectively, Buyer and Seller agree to provide the other with any information required to complete IRS Form 8594 within ten (10) days of the request for such information. Buyer and Seller shall notify and provide the other with reasonable assistance in the event of an examination, audit or other proceeding relating to Taxes regarding the allocation of the Purchase Price pursuant to this Section 2.3(c). Buyer and Seller shall treat the transaction contemplated by this Agreement as the acquisition by Buyer of a trade or business

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for United States federal income Tax purposes and agree that no portion of the consideration shall be treated in whole or in part as the payment for services or future services.

(iv) Buyer and Seller agree that the transactions contemplated by this Agreement and the Ancillary Agreements shall be treated for all Tax purposes consistent with the totality of the terms and conditions contained in this Agreement and the Ancillary Agreements.

Section 2.4 Proration.

(a) Buyer and Seller agree that all of the items normally prorated, including those listed below (but not including Income Taxes and Transfer Taxes), relating to the business and operation of the Point Beach Assets shall be prorated as of the Closing Date, with Seller liable to the extent such items relate to any time period prior to the Closing Date, and Buyer liable to the extent such items relate to periods commencing with the Closing Date (measured in the same units used to compute the item in question, otherwise measured by calendar days):

(i) Taxes, assessments and other charges, if any, relating to the ownership, use or business of the Point Beach Assets;

(ii) Any prepaid expenses (including security deposits) relating to the Point Beach Assets;

(iii) Rent, Taxes and all other items (including prepaid services or goods not included in Inventory) payable by or to Seller under any of Seller’s Agreements, the Dominion Lease, the Farmland Leases or the Non-Material Contracts;

(iv) Any permit, license, registration, compliance assurance fees or other fees with respect to any Transferable Permit;

(v) Sewer rents and charges for water, telephone, electricity and other utilities;

(vi) Fees or charges (other than Taxes) imposed by any Governmental Authority;

(vii) Insurance premiums with respect to the Nuclear Insurance Policies with ANI transferred to Buyer pursuant to Section 2.1(a)(xii); and

(viii) the Spent Nuclear Fuel Fees paid in accordance with Section 5.11(a).

(b) Notwithstanding any other provision of this Agreement, (i) a Tax in the form of interest or penalties shall be allocated (i) to Seller (whether such Taxes accrue or are imposed or assessed on, before or after the Closing Date) to the extent they

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result from a failure by Seller to pay a Tax or failure by Seller to file a Tax Return, in each case, that was due before the Closing Date and (ii) to Buyer (whether such Taxes accrue or are imposed or assessed on, before or after the Closing Date) to the extent they result from a failure by Buyer to pay a Tax or failure by Buyer to file a Tax Return, in each case that was due on or after the Closing Date. In connection with the prorations referred to in (a) above, in the event that actual figures are not available at the Closing Date, the proration shall be based upon the actual Taxes or other amounts accrued through the Closing Date or paid for the most recent year (or other appropriate period) for which actual Taxes or other amounts paid are available. Such prorated Taxes or other amounts shall be re-prorated and paid to the appropriate Party within sixty (60) days of the date that the previously unavailable actual figures become available. Prorations measured by calendar days shall be based on the number of days in a year or other appropriate period (i) before the Closing Date and (ii) including and after the Closing Date. Seller and Buyer agree to furnish each other with such documents and other records as may be reasonably requested in order to confirm all adjustment and proration calculations made pursuant to this Section 2.4.

(c) To the extent that the proration of a Tax under this Section 2.4 allocates such Tax to a period (or portion thereof) ending before the Closing Date, such Tax shall constitute an Excluded Liability. To the extent that the proration of a Tax under this Section 2.4 allocates such Tax to a period (or portion thereof) ending on or after the Closing Date, such Tax shall constitute an Assumed Liability.

Section 2.5 Closing. Upon the terms and subject to the conditions of this Agreement, the sale and purchase of the Point Beach Assets contemplated hereby shall take place at a closing (the “Closing”) to be held at 10:00 a.m., Chicago time, on the sixth Business Day following the satisfaction or waiver of the conditions to the obligations of the parties set forth in Article VI, at the offices of Skadden, Arps, Slate, Meagher & Flom LLP, 333 West Wacker Drive, Chicago, Illinois, or at such other time or on such other date or at such other place as Seller and Buyer may agree upon in writing (the day on which the Closing takes place being, the “Closing Date”).

Section 2.6 Closing Deliveries by Seller. At the Closing, Seller will deliver, or cause to be delivered, the following to Buyer:

(a) All Ancillary Agreements duly executed by Seller, as applicable;

(b) Copies of Seller’s Required Regulatory Approvals;

(c) Recorded memorandum of Seller’s Right of First Refusal;

(d) Copies, certified by the Secretary or any Assistant Secretary of Seller, of corporate resolutions authorizing the execution and delivery of this Agreement and all of the agreements and instruments to be executed and delivered by Seller in connection herewith, and the consummation of the transactions contemplated hereby;

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(e) A certificate of status with respect to Seller, issued by the Department of Financial Institutions of the State of Wisconsin;

(f) The assets of the Qualified Decommissioning Fund to be transferred pursuant to Section 5.10 shall be delivered to the Trustee of the Post-Closing Decommissioning Trust Agreement;

(g) Seller’s certificate in the form of Exhibit J hereto satisfying the requirements of the Foreign Investment and Real Property Tax Act of 1980 (the “FIRPTA Certificate”);

(h) Such affidavits, releases, certificates or other evidence reasonably required pursuant to the Title Commitment including a Seller’s Affidavit required by the title company to delete the “gap” and “standard” exceptions set forth in the Title Commitment;

(i) A title policy issued by Chicago Title Insurance Company of New York insuring Buyer’s interest in the Real Property and the ATC Easement in the amount of the Purchase Price subject only to the Permitted Encumbrances;

(j) The Wisconsin Real Estate Transfer Return duly executed by Seller;

(k) A schedule setting forth Nuclear Material, Nuclear Fuel Inventories and Non-Nuclear Fuel Inventories as of the Closing Date; and

(l) A schedule setting forth the Low Level Waste at the Facilities as of the Closing Date.

Section 2.7 Closing Deliveries by Buyer. At the Closing, Buyer will deliver, or cause to be delivered, the following to Seller:

(a) The Closing Payment;

(b) All Ancillary Agreements duly executed by Buyer, as applicable;

(c) Copies of Buyer’s Required Regulatory Approvals;

(d) Copies, certified by the Secretary or any Assistant Secretary of Buyer, of resolutions authorizing the execution and delivery of this Agreement, and all of the agreements and instruments to be executed and delivered by Buyer and Buyer’s Parent in connection herewith, and the consummation of the transactions contemplated hereby;

(e) A certificate of good standing with respect to Buyer, issued by the Secretary of State of the State of Wisconsin and a certificate of good standing with respect to Buyer’s Parent, issued by the Secretary of State of the State of Florida;

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(f) A certificate of authority of Buyer (or its assignee of this Agreement) to do business in Wisconsin, issued by the Department of Financial Institutions of the State of Wisconsin; and

(g) A copy of the Post-Closing Decommissioning Trust Agreement.

ARTICLE III

REPRESENTATIONS AND WARRANTIES OF SELLER

Seller represents and warrants to Buyer, except as otherwise set forth in the forms, statements, schedules, reports and documents filed by Seller or Seller’s parent company, Wisconsin Energy Corporation, a Wisconsin corporation, with the SEC, or in the Seller Disclosure Schedule, as follows (it being agreed and understood that (i) any matter set forth for purposes of this Article III in any section of the Seller Disclosure Schedule shall be deemed disclosed with respect to any other relevant section of this Article III to the extent (notwithstanding the absence of a specific cross-reference) it is reasonably apparent that such disclosure relates to such other section and (ii) no reference to or disclosure of any item on the Seller Disclosure Schedule shall be construed as an admission or indication that such item or other matter is material or that such item or other matter is required to be referred to or disclosed on the Seller Disclosure Schedule):

Section 3.1 Organization. Seller is a corporation duly organized, validly existing and in good standing under the laws of the State of Wisconsin and has all requisite corporate power and authority to own, lease, and operate its properties and to carry on its business as is now being conducted, except where the failure to have such power and authority would not have a Material Adverse Effect. Copies of the Articles of Incorporation and Bylaws of Seller, each as amended and in effect on the date hereof, have been made available to Buyer.

Section 3.2 Authority Relative to this Agreement. Seller has full corporate power and authority to execute and deliver this Agreement and the Ancillary Agreements, as applicable, and to consummate the transactions contemplated hereby and thereby. The execution and delivery of this Agreement and the Ancillary Agreements, as applicable, and the consummation of the transactions contemplated hereby and thereby have been duly and validly authorized by all necessary corporate action required on the part of Seller and no other corporate proceedings on the part of Seller are necessary to authorize this Agreement or the Ancillary Agreements, as applicable, or to consummate the transactions contemplated hereby and thereby. This Agreement has been duly and validly executed and delivered by Seller and at the Closing, the Ancillary Agreements, as applicable, will be duly and validly executed and delivered by Seller, and assuming that this Agreement and the Ancillary Agreements, as applicable, constitute valid and binding agreements of Buyer and subject to the receipt of Seller’s Required Regulatory Approvals and Buyer’s Required Regulatory Approvals, this Agreement and the Ancillary Agreements, as applicable, constitute the legal, valid and binding agreement of Seller, enforceable against Seller in accordance with their respective terms, subject to applicable

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bankruptcy, reorganization, insolvency, moratorium, and other similar Laws affecting creditors’ rights generally and to general principals of equity (whether considered in a proceeding at law or in equity).

Section 3.3 Consents and Approvals; No Violation.

(a) Subject to the receipt of the third-party consents set forth on Section 3.3(a) of the Seller Disclosure Schedule and the Seller’s Required Regulatory Approvals, neither the execution and delivery of this Agreement or the Ancillary Agreements, as applicable, by Seller nor the consummation of the transactions contemplated hereby or thereby will (i) conflict with or result in the breach or violation of any provision of the Articles of Incorporation or By-laws of Seller; (ii) result in a default (or give rise to any right of termination, cancellation or acceleration) under any note, bond, mortgage, indenture, license, agreement or other instrument or obligation to which Seller is a party or by which Seller, or any of the Point Beach Assets, may be bound, except for such defaults (or rights of termination, cancellation or acceleration) as to which requisite waivers or consents have been obtained or which would not have a Material Adverse Effect; or (iii) constitute violations of any Law applicable to Seller, or any of its assets, which violation would have a Material Adverse Effect.

(b) Except for the Seller’s Required Regulatory Approvals set forth on Section 3.3(b) of the Seller Disclosure Schedule, no declaration, filing or registration with, or notice to, or authorization, consent or approval of any Governmental Authority is necessary for the execution and delivery of this Agreement or the Ancillary Agreements, as applicable, or the consummation by Seller of the transactions contemplated hereby or thereby, other than (i) such declarations, filings, registrations, notices, authorizations, consents or approvals which, if not obtained or made, would not have a Material Adverse Effect, or (ii) such declarations, filings, registrations, notices, authorizations, consents or approvals which become applicable to Seller as a result of the specific regulatory status of Buyer (or any of its Affiliates) or the result of any other facts that specifically relate to the business or activities in which Buyer (or any of its Affiliates) is or proposes to be engaged.

Section 3.4 Reports. Since January 1, 2005, Seller has filed or caused to be filed with the SEC, the applicable state or local utility commissions or regulatory bodies, the NRC, the FCC, the Department of Energy and the FERC, as the case may be, all material forms, statements, reports and documents (including all exhibits, amendments and supplements thereto) required to be filed by Seller with respect to the Point Beach Assets or the ownership or operation thereof under each of the Securities Act, the Exchange Act, the applicable state public utility laws, the Federal Power Act, the Public Utility Holding Company Act of 1935, the Public Utility Holding Company Act of 2005, the Atomic Energy Act, the Energy Reorganization Act, and the Price-Anderson Act and the respective rules and regulations thereunder, except for such filings the failure of which to make would not have a Material Adverse Effect. All such filings complied in all material respects with all applicable requirements of the appropriate act and the rules and regulations thereunder in effect on the date each such report was filed.

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Section 3.5 Title and Related Matters.

(a) Seller has marketable title to all of the Real Property, its interest in the Dominion Lease, and all other real property interests which are necessary to operate the Point Beach Assets free and clear of all Encumbrances, except Permitted Encumbrances. Seller has good and valid title to the Point Beach Assets not constituting Real Property free and clear of all Encumbrances, except Permitted Encumbrances.

(b) There are no pending or, to the Knowledge of Seller, threatened governmental proceedings in eminent domain which would materially affect the Real Property or the ATC Easement. To the Knowledge of Seller, the Real Property, the ATC Easement and the Dominion Lease comply in all material respects with applicable Law. To the Knowledge of Seller, there are no special assessments or Encumbrances imposed or contemplated by Governmental Authorities or violations that could be reasonably be expected to result in the creation of any material Encumbrance.

(c) Seller has not received written notice of, and to the Knowledge of Seller there is not, any defect or condition of the soil or land, but specifically not including wetlands, which could reasonably be expected to materially impair the use of the Real Property for the operation of the Point Beach Assets or any portion thereof.

(d) Other than the ATC Easements, the Farmland Leases, the siren agreements and those agreements set forth in Section 3.5(d) of the Seller Disclosure Schedule, there are no unrecorded real property leases, mortgages, deeds of trust, easements, licenses or other rights in real property which materially affect the use of the Real Property as currently used or have a financial impact in excess of $300,000; provided, however, should such unrecorded rights in real estate exist, Seller shall have the opportunity to cure whether by (i) obtaining the discharge of or providing insurance coverage over such interest or (ii) other acceptable means. Seller’s interest in all such agreements shall be transferred and assigned by Seller to Buyer on the Closing Date.

Section 3.6 Insurance. All material policies of property damage, fire, liability, Nuclear Insurance Policies, worker’s compensation and other forms of insurance relating to the Point Beach Assets are in full force and effect, all premiums with respect thereto covering all periods up to and including the date as of which this representation is being made have been paid (other than retroactive premiums which may be payable with respect to NEIL policies), and no written notice of cancellation, non-renewal or termination has been received with respect to any such policy which was not replaced on substantially similar terms prior to the date of such cancellation, except for such policies the failure of which to have would not have a Material Adverse Effect. As of the date of this Agreement, to the Knowledge of Seller, no insurance with respect to the Point Beach Assets has been refused nor has its coverage been limited by any insurance carrier to which it has applied for any such insurance or with which it has carried insurance during the past three (3) years, and all required notices have been sent to insurers to preserve all material claims under the aforementioned insurance policies.

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Section 3.7 Environmental Matters. With respect to the Point Beach Assets and the ownership or operation thereof:

(a) Seller (alone or together with NMC) has obtained and holds all material Environmental Permits used in or necessary for the ownership and operation of the Facilities as conducted prior to the Closing Date, Seller (and NMC) is in material compliance with all of its obligations thereunder, there are no proceedings pending, or to the Knowledge of Seller, threatened that would reasonably be expected to result in the revocation, termination, modification or amendment of any such Environmental Permit, and Seller (and NMC) has not failed to make in a timely fashion any application or other filing required for the renewal of any such Environmental Permit which failure would reasonably be expected to result in such Environmental Permit’s termination or being revoked, terminated, suspended or adversely modified;

(b) The Facilities are in compliance in all material respects with all terms, conditions and provisions of, and have not received within the past two (2) years any written notice from any Governmental Authority that they are not or have not been in compliance with (i) all applicable Environmental Laws and (ii) all material Environmental Permits;

(c) There are no material Environmental Claims pending against Seller or, to the Knowledge of Seller, threatened, with respect to the Point Beach Assets and Seller does not have Knowledge of any facts or circumstances which are reasonably likely to form the basis for any material Environmental Claim against Seller with respect to the Point Beach Assets;

(d) To the Knowledge of Seller, no Releases of Hazardous Substances have occurred at, from, on, or under the Site, and no Hazardous Substances are present on or migrating from the Site, that are reasonably likely to give rise to a material Environmental Claim against Seller or require any Remediation;

(e) Neither the Site nor any portion thereof is an Environmental Clean-up Site and, to the Knowledge of Seller, neither Seller nor NMC has transported or arranged for treatment, storage, handling, disposal or transportation of any Hazardous Substances from the Site to any location which is an Environmental Clean-up Site;

(f) There are no (i) underground storage tanks, active or abandoned, or (ii) polychlorinated-biphenyl-containing equipment located at the Site;

(g) There are no Encumbrances arising under or pursuant to an Environmental Law with respect to the Point Beach Assets that are inconsistent with the current use of the Point Beach Assets and, to the Knowledge of Seller, there are no facts, circumstances, or conditions that are reasonably likely to materially restrict, encumber or result in the imposition of special conditions under any Environmental Law with respect to the development or use of the Point Beach Assets, except those facts, circumstances or conditions relating to the status of the Point Beach Assets as a nuclear facility and except for such restrictions, Encumbrances or special conditions that are consistent with the current use of the Point Beach Assets;

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(h) There have been no environmental audits or assessments with respect to the Point Beach Assets by, on behalf of, or which are in the possession of Seller or NMC which have not been made available, either in whole or in audit summary form that contains all material information, to Buyer prior to the execution of this Agreement; and

(i) There are no outstanding material claims by Seller or, to the Knowledge of Seller, NMC against comprehensive general liability or excess insurance carriers for any Loss resulting from, relating to or arising from Environmental Claims with respect to the Point Beach Assets.

Except for the representations in Section 3.3 (regarding third-party consents and Seller’s Required Regulatory Approvals), Section 3.6 (regarding any insurance issues relating to Environmental Claims or Environmental Laws) and Section 3.12(b) (regarding Environmental Permits), the representations and warranties made by Seller in this Section 3.7 are the exclusive representations and warranties made to Buyer relating to environmental matters.

Section 3.8 Labor Matters. Section 3.8(a) of the Seller Disclosure Schedule sets forth all Collective Bargaining Agreements that relate to the Seller Bargaining Unit Employees and NMC Bargaining Unit Employees as of the date of this Agreement. Section 3.8(b) of the Seller Disclosure Schedule sets forth all employment agreements between Seller or NMC and certain Non-Bargaining Unit Employees as of the date of this Agreement. Section 3.8(c) of the Seller Disclosure Schedule sets forth all agreements that relate to the Independent Contractors as of the date of this Agreement. To the Knowledge of Seller, each Seller Bargaining Unit Employee, NMC Bargaining Unit Employee, Non-Bargaining Unit Employee and Independent Contractor who provides services at the Facilities or otherwise in support of the Point Beach Assets is performing, and is qualified, licensed, certified or trained, in accordance with applicable government requirements or standards to perform the duties and responsibilities of their current job assignment, and each has the appropriate nuclear power plant access authorizations, where required.

Section 3.9 ERISA; Benefit Plans.

(a) Section 3.9(a) of the Seller Disclosure Schedule lists (as of the date of this Agreement) each employee benefit plan, including each employee benefit plan as defined in Section 3(3) of ERISA, and each other plan, contract, agreement, arrangement or policy, whether written or oral, qualified or non-qualified, providing for (i) severance benefits, bonuses, profit-sharing or other forms of incentive compensation; (ii) vacation, holiday, sickness or other time-off; (iii) health, medical, dental, disability, life, accidental death and dismemberment, employee assistance, educational assistance, relocation or fringe benefits or perquisites, including post-employment benefits; and (iv) deferred compensation, defined benefit or defined contribution retirement or pension benefits, or equity-based compensation that covers any Seller Bargaining Unit Employees and, to the Knowledge of Seller, NMC Bargaining Unit Employees and Non-Bargaining Unit Employees, or that is maintained, administered or with respect to which

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contributions are made by Seller or an ERISA Affiliate or, to the Knowledge of Seller, NMC or an ERISA Affiliate, in respect of Seller Bargaining Unit Employees, NMC Bargaining Unit Employees and Non-Bargaining Unit Employees (the “Benefit Plans”). To the Knowledge or Seller, true, correct, and complete copies of all such Benefit Plans, including all amendments thereto and other information regarding benefit changes that have been previously communicated, have been made available to Buyer.

(b) Except as set forth on Section 3.9(b) of the Seller Disclosure Schedule, Seller and its ERISA Affiliates and, to the Knowledge of Seller, NMC and its ERISA Affiliates, have fulfilled their respective obligations under the minimum funding requirements of Section 302 of ERISA and Section 412 of the Code with respect to each Benefit Plan that is an “employee pension benefit plan” as defined in Section 3(2) of ERISA and to which Section 302 of ERISA applies. Except as set forth on Section 3.9(b) of the Seller Disclosure Schedule, neither NMC (to the Knowledge of Seller), Seller nor any ERISA Affiliate has incurred any liability under Sections 4062(b), 4063 or 4064 of ERISA to the PBGC in connection with any Benefit Plan that is subject to Title IV of ERISA, nor any withdrawal liability to any multiemployer pension plan under Section 4201 et. seq. of ERISA or to any multi-employer welfare benefit plan which is a Benefit Plan. Each Benefit Plan which is intended to be qualified within the meaning of Code Section 401(a) is so qualified and has received a favorable determination letter as to its qualification under all applicable Laws (or if no favorable determination letter has yet been issued, such Benefit Plan was timely submitted); and, to the Knowledge of Seller, nothing has occurred, whether by action or failure to act, that could reasonably be expected to cause the loss of IRS qualification. No notice of a reportable event (as described in Section 4043 of ERISA) with respect to any Benefit Plan, for which the reporting requirement has not been waived, has been required to be reported to the PBGC and, to the Knowledge of Seller, no non-exempt prohibited transaction (as described in Section 406 of ERISA and Section 4975 of the Code) has occurred with respect to any Benefit Plan for which the Buyer could have any Liability.

(c) Neither Seller nor any ERISA Affiliate nor, to the Knowledge of Seller, NMC or any ERISA Affiliate, or successor corporation, within the meaning of Section 4069(b) of ERISA, has engaged in any transaction that may be disregarded under Section 4069 or Section 4212(c) of ERISA.

Section 3.10 Certain Contracts and Arrangements.

(a) Except for Seller’s interests in and rights under (i) those purchase orders, contracts, agreements, licenses and leases relating to the ownership, operation and maintenance of the Point Beach Assets (the “Seller’s Agreements”), which are listed on Section 3.9(a) and Section 3.10(a)(i) of the Seller Disclosure Schedule, (ii) those contracts, agreements, commitments and understandings relating to the procurement or fabrication of Nuclear Fuel, a complete list of which is included on Section 3.10(a)(ii) of the Seller Disclosure Schedule (the “Fuel Contracts”), (iii) the Dominion Lease, (iv) the Farmland Leases, (v) contracts, agreements, personal property leases, commitments, understandings or instruments in which all obligations of Seller will be fully performed or terminated prior to the Closing Date, (vi) Non-Material

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Contracts, (vii) the Ancillary Agreements, as applicable, and (viii) software licenses or data licensing contracts used in the conduct of the Point Beach Assets, including the NMC Intellectual Property, Seller is not, as of the date of this Agreement, a party to any written contract, agreement, personal property lease, commitment, understanding or instrument which is material to the ownership or operation of the Point Beach Assets or provides for the sale of capacity, energy or ancillary services from any of the Point Beach Assets (whether or not entered into in the ordinary course of business).

(b) There is not, under any of the agreements listed on Sections 3.10(a)(i) and 3.10(a)(ii) of the Seller Disclosure Schedule, any breach, violation or default on the part of Seller, or to the Knowledge of Seller, on the part of any of the parties thereto, except such events of default and other events as to which requisite waivers or consents have been obtained or which would not have a Material Adverse Effect.

Section 3.11 Legal Proceedings. As of the date hereof, there are no claims, actions, proceedings or investigations pending against Seller or, to the Knowledge of Seller, NMC or, to the Knowledge of Seller (x) threatened against or (y) relating to Seller before any court, arbitrator, mediator or Governmental Authority with respect to the Point Beach Assets which would (i) have a Material Adverse Effect or (ii) prohibit the performance by Seller of this Agreement or any of the Ancillary Agreements, as applicable, or the consummation of the transactions contemplated hereby or thereby. Neither Seller nor, to the Knowledge of Seller, NMC, is subject to any outstanding Governmental Orders with respect to the Point Beach Assets which would, individually or in the aggregate, have a Material Adverse Effect.

Section 3.12 Permits.

(a) Seller (alone or together with NMC) has all permits, licenses, registrations, certificates, franchises and other governmental authorizations, consents and approvals, other than with respect to permits under Environmental Laws referred to in Section 3.7 or licenses issued by the NRC referred to in Section 3.13 (collectively, “Permits”), used in, or necessary for the ownership and operation of, the Point Beach Assets as presently conducted or as required by Law, except where the failure to have such Permits would not have a Material Adverse Effect. All Permits are in full force and effect, except where the failure to be in full force and effect would not have a Material Adverse Effect. Seller has not received any written notification which remains unresolved that it is in violation of any of such Permits, or any Law applicable to the Point Beach Assets, except for notifications of violations that would not have a Material Adverse Effect. The Point Beach Assets are in compliance with all Permits and Laws of any Governmental Authority applicable to the Point Beach Assets, except for violations which would not have a Material Adverse Effect.

(b) Section 3.12(b) of the Seller Disclosure Schedule sets forth all material Permits and Environmental Permits other than Transferable Permits applicable to the Point Beach Assets.

Section 3.13 NRC Licenses.

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(a) Seller (alone or together with NMC) has all licenses, permits, and other consents and approvals applicable to Point Beach that are issued by the NRC and are necessary to the ownership and operation of the Point Beach Assets as presently operated, pursuant to the requirements of all Nuclear Laws and all such licenses are in full force and effect. Seller has not received any written notification which remains unresolved that it is in material violation of any of such license, or any order, rule, regulation, or decision of the NRC with respect to the Point Beach Assets. Seller is in material compliance with all Nuclear Laws and all orders, rules, regulations, or decisions of NRC applicable to it with respect to the Point Beach Assets.

(b) Section 3.13(b) of the Seller Disclosure Schedule sets forth all NRC Licenses applicable to the Point Beach Assets and currently in effect.

Section 3.14 Regulation as a Utility. Seller is a “subsidiary company” of a “holding company” as defined in the Public Utility Holding Company Act of 2005, a public utility within the meaning of the Federal Power Act and an electric utility within the meaning of the NRC regulations implementing the Atomic Energy Act. Seller is a public utility within the meaning of Wisconsin Statutes 196.01(5). Except with respect to local tax and zoning laws, Seller is not, as a result of its ownership or operation of the Point Beach Assets, subject to regulation as a public utility or public service company (or similar designation) by any state of the United States other than Wisconsin and Michigan, any foreign country or any municipality or any political subdivision of the foregoing.

Section 3.15 Tax Matters. Except as set forth on Section 3.15 of the Seller Disclosure Schedule and except with respect to the portion of the Point Beach Assets that are part of the Qualified Decommissioning Fund, with respect to the Point Beach Assets, (i) all material Tax Returns of Seller required to be filed for taxable periods ended prior to the Closing Date regarding the ownership or operation of the Point Beach Assets have been filed, and (ii) all material Taxes shown to be due on such Tax Returns have been paid, except where such Taxes are being contested in good faith through appropriate proceedings. No notice of deficiency or assessment has been received from any taxing authority with respect to any material amount of liabilities for Taxes of Seller in respect of the Point Beach Assets that has not been fully paid or finally settled, except for matters that are being contested in good faith through appropriate proceedings. There are no Encumbrances for Taxes upon the Point Beach Assets, except for Encumbrances for Taxes not yet due and payable and Encumbrances for Taxes that are being contested in good faith through appropriate proceedings.

Section 3.16 Qualified Decommissioning Fund.

(a) Except as described on Section 3.16(a) of the Seller Disclosure Schedule, with respect to all periods prior to the Closing: (i) Seller’s Qualified Decommissioning Fund has been a trust, validly existing under the Laws of the State of Illinois, with all requisite authority to conduct its affairs as it now does; (ii) Seller’s Qualified Decommissioning Fund satisfied the requirements necessary for such fund to be treated as a “Nuclear Decommissioning Fund” and a “Qualified Nuclear Decommissioning Fund” within the meaning of Treas. Reg. §1.468A-1(b)(3); (iii)

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Seller’s Qualified Decommissioning Fund has been in compliance with all applicable Laws of the NRC, FERC, the IRS, PSCW, MPSC and any other Governmental Authority; (iv) Seller’s Qualified Decommissioning Fund has not engaged in any acts of “self-dealing” as defined in Treas. Reg. § 1.468A-5(b)(2); (v) no “excess contribution,” as defined in Treas. Reg. § 1.468A-5(c)(2)(ii), has been made to Seller’s Qualified Decommissioning Fund which has not been withdrawn within the period provided under Treas. Reg. § 1.468A-5(c)(2)(i); and (vi) Seller has timely made valid elections to make annual contributions to the Qualified Decommissioning Fund since the first taxable year after the establishment of such fund and Seller has made available copies of such elections requested by Buyer for the Tax years ended December 31, 2001 through 2005.

(b) Seller has heretofore delivered or made available to Buyer a copy of Seller’s Decommissioning Trust Agreement as in effect on the date of this Agreement. Seller agrees not to amend Seller’s Decommissioning Trust Agreement between the date of this Agreement and the Closing Date without Buyer’s prior written consent, which shall not be unreasonably withheld, except for any amendment which may be required to be made to Seller’s Decommissioning Trust Agreement by any Law, to permit the transfer contemplated by Section 5.10 or to facilitate receipt of any Required Rulings pursuant to Section 5.15.

(c) Subject only to Seller’s Required Regulatory Approvals, Seller and the Trustee have, or as of Closing will have, all requisite authority to cause the assets of the Qualified Decommissioning Fund to be transferred on behalf of Buyer to the Trustee of the Post-Closing Decommissioning Trust Agreement.

(d) With respect to all periods prior to the Closing, (i) Seller or the Trustee of Seller’s Qualified Decommissioning Fund has filed or caused to be filed with the NRC, FERC, PSCW, MPSC and any other Governmental Authority all material forms, statements, reports, documents (including all exhibits, amendments and supplements thereto) required to be filed by such entities and (ii) there are no interim rate orders that may be retroactively adjusted or retroactive adjustments to interim rate orders that may affect amounts that may be contributed to the Qualified Decommissioning Fund or may require distributions to be made from the Qualified Decommissioning Fund. Seller has delivered or made available to Buyer a copy of the schedule of ruling amounts most recently issued by the IRS for Seller’s Qualified Decommissioning Fund and a complete copy of the currently pending request for revised ruling amounts, together with all exhibits, amendments and supplements thereto. Any amounts contributed to Seller’s Qualified Decommissioning Fund while such ruling request is pending before the IRS and which are finally determined to exceed the applicable amounts provided in the schedule of ruling amounts issued by the IRS will be withdrawn from Seller’s Qualified Decommissioning Fund within the period provided in Treas. Reg. § 1.468A-5(c)(2)(i).

(e) Seller has made available to Buyer a statement of assets and liabilities verified by the Trustee for Seller’s Qualified Decommissioning Fund as of December 31, 2005 and will make such an unaudited statement as of the last Business Day before Closing available within sixty (60) days after the Closing, and they present or will present fairly in all material respects as of such dates the financial position of

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Seller’s Qualified Decommissioning Fund. There are no Encumbrances for Taxes upon the assets of the Seller’s Qualified Decommissioning Fund other than Permitted Encumbrances.

(f) Seller’s Qualified Decommissioning Fund has filed or as of the Closing Date will have filed all material Tax Returns required to be filed prior to the Closing Date with respect to all taxable periods ending on or prior to the Closing Date, including returns for estimated Income Taxes; such Tax Returns are true, correct and complete in all material respects, and all Taxes shown to be due on such Tax Returns have been paid in full. Except as shown on Section 3.16(f) of the Seller Disclosure Schedule, no notice of deficiency or assessment has been received from any taxing authority with respect to any Liability for Taxes of Seller’s Qualified Decommissioning Fund which have not been fully paid or finally settled, and any such deficiency shown on Section 3.16(f) of the Seller Disclosure Schedule, is being contested in good faith through appropriate proceedings. Except as set forth on Section 3.16(f) of the Seller Disclosure Schedule, there are no outstanding agreements or waivers extending the applicable statutory periods of limitations for any Taxes associated with Seller’s Qualified Decommissioning Fund for any period.

Section 3.17 Intellectual Property. Section 3.17 of the Seller Disclosure Schedule lists the registrations and applications for Intellectual Property that are owned by Seller and included in the Point Beach Assets (the “Owned Intellectual Property”). The Owned Intellectual Property and the NMC Intellectual Property is all of the Intellectual Property reasonably necessary for the operation and maintenance of the Point Beach Assets. Except as otherwise described in Section 3.17 of the Seller Disclosure Schedule, Seller is the sole owner of all right, title, and interest in the Owned Intellectual Property. No proceedings have been instituted, or are pending or, to the Knowledge of Seller, threatened, which challenge the rights of Seller in respect of the Owned Intellectual Property. Except as would not have a Material Adverse Effect, to the Knowledge of Seller, the operation and maintenance of the Point Beach Assets, as presently conducted, does not infringe or otherwise violate any Intellectual Property rights of any other Person, no Person is materially infringing or otherwise violating any of the Owned Intellectual Property, and Seller has not received any written notice thereof in the past two (2) years.

Section 3.18 Undisclosed Liabilities. Since January 1, 2006, Seller has not incurred any Liabilities arising from the ownership of the Point Beach Assets that would be required to be reflected or reserved against in a consolidated balance sheet of Seller prepared in accordance with GAAP consistent with past practice, other than (a) Liabilities incurred in the ordinary course of business consistent with past practice, (b) Liabilities incurred in connection with the transactions contemplated hereby or otherwise contemplated or permitted by this Agreement; and (c) Liabilities which would not have a Material Adverse Effect.

Section 3.19 Complete Copies. Buyer has been provided access to true, complete and unredacted copies of the Seller’s Agreements, the Fuel Contracts, the

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Dominion Lease, the Farmland Leases, the Non-Material Contracts, the Generation-Transmission Interconnection Agreement and the Transferable Permits.

Section 3.20 Zoning Classification. The Real Property is zoned as set forth on Section 3.20 of the Seller Disclosure Schedule and is currently zoned in zoning categories which permit the operation of the Facilities including all ancillary facilities on the Site as currently operated, as a matter of right. Seller has not requested, applied for, or given its consent to, and Seller has no Knowledge of, any pending zoning variance or change with respect to the zoning of the Real Property. To the Knowledge of Seller, there exist no outstanding covenants or agreements in connection with the zoning of the Real Property or any portion thereof which would bind or require Buyer to perform any actions or pay any monies in connection therewith.

Section 3.21 Sufficiency of Purchased Assets. Taken together, the Point Beach Assets constitute substantially all of the material tangible and intangible assets necessary to operate Point Beach consistent in all material respects with the manner in which it has been operated during the twelve (12) month period prior to the date of this Agreement (it being understood and agreed that nothing set forth in this Section 3.21 constitutes a representation or warranty that the Point Beach Assets can or will be operated at the existing performance levels following the Closing Date).

Section 3.22 Brokerage Fees and Commissions. No broker, finder or investment banker, other than Concentric Energy Advisors, whose fee shall be paid by Seller, is entitled to any brokerage, finder’s or other fee or commission in connection with the transactions contemplated by this Agreement and the Ancillary Agreements based upon arrangements made by or on behalf of Seller.

Section 3.23 Disclaimer. EXCEPT FOR THE REPRESENTATIONS AND WARRANTIES SET FORTH IN THIS ARTICLE III, THE POINT BEACH ASSETS ARE BEING SOLD AND TRANSFERRED “AS IS, WHERE IS,” AND ACCORDINGLY SELLER IS NOT MAKING ANY OTHER REPRESENTATIONS OR WARRANTIES, WRITTEN OR ORAL, STATUTORY, EXPRESS OR IMPLIED, CONCERNING THE POINT BEACH ASSETS, INCLUDING, IN PARTICULAR, ANY WARRANTY OF MERCHANTABILITY, USAGE, SUITABILITY OR FITNESS FOR A PARTICULAR PURPOSE, OR AS TO THE WORKMANSHIP THEREOF OR THE ABSENCE OF ANY DEFECTS THEREIN, WHETHER LATENT OR PATENT, OR COMPLIANCE WITH ENVIRONMENTAL REQUIREMENTS, OR AS TO THE CONDITION OF THE POINT BEACH ASSETS, OR ANY PART THEREOF, ALL OF WHICH ARE HEREBY EXPRESSLY EXCLUDED AND DISCLAIMED. EXCEPT AS OTHERWISE EXPRESSLY PROVIDED IN THIS ARTICLE III, SELLER FURTHER SPECIFICALLY DISCLAIMS ANY REPRESENTATION OR WARRANTY REGARDING THE ABSENCE OF HAZARDOUS SUBSTANCES OR LIABILITY ARISING UNDER ENVIRONMENTAL LAWS. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, EXCEPT AS EXPRESSLY PROVIDED IN THIS AGREEMENT, SELLER EXPRESSLY DISCLAIMS ANY REPRESENTATION OR WARRANTY OF ANY KIND REGARDING THE CONDITION OF THE POINT BEACH ASSETS OR THE SUITABILITY OF THE

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FACILITIES FOR OPERATION AS A POWER PLANT AND NO OTHER MATERIAL OR INFORMATION PROVIDED BY OR COMMUNICATION MADE BY SELLER OR ANY OFFICER, EMPLOYEE, CONSULTANT OR AGENT THEREOF, OR ANY BROKER OR INVESTMENT BANKER WILL CAUSE OR CREATE ANY WARRANTY, EXPRESS OR IMPLIED, AS TO THE TITLE, CONDITION, VALUE OR QUALITY OF THE POINT BEACH ASSETS OR ANY PART THEREOF.

THE PROVISIONS OF THIS SECTION HAVE BEEN NEGOTIATED BY THE PARTIES HERETO AFTER DUE CONSIDERATION AND ARE INTENDED TO BE A COMPLETE EXCLUSION AND NEGATION OF ANY REPRESENTATIONS AND WARRANTIES, WHETHER EXPRESS OR IMPLIED OR STATUTORY, OTHER THAN THOSE REPRESENTATIONS AND WARRANTIES EXPRESSLY SET FORTH IN THIS AGREEMENT.

ARTICLE IV

REPRESENTATIONS AND WARRANTIES OF BUYER

Each of Buyer and Buyer’s Parent represents and warrants to Seller, except as otherwise set forth in the forms, statements, schedules, reports and documents filed by Buyer’s Parent with the SEC, and except as otherwise set forth on the Buyer Disclosure Schedule, as follows (it being agreed and understood that (i) any matter set forth for purposes of this Article IV in any section of the Buyer Disclosure Schedule shall be deemed disclosed with respect to any other relevant section of this Article IV to the extent (notwithstanding the absence of a specific cross-reference) it is reasonably apparent that such disclosure relates to such other section and (ii) no reference to or disclosure of any item on the Buyer Disclosure Schedule shall be construed as an admission or indication that such item or other matter is material or that such item or other matter is required to be referred to or disclosed on the Buyer Disclosure Schedule):

Section 4.1 Organization; Qualification. Buyer is a limited liability company duly formed, validly existing and in good standing under the laws of the State of Wisconsin. Buyer’s Parent is a corporation duly formed, validly existing and in good standing under the laws of the State of Florida. Each of Buyer and Buyer’s Parent has all requisite corporate power and authority to own, lease and operate its properties and to carry on its business as it is now being conducted. Buyer has heretofore delivered or made available to Seller complete and correct copies of its Certificate of Formation and Operating Agreement as currently in effect. Buyer’s Parent has heretofore delivered or made available to Seller complete and correct copies of its Articles of Incorporation and By-laws as currently in effect. Buyer is, or on the Closing Date will be, qualified to conduct business in the State of Wisconsin.

Section 4.2 Authority Relative to this Agreement. Each of Buyer and Buyer’s Parent has full corporate power and authority to execute and deliver this Agreement and the Ancillary Agreements, as applicable, and to consummate the transactions contemplated hereby or thereby. The execution and delivery of this

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Agreement and the Ancillary Agreements as applicable, and the consummation of the transactions contemplated hereby or thereby, have been duly and validly authorized by all necessary corporate action required on the part of each of Buyer and Buyer’s Parent and no other corporate proceedings on the part of Buyer or Buyer’s Parent are necessary to authorize this Agreement and the Ancillary Agreements, as applicable, or to consummate the transactions contemplated hereby or thereby. This Agreement has been duly and validly executed and delivered by each of Buyer and Buyer’s Parent, and assuming that this Agreement constitutes a valid and binding agreement of Seller and subject to the receipt of Buyer’s Required Regulatory Approvals and Seller’s Required Regulatory Approvals, constitutes a valid and binding agreement of each of Buyer and Buyer’s Parent, enforceable against each of Buyer and Buyer’s Parent in accordance with its terms, subject to applicable bankruptcy, reorganization, insolvency, moratorium, and other similar Laws affecting creditors’ rights generally and to general principles of equity (whether considered in a proceeding at law or in equity).

Section 4.3 Consents and Approvals; No Violation.

(a) Subject to the receipt of the third-party consents set forth on Section 4.3(a) of the Buyer Disclosure Schedule and the Buyer’s Required Regulatory Approvals, neither the execution and delivery of this Agreement and the Ancillary Agreements, as applicable, by each of Buyer and Buyer’s Parent nor the consummation of the transactions contemplated hereby or thereby will (i) conflict with or result in any breach of any provision of the Certificate of Formation and Operating Agreement of Buyer, (ii) require any consent, approval, authorization or permit of, or filing with or notification to, any Governmental Authority, (iii) result in a default (or give rise to any right of termination, cancellation or acceleration) under any of the terms, conditions or provisions of any note, bond, mortgage, indenture, agreement, lease or other instrument or obligation to which Buyer is a party or by which any of its assets may be bound, except for such defaults (or rights of termination, cancellation or acceleration) as to which requisite waivers or consents have been obtained or which would not have a material adverse effect on the ability of Buyer to perform its obligations hereunder (a “Buyer Material Adverse Effect”), or (iv) violate any Laws applicable to Buyer, which violations would have a Buyer Material Adverse Effect. Buyer has no Knowledge of any facts or circumstances that make it reasonably likely that Buyer’s Required Regulatory Approvals will not be obtained.

(b) Except for the Buyer’s Required Regulatory Approvals set forth on Section 4.3(b) of the Buyer Disclosure Schedule, no declaration, filing or registration with, or notice to, or authorization, consent or approval of any Governmental Authority is necessary for the consummation by Buyer of the transactions contemplated hereby.

Section 4.4 Availability of Funds. Buyer has sufficient funds available to it through corporate funds or commitment letters from financial institutions to provide sufficient funds to pay the Purchase Price on the Closing Date and to enable Buyer to timely perform all of its obligations under this Agreement.

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Section 4.5 Legal Proceedings. To the Knowledge of Buyer or Buyer’s Parent, there are no claims, actions, proceedings or investigations pending or threatened against Buyer or Buyer’s Parent before any court, arbitrator, mediator or Governmental Authority which would (i) have a Buyer Material Adverse Effect or (ii) prohibit the performance by Buyer of this Agreement or any of the Ancillary Agreements or the consummation of the transactions contemplated hereby or thereby. Buyer is not subject to any outstanding Governmental Orders which would have a Buyer Material Adverse Effect.

Section 4.6 WARN Act. Neither Buyer nor Buyer’s Parent has any intention with respect to the Point Beach Assets to engage in a “plant closing” or “mass layoff,” as such terms are defined in the WARN Act or any similar applicable state or local Law, within ninety (90) days after the Closing Date.

Section 4.7 Transfer of Assets of Qualified Decommissioning Fund. With respect to Seller’s transfer of the assets of Seller’s Qualified Decommissioning Fund to the Trustee under the Post-Closing Decommissioning Trust Agreement, except for the fact that Point Beach as owned by Buyer may not be treated as a “nuclear power plant” within the meaning of Treas. Reg. § 1.468A-1(b)(4) because Buyer’s rates for the sale or furnishing of electricity are not established or approved by a public utility commission or under the jurisdiction of the Rural Utilities Service. Buyer otherwise will acquire and own a “qualifying interest” in Point Beach within the meaning of Treas. Reg. § 1.468A-l and will, as the transferee, satisfy each of the requirements applicable to the transferee set forth in Treas. Reg. § 1.468A-6(b)(2). At the Closing, the Post-Closing Decommissioning Trust Agreement will satisfy the requirements of Section 468A of the Code and the regulations promulgated thereunder. At the Closing, the Post-Closing Decommissioning Trust Agreement for Buyer’s Qualified Decommissioning Fund will satisfy the NRC’s requirements for decommissioning trust provisions in 10 C.F.R. § 50.75(h)(i).

Section 4.8 Foreign Ownership or Control. Buyer or, if applicable, Buyer’s Parent will conform to the restrictions on foreign ownership, control or domination contained in Sections 103d and 104d of the Atomic Energy Act of 1954, as applicable, and the NRC’s regulations in 10 C.F.R. § 50.38. Neither Buyer nor Buyer’s Parent is currently owned, controlled or dominated by a foreign entity and neither will become owned, controlled, or dominated by a foreign entity before the Closing.

Section 4.9 Permit Qualifications. To the Knowledge of Buyer, Buyer (or its successor or permitted assigns) will be as the owner of Point Beach qualified to hold any Permits and Environmental Permits necessary to operate the Point Beach Assets.

Section 4.10 Brokerage Fees and Commissions. No broker, finder or investment banker, other than JP Morgan Securities Inc. whose fee will be paid entirely by Buyer, is entitled to any brokerage, finder’s or other fee or commission in connection with the transactions contemplated by this Agreement and the Ancillary Agreements based upon arrangements made by or on behalf of Buyer.

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ARTICLE V

COVENANTS OF THE PARTIES

Section 5.1 Conduct of Business Relating to the Point Beach Assets.

(a) Subject to the terms of the Interim Operating Agreement, if applicable, Buyer acknowledges that NMC, as the licensed operator of the Facilities, retains the exclusive responsibility for safe operation of the Facilities, and nothing in this Agreement shall in any way alter the licensed operator’s duties or obligations under any Law or NRC licenses. Except as described on Section 5.1(a) of the Seller Disclosure Schedule, during the period from the date hereof to the Closing Date, Seller shall operate and maintain, or cause to be operated and maintained, the Point Beach Assets in the ordinary course consistent with Prudent Utility Practices and past practices at Point Beach; it being understood that (i) any actions deemed reasonably necessary in the operation of the Point Beach Assets in accordance with Prudent Utility Practices shall be deemed to be in the ordinary course and (ii) Buyer expressly acknowledges that the Capital Budget, as set forth on Section 5.1(a) of the Seller Disclosure Schedule, is consistent with this standard. Without limiting the generality of the foregoing, during the period from the date of this Agreement to the Closing Date, subject to the terms of the Interim Operating Agreement, Seller (1) shall use and cause to be used commercially reasonable efforts to preserve intact the Point Beach Assets and preserve the goodwill and relationships with the Seller Bargaining Unit Employees, the NMC Bargaining Unit Employees, the Non-Bargaining Unit Employees, the Independent Contractors, vendors, suppliers and others having business dealings with Seller with respect thereto and (2) shall comply in all material respects with all applicable Laws relating to the Point Beach Assets and the Seller Bargaining Unit Employees, the NMC Bargaining Unit Employees and the Non-Bargaining Unit Employees. Notwithstanding the foregoing, except as contemplated in this Agreement, the Interim Operating Agreement or as described on Section 5.1(a) of the Seller Disclosure Schedule, during the period from the date hereof to the Closing Date, without the prior written consent of Buyer, which consent will not be unreasonably withheld, or to the extent advised by Buyer pursuant to the terms of the Transitional Advisory Support Services Agreement, Seller shall not directly do any of the following with respect to the Point Beach Assets, and shall not issue any consent or approval, or otherwise take any action, which permits NMC to do any of the following on Seller’s behalf or otherwise with respect to the Point Beach Assets (Buyer acknowledges, however, that NMC may be permitted to do one or more of the following without Seller’s or Buyer’s consent or approval under the terms and conditions of the NPPOSA and the NRC Licenses, and if NMC proceeds to do so accordingly, Seller shall not be in violation of this Section 5.1):

(i) make any material change in the levels of Nuclear Fuel Inventories and Non-Nuclear Fuel Inventories customarily maintained by Point Beach with respect to the Point Beach Assets, except for such changes as are consistent with Prudent Utility Practices;

(ii) except for Permitted Encumbrances (including amendments and/or replacements to the Permitted Encumbrances), sell, lease (as

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lessor), pledge, mortgage, encumber, restrict, transfer or otherwise dispose of, or grant any right, or suffer to be imposed any Encumbrance with respect to, any of the Point Beach Assets, other than assets used, consumed or replaced in the ordinary course of business;

(iii) enter into any new commitment or agreement for the purchase of Nuclear Fuel or amend, extend or voluntarily terminate prior to the expiration date thereof any of the Fuel Contracts, unless (A) the aggregate payments under all such new commitments would not be expected to exceed $500,000 or (B) the commitment is terminable either (x) automatically on the Closing Date or (y) at the option of Buyer at any time after the Closing Date without any penalty or cancellation charge;

(iv) enter into any new commitment or agreement for the sale of Nuclear Fuel;

(v) enter into any power sales agreement (other than the Power Purchase Agreement) relating to Point Beach having a term that extends beyond the Closing Date;

(vi) except as required by Law or GAAP, change, in any material respect, its Tax practice or policy (including making new Tax elections or changing Tax elections and settling Tax controversies not in the ordinary course of business) to the extent such change or settlement would be binding on Buyer;

(vii) knowingly breach any representation or warranty of Seller hereunder as of the Closing Date;

(viii) fail to make commercially reasonable efforts to pursue currently pending regulatory approvals and Permit or Environmental Permit applications, approvals and renewals relating to the Point Beach Assets that are reasonably necessary to operate the Facilities;

(ix) settle any claim or litigation that results in any material obligation imposed on the Point Beach Assets that could reasonably be likely to continue past the Closing Date;

(x) enter into or adopt any new agreement, plan or arrangement relating to the Seller Bargaining Unit Employees, the Non-Bargaining Unit Employees or the NMC Bargaining Unit Employees, amend any existing agreement, plan or arrangement relating to the Seller Bargaining Unit Employees, the Non-Bargaining Unit Employees or the NMC Bargaining Unit Employees to materially increase benefits thereunder, hire or retain any Person who would be deemed a Seller Bargaining Unit Employee, Non-Bargaining Unit Employee or NMC Bargaining Unit Employee except to replace a vacancy for the same position, or materially increase the compensation of any Seller Bargaining Unit Employee, Non-Bargaining Unit Employee or NMC Bargaining Unit Employee except (1) in the ordinary course of business consistent with past practice, (2) as provided in any

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existing agreements with any such employee or (3) as required by any Collective Bargaining Agreement or applicable Law (including any amendments that are required in order to maintain a Plan’s tax-qualified status under Section 401(a) of the Code);

(xi) transfer out of Point Beach or terminate any Point Beach Employee other than (1) for cause, (2) with the consent of Buyer, (3) through voluntary transfer pursuant to the bidding or bumping provisions of the applicable Collective Bargaining Agreement or (4) through voluntary termination or retirement;

(xii) consent to NMC’s replacement of the Point Beach Plant Manager or Site Vice President without first providing notice to and consulting with Buyer; and

(xiii) agree to enter into any of the transactions set forth in the foregoing paragraphs (i) through (xii);

provided, however, that this Agreement shall not restrict the ability of Seller at any time to (1) negotiate, execute or deliver, or authorize NMC to negotiate, execute or deliver, any amendment to or replacement of any of the Collective Bargaining Agreements where such amendment or replacement (a) provides for wages, benefits and other terms and conditions of employment for Seller Bargaining Unit Employees that are either, in the aggregate, (i) not materially greater in cost than overall wages, benefits and other terms and conditions of employment in the market, taking into account the trend for economic increases in the market, or (ii) materially consistent with such terms and conditions of employment for all other employees covered by that certain agreement between Seller, Wisconsin Gas LLC and Local Union No. 2150, IBEW, AFL-CIO; or (b) provides for wages, benefits and other terms and conditions of employment for NMC Bargaining Unit Employees that are, in the aggregate, not materially greater in cost than overall wages, benefits and other terms and conditions of employment in the market, taking into account the trend for economic increases in the market; or (2) take any and all actions necessary to effect Seller’s termination of the NPPOSA.

(b) The Parties shall establish, as soon as practicable after the execution of this Agreement, a committee (the “Transition Committee”) comprised of at least four (4) persons, including two (2) persons designated by Seller and two (2) persons designated by Buyer. The Transition Committee shall remain in existence until the earlier of the Closing Date and the Termination Date and shall oversee and manage the transition process through the earlier of the Closing Date and the Termination Date. Subject to applicable Laws, the Transition Committee will be kept apprised of all the Facilities’ management and operating developments, including with respect to any pre-closing outage, any repairs to the Facilities and the Capital Expenditures. The Transition Committee shall have no authority to bind or make agreements on behalf of Seller or Buyer or to issue instructions to or direct or exercise authority over Seller or Buyer or any of their respective officers, employees, advisors or agents or to waive or modify any provision of this Agreement. Seller shall use commercially reasonable efforts to arrange

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for Buyer’s representatives on the Transition Committee to have reasonable access to the management of NMC in the presence of one or more individuals designated by Seller.

(c) Between the date of this Agreement and the Closing Date, in the interest of cooperation between Seller and Buyer and to plan for and facilitate an orderly transition of ownership and operation of the Point Beach Assets from Seller to Buyer, the Parties agree that at the sole responsibility and expense of Buyer, and subject to compliance with all applicable NRC rules and regulations and other applicable Laws, and the terms of the Transitional Advisory Support Services Agreement and the Interim Operating Agreement, if applicable, Seller will permit designated Buyer Representatives (such Representatives acting in their capacity as observers, the “Observers”) of Buyer to observe all operations of Point Beach that relate to the Point Beach Assets, and such observation will be permitted on a cooperative basis in the presence of one or more individuals designated by Seller together with NMC (the “Seller’s Agents”); provided, however, that such Observers and their actions shall not interfere with the operation of Point Beach; and provided, further, that the number of Observers observing at any particular time and the scheduling and duration of their observation shall be subject at all times to the approval of Seller or the Seller’s Agents, which shall not be unreasonably withheld. Buyer shall indemnify Seller for any Loss or Liability resulting from the actions of the Observers. Seller shall use commercially reasonable efforts to provide to the Observers interim furnished office space, utilities and HVAC at the Facilities reasonably necessary to allow Buyer to conduct its transition efforts until the earlier of the Closing Date and the Termination Date; provided, that Buyer shall be responsible for all costs relating thereto, including telecommunications expenses and the cost of workers’ compensation and employer’s liability coverage, which will be maintained by Buyer for its employees. The Observers shall have no authority to bind or make agreements on behalf of Seller, to conduct discussions with or make representations to third parties on behalf of Seller, or to issue instructions to or direct or exercise authority over Seller or NMC or any of Seller’s or NMC’s officers, employees, advisors or agents. Notwithstanding anything in this Section 5.1(c) to the contrary, prior to the Closing Date, Buyer shall not have the right to perform or conduct any environmental sampling or testing at, in, on or underneath the Point Beach Assets.

Section 5.2 Access to Information.

(a) In addition to the rights granted by Sections 5.1(b), (c) and (d), and subject to all applicable Laws and the terms of the Transitional Advisory Support Services Agreement and the Interim Operating Agreement, if applicable, between the date of this Agreement and the earlier of the Closing Date and the Termination Date, Seller will, and will use commercially reasonable efforts to cause NMC to, during ordinary business hours, upon reasonable notice and subject to compliance with all applicable NRC rules and regulations and other applicable Laws and subject to approval in advance by Seller or the Seller’s Agents (i) give Buyer and Buyer’s Representatives reasonable access to all management personnel engaged in the operation of the Point Beach Assets and all books, documents, records, plants, offices and other facilities and properties constituting the Point Beach Assets; (ii) permit Buyer to make such reasonable inspections thereof as Buyer may reasonably request; (iii) furnish Buyer with such

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financial and operating data and other information with respect to the Point Beach Assets as Buyer may from time to time reasonably request; (iv) furnish Buyer a copy of each material report, schedule or other document filed or received by it since the date hereof with respect to the Point Beach Assets with the SEC, FCC, NRC, FERC or any other Governmental Authority having jurisdiction over the Point Beach Assets; provided, however, that (A) any such investigation shall be conducted in such a manner as not to interfere unreasonably with the operation of the Point Beach Assets, (B) Seller shall not be required to take any action which would constitute a waiver of the attorney-client privilege, and (C) Seller need not supply Buyer with any information that Seller is legally prohibited from supplying. Seller will use its commercially reasonable efforts to cause NMC to provide Buyer or Buyer’s Representatives with access to the Transferred Employee Records that it has, but Seller and NMC shall not be required to provide access to other employee records or medical information unless required by Law or specifically authorized by the affected employee. Notwithstanding anything in this Section 5.2 to the contrary, Seller and NMC will only furnish or provide such access to Transferred Employee Records and personnel and medical records as is permitted by Law or required by legal process or subpoena (other than data concerning salaries and benefits, dates of birth, dates of hire and other information used to calculate pension benefits which shall be provided).

(b) Buyer, Buyer’s Parent and Seller acknowledge that all information furnished to or obtained by Buyer or Buyer’s Representatives pursuant to either Section 5.1 or this Section 5.2 shall be subject to the provisions of the Confidentiality Agreement and shall be treated as Proprietary Information.

(c) Following the Closing Date and subject to all applicable NRC rules and regulations, each Party and its respective Representatives shall have reasonable access to all of the Business Books and Records, including all Transferred Employee Records or other personnel and medical records required to be made available by Law, legal process or subpoena, in the possession of the other Party to the extent that such access may reasonably be required by such Party in connection with the Assumed Liabilities or the Excluded Liabilities, or other matters relating to or affected by the operation of the Point Beach Assets or the Excluded Assets. Such access shall be afforded by the Party in possession of such books and records upon receipt of reasonable advance notice and during normal business hours. The Party exercising this right of access shall be solely responsible for any costs or expenses incurred by it or them pursuant to this Section 5.2(c). If the Party in possession of such books and records shall desire to dispose of any such books and records, such Party shall, prior to such disposition, give the other Party a reasonable opportunity at such other Party’s expense, to segregate and remove such books and records as such other Party may select. Notwithstanding the foregoing, the right of access to medical records and other confidential employee records shall be subject to all applicable Laws.

(d) Each of Buyer and Buyer’s Parent agrees that, prior to the Closing Date, it will not contact any vendors, suppliers, employees, or other contracting parties of NMC, Seller or Seller’s Affiliates with respect to any aspect of the Point Beach

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Assets or the transactions contemplated hereby, without the prior written consent of Seller or NMC, as applicable, which consent of Seller shall not be unreasonably withheld.

(e) Subject to the terms of the Interim Operating Agreement, if applicable, upon Buyer’s or Seller’s (as the case may be) prior written consent (which consent shall not be unreasonably withheld), Seller or Buyer (as the case may be) may provide Proprietary Information of the other Party to the SEC, NRC, FERC or any other Governmental Authority having jurisdiction over the Point Beach Assets or any stock exchange, as may be necessary to obtain Seller’s Required Regulatory Approvals or Buyer’s Required Regulatory Approvals, as the case may be. The disclosing Party shall seek confidential treatment for the Proprietary Information provided to any such Governmental Authority and the disclosing Party shall notify the other Party as far in advance as practical of its intention to release to any Governmental Authority any such Proprietary Information.

(f) In the event that a Party is requested or required by Governmental Authority to disclose any of the other Party’s Proprietary Information, the Party requested or required to make the disclosure shall provide the other Party with prompt written notice of any such request or requirement so that the other Party may seek a protective order or other appropriate remedy and/or waive compliance with this Section 5.2(f). If, in the absence of a protective order or other remedy or the receipt of a waiver by such other Party, the Party requested or required to make the disclosure is legally compelled to disclose the other Party’s Proprietary Information to any Governmental Authority, the Party requested or required to make the disclosure may, without liability hereunder, disclose to such Governmental Authority only that portion of the other Party’s Proprietary Information which is legally required to be disclosed.

(g) The Parties agree that the Confidentiality Agreement shall remain in effect until the Closing Date. Thereafter, the Parties agree that any restrictions contained in the Confidentiality Agreement with respect to Buyer’s disclosure of Proprietary Information shall terminate, other than with respect to the Proprietary Information of Seller that does not relate to the Point Beach Assets. The Parties further agree that after the Closing Date, Seller shall keep confidential all Proprietary Information provided by Buyer or which Seller possesses with respect to the Point Beach Assets, to the extent permitted by Law, and to the same extent and under the same conditions applicable to Buyer’s obligations with respect to Seller’s Proprietary Information as contained in the Confidentiality Agreement between the Parties, but without limitation as to duration.

Section 5.3 Expenses.

(a) Except to the extent specifically provided herein or in the Transitional Advisory Support Services Agreement or the Interim Operating Agreement, if applicable, whether or not the transactions contemplated hereby are consummated, all costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby, including the cost of legal, technical and financial consultants and the cost of filing for and prosecuting applications for Buyer’s Required Regulatory

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Approvals and Seller’s Required Regulatory Approvals, shall be borne by the Party incurring such costs and expenses.

(b) Except to the extent specifically provided in the Interim Operating Agreement, if applicable, Buyer shall be responsible for all third party vendor costs and expenses incurred and relating to work performed with respect to the Point Beach Assets at the request of Buyer or Buyer’s Parent after the date hereof.

(c) Buyer shall reimburse Seller for all fees and expenses incurred by Seller in connection with obtaining title insurance or surveys relating to the Real Property.

Section 5.4 Further Assurances; Cooperation.

(a) Subject to the terms and conditions of this Agreement, each of the Parties hereto will use commercially reasonable efforts to take, or cause to be taken, all action, and to do, or cause to be done, all things necessary, proper or advisable under applicable Laws to consummate and make effective the sale, transfer, conveyance and assignment of the Point Beach Assets and the assignment of the Assumed Liabilities or the exclusion of the Excluded Liabilities pursuant to this Agreement and to consummate and make effective the other transactions contemplated by this Agreement and the Ancillary Agreements, including using commercially reasonable efforts to ensure satisfaction of the conditions precedent to each Party’s obligations hereunder and thereunder, and including all regulatory approvals. Notwithstanding anything in the previous sentence to the contrary, the Parties shall use commercially reasonable efforts to obtain all Permits and Environmental Permits necessary for Buyer to acquire and operate the Point Beach Assets. Neither Buyer nor Seller nor any of their respective Affiliates will, without the prior written consent of the other Party, advocate or take any action which would reasonably be expected to prevent or materially impede, interfere with or delay the transactions contemplated by this Agreement or which could reasonably be expected to cause, or to contribute to causing, the other to receive less favorable regulatory treatment than that sought by the other. Buyer further agrees that prior to the Closing Date, neither it nor its Affiliates will enter into any other contract to acquire or market or control the output of, nor acquire or market or control the output of, electric generation facilities or uncommitted generation capacity if the proposed acquisition or the ability to market or control output of such additional electric generation facilities or uncommitted generation capacity would increase the market power attributable to Buyer in a manner materially adverse to approval of the transactions contemplated hereby or would otherwise prevent or materially interfere with the transactions contemplated by this Agreement.

(b) From time to time after the Closing Date, Seller will execute and deliver or make available such documents to Buyer as Buyer may reasonably request, at Buyer’s expense, in order to more effectively consummate the transactions contemplated by this Agreement or to more effectively vest in Buyer such title to the Point Beach Assets, subject to the Permitted Encumbrances. From time to time after the Closing Date, without further consideration, Buyer will, at its own expense, execute and

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deliver or make available such documents to Seller as Seller may reasonably request in order to evidence Buyer’s assumption of the Assumed Liabilities.

(c) The Parties shall use commercially reasonable efforts to cooperate with each other to facilitate the transition of the information systems, computer applications and processing of data at the Facilities.

(d) Anything in this Agreement to the contrary notwithstanding, this Agreement shall not constitute an agreement to assign any contract or agreement or any claim, right or benefit arising thereunder or resulting therefrom if an attempted assignment thereof, without the consent of a third party thereto, would constitute a breach or other contravention thereof or be ineffective with respect to any party thereto. To the extent that Seller’s rights under any contract or agreement may not be assigned without the consent of another Person, Seller, at its expense, shall use commercially reasonable efforts to obtain any such required consent as promptly as possible. Seller and Buyer shall cooperate and shall each use commercially reasonable efforts for a reasonable period of time after the Closing to obtain an assignment of such contract or agreement to Buyer. In the event that any such consent to assignment has not been obtained, the Parties agree to proceed under this Agreement to the extent permissible. Without limiting the generality of the foregoing, during the period from the date hereof to the Closing Date, Seller will direct and use reasonable good faith efforts to cause NMC to obtain, or cause to be obtained, the written consent of the other parties to the NMC Intellectual Property and any Seller’s Agreement to which NMC is a party, or, if required, novation thereof to Buyer or, alternatively, written confirmation from such parties reasonably satisfactory in form and substance to Buyer and Seller that such consent is not required.

(e) Buyer shall use commercially reasonable efforts to cooperate with Seller, upon Seller’s reasonable request and at Seller’s expense, in Seller’s prosecution of the Department of Energy Claim and, if applicable, in Seller’s commencement and prosecution of the Department of Energy Potential Claim.

(f) During the period from the date hereof to the Closing Date, Seller shall direct and use good faith efforts to cause NMC to cooperate with Buyer to execute Buyer’s thermal power uprate project, as more specifically described in Section 5.4(f) of Buyer’s Disclosure Schedule, at Buyer’s sole cost, expense and risk; unless Seller and NMC determine in their reasonable judgment that the allocation of NMC personnel and other resources required to cooperate with Buyer on such project will have an adverse impact to the safe operation of Point Beach or the Calculation Reconstitution Project.

(g) During the period from the date hereof to the Closing Date, Seller will use reasonable good faith efforts to cause NMC to identify, to the extent practicable, the NMC Assets.

Section 5.5 Public Statements. Without the consent of the non-disclosing Party, a Party shall not issue any press release or other public disclosure with respect to this Agreement or the transactions contemplated hereby without first affording

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the non-disclosing Party the opportunity to review and comment on such disclosure, except as may be required by applicable Law or stock exchange rules.

Section 5.6 Consents and Approvals.

(a) Seller and Buyer shall each file or cause to be filed with the Federal Trade Commission and the Department of Justice (together or individually, the “Antitrust Agency”) any notifications required to be filed under the HSR Act and the rules and regulations promulgated thereunder with respect to the transactions contemplated hereby. The Parties shall consult with each other as to the appropriate time of filing such notifications and shall agree upon the timing of such filings. All filing fees under the HSR Act shall be borne by Buyer, and each Party will bear its own costs for the preparation of any such filing. Each Party shall (i) respond promptly to any request for additional information made by either of such agencies; (ii) promptly notify the other Party of, and if in writing, furnish the other Party with copies of (or, in the case of material oral communications, advise the other Party orally of) any communications from or with the Antitrust Agency in connection with any of the transactions contemplated by this Agreement; (iii) not participate in any meeting with the Antitrust Agency unless it consults with the other Party in advance and to the extent permitted by the agency gives the other Party the opportunity to attend and participate thereat; (iv) furnish the other Party with copies of all correspondence, filings and communications (and memoranda setting forth the substance thereof) between it and the Antitrust Agency with respect to any of the transactions contemplated by this Agreement; (v) furnish the other Party with such necessary information and reasonable assistance as may be reasonably necessary in connection with the preparation of necessary filings or submission of information to the Antitrust Agency and consistent with appropriate confidentiality safeguards. Nothing in this Section 5.6(a) shall be construed to require either Party to disclose to the other documents it provides to the Antitrust Agency in response to Item 4(c) of the Hart-Scott-Rodino Notification Report Form. The Parties shall use their commercially reasonable efforts to cause the waiting periods under the HSR Act to terminate or expire at the earliest possible date after the date of filing, and to resist any action, including any legislative, administrative or judicial action, and to have vacated, lifted, reversed or overturned any Governmental Order (whether temporary, preliminary or permanent) that restricts, prevents or prohibits the consummation of any of the transactions contemplated by this Agreement under any applicable Law.

(b) As promptly as practicable after the date of this Agreement and after the receipt of any determination required to be made by any other Governmental Authority as a condition to Buyer and Seller making the filings contemplated by this paragraph, (i) Buyer shall file with FERC (and if requested by Buyer, Seller shall support) a notice of self-certification or an application requesting Exempt Wholesale Generator status for Buyer, and (ii) Buyer shall file with FERC any necessary applications requesting acceptance of the Power Purchase Agreement. In fulfilling its obligations set forth in part (i) of the immediately preceding sentence, Buyer shall use commercially reasonable efforts to effect the referenced filings with FERC within fifteen (15) days of the receipt of the last of any determinations required to be made by any other Governmental Authority as a condition to Buyer and Seller making the filing. In fulfilling

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its obligations set forth in part (ii) of the immediately preceding sentence, Buyer shall use commercially reasonable efforts to effect the referenced filings with FERC within thirty (30) days of the date of this Agreement. No later than ten (10) days prior to submitting any such applications with FERC, Buyer shall submit the application to Seller for review and comment, and Buyer shall in good faith consider any revisions reasonably requested by Seller. Buyer shall be solely responsible for its own cost of preparing, reviewing and filing its respective application, responses and any petition for rehearing or any reapplication.

(c) As promptly as practicable after the date of this Agreement, Buyer and Seller, as applicable, shall make the filings listed on Section 5.6(c) of the Seller Disclosure Schedule. In fulfilling their respective obligations under this Section 5.6(c), Buyer and Seller shall each use commercially reasonable efforts to effect or cause to be effected any such filings within thirty (30) days of the date of this Agreement. No later than ten (10) days prior to submitting any application contemplated by this Section 5.6(c), the submitting Party shall provide a draft of such application to the other Parties for review and comment and the submitting Party shall in good faith consider any revisions reasonably requested by the reviewing Parties. Each Party will bear its own costs of the preparation and review of any such filings.

(d) As promptly as practicable after the date of this Agreement, Buyer shall file with FERC an application requesting authorization under Section 205 of the Federal Power Act to sell electric generating capacity and energy (and, at Buyer’s discretion, other services, including ancillary services) at wholesale at market-based rates. In fulfilling its obligations set forth in the immediately preceding sentence, Buyer shall use its commercially reasonable efforts to file the referenced application with FERC within thirty (30) days of the date of this Agreement. No later than ten (10) days prior to submitting any such application with FERC, Buyer shall submit such application to Seller for review and comment and Buyer shall consider any revisions reasonably requested by Seller. Buyer shall be solely responsible for the cost of preparing and filing this application, any petition for rehearing, or any reapplication. Each Party will bear its own costs of the preparation and review of any such filings.

(e) As promptly as practicable after the date of this Agreement, Buyer and Seller shall file with NRC an application requesting consent under Section 184 of the Atomic Energy Act and 10 C.F.R. § 50.80 for the transfer of the NRC Licenses from Seller and NMC, as applicable, to Buyer, including the operation by Buyer of Point Beach under the Interim Operating Agreement, and approval of any conforming license amendments or other related approvals. In fulfilling their respective obligations set forth in the immediately preceding sentence, each of Buyer and Seller shall use its commercially reasonable efforts to effect any such filing within thirty (30) days of the date of this Agreement. Each Party will bear its own costs of the preparation of any such filing and NRC fees shall be borne solely by Buyer. Thereafter, Buyer and Seller shall cooperate with one another to facilitate NRC review of the application by providing the NRC staff with such documents or information that the NRC staff may reasonably request or require any of the Parties to provide or generate.

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(f) As promptly as practicable after the date of this Agreement, but no later than thirty (30) days after Buyer supplies to Seller all of the information regarding Buyer that is required to be included in the application described in this Section 5.6(f), Seller and Buyer shall jointly prepare as co-applicants, and Seller shall file with FERC, an application for approval of this transaction under Section 203 of the Federal Power Act. In fulfilling their respective obligations set forth in this Section 5.6(f), Seller and Buyer shall use their commercially reasonable efforts. No later than ten (10) days prior to submitting any such application with FERC, Seller shall submit such application to Buyer for review and comment and Seller shall consider any revisions reasonably requested by Buyer. Seller and Buyer shall respond promptly to all requests from FERC or its staff for additional information regarding such application and use their respective commercially reasonable efforts to participate in any hearings, settlement proceedings or other proceedings ordered by FERC with respect to the application. Each Party will bear its own costs of preparation and review of such filings.

(g) Seller and Buyer shall cooperate with each other, as promptly as practicable after the date of this Agreement, to (i) prepare and make with FERC or any other Governmental Authority having jurisdiction over Seller, Buyer or the Point Beach Assets, all necessary filings required to be made with respect to the transactions contemplated hereby (including those specified above), (ii) effect all necessary applications, notices, petitions and filings and execute all agreements and documents, (iii) use commercially reasonable efforts to obtain the transfer or reissuance to Buyer of all necessary Permits, Environmental Permits, consents, approvals and authorizations of all Governmental Authorities, and (iv) use commercially reasonable efforts to obtain all necessary consents, approvals and authorizations of all other parties, in the case of each of the foregoing clauses (i), (ii) and (iii), necessary or advisable to consummate the transactions contemplated by this Agreement (including Seller’s Required Regulatory Approvals and Buyer’s Required Regulatory Approvals) or required by the terms of any note, bond, mortgage, indenture, deed of trust, license, franchise, permit, concession, contract, lease or other instrument to which Seller or Buyer is a party or by which any of them is bound. The Parties shall respond promptly to any requests for additional information made by such agencies, use their respective commercially reasonable efforts to participate in any hearings, settlement proceedings or other proceedings ordered with respect to the applications, and use their respective commercially reasonable efforts to cause regulatory approval to be obtained at the earliest possible date after the date of filing. Each Party will bear its own costs of the preparation and review of any such filing. Seller and Buyer shall have the right to review in advance all characterizations of the information relating to the transactions contemplated by this Agreement which appear in any filing made in connection with the transactions contemplated hereby and the filing Party shall consider in good faith any revisions reasonably requested by the non-filing Party.

(h) Buyer shall have the primary responsibility for securing the transfer, reissuance or procurement of the Permits and Environmental Permits (other than Transferable Permits) effective as of the Closing Date. Seller shall cooperate with Buyer’s efforts in this regard and assist in any transfer or reissuance of a Permit or Environmental Permit held by Seller or the procurement of any other Permit or

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Environmental Permit when so requested by Buyer. In the event that Buyer is unable, despite its commercially reasonable efforts, to obtain a transfer or reissuance of one or more of the Permits or Environmental Permits as of the Closing Date, Buyer may use the applicable Permit or Environmental Permit issued to Seller, provided (i) such use is not unlawful, (ii) Buyer notifies Seller prior to the Closing Date, (iii) Buyer continues to make commercially reasonable efforts to obtain a transfer or reissuance of such Permit or Environmental Permit after the Closing Date, and (iv) Buyer indemnifies Seller for any losses, claims or penalties suffered by Seller in connection with the Permit or Environmental Permit that is not transferred or reissued as of the Closing Date resulting from Buyer’s ownership or operation of the Point Beach Assets following the Closing Date. In no event shall Buyer use or otherwise rely on a Permit or Environmental Permit issued to Seller beyond one year after the Closing Date.

Section 5.7 Tax Matters.

(a) All Transfer Taxes incurred in connection with this Agreement and the transactions contemplated hereby shall be the responsibility of Buyer. Buyer will file, to the extent required by applicable Law, all necessary Tax Returns and other documentation with respect to all such Transfer Taxes, and, if required by applicable Law, Seller will join in the execution of any such Tax Returns or other documentation. Prior to the Closing Date, Buyer will provide to Seller, to the extent possible, an appropriate exemption certificate in connection with this Agreement and the transactions contemplated hereby, due from each applicable taxing authority, and the Parties shall comply with all requirements and use commercially reasonable efforts to secure applicable sales tax exemptions for the transactions contemplated by this Agreement.

(b) With respect to Taxes to be prorated in accordance with Section 2.4, Buyer shall prepare and timely file all Tax Returns required to be filed after the Closing with respect to the Point Beach Assets, if any, and shall duly and timely pay all such Taxes shown to be due on such Tax Returns. Seller shall be entitled to review any such Tax Returns to the extent that such Returns relate to any period, allocation or other amount for which Seller is responsible and provide comments thereon, which Buyer shall accept to the extent such comments are reasonable. If required by applicable Law, Seller will join in the execution of any such Tax Returns or other documentation. Buyer shall make such Tax Returns and all schedules and working papers supporting such Tax Returns available for Seller’s review and approval no later than thirty (30) Business Days prior to the due date for filing such Tax Return. Seller shall respond no later than ten (10) Business Days prior to the due date for filing such Tax Return. Subject to Section 5.7(e), not less than five (5) Business Days prior to the due date of any such Tax Return, Seller shall pay to Buyer its proportionate share of the amount shown as due on such Tax Return as determined in accordance with Section 2.4. In the event Buyer and Seller cannot agree as to the preparation or the reporting of any material item on a Tax Return to be filed by Buyer, the dispute shall be settled in the manner provided by Section 5.7(e) and the cost of such Independent Accounting Firm shall be borne equally by the Parties; provided, that if the Independent Accounting Firm has not made a determination as of the date that such Tax Return is required to be filed, such Tax Return shall be filed in a

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manner consistent with Buyer’s position; provided, further, that with respect to any such Tax Return that is filed prior to a determination by the Independent Accounting Firm, Seller and Buyer shall take all commercially reasonable steps to amend such Tax Return, if necessary, to reflect any material determination made by the Independent Accounting Firm.

(c) Prior to the Closing Date, Seller shall cause the Trustee of Seller’s Qualified Decommissioning Fund to pay estimated Income Taxes for the taxable period that ends on the Closing Date in an amount equal to the estimated and unpaid Income Tax Liability of the Seller’s Qualified Decommissioning Fund for the taxable period that ends on the Closing Date. To the extent that the amount of estimated Income Taxes paid pursuant to this Section 5.7(c) is in excess of the Income Tax Liability of Seller’s Qualified Decommissioning Fund for the taxable period that ends on the Closing Date, any refund resulting from such excess shall be forwarded to, and deposited in, Buyer’s Qualified Decommissioning Fund. To the extent that the amount of estimated Income Taxes paid pursuant to this Section 5.7(c) is less than the Income Tax Liability of Seller’s Qualified Decommissioning Fund for the taxable period that ends on the Closing Date, any such deficiency shall be paid by Buyer’s Qualified Decommissioning Fund. To the extent that Buyer’s Qualified Decommissioning Fund is liable for a deficiency, the Purchase Price shall be decreased by such amount, and to the extent that Buyer receives a refund, the Purchase Price shall be increased by such amount.

(d) Each of the Parties shall provide the other with such assistance as may reasonably be requested by the other Party in connection with the preparation of any Tax Return, any audit or other examination by any taxing authority, or any judicial or administrative proceedings relating to Liability for Taxes or effectuating the terms of this Agreement, and each will retain and provide the requesting Party with any records or information which may be relevant to such return, audit or examination, proceedings or determination. Any information obtained pursuant to this Section 5.7 or pursuant to any other Section hereof providing for the sharing of information or review of any Tax Return or other schedule relating to Taxes shall be subject to the provisions of the Confidentiality Agreement and shall be treated as Proprietary Information.

(e) In the event that a dispute arises between Seller and Buyer as to the preparation or the reporting of any material item on a Tax Return to be filed by Buyer or the allocation of such Taxes between Seller and Buyer, the Parties shall attempt in good faith to resolve such dispute, and any agreed amount shall be paid to the appropriate Party within ten (10) Business Days of the date on which the Parties reach agreement. If a dispute is not resolved within thirty (30) days of a Party having provided the other Party written notice of a dispute, the Parties shall submit the dispute for determination and resolution to the Independent Accounting Firm, which shall be instructed to determine and report to the Parties in writing, within thirty (30) days after such submission, upon such disputed amount, and such written report shall be final, conclusive and binding on the Parties. The Independent Accounting Firm shall act as an expert and not as an arbitrator and shall make findings only with respect to the remaining disputes so submitted to it (and not by independent review). The fees and expenses of the Independent Accounting Firm in resolving the dispute shall be borne equally by Seller

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and Buyer. Any payment required to be made as a result of the resolution of the dispute by the Independent Accounting Firm shall be made within ten (10) days after such resolution, together with any interest determined by the Independent Accounting Firm to be appropriate. Submission of a dispute to the Independent Accounting Firm shall not relieve any Party from any obligation under this Agreement to timely file a Tax Return or pay a Tax.

Section 5.8 Advice of Changes.

(a) Prior to the Closing Date, each Party will promptly advise the other in writing of any change or discovery occurring after the date hereof that would constitute a material breach of any representation, warranty or covenant of the advising or other Party under this Agreement. If a Party advises the other Party of any such matter with respect to a material breach of the advising Party, the other Party shall have the right to terminate this Agreement in accordance with and subject to the provisions of Section 8.1(c) or Section 8.1(d) as the case may be. If a Party advises the other Party of any such matter with respect to a material breach by the other Party, the advising Party shall have the right to terminate this Agreement in accordance with and subject to the provisions of Section 8.1(c) or Section 8.1(d), as the case may be. If a Party fails to exercise its termination right, the written notice under this Section 5.8 will be deemed to have amended this Agreement, including the appropriate schedule, or to have qualified the representations and warranties contained in Article III and Article IV. Seller shall be entitled to amend, substitute or otherwise modify any Seller’s Agreement to the extent that such Seller’s Agreement expires by its terms prior to the Closing Date or is terminable without Liability to Buyer on or after the Closing Date (other than an amendment that would extend the term thereof for a new term of years in excess of the then current term), or if the terms and conditions of such modified Seller’s Agreement constituting the Assumed Liabilities are on terms and conditions not less favorable to Buyer than the original Seller’s Agreement.

(b) As of a date no more than one (1) Business Day prior to the Closing, each of the Parties shall provide the other Party with any and all revisions, modifications and updates to the Schedules such that the Schedules will be true and correct as of such date. To the extent that such revisions, modifications and updates do not, either individually or in the aggregate, have a Material Adverse Effect or a Buyer Material Adverse Effect, as the case may be, then such revisions, modifications and updates will be deemed to be automatically incorporated into the Schedules.

Section 5.9 Employees.

(a)

(i) Buyer shall offer employment, commencing as of the Closing Date, in the same position of employment and at the same level of wages as applied immediately prior to the Closing Date, to each Seller Bargaining Unit Employee, each NMC Bargaining Unit Employee and each Non-Bargaining Unit Employee who is employed immediately prior to the Closing Date, which employees are set forth on Schedule 5.9(a)(i), as amended between the date of this

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Agreement and the Closing Date to reflect any changes in the identities of work force personnel. Each such employee who is offered and accepts continued employment with Buyer shall be referred to herein as a “Seller Bargaining Unit Transferred Employee”, a “NMC Bargaining Unit Transferred Employee” or a “Non-Bargaining Unit Transferred Employee”, as applicable, (collectively, the “Transferred Employees”). Notwithstanding the foregoing, Buyer shall not be required to hire any Seller Bargaining Unit Employee, NMC Bargaining Unit Employee or Non-Bargaining Unit Employee who is absent from active service immediately prior to the Closing Date due to an authorized leave of absence or active military duty (not including any employee using authorized sick or vacation time) unless and until such employee is available and able (with or without reasonable accommodation) to return to work, on which date such employee shall become a Transferred Employee and be treated by Buyer with the same seniority as if such employee had become a Transferred Employee on the Closing Date, provided that such date falls within the timeframe established by applicable Law or the applicable Collective Bargaining Agreement or, if there is no Law or Collective Bargaining Agreement provision applicable to the employee’s leave of absence, the twelve (12) month period following the Closing Date.

(ii) At the Closing, Buyer shall assume the Collective Bargaining Agreements and all of Seller’s and NMC’s obligations under the Collective Bargaining Agreements, including the provision of substantially equivalent fringe benefits, and retirement and insurance benefits, for the Seller Bargaining Unit Transferred Employees and NMC Bargaining Unit Transferred Employees, for a period of no less than thirty (30) months following the Closing Date or as modified by a Collective Bargaining Agreement between Buyer and the applicable labor union.

(iii) At the Closing, Buyer shall also assume all employment agreements listed on Section 3.8(b) of the Seller Disclosure Schedule hereto and all agreements relating to the Independent Contractors listed on Schedule 3.8(c) of the Seller Disclosure Schedule hereto, and all of Seller’s or NMC’s obligations under each of such agreements.

(iv) Buyer agrees that, for a period of eighteen (18) months following the Closing Date, it shall not, and shall not cause any of its Affiliates to, terminate the employment of any Transferred Employee for any reason other than for cause. In the event that the employment of a Transferred Employee is nonetheless terminated by Buyer other than for cause during such eighteen month period, Buyer shall (A) comply with the terms and conditions of the applicable Collective Bargaining Agreement in the case of a Seller Bargaining Unit Transferred Employee or a NMC Bargaining Unit Transferred Employee, or (B) cause the Non-Bargaining Unit Transferred Employee to be paid an amount equal to the greater of (1) the severance benefits that are applicable to such employee under the severance plans maintained by Seller immediately prior to the Closing Date or (2) an amount equal to the Non-Bargaining Unit Transferred Employee’s base salary for the remainder of the eighteen (18) month period as if still employed.

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Nothing contained herein shall alter the at-will employment relationship of any Non-Bargaining Unit Transferred Employee.

(v) Buyer shall, and shall cause its Affiliates to, recognize or otherwise provide full credit for each Transferred Employee’s seniority or years of service prior to the Closing Date with Seller, NMC or their respective Affiliates for purposes of eligibility, vesting and service related level of benefits under the employee benefit plans and policies provided by Buyer to the Transferred Employees following the Closing Date, to the same extent such seniority or service is recognized by Seller, NMC or their respective Affiliates immediately prior to the Closing Date. For the purpose of benefit accrual, Buyer shall give Transferred Employees credit for all service with NMC, Seller and their respective Affiliates under all Buyer Benefit Plans, but the ultimate benefits provided under the Buyer Benefit Plans may be offset by the corresponding benefits previously provided by NMC, Seller, or their respective Affiliates, or by the corresponding benefits accrued under the Benefit Plans of Seller or its Affiliates or otherwise to committed to be provided by NMC, Seller, or their respective Affiliates in the future.

(vi) Buyer shall be responsible for providing COBRA continuation coverage to Transferred Employees and qualified beneficiaries of such employees by reason of the occurrence of a qualifying event following the Closing Date. Seller shall be responsible for providing COBRA continuation coverage to former Seller Bargaining Unit Employees, NMC Bargaining Unit Employees and Non-Bargaining Unit Employees and qualified beneficiaries of such former employees who become or became entitled to such COBRA continuation coverage on or before the Closing Date by reason of the occurrence of a qualifying event on or before the Closing Date, including those for whom the Closing Date occurs during their COBRA election period.

(b) For no less than thirty (30) months following the Closing Date, Buyer shall provide Non-Bargaining Unit Transferred Employees with (i) wage or base salary rates no less than the wage or base salary rates in effect immediately prior to Closing and (ii) terms and conditions of employment and fringe benefits under all applicable employee benefit plans, programs and fringe benefit arrangements maintained by Buyer or its Affiliates (the “Buyer Benefit Plans”), including pension, retiree medical and life insurance benefits (the “Replacement Retiree Coverages” and, together with the pension, retiree medical and life insurance benefits available to Seller Bargaining Unit Employees and NMC Bargaining Unit Employees, the “Point Beach Retiree Coverages”) that are substantially equivalent in value, premium and nature to those available to the Non-Bargaining Unit Transferred Employees immediately prior to the Closing Date.

(c) As of the Closing Date, or, if later, the first date of employment with Buyer following the Closing Date as contemplated by the final sentence of Section 5.9(a)(i) (a “Permitted Hire Date”), Buyer shall allow the Transferred Employees to be eligible to commence participation in one or more tax-qualified 401(k) plans sponsored by Buyer or its Affiliates that will provide for employer matching

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contributions and salary deferral options which, in the aggregate, are substantially equivalent to those provided under the 401(k) savings plans maintained by Seller or NMC, respectively, prior to the Closing Date. To the extent allowable by Law and the applicable Seller or NMC plan, Buyer shall take any and all necessary action to cause the trustee of any tax-qualified 401(k) plan of Buyer or its Affiliates in which any Transferred Employee becomes a participant to accept a direct “rollover” in cash of all or a portion of said employee’s “eligible rollover distribution” within the meaning of Section 402 of the Code from the applicable Seller or NMC 401(k) savings plan, if requested to do so by the Transferred Employee.

(d) Buyer shall (i) waive all limitations as to pre-existing condition exclusions and waiting periods with respect to the Transferred Employees under the Buyer Benefit Plans providing welfare benefits, including Replacement Retiree Coverages, other than, but only to the extent of limitations or waiting periods under the corollary welfare plans maintained by Seller or its Affiliates and that have not been satisfied as of the Closing Date, or the Permitted Hire Date, as applicable and (ii) provide each Transferred Employee with credit for any co-payments and deductibles paid prior to the Closing Date under Seller’s plans, including the Point Beach Retiree Coverages, and including by application of the “mutualization benefit” (Transferred Employees may file a claim for reimbursement for prescription drug out-of-pocket co-payments in excess of $200, which are then applied toward the out-of-pocket maximum co-payment in effect under the group medical plan covering such Transferred Employees), during a plan year that has not ended as of the Closing Date, in satisfying any deductible or out-of-pocket requirements under the Buyer Benefit Plans including the Replacement Retiree Coverages (on a pro-rata basis in the event of a difference in plan years). Effective as of the Closing Date, neither Seller nor NMC shall have any responsibility to provide retiree medical or life insurance coverages for any Transferred Employee.

(e)

(i) Effective as of the Closing Date, Buyer shall cause to be provided a defined benefit pension plan (the “Replacement Defined Benefit Plan”) for the benefit of the Transferred Employees who participated in the pension plan maintained by Seller immediately prior to the Closing Date (the “Point Beach Defined Benefit Plan”). Such Transferred Employees are referred to hereinafter as the “Pension Plan Employees”. The Replacement Defined Benefit Plan shall provide benefit formulas and provisions that are equivalent in value to the benefit plan formulas and provisions set forth in the Point Beach Defined Benefit Plan as of the Closing Date. Buyer agrees that it shall (i) maintain such benefit formulas and provisions for Pension Plan Employees for a period of at least thirty (30) months after the Closing Date or for the term of the applicable Collective Bargaining Agreement, if greater (provided, however, that if changes in an applicable collective bargaining agreement or the Law require any such terms to be modified or if any such terms are required by the IRS to be modified in connection with Buyer’s application for a determination letter for the Replacement Defined Benefit Plan, Buyer may modify such terms to the extent necessary to comply with such Laws or requirements) and (ii) be responsible for providing that,

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in the aggregate, the total benefit for each Pension Plan Employee is substantially equivalent to the total benefit that would have been paid to such Pension Plan Employee under the Point Beach Defined Benefit Plan, had the Pension Plan Employee remained employed with Seller or NMC, as the case may be. The Pension Plan Employees shall be given credit for all purposes under the Replacement Defined Benefit Plan for all service with and compensation from NMC, Seller, or their Affiliates as if it were service with and compensation from Buyer. The Replacement Defined Benefit Plan shall provide, upon the transfer of assets referred to below, that the benefit liabilities for the Pension Plan Employees under the Replacement Defined Benefit Plan shall in no event be less than their benefit liabilities under the Point Beach Defined Benefit Plan as of the Closing Date. As of the Closing Date, Seller shall cause the Transferred Employees to cease further accrual of benefits under the Point Beach Defined Benefit Plan.

(ii) On the Closing Date, Seller shall cause the Initial Transfer Amount of the assets related to the Pension Plan Employees, as calculated below, to be transferred to the trust under the Replacement Defined Benefit Plan; provided, however, that no such transfer shall be made unless and until the conditions set forth in Section 5.9(e)(iv) have been met. In connection herewith, Seller shall direct the trustee of the trust under the Point Beach Defined Benefit Plan to transfer from the trust under the Point Beach Defined Benefit Plan to the trust under the Replacement Defined Benefit Plan cash, cash equivalents, and marketable securities, the value of which shall be equal to ninety percent (90%) of the good faith estimate of the actuary under the Point Beach Defined Benefit Plan of the amount of assets required to be transferred in respect of the Pension Plan Employees, measured as of the Closing Date, calculated in accordance with Section 414(l) of the Code and Treasury Regulation Section 1.414(1)-1 (determined under the assumptions mandated by the PBGC as of the Closing Date) and the regulations promulgated thereunder (the “Initial Transfer Amount”). In no event shall more than the amount permitted to be transferred in accordance with Section 414(l) of the Code be transferred from the Point Beach Defined Benefit Plan to the Replacement Defined Benefit Plan. The Initial Transfer Amount shall be calculated using census data as of the most recently completed fiscal year prior to the Closing Date projected through the Closing Date, taking into account all Point Beach Defined Benefit Plan amendments and benefit changes negotiated and agreed to at any time prior to the Closing Date. Buyer shall cause the Replacement Defined Benefit Plan to accept such transfer.

(iii) As soon as practicable after the Closing Date, Seller shall cause a second transfer to be made from the Point Beach Defined Benefit Plan to the Replacement Defined Benefit Plan, in cash, cash equivalents or marketable securities, equal to the “True-Up Amount”. The True-Up Amount shall be equal to the amount of assets required to be transferred in respect of the Pension Plan Employees, measured as of the Closing Date, calculated in accordance with Section 414(l) of the Code and Treasury Regulation Section 1.414(1)-1 (determined under the assumptions mandated by the PBGC as of the Closing Date) and the regulations promulgated thereunder minus the sum of (A) the Initial

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Transfer Amount and (B) distributions, if any, under the Point Beach Defined Benefit Plan for benefits paid with respect to the Pension Plan Employees and allocable plan expenses from the Closing Date through the date of the second transfer, adjusted for the actual investment rate of return of the Point Beach Defined Benefit Plan from the Closing Date through but not including the date of the second transfer. The “Total Transfer Amount” (sum of the Initial Transfer Amount and the True-Up Amount) under the preceding two paragraphs shall be determined by the actuary for the Point Beach Defined Benefit Plan and reviewed and agreed to as being done in accordance with the methodology and assumptions contemplated by this Section 5.9(e) by the actuary for the Replacement Defined Benefit Plan. For this purpose, Seller shall provide Buyer with the Total Transfer Amount figure no later than one hundred eighty (180) days following the Closing Date. If the Total Transfer Amount cannot be mutually agreed to by the actuaries for Seller and Buyer, a third actuary chosen by Seller’s actuary and Buyer’s actuary, whose expenses shall be borne solely by Buyer, shall be retained and its determination of the Total Transfer Amount shall be binding on the Parties.

(iv) Notwithstanding the foregoing, the transfer of assets referred to above shall not take place until the last to occur of the following: (A) Buyer has furnished to Seller written evidence of Buyer’s adoption of the Replacement Defined Benefit Plan and the assumption of liabilities thereunder, (B) Buyer has furnished to Seller either a favorable determination letter from the IRS with respect to the qualification of the Replacement Defined Benefit Plan under Section 401(a) of the Code and its related trust under Section 501(a) of the Code, or an opinion of Buyer’s counsel, satisfactory to Seller’s counsel, that the Replacement Defined Benefit Plan and its related trust are so qualified, and (C) the 31^st day following the filing of all required IRS Forms 5310 in connection with the transfer. Buyer agrees to use its commercially reasonable efforts to file any required IRS Form 5310 on or prior to the date hereof or as soon as practicable thereafter, and Seller agrees to use its commercially reasonable efforts to facilitate the filing of any required IRS Form 5310.

(v) At the time of transfer of the Initial Transfer Amount, Buyer and the Replacement Defined Benefit Plan shall assume the liabilities for all accrued benefits under the Point Beach Defined Benefit Plan in respect of the Pension Plan Employees, and Seller and their affiliates and the Point Beach Defined Benefit Plan shall be relieved of all such liabilities.

(vi) Buyer agrees that it shall be responsible for all costs incurred in connection with the calculation of and transfer of the Initial Transfer Amount and the Total Transfer Amount under this Section 5.9(e) including the costs of Seller’s actuaries and all certifications required by IRS Form 5310. Buyer shall promptly reimburse Seller for such costs upon receipt of an invoice from Seller.

(f) Buyer agrees that it shall assume all FAS 106 liabilities for the Transferred Employees who participate in the retiree medical, dental and life

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insurance plans maintained by Seller. The Parties agree that no assets shall be transferred to Buyer with respect to such FAS 106 liabilities, irrespective of whether any funding exists relating to such FAS 106 liabilities.

(g)

(i) On or before the Closing Date, Seller shall provide a list of the name and site of employment of any and all of Seller’s and NMC’s employees at the Facilities who have experienced, or will experience, an employment loss or layoff – as defined by the WARN Act or any similar applicable state or local law requiring notice to employees in the event of a closing or layoff – within ninety (90) days prior to the Closing Date (the “WARN Certificate”). Seller shall update the WARN Certificate up to and including the Closing Date.

(ii) For a period of ninety (90) days after the Closing Date, Buyer shall not engage in any conduct which would result in an employment loss or layoff for a sufficient number of employees at the Facilities which, if aggregated with any such conduct on the part of Seller or NMC prior to the Closing Date, would trigger the WARN Act or any similar applicable state or local law.

(h) Seller shall pay to Buyer, to the extent payable pursuant to Seller’s policies in effect from time to time and to the extent permitted by the Collective Bargaining Agreements, the cash equivalent for all vacation time, floating holidays, sick days, personal days and bonuses and incentive compensation for Transferred Employees which have accrued but remain unpaid as of the Closing Date, the Liability for which is assumed by Buyer. For purposes hereof, the foregoing calculations shall be determined consistent with NMC’s and Seller’s past practices, as applicable.

(i) Buyer and Seller shall cooperate as reasonably necessary to implement the provisions and undertakings contained in this Section 5.9, including with respect to each Seller Bargaining Unit Employee, NMC Bargaining Unit Employee and Non-Bargaining Unit Employee who becomes a Transferred Employee on a Permitted Hire Date, and agree to provide each other with such records and information as may be necessary and appropriate to carry out their respective obligations under this Section 5.9.

(j) Notwithstanding anything to the contrary contained in this Section 5.9, if the Effective Date (as defined in the Interim Operating Agreement) of the Interim Operating Agreement shall occur prior to the Closing Date, the provisions of Sections 5.9(a), (b), (c), (d), (e)(i), (f), (g), (h) and (i) with respect to the NMC Bargaining Unit Transferred Employees and NMC employees that are Non-Bargaining Unit Transferred Employees shall apply at the time of the Effective Date with the “Effective Date” replacing the “Closing Date” in the provisions of Sections 5.9(a), (b), (c), (d), (e)(i), (f), (g), (h) and (i) as they relate to such NMC employees.

Section 5.10 Qualified Decommissioning Fund.

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(a) Between the date hereof and the Closing, any deposits by Seller to Seller’s Qualified Decommissioning Fund shall not exceed the maximum amounts permitted to be contributed to Seller’s Qualified Decommissioning Fund under Code Section 468A and any private letter ruling issued to Seller by the IRS.

(b) At the Closing, Seller shall cause to be transferred to the Trustee under the Post-Closing Decommissioning Trust Agreement assets in an amount equal to the Decommissioning Target. After such transfer, any assets remaining in Seller’s Qualified Decommissioning Fund (the “Excess Qualified Decommissioning Fund Assets”) shall be retained by Seller’s Qualified Decommissioning Fund for distribution to Seller, as provided by the private letter ruling contemplated by Section 5.15(b).

(c) Buyer shall take all reasonable steps necessary to satisfy any requirements imposed by the NRC regarding Buyer’s Qualified Decommissioning Fund, in a manner sufficient to obtain NRC approval of the transfer of Seller’s Qualified Decommissioning Fund assets to Buyer.

(d) The Parties shall not take any actions that would cause the actual Tax consequences of the transactions contemplated by this Agreement to differ from or be inconsistent with the Basic Requested Rulings or any private letter rulings received pursuant to Section 5.15.

(e) Seller shall cause the Trustee of Seller’s Qualified Decommissioning Fund to pay estimated final expenses for trustee and investment management fees and other final administrative expenses attributable to Seller’s Qualified Decommissioning Fund to the extent practicable before the Closing. To the extent that the amount of such estimated final expenses paid before the Closing pursuant to this Section 5.10(e) is in excess of the actual final expenses attributable to Seller’s Qualified Decommissioning Fund, any refund resulting from such excess shall be forwarded to, and deposited in, Buyer’s Qualified Decommissioning Fund. To the extent that the amount of such estimated final expenses paid before the Closing pursuant to this Section 5.10(e) is less than the actual final expenses attributable to Seller’s Qualified Decommissioning Fund, any such deficiency shall be paid by Buyer’s Qualified Decommissioning Fund. To the extent that Buyer’s Qualified Decommissioning Fund is liable for any such deficiency, the Purchase Price shall be decreased by such deficiency amount, and to the extent that Buyer’s Qualified Decommissioning Fund receives any such refund, the Purchase Price shall be increased by such refund amount, each in accordance with Section 2.3(b).

(f) Any Excess Qualified Decommissioning Fund Assets transferred to the Trustee under the Post-Closing Qualified Decommissioning Trust Agreement pursuant to this Section 5.10 shall be subject to the provisions of Section 5.15.

Section 5.11 Spent Nuclear Fuel Fees.

(a) Except as provided in the third sentence of this paragraph and in Sections 2.1 and 2.2, between the date hereof and the Closing Date, and at all

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times thereafter, Seller will remain liable for all Spent Nuclear Fuel Fees and any other fees associated with electricity generated at Point Beach and sold prior to the Closing Date, and Buyer shall have no Liability or responsibility therefor. Buyer shall pay and discharge all Spent Nuclear Fuel Fees and any other fees associated with electricity generated at Point Beach and sold from and after the Closing Date, and Seller shall have no Liability or responsibility therefor. On the Closing Date, Buyer shall assume title to, and responsibility for the management, storage, removal, transportation and disposal of all of the Spent Nuclear Fuel. Pursuant to Section 302(b)(3) of the Nuclear Waste Policy Act, Seller shall assign to Buyer its rights, duties, title and interest in and to the Standard Spent Fuel Disposal Contract. Seller shall provide the required notice to the Department of Energy of the assignment of the Standard Spent Fuel Disposal Contract to Buyer within ninety (90) days following the Closing, such notice to be in a form reasonably acceptable to Seller and Buyer and to include a copy of this Agreement therewith.

(b) Notwithstanding anything to the contrary in this Agreement, after the Closing, (i) Buyer will assume all of the rights and obligations under the Standard Spent Fuel Disposal Contract, including the right to recover post-Closing damages resulting from the Department of Energy’s failure to commence the removal, transportation, acceptance or any delay in accepting Spent Nuclear Fuel for disposal pursuant to the Standard Spent Fuel Disposal Contract and the Nuclear Waste Policy Act, (the “Department of Energy Post-Closing Claim”) and (ii) Seller will retain and prosecute the Department of Energy Claim and will retain the right to commence and prosecute the Department of Energy Potential Claim in a manner consistent with its best judgment; provided, that Seller (x) will not take positions in prosecuting its Department of Energy Claim or Department of Energy Potential Claim or (y) will not enter into any settlement agreement relating to the Department of Energy Claim or the Department of Energy Potential Claim, in a manner that materially and adversely impacts (A) Buyer’s operation of Point Beach or (B) Buyer’s prosecution of any Department of Energy Post-Closing Claim.

Section 5.12 Department of Energy Decontamination and Decommissioning Fees. Seller will continue to pay all Department of Energy Decontamination and Decommissioning Fees relating to Nuclear Fuel purchased and consumed at Point Beach prior to the Closing Date.

Section 5.13 Cooperation Relating to Insurance and Price-Anderson Act. Until the Closing, Seller will maintain, or cause to be maintained, in effect (a) insurance in amounts and against such risks and losses as is customary in the commercial nuclear power industry and (b) not less than the level of property damage and liability insurance for the Facilities as in effect on the date hereof. Seller shall use commercially reasonable efforts to cooperate with Buyer’s efforts to obtain insurance, including insurance required under the Price-Anderson Act or other Nuclear Laws with respect to the Point Beach Assets. Buyer agrees to indemnify Seller for its reasonable out-of-pocket expenses incurred in providing such assistance and cooperation and not to take any action which shall adversely affect any residual rights of Seller in such insurance policies.

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Section 5.14 Release of Seller. Buyer shall use commercially reasonable efforts to support Seller’s efforts to obtain a written release of Seller effective as of the Closing with respect to obligations arising on or after the Closing Date under any of the Seller’s Agreements, Fuel Contracts, Dominion Lease or Non-Material Contracts assigned to Buyer hereunder.

Section 5.15 Private Letter Rulings. The Parties agree to cooperate in good faith in the preparation and, as appropriate, the joint filing of one or more private letter ruling requests to be made by Buyer and Seller pursuant to Section 5.15(a) (the “Basic Requested Rulings”) and pursuant to Section 5.15(b) (the “Additional Requested Rulings” and, together with the Basic Requested Rulings, the “Requested Rulings”). The Requested Rulings shall be modified, as necessary, to take into account any legislation enacted on or after the date of this Agreement or any change in the Code or the Treasury Regulations promulgated thereunder or the issuance of any notice, revenue procedure, private letter ruling or similar administrative item by the IRS occurring on or after the date of this Agreement. Neither Buyer nor Seller shall take any action that would cause the transfer of assets from Seller’s Qualified Decommissioning Fund to Buyer’s Qualified Decommissioning Fund to fail to be treated as satisfying the requirements of Treas. Reg. § 1.468A-6(b) (assuming solely for purposes of this sentence that Point Beach as owned by Buyer qualifies as a “nuclear power plant” within the meaning of Treas. Reg. § 1.468A-1(b)(4) because Buyer’s rates for the sale or furnishing of electricity are not established or approved by a public utility commission or under the jurisdiction of the Rural Utilities Service),or cause Buyer and Seller to fail to obtain the Requested Rulings. The user fee set forth in the applicable IRS Revenue Procedure for substantially identical letter rulings by a common sponsor shall be shared equally by both Parties. Each Party shall bear its own legal fees with respect to any requests. The Parties agree to use commercially reasonable efforts to file the private letter ruling request seeking the Requested Rulings within forty-five (45) days of the date of this Agreement. The receipt of the Requested Rulings shall not be a condition to the occurrence of the Closing.

(a) Basic Requested Rulings. Buyer and Seller shall use commercially reasonable efforts to obtain, prior to the Closing Date, the Basic Requested Rulings determining that (i) the transfer of all or a portion of the assets from Seller’s Qualified Decommissioning Fund to Buyer’s Qualified Decommissioning Fund is a disposition that either satisfies or is treated as satisfying the requirements of Treas. Reg. § 1.468A-6(b) pursuant to the IRS’s exercise of discretion under Treas. Reg. § 1.468A-6(g)(1), (ii) none of Seller, Buyer nor their respective Qualified Decommissioning Funds will recognize gain or loss or otherwise take any income or deduction into account by reason of the transfer of assets from Seller’s Qualified Decommissioning Fund to Buyer’s Qualified Decommissioning Fund, except to the extent incurred as a result of the liquidation of assets to pay fees and expenses pursuant to Section 5.10(d), (iii) Buyer’s Qualified Decommissioning Fund will be treated as satisfying the requirements of Section 468A of the Code, (iv) Buyer’s Qualified Decommissioning Fund will have a carryover Tax basis in the assets received from Seller’s Qualified Decommissioning Fund and (v) pursuant to Section 2.2(a)(x) and Treas. Reg. § 1.461-4(d)(5), for the taxable year that ends immediately prior to the Closing Date, Seller will be entitled to a current

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deduction in an amount equal to the total of any amounts treated as realized by Seller as a result of Buyer’s assumption of Seller’s liabilities for Decommissioning the Plant and the Site.

(b) Additional Requested Rulings. Buyer and Seller shall submit the Additional Requested Rulings as described in this Section 5.15(b). Buyer and Seller shall use commercially reasonable efforts to obtain, prior to the Closing Date, the Additional Requested Rulings determining that, at the Closing, (i) immediately following the transfer to Buyer of Point Beach and the transfer to Buyer’s Qualified Decommissioning Fund of assets in an amount equal to the Decommissioning Target, the IRS will exercise its discretion under Treas. Reg. § 1.468A-5(c)(1) to disqualify Seller’s Qualified Decommissioning Fund, (ii) the Excess Qualified Decommissioning Fund Assets will be deemed to be distributed on the Closing Date to Seller pursuant to Treas. Reg. § 1.468A-5(c)(3) and will be included in Seller’s gross income, net of Taxes paid by Seller’s Qualified Decommissioning Fund upon such deemed distribution, (iii) pursuant to Treas. Reg. § 1.468A-5(c)(3), Seller’s Qualified Decommissioning Fund will be treated as disposing of the Excess Qualified Decommissioning Fund Assets for purposes of Section 1001 of the Code; (iv) pursuant to Treas. Reg. § 1.468A-5(b)(2)(iii), the deemed distribution of the Excess Qualified Decommissioning Fund Assets, net of Taxes paid by Seller’s Qualified Decommissioning fund pursuant to Treas. Reg. § 1.468A-5(c)(3), shall not be considered an act of “self-dealing” as defined in Treas. Reg. § 1.468A-5(b)(2) and Seller will not be subject to the excise tax under Section 4951 of the Code or other penalties as a result of such deemed distribution, and (v) Seller will take a fair market value basis in the Excess Qualified Decommissioning Fund Assets upon their deemed distribution.

(c) In the event that the Additional Requested Rulings described in Section 5.15(b) are not obtained prior to the Closing Date, the Purchase Price shall be adjusted in accordance with Section 2.3(b)(i)(6).

(d) Upon Decommissioning, Buyer shall remit to Seller an amount in cash equal to the Decommissioning Target as assessed on the Closing Date less the total nominal cost of Decommissioning; provided, however, that such difference is a positive amount.

Section 5.16 NRC Commitments. Buyer shall maintain and operate the Facilities in accordance with the NRC Commitments, the NRC Licenses, applicable NRC regulations and policies and with applicable Nuclear Laws.

Section 5.17 Decommissioning.

(a) Buyer hereby agrees, and agrees to commit to the PSCW as part of receiving the Required Regulatory Approvals, that it will complete, at its sole cost and expense, the Decommissioning of the Site once the Site is no longer utilized either for power generation of any kind or for any storage of Spent Nuclear Fuel or other Nuclear Material and that it will complete all Decommissioning activities in accordance with all Laws, including applicable requirements of the Atomic Energy Act, the NRC’s rules, regulations, orders and pronouncements thereunder, and the orders of the PSCW,

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except that, whether or not permitted by any Law, entombment (or ENTOMB) of structures, components and equipment on the Site shall not be an acceptable form of Decommissioning. The Parties acknowledge that Seller shall have no obligation to audit, monitor or enforce rights and obligations with respect to this Section 5.17.

(b) Buyer hereby agrees that:

(i) The Decommissioning Target is expected to be sufficient to cover the costs to Decommission the Site at the expected time of Decommissioning pursuant to the DECON method, as such method is specified by the NRC; provided, however, that in the event that such funds are not sufficient, at or after the Closing, to meet the above-mentioned requirement, Buyer’s Parent will execute a parent guaranty in favor of Buyer for the shortfall in a form that would otherwise be sufficient to meet NRC requirements in the event that such funds become insufficient to meet minimum NRC Decommissioning funding requirements.

(ii) Buyer will maintain all funds in its Qualified Decommissioning Fund in an external trust fund;

(iii) Buyer will perform a Site-specific estimate of costs to Decommission the Site in accordance with the terms of this Agreement every five (5) years; and

(iv) in any future sale of Point Beach, any purchaser of Point Beach shall agree to Decommission the Site in a manner consistent with the terms of this Agreement.

(c) Buyer agrees to deliver or make available to Seller a copy of Buyer’s Post-Closing Decommissioning Trust Agreement (reflecting the requirements stated in Section 4.7) at least twenty (20) days prior to the Closing Date and, except to the extent required by Law, not to amend Buyer’s Post Closing Decommissioning Trust Agreement following such delivery in a manner that would be adverse to Seller, without Seller’s prior written consent, which consent shall not be unreasonably withheld.

Section 5.18 Nuclear Insurance Policies. On and after the Closing Date, Buyer shall have and maintain in effect policies of liability and property insurance with respect to the ownership, operation and maintenance of the Facilities which shall afford protection against the insurable hazards and risks with respect to which nuclear facilities of similar size and type to the Facilities customarily maintain insurance, and which meets the requirements of 10 C.F.R. § 50.54(w) and 10 C.F.R. Part 140. Such coverage shall include nuclear liability insurance from ANI in such form and in such amount as will meet the financial protection requirements of the Atomic Energy Act, and an agreement of indemnification as contemplated by Section 170 of the Atomic Energy Act. In the event that the nuclear liability protection system contemplated by Section 170 of the Atomic Energy Act is repealed or changed, Buyer shall have and maintain in effect, to the extent commercially available on reasonable terms, alternate protection against

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nuclear liability. In addition, Buyer shall provide the financial assurance that it will be able to pay the retrospective premiums for the Facilities as prescribed by Section 170 of the Atomic Energy Act.

Section 5.19 No Transport or Storage of Waste. From and after the Closing Date, Buyer shall not permit any Spent Nuclear Fuel that was not generated by the Facilities to be transported to the Facilities or to be stored at the Facilities for any period of time.

Section 5.20 Buyer’s Parent Guaranty. Buyer’s Parent shall provide on the date hereof the Buyer’s Parent Guaranty to provide security for compliance with Buyer’s obligations under this Agreement, which guaranty shall remain in effect until the earliest to occur of (i) all such obligations having been fully and irrevocably performed and satisfied, (ii) the occurrence of the Closing and (iii) if applicable, the termination of this Agreement pursuant to Section 8.1 (other than a termination under Section 8.1(d)). If at any time there shall occur a Downgrade Event, then Buyer shall supplement Buyer’s Parent Guaranty with a standby letter of credit in the amount of the Purchase Price. Any such letter of credit shall be satisfactory to Seller in form and substance, shall be issued by a financial institution acceptable to Seller and shall remain in effect until the expiration of Buyer’s Parent Guaranty. Any such security shall be subject to all terms and conditions of this Agreement otherwise applicable to Buyer’s Parent Guaranty. In the event Buyer shall fail to provide such security within five (5) Business Days of receipt of written notice, then a breach of this Agreement shall be deemed to have occurred.

Section 5.21 Subsequent Sale of Point Beach or Buyer. Each of Buyer and Buyer’s Parent hereby agree that:

(a) subject to Seller’s Right of First Refusal, any subsequent sale of Point Beach or Buyer shall be approved by the PSCW for the purpose of determining whether the potential purchaser has sufficient financial resources to operate Point Beach;

(b) any subsequent purchaser of Point Beach or Buyer shall be contractually required to intervene as a party in any PSCW proceeding initiated pursuant to Section 5.21(a) and affirmatively commit on the record of such proceeding to be bound by the terms of Seller’s Right of First Refusal, Section 5.17, Section 5.19, this Section 5.21 and Section 5.22; and

(c) any subsequent purchaser of Point Beach or Buyer shall be contractually required to assume the obligations of Buyer under the Generation Development Option.

Section 5.22 Intercompany Transactions. As long as Buyer owns Point Beach:

(a) Buyer shall not guaranty any debt of or provide any loans to Buyer’s Parent or any of its Affiliates; and

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(b) Buyer’s Parent shall notify the PSCW of any request made of the SEC to pay dividends from funds other than Buyer’s retained earnings.

Section 5.23 Information. Buyer shall provide to Seller all financial statements, documents evidencing Buyer’s capital structure and any other financial information reasonably requested by Seller from time to time in order to allow Seller and its independent auditor to make any accounting determination, including any accounting of the Facilities by Seller. Buyer shall furnish to Seller such certifications to such information from a Senior Financial Officer of Buyer or, if a Senior Financial Officer of Buyer is not available, a Senior Financial Officer of an Affiliate of Buyer, as Seller may reasonably request from time to time.

Section 5.24 Risk of Loss.

(a) Except as otherwise provided in this Agreement, prior to the Closing, Buyer shall not bear any risk of loss or damage to the property included in the Point Beach Assets. Seller shall use commercially reasonable efforts to replace or repair any damage to the Point Beach Assets in accordance with Prudent Utility Practices, except as otherwise provided in paragraphs (b) or (c) below.

(b) If, before the Closing, all or any material portion of the Point Beach Assets are taken by eminent domain or are the subject of a pending or, to the Knowledge of Seller, contemplated taking which has not been consummated and such taking has resulted in, or such contemplated taking could reasonably be expected to result in, a Material Adverse Effect, Seller shall notify Buyer promptly in writing of such fact. Buyer and Seller shall negotiate in good faith to settle the loss resulting from such taking (including by making a fair and equitable adjustment to the Purchase Price) and, upon such settlement, consummate the transactions contemplated by this Agreement pursuant to the terms of this Agreement. If no such settlement is reached within sixty (60) days after Seller has notified Buyer of such taking, then Buyer or Seller may terminate this Agreement pursuant to Section 8.1(e); provided, that any such termination notice must be given no later than ten (10) Business Days after the expiration of such sixty (60) day period.

(c) If, before the Closing, all or any material portion of the Point Beach Assets is damaged or destroyed by fire or other casualty and such damage or destruction has resulted in a Material Adverse Effect, Seller shall notify Buyer promptly in writing of such fact. If Seller has not notified Buyer within fifteen (15) days after its occurrence of its intention to repair such damage or destruction (such repair to be reasonably satisfactory to Buyer), Buyer and Seller shall negotiate in good faith to settle the loss resulting from such casualty (including by making a fair and equitable adjustment to the Purchase Price) and, upon such settlement, consummate the transactions contemplated by this Agreement pursuant to the terms of this Agreement. If no such settlement is reached within sixty (60) days after Seller has notified Buyer of such casualty, then Buyer or Seller may terminate this Agreement pursuant to Section 8.1(e); provided, that any such termination notice must be given no later than ten (10) Business Days after the expiration of such sixty (60) day period.

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Section 5.25 Monthly Net Capability. At least three (3) days prior to Closing, Seller and Buyer shall agree to a “Monthly Net Capability” (as defined in applicable Mid-America Interconnected, Inc. regulations) of the Facilities (excluding the CT), at the Interconnection Point (as defined in the Generation Transmission Interconnection Agreement, and for the avoidance of doubt, the Interconnection Point shall be those points into the 345kV bus) as of the Closing Date, and determined in accordance with the standards, procedures and guidelines set forth in Mid-America Interconnected Inc. Guide No. 3A, “Procedure for the Uniform Rating of Generating Equipment” (as revised). The Purchase Price shall be decreased by Two Thousand One Hundred Fifty Dollars ($2,150) for each kilowatt by which the Monthly Net Capability of the Facilities (excluding the CT) as so established is less than 1030 megawatts and increased by Two Thousand One Hundred Fifty Dollars ($2,150) for each kilowatt by which the Monthly Net Capability of the Facilities (excluding the CT) as so established exceeds 1030 megawatts measured.

Section 5.26 Power Purchase Agreement. The Parties hereby agree that, the term of the Power Purchase Agreement shall be, at Seller’s option to be exercised prior to the Closing Date, either (i) until the day before (a) with respect to Unit 1, the sixteenth (16^th) anniversary of the Closing Date and (b) with respect to Unit 2, the seventeenth (17^th) anniversary of the Closing Date, in which case the Power Purchase Agreement attached hereto as Exhibit C1 shall become effective and the Power Purchase Agreement attached hereto as Exhibit C2 shall be terminated, or (ii) until the expiration of the current NRC License for each of Unit 1 and Unit 2, in which case the Power Purchase Agreement attached hereto as Exhibit C2 shall become effective and the Power Purchase Agreement attached hereto as Exhibit C1 shall be terminated, and, in any event, with no adjustment to the Purchase Price.

ARTICLE VI

CONDITIONS TO CLOSING

Section 6.1 Conditions to Obligations of Each Party. The respective obligation of each Party to consummate the transactions contemplated by this Agreement is subject to the satisfaction or (to the extent permitted by Law) waiver by Buyer and Seller on or prior to the Closing Date of the following conditions:

(a) Any waiting period (and any extension thereof) under the HSR Act applicable to the consummation of the transactions contemplated by this Agreement shall have expired or been terminated;

(b) No preliminary or permanent injunction or Law or Governmental Order shall be in effect which prohibits the consummation of the transactions contemplated by this Agreement; and

(c) The Seller’s Required Regulatory Approvals and the Buyer’s Required Regulatory Approvals shall have been obtained and shall be in full force and effect in form and substance reasonably satisfactory to Seller and Buyer.

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Section 6.2 Conditions to Obligations of Buyer. The obligation of Buyer to consummate the transactions contemplated by this Agreement shall be subject to the satisfaction or (in Buyer’s sole discretion) waiver on or prior to the Closing Date of the following conditions:

(a) the representations and warranties of Seller herein shall be true and accurate as of the Closing Date as if made at and as of such time (other than those representations and warranties that address matters only as of a particular date or only with respect to a specific period of time which need only be true and accurate as of such date or with respect to such period), except where the failure of such representations and warranties to be so true and accurate (without giving effect to any limitation as to “materiality” or “material adverse effect” set forth therein) would not have a Material Adverse Effect;

(b) Seller shall have performed and complied in all material respects with the covenants and agreements contained in this Agreement which are required to be performed and complied with by Seller on or prior to the Closing Date;

(c) Buyer shall have received a certificate from an authorized officer of Seller, dated the Closing Date, to the effect that, to such officer’s knowledge, the conditions set forth in Section 6.2(a) and Section 6.2(b) have been satisfied by Seller;

(d) Seller shall have transferred to the Trustee, pursuant to the Post-Closing Decommissioning Trust Agreement all assets in Seller’s Qualified Decommissioning Fund, subject to and in accordance with Section 5.10 of this Agreement;

(e) Seller shall have delivered, as applicable, executed Ancillary Agreements to Buyer at the Closing and each such Ancillary Agreement shall be in full force and effect; and

(f) the Facilities shall have been operating at an average of not less than ninety-five (95%) of their licensed thermal output and full rated electric output as measured on the low side of the Units’ main generator step-up transformers for a period of five (5) days immediately preceding the Closing Date.

Section 6.3 Conditions to Obligations of Seller. The obligation of Seller to consummate the transactions contemplated by this Agreement shall be subject to the satisfaction or (in Seller’s sole discretion) waiver on or prior to the Closing Date of the following conditions:

(a) the representations and warranties of Buyer and Buyer’s Parent herein shall be true and accurate as of the Closing Date as if made at and as of such time (other than those representations and warranties that address matters only as of a particular date or only with respect to a specific period of time which need only be true and accurate as of such date or with respect to such period), except where the failure of such representations and warranties to be so true and accurate (without giving effect to

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any limitation as to “materiality” or “material adverse effect” set forth therein) would not have a Buyer Material Adverse Effect;

(b) Each of Buyer and Buyer’s Parent shall have performed and complied with in all material respects the covenants and agreements contained in this Agreement and the Ancillary Agreements which are required to be performed and complied with by such Party on or prior to the Closing Date;

(c) Seller shall have received certificates from an authorized officer of each of Buyer and Buyer’s Parent, dated the Closing Date, to the effect that, to the knowledge of such officer the conditions set forth in Sections 6.3(a) and (b) have been satisfied by such Party; and

(d) Buyer shall have delivered, as applicable, executed Ancillary Agreements to Seller at the Closing and each such Ancillary Agreement shall be in full force and effect.

ARTICLE VII

SURVIVAL AND INDEMNIFICATION

Section 7.1 Survival. The representations and warranties contained in this Agreement shall survive the Closing for a period of twelve (12) months, except that (i) the representations and warranties set forth in Section 3.9 and Section 3.15 and shall survive the Closing for the period of the applicable statutes of limitations plus any extensions or waivers thereof; and (ii) the representations and warranties set forth in Section 3.1, Section 3.2, Section 3.16, Section 3.22, Section 4.1, Section 4.2, Section 4.7 and Section 4.10 shall survive the Closing indefinitely; provided, however, that such representations and warranties shall survive (if at all) beyond such period with respect to any inaccuracy therein or breach thereof, notice of which shall have been duly given within such period in accordance with Section 7.3 and Section 7.4. The covenants and agreements of the Parties contained in this Agreement shall survive indefinitely unless the covenant or agreement specifies a term, in which case such covenant or agreement shall survive for such specified term. Notwithstanding the foregoing, no such survival period shall apply in the event of the intentional misrepresentation or fraudulent breach of any representation or warranty of Seller or Buyer (it being understood that the Party seeking indemnity shall bear the burden of proof of establishing the existence of the intentional misrepresentation or fraudulent breach).

Section 7.2 Indemnification.

(a) Indemnification by Buyer. Subject to the other provisions of this Article VII, from and after the Closing, Buyer shall indemnify, defend and hold harmless the Seller Indemnified Parties from and against any and all Losses suffered, incurred or sustained by any Seller Indemnified Party resulting from, arising out of or due to (i) the inaccuracy or breach of any representation or warranty of Buyer contained in this Agreement (without giving effect to any limitations or qualifications as to “materiality” (including the word “material”) or “Buyer Material Adverse Effect” set

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forth therein); provided, that Buyer shall not be liable under this Section 7.2(a) with respect to any Losses arising out of or related to matters known to Seller at the Closing; (ii) any breach by Buyer or failure of Buyer to perform any covenant or agreement contained in this Agreement; (iii) the Assumed Liabilities; (iv) any Third Party Claim against a Seller Indemnified Party resulting from, arising out of or due to Buyer’s ownership or operation of the Point Beach Assets following the Closing (other than Third Party Claims that are Excluded Liabilities); and (v) enforcing the indemnification rights of Seller pursuant to this Article VII.

(b) Indemnification by Seller. Subject to the other provisions of this Article VII, from and after the Closing, Seller shall indemnify, defend and hold harmless the Buyer Indemnified Parties from and against any and all Losses suffered, incurred or sustained by any Buyer Indemnified Party resulting from, arising out of or due to (i) the inaccuracy or breach of any representation or warranty of Seller contained in this Agreement (without giving effect to any limitations or qualifications as to “materiality” (including the word “material”) or “Material Adverse Effect” set forth therein); provided, that Seller shall not be liable under this Section 7.2(b) with respect to any Losses arising out of or related to matters known to Buyer at the Closing; (ii) any breach by Seller or failure of Seller to perform any covenant or agreement contained in this Agreement; (iii) the Excluded Liabilities; (iv) any Third Party Claim against a Buyer Indemnified Party resulting from, arising out of or relating to Seller’s ownership or operation of the Point Beach Assets prior to the Closing (other than Third Party Claims that are Assumed Liabilities); (v) any Third Party Claim resulting from, arising out of or due to Seller’s ownership or operation of the Excluded Assets; and (vi) enforcing the indemnification rights of Buyer pursuant to this Article VII.

Section 7.3 Limitations on Indemnification.

(a) Notwithstanding anything to the contrary contained in this Agreement, no amounts shall be payable as a result of any claim in respect of a Loss arising under Section 7.2: (i) unless the Indemnified Party has given the Indemnifying Party a Claim Notice or Indemnity Notice, as applicable, with respect to such claim, setting forth in reasonable detail the specific facts and circumstances pertaining thereto, as soon as practical following the time at which the Indemnified Party discovered, or reasonably should have discovered, such claim (except to the extent the Indemnifying Party is not prejudiced by any delay in the delivery of such notice) and, in any event, prior to the date on which the applicable representation, warranty, covenant or agreement ceases to survive pursuant to Section 7.1; (ii) to the extent that the Indemnified Party had a reasonable opportunity, but failed, in good faith to mitigate the Loss, including but not limited to the failure to use commercially reasonable efforts to recover under a policy of insurance or under a contractual right of set-off or indemnity; (iii) to the extent it arises from or was caused by actions taken or failed to be taken by the Indemnified Party or any of its Affiliates after the Closing; or (iv) to the extent it asserts a claim for consequential, incidental, indirect, special or punitive damages, including losses or damages caused by reason of the unavailability of Point Beach, plant shutdowns or service interruptions, loss of use, profits or revenue, inventory or use charges, cost of purchased or replacement power, interest charges or cost of capital.

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(b) Notwithstanding anything to the contrary contained in this Agreement, no amounts shall be payable as a result of any claim in respect of a Loss arising under Section 7.2(a)(i) or Section 7.2(b)(i) (i) unless and until the aggregate amount (without duplication) of Losses suffered or incurred by all Seller Indemnified Parties or Buyer Indemnified Parties, as the case may be, with respect to all such matters, exceeds Six Million Dollars ($6,000,000) (the “Basket”); (ii) unless and only to the extent that a Loss exceeds One Million Dollars ($1,000,000) individually and such Loss shall be applied against the Basket; and (iii) to the extent that the total amount paid by an Indemnifying Party exceeds Thirty Million Dollars ($30,000,000) in the aggregate; provided however that any intentional misrepresentation or fraudulent breach of any representation or warranty of Seller or Buyer shall not be subject to the foregoing cap on indemnity (it being understood that the Party seeking indemnity in excess of such cap shall bear the burden of proof of establishing the existence of the international misrepresentation or fraudulent breach).

Section 7.4 Claims for Indemnification. All claims for indemnification by any Indemnified Party under Section 7.2 will be asserted and resolved as follows:

(a) In the event that any written claim or demand for which an Indemnifying Party may be liable to any Indemnified Party hereunder is asserted against or sought to be collected from any Indemnified Party by a third party, such Indemnified Party shall promptly, but in no event later than fifteen (15) days following such Indemnified Party’s receipt of such claim or demand (including a copy of any related written third party demand, claim or complaint) (the “Claim”), deliver a Claim Notice to the Indemnifying Party. The Indemnifying Party shall be relieved of its obligations to indemnify the Indemnified Party with respect to such Claim if the Indemnified Party fails to timely deliver the Claim Notice and the Indemnifying Party is actually prejudiced thereby. If a Claim is made against an Indemnified Party, the Indemnifying Party shall be entitled to participate therein and, to the extent that they shall wish, to assume the defense thereof, and, after notice from the Indemnifying Party to the Indemnified Party of such election to so assume the defense thereof, the Indemnifying Party shall not be liable to the Indemnified Party for any legal expenses of other counsel or any other expenses subsequently incurred by the Indemnified Party in connection with the defense thereof. The Indemnified Party shall cooperate fully with the Indemnifying Party and its counsel in the defense against any such Claim. The Indemnified Party shall have the right to participate at its own expense in the defense of such Claim. Neither the Indemnifying Party, on the one hand, nor the Indemnified Party, on the other hand, shall admit liability to, or settle, compromise or discharge any such Claim without the prior consent of the other Party, which consent shall not be unreasonably withheld or delayed. In the event the Indemnifying Party elects not to defend such Claim, the Indemnified Party shall defend against such Claim in good faith and in a commercially reasonable manner at the cost and expense of the Indemnifying Party, and the Indemnifying Party shall have the right to participate in such defense at its own expense.

(b) In the event of any claim for indemnity under Section 7.2(b), Buyer agrees to give Seller and its Representatives reasonable access to the books and records and employees of Buyer in connection with the matters for which indemnification

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is sought to the extent Seller reasonably deems necessary in connection with its rights and obligations under this Article VII.

Section 7.5 Insurance Offset. If any Losses sustained by an Indemnified Party are covered by an insurance policy or an indemnification, contribution or similar obligation of another Person (other than an Affiliate of such Indemnified Party), the Indemnified Party shall use commercially reasonable efforts to collect such insurance proceeds or indemnity, contribution or similar payments. If the Indemnified Party receives such insurance proceeds or indemnity, contribution or similar payments prior to being indemnified, held harmless and reimbursed under Section 7.2(a) or Section 7.2(b), as applicable, with respect to such Losses, the payment by an Indemnifying Party under this Article VII with respect to such Losses shall be reduced by the net amount of such insurance proceeds or indemnity, contribution or similar payments to the extent related to such Losses, less reasonable attorney’s fees and other expenses incurred in connection with such recovery. If the Indemnified Party receives such insurance proceeds or indemnity, contribution or similar payments after being indemnified and held harmless by an Indemnifying Party with respect to such Losses, the Indemnified Party shall pay to the Indemnifying Party the net amount of such insurance proceeds or indemnity, contribution or similar payment to the extent related to such Losses, less reasonable attorney’s fees and other expenses incurred in connection with such recovery. If any Indemnified Party receives payment under this Article VII on account of a claim that an Indemnifying Party believes in good faith is covered by an insurance policy or an indemnification, contribution or similar obligation of another Person (other than an Affiliate of such Indemnified Party), that Indemnified Party shall (i) on written request of the Indemnifying Party assign, to the extent assignable, its rights under such insurance policy or indemnification, contribution or similar obligation with respect to such claim to the Indemnifying Party and (ii) be relieved of any further obligation to pursue collection of such insurance or indemnification, contribution or similar obligation (except that, if requested to do so by the Indemnifying Party, the Indemnified Party shall reasonably cooperate with the Indemnifying Party at the Indemnifying Party’s sole expense, to collect any such insurance or indemnification, contribution or similar obligation).

Section 7.6 Exclusivity. After the Closing, to the extent permitted by Law and except as provided in Section 5.7, the indemnities set forth in this Article VII shall be the sole and exclusive remedies of the Parties and their respective officers, directors, employees, agents and Affiliates with respect to (i) any inaccuracy in any representation or warranty, misrepresentation, breach of warranty or nonfulfillment or failure to be performed of any covenant or agreement contained in this Agreement and (ii) the Assumed Liabilities or the Excluded Liabilities, as applicable. The indemnities set forth in this Article VII apply only to matters arising out of this Agreement. Any Loss arising under or pursuant to an Ancillary Agreement shall be governed by the indemnification obligations, if any, contained in such Ancillary Agreement. The parties shall not be entitled to a rescission of this Agreement or to any further indemnification rights or claims of any nature whatsoever in respect thereof (whether by contract, common law, statute, law, regulation or otherwise, including under the Racketeer Influenced and Corrupt Organizations Act, all of which the parties hereto hereby waive).

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ARTICLE VIII

TERMINATION

Section 8.1 Termination. This Agreement may be terminated at any time prior to the Closing:

(a) by the mutual written consent of Seller and Buyer;

(b) by Seller or Buyer, if (i) any Governmental Order prohibiting the consummation of the transactions contemplated by this Agreement shall have been issued and made final or non-appealable or (ii) the Closing shall have not occurred on or before the date that is eighteen (18) months following the date of this Agreement (the “Termination Date”); provided, that the right to terminate this Agreement under this Section 8.1(b)(ii) shall not be available to a Party whose failure to fulfill any obligation under this Agreement has been the cause of, or resulted in, the failure of the Closing to occur on or before the Termination Date; provided, further, that if on the Termination Date the condition to the Closing set forth in Section 6.1(c) of this Agreement shall not have been fulfilled but all other conditions to the Closing shall have been fulfilled or shall be capable of being fulfilled, then the Termination Date shall be the date that is twenty-four (24) months following the date of this Agreement;

(c) by Buyer, if there has been a violation or breach by Seller of any covenant, representation or warranty contained in this Agreement or any Ancillary Agreement constituting a Material Adverse Effect and such violation or breach (i) is not cured by the earlier of the Closing Date or thirty (30) days after receipt by Seller (or by Buyer in the case of notice by Seller pursuant to Section 5.8 of this Agreement) of written notice specifying particularly such violation or breach (provided that in the event Seller is attempting in good faith to cure the violation or breach, then Buyer may not terminate pursuant to this provision unless the violation or breach is not cured by the earlier of the Closing Date or the Termination Date), and (ii) such violation or breach has not been waived by Buyer;

(d) by Seller, if there has been a violation or breach by Buyer or Buyer’s Parent of any covenant, representation or warranty contained in this Agreement or any Ancillary Agreement constituting a Buyer Material Adverse Effect and such violation or breach (i) is not cured by the earlier of the Closing Date or thirty (30) days after receipt by Buyer (or by Seller in the case of notice by Buyer pursuant to Section 5.8 of this Agreement) of written notice specifying particularly such violation or breach (provided that in the event Buyer is attempting to cure the violation or breach in good faith, then Seller may not terminate pursuant to this provision unless the violation or breach is not cured by the earlier of the Closing Date or the Termination Date), and (ii) such violation or breach has not been waived by Seller; and

(e) by Buyer or Seller in accordance with the provisions of Section 5.24(b) or Section 5.24(c).

Section 8.2 Effect of Termination. In the event a Party terminates this Agreement pursuant to Section 8.1, this Agreement shall immediately become void and

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there shall be no liability on the part of any Party, except as set forth in Sections 5.2(b), (f) and (g), Section 5.3, Section 5.5, Section 9.1, Section 9.3 and Section 9.4; provided, however, that nothing in this Agreement shall relieve a Party from liability for any willful breach of or willful failure to perform under this Agreement.

Section 8.3 Waiver. At any time prior to the Closing, any Party may (a) extend the time for the performance of any of the obligations or other acts of the other Party, (b) waive any inaccuracies in the representations and warranties contained in this Agreement or in any document delivered pursuant to this Agreement or (c) waive compliance with any of the covenants, agreements or conditions contained in this Agreement. Any such extension or waiver shall be valid only if set forth in an instrument in writing signed by the Party to be bound thereby. The waiver by a Party of a breach of any term or provision of the Agreement shall not be construed as a waiver of any subsequent breach.

ARTICLE IX

MISCELLANEOUS PROVISIONS

Section 9.1 Notices. All notices and other communications hereunder shall be in writing and shall be deemed given if delivered personally or by facsimile transmission, or mailed by overnight courier or registered or certified mail (return receipt requested), postage prepaid, to the recipient Party at the following address (or at such other address or facsimile number for a Party as shall be specified by like notice):

(a)	if to Seller, to:
	Wisconsin Electric Power Company
	231 West Michigan Street
	Milwaukee, Wisconsin 53203
	Attention: James Fleming, General Counsel
	Facsimile: 414-221-2769
	with a copy to:
	Skadden, Arps, Slate, Meagher & Flom LLP
	333 West Wacker Drive
	Chicago, Illinois 60606
	Attention: Susan S. Hassan, Esq.
	Facsimile: (312) 407-0411
(b)	if to Buyer, to:
	FPL Energy Point Beach, LLC
	700 Universe Blvd.
	Juno Beach, Florida 33048
	Attn: Vice President, Business Management
	FPL Energy, LLC

90

	Facsimile: 561-691-2988
	with a copy to:
	FPL Energy Point Beach, LLC
	700 Universe Blvd.
	Juno Beach, Florida 33048
	Attention: General Counsel, FPL Energy, LLC
	Facsimile: 561-691-2988
(c)	if to Buyer’s Parent, to:
	FPL Group Capital Inc.
	700 Universe Blvd.
	Juno Beach, Florida 33408
	Attn: General Counsel, FPL Group, Inc.
	Facsimile: 561-694-4640

Section 9.2 Acknowledgement; Independent Due Diligence. Buyer acknowledges that Seller has not made any representation or warranty, express or implied, as to the accuracy or completeness of any information regarding the Facilities not included in this Agreement and the schedules hereto. Without limiting the generality of the foregoing, no representation or warranty is made with respect to any information contained in the Confidential Information Memorandum relating to the Facilities, dated July 2006, or any supplement or amendment thereto provided by Seller. Buyer further acknowledges that: (a) Buyer, either alone or together with its Representatives, has knowledge and experience in transactions of this type and in the business to which the Facilities relate and is therefore capable of evaluating the risks and merits of acquiring the Facilities; (b) Buyer has relied on its own independent investigation, and has not relied on any information or representations furnished by Seller or any of its Representatives (except as specifically set forth in this Agreement), in determining to enter into this Agreement; (c) neither Seller nor any of its Representatives has given any investment, legal or other advice or rendered any opinion as to whether the purchase of the Facilities is prudent, and Buyer is not relying on any representation or warranty by Seller or any Representative of Seller except as set forth in this Agreement; (d) Buyer has conducted extensive due diligence, including a review of the documents provided by or on behalf of Seller; and (e) Seller has made available to Buyer all documents, records and books pertaining to the Facilities that Buyer and Buyer’s attorneys, accountants and advisors have requested, and Buyer and its attorneys, accountants and advisors have had the opportunity to visit the Facilities and to ask questions and receive answers concerning the Facilities and the terms and conditions of this Agreement. All such questions have been answered to Buyer’s complete satisfaction.

Section 9.3 Governing Law. This Agreement shall be governed by and construed in accordance with the law of the State of Wisconsin (without giving effect to conflict of law principles) as to all matters, including matters of validity, construction, effect, performance and remedies.

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Section 9.4 Jurisdiction; WAIVER OF JURY TRIAL.

(a) The Parties hereby irrevocably submit to the exclusive jurisdiction of the United States District Court for the Eastern District of Wisconsin, or in the event that jurisdiction for any matter cannot be established in the United States District Court for the Eastern District of Wisconsin, in the Circuit Court for Manitowoc County, solely in respect of the interpretation and enforcement of the provisions of this Agreement and of the documents referred to in this Agreement, and in respect of the transactions contemplated hereby, and hereby waive, and agree not to assert, as a defense in any action, suit or proceeding for the interpretation or enforcement hereof or of any such document, that it is not subject thereto or that such action, suit or proceeding may not be brought or is not maintainable in said courts or that the venue thereof may not be appropriate or that this Agreement or any such document may not be enforced in or by such courts, and the parties hereto irrevocably agree that all claims with respect to such action or proceeding shall be heard and determined in such a court. The parties hereby consent to and grant any such court jurisdiction over the person of such parties solely for such purpose and over the subject matter of such dispute and agree that mailing of process or other papers in connection with any such action or proceeding in the manner provided in Section 9.1 hereof or in such other manner as may be permitted by Law shall be valid and sufficient service thereof.

(b) EACH PARTY ACKNOWLEDGES AND AGREES THAT ANY CONTROVERSY WHICH MAY ARISE UNDER THIS AGREEMENT IS LIKELY TO INVOLVE COMPLICATED AND DIFFICULT ISSUES, AND THEREFORE EACH PARTY HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY RIGHT A PARTY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION RESULTING FROM, ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. EACH PARTY CERTIFIES AND ACKNOWLEDGES THAT (i) NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER, (ii) EACH PARTY UNDERSTANDS AND HAS CONSIDERED THE IMPLICATIONS OF THIS WAIVER, (iii) EACH PARTY MAKES THIS WAIVER VOLUNTARILY AND (iv) EACH PARTY HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 9.4(b).

Section 9.5 Specific Performance. Each Party acknowledges and agrees that the other Party would be damaged irreparably in the event any of the provisions of this Agreement are not performed in accordance with their specific terms or are otherwise breached. Accordingly, each Party agrees that the other Party shall be entitled to an injunction or injunctions to prevent breaches of the provisions of this Agreement and to enforce specifically this Agreement and the terms and provisions hereof in addition to any other remedy to which it may be entitled, at law or in equity.

92

Section 9.6 Change in Law. If and to the extent that any Law governing any aspect of this Agreement shall change so as to make any aspect of this transaction unlawful, then the Parties agree to make such modifications to this Agreement as may be reasonably necessary for this Agreement to accommodate any such changes, without materially changing the overall benefits or consideration expected hereunder by any Party.

Section 9.7 No Joint Venture. Nothing in this Agreement creates or is intended to create an association, trust, partnership, joint venture or other entity or similar legal relationship among the Parties, or impose a trust, partnership or fiduciary duty, obligation, or liability on or with respect to the Parties. Except as expressly provided herein, neither Party is or shall act as or be the agent or representative of the other Party.

Section 9.8 Bulk Sales Laws. Buyer hereby waives compliance by Seller, and Seller hereby waives compliance by Buyer, with the provisions of any so-called bulk sales laws of any jurisdiction in connection with the transactions contemplated hereby.

Section 9.9 Entire Agreement. This Agreement, the Confidentiality Agreement and the Ancillary Agreements, including the Exhibits, Schedules, documents, certificates and instruments referred to herein or therein, embody the entire agreement and understanding of the Parties in respect of the transactions contemplated hereby and shall supersede all prior agreements and understandings, both written and oral, between the Parties with respect to the subject matter of this Agreement, the Confidentiality Agreement and the Ancillary Agreements.

Section 9.10 Schedules and Exhibits. Except as otherwise provided in this Agreement, all Exhibits and Schedules referred to herein are intended to be and hereby are specifically made a part of this Agreement. Any fact or item disclosed on any Schedule to this Agreement shall be deemed disclosed on all other Schedules to this Agreement to which such fact or item may reasonably apply so long as such disclosure is in sufficient detail to enable a Party to identify the facts or items to which it applies. Any fact or item disclosed on any Schedule hereto shall not by reason only of such inclusion be deemed to be material and shall not be employed as a point of reference in determining any standard of materiality under this Agreement.

Section 9.11 Severability. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any Law or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner adverse to any Party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the Parties shall negotiate in good faith to modify this Agreement so as to effect the original intent of the Parties as closely as possible in order that the transactions contemplated hereby be consummated as originally contemplated to the greatest extent possible.

Section 9.12 Succession and Assignment; Third Party Beneficiaries. This Agreement and all of the provisions hereof shall be binding upon and inure to the

93

benefit of the Parties and their respective successors and permitted assigns, but neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by any Party, by operation of law or otherwise, without the prior written consent of each other Party, nor is this Agreement intended (except as specifically provided in Section 7.2) to confer upon any Person other than the Parties any rights, interests, obligations or remedies hereunder. Any assignment in contravention of the foregoing sentence shall be null and void and without legal effect on the rights and obligations of the Parties hereunder. In the event Buyer assigns this Agreement pursuant to this Section 9.12, such assignee shall be defined as “Buyer” for all purposes hereunder thereafter.

Section 9.13 Amendment and Modification. Subject to applicable Law, this Agreement may not be amended, modified or supplemented except by a written instrument signed by Seller and Buyer.

Section 9.14 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

[Signature Page Follows]

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IN WITNESS WHEREOF, Seller and Buyer have caused this Agreement to be executed as of the date first written above by their respective officers thereunto duly authorized.

WISCONSIN ELECTRIC POWER COMPANY
By:	/s/ Frederick D. Kuester
Name:	Frederick D. Kuester
Title:	Executive Vice President and Chief Operating Officer
FPL ENERGY POINT BEACH, LLC,
By:	/s/ Michael O’Sullivan
Name:	Michael O’Sullivan
Title:	Vice-President
For purposes of Article IV, Section 5.20, Section 5.24, Section 6.3, Section 8.1(d), Section 9.1 and Section 9.12 only:
FPL GROUP CAPITAL, INC.
By:	/s/ James L. Robo
Name:	James L. Robo
Title:	Vice-President

[Asset Sale Agreement]

Index of Exhibits and Disclosure Schedules*

EXHIBITS

Exhibit A	Transitional Advisory Support Services Agreement
Exhibit B	Interim Operating Agreement
Exhibit C1	Power Purchase Agreement (16/17 Year Option)
Exhibit C2	Power Purchase Agreement (Life of License Option)
Exhibit D	Buyer’s Parent Guaranty
Exhibit E	Form of Assumption Agreement
Exhibit F	Form of Bill of Sale and Assignment
Exhibit G	Form of Deed
Exhibit H	Form of Generation Development Option
Exhibit I	Form of Seller’s Right of First Refusal
Exhibit J	Form of Seller’s FIRPTA Certificate
Exhibit K	Form of Title Commitment

SCHEDULES

Schedule 2.1(a)(i)	Land Comprising the Site
Schedule 2.1(a)(iii)	Tangible Personal Property
Schedule 2.1(a)(v)	Transferable Permits
Schedule 2.1(a)(xiii)	Radio Licenses
Schedule 2.1(a)(xvii)	Emergency Warning Assets
Schedule 2.1(b)(xiv)	Excluded Agreements
Schedule 2.3(b)(i)(5)	Low Level Waste Disposal
Schedule 5.4(f)	Buyer’s Thermal Power Uprate Project
Schedule 5.9(a)(i)	Employees to be Offered Employment by Buyer
Seller Disclosure Schedule	Seller Representations and Warranties
Buyer Disclosure Schedule	Buyer Representations and Warranties

* Exhibits and Disclosure Schedules to the Asset Sale Agreement are not being filed herewith. The Registrant undertakes to furnish supplementally a copy of any omitted exhibit or schedule to the Commission upon request, pursuant to Item 601(b)(2) of Regulation S-K.

[Asset Sale Agreement]

EX-10.17

Exhibit 10.17

BASE SALARIES OF NAMED EXECUTIVE OFFICERS OF THE REGISTRANT

Set forth below are the 2007 annual base salaries of the named executive officers (as defined in Item 402(a)(3) of Regulation S-K) of Wisconsin Energy Corporation. Unless otherwise noted, the named executive officers serve in the positions indicated for Wisconsin Energy Corporation (WEC) and its wholly-owned subsidiaries, Wisconsin Electric Power Company (WE) and Wisconsin Gas LLC. WE is a reporting company under the Securities and Exchange Act of 1934, as amended.

Gale E. Klappa	$	1,075,350
Chairman of the Board,   President and Chief Executive Officer
Frederick D. Kuester	$	622,750
Executive Vice President of WEC and WG;   Executive Vice President and Chief Operating Officer of WE
Allen L. Leverett	$	576,000
Executive Vice President and Chief Financial Officer
James C. Fleming	$	420,000
Executive Vice President and General Counsel
Larry Salustro*   Executive Vice President	$	424,872

* Mr. Salustro retired effective February 28, 2007, and will receive a pro rated amount of his annual base salary.

EX-10.46(A)

Exhibit 10.46(a)

CONFIDENTIAL AND PROPRIETARY

EXECUTION VERSION

Wisconsin Energy Corporation has requested confidential treatment of certain portions of this document pursuant to an application for confidential treatment sent to the SEC. Wisconsin Energy has omitted such portions from this filing and filed them separately with the SEC. Such omissions are designated as "[**]".

POINT BEACH NUCLEAR PLANT

POWER PURCHASE AGREEMENT

BETWEEN

FPL ENERGY POINT BEACH, LLC

AND

WISCONSIN ELECTRIC POWER COMPANY

DATED AS OF DECEMBER 19, 2006

CONFIDENTIAL AND PROPRIETARY

EXECUTION VERSION

POWER PURCHASE AGREEMENT

TABLE OF CONTENTS

ARTICLE I: DEFINITIONS		1
1.1.	Defined Terms	1
1.2.	Rules of Interpretation	13
1.3.	Accounting Terms	14
1.4.	Legal Representation	14
ARTICLE II: PURCHASE OF CAPACITY, ENERGY, AND ANCILLARY SERVICES		14
2.1.	Capacity Sale and Purchase	14
2.2.	Energy Sale and Purchase	14
2.3.	Ancillary Services	15
2.4.	Replacement Energy and Replacement Capacity	16
2.5.	Financial Transmission Rights	17
2.6.	Title and Risk of Loss	18
2.7.	Delivery Point	18
2.8.	Capacity Accreditation	18
2.9.	Uprates	18
2.10.	Right of First Offer	20
2.11.	Reactive Power	20
2.12.	Station Service	21
2.13.	CT Capacity	21
ARTICLE III: PAYMENTS		21
3.1.	Purchase Payments	21
3.2.	Peak Adjustment Payment	22
ARTICLE IV: SCHEDULING		22
4.1.	Scheduling	22
4.2.	Failure to Schedule	23
ARTICLE V: MAINTENANCE AND OPERATION		23
5.1.	Scheduled Maintenance	23
5.2.	Derate Notices	24
5.3.	Operation	25
ARTICLE VI: METERING		28
6.1.	Metering	28
ARTICLE VII: BILLING AND PAYMENT		29
7.1.	Billing and Payment	29
ARTICLE VIII: PERFORMANCE SECURITY		30
8.1.	Seller Performance Security	30

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CONFIDENTIAL AND PROPRIETARY

EXECUTION VERSION

8.2.	Buyer Performance Security	30
8.3.	Draws; Replenishments	30
8.4.	Reporting	31
ARTICLE IX: FORCE MAJEURE		31
9.1.	Conditions of Excuse for Seller	31
9.2.	Conditions of Excuse for Buyer	31
9.3.	Burden of Proof	32
9.4.	Payment and Security Obligations Not Excused	32
9.5.	Time Limits	32
9.6.	Deadline Extended	32
ARTICLE X: EVENTS OF DEFAULT; REMEDIES		33
10.1.	List of Events of Default	33
10.2.	Remedies	34
10.3.	Rights of Specific Performance	35
10.4.	Limitation of Liability	35
10.5.	Disclaimer of Warranties	35
ARTICLE XI: REPRESENTATIONS, WARRANTIES AND COVENANTS		36
11.1.	Representations and Warranties of Buyer	36
11.2.	Representations and Warranties of Seller	37
11.3.	Covenants of Seller	38
ARTICLE XII: INDEMNITY		38
12.1.	By Seller	38
12.2.	Indemnification by Buyer	39
12.3.	Joint Negligence	39
12.4.	Responsibility for Employees	39
12.5.	Notice and Participation	39
12.6.	Payment of Indemnification Claims	40
12.7.	Survival of Obligation	40
ARTICLE XIII: TERM		40
13.1.	Term	40
13.2.	Termination	41
13.3.	Effect of Termination	41
ARTICLE XIV: ADMINISTRATIVE COMMITTEE		41
14.1.	Purpose	41
14.2.	Membership	41
14.3.	Meetings	41
14.4.	Functions	42
14.5.	Expenses	42

ii

CONFIDENTIAL AND PROPRIETARY

EXECUTION VERSION

ARTICLE XV: NOTICES	42
15.1. Notices in Writing	42
15.2. Date of Notification	43
15.3. Oral Notice in Emergency	43
ARTICLE XVI: CONFIDENTIALITY	43
16.1. Non-Disclosure to Third Parties	43
16.2. Definition of Proprietary Information	44
16.3. Limitations on Required Disclosure	44
16.4. Remedies	44
16.5. Survival of Confidentiality	45
ARTICLE XVII: INSURANCE	45
17.1. Coverage and Amounts of Seller	45
17.2. Insurance Certificates	46
17.3. Coverage For Full Term	47
ARTICLE XVIII: ASSIGNMENT	47
18.1. Binding Effect	47
18.2. Assignment	47
18.3. Change in Control	48
ARTICLE XIX: DISPUTE RESOLUTION	48
19.1. General Provisions	48
19.2. Negotiation	48
19.3. Binding Upon Parties	49
19.4. Continued Performance	49
ARTICLE XX: COMPLIANCE WITH LAWS; TAXES	49
20.1. Compliance with Laws	49
20.2. Mobile-Sierra	49
20.3. Taxes and Other Charges	49
ARTICLE XXI: CHANGE IN LAW	50
21.1. Change in Law	50
21.2. Future Attributes	50
21.3. MISO Changes	51
ARTICLE XXII: MISCELLANEOUS	51
22.1. Recording Telephone Conversations	51
22.2. Governing Law	51
22.3. Entire Agreement; Amendment	52
22.4. No Implied Waiver	52
22.5. Severability	52
22.6. No Exclusivity/Dedication of Assets	53
22.7. Expenses	53

iii

CONFIDENTIAL AND PROPRIETARY

EXECUTION VERSION

22.8. Counterparts	53
22.9. Survival	53
22.10. Individual Responsibility	53
22.11. No Duty To Third Parties	53
22.12. Forward Contract	54
22.13. Press Releases	54

Exhibits
Exhibit A	Delivered Energy Charges
Exhibit B	Buyer’s Capacity Amount
Exhibit C	Delivered Energy Charge Shaping Factor
Exhibit D	Diagram of Metering Devices
Exhibit E	Form of Seller’s Guaranty
Exhibit F	Form of Letter of Credit
Exhibit G	Peak Adjustment Payment
Exhibit H	Scheduling Provisions
Exhibit I	MAIN Guide No. 3A Standards

iv

CONFIDENTIAL AND PROPRIETARY

EXECUTION VERSION

POWER PURCHASE AGREEMENT

This POWER PURCHASE AGREEMENT is made and entered into as of December 19, 2006, by and between FPL ENERGY POINT BEACH, LLC, a Wisconsin limited liability company (“Seller”), and WISCONSIN ELECTRIC POWER COMPANY, a Wisconsin corporation (“Buyer”) (hereinafter the parties hereto are sometimes referred to collectively as the “Parties,” or individually as a “Party”).

W I T N E S S E T H:

WHEREAS, Buyer is a public utility which operates a system for generation and distribution of electric power in the States of Wisconsin and Michigan; and

WHEREAS, Buyer intends to transfer to Seller all of its rights, title, and interests in and to the Point Beach Nuclear Plant, a nuclear-powered electric generating facility consisting of two generating units and facilities, equipment, supplies and improvements (including the CT) located in Two Rivers, Wisconsin, NRC Operating License Nos. Unit 1 – DPR 24 and Unit 2 – DPR 27, as more specifically described in the Asset Sale Agreement (“Point Beach”); and

WHEREAS, in order to continue serving its customers following transfer of Buyer’s interests in the Facilities to Seller, Buyer desires to purchase, and Seller desires to sell, Capacity, Energy, and all associated Ancillary Services on the terms, and subject to the conditions, set forth below.

NOW, THEREFORE, in consideration of the recitals and the mutual promises, covenants and agreements contained herein and in the Asset Sale Agreement and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties hereto hereby agree as follows:

ARTICLE I: DEFINITIONS

1.1. Defined Terms

As used in this Agreement, the following terms shall have the following meanings:

“Accredited Capacity” means Capacity or Replacement Capacity that (a) meets the resource adequacy requirements in Module E of the Transmission Provider Tariff (“Module E”) for Buyer’s Network Load, a portion of which may include Capacity or Replacement Capacity that satisfies the requirement for a Local Capacity Resource for Buyer’s Network Load and (b) is measured in accordance with the MAIN Guide No. 3A standards; provided, however, that if either or both requirements in (a) or (b) is inapplicable, then Accredited Capacity means Capacity or Replacement Capacity that meets the applicable requirements for Capacity (the “Effective Capacity Requirements”) of any Governing Authority having jurisdiction over Buyer, including any Capacity from the Facilities that may be deemed available under the Effective Capacity Requirements even if the Facilities are not operating.

“Administrative Committee” has the meaning set forth in Article XIV.

CONFIDENTIAL AND PROPRIETARY

EXECUTION VERSION

“Affiliate” has the meaning given such term in Rule 12b-2 under the Securities Exchange Act of 1934.

“Agreement” means this Power Purchase Agreement entered into by Seller and Buyer.

“Ancillary Services” means those services that during the Term are necessary to support the transmission of electric capacity and energy, or support the generation or transmission of Energy from the Facilities or Replacement Capacity, as applicable, while maintaining reliable operation of the transmission system, associated with or otherwise corresponding to the Capacity of the Facilities or Replacement Capacity, as applicable, and/or output of Energy at such time, which Ancillary Services shall include reactive power and frequency response service.

“Asset Sale Agreement” means that certain Asset Sale Agreement between Buyer and Seller, dated as of the date hereof.

“Associate” means, with respect to any Party, any officer, director, trustee, fiduciary, employee, agent, representative, contractor or subcontractor of such Party and any shareholder, partner, member or other owner of such Party.

“ATC” means the American Transmission Company LLC.

“Authorization” means any license, permit, approval, consent, filing, waiver, exemption, variance, clearance, entitlement, allowance, franchise or other authorization, whether corporate, governmental, regulatory or otherwise.

“Balancing Authority Function” means the operating authority that maintains the load resource balancing and reliability for the balancing authority area in which the Facilities are located.

“Billing Cycle” means each calendar month during the Term and any partial calendar month at the beginning or end of the Term.

“Business Day” means any day other than Saturday, Sunday, or any NERC holiday or any other day on which commercial banks in Milwaukee, Wisconsin are required to be closed.

“Buyer” has the meaning set forth in the preamble hereto.

“Buyer Performance Security” means any performance security that may be required to be posted by Buyer pursuant to Section 8.2.

“Buyer’s Capacity Amount” means, for any given time, the applicable amount set forth in Exhibit B. The Capacity of the Facilities, and the associated amounts in the column in Exhibit B entitled “Capacity of the Facilities,” shall be revised during the Term upon written notice from Seller to Buyer providing the results of any Performance Testing of the Facilities conducted in accordance with the MAIN Guide No. 3A Standards (or with the Effective Capacity Requirements, if applicable).

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“Buyer’s Energy Amount” means, for any period of time, an aggregate amount of Energy (including Replacement Energy) associated with the Buyer’s Capacity Amount (excluding the CT Capacity) for such period of time.

“Buyer’s Guarantor” means a Person that, at the time of the execution and delivery of any guaranty issued pursuant to Section 8.2, is a direct or indirect owner of Buyer and (a) has an Investment Grade Credit Rating and a consolidated Net Worth of at least five hundred million dollars ($500,000,000.00); or (b) is reasonably acceptable to Seller as having a verifiable creditworthiness and Net Worth sufficient to secure Buyer’s Guarantor’s obligations under any guaranty issued pursuant to Section 8.2.

“Calculation Reconstitution Program” means the specific project to validate and integrate calculations and setpoints at Point Beach described in that certain Point Beach Nuclear Plant Calculation Review and Reconstruction Project Plan, CRR-PB-PP, Revision 3, dated January 27, 2006.

“Calendar Year” means a twelve-month period beginning January 1 and ending December 31.

“Capacity” means, on or as of any date of determination, a power generation unit’s capability to generate a specific amount of electrical energy at a given point in time.

“Change in Control” means any one or more of the following events that occurs with respect to Seller, or with respect to any Person which is a direct or indirect owner of a majority of the ownership interests in Seller: (i) a transfer of a majority of the ownership interests in Seller or such Person; (ii) a change in the general partner of any such Person; (iii) any consolidation or merger of Seller or any such Person in which Seller or such Person, as the case may be, is not the continuing or surviving entity, other than a consolidation or merger of a Person in which the holders of such Person’s ownership interests immediately before the consolidation or merger shall, upon consummation of the consolidation or merger, own at least 50% of the equity of the surviving entity; or (iv) any other event or circumstance in which “control” (as defined in Rule 12b-2 under the Securities Exchange Act of 1934) of Seller or of any such Person is transferred to another Person.

“Change in Law” has the meaning set forth in Section 21.1.

“Claims” means all third party claims or actions, threatened or filed and, whether groundless, false, fraudulent or otherwise, that directly or indirectly relate to the subject matter of an indemnity, and the resulting losses, damages, expenses, reasonable attorneys’ fees and court costs.

“Communications Protocol” has the meaning set forth in Section 5.3(b)(i).

“CPNode” means the commercial pricing nodes established by the Transmission Provider for both Unit 1 and Unit 2 (as of the Effective Date, such nodes are WEC.PTBHGB1 (for Unit 1) and WEC.PTBHGB2 (for Unit 2)); provided, that if this Agreement only applies to one Unit, then the CPNode shall be the applicable commercial pricing node for such Unit.

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“CPT” or “Central Prevailing Time” means, with respect to any particular time in question, Central Standard Time or Central Daylight Time in effect at such time.

“Credit Rating” means, with respect to an entity, the rating assigned to such entity’s unsecured, senior long-term debt obligations (not supported by third party credit enhancements) by Moody’s or S&P or, in the event such rating is not assigned, then the issuer rating assigned by S&P or Moody’s with respect to such entity.

“CT” means the existing No. 2 fuel oil-fired combustion turbine generator located at the Facilities site.

“Delivered Energy” means, for any period of time, the sum of the Net Energy Output plus Replacement Energy delivered to the Delivery Point and confirmed by Buyer in accordance with the scheduling provisions in Exhibit H, part (b)(iii).

“Delivered Energy Charge” has the meaning set forth in Section 3.1(a).

“Delivered Energy Payment” has the meaning set forth in Section 3.1(a).

“Delivery Point” has the meaning set forth in Section 2.7.

“Derate” means an event or condition which causes the Net Energy Output to be less than [**] of the associated Buyer’s Capacity Amount (excluding the CT Capacity), or causes the MISO FinSched to be less than [**] of the associated Buyer’s Capacity Amount (excluding the CT Capacity), unless such event or condition resulting in a reduction in the MISO FinSched was agreed to by Buyer, excluding any ramp up or ramp down of the Facilities associated with Seller’s nuclear fuel management procedures scheduled in accordance with Section 5.1.

“Derate Notice” has the meaning set forth in Section 5.2.

“Designated Network Resource” or “DNR” means a resource deliverable to the Buyer’s Network Load designated as a “Network Resource” as defined under the applicable Transmission Provider Tariff and related documents. The term DNR shall apply to the Facilities and to the resource selected by Seller, and accepted by MISO as a WEPCO Designated Network Resource, and accepted by the applicable regional reliability council, to provide Replacement Capacity for Buyer in accordance with the terms and conditions of this Agreement.

“Dispatch Authority Function” means the Buyer’s Trading and Operations Group in its Wholesale Energy & Fuels department.

“Dispute” means any controversy, claim or dispute of whatsoever nature, arising out of or relating to this Agreement or the making, validity, execution, performance, discharge, termination, or breach hereof.

“Dispute Resolution Procedures” means the dispute resolution procedures for Disputes set forth in Article XIX.

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“Early Termination Date” has the meaning set forth in Section 10.2.

“Effective Capacity Requirements” has the meaning set forth in the definition of Accredited Capacity.

“Effective Date” means the Closing Date, as defined in the Asset Sale Agreement.

“Electric Reliability Organization” or “ERO” has the meaning set forth in 18 C.F.R. § 39.1.

“Energy” means electric energy expressed in MWh.

“Event of Default” has the meaning set forth in Section 10.1.

“Facilities” means Point Beach excluding any Uprate not accepted by Buyer pursuant to Section 2.9(a); provided, that after the Unit 1 Termination Date (if not the same as the Unit 2 Termination Date), the term “Facilities” shall exclude Unit 1 for the remainder of the Term of this Agreement; provided, further, that if for any reason this Agreement terminates earlier with respect to Unit 2, but not Unit 1, then after the Unit 2 Termination Date, the term “Facilities” shall exclude Unit 2 for the remainder of the Term of this Agreement.

“FASB” means the Financial Accounting Standards Board.

“FERC” means the Federal Energy Regulatory Commission.

“Financial Bilateral Transaction” has the meaning ascribed to such term by the Transmission Provider in the applicable Transmission Provider Tariff or related documents, as such relevant meaning or relevant term may be modified from time to time.

“Force Majeure” means any cause or occurrence beyond the reasonable control of and without the fault or negligence of the Party claiming Force Majeure which causes the Party to be unable to, or otherwise materially impairs its ability to, perform its obligations hereunder and which by the exercise of reasonable foresight such Party could not have been reasonably expected to avoid and could not have been prevented or avoided by such Party through the exercise of reasonable diligence. Subject to the foregoing, such causes or occurrences may include any acts of God; acts of the public enemy; wars; blockades; insurrections; riots; epidemics; landslides; lightning; earthquakes; fires; storms; floods; washouts; civil disturbances; strikes, lockouts, work stoppages or other labor actions that affect the U.S. electric generation or utility industry as a whole, including operation of the Facilities; shutdowns or reductions in the Facilities’ output or capabilities required, caused by, or related to directives, orders or requirements of the NRC or any other Governing Authority that affect the U.S. nuclear generation industry as a whole; shutdowns or reductions in the Facilities’ output directly related to the Calculation Reconstitution Program, but only if such shutdown or reduction occurs 12 months after the Effective Date; and any other cause, whether of the kind herein enumerated or otherwise, which, despite all reasonable efforts of such Party to prevent or mitigate its effects, prevents or delays the performance of a Party, or prevents the obtaining of the benefits of performance by the other Party, and is not within the control of the Party claiming excuse. The following acts, events

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or causes shall in no event constitute an event of Force Majeure: (i) any lack of profitability to a Party or any losses incurred by a Party or any other financial consideration of a Party; (ii) unavailability of funds or financing; (iii) an event caused by conditions of national or local economics or markets; (iv) any failure of equipment which is not itself directly caused by an event which would otherwise independently constitute a Force Majeure; (v) strikes, lockouts, work stoppages or other labor actions that affect the operation of the Facilities but do not affect the U.S. electric generation or utility industry as a whole; (vi) changes in market conditions that affect the cost or availability of equipment, materials, supplies or services, including the Facilities’ fuel supply or the cost of power from resources other than the Facilities; (vii) failures of third parties, unless such failures are caused by an event which would otherwise constitute a Force Majeure event hereunder, if experienced by a Party and the Party claiming Force Majeure is relying on such third party in order to discharge any of such Party’s duties or obligations hereunder; (viii) climatic temperature and humidity conditions; and (ix) shutdowns or reductions in the Facilities output or capabilities required, caused by, or related to, directives, orders or requirements of the NRC or any other Governing Authority that do not apply to the U.S. nuclear electric generation industry as a whole. The curtailment, unavailability or interruption of transmission service shall not constitute a Force Majeure event unless the Transmission Provider directs the curtailment or interruption of transmission service over all, or substantially all, of the transmission system owned and/or controlled by the Transmission Owner in the State of Wisconsin.

“GAAP” means generally accepted accounting principles in the United States, as in effect from time to time, consistently applied, except as to consistency for mandated changes imposed by appropriate accountancy administrative bodies (including the FASB) or regulatory authorities.

“Generation Offer” has the meaning ascribed to such term by MISO in the applicable Transmission Provider Tariff or related documents, as such relevant meaning or relevant term may be modified from time to time.

“Governing Authority” means the federal government of the United States, and any state, county or local government, and any regulatory department, body, political subdivision, commission, bureau, administration, agency, instrumentality, ministry, court, judicial or administrative body, taxing authority, or other authority of any of the foregoing (including, without limitation, any corporation or other entity owned or controlled by any of the foregoing), MISO, ERO, NRC, any other regional reliability council, the Transmission Provider and any other regional transmission organization, in each case having jurisdiction over any or all of the Parties, the Facilities or the Transmission Provider’s transmission system, whether acting under express or delegated authority.

“Gross Receipts Tax” means the tax imposed by the State of Wisconsin pursuant to Sections 76.28 and 76.29 of the Wisconsin Statutes as amended.

“Gross Receipts Tax Payment” has the meaning set forth in Section 20.3(d).

“Indemnified Person” has the meaning set forth in Section 12.5.

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“Indemnifying Person” has the meaning set forth in Section 12.5.

“Insufficient Credit Status” means, as to Buyer or Seller, or if Buyer is providing collateral in the form of a guaranty, the Buyer’s Guarantor, or if Seller is providing collateral in the form of a guaranty, Seller’s Guarantor, that: (a) such Person does not have a Credit Rating or such Person’s Credit Rating is not Investment Grade or is determined by either Moody’s or S&P to not be Investment Grade; or (b) the maturity of any indebtedness of such Person which in the aggregate exceeds one hundred million dollars ($100,000,000) or five percent of the shareholders’ equity of such Person, whichever is less, is accelerated by the holder or holders thereof as a result of a default thereunder, or such holders have the right to accelerate such indebtedness (without regard to any requirements relating to notice, the passage of time or both) as a result of a payment default or a default with respect to a failure by Buyer or Seller (or Buyer’s Guarantor or Seller’s Guarantor), as applicable, to comply with a financial covenant.

“Interconnection Agreement” means the Generation Transmission Interconnection Agreement by and between Buyer and ATC dated as of November 1, 2000, as revised by the Second Revision issued on January 2, 2002.

“Investment Grade” means a Credit Rating of at least BBB- by S&P and Baa3 by Moody’s; provided, that if an entity is rated by only S&P or Moody’s, as applicable, then such Credit Rating shall be at least the rating stated above by S&P or Moody’s, as applicable. In the event that a Credit Rating from one of S&P or Moody’s is at or above Investment Grade and the Credit Rating from the other rating agency is below Investment Grade with respect to a Person or its obligations, then such Person and its obligations shall be considered to not have an Investment Grade Credit Rating.

“Law” means any federal, state and local laws, statutes, regulations, rules, codes, orders, judgments, decrees or ordinances enacted, adopted, issued or promulgated by any Governing Authority, including any Authorizations issued to a Party or by which a Party or the Facilities may be bound (including any of the foregoing pertaining to electrical, building, zoning, environmental and occupational safety and health requirements) or any published directive, guideline, requirement or other governmental restriction which has the force of law or any determination by, or interpretation of, any of the foregoing by any Governing Authority, binding on a given Person in a relevant jurisdiction.

“Letter of Credit” means an irrevocable standby letter of credit, substantially in the form attached hereto as Exhibit F and which (i) is issued by a U.S. commercial bank or the U.S. branch of a foreign bank with total assets of at least ten billion U.S. dollars ($10,000,000,000) having a Credit Rating of A- or higher by S&P or A3 or higher by Moody’s; and (ii) permits presentation for drawing at a bank located in Milwaukee, Wisconsin.

“LMP” means the “Locational Marginal Price” at the relevant CPNode for the relevant hour(s) and day(s) for the MISO Day-Ahead Market or MISO Real-Time Market, as applicable, as posted by the Transmission Provider.

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“Local Capacity Resource” has the meaning set forth in the Transmission Provider Tariff.

“MAIN Guide No. 3A Standards” means the standards attached as Exhibit I.

“Maintenance Schedule” has the meaning set forth in Section 5.1(a).

“Metering Devices” has the meaning set forth in Section 6.1(a).

“MISO” means the Midwest Independent Transmission System Operator, Inc.

“MISO Day-Ahead Market” means the Day-Ahead Market as defined in the applicable Transmission Provider Tariff.

“MISO FinSched” means a Financial Bilateral Transaction for a given Operating Day that is subsequently settled in the MISO Day Ahead Market with a source point, delivery point and sink point at the CPNode.

“MISO FinSched Energy” means the quantity of MWh Scheduled on MISO FinScheds for a given Operating Day.

“MISO Market” means the MISO Real-Time Market or the MISO Day-Ahead Market.

“MISO Market Time” means Eastern Standard Time or as otherwise set forth in the Transmission Provider Tariff.

“MISO Real-Time Market” means the Real-Time Market as defined in the applicable Transmission Provider Tariff.

“Module E” has the meaning set forth in the definition of Accredited Capacity.

“Moody’s” means Moody’s Investor Services, Inc.

“MW” means a megawatt.

“MWh” means megawatt-hours.

“NEIL” means Nuclear Electric Insurance Limited.

“NERC” means the North American Electric Reliability Council.

“Net Energy Output” means, for any hour during a Billing Cycle and with respect to the Facilities (excluding the CT), (a) if the Facilities (excluding the CT) are operating, total Energy output of the Facilities (excluding the CT) as measured at the Delivery Point, less Station Service Load (provided such Station Service Load is netted as provided in Section 2.12), which amounts shall be calculated at the applicable Metering Devices, multiplied by a fraction, the numerator of which is the Capacity of the Facilities (excluding the CT) and the denominator of which is the sum of (i) the Capacity of the Facilities (excluding the CT) and (ii) the Capacity of any Uprate not accepted by Buyer pursuant to Section 2.9(a) (provided that Net Energy Output can in no event be less than zero), or (b) if the Facilities (excluding

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the CT) are not operating, zero. For the avoidance of doubt, all Energy generated by the Units must first satisfy Buyer’s Energy Amount before any Energy from the Units is made available to third parties.

“Net Worth” means the dollar value calculated by subtracting liabilities from total assets (excluding goodwill and other intangible assets described in FASB Statement 142) as such terms are determined in accordance with GAAP.

“Network Load” has the meaning set forth in the Transmission Provider Tariff.

“Non-Defaulting Party” has the meaning set forth in Section 10.2.

“Notice Time” means the time no later than two (2) hours prior to the deadline for submission to the Transmission Provider of Generation Offers for the next Operating Day.

“NRC” means the United States Nuclear Regulatory Commission.

“Off-Peak” means all hours that are not On-Peak hours.

“Offer” has the meaning given such term in Section 2.10.

“On-Peak” means hour ending 0700 CPT through hour ending 2200 CPT, Monday through Friday, excluding NERC holidays.

“Operating Contact” has the meaning set forth in Section 14.2.

“Operating Day” has the meaning ascribed to such term by MISO in the applicable Transmission Provider Tariff or related documents, as such relevant meaning or relevant term may be modified from time to time.

“Party” has the meaning set forth in the preamble hereto.

“Peak Adjustment Payment” has the meaning set forth in Section 3.2.

“Peak Period” has the meaning set forth in Exhibit G.

“Performance Test” has the meaning set forth in Section 5.3(d)(ii).

“Permitted Assignee” has the meaning set forth in Section 18.2.

“Person” means any legal or natural person, including any individual, corporation, partnership, limited liability company, joint stock company, association, joint venture, trust, Governing Authority or international body or agency, or other entity.

“Planned Uprate” means the extended power uprate, based on licensing and engineering evaluations completed by Westinghouse Electric Company (nuclear steam supply system supplier for Point Beach), Stone & Webster Engineering Corporation, and Siemens-Westinghouse (turbine-generator original equipment manufacturer), designed to

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increase the reactor thermal output of each Unit by approximately 8.6% (or approximately 45 MWe per Unit).

“Point Beach” has the meaning given such term in the second recital to this Agreement.

“Prime Rate” means, for any period, the rate per annum expressed as a daily percentage, in effect on the first day of such period, as published from time to time in the money rates section of The Wall Street Journal representing the base rate on corporate loans posted by at least seventy-five percent (75%) of the nation’s thirty (30) largest banks. If for any reason such rate is not available, “Prime Rate” means the rate per annum which JPMorgan Chase Bank announces in New York from time-to-time as its prime or base lending rate for corporate customers.

“Proprietary Information” has the meaning set forth in Section 16.2.

“Prudent Utility Practice” means any applicable practices, methods and acts engaged in or approved by a significant portion of (a) as to Seller, the nuclear power electric generating industry in the United States of America, or (b) as to Buyer, the electric utility industry in the United States of America, during the relevant time period, or the practices, methods and acts which, in the exercise of reasonable judgment by a prudent nuclear operator (or prudent utility operator, if applicable to Buyer) in light of the facts known or which should reasonably have been known at the time the decision was made, could have been expected to accomplish the desired result consistent with good business practices, reliability, safety, expedition and the requirements of any Governing Authority having jurisdiction. “Prudent Utility Practice” is not intended to be limited to the optimum practice, method or act to the exclusion of all others, but rather to the acceptable practices, methods or acts generally accepted (a) as to Seller, by the nuclear power electric generating industry in the United States of America or (b) as to Buyer, by the electric utility industry in the United States of America.

“PSCW” means the Public Service Commission of Wisconsin.

“Reactive Power” means the reactive power capability of the Facilities as set forth in the Interconnection Agreement.

“Related Entity” has the meaning set forth in Section 18.2(c).

“Replacement Capacity” means, at any time, Accredited Capacity supplied to Buyer by Seller from any DNR (other than the Facilities) or from any other generation resource satisfying the requirements of a Local Capacity Resource associated with Buyer’s Network Load (other than the Facilities) to fulfill, in whole or in part, Seller’s obligation to supply Accredited Capacity under this Agreement. Replacement Capacity, when combined with Accredited Capacity from the Facilities, shall not exceed the Buyer’s Capacity Amount. In addition, Replacement Capacity shall (a) not be committed for sale to any third party, and (b) be accredited at all times to serve Buyer’s Capacity requirements.

“Replacement Energy” means, at any time, Energy supplied to Buyer by Seller from any resource other than the Facilities to fulfill, in part or in whole, Seller’s obligation hereunder

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to deliver Energy which, when combined with the Net Energy Output of the Facilities, shall not exceed the Buyer’s Energy Amount applicable to Buyer at such time under this Agreement.

“S&P” means Standard & Poor’s Ratings Group (A Division of The McGraw-Hill Companies).

“SCADA” means supervisory, control and data acquisition technology and equipment.

“Schedule”, “Scheduled” or “Scheduling” means the actions of Seller, Buyer and/or their designated representatives, of notifying, requesting and confirming to each other and to any third party the quantity and type of Energy to be delivered on any Operating Day (a) submitted to MISO by Seller as Seller’s Generation Offer from the Facilities for a relevant Operating Day during the Term pursuant to this Agreement, or (b) submitted to MISO by Seller and accepted by Buyer as a Financial Bilateral Transaction for a relevant Operating Day during the Term pursuant to this Agreement.

“Scheduled Maintenance Outage” has the meaning set forth in Section 5.1(a).

“Seller” has the meaning set forth in the preamble hereto.

“Seller Performance Security” means the performance security required to be posted by Seller pursuant to Section 8.1.

“Seller’s Guarantor” means a Person that, at the time of the execution and delivery of the Seller’s Guaranty, is a direct or indirect owner of Seller and (a) has an Investment Grade Credit Rating and a consolidated Net Worth of at least five hundred million dollars ($500,000,000.00); or (b) is reasonably acceptable to Buyer as having a verifiable creditworthiness and Net Worth sufficient to secure Seller’s Guarantor’s obligations under the Seller’s Guaranty.

“Seller’s Guaranty” has the meaning set forth in Section 8.1.

“Senior Executives” has the meaning set forth in Section 19.2.

“Senior Financial Officer” means an officer of Seller or of an Affiliate of Seller having financial and accounting expertise reasonably satisfactory to Buyer.

“Station Service Load” means all electric service requirements used in connection with the operation and maintenance of the Facilities and any improvements thereto, including auxiliary, stand-by, supplemental, back-up maintenance and interruptible power.

“Target Capacity Factor” means [**].

“Tax” means (i) any tax (including but not limited to franchise tax), charge, fee, levy or other assessment imposed by any Governing Authority and based on or measured with respect to net income or profits, including any interest, penalties or additions attributable or imposed with respect thereto, and (ii) any other tax, charge, levy, fee or other assessment

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imposed by any Governing Authority, including any transfer, gross receipts, sales, use, service, occupation, ad valorem, property, payroll, personal property, excise, severance, premium, stamp, documentary, license, registration, social security, employment, unemployment, disability, environmental (including but not limited to taxes under Section 59A of the Internal Revenue Code of 1986), add-on, value added, withholding (whether payable directly or by withholding and whether or not requiring the filing of a tax return therefor), commercial rent and occupancy tax, and (iii) any estimated tax, deficiency assessment, interest, penalties and additions to tax or additional amounts in connection with any of the foregoing, imposed by any Governing Authority; provided, that “Tax” does not include any Gross Receipts Tax.

“Term” means the period from and after the Effective Date to and including the date and time of the later of the Unit 1 Termination Date or the Unit 2 Termination Date.

“Transferee” has the meaning set forth in Section 16.1.

“Transferor” has the meaning set forth in Section 16.1.

“Transmission Owner” means ATC.

“Transmission Provider” means MISO with respect to its function as the regional transmission organization and/or with respect to its function as market operator of the MISO Market, as applicable; in the event either of such functions is performed by a separate entity, “Transmission Provider” shall refer to such entity as and where applicable in this Agreement.

“Transmission Provider Tariff” means the “Open Access Transmission and Energy Market Tariff for the Midwest Independent Transmission System Operator, Inc.,” or any tariff of a successor to the MISO, and any related procedures or rules published by the Transmission Provider, including the “Business Practice Manual” related thereto.

“Unit” means Unit 1 or Unit 2.

“Unit 1” means Point Beach Nuclear Plant Unit 1 and related facilities as more specifically described in the Asset Sale Agreement.

“Unit 1 Termination Date” has the meaning set forth in Section 13.1.

“Unit 2” means Point Beach Nuclear Plant Unit 2 and related facilities as more specifically described in the Asset Sale Agreement.

“Unit 2 Termination Date” has the meaning set forth in Section 13.1.

“Unscheduled Outage” means any Derate of the Facilities other than a Scheduled Maintenance Outage.

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“Uprate” means, with respect to each Unit, an increase in the maximum thermal power level at which such Unit may operate under its NRC license as such license may be amended after the date hereof.

“VAR” or “VARs” means Volt-Amps-Reactive, a measure of reactive power.

“Variable Interest Entity” or “VIE” has the meaning set forth in the FASB Interpretation No. 46 (Revised December 2003) as issued and amended from time to time by FASB.

“Weekly Schedule” has the meaning set forth in Section 2.4(a).

“Wisconsin Energy Group” means the collective group of companies identified as affiliates in the most recent Form 10-K filed at the U.S. Securities and Exchange Commission by Wisconsin Energy Corporation.

“Worker’s Compensation Laws” means all Laws relating to employment-related accidents and diseases and the benefits, insurance and other compensation required in relation thereto.

1.2. Rules of Interpretation

In this Agreement and in any Appendices, Exhibits or Schedules attached hereto, except to the extent that the context requires otherwise:

(a) The Table of Contents and the headings of the Articles and Sections herein have been inserted as a matter of convenience for reference only and shall not control or affect the meaning or construction of any of the terms or provisions hereof;

(b) The singular includes the plural and the masculine includes the feminine and neuter unless the context requires otherwise;

(c) References to any document, agreement or Law, including this Agreement, shall be deemed to include references to (i) all appendices, exhibits, and schedules attached thereto and (ii) such document, agreement or Law as amended, modified, supplemented, replaced or restated from time to time in accordance with its terms (if applicable) and (where applicable) subject to compliance with the requirements set forth therein;

(d) The Exhibits hereto are incorporated herein by this reference and are intended to be a part of this Agreement; provided, however, that in the event of a conflict between the terms of an Exhibit and the terms of the remainder of this Agreement, the terms of the remainder of the Agreement shall take precedence;

(e) References to “Articles,” “Sections,” clauses, “Paragraphs,” “Appendices,” “Exhibits,” or “Schedules,” are to articles, sections, clauses, paragraphs, appendices, exhibits or schedules of this Agreement;

(f) All references to a particular Person shall include a reference to such Person’s successors and permitted assigns;

(g) The words “herein,” “hereof” and “hereunder” shall refer to this Agreement as a whole and not to any particular section or subsection of this Agreement; the

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words “include,” “includes” or “including” shall mean “including, but not limited to;”

(h) The term “day” shall mean a calendar day commencing at 12:00 a.m. CPT and whenever an event is to be performed or a payment is to be made by a particular date and the date in question falls on a day that is not a Business Day, the event shall be performed or the payment shall be made on the next succeeding Business Day; the term “week” shall mean a seven consecutive day period; the term “month” shall mean a calendar month; provided, that when a period measured in months commences on a date other than the first day of a month, the period shall run from the date on which it starts to the corresponding date in the next month and, as appropriate, to succeeding months thereafter; and the term “year” shall mean a Calendar Year; and

(i) All monetary references contained herein refer to U.S. dollars.

1.3. Accounting Terms

All accounting terms used herein shall be construed in accordance with GAAP unless the context or use requires a different interpretation.

1.4. Legal Representation

This Agreement was negotiated and prepared by both Parties with the advice of counsel to the extent deemed necessary by each Party; the Parties have agreed to the wording of this Agreement; and none of the provisions hereof shall be construed against one Party on the ground that such Party is the author or drafter of this Agreement or any part hereof.

ARTICLE II: PURCHASE OF CAPACITY, ENERGY, AND

ANCILLARY SERVICES

2.1. Capacity Sale and Purchase

Subject to the terms and conditions of this Agreement, Seller agrees to sell and supply to Buyer, and Buyer agrees to accept and purchase from Seller, all Accredited Capacity (i) from the Facilities for the duration of the Term and (ii) associated with Replacement Capacity that Seller supplies to Buyer pursuant to the terms of this Agreement. Furthermore, except as otherwise specifically provided for herein, Seller shall not sell or commit to sell the Capacity of the Facilities during the Term to any party other than Buyer.

2.2. Energy Sale and Purchase

(a) Subject to the terms and conditions of this Agreement, for the duration of the Term, Seller shall sell and deliver to Buyer at the Delivery Point, and Buyer shall accept and purchase, (i) the Net Energy Output and (ii) all Replacement Energy that Seller delivers to Buyer pursuant to the terms of this Agreement. The amount of all Energy sold to Buyer as Scheduled by Seller and purchased by Buyer from Seller as confirmed by Buyer in accordance with Exhibit H, for any period of time, shall be the aggregate amount of Delivered Energy for such period of time. Furthermore, except as otherwise specifically provided for herein, Seller shall not

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sell or commit to sell the Net Energy Output during the Term to any party other than Buyer.

(b) The Parties acknowledge and agree that any increases in Capacity, Energy or Ancillary Services from the Facilities (excluding the Energy (and Ancillary Services related thereto) from the CT), whether due to changes in ambient conditions or otherwise (other than that attributable to Uprates not accepted by Buyer in accordance with Sections 2.9(a) or (b), as applicable), are included in the Buyer’s Capacity Amount and Net Energy Output to be provided hereunder.

2.3. Ancillary Services

(a) The sale of Capacity and Energy hereunder from the Facilities (or in respect of any Replacement Capacity as provided in Section 2.4(c)) to Buyer shall include the Ancillary Services associated with such Capacity and Energy from the Facilities (or in respect of any Replacement Capacity as provided in Section 2.4(c)). Seller agrees to provide and/or execute any documents or agreements necessary to transfer to Buyer any revenue and any other benefits and rights received from third parties by Seller in providing such Ancillary Services. For all periods during which such documents and agreements are not in effect, Seller agrees to credit to Buyer such revenues as provided in Section 3.1(b) until such time as an agreement is executed. Further, to the extent permitted by Law, Seller hereby assigns and delegates to Buyer all rights and obligations Seller may have to reach agreement with the Transmission Provider or Transmission Owner, as applicable, as to the appropriate entitlement of revenues for Ancillary Services provided by the Facilities (or in respect of any Replacement Capacity as provided in Section 2.4(c)) under the applicable Transmission Provider Tariff and/or under the Interconnection Agreement, as applicable.

(b) To the extent that Seller’s unexcused failure to deliver Ancillary Services to Buyer results in any increased cost, damage or penalty incurred by Buyer, Seller shall reimburse Buyer for any such increased cost, damage or penalty within 10 Business Days of invoice receipt therefor. Any invoice submitted by Buyer to Seller pursuant to this Section 2.3(b) shall include a written statement explaining in reasonable detail the calculation of the amount owed by Seller. The amount of such cost, damages or penalty to be reimbursed shall not exceed an amount equal to the increased costs or penalties actually incurred by Buyer. Notwithstanding the preceding sentence, in the event that during the Term there exists a market for the purchase and sale of Ancillary Services, then (i) if Seller fails to provide an Ancillary Service required to be delivered hereunder from the Facilities, Seller shall use commercially reasonable efforts to provide Buyer with a replacement for such Ancillary Service and (ii) if Seller is unsuccessful in satisfying its obligation under clause (i), Seller shall reimburse Buyer for the market-clearing price for such undelivered Ancillary Service.

(c) Notwithstanding the foregoing, in no event shall Seller be required to reduce its Net Energy Output below the Energy associated with the Target Capacity Factor for the purpose of providing Ancillary Services to Buyer.

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2.4 Replacement Energy and Replacement Capacity

(a) Replacement Energy. Subject to the provisions of this Agreement, Seller may provide Buyer with Replacement Energy as set forth below in this Section 2.4(a) during a Scheduled Maintenance Outage or an Unscheduled Outage, but only to the extent of any associated Derate. Seller may provide Replacement Energy from a source that differs from the DNR selected by Seller to supply Replacement Capacity, if any.

(i) Unscheduled Outage Replacement Energy Notices

If the event or condition constituting the Derate is an Unscheduled Outage, Seller shall telephonically notify the Dispatch Authority Function of Seller’s election in accordance with Section 2.4(a)(iii) below (to provide or not to provide Replacement Energy) as soon as practicable but no later than the Notice Time on the day following the day the Derate commenced with confirmation (by email or facsimile) within 24 hours. Seller’s election shall be effective based on a “Weekly Schedule”, which means seven consecutive days beginning at 00:00 MISO Market Time on any day of the week following the appropriate Notice Time and ending at 23:59 MISO Market Time on the seventh day. Seller shall provide Buyer notice of its intent to continue or discontinue its Replacement Energy election no later than two (2) Business Days prior to the commencement of the applicable Weekly Schedule.

(ii) Scheduled Maintenance Replacement Energy Notices

If the event or condition constituting the Derate is a Scheduled Maintenance Outage, Seller shall telephonically notify the Dispatch Authority Function of Seller’s election in accordance with Section 2.4(a)(iii) below to provide or not to provide Replacement Energy no later than two (2) Business Days prior to the scheduled commencement of such Scheduled Maintenance Outage with confirmation (by email or facsimile) within 24 hours. Seller’s election shall be effective based on a Weekly Schedule. Seller shall provide Buyer notice of its intent to continue or discontinue its Replacement Energy election no later than two (2) Business Days prior to the commencement of the applicable Weekly Schedule.

(iii) Replacement Energy Scheduling

Any Replacement Energy Scheduled hereunder shall be Scheduled in accordance with Article IV, subject to the following: Replacement Energy may only be Scheduled and delivered on a continuous basis in either (A) a single, fixed quantity or (B) a quantity varied to reflect expected changes in the Net Energy Output (e.g., changes in output or ramp rates or expected resolution of outages with respect to the Facilities) such that the aggregate of such Replacement Energy and the Net Energy Output will result in a single, fixed quantity.

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(b) Replacement Capacity

(i) Subject to the provisions of this Agreement, if at any time the Accredited Capacity of the Facilities is less than the Buyer’s Capacity Amount, then Seller may provide Buyer with Replacement Capacity but only to the extent that the Accredited Capacity of the Facilities is less than the Buyer’s Capacity Amount. In no event shall Seller provide Replacement Capacity for a period of less than 12 months; provided, that if the MISO market provides for a capacity product of less than 12 months, Seller may provide Replacement Capacity for such shorter period of capacity product, but in no event less than one month or less than the Peak Period in the event Accredited Capacity is unavailable for any month in the applicable Peak Period; provided, further, that if the applicable regional reliability council or any other Governing Authority requires Replacement Capacity to be provided for a period of time greater than as set forth in the preceding proviso in order for such Replacement Capacity to be deemed Accredited Capacity, then Seller may only provide Replacement Capacity for a period no less than as mandated by such Governing Authority. Seller shall notify the Dispatch Authority Function of the source of such Replacement Capacity as soon as practicable. Subject to the terms of this Agreement, if at any time Seller does not deliver Accredited Capacity from the Facilities or Replacement Capacity, in either case in an amount equal to Buyer’s Capacity Amount, Seller shall be required to pay Buyer liquidated damages equal to [**] (“Accredited Capacity Liquidated Damages”) for each MW-month (or portion thereof) of each such shortfall. At Buyer’s election, Seller shall be required to pay Accredited Capacity Liquidated Damages within five (5) Business Days of invoice receipt therefor.

(ii) The amount, if any, by which the Accredited Capacity Liquidated Damages incurred in any calendar month exceed the Delivered Energy Payment due and payable for such month is referred to as the “Monthly Excess Accredited Capacity Liquidated Damages Amount”. In no event shall the sum of the Monthly Excess Accredited Capacity Liquidated Damages Amounts accrued during any Calendar Year exceed [**].

(c) When supplying Replacement Capacity, to the extent there are Ancillary Services associated with the Replacement Capacity obtained by Seller, Seller shall supply such Ancillary Services to Buyer at no additional cost or expense to Buyer.

2.5. Financial Transmission Rights

Buyer shall be entitled to all financial transmission rights and all other rights and benefits with and from the Transmission Provider associated with the Capacity, Energy and Ancillary Services being purchased from the Facilities. Seller shall cooperate in good faith with Buyer to ensure that such financial transmission rights and other rights and benefits are effectively assigned and transferred to Buyer at no additional cost to Buyer. Further, Seller hereby assigns and delegates to Buyer all rights and obligations Seller may have to reach agreement with the Transmission Provider as to the appropriate entitlement of such financial transmission rights under the applicable Transmission Provider Tariff.

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2.6. Title and Risk of Loss

Title to and risk of loss related to the Capacity, Energy and Ancillary Services being purchased hereunder shall transfer from Seller to Buyer at the Delivery Point. Seller warrants that it will deliver to Buyer such Capacity, Energy and Ancillary Services free and clear of all liens, security interests, claims and encumbrances or any interest therein or thereto by any Person.

2.7. Delivery Point

The “Delivery Point” for Energy (including Replacement Energy) delivered pursuant to this Agreement is the CPNode.

2.8. Capacity Accreditation

Seller shall, at its sole cost and expense, take all reasonable actions required to cause the Buyer’s Capacity Amount and any Replacement Capacity to be Accredited Capacity, including the satisfaction of all applicable requirements to establish and maintain the DNR status (as defined under the applicable Transmission Provider Tariff and acceptable to the applicable regional reliability council and the Transmission Provider, as applicable), and including Local Capacity Resource status in relation to Buyer’s Network Load, of the Facilities or the source of the Replacement Capacity for Buyer.

2.9. Uprates

(a)          (i) Seller shall use its commercially reasonable efforts to complete the Planned Uprate by June 1, 2012; provided, however, that Seller shall have the right, consistent with Prudent Utility Practice, to change the date for the completion of the Planned Uprate so long as Seller provides Buyer with advance written notice of such change no later than June 1, 2010 and at least two years prior to the expected completion date of the Planned Uprate. Upon completion of the Planned Uprate the actual Capacity increase associated with the Planned Uprate, as determined by Performance Tests pursuant to Section 5.3(d)(ii), shall become a part of the Buyer’s Capacity Amount, and Exhibit B shall be adjusted to include the increase in Capacity related to such Planned Uprate. The procedures for Uprates described in Section 2.9(b) shall not apply to the Planned Uprate. The Planned Uprate shall not be included in Delivered Energy until the transmission upgrades, if any, required for the Planned Uprate have been completed in accordance with the applicable transmission studies performed by ATC and/or MISO.

(ii) Any transmission upgrade costs to be assessed upon Seller as a direct result of the Capacity increase of the Planned Uprate (the “Planned Uprate Transmission Upgrade Costs”) shall be reimbursed by Buyer. Buyer’s payment therefor shall be due within 10 days after Seller’s actual payment of such costs and the receipt by Buyer of an invoice for such payment together with documentation setting forth such Planned Uprate Transmission Upgrade Costs in reasonable detail.

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(iii) Notwithstanding subsection (ii), Buyer may, in its discretion, by written notice to Seller, within 120 days after receipt of notification of the amount of such Planned Uprate Transmission Upgrade Costs to be assessed upon Seller, decline to accept the Capacity, Energy and Ancillary Services of the Planned Uprate under this Agreement, in which case Buyer shall not be obligated to purchase any of such products associated with the Planned Uprate or to reimburse Seller for any such Planned Upgrade Transmission Upgrade Costs. In the event that Buyer declines the Planned Uprate as provided above, Seller shall have the right to sell to any third party the incremental Capacity, Energy and associated Ancillary Services generated at the Facilities as a direct result of the Planned Uprate; provided, that all Energy generated by the Units must first satisfy Buyer’s Energy Amount before any Energy from the Units is made available to third parties.

(iv) In the event of any Uprate project proposed by Seller that consists both of the Planned Uprate and any other Uprate, Seller shall cause one or more transmission studies to be performed that separately identify the transmission requirements and associated costs for the Planned Uprate and any such other Uprate proposed by Seller. The transmission costs associated with the Planned Uprate shall be determined based on a transmission study that assumes no other Uprate has been or will be completed.

(b) Seller agrees to sell and Buyer agrees to purchase any Capacity, Energy and Ancillary Services related to any Uprate (other than the Planned Uprate) upon the same terms and conditions as provided in this Agreement, effective upon the completion of any such Uprate; provided, however, Buyer may, by written notice to Seller, within 120 days after receipt of notification of the amount of such transmission costs to be assessed upon Seller, decline to purchase the Capacity, Energy and Ancillary Services of any such Uprate that Buyer determines, in its discretion, would either (1) cause transmission disruptions or impose incremental transmission costs on the Buyer or (2) materially diminish the capacity factor of the Facilities, in which case Buyer shall not be obligated to purchase any such products from such Uprate. Unless Buyer declines such Uprate as provided above, the Parties shall promptly adjust the Buyer’s Capacity Amount on Exhibit B to account for the Capacity of such Uprate, as determined pursuant to Performance Tests pursuant to Section 5.3(d)(ii), to take effect upon the completion of such Uprate. An Uprate (other than the Planned Uprate) shall not be included as Delivered Energy until the transmission upgrades, if any, required for such Uprate have been completed in accordance with the applicable transmission studies performed by ATC and/or MISO. In the event that Buyer declines any Uprate as provided above, Seller shall have the right to sell to any third party the incremental Capacity, Energy and associated Ancillary Services generated at the Facilities as a direct result of such Uprate not accepted by the Buyer; provided, that all Energy generated by the Units must first satisfy Buyer’s Energy Amount before any Energy from the Units is made available to third parties.

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(c) Notwithstanding anything to the contrary in this Agreement, changes to the Buyer’s Capacity Amount resulting from the Planned Uprate or any other Uprate shall be conditioned upon the receipt of all requisite regulatory approvals, applicable to such Planned Uprate or any other Uprate, by the Party to whom such regulatory approvals apply.

(d) In the event any Uprate is not accepted by Buyer, then Net Energy Output shall be provided as follows: (i) Buyer shall first receive Buyer’s Energy Amount; (ii) Seller shall receive an amount of Energy associated with any unaccepted Uprate second; and (iii) if any of the Net Energy Output exceeds the sum of (i) and (ii) above, such additional Energy shall be prorated as provided in the definition of Net Energy Output.

2.10. Right of First Offer

Except as otherwise specifically provided for in this Agreement, during the Term, Seller shall not have the right to sell or otherwise transfer any Capacity, Energy or Ancillary Services from the Facilities to another Person (whether by way of a power purchase agreement or otherwise) without first offering (the “Offer”), subject to all requisite regulatory approvals, such Capacity, Energy or Ancillary Services to the Buyer at least 18 months prior to the Unit 1 Termination Date and at least 18 months prior to the Unit 2 Termination Date. Such Offer shall be for the full output of the Unit (including any Uprate affected during the Term), made in the form of a proposed contract to the Buyer and shall be open for acceptance to the Buyer for a period of ninety (90) days. In the event the Buyer accepts such Offer, the Seller and Buyer shall proceed to the execution of such proposed contract in an expeditious manner; provided, Buyer must procure all of its requisite regulatory approvals at least six (6) months prior to the Unit 1 Termination Date or Unit 2 Termination Date, as applicable, or such Offer shall be deemed to have expired.

2.11. Reactive Power

Without limiting the general application of Section 2.3:

(a) Seller agrees that it shall not have any rights to the production or absorption, if applicable, of Reactive Power and that Seller shall, consistent with the requirements of any Governing Authority, not operate the Facilities to produce real power at a level or in a manner that compromises its ability to operate the Facilities to produce or absorb, if applicable, Reactive Power to maintain the output voltage or power factor at the applicable CPNode in any agreement governing Seller’s obligation to produce or absorb, if applicable, Reactive Power consistent with the Interconnection Agreement.

(b) If requested by the Transmission Provider, without additional charge under this Agreement, Seller shall adjust Reactive Power (as so requested), subject to Prudent Utility Practice. As between the Parties, Buyer shall have the right to receive any compensation paid by any third party for Reactive Power (including for any increases in reactive power output or capability of the Facilities after the Effective Date) produced or absorbed by the Facilities. Any disagreement about

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the amount of such compensation shall be resolved in accordance with the Dispute Resolution Procedures.

2.12. Station Service

During any period in which any Unit is operating, Seller shall be permitted to satisfy the Station Service Load using Energy generated by any such Unit. If Seller is not able to self-supply Energy to satisfy Station Service Load, Seller shall compensate Buyer for Energy to serve the Station Service Load at the MISO Real-Time Market LMP for the appropriate CPNode, including any transmission or settlement charges associated with such Energy, during any period of time in which the Facilities are not operating or are not generating sufficient Energy to meet the Station Service Load of the Facilities. In the event that any fees, damages, penalties or transmission charges are assessed against Buyer by any Governing Authority in connection with the Station Service Load or any Energy obtained to serve the Station Service Load, Seller shall reimburse Buyer for such fees, damages, penalties or transmission charges within 10 Business Days of invoice receipt therefor. Any invoice submitted by Buyer to Seller pursuant to this Section 2.12 shall include a written statement explaining in reasonable detail the calculation of the amount due from Seller. As of the date of execution of this Agreement, the Station Service Load related to each Unit is calculated as approximately five MW. In the event such amount is materially changed for any reason, Seller shall give Buyer prompt written notice of such change.

2.13. CT Capacity

The CT Capacity shall be provided by the Seller to the Buyer under this Agreement as part of the Accredited Capacity delivered from the Facilities. Seller shall be responsible for all costs associated with the CT in Seller’s operation and maintenance of the Facilities as provided herein, and the operation and maintenance of the CT and the provision to Buyer of the Accredited Capacity therefrom will not result in any additional cost to the Buyer. Seller shall use commercially reasonable efforts to ensure that the Accredited Capacity associated with the CT shall be at least fifteen (15) MW during the Peak Period. Seller is responsible for all payments to (and is entitled to all revenue from) Transmission Provider associated with the dispatch of Energy from the CT. The Seller shall not replace or retire the CT without first giving to Buyer at least two (2) years prior written notice.

ARTICLE III: PAYMENTS

3.1. Purchase Payments

The amounts to be paid to the Seller by the Buyer for purchases of Capacity, Energy and Ancillary Services under this Agreement shall be determined as follows:

(a) Delivered Energy Payment. With respect to each Billing Cycle, Buyer shall make a payment to Seller equal to the sum of (i) the product of: (A) the applicable “Delivered Energy Charge” set forth in Exhibit A; (B) the applicable Delivered Energy Charge Shaping Factor set forth in Exhibit C; and (C) the sum of the MISO FinSched Energy (on-peak and off-peak as appropriate) for the Operating Days in such Billing Cycle, and (ii) any Gross Receipts Tax Payment applicable

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to the invoice for such Billing Cycle (pursuant to Section 20.3(d))(each, a “Delivered Energy Payment”).

(b) Ancillary Services. The Delivered Energy Payment includes payment for any and all Ancillary Services received by Buyer, and no additional payment from Buyer in respect thereof shall be due at any time. For the avoidance of doubt, Seller specifically agrees that it shall not be entitled to any payment for reactive power under this Agreement, notwithstanding its obligation to operate the Facilities in accordance with Section 2.10. Any and all revenues Seller receives from the Transmission Provider for Ancillary Services from the Facilities in each Billing Cycle shall be credited to Buyer and offset with any other payments due from Buyer to Seller under this Agreement (unless otherwise directly transferred to Buyer as provided in Section 2.3).

(c) Accredited Capacity. The Delivered Energy Payment includes payment for any and all Accredited Capacity constituting Buyer’s Capacity Amount provided to Buyer under this Agreement based on the aggregate amount of Delivered Energy for such Billing Cycle, and no additional payment from Buyer in respect thereof shall be due at any time. The sole purchase price for such Accredited Capacity shall be the Delivered Energy Payment for such Delivered Energy. For the avoidance of doubt, no payment shall be owed by Buyer for Accredited Capacity if the Delivered Energy Payment for any Billing Cycle is zero; provided, however, that, notwithstanding the foregoing, Seller shall be obligated to provide Accredited Capacity as provided in this Agreement.

3.2. Peak Adjustment Payment

If applicable, Seller shall make a payment to Buyer as determined in accordance with Exhibit G (each, a “Peak Adjustment Payment”).

ARTICLE IV: SCHEDULING

4.1. Scheduling

Seller shall submit its Generation Offers and Financial Bilateral Transactions in accordance with applicable Transmission Provider rules and procedures and must offer Unit 1 and Unit 2 in the MISO Day-Ahead Market and the MISO Real-Time Market for dispatch as must run generation units with a dispatch minimum for each hour equal to no less than the full expected Net Energy Output of Unit 1 and Unit 2 (consistent with the Transmission Provider Tariff). Notwithstanding the foregoing, Seller shall have the option to not Schedule Energy from Unit 1 and/or Unit 2 in the MISO Day-Ahead Market in instances when Unit 1 and Unit 2 are being ramped up to return to service following a Scheduled Maintenance Outage or an Unscheduled Outage; provided, however, that Seller shall hold harmless, defend and indemnify Buyer from and against any charges or fees, including Revenue Sufficiency Guaranty (as defined in the Transmission Provider Tariff) charges, levied on Buyer as a result of Seller’s Scheduling in the MISO Real-Time Market. Seller shall offer the CT in the MISO Day-Ahead Market and the MISO Real-Time Market in accordance with the Transmission Provider Tariff. Exhibit H includes other scheduling provisions applicable to this Agreement.

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4.2. Failure to Schedule

(a) If Seller fails to Schedule Energy (including Replacement Energy) in accordance with Section 2.4(a)(iv) or Section 4.1, as applicable, and such failure is not excused under the terms of this Agreement, then Seller shall pay to Buyer, within five (5) Business Days of receipt of an invoice therefor, an amount equal to (i) the MISO Day-Ahead Market LMP for such applicable period multiplied by the Energy that Seller failed to Schedule, plus any charges, penalties, damages, fees and other costs, including Transmission Provider charges, incurred by Buyer resulting from such failure, minus (ii) the amount of the Delivered Energy Payment that Buyer would have incurred under this Agreement had the Energy been Scheduled. Any invoice submitted by Buyer to Seller pursuant to this Section 4.2(a) shall include a written statement explaining in reasonable detail the calculation of the amount due from Seller.

(b) If Buyer fails to Schedule Energy (including Replacement Energy) that is Scheduled by Seller in accordance with Exhibit H of this Agreement, and such failure is not excused under the terms of this Agreement, then Buyer shall pay to Seller, within five (5) Business Days of receipt of an invoice therefor, an amount equal to (i) the amount of the Delivered Energy Payment that Seller would have received under this Agreement had the Energy been Scheduled by Buyer, minus (ii) the MISO Day-Ahead Market LMP for such applicable period multiplied by the Energy that Buyer failed to Schedule, plus any charges, penalties, damages, fees and other costs, including Transmission Provider charges, incurred by Seller resulting from such failure. Any invoice submitted by Seller to Buyer pursuant to this Section 4.2(b) shall include a written statement explaining in reasonable detail the calculation of the amount due from Buyer.

ARTICLE V: MAINTENANCE AND OPERATION

5.1. Scheduled Maintenance

(a) Scheduling Procedure.

Subject to subsection (b) below, Seller shall submit to Buyer a schedule of maintenance of the Facilities (each, a “Maintenance Schedule” and each item thereon a “Scheduled Maintenance Outage”) for each Calendar Year and a projection of scheduled outages for the following four years thereafter no later than twelve (12) months before the beginning of any year (or not later than three (3) months prior to the deadline for submittal of any such schedule to the Transmission Provider or any other applicable Governing Authority, if earlier); except that within thirty (30) days following the Effective Date, Seller shall submit to Buyer a Maintenance Schedule for the remainder of the Calendar Year in which the Effective Date occurs and for the following Calendar Year. Each Maintenance Schedule shall meet the requirements set forth in Section 5.1(b).

Within thirty (30) days of receipt of such Maintenance Schedule, Buyer may request reasonable modifications therein to the extent the requested modifications are not contrary to Prudent Utility Practice. Subject to subsection (b) below,

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Buyer and Seller shall work together to schedule Scheduled Maintenance Outages to meet their mutual requirements and the requirements of the Transmission Provider and/or Transmission Owner, it being understood that Buyer shall consider, among other things, its reserve requirements, energy delivery commitments, costs of replacement power and other generating resources and expected loads in requesting such reasonable modifications; provided, that in the event of a disagreement, such scheduling shall be resolved by the Administrative Committee. All Scheduled Maintenance Outages shall be of a duration that is no longer than that reasonably necessary to carry out the required maintenance activities. Seller shall provide notice to Buyer as soon as practicable but in any event no later than forty-eight (48) hours prior to the expected cessation of maintenance activities and shall promptly inform Buyer of the completion of such activities.

Scheduled Maintenance Outages for the subsequent three (3) year period of the Maintenance Schedule may only be rescheduled within a period of time from 30 days prior to the projected start of such Scheduled Maintenance Outage to 30 days after the projected end of such Scheduled Maintenance Outage; provided, however, that no Scheduled Maintenance Outage in such subsequent three (3) year period may be rescheduled so that all or any portion of such Scheduled Maintenance Outage falls within a different Calendar Year; and provided, further, that if Seller experiences an extended Unscheduled Outage and desires to move a Scheduled Maintenance Outage into a prior or subsequent Calendar Year, any such rescheduling shall require the consent of Buyer, not to be unreasonably withheld.

(b) Limitations on Scheduled Maintenance Outages

Scheduled Maintenance Outages may not occur during the Peak Period.

5.2. Derate Notices

In the event of any Derate, Seller must notify the Dispatch Authority Function and the Balancing Authority Function telephonically of such Derate as soon as practicable after Seller becomes aware of the necessity or occurrence thereof (each, a “Derate Notice”), with written confirmation within 24 hours of such oral notice. During any ongoing Derate, Seller shall provide updates as often as practicable, but no less than daily, to the Dispatch Authority Function of the nature and expected duration of such Derate as well as the magnitude and timing of actual and expected output changes of the Facilities and such other information as may assist Buyer in assessing the reliability and expected quantity of output from the Facilities, and Seller shall provide the Dispatch Authority Function with oral notice (confirmed promptly by email or facsimile) as much prior notice as practicable of when the Derate is expected to be remedied.

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5.3. Operation

(a) Operation

Seller shall manage, control, operate and maintain all parts of the Facilities in a manner consistent with Prudent Utility Practice and the terms and conditions of this Agreement and the Interconnection Agreement. As between the Parties, Seller shall bear the sole responsibility for complying with all applicable Laws associated with operating the Facilities, including all environmental, permitting and zoning requirements in effect during the Term of this Agreement.

(b) Communications Protocol

(i) Seller and Buyer have developed, or will develop within a reasonable period of time after the Effective Date, written communications procedures for the Facilities (the “Communications Protocol”), which include processes related to Seller’s interface with MISO, ATC, ERO and other Governing Authorities, operating communications between and among the Dispatch Authority Function and the Balancing Authority Function and testing procedures. The Communications Protocol is deemed incorporated herein by this reference.

(ii) The Communications Protocol shall be reviewed by the Administrative Committee no less than annually and any mutually agreed changes shall be made. In the event the Parties are unable to agree upon any changes to the Communications Protocol, such disagreement shall be resolved in accordance with the Dispute Resolution Procedures.

(c) Authorizations

Seller shall, at its own expense, acquire and maintain, comply with and, as necessary, renew and modify from time to time, any and all permits, licenses, approvals and other Authorizations of any Governing Authority required for the lawful operation and maintenance of the Facilities. Copies of said Authorizations shall be made available to Buyer for review upon Buyer’s written request. Buyer shall not be liable for any violation by Seller of any Authorization required to be obtained by Seller pursuant to this Section 5.3(c).

(d) Testing

(i) Notice of Testing

Seller shall notify Buyer in writing at least thirty (30) days prior to the expected date of any Performance Test or any other testing of the net capability of the Facilities (including for any Uprate); provided, that Seller may postpone any such test until such test is able to be performed with prior written notice to Buyer of such postponement and of the date and time such test is actually to be performed. Buyer may have a representative present at the time of each Performance Test, although the failure to have such a representative present shall not invalidate the result of the applicable test; provided, that the above required notices were given.

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(ii) Performance Tests

Seller shall perform (A) a performance test each year, on a date mutually agreed by the Parties, at Seller’s expense, which shall measure the net capability of the Facilities (including the CT and any Uprate) and (B) a performance test as soon as practicable, consistent with the MAIN Guide No. 3A Standards, (I) prior to the outage during which an Uprate is performed but prior to any coastdown and (II) following start-up from an outage during which an Uprate is performed (each, a “Performance Test”). In addition to the required Performance Test, either Party may request a Performance Test at any reasonable time, at the expense of the Party requesting such test. All Performance Tests shall be conducted in accordance with testing procedures (A) to confirm the Accredited Capacity constituting Buyer’s Capacity Amount (pursuant to Transmission Provider requirements) or (B) as otherwise mutually agreed by the Parties. For the avoidance of doubt, as of the execution of this Agreement the current Performance Test standards are the MAIN Guide No. 3A Standards.

(e) Other Operations Obligations

(i) Information Requirements

Seller shall provide Buyer with the following real-time telemetered data (scanned no less frequently than once every four seconds) for the duration of the Term: (A) net Unit output (MW and VARs), (B) status (i.e., open or closed) of generator breakers and generator disconnect switches, (C) MW and VARs at each metering point, and (D) transformer neutral currents. Seller shall provide Buyer with copies of any scheduling notices or requests submitted to the Transmission Provider concurrently with the submission thereof. In addition, Seller shall provide Buyer with any other information Buyer may reasonably request regarding the operation of the Facilities in order to allow Buyer to maintain reliability for Buyer’s Network Load.

(ii) SCADA Data

Seller shall provide and make available to Buyer, on a real-time basis, all data generated by the SCADA system at the Facilities, including all four-second meter data.

(iii) Quality of Energy

All Energy delivered hereunder shall be three-phase, 60 Hertz (plus or minus variations as may be required or allowed by the Transmission Provider), alternating current, at a voltage acceptable to the Transmission Provider, or shall otherwise comply with such other specifications of the Transmission Provider, regional reliability council or other authority responsible for the safety and reliability of the electric grid with authority over the Delivery Point as may be in effect at the time of delivery.

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(iv) Buyer’s Right of Access to Facilities

Seller shall provide Buyer with the right to enter Seller’s premises at the Facilities during normal business hours to (i) review records maintained pursuant to this Agreement, (ii) obtain information regarding operation of the Facilities, (iii) visually inspect the Facilities, (iv) observe the testing, operation and maintenance of the Facilities and (v) undertake any other activities reasonably necessary for Buyer to fulfill its rights and obligations hereunder. Buyer shall provide prior written notice to Seller of the date and time of such proposed entry and the identity of all Persons conducting such entry, which prior written notice shall in no event be provided less than three Business Days prior to the date of such entry. Seller shall schedule Buyer’s entries upon Seller’s premises at the Facilities so as to minimize any disruption of the operation of the Facilities due to such entries or to any activities carried out by Buyer at the Facilities during any such entry. Each such Person conducting any such entry shall observe and comply with all of Seller’s applicable safety and security rules at all times during such entry, as such rules shall have been presented to such Person by Seller or by any operator on behalf of Seller prior to or at the time of such visit.

(v) Maintenance of Books and Records

Seller shall maintain at the Facilities site for a period of not less than five (5) years from the date of preparation thereof: (i) all measurements by Metering Devices of Energy delivered from the Facilities pursuant to this Agreement; (ii) all data and information necessary to calculate payments as provided in this Agreement, including invoices, receipts, charts, printouts, electronic media, magnetic tapes and other materials and documents; and (iii) an accurate and up-to-date operating log at the Facilities with records of: real and reactive power production from the Facilities for each hour, changes in operating status of the Facilities and scheduled outages of the Facilities. Buyer shall be permitted to inspect such operating log upon prior written request during normal business hours and copies of such log shall be provided, if requested, at Buyer’s expense, within ten (10) days of such request.

(vi) Interconnection

As between the Parties, Seller shall be responsible to maintain and operate Seller’s electric interconnection facilities in accordance with the Interconnection Agreement. Seller shall not permit any action or inaction under the Interconnection Agreement that could adversely affect Buyer’s rights, benefits, liability or obligations under this Agreement and shall not consent to (unless required by a Governing Authority) any modification of the Interconnection Agreement that would adversely affect Buyer’s rights hereunder without Buyer’s prior written consent, such consent not to be unreasonably withheld. Furthermore, subject to any prohibitions of a Governing Authority, Seller shall:

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(A) promptly advise Buyer of all communications and notices to be made by or to Seller under the Interconnection Agreement; and

(B) use commercially reasonable efforts to ensure that the Transmission Owner’s and/or Transmission Provider’s planned maintenance schedules for the transmission system are coordinated with the Scheduled Maintenance Outages for the Facilities.

ARTICLE VI: METERING

6.1. Metering

(a) The electric watt-hour meters and any other Energy measuring devices and equipment used for purposes of this Agreement (“Metering Devices”), shall at all times during the Term meet the requirements set by the Transmission Provider and all applicable Governing Authorities and as set forth in the Interconnection Agreement. Seller shall own, operate, maintain and replace Metering Devices, including those Metering Devices shown on Exhibit D, sufficient to permit an accurate determination of the quantity and time of delivery of Energy delivered to the Delivery Point. Seller’s Metering Devices shall be used for measurements under this Agreement. Seller shall calibrate the Metering Devices in accordance with Prudent Utility Practice, but no less than once during each refueling outage on the Maintenance Schedule. Buyer or Buyer’s representative shall have the right to be present during any calibration of the Metering Devices and Seller shall provide reasonable notice to Buyer of any such calibration.

(b) The Buyer shall have the right to inspect and require a test of the Metering Devices (to be performed by Seller) from time to time at its discretion, and any inaccuracy disclosed by such tests shall be promptly corrected. If errors greater than one-half of one percent (0.5%) are discovered, the test shall be at Seller’s expense. Upon reasonable notice, Seller shall provide the Buyer access to the Metering Devices at Buyer’s expense during normal business hours and from time to time for the purposes of reading, inspecting and witnessing any testing of such equipment.

(c) If any Metering Device used to determine the amount of Delivered Energy is found to be in error by more than three quarters of one percent (0.75%), the payments for Delivered Energy made since the previous test of such Metering Device shall be adjusted to reflect the corrected measurements determined pursuant to this Article VI. The amount of such adjustment payment shall be equal to the total adjustment that would be due if the inaccurate Metering Device were deemed to be equally inaccurate during the entire period since the previous test of such Metering Device, divided by two (2); provided, however, that if the period of inaccuracy can be ascertained, then the Parties shall adjust the payments for Delivered Energy for that ascertained period of inaccuracy. Any amount payable as a result of such correction shall be paid to the Party entitled to such payment within thirty (30) days of notice of such correction.

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ARTICLE VII: BILLING AND PAYMENT

7.1. Billing and Payment

(a) Seller shall send a billing statement to Buyer on or before the tenth (10^th) day after the end of each Billing Cycle. If any net amount is due to Seller with respect to any such billing statement, Buyer shall pay such amount to Seller within ten (10) days after receipt of such billing statement. If any net amount is due to Buyer with respect to any such billing statement, Seller shall pay such amount to Buyer on or before the fifteenth (15^th) day after the end of such Billing Cycle. The billing statement shall show (i) the megawatt-hours of Delivered Energy for such Billing Cycle as Scheduled by the Seller and confirmed by the Buyer pursuant to Exhibit H; (ii) the amounts due Seller for that Billing Cycle in respect of (A) the Delivered Energy Payment and (B) any other amounts due to Seller hereunder; (iii) the amounts due Buyer for that Billing Cycle in respect of (A) the Peak Adjustment Payment, if applicable, (unless Buyer makes the election provided for in Exhibit G) and (B) any other amounts due to Buyer hereunder; and (iv) the data reasonably pertinent to the calculation of the payments due to Seller or Buyer. For purposes of billing for Replacement Capacity and Replacement Energy, the Capacity of the resources providing Replacement Capacity and Replacement Energy shall be determined in accordance with Module E, such determination to be submitted by Seller to Buyer in accordance with Section 2.4. Any amounts due and payable and not paid by the due date will be deemed delinquent and will accrue interest at the Prime Rate, such interest to be calculated from and including the due date to but excluding the date the delinquent amount is paid in full.

(b) In the event of a dispute as to the amount of any bill, the disputing Party shall notify the other Party of the amount in dispute and Buyer or Seller, as applicable, shall pay to the other Party the undisputed portion of the bill on or prior to the due date therefor, as identified in Section 7.1(a). Buyer or Seller, as applicable, shall pay, with an interest charge computed at the Prime Rate, from and including the date payment was due to but excluding the date payment is made, any portion of the disputed amount ultimately found to be proper. In the event of a refund, Buyer or Seller, as applicable, shall pay, with an interest charge computed at the Prime Rate, from and including the date the disputed payment was made to but excluding the date the refund payment is made, any refund amount ultimately found to be due to the other Party.

(c) Neither the Buyer nor Seller shall have the right to challenge any billing statement rendered or received hereunder after a period of the longer of (A) two (2) years from the date such statement was rendered or (B) ten (10) days after the last MISO settlement statement for the last Operating Day included in the billing statement. In the event that any such billing statement depends in whole or in part upon estimated data, this two (2) year limitation period shall be deemed to begin on the first day of the Billing Cycle in which such estimated data is adjusted to actual.

(d) Each Party reserves to itself all rights, setoffs, counterclaims, recoupment, combination of accounts, liens and other remedies, rights and defenses which

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such Party has or may be entitled to (whether by operation of law or in equity, under contract or otherwise). The obligations of each Party to make payments under this Agreement may be offset against each other, setoff or recouped therefrom.

ARTICLE VIII: PERFORMANCE SECURITY

8.1. Seller Performance Security

If at any time Seller (or Seller’s Guarantor) has Insufficient Credit Status, Seller shall deliver to Buyer within two (2) Business Days following the commencement of such Insufficient Credit Status either (a) a Letter of Credit; (b) a guaranty from a Seller’s Guarantor (substantially in the form attached hereto as Exhibit E) (so long as such Insufficient Credit Status is not with respect to such Seller’s Guarantor) or (c) other collateral in form and substance reasonably acceptable to Buyer, in each case in an amount equal to [**], which amount shall escalate at [**] per annum on January 1, 2024 and on January 1^st of each year thereafter until the end of the Term; provided, that if Seller has Insufficient Credit Status as of the date of execution of this Agreement, then Seller shall be obligated to provide Seller Performance Security as of the date of execution of this Agreement. Costs of a Letter of Credit posted hereunder shall be borne by the applicant for such Letter of Credit.

8.2. Buyer Performance Security

If at any time Buyer (or Buyer’s Guarantor) has Insufficient Credit Status, Buyer shall deliver to Seller within two (2) Business Days following the commencement of such Insufficient Credit Status either (a) a Letter of Credit; (b) a guaranty from a Buyer’s Guarantor (substantially in the form attached hereto as Exhibit E) (so long as such Insufficient Credit Status is not with respect to such Buyer’s Guarantor) or (c) other collateral in form and substance reasonably acceptable to Seller, in each case in the same amount as the Seller Performance Security; provided, that if Buyer has Insufficient Credit Status as of the date of execution of this Agreement, then Buyer shall be obligated to provide Buyer Performance Security as of the date of execution of this Agreement. Costs of a Letter of Credit posted hereunder shall be borne by the applicant for such Letter of Credit.

8.3. Draws; Replenishments

A Non-Defaulting Party may draw upon the Buyer Performance Security or Seller Performance Security, as applicable, following the occurrence of an Event of Default by such other Party or pursuant to the other provisions of this Agreement in order to recover any damages to which such Non-Defaulting Party is entitled under this Agreement. In the event of such a draw on the Buyer Performance Security or Seller Performance Security, as applicable, then, except in the circumstance when the Non-Defaulting Party establishes an Early Termination Date pursuant to Section 10.2 or this Agreement otherwise terminates, the Defaulting Party shall within two (2) Business Days replenish the Seller Performance Security or Buyer Performance Security, as applicable, to the full amount required by Sections 8.1 or 8.2, as applicable.

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8.4. Reporting

(a) Seller shall promptly notify Buyer of any Insufficient Credit Status relating to Seller or to Seller’s Guarantor or any circumstance that results in Seller’s failure to be in compliance with the Seller Performance Security requirements of this Article VIII. From time to time, at Buyer’s written request, Seller shall provide Buyer promptly with such evidence as Buyer may reasonably request that any Seller Performance Security is in full compliance with this Agreement.

(b) Buyer shall promptly notify Seller of any Insufficient Credit Status relating to Buyer or any circumstance that results in Buyer’s failure to be in compliance with the Buyer Performance Security requirements of this Article VIII. From time to time, at Seller’s written request, Buyer shall provide Seller promptly with such evidence as Seller may reasonably request that Buyer and any Buyer Performance Security is in full compliance with this Agreement.

ARTICLE IX: FORCE MAJEURE

9.1. Conditions of Excuse for Seller

If, as a result of an event of Force Majeure, Seller is rendered wholly or partly unable to perform its obligations under this Agreement, Seller shall be excused except as specifically provided elsewhere in this Agreement, from only that portion of its performance that is prevented by such Force Majeure event to the extent so prevented; provided, that:

(a) Seller gives Buyer prompt written notice, and in any event within twenty-four (24) hours after Seller obtains actual knowledge thereof, describing the particulars of the event of, and how such event qualifies as a, Force Majeure;

(b) the permitted suspension of performance is of no greater scope and of no longer duration than is required by the event of Force Majeure and the effects thereof; and

(c) Seller exercises its reasonable best efforts to eliminate or mitigate the effects of the Force Majeure condition.

9.2. Conditions of Excuse for Buyer

If, as a result of an event of Force Majeure, Buyer is rendered wholly or partly unable to perform its obligations under this Agreement, Buyer shall be excused except as specifically provided elsewhere in this Agreement, from only that portion of its performance that is prevented by such Force Majeure event to the extent so prevented, provided that:

(a) Buyer gives Seller prompt written notice, and in any event within twenty-four (24) hours after the day that Buyer obtains actual knowledge thereof, describing the particulars of the event of, and how such event qualifies as a, Force Majeure;

(b) the permitted suspension of performance is of no greater scope and of no longer duration than is required by the event of Force Majeure and the effects thereof; and

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(c) Buyer exercises its reasonable best efforts to eliminate or mitigate the effects of the Force Majeure condition.

9.3. Burden of Proof

The burden of proof as to whether a Force Majeure has occurred shall be upon the Party claiming Force Majeure.

9.4. Payment and Security Obligations Not Excused

Notwithstanding anything in this Agreement to the contrary, no payment obligation arising under this Agreement prior to the date of an event of Force Majeure, and no obligation to provide Buyer Performance Security or Seller Performance Security, as applicable, shall be excused by such event of Force Majeure.

9.5. Time Limits

(a) If at any time during the period of Force Majeure the non-performing Party fails to undertake or ceases undertaking its reasonable best efforts to remedy its inability to perform, then the non-performing Party shall no longer be excused from its performance.

(b) Seller shall, within sixty (60) days of the occurrence of a Force Majeure affecting Seller’s performance under this Agreement that Seller reasonably anticipates will last more than twelve (12) months after the commencement thereof, deliver to Buyer a detailed plan for the remedy of the Force Majeure condition, which plan shall include a detailed specification of Seller’s proposal (including a timetable) to remedy the Force Majeure condition and restore the Facilities to maximum attainable operating status.

(c) If an event of Force Majeure has prevented Seller from performing all, or a significant portion of, its material obligations under this Agreement for a period of eighteen (18) months, Buyer may terminate this Agreement by written notice to Seller. Effective upon any such termination, neither Party shall have any continuing obligations for performance under this Agreement except for the satisfaction of liabilities that arose prior to such termination and except for those obligations which survive such termination in accordance with Section 22.9.

(d) Notwithstanding anything to the contrary in this Agreement, if, as a result of an event of Force Majeure, Buyer is rendered wholly or partly unable to perform its obligations under this Agreement, Seller may offer and sell the Energy and Ancillary Services from the Facilities to any third party until such time as the Buyer can resume performance under this Agreement.

9.6. Deadline Extended

Whenever either Party is required to commence or complete any action within a specified period, the performance of which action is excused under the terms of this Agreement by reasons of an event of Force Majeure, such period shall be extended by an amount equal to the duration of the period such performance was excused by such event of Force Majeure occurring or continuing during such period; provided, however, that the Term shall not be extended.

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ARTICLE X: EVENTS OF DEFAULT; REMEDIES

10.1. List of Events of Default

Each of the following events, unless and to the extent expressly excused under the terms of this Agreement, shall constitute an “Event of Default” of the defaulting party (“Defaulting Party”), the other Party being the non-defaulting party (“Non-Defaulting Party”):

(a) The failure of a Party to make any undisputed payment due hereunder and such failure shall continue for five (5) Business Days after written notice demanding such payment is received.

(b) Any representation or warranty made by a Party herein or in any certificate or other document delivered by such Party pursuant hereto was false or misleading in any material respect when made, unless such false or misleading representation or warranty is capable of being cured or remedied and (i) the representation and warranty is contained in Sections 11.1(a) and 11.2(a) hereof and such Party shall promptly commence and diligently pursue action to cause such representation and warranty to become true in all material respects within two (2) Business Days or (ii) as to any other representation or warranty such Party shall promptly commence and diligently pursue action to cause such representation or warranty to become true in all material respects and does so within thirty (30) days after notice thereof has been given to such Party by the other Party.

(c) In the event a Party shall cease doing business as a going concern, shall generally not pay its debts as they become due or admit in writing its inability to pay its debts as they become due, shall file a voluntary petition in bankruptcy or shall be adjudicated a bankrupt or insolvent, or shall file any petition or answer seeking any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under the present or any future federal bankruptcy code or any other present or future applicable Law, or shall seek or consent to or acquiesce in the appointment of any trustee, receiver, custodian or liquidator of such Party or of all or any substantial part of its properties, or shall make an assignment for the benefit of creditors, or such Party shall take any corporate action to authorize or that is in contemplation of the actions set forth above in this Section 10.1(c).

(d) In the event that within thirty (30) days after the commencement of any proceeding against a Party seeking any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under the present or any future federal bankruptcy code or any other statute or Law, such proceeding shall not have been dismissed, or if, within thirty (30) days after the appointment without the consent or acquiescence of such Party of any trustee, receiver, custodian or liquidator of such Party or of all or any substantial part of its properties, such appointment shall not have been vacated or stayed on appeal or otherwise, or if, within thirty (30) days after the expiration of any such stay, such appointment shall not have been vacated.

(e) A Party fails to comply or cause compliance with the Seller Performance Security or Buyer Performance Security, as applicable, requirements of Article VIII, or

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Buyer’s Guarantor, if any, or Seller’s Guarantor, if any, breaches any of its obligations under the Buyer’s Guaranty or Seller’s Guaranty, as applicable, or if any representation or warranty made by Buyer’s Guarantor or Seller’s Guarantor, as applicable, in the Buyer’s Guaranty or Seller’s Guaranty, as applicable, shall prove to be incorrect in any material respect when made, unless any of the foregoing is cured by the end of the next Business Day following receipt of a written notice from the other Party of a failure under this Section 10.1(e).

(f) The failure of Seller to provide the Buyer’s employees, agents and other representatives reasonable access to witness testing of or to examine the Metering Devices after receiving notice to do so by the Buyer as required under this Agreement.

(g) Seller, or any of its employees, contractors, subcontractors, agents or representatives willfully adjusts the Metering Devices or the interconnection facilities without Buyer’s written consent and which adjustment has the effect of falsely increasing the amounts owed by Buyer under this Agreement.

(h) A Party violates the requirements of Article XVIII through an attempted or purported assignment or transfer of this Agreement or an ownership interest in the Facilities or through a Change of Control transaction or breach of the terms and conditions of Section 2.10.

(i) A material default in performance or observance of any agreement, undertaking, covenant or other obligation (other than as specified in the other provisions of this Section 10.1) contained in this Agreement by a Party unless, within thirty (30) days after written notice from the other Party specifying the nature of such material default, such Party cures such default or, if such cure cannot reasonably be completed within thirty (30) days and if such Party within such thirty (30) day period commences, and thereafter diligently and continuously proceeds to cure such default, said period shall be extended for such further period as shall be necessary for such Party diligently and continuously to cure such default, provided that the extended cure period shall not exceed ninety (90) days from the date of the original notice.

10.2. Remedies

If an Event of Default occurs at any time during the Term, the Non-Defaulting Party may, for so long as the Event of Default is continuing, subject to the provisions of Article XIX, take one or more of the following actions: (i) establish a date (which date shall be no more than ten (10) Business Days after the Non-Defaulting Party delivers written notice of such date to the Defaulting Party) on which this Agreement shall terminate (the “Early Termination Date”), (ii) proceed by appropriate proceedings in accordance with this Agreement at law, in equity or otherwise, to protect and enforce its right to damages (actual or liquidated) or, where the Event of Default is one other than the failure to pay money, equitable relief, including specific performance, and (iii) immediately cease performance or withhold any payments, or both, due in respect of this Agreement. For avoidance of doubt, in the event the Non-Defaulting Party ceases performance or withholds payment as provided in (iii) above, the Defaulting Party shall continue to be obligated to pay damages relating to the Defaulting Party’s failure to perform during such cessation or period of withholding.

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Notwithstanding anything to the contrary in this Agreement, if an Event of Default under Section 10.1(a) with respect to Buyer has occurred and is continuing, Seller may offer and sell Energy and Ancillary Services from the Facilities to any third party until such time as the Buyer can resume performance under this Agreement. The proceeds of any such sale shall be applied as an offset to amounts otherwise owed by Buyer to Seller under this Agreement.

10.3. Rights of Specific Performance

In the case of an Event of Default, the Parties recognize that any remedy at law may be inadequate because this Agreement is unique and/or because the actual damages of the Non-Defaulting Party may be difficult to reasonably ascertain and/or may exceed the amount of any guaranty or other collateral available to the Non-Defaulting Party. Therefore, the Parties agree that the Non-Defaulting Party shall be entitled to pursue an action for specific performance, and the Defaulting Party waives all of its rights to assert as a defense to such action that the Non-Defaulting Party’s remedy at law is adequate.

10.4. Limitation of Liability

THE PARTIES CONFIRM THAT THE EXPRESS REMEDIES AND MEASURES OF DAMAGES PROVIDED IN THIS AGREEMENT SATISFY THE ESSENTIAL PURPOSES HEREOF FOR BREACH OF ANY PROVISION FOR WHICH AN EXPRESS REMEDY OR MEASURE OF DAMAGES IS PROVIDED. UNLESS EXPRESSLY HEREIN OTHERWISE PROVIDED, AND EXCEPT FOR THE PAYMENT OF LIQUIDATED DAMAGES SPECIFIED HEREIN, NEITHER PARTY NOR THEIR AFFILIATES SHALL BE LIABLE FOR CONSEQUENTIAL, INCIDENTAL, PUNITIVE, EXEMPLARY OR INDIRECT DAMAGES, LOST PROFITS (WHICH DOES NOT INCLUDE RECOVERY FOR ACCRUED DELIVERED ENERGY PAYMENTS) OR OTHER BUSINESS INTERRUPTION DAMAGES, BY STATUTE, IN TORT OR CONTRACT; PROVIDED, HOWEVER, THAT THIS SENTENCE SHALL NOT APPLY (A) TO LIMIT THE LIABILITY OF A PARTY WHOSE ACTIONS GIVING RISE TO SUCH LIABILITY CONSTITUTE WILLFUL MISCONDUCT OR (B) TO ANY INDEMNITY OBLIGATION PROVIDED HEREIN. TO THE EXTENT ANY DAMAGES REQUIRED TO BE PAID HEREUNDER ARE LIQUIDATED, THE PARTIES ACKNOWLEDGE THAT THE ACTUAL DAMAGES ARE DIFFICULT OR IMPOSSIBLE TO DETERMINE, OTHERWISE OBTAINING AN ADEQUATE REMEDY IS INCONVENIENT, AND THE LIQUIDATED DAMAGES DO NOT CONSTITUTE A PENALTY AND ARE A REASONABLE ADVANCE APPROXIMATION OF THE HARM OR LOSS. THE PARTIES FURTHER EXPRESSLY AGREE THAT NEITHER SHALL HAVE THE RIGHT, AND EACH WAIVES ALL RIGHTS, TO BRING AN ACTION AGAINST THE OTHER (INCLUDING ANY AFFILIATE OF THE OTHER) IN TORT OR STRICT LIABILITY FOR ANY ACT(S) OR OMISSIONS CONSTITUTING A BREACH OR ALLEGED BREACH OF CONTRACT.

10.5. Disclaimer of Warranties

NEITHER PARTY TO THIS AGREEMENT MAKES ANY REPRESENTATION, WARRANTY OR INDEMNITY, EXPRESS OR IMPLIED, TO THE OTHER PARTY TO

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THIS AGREEMENT EXCEPT FOR THE REPRESENTATIONS, WARRANTIES AND INDEMNITIES EXPRESSLY SET FORTH IN THIS AGREEMENT.

ARTICLE XI: REPRESENTATIONS, WARRANTIES AND COVENANTS

11.1. Representations and Warranties of Buyer

Buyer makes the following representations and warranties to Seller, each of which is true and correct as of the Effective Date:

(a) Buyer is a corporation duly organized, validly existing and in good standing under the Laws of the State of Wisconsin.

(b) Buyer possesses all requisite power and authority to enter into and perform this Agreement and to carry out the transactions contemplated herein. Buyer has all legal power and authority to own and use its properties and to transact the business in which it engages or proposes to engage and holds or will obtain on or before the time required all Authorizations necessary and required therefor.

(c) Buyer’s execution, delivery and performance of this Agreement have been duly authorized by, or are in accordance with, its articles of incorporation and by-laws; this Agreement has been duly executed and delivered for it by the signatories so authorized; and this Agreement constitutes Buyer’s legal, valid and binding obligation, enforceable against it in accordance with the terms hereof, except as such enforceability may be limited by applicable bankruptcy laws from time to time in effect that affect creditors’ rights generally or by general principles of equity (regardless of whether such enforcement is considered in equity or at law).

(d) Buyer’s execution, delivery and performance of this Agreement (i) will not result in a breach or violation of, or constitute a default under, or conflict with any material Authorization, or any material contract, lease or other agreement or instrument to which it is a party, or by which it or its properties may be bound or affected; and (ii) does not require any Authorization, or the consent, authorization or notification of any other Person, or any other action by or with respect to any other Person (except for Authorizations and consents or authorizations of other Persons already obtained, notifications already delivered, or other actions already taken or necessary or required Authorizations it will obtain on or before the time required).

(e) No suit, action or arbitration, or legal, administrative or other proceeding is pending or, to Buyer’s knowledge, has been threatened against Buyer that purports to materially adversely affect the validity or enforceability of this Agreement or the ability of Buyer to perform its obligations hereunder, or that would, if adversely determined, have a material adverse effect on the business or financial condition of Buyer. There are no bankruptcy, insolvency, reorganization, receivership or other proceedings pending against or being contemplated by Buyer, or, to Buyer’s knowledge, threatened against it.

(f) Buyer is not in breach of, in default under, or in violation of, any applicable Law, or the provisions of any Authorization, or in breach of, in default under, or in

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violation of, or in conflict with any provision of any promissory note, indenture or any evidence of indebtedness or security therefor, lease, contract, or other agreement by which it is bound, except for any such breaches, defaults, violations or conflicts which, individually or in the aggregate, could not reasonably be expected to have a material adverse effect on the business or financial condition of Buyer or its ability to perform its obligations hereunder.

11.2. Representations and Warranties of Seller

Seller makes the following representations and warranties to Buyer as of the Effective Date:

(a) Seller is a limited liability company duly organized, validly existing and in good standing under the Laws of the State of Wisconsin and qualified to do business in the State of Wisconsin, and is the sole owner of the Facilities.

(b) Seller possesses all requisite power and authority to enter into and perform this Agreement and to carry out the transactions contemplated herein. Seller has all legal power and authority to own and use its properties and to transact the business in which it engages or proposes to engage and holds or will obtain on or before the time required all Authorizations necessary and required therefor.

(c) Seller’s execution, delivery and performance of this Agreement have been duly authorized by, or are in accordance with, its articles of organization and operating agreement; this Agreement has been duly executed and delivered for it by the signatories so authorized; and this Agreement constitutes Seller’s legal, valid and binding obligation, enforceable against it in accordance with the terms hereof, except as such enforceability may be limited by applicable bankruptcy laws from time to time in effect that affect creditors’ rights generally, or by general principles of equity (regardless of whether such enforcement is considered in equity or at law).

(d) Seller’s execution, delivery and performance of this Agreement (i) will not result in a breach or violation of, or constitute a default under, or conflict with any Authorization, or any contract, lease or other agreement or instrument to which it is a party, or by which it or its properties may be bound or affected; and (ii) does not require any Authorization, or the consent, authorization or notification of any other Person, or any other action by or with respect to any other Person (except for Authorizations and consents or authorizations of other Persons already obtained, notifications already delivered, or other actions already taken or necessary or required Authorizations it will obtain on or before the time required).

(e) No suit, action or arbitration, or legal, administrative or other proceeding is pending or, to Seller’s knowledge, has been threatened against Seller that purports to materially adversely affect the validity or enforceability of this Agreement or the ability of Seller to perform its obligations hereunder, or that would, if adversely determined, have a material adverse effect on the business or financial condition of Seller. There are no bankruptcy, insolvency, reorganization, receivership or other proceedings pending against or being contemplated by Seller, or, to Seller’s knowledge, threatened against it.

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(f) Seller is not in breach of, in default under, or in violation of, or in conflict with any applicable Law, or the provisions of any Authorization, or in breach of, in default under, or in violation of, or in conflict with, any provision of any promissory note, indenture or any evidence of indebtedness or security therefor, lease, contract, or other agreement by which it is bound, except for any such breaches, defaults, violations or conflicts which, individually or in the aggregate, could not reasonably be expected to have a material adverse effect on the business or financial condition of Seller or its ability to perform its obligations hereunder.

11.3. Covenants of Seller

Seller hereby covenants and agrees that throughout the Term:

(a) No modifications to, or expansion of, the Facilities that would have a material adverse effect on Buyer’s rights or obligations under this Agreement will occur without the prior written consent of Buyer, such consent not to be unreasonably withheld.

(b) Seller will not convey, sell, lease, transfer or otherwise dispose of all or substantially all of its business or assets, whether now owned or hereafter acquired, to the extent that such conveyance, sale, lease, transfer or other disposition would have a material adverse effect on Buyer’s rights or obligations under this Agreement without the prior written consent of Buyer, such consent not to be unreasonably withheld.

(c) Seller shall provide to Buyer all financial statements, documents evidencing Seller’s capital structure and any other financial information reasonably requested by Buyer on the Effective Date and thereafter as reasonably requested by Buyer. Seller shall furnish to Buyer such certifications to such information from a Senior Financial Officer as Buyer may reasonably request from time to time. Seller covenants to promptly notify Buyer following any determination made by Seller or its independent auditor that Seller constitutes a VIE.

ARTICLE XII: INDEMNITY

12.1. By Seller

(a) Seller shall defend, indemnify and hold harmless Buyer and its officers, directors, employees and agents from and against any and all costs, expense, damage, liability or loss, including reasonable attorneys’ fees, resulting from or arising out of any Claims arising from the failure of Seller to fulfill its obligations under this Agreement.

(b) Seller shall defend, indemnify and hold harmless Buyer and its officers, directors, employees and agents from and against all loss, damage, expense, costs and liability, including reasonable attorneys’ fees, arising from any Claims against Buyer arising from injury to or death of Persons or damage to or destruction of property occurring at the Facilities to the extent such injury, death or damage is not caused by the willful misconduct of Buyer, its Affiliates or Associates while on Seller’s premises at the Facilities.

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12.2. Indemnification by Buyer

Buyer shall defend, indemnify and hold harmless Seller and its officers, directors, employees and agents from and against all loss, damage, expense, costs and liability, including reasonable attorneys’ fees, resulting from or arising out of any Claims arising from the failure of Buyer to fulfill its obligations under this Agreement.

12.3. Joint Negligence

In the case of joint or concurring negligence or other fault of the Parties giving rise to a loss or Claim against either one or both of them, each shall have rights of contribution against the other Party in proportion to their comparative negligence as determined by the court trying the matter in dispute. Each Party shall promptly notify the other Party of the assertion of any Claim against which such other Party may be required to provide indemnity hereunder and shall give the other Party an opportunity to defend such Claim. These indemnification provisions are for the protection of the Parties hereto only and shall not establish, of themselves, any liability to third parties.

12.4. Responsibility for Employees

The Parties agree that, as between themselves, each Party shall be responsible for the acts and omissions of, and any Claims by, its employees and agents, irrespective of any limitation on the amount or type of damages, compensation or benefits payable by or for such Party under Workers’ Compensation Laws, disability benefit acts or other employee benefit acts; provided, however, that the foregoing is not intended to create third party beneficiary rights in any party not a Party to this Agreement. Each Party shall indemnify the other Party from and against all liabilities, Claims, damages, suits, fines or judgments for injury or death to any third party and damage to or destruction of property of any third party, to the extent caused by such Party’s employees’ or agents’ negligence or willful misconduct.

12.5. Notice and Participation

If any Party entitled to indemnification hereunder (the “Indemnified Party”) intends to seek indemnification under this Article XII from any other Party (the “Indemnifying Party”) with respect to any Claim, the Indemnified Party shall give the Indemnifying Party notice of such Claim upon the receipt of actual knowledge or information by the Indemnified Party of any possible Claim or of the commencement of such Claim, which period shall in no event be later than the lesser of (i) fifteen (15) Business Days prior to the last day for responding to such Claim or (ii) one-half of the period allowed for responding to such Claim. The Indemnifying Party shall have no liability under this Article XII for any Claim for which such notice is not provided, to the extent that the failure to give such notice prejudices the Indemnifying Party. The Indemnifying Party shall have the right to assume the defense of any such Claim, at its sole cost and expense, with counsel designated by the Indemnifying Party and reasonably satisfactory to the Indemnified Party; provided, however, that if the defendants in any such Claim include both the Indemnified Party and the Indemnifying Party, and the Indemnified Party shall have reasonably concluded that there may be legal defenses available to it which are different from or additional to those available to the Indemnifying Party, the Indemnified Party shall have the right to select separate counsel, at the Indemnifying Party’s expense, to assert such legal defenses and to otherwise participate

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in the defense of such Claim on behalf of such Indemnified Party. Should any Indemnified Party be entitled to indemnification under this Section 12.5 as a result of a Claim, and should the Indemnifying Party fail to assume the defense of such Claim, the Indemnified Party may, at the expense of the Indemnifying Party, contest (or, with or without the prior consent of the Indemnifying Party, settle) such Claim. Except to the extent expressly provided herein, no Indemnified Party shall settle any Claim with respect to which it has sought or intends to seek indemnification pursuant to this Section without the prior written consent of the Indemnifying Party, which consent shall not be unreasonably withheld. Except to the extent expressly provided herein, no Indemnifying Party shall settle any Claim with respect to which it may be liable to provide indemnification pursuant to this Section without the prior written consent of the Indemnified Party, which consent shall not be unreasonably withheld; provided, however, that if the Indemnifying Party has reached a bona fide monetary settlement agreement with the plaintiff(s) in any such Claim and the Indemnified Party does not consent to such settlement agreement, then the dollar amount specified in the settlement agreement, plus the Indemnified Party’s legal fees and other costs related to the defense of the Claim prior to the date of such settlement agreement, shall act as an absolute maximum limit on the indemnification obligation of the Indemnifying Party.

12.6. Payment of Indemnification Claims

The Indemnifying Party shall pay any amount due pursuant to this Article XII within ten (10) Business Days after the determination of the amount of any such indemnification, to the extent that the existence and entitlement to indemnification is not disputed by the Indemnifying Party, or within ten (10) Business Days after the conclusion of any Dispute Resolution Procedures, to the extent that the existence or entitlement to indemnification is disputed by the Indemnifying Party and is established pursuant to such Dispute Resolution Procedures.

12.7. Survival of Obligation

The duty to indemnify under this Article XII shall continue in full force and effect notwithstanding the expiration or termination of this Agreement, with respect to any loss, liability, damage, claim or other expense based on facts or conditions which occurred prior to such termination.

ARTICLE XIII: TERM

13.1. Term

Subject to the terms and conditions of this Agreement, this Agreement shall commence on the Effective Date and, unless terminated earlier as expressly provided herein, shall continue in effect until 11:59:59 p.m. (CPT) on the day before (a) with respect to Unit 1, October 5, 2030 (the “Unit 1 Termination Date”) and (b) with respect to Unit 2, March 8, 2033 (the “Unit 2 Termination Date”); provided, however, that in the event that the Unit 1 Termination Date or Unit 2 Termination Date is scheduled to fall during any Peak Period, the Unit 1 Termination Date or Unit 2 Termination Date, as applicable, shall be extended until the day after the end of such Peak Period.

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13.2. Termination

If the continued operation of a Unit pursuant to this Agreement has become materially adverse to Seller such that the continued operation of such Unit is no longer feasible, prudent or sustainable, Seller shall have the right to elect to permanently shut down such Unit upon written notice of termination of this Agreement in relation to such Unit effective on the later of (a) twenty-four (24) months after such notice and (b) the permanent shutdown of such Unit; provided, that this Agreement shall be in full force and effect and Seller shall continue to perform its obligations under this Agreement, and shall be liable for any failure to perform as provided herein, through such remaining effectiveness of this Agreement (as to such Unit and through the remainder of the Term as to the other Unit). Neither Party shall have any further liability upon the effectiveness of the termination provided above except for those obligations that by their express terms are to survive termination of this Agreement.

13.3. Effect of Termination

Termination of this Agreement shall not terminate the rights or duties of either Party hereunder with respect to any obligations due to be performed on or before the effective date of termination.

ARTICLE XIV: ADMINISTRATIVE COMMITTEE

14.1. Purpose

From time to time various administrative and technical matters may arise in connection with the terms and conditions of this Agreement which will require the cooperation and consultation of the Parties and the exchange of information. As a means of providing for such cooperation, consultation and exchange, an Administrative Committee is hereby established with the functions described in Section 14.4. However, the Administrative Committee shall not (a) have the authority to amend this Agreement or (b) diminish in any manner the authority or responsibility of either Party as set forth in the various sections of this Agreement.

14.2. Membership

The Administrative Committee shall have two (2) members, each an “Operating Contact”. Within sixty (60) days after execution of this Agreement, each Party shall designate its Operating Contact (and alternate) and shall promptly give written notice thereof to the other Party. Thereafter, each Party shall promptly give written notice to the other Party of any change in the designation of its Operating Contact. All actions taken by the Administrative Committee must be approved by both Operating Contacts.

14.3. Meetings

Meetings as are reasonably required may be called by either Operating Contact with as much advance notice as is practicable. Meetings may be attended by other representatives of the Parties.

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14.4. Functions

The Administrative Committee shall have the following functions:

(a) Provide liaison between the Parties at the management level and exchange information with respect to significant matters arising under this Agreement.

(b) Appoint ad hoc committees, the members of which need not be the Operating Contacts, as necessary to perform detailed work and conduct studies regarding matters requiring investigation.

(c) Review, discuss and attempt to resolve disputes arising under this Agreement; provided, that the Administrative Committee shall not limit the provisions of Article XIX.

(d) Provide liaison between the Parties concerning the status and operation of the Facilities.

14.5. Expenses

Each Party shall be responsible for the salary and out-of-pocket expenses of its Operating Contact and its other attendees. All other expenses incurred in connection with the performance by the Administrative Committee of its functions shall be allocated and paid as determined by the Administrative Committee.

ARTICLE XV: NOTICES

15.1. Notices in Writing

All notices or other communications which are required or permitted under this Agreement shall be effective if they are in writing and delivered personally or by certified mail (postage prepaid and return receipt requested), reputable overnight delivery service, or telecopy or other confirmable form of electronic delivery, to the following address (except as to notices which are required by this Agreement to be delivered to a Party’s Operating Contact or to the Dispatch Authority Function or the Balancing Authority Function, which shall be delivered to such Party’s Operating Contact or to the Dispatch Authority Function or the Balancing Authority Function, as the case may be):

(a) if to Seller:

FPL Energy Point Beach, LLC

700 Universe Boulevard

Juno Beach, FL 33408

Attention: Vice President, Business Management

Facsimile: 561-304-5161

(b) With a copy to:

FPL Energy, LLC

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700 Universe Boulevard

Juno Beach, FL 33408

Attention: Managing Attorney

Facsimile: 561-691-7305

(c) if to the Buyer:

Wisconsin Electric Power Company

333 West Everett Street, Room A214

Milwaukee, Wisconsin 53203

Attention: Trading and Operations

Facsimile: 414-221-4210

or to such other person or address as the addressee may have specified in a notice duly given to the sender as provided herein.

15.2. Date of Notification

All notices or communications duly delivered or mailed and postmarked to a Party hereto as provided in Section 15.1 shall be effective as of the date of receipt.

15.3. Oral Notice in Emergency

Notwithstanding the provisions of Section 15.1, any notice required hereunder with respect to an occurrence or event requiring immediate attention may be made orally, by telephone or otherwise, provided such notice shall be confirmed in writing within 24 hours thereafter. Each Party shall make any such oral notice directly to the Operating Contact of the other Party.

ARTICLE XVI: CONFIDENTIALITY

16.1. Non-Disclosure to Third Parties

Any Proprietary Information of a Party (the “Transferor”) which is disclosed to or otherwise received or obtained by the other Party (the “Transferee”) in connection with this Agreement is disclosed, and shall be held, in confidence, and the Transferee shall not publish or otherwise disclose any Proprietary Information to any Person for any reason or purpose whatsoever, or use any Proprietary Information for its own purposes (other than in connection with this Agreement) or for the benefit of any Person, without the prior written approval of the Transferor, which approval may be granted or withheld by the Transferor in its sole discretion; provided, however, that nothing herein shall limit the right of the Transferee to provide any Proprietary Information to any Governing Authority having jurisdiction over or asserting a right to obtain such information (including as part of the application for any Authorization); provided, that (i) such Governing Authority requests that such Proprietary Information be provided, and (ii) the Transferee promptly advises the Transferor of any request for such information by such Governing Authority and cooperates in giving the Transferor an opportunity to present objections, requests for limitation or a protective order, and/or requests for confidentiality or other restrictions on disclosure or

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access, to such Governing Authority. Each Party’s obligation to maintain Proprietary Information in confidence shall be deemed performed if such Party observes, with respect thereto, the same safeguards and precautions which such Party observes with respect to its own proprietary information of the same or similar kind.

16.2. Definition of Proprietary Information

The term “Proprietary Information” means all information, written or oral, which has been or is disclosed by the Transferor, or by any Affiliate or Associate of the Transferor, or which otherwise becomes known to the Transferee, or to any Affiliate, Associate or other party in a confidential relationship with, the Transferee, and which (x) relates to matters such as patents, trade secrets, research and development activities, draft or final contracts or other business arrangements, books and records, budgets, cost estimates, pro forma calculations, engineering work product, environmental compliance, vendor lists, suppliers, manufacturing processes, energy consumption, pricing information, private processes, and other similar information, as may exist from time to time, or (y) the Transferor expressly designates in writing to be confidential. However, Proprietary Information shall exclude information falling into any of the following categories:

(a) Information that, at the time of disclosure hereunder, is in the public domain, other than information that entered the public domain by breach of this or any other agreement, or in violation of any other applicable Law;

(b) Information that, after disclosure hereunder, enters the public domain, other than information that entered the public domain by breach of this or any other agreement, or in violation of any other applicable Law;

(c) Information, other than that obtained from third parties, that prior to disclosure hereunder, was already in the recipient’s possession, either without limitation on disclosure to others or subsequently becoming free of such limitation;

(d) Information obtained by the recipient from a third party having an independent right to disclose the information; or

(e) Information that is available through independent research without use of or access to the Proprietary Information.

16.3. Limitations on Required Disclosure

Each Party agrees that it will make available Proprietary Information received from the other Party to its own Affiliates and Associates only on a need-to-know basis, and that all Persons to whom such Proprietary Information is made available will be made aware of the confidential nature of such Proprietary Information, and will be required to agree to hold such Proprietary Information in confidence under terms substantially identical to the terms hereof.

16.4. Remedies

In the event of a breach or threatened breach of the provisions of Section 16.1 above by any Transferee, the Transferor shall be entitled to an injunction restraining such Party from such breach. Nothing contained in this Agreement (including Section 10.4) shall be construed as

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prohibiting the Transferor from pursuing any other remedies available at law or in equity for such breach or threatened breach of this Agreement.

16.5. Survival of Confidentiality

The provisions of this Article XVI shall survive the expiration or termination of this Agreement for a period of three (3) years.

ARTICLE XVII: INSURANCE

17.1. Coverage and Amounts of Seller

During the Term, Seller shall procure, pay premiums for and maintain in full force and effect the insurance coverages described below.

(a) Worker’s Compensation Insurance with statutory limits as required by the Laws of the State of Wisconsin, and Employer’s Liability with minimum limits of $1 million or as established by state or federal Law, if applicable. This insurance shall include all applicable maritime coverages as required by Law. This policy is to be endorsed to include a waiver of subrogation in favor of the Buyer.

(b) Commercial General and Umbrella/Excess Liability insurance, including coverage for (i) premises/operations, (ii) independent contractor, (iii) products and completed operations, (iv) broad form contractual liability, (v) broad form property damage, (vi) explosion, collapse and underground damage exclusion deletion, and (vii) personal injury, all with limits of not less than $25,000,000 each occurrence and in the aggregate.

(c) Business Auto Liability Insurance, covering all vehicles and automobiles whether owned, leased, or rented when used by Seller in connection with performance of this Agreement and including commercially reasonable coverage for each accident of bodily injury and property damage.

(d) Nuclear primary and excess property insurance in the amount that is reasonably consistent with the custom in the commercial nuclear power industry and which, at a minimum, satisfies the requirements of 10 CFR 50.54(w), currently $1.06 billion. Deductibles shall be reasonably consistent with the custom in the commercial nuclear power industry, but shall not exceed $5,000,000 without the written consent of Buyer, such consent not to be unreasonably withheld.

(e) Nuclear liability insurance from American Nuclear Insurers in accordance with the Price Anderson Act until such time as the NRC shall release Seller from this obligation. Should the Price Anderson Act be repealed, the Seller shall at its cost, provide insurance or other similar financial protection affording coverage consistent with coverages maintained for other nuclear power plants from the commercial marketplace to the extent such coverage is commercially available and to the extent that such coverage is available at commercially reasonable rates. Such insurance shall include, at a minimum, the following policies (as such are in effect for Unit 1 and Unit 2 as of the Effective Date):

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(i) Facility Form

(ii) Secondary Financial Protection

(iii) Master Worker

(iv) Suppliers and Transporters

(f) NEIL nuclear business interruption and extra expense insurance in an amount that is reasonably consistent with the custom in the commercial nuclear power industry, but only to the extent of available limits remaining and in coordination with the amount purchased by the Buyer. Seller hereby agrees that the Buyer has an insurable interest in business interruption and extra expense created by the insurable events making power from the plant unavailable. Seller acknowledges that NEIL insurance covers this exposure and agrees that Buyer is entitled to purchase NEIL coverage on its own behalf in an amount up to 5% of the total available limit offered by NEIL; provided, however, that Buyer shall be entitled to increase such coverage up to a minimum of 10%, but no greater than 25%, of the total available limit offered by NEIL in the event that Buyer’s participation in NEIL’s non-nuclear insurance program is terminated by NEIL; provided, further, that the amount of coverage which Buyer is entitled to obtain shall be no greater than the amount reasonably necessary to permit Buyer to realize the full benefits of Buyer’s NEIL member policyholder percentage.

(g) Notwithstanding the foregoing, Seller may self-insure to meet the minimum insurance requirements above to the extent it maintains a self-insurance program; provided that Seller (or its guarantor’s) Credit Rating is rated Investment Grade or better and that its self-insurance program meets the above minimum insurance requirements. Self-insurance shall be approved and recognized by the State of Wisconsin for workers compensation and automobile liability. Self-insurance amounts shall not exceed the maximum for each line of coverage or $5 million in the aggregate. For any period of time that Seller (or its guarantor’s) does not have an Investment Grade Credit Rating, Seller shall comply with the above minimum insurance requirements. In the event that Seller is permitted to self-insure pursuant to this section, Seller shall notify Buyer that Seller meets the requirements to self-insure and that its self-insurance program meets the above minimum insurance requirements.

17.2. Insurance Certificates

On the Effective Date, and thereafter from time to time at the request of Buyer, Seller shall provide certificates of insurance from insurance companies having a Best rating of A minus or better confirming that the insurance coverages required herein are maintained. Such certificates shall provide that Buyer be given thirty (30) days prior written notice by the insurer, or its authorized representative, of any cancellation and ten (10) days’ prior written notice due to cancellation for non-payment of premiums for any required coverage provided by such insurer as evidenced by the certificates. In addition, Seller agrees to provide notice to Buyer of any material change in the insurance coverages or policies required hereby.

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17.3. Coverage For Full Term

All required coverages shall remain in full force and effect during the Term. Seller’s liability under this Agreement shall not be limited to or by the insurance coverages required by this Agreement.

ARTICLE XVIII: ASSIGNMENT

18.1. Binding Effect

This Agreement shall be binding upon and shall inure to the benefit of the Parties and their respective successors and permitted assignees.

18.2. Assignment

(a) Subject to Section 2.10, Seller may assign its rights or delegate its duties under this Agreement with the prior written consent of Buyer in connection with any assignment or sale of the Facilities; provided, that the assignee, either directly or through Affiliates, is approved as a licensee to own and/or operate the Facilities by the NRC; provided, further, that Seller shall not assign this Agreement or sell the Facilities (or any portion thereof) to any Person that (i) does not have a Credit Rating equal to or better than Investment Grade, or (ii) cannot replace the Seller Performance Security with replacement security consisting of (A) a guaranty or guaranties from a guarantor with a Credit Rating equal to or better than Investment Grade, or (B) other Seller Performance Security; and provided, further, that the assigning Party shall provide prompt prior written notice of such assignment to the other Party and the assuming Person agrees in writing to assume all obligations under this Agreement. An assignee that meets the requirements of all of the foregoing provisos in the preceding sentence shall be deemed a “Permitted Assignee.” Once a Permitted Assignee provides such replacement security, any Seller Performance Security provided by Seller/assignor shall be promptly returned to Seller/assignor.

(b) Seller shall also have the right, without the consent of Buyer, to assign its rights or delegate its duties under this Agreement to an Affiliate of Seller, provided that all Seller Performance Security requirements under this Agreement remain satisfied. An Affiliate that meets the requirements of the preceding sentence shall be deemed a “Permitted Assignee.”

(c) Seller shall have the right to assign all or a portion of its rights or obligations under this Agreement to any lender providing financing for Seller’s acquisition of the Facilities as collateral security for obligations under the financing documents entered into with such lenders; provided, that (a) Seller first provides Buyer with written notice of not less than 60 days of such collateral assignment; and (b) Buyer consents in good faith to the form of collateral assignment and related documentation.

(d) Buyer shall have the right, with the prior written consent of Seller (such consent not to be unreasonably withheld), to assign its rights or delegate its duties under this Agreement to a non-Affiliate, provided that such assignee has a Credit Rating

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equal to or better than Investment Grade, or provides Seller with other evidence reasonably satisfactory to Seller of its financial ability to perform Buyer’s obligations hereunder.

(e) Buyer shall have the right, without the consent of Seller, to assign its rights or delegate its duties under this Agreement (A) to an Affiliate of Buyer or an entity that is part of the Wisconsin Energy Group (a “Related Entity”); provided, that such Affiliate or Related Entity is an entity with an Investment Grade Credit Rating or (B) if it shall merge into, be consolidated with, or reorganized pursuant to a divestiture in such a way that the surviving entity is, or on the date of the merger, consolidation, or reorganization, will be bound by all of the obligations under this Agreement; provided, further, that if such assignee (or parent or affiliate of such assignee) does not possess an Investment Grade Credit Rating at the time of such assignment, then Buyer, or any Affiliate of Buyer with an Investment Grade Credit Rating, shall provide to Seller a guaranty of assignee’s payment obligations under this Agreement.

18.3. Change in Control

Seller covenants and agrees that without the express written consent of Buyer any Change in Control of Seller shall be prohibited; provided, however, that notwithstanding the foregoing, if the Person acquiring the control of Seller meets the requirements of a Permitted Assignee, Buyer’s consent shall not be required.

ARTICLE XIX: DISPUTE RESOLUTION

19.1. General Provisions

Every Dispute between the Parties arising out of or in connection with this Agreement shall be resolved in accordance with this Article XIX, to the extent permitted by law.

19.2. Negotiation

In the event of a Dispute, the Parties shall in good faith attempt to resolve such Dispute by negotiations through the Administrative Committee. Either Operating Contact may request the other to meet within seven (7) days at a mutually agreed upon time and place. Such request must be in the form of a written notice that sets forth the nature of the controversy or claim. If the Dispute that gave rise to such controversy or claim is not resolved within thirty (30) days from the date of the first meeting of the Administrative Committee (or, if the Administrative Committee fails to meet within the applicable period required by this Section 19.2), the Administrative Committee shall refer the Dispute to senior executives, who shall have authority to settle the Dispute (the “Senior Executives”). Thereupon, each Operating Contact shall in no later than fifteen (15) days prepare and deliver to the Senior Executives and the other Operating Contact a memorandum stating the issues in dispute and their positions, summarizing any negotiations which have taken place and attaching relevant documents. The Senior Executives shall meet for negotiations within fifteen (15) days from the exchange of such memoranda, at a mutually agreed time and place. If the Dispute is not resolved under this Section 19.2 within ten (10) days of the first meeting of the Senior

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Executives, then, in accordance with this Agreement, either Party may pursue any remedy it may have at law or in equity.

19.3. Binding Upon Parties

In the resolution of any Dispute pursuant to this Article XIX, each of the Parties, their Operating Contacts and Senior Executives shall give effect to this Article XIX.

19.4. Continued Performance

Subject to the provisions of Section 10.2, notwithstanding any Dispute between the Parties and pending the final decision of a Dispute, each Party shall continue to perform its respective obligations under this Agreement.

ARTICLE XX: COMPLIANCE WITH LAWS; TAXES

20.1. Compliance with Laws

Each Party shall at all times comply with all applicable Laws relating to the performance of its obligations under this Agreement. Each Party shall give all required notices, shall procure and maintain all necessary Authorizations and inspections necessary for its performance of this Agreement, and shall pay all charges and fees in connection therewith.

20.2. Mobile-Sierra

It is the intent of the Parties that the rates and all other terms and conditions of the services provided hereunder shall not be subject to change under Sections 205 or 206 of the Federal Power Act of 1935, 16 U.S.C. § 791 et seq., (or any successor legislation) without the consent of both Parties. Each of the Parties hereto agrees not to unilaterally file with the FERC a change in the rates, terms or conditions of this Agreement. Moreover, absent agreement of all Parties to a proposed change, the standard of review for changes to any rate, term or condition of this Agreement proposed by a non-Party or the FERC or any other Governing Authority acting sua sponte shall be the “public interest” standard of review set forth in United Gas Pipe Line Co. v. Mobile Gas Services Corp., 350 U.S. 332 (1956) and Federal Power Commission v. Sierra Pac Power Co., 350 U.S. 348 (1956). To the extent that the FERC adopts specific language that parties must incorporate into agreements in order to bind FERC, third parties and themselves to a public interest standard of review, the Parties hereby incorporate such language herein by reference.

20.3. Taxes and Other Charges

(a) Seller’s Taxes

Seller is liable for and shall pay, or cause to be paid, or reimburse Buyer if Buyer has paid, all Taxes applicable to any transaction arising out of this Agreement at or prior to the Delivery Point on the sale of Energy, Capacity or Ancillary Services to Buyer. Seller shall indemnify, defend and hold harmless Buyer from any Claims for such Taxes applicable at or prior to the Delivery Point.

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(b) Buyer’s Taxes

Buyer is liable for and shall pay, or cause to be paid, or reimburse Seller if Seller has paid, all Taxes applicable to any transaction arising out of this Agreement after the Delivery Point on the sale by Buyer of Energy, Capacity or Ancillary Services. Buyer shall indemnify, defend and hold harmless Seller from any Claims for such Taxes applicable after the Delivery Point.

(c) Certificate of Tax Exemption

Either Party, upon written request of the other, shall provide a certificate of exemption or other reasonably satisfactory evidence of exemption if either Party is exempt from Taxes.

(d) Gross Receipts Tax

The Buyer is liable for any Gross Receipts Tax applicable to any transaction arising out of this Agreement. If Seller pays any such Gross Receipts Tax, then Seller shall include such amounts so paid in the next Billing Cycle invoice as provided in Sections 3.1(a) and 7.1 (the “Gross Receipts Tax Payment”).

ARTICLE XXI: CHANGE IN LAW

21.1. Change in Law

In the event there is a change or changes in any Laws or interpretations thereof, enacted or adopted after execution of this Agreement or any Law or interpretation thereof, enacted or adopted after the Effective Date results in the application of any Law to a new or different class of parties (a “Change in Law”), the Party affected by such Change in Law shall be responsible for the burden and, except as provided in Section 21.2 or elsewhere in this Agreement, shall be permitted to retain the benefits of such Change in Law. For the avoidance of doubt, except as specifically provided elsewhere in this Agreement, the terms and conditions of this Agreement shall not be subject to change due to a Change in Law.

21.2. Future Attributes

In the event that, at any time during the Term, a Change in Law occurs that causes any aspect of the Facilities as in existence on the date hereof to become a tradable attribute (e.g., emission credit, renewable energy credit, environmental credit, “Green” credit, etc.) or otherwise to have a market value, Buyer shall be entitled to 100% of such tradable attribute and the benefits of such attribute for the first seven Calendar Years following the Effective Date and thereafter 50% for the remainder of the Term (with the other 50% belonging to Seller), and the Parties shall in good faith negotiate to reflect such allocation to Buyer at no additional cost to Buyer. Seller agrees to execute a separate agreement to transfer to Buyer any revenue, or any other benefit received by Seller for such tradable attributes, and to execute all documents and agreements and take all steps necessary to permit Buyer to market Buyer’s tradable attributes. Failing any such agreement, Seller agrees to credit to Buyer such revenues as provided in Section 3.1(b) until such time as an agreement is executed.

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21.3. MISO Changes

In the event that, at any time during the Term, the applicable Transmission Provider or Transmission Provider Tariff is changed or if an applicable regional reliability council issues a directive, rule or regulation that materially adversely affects Seller or Buyer so that the benefits and burdens of this Agreement are no longer as contemplated by the original intentions of the Parties, the Parties shall use their commercially reasonable efforts to reform this Agreement in order to give effect to the original intentions of the Parties regarding the appropriate allocation of benefits and burdens to each Party.

ARTICLE XXII: MISCELLANEOUS

22.1. Recording Telephone Conversations

Each Party agrees that the other Party or its representatives may record any or all telephone conversations between representatives of the two Parties pursuant to or relating to this Agreement. Each Party is hereby advised that telephone conversations with Buyer’s personnel relating to Section 2.4 and Article IV are routinely recorded and each Party agrees to obtain any necessary consent of its personnel regarding such recording. Each Party further agrees that such recorded telephone conversations shall not be deemed inadmissible in any arbitration proceeding or court of law by virtue of the recorded nature of the conversations. Each Party hereby waives any objection to the introduction of such recorded telephone conversations as evidence in any court of law to the extent such objections are based on the recorded nature of such conversations.

22.2. Governing Law

(a) This Agreement shall be governed by and construed in accordance with the law of the State of Wisconsin as to all matters, including but not limited to matters of validity, construction, effect, performance and remedies.

(b) The Parties hereby irrevocably submit to the exclusive jurisdiction of the United States District Court for the Eastern District of Wisconsin or, in the event that jurisdiction for any matter cannot be established in the United States District Court for the Eastern District of Wisconsin, in the Circuit Court for Manitowoc County, solely in respect of the interpretation and enforcement of the provisions of this Agreement and of the documents referred to in this Agreement, and in respect of the transactions contemplated hereby, and hereby waive, and agree not to assert, as a defense in any action, suit or proceeding for the interpretation or enforcement hereof or of any such document, that it is not subject thereto or that such action, suit or proceeding may not be brought or is not maintainable in said courts or that the venue thereof may not be appropriate or that this Agreement or any such document may not be enforced in or by such courts, and the Parties hereto irrevocably agree that all claims with respect to such action or proceeding shall be heard and determined in such a court. The Parties hereby consent to and grant any such court jurisdiction over the Person of such Parties solely for such purpose and over the subject matter of such dispute and agree that mailing of process or other papers in connection with any such action or proceeding in the

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manner provided in Article XV hereof or in such other manner as may be permitted by Law shall be valid and sufficient service thereof.

(c) EACH PARTY ACKNOWLEDGES AND AGREES THAT ANY CONTROVERSY WHICH MAY ARISE UNDER THIS AGREEMENT IS LIKELY TO INVOLVE COMPLICATED AND DIFFICULT ISSUES, AND THEREFORE EACH PARTY HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY RIGHT A PARTY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION RESULTING FROM, ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. EACH PARTY CERTIFIES AND ACKNOWLEDGES THAT (i) NO REPRESENTATIVE, AGENT OR ATTORNEY OF THE OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER, (ii) EACH PARTY UNDERSTANDS AND HAS CONSIDERED THE IMPLICATIONS OF THIS WAIVER, (iii) EACH PARTY MAKES THIS WAIVER VOLUNTARILY AND (iv) EACH PARTY HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 22.2(c).

22.3. Entire Agreement; Amendment

This Agreement constitutes the entire agreement between the Parties pertaining to the subject matter of this Agreement, and supersedes and terminates any letters of intent and all prior and contemporaneous agreements, understandings, negotiations and discussions with the Parties, whether oral or written, regarding said subject matter, and there are no warranties, representations or other agreements between the Parties in connection with the subject matter of this Agreement, except as specifically set forth in this Agreement. No amendment, supplement, modification, waiver or termination of this Agreement shall be binding unless executed in writing by the Party to be bound thereby. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provision of this Agreement, whether or not similar, nor shall such waiver constitute a continuing waiver unless otherwise expressly provided.

22.4. No Implied Waiver

The failure or delay of any Party hereto to enforce at any time any of the provisions of this Agreement, or to require at any time performance of the other Party hereto of any of the provisions hereof, shall neither be construed to be a waiver of such provisions nor affect the validity of this Agreement or any part hereof or the right of such Party thereafter to enforce each and every such provision.

22.5. Severability

If any provision of this Agreement shall be determined to be unenforceable, void or otherwise contrary to any Law, such condition shall in no manner operate to render any other provision of this Agreement unenforceable, void or contrary to any Law, and this Agreement shall continue in force in accordance with the remaining terms and provisions hereof, unless such condition invalidates the purpose or intent of this Agreement. In the

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event that any of the provisions, or portions or applications thereof, of this Agreement are held unenforceable or invalid by any court of competent jurisdiction, Seller and Buyer shall negotiate in good faith to attempt to implement a reformation of the provisions of this Agreement with a view toward effecting the purposes of this Agreement by replacing the offending provision with a valid provision the economic effect of which comes as close as possible to that of the offending provision.

22.6. No Exclusivity/Dedication of Assets

This Agreement is not intended to be an exclusive arrangement between Buyer and Seller. No undertaking by a Party hereto to the other Party hereto under any provision of this Agreement shall constitute the dedication of that Party’s assets or any portion thereof to the public.

22.7. Expenses

Each Party shall pay the fees and expenses of its respective counsel, accountants, brokers, consultants, investment bankers and other experts incident to the negotiation and preparation of this Agreement.

22.8. Counterparts

This Agreement may be executed simultaneously in two (2) or more counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument.

22.9. Survival

The applicable provisions of this Agreement shall continue in effect after the termination of this Agreement, to the extent necessary to provide for final billing and adjustment, and to make other appropriate settlements hereunder. Those provisions hereof that by their express terms are intended to survive this Agreement shall so survive for the periods indicated. Without limitation of the foregoing, Article VII, Article VIII, Article X, Article XII and Article XIX shall survive the termination of this Agreement.

22.10. Individual Responsibility

This Agreement shall not be construed to create or give rise to any partnership, joint venture, agency or other relationship between Seller and Buyer other than that of purchaser and seller. Each Party shall be solely and individually responsible for its own covenants, obligations and liabilities as herein provided, and the Parties do not intend to create any joint, several or joint and several obligations to any third party. Neither this Agreement, nor any grant, lease or license related thereto, shall create or be construed to create any new entity, such as a partnership, association or joint venture.

22.11. No Duty To Third Parties

This Agreement is for the sole benefit of the Parties hereto, and except as specifically provided herein nothing in this Agreement or any action taken hereunder shall be construed to create any duty, liability or standard of care to any Person not a party to this Agreement. Except as specifically provided herein, no Person shall have any rights or interest, direct or

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indirect, in this Agreement or the services to be provided hereunder, or both, except Buyer and Seller. The Parties specifically disclaim any intent to create any rights in any Person as a third-party beneficiary to this Agreement or the services to be provided hereunder, or both.

22.12. Forward Contract

The Parties acknowledge and agree that this Agreement, the transactions contemplated hereby, and any instrument(s) that may be provided by either Party hereunder (including any guaranty) shall each, and together, constitute one and the same “forward contract” within the meaning of the United States Bankruptcy Code, and Seller, Seller’s Guarantor and Buyer shall each constitute a “forward contract merchant” under the United Stated Bankruptcy Code.

22.13. Press Releases

Neither Buyer nor Seller shall, without the approval of the other, make any press release or other public announcement which describes the substantive terms of this Agreement; provided, that subject to Article XVI the foregoing shall not preclude communications or disclosures (i) necessary to implement the provisions of this Agreement, (ii) to comply with accounting and United States Securities and Exchange Commission disclosure obligations or (iii) in connection with the application for any Authorization.

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IN WITNESS WHEREOF, each of the Parties hereto has caused this Agreement to be duly executed on its behalf by its duly authorized officer as of the date first set forth above.

FPL ENERGY POINT BEACH, LLC
By:	/s/ Michael O’Sullivan
Name:	Michael O’Sullivan
Title:	Vice-President

WISCONSIN ELECTRIC POWER COMPANY
By:	/s/ Frederick D. Kuester
Name:	Frederick D. Kuester
Title:	Executive Vice President and
	Chief Operating Officer

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EXHIBIT A

Delivered Energy Charges

Year	Delivered Energy Charge (in $/MWh)
2007	[**]
2008	[**]
2009	[**]
2010	[**]
2011	[**]
2012	[**]
2013	[**]
2014	[**]
2015	[**]
2016	[**]
2017	[**]
2018	[**]
2019	[**]
2020	[**]
2021	[**]
2022	[**]
2023	[**]
2024	[**]
2025	[**]
2026	[**]
2027	[**]
2028	[**]
2029	[**]
2030	[**]
2031	[**]
2032	[**]
2033	[**]

For each month during the Term, the Delivered Energy Charge set forth above shall apply to all Capacity, Energy and Ancillary Services purchased by Buyer under the Power Purchase Agreement, including any Uprate accepted hereunder. The Delivered Energy Charge shall be adjusted by multiplying the amount of such charge by the Delivered Energy Charge Shaping Factor for such month as set forth on Exhibit C hereto.

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EXHIBIT B

Buyer’s Capacity Amount

For any given month during the Term, the Buyer’s Capacity Amount shall be as set forth in the table below:

Column A	Column B			Column C
Month	Capacity of the Facilities (MW)			Buyer’s Capacity Amount
	Unit 1	Unit 2	CT
January	517	519	19	1055
February	517	519	18	1054
March	517	519	17	1053
April	517	519	16	1052
May	517	519	16	1052
June	517	519	15	1051
July	512	514	15	1041
August	512	514	15	1041
September	512	514	15	1041
October	517	519	16	1052
November	517	519	17	1053
December	517	519	18	1054

Column A – Depicts the month of the year.

Column B – Will be updated over the Term of this Agreement to reflect the Capacity of the Facilities (including the Planned Uprate, but excluding Capacity related to any Uprate not accepted by Buyer pursuant to Section 2.9(a)), as determined in accordance with the MAIN Guide No. 3A Standards (or with the Effective Capacity Requirements, if applicable). CT Capacity will be included in Buyer’s Capacity Amount only in the event that Buyer has documented to the reasonable satisfaction of the applicable regional reliability council and/or MISO, as applicable, that the CT is interconnected and available to provide Capacity and Energy to the Transmission Owner’s system.

Column C – Shall be the sum of the subcolumns of Column B as those values may be revised during the Term of this Agreement.

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EXHIBIT C

Delivered Energy Charge Shaping Factor

Month	On-Peak Hours	Off-Peak Hours
January	[**]	[**]
February	[**]	[**]
March	[**]	[**]
April	[**]	[**]
May	[**]	[**]
June	[**]	[**]
July	[**]	[**]
August	[**]	[**]
September	[**]	[**]
October	[**]	[**]
November	[**]	[**]
December	[**]	[**]

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EXHIBIT D

DIAGRAM OF METERING DEVICES

The Metering Devices identified above as numbers 3, 4, 7 and 8 are revenue quality meters.

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EXHIBIT E

FORM OF SELLER’S GUARANTY

GUARANTY AGREEMENT

THIS GUARANTY made as of the          day of December, 2006 (the “Guaranty”), from FPL GROUP CAPITAL INC., a corporation organized and existing under the laws of the State of Florida and having its principal place of business in 700 Juno Universe Boulevard, Juno Beach, FL 33408 being hereinafter referred to as the “Guarantor,” to WISCONSIN ELECTRIC POWER COMPANY, a Wisconsin corporation with a principal place of business in Milwaukee, Wisconsin (“WEPCO”).

WITNESSETH:

WHEREAS, WEPCO and FPL ENERGY POINT BEACH, LLC, a limited liability company organized under the laws of Wisconsin (“Seller”) have entered into a Power Purchase Agreement dated as of the date hereof (the “PPA”); and

WHEREAS, Seller is an affiliate of the Guarantor and the Guarantor will benefit from the transactions contemplated by the PPA; and

WHEREAS, WEPCO has agreed to sign the PPA on the condition, among others, that the Guarantor executes and delivers this Guaranty; and

NOW, THEREFORE, to induce WEPCO to sign the PPA and consummate the transactions contemplated thereby and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Guarantor does hereby warrant to and covenant and agree with WEPCO as follows:

ARTICLE 1—DEFINITIONS

1.1 Definitions. Unless otherwise defined in this Guaranty, capitalized terms have the meanings specified or referred to in the PPA.

ARTICLE 2—GUARANTY

2.1 Guaranty. Subject to the provisions of Section 2.3(c) hereof, Guarantor hereby unconditionally and irrevocably guarantees to WEPCO and its successors and permitted assigns, the prompt and full payment and performance of any and all obligations of the Seller to WEPCO when due, whether by acceleration or otherwise, with such interest as may accrue thereon, under the PPA or under any other documents or instruments now or hereafter evidencing, securing or otherwise relating to the PPA (the “Guaranteed Obligations”); provided, however, that Guarantor’s liability under this Guaranty, and the maximum recovery from the Guarantor

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pursuant to this Guaranty, shall in no event exceed [**] in the aggregate, which amount shall escalate at [**] per annum on January 1, 2024 and on January 1^st of each year thereafter until the end of the Term (the “Maximum Recovery Amount”), plus any reasonable expenses required to be paid by Guarantor pursuant to Section 4.4 herein. If Seller fails to pay or perform any Guaranteed Obligation, following the date the same becomes due and payable (and after giving effect to all applicable periods of grace and notice), then, subject to the limit of the Maximum Recovery Amount, Guarantor will pay or perform such obligation within three Business Days following written demand by WEPCO to the Guarantor.

2.2 Guaranty Absolute. (a) Subject to the provisions hereof, the Guarantor absolutely guarantees that the Guaranteed Obligations will be paid and performed strictly in accordance with the terms of the PPA, regardless of any law or regulation now or hereafter in effect in any jurisdiction affecting any of such terms or the rights of WEPCO with respect thereto. This Guaranty constitutes a guarantee of payment and performance and not of collection. The obligations of the Guarantor hereunder are several from the Seller or any other person, and are primary obligations concerning which the Guarantor is the principal obligor. The liability of Guarantor under this Guaranty shall be direct and immediate and not conditional or contingent upon the pursuit of any remedies against the Seller or any other person, nor against securities or liens available to WEPCO, its successors or permitted assigns. Subject to the provisions hereof, the liability of the Guarantor under this Guaranty shall be irrevocable, absolute and unconditional irrespective of, and the Guarantor hereby irrevocably waives any defenses it may now have or hereafter acquire in any way relating to, any or all of:

(i) any change in the time, manner or place of payment of, or in any other term of, all or any of the Guaranteed Obligations, or any other amendment, modification or waiver of, or any consent to departure from, the terms of such Guaranteed Obligations;

(ii) any change, restructuring or termination of the corporate structure or existence of the Seller or any of its subsidiaries;

(iii) any lack of validity or enforceability of the PPA or any agreement or instrument relating thereto;

(iv) any failure of WEPCO to disclose to either the Seller or the Guarantor any information relating to the business, condition (financial or otherwise), operations, performance, properties or prospects of either the Seller or any of its subsidiaries now or hereafter known to WEPCO (the Guarantor waiving any duty on the part of WEPCO to disclose such information);

(v) any lack of due diligence by WEPCO in the collection or protection of or realization upon any collateral securing the Guaranteed Obligations; or

(vi) any circumstance whatsoever or any act of WEPCO or any existence of or reliance on any representation by WEPCO that might otherwise constitute

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a legal or equitable defense available to, or a discharge of, a guarantor or surety.

This Guaranty shall continue to be effective or be reinstated, as the case may be, if at any time any payment of any of the Guaranteed Obligations is rescinded or must otherwise be returned by WEPCO or any other Person upon the insolvency, bankruptcy, or reorganization of the Seller or otherwise, all as though such payment had not been made.

(b) No action which WEPCO shall take or fail to take in connection with the Guaranteed Obligations, or any security for the payment or performance of any of the Guaranteed Obligations, nor any course of dealing with Seller or any other person, shall release Guarantor’s obligations hereunder, affect this Guaranty in any way, or afford Guarantor any recourse against WEPCO.

(c) In the case of an Event of Default under the PPA or with regard to any of the Guaranteed Obligations, Guarantor hereby consents and agrees that WEPCO shall have the right to enforce its rights, powers, and remedies thereunder or hereunder or under any other instrument now or hereafter evidencing, securing, or otherwise relating to the Guaranteed Obligations, and apply any payments or credits received by the Seller or Guarantor or realized from any security, in any manner and in any order as WEPCO, in its sole discretion, shall see fit, and all rights, powers, and remedies available to WEPCO in such event shall be nonexclusive and cumulative of all other rights, powers, and remedies provided thereunder or hereunder or by law or in equity. If the Guaranteed Obligations are partially paid by reason of the election of WEPCO, its successors or assigns, to pursue any of the remedies available to WEPCO, or if such indebtedness is otherwise partially paid, this Guaranty shall nevertheless remain in full force and effect, and Guarantor shall ,subject to the Maximum Recovery Amount, remain liable for the entire balance of the Guaranteed Obligations even though any rights which Guarantor may have against the Seller may be destroyed or diminished by the exercise of any such remedy.

2.3 Waivers and Acknowledgments. (a) Guarantor hereby waives promptness, diligence, presentment, demand of payment, acceptance, notice of acceptance, protest, notice of dishonor and any other notices with respect to any of the Guaranteed Obligations and this Guaranty.

(b) The Guarantor hereby unconditionally and irrevocably waives any right to revoke this Guaranty and acknowledges that this Guaranty is continuing in nature and applies to all Guaranteed Obligations, whether existing now or in the future, subject however to the limit of the Maximum Recovery Amount; provided, however, that this Guaranty shall automatically terminate upon receipt by WEPCO of replacement Seller Performance Security meeting the requirements of Section 8.1 of the PPA. The provisions of this Guaranty shall extend and be applicable to all renewals, amendments, extensions, consolidations, and modifications of the PPA.

(c) The Guarantor hereby unconditionally and irrevocably waives any defense based on any right of set-off or counterclaim against or in respect of the obligations of the Guarantor

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hereunder; provided, however, that Guarantor shall have, and expressly reserves to itself, the same defenses available to the Seller with respect to any payment obligations arising under the PPA, except for defenses arising out of bankruptcy, insolvency, dissolution or liquidation of the Seller.

2.4 Subrogation. Notwithstanding any payment or payments or performance made by the Guarantor hereunder, the Guarantor hereby irrevocably waives any and all rights of subrogation to the rights of WEPCO against the Seller and any and all rights of reimbursement, assignment, indemnification or implied contract or any similar rights (including without limitation any statutory rights of subrogation under Section 509 of the Bankruptcy Code, 11 U.S.C. § 509) against the Seller or against any other guarantor of all or any part of the Guaranteed Obligations until such time as the Guaranteed Obligations have been indefeasibly paid or performed in full. If, notwithstanding the foregoing, any amount shall be paid to the Guarantor on account of such subrogation or similar rights at any time when all of the Guaranteed Obligations shall not have been indefeasibly paid in full, such amount shall be held by the Guarantor in trust for WEPCO and shall be turned over to WEPCO in the exact form received by the Guarantor, to be applied against the Guaranteed Obligations in such order as WEPCO may determine in its sole discretion.

2.5 Reporting. Guarantor shall promptly notify WEPCO of any Insufficient Credit Status relating to Guarantor or any circumstance that results in Seller’s failure to be in compliance with the Seller Performance Security requirements of Article VIII of the PPA. From time to time, at WEPCO’s written request, Guarantor shall provide WEPCO promptly with such evidence as WEPCO may reasonably request that this Guaranty is in full compliance with the PPA.

ARTICLE 3—REPRESENTATIONS AND WARRANTIES

The Guarantor hereby represents and warrants as follows:

3.1 Organization. The Guarantor is a corporation duly organized, validly existing and in good standing under the laws of the state of Florida.

3.2 Authorization; No Conflict. The execution and delivery by the Guarantor of this Guaranty, and the performance by the Guarantor of its obligations hereunder (i) are within the Guarantor’s corporate powers, (ii) have been duly authorized by all necessary corporate action, (iii) do not contravene its Articles of Incorporation or any law or regulation applicable to or binding on the Guarantor or any of its properties and (iv) do not require the consent or approval of any person which has not already been obtained or the satisfaction or waiver of any conditions precedent to the effectiveness of this Guaranty that have not been satisfied or waived.

3.3 Enforceability. This Guaranty constitutes the legal, valid and binding obligation of the Guarantor enforceable against the Guarantor in accordance with its terms, except to the extent that such enforceability may be limited by applicable bankruptcy, insolvency, dissolution, reorganization, moratorium, liquidation or other similar laws affecting creditors’ rights generally

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and by general principles of equity (regardless of whether enforcement is sought in a proceeding in equity or at law).

3.4 No Bankruptcy Proceedings. There are no bankruptcy proceedings pending or being contemplated by Guarantor or, to its knowledge, threatened against it.

3.5 No Legal Proceedings. There are no legal proceedings pending against the Guarantor that would be reasonably likely to materially adversely affect the legality, validity or enforceability of this Guaranty.

ARTICLE 4—MISCELLANEOUS

4.1 Continuing Guaranty; Assignment. This Guaranty is a continuing guaranty and shall (i) remain in full force and effect until all of the Guaranteed Obligations have been satisfied, (ii) consistent with the terms hereof, apply to all Guaranteed Obligations whenever arising, (iii) be binding upon the Guarantor, its successors and assigns, and (iv) inure to the benefit of, and be enforceable by, WEPCO and its permitted assignees hereunder. The WEPCO may not assign or delegate its rights or obligations under this Guaranty without the prior written consent of the Guarantor, which consent shall not be unreasonably delayed or withheld. The Guarantor may not assign or delegate its rights or obligations under this Guaranty without (x) the prior written consent of WEPCO, which consent may be withheld in WEPCO’s sole discretion, and (y) a written assignment and assumption agreement in form and substance reasonably acceptable to WEPCO. Without prejudice to the survival of any of the other agreements of the Guarantor under this Guaranty, the agreements and obligations of the Guarantor contained in Section 4.4 (with respect to enforcement expenses) and the last sentence of Section 2.2(a) shall survive the payment in full of the Guaranteed Obligations and all of the other amounts payable under this Guaranty.

4.2 Notices. All notices, requests, demands and other communications which are required or may be given under this Guaranty shall be in writing and shall be deemed to have been duly given when actually received if (a) personally delivered; (b) transmitted by facsimile, electronic or digital transmission method; or (c) if sent by certified or registered mail, return receipt requested. In each case notice shall be sent:

(i) if to WEPCO:

Wisconsin Electric Power Company

333 West Everett Street, Room A214

Milwaukee, Wisconsin 53203

Attention: Treasurer

(ii) if to the Guarantor:

FPL Group Capital Inc

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700 Universe Boulevard

Juno Beach, FL 33408

Attention: Treasurer

or to such other place and with such other copies as WEPCO or the Guarantor may designate as to itself by written notice to the other pursuant to this Section 4.2. Delivery by facsimile of an executed counterpart of a signature page to any amendment or waiver of any provision of this Guaranty shall be effective as delivery of an original executed counterpart thereof.

4.3 Delay and Waiver. No failure on the part of WEPCO to exercise, and no delay in exercising, any right hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right hereunder preclude any other or further exercise thereof or the exercise of any other right. The remedies herein provided are cumulative and not exclusive of any remedies provided by law.

4.4 Expenses. The Guarantor agrees to pay or reimburse WEPCO and any permitted assignees of WEPCO on demand for its reasonable costs, charges and expenses (including reasonable fees and expenses of counsel) incurred in connection with the enforcement of this Guaranty or occasioned by any breach by the Guarantor of any of its obligations under this Guaranty should Guarantor be required to pay under this Guaranty.

4.5 Entire Agreement; Amendments. This Guaranty and any agreement, document or instrument attached hereto or referred to herein integrate all the terms and conditions mentioned herein or incidental hereto and supersede all oral negotiations and prior writings in respect to the subject matter hereof. In the event of any conflict between the terms, conditions and provisions of this Guaranty and any such agreement, document or instrument, the terms, conditions and provisions of this Guaranty shall prevail. This Guaranty may only be amended or modified by an instrument in writing signed by each of the Guarantor and WEPCO and any permitted assignees of WEPCO.

4.6 Headings. The headings of the various Sections of this Guaranty are for convenience of reference only and shall not modify, define or limit any of the terms or provisions hereof.

4.7 Governing Law; Consent to Jurisdiction. (a) This Guaranty shall be construed and interpreted, and the rights of the parties determined, in accordance with the law of the State of Wisconsin, without giving effect to principles of conflicts of law that would require the application of the laws of another jurisdiction.

(b) Each party hereto irrevocably and unconditionally agrees to the exclusive jurisdiction of the United States District Court for the Eastern District of Wisconsin or, in the event that jurisdiction for any matter cannot be established in the United States District Court for the Eastern District of Wisconsin, in the Circuit Court for Manitowoc County, solely in respect of the interpretation and enforcement of the provisions of this Guaranty and hereby waive, and agree not to assert, as a defense in any action, suit or proceeding for the interpretation or

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enforcement hereof that it is not subject thereto or that such action, suit or proceeding may not be brought or is not maintainable in said courts or that the venue thereof may not be appropriate or that this Guaranty may not be enforced in or by such courts, and the parties hereto irrevocably agree that all claims with respect to such action or proceeding shall be heard and determined in such a court. The parties hereby consent to and grant any such court jurisdiction over the person of such parties solely for such purpose and over the subject matter of such dispute and agree that mailing of process or other papers in connection with any such action or proceeding in the manner provided in Section 4.2 hereof or in such other manner as may be permitted by Law shall be valid and sufficient service thereof.

(c) THE GUARANTOR AND, BY ITS ACCEPTANCE OF THIS GUARANTY, WEPCO, HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR RELATING TO, THIS GUARANTY, OR THE ACTIONS OF ANY PARTY IN THE NEGOTIATION, ADMINISTRATION, PERFORMANCE OR ENFORCEMENT THEREOF.

4.8 Severability. Any provision of this Guaranty that shall be prohibited or unenforceable shall be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof.

IN WITNESS WHEREOF, the Guarantor has caused this Guaranty to be duly executed and delivered by its duly authorized representative as of the day and year first above written.

FPL Group Capital Inc.
By:
Name:	James L. Robo
Title:	Vice President

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WEPCO EXHIBIT F

FORM OF LETTER OF CREDIT

IRREVOCABLE STANDBY LETTER OF CREDIT No.             

[Date]

[Credit No.]

[Name and Address

of Beneficiary]

Dear Sirs:

We hereby establish in your favor, for the account of [NAME OF ACCOUNT PARTY] (“Account Party”), with respect to the Power Purchase Agreement dated as of [                    ] between [Account Party] and you (“Beneficiary”) (the “PPA”), our irrevocable standby letter of credit no. (the “Standby Letter of Credit”) whereby we hereby irrevocably authorize you to draw on us, in accordance with the terms and conditions hereinafter set forth, by your draft or drafts at sight, in the aggregate in an amount not to exceed                                          United States Dollars (U.S. $                    ).

Funds against this Standby Letter of Credit are available to you against your sight draft(s) drawn on us, referring thereon to the number and date of this Standby Letter of Credit, accompanied by a written and completed certificate executed by you in the form attached as Annex 1 hereto, with appropriate insertions. Multiple, partial drafts may be drawn hereunder. Such available funds shall not directly or indirectly constitute funds or collateral deposited with or for the bank account by the [Account Party], or pledged with or for the bank’s account by the [Account Party].

Presentation of such drafts, and such certificates shall be made on any day which is a business day for us at or prior to 5:00 p.m. (CPT) at our office located at Milwaukee, Wisconsin, or at any other office in the United States of America which may be designated by us in a written notice delivered to you. If such sight draft and such certificate are received at any such office, all in strict conformity with the terms and conditions of this Standby Letter of Credit, on or prior to the expiration date hereof, we hereby agree with you that we will duly honor the same within three (3) business days of such presentation. Notwithstanding the foregoing, Beneficiary may demand payment under this Standby Letter of Credit by telecopy or e-mail when promptly confirmed by written demand; however, actual disbursement of funds pursuant to a demand presented by telecopy or e-mail shall not occur until we are presented with the original Standby Letter of Credit.

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CONFIDENTIAL AND PROPRIETARY

EXECUTION VERSION

This Standby Letter of Credit is effective immediately and expires at 5:00 p.m. (CPT) on                     , 20    . It is a condition of this Standby Letter of Credit that it will be deemed automatically extended for successive periods of one year each from the present or any future expiration date under clause (b) above (but in no event later than                     , 20    ), unless we notify you, in writing, by certified or registered mail at your respective addresses, not less than ninety (90) days prior to any such date, that we have elected not to extend such expiration date for such additional period. Notwithstanding Article 16 of the UCP (as such term is defined below), any notice of our election not to extend the expiration date of this Standby Letter of Credit shall be effective only upon actual receipt by you and no such notice shall have any effect absent such actual receipt. In the event that the expiration date of this Standby Letter of Credit occurs at such time as the events described in Article 17 of the UCP (as such term is defined below) are occurring, said expiration date shall be automatically extended by a period of time equal to the duration of such events.

We hereby undertake that we will not modify, revoke or terminate this Standby Letter of Credit without your written consent. Except as stated herein, payment of drafts drawn under this Standby Letter of Credit is not subject to any condition or qualification. This Standby Letter of Credit sets forth in full the terms of our undertaking, and such undertaking shall not be modified, annulled or amplified by reference to any other document, instrument or agreement referred to herein or in which the Standby Letter of Credit is referred or to which the Standby Letter of Credit relates, and any such reference shall not be deemed to incorporate herein by reference any document, instrument or agreement. Our obligations hereunder are primary obligations that shall not be affected by the performance or non-performance by [Account Party] of any obligations under any loan agreement or under any agreement between [Account Party] and you or between [Account Party] and us or between [Account Party] and its agents.

We hereby waive any right to set off and apply any and all deposits (general or special, time or demand, provisional or final) or collateral at any time held and other indebtedness at any time owing by us to or for the credit of or the account of Account Party against any and all of the obligations of Account Party now or hereafter existing to reimburse us for our disbursements under this Standby Letter of Credit; provided, however, that each such right shall be reinstated if it is determined that such right would not lead to our being released, prevented or restrained from or delayed in, honoring any draft presented in accordance with this Standby Letter of Credit. The foregoing waiver is intended to defeat any possible claim that honor of this Standby Letter of Credit, or of any draft presented hereunder, may constitute a preferential transfer of the bankrupt account party’s property securing our right of reimbursement. Nothing herein shall be construed to support the validity of any such claim, to support any delay in our obligation to honor this Standby Letter of Credit or to detract from the independence of our obligation to honor this Standby Letter of Credit at the times and in accordance with the terms stated and incorporated by reference herein.

This Standby Letter of Credit is transferable in its entirety (but not in part). Each letter of credit issued upon any such transfer and assignment may be successively transferred and assigned. Transfer of this Standby Letter of Credit to any transferee shall be effected by the presentation to us of this Standby Letter of Credit accompanied by a certificate in the form attached as Annex 2 hereto, with appropriate insertions. Upon such presentation we shall forthwith issue an irrevocable

F-2

CONFIDENTIAL AND PROPRIETARY

EXECUTION VERSION

letter of credit to such transferee with provisions therein consistent with this Standby Letter of Credit.

To the extent not contrary to the express terms hereof, this Standby Letter of Credit shall be governed by the Uniform Customs and Practice for Documentary Credits (1993 Revision), International Chamber of Commerce Publication No. 500 (herein referred to as the “UCP”), or by subsequent Uniform Customs and Practice fixed by subsequent Congresses of the International Chamber of Commerce. This Standby Letter of Credit shall be deemed to be a contract made under the laws of the State of Wisconsin and shall, as to matters not governed by the UCP, be governed by and construed in accordance with the laws of the State of Wisconsin.

Yours very truly,

[ISSUING BANK]

F-3

CONFIDENTIAL AND PROPRIETARY

EXECUTION VERSION

ANNEX 1

CERTIFICATE

Re: Point Beach Nuclear Plant Power Purchase Agreement dated                     , 20     between [Name of Account Party] (“[Account Party]”) and [Name of Beneficiary] (“[Beneficiary]”) (the “PPA”).

The undersigned, each a duly authorized officer of [Beneficiary], hereby certify to [ISSUING BANK] (the “Bank”) with reference to irrevocable standby letter of credit no.      (the “Standby Letter of Credit”), issued by the Bank for the account of [Account Party] in favor of [Beneficiary] that:

(1) (Insert one of the following, as applicable)

Pursuant to the provisions of the PPA, an event has occurred under the PPA that entitles Beneficiary to draw on the Standby Letter of Credit in the amount of the sight draft (after giving effect to all applicable periods of grace and notice), which event remains uncured or unwaived as of the date of this Certificate (an example of such an event includes, without limitation, an Event of Default described in the PPA).

or

[Beneficiary] has received written notice from the Bank in accordance with the terms of the Standby Letter of Credit that the Bank has elected not to extend the expiration date of the Standby Letter of Credit for an additional period past its then-expiration date and the Account Party has failed to replace this Standby Letter of Credit with other [Seller Performance Security][Buyer Performance Security] meeting the requirements of the PPA at least thirty (30) days prior to the then-expiration date of the Standby Letter of Credit.

(2) The undersigned are each a duly elected and incumbent officer of [Beneficiary] and are authorized to execute and deliver this certificate and to draw upon the Standby Letter of Credit.

F-4

CONFIDENTIAL AND PROPRIETARY

EXECUTION VERSION

IN WITNESS WHEREOF, the undersigned have executed and delivered this Certificate as of this      day of         , 20    .

[BENEFICIARY]

By:

Title:

By:

Title:

F-5

CONFIDENTIAL AND PROPRIETARY

EXECUTION VERSION

ANNEX 2

INSTRUCTION TO ASSIGN IN ENTIRETY

                    , 20

Re: Irrevocable Standby Letter of Credit No.

Gentlemen:

For value received, the undersigned beneficiary hereby irrevocably assigns to:

(Name of Assignee)

(Address)

all rights of the undersigned beneficiary to draw under the above Standby Letter of Credit in its entirety.

By this assignment, all rights of the undersigned beneficiary in such Standby Letter of Credit are transferred to the assignee and the assignee shall hereafter have the sole rights as beneficiary thereof.

The Standby Letter of Credit is returned herewith and in accordance therewith we ask you to issue a new irrevocable Standby Letter of Credit in favor of the assignee with provisions consistent with the Standby Letter of Credit.

Very truly yours

[Beneficiary]

By:

Title:

By:

Title:

F-6

CONFIDENTIAL AND PROPRIETARY

EXECUTION VERSION

EXHIBIT G

PEAK ADJUSTMENT PAYMENT

During each month of June, July and August for each Calendar Year of the Term (the “Peak Period”), Seller must achieve the Target Capacity Factor for the Facilities as set forth in this Exhibit G. If Seller fails to achieve such Target Capacity Factor for any such month, Seller shall be responsible for a payment to Buyer (the “Peak Adjustment Payment”) calculated in accordance with the following formula:

(TEM – DEM) x [**] (in 2007 dollars escalating by three percent (3%) for each year of the Term)

where

TEM = Targeted Energy for the month, which shall be the product of: (i) the applicable Buyer’s Capacity Amount for the month (excluding the CT Capacity); (ii) the number of hours in the month; and (iii) the Target Capacity Factor.

DEM = Delivered Energy for the month.

If the resulting product of the above formula is positive, then such positive amount shall equal the Peak Adjustment Payment for the month in question and Seller shall pay that Peak Adjustment Payment in accordance with this Exhibit G. If the resulting product is zero or negative, then neither Seller nor Buyer shall owe a Peak Adjustment Payment for the month.

If it is determined that Seller owes Buyer a Peak Adjustment Payment for a particular month, Buyer shall have the right to either (a) demand payment of that Peak Adjustment Payment in writing, in which case Seller shall make such payment to Buyer within five (5) Business Days after the written demand for payment is received, or (b) include the Peak Adjustment Payment on the invoices for such Billing Cycle pursuant to Section 7.1(a).

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EXHIBIT H

SCHEDULING PROVISIONS

(a) Scheduling of Generation Offers. Seller shall submit its Generation Offer, as a DNR, for the Facilities (other than the CT) into the MISO Day-Ahead Market and the MISO Real-Time Market for dispatch as a must-run generation unit with a dispatch minimum for each hour of the Operating Day equal to no less than the full expected Net Energy Output (consistent with the Transmission Provider Tariff) except as agreed otherwise by Buyer, provided, however, that during any Derate, Seller shall be obligated to schedule Generation Offers under Section 4.1 and this Exhibit H with respect to the full expected Net Energy Output, and provided further that Seller shall reasonably coordinate with Buyer in responding to a negative LMP. Seller shall offer the CT in the MISO Day-Ahead Market and MISO Real-Time Market in accordance with the Transmission Provider Tariff.

(b) Scheduling of Financial Bilateral Transactions. Unless otherwise mutually agreed by the Parties, for each Operating Day, Seller shall submit one or more MISO FinScheds that reflect the Net Energy Ouptut plus any Replacement Energy for such Operating Day and Buyer shall accept each such MISO FinSched no later than the deadline established by MISO for such acceptance, with each utilizing the appropriate MISO electronic scheduling system and protocols in accordance with the following Scheduling parameters:

(i) Seller and Buyer shall work together using commercially reasonable efforts to provide the necessary documentation to MISO to facilitate the processing of MISO FinScheds;

(ii) At least 48 hours prior to the deadline established by MISO, but no later than two Business Days after the relevant Operating Day (the “Scheduling Window”), Seller shall submit a MISO FinSched for settlement in the MISO Day-Ahead Market for the actual Net Energy Output or Replacement Energy or both, as applicable, for the relevant Operating Day;

(iii) At least two (2) hours prior to the deadline established by MISO, Buyer shall confirm such MISO FinSched submitted by Seller in accordance with paragraph (i) above; provided, that if Buyer disputes any component of any such MISO FinSched submitted by Seller, Buyer shall promptly notify Seller and Buyer and Seller shall cooperate to resolve any discrepancies in a timely manner; and

(iv) No true-up to the MISO FinSched shall be made; provided, that Seller may make revisions to any MISO FinSched during the applicable Scheduling Window by giving Buyer telephonic notice of such revision(s) with confirmation (by e-mail or fax) as soon as practicable.

H-1

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EXECUTION VERSION

EXHIBIT I

MAIN GUIDE NO. 3A STANDARDS

(as attached)

I-1

EX-10.46(B)

Exhibit 10.46(b)

CONFIDENTIAL AND PROPRIETARY

EXECUTION VERSION

Wisconsin Energy Corporation has requested confidential treatment of certain portions of this document pursuant to an application for confidential treatment sent to the SEC. Wisconsin Energy has omitted such portions from this filing and filed them separately with the SEC. Such omissions are designated as “[**]”.

POINT BEACH NUCLEAR PLANT

POWER PURCHASE AGREEMENT

BETWEEN

FPL ENERGY POINT BEACH, LLC

AND

WISCONSIN ELECTRIC POWER COMPANY

DATED AS OF DECEMBER 19, 2006

CONFIDENTIAL AND PROPRIETARY

EXECUTION VERSION

POWER PURCHASE AGREEMENT

TABLE OF CONTENTS

ARTICLE I: DEFINITIONS		1
1.1.	Defined Terms	1
1.2.	Rules of Interpretation	13
1.3.	Accounting Terms	14
1.4.	Legal Representation	14
ARTICLE II: PURCHASE OF CAPACITY, ENERGY, AND ANCILLARY SERVICES		14
2.1.	Capacity Sale and Purchase	14
2.2.	Energy Sale and Purchase	14
2.3.	Ancillary Services	15
2.4.	Replacement Energy and Replacement Capacity	16
2.5.	Financial Transmission Rights	17
2.6.	Title and Risk of Loss	18
2.7.	Delivery Point	18
2.8.	Capacity Accreditation	18
2.9.	Uprates	18
2.10.	Right of First Offer	20
2.11.	Reactive Power	20
2.12.	Station Service	21
2.13.	CT Capacity	21
ARTICLE III: PAYMENTS		21
3.1.	Purchase Payments	21
3.2.	Peak Adjustment Payment	22
ARTICLE IV: SCHEDULING		22
4.1.	Scheduling	22
4.2.	Failure to Schedule	23
ARTICLE V: MAINTENANCE AND OPERATION		23
5.1.	Scheduled Maintenance	23
5.2.	Derate Notices	24
5.3.	Operation	25
ARTICLE VI: METERING		28
6.1.	Metering	28
ARTICLE VII: BILLING AND PAYMENT		29
7.1.	Billing and Payment	29
ARTICLE VIII: PERFORMANCE SECURITY		30
8.1.	Seller Performance Security	30

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8.2.	Buyer Performance Security	30
8.3.	Draws; Replenishments	30
8.4.	Reporting	31
ARTICLE IX: FORCE MAJEURE		31
9.1.	Conditions of Excuse for Seller	31
9.2.	Conditions of Excuse for Buyer	31
9.3.	Burden of Proof	32
9.4.	Payment and Security Obligations Not Excused	32
9.5.	Time Limits	32
9.6.	Deadline Extended	32
ARTICLE X: EVENTS OF DEFAULT; REMEDIES		33
10.1.	List of Events of Default	33
10.2.	Remedies	34
10.3.	Rights of Specific Performance	35
10.4.	Limitation of Liability	35
10.5.	Disclaimer of Warranties	35
ARTICLE XI: REPRESENTATIONS, WARRANTIES AND COVENANTS		36
11.1.	Representations and Warranties of Buyer	36
11.2.	Representations and Warranties of Seller	37
11.3.	Covenants of Seller	38
ARTICLE XII: INDEMNITY		38
12.1.	By Seller	38
12.2.	Indemnification by Buyer	39
12.3.	Joint Negligence	39
12.4.	Responsibility for Employees	39
12.5.	Notice and Participation	39
12.6.	Payment of Indemnification Claims	40
12.7.	Survival of Obligation	40
ARTICLE XIII: TERM		40
13.1.	Term	40
13.2.	Termination	41
13.3.	Effect of Termination	41
ARTICLE XIV: ADMINISTRATIVE COMMITTEE		41
14.1.	Purpose	41
14.2.	Membership	41
14.3.	Meetings	41
14.4.	Functions	42
14.5.	Expenses	42

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ARTICLE XV: NOTICES		42
15.1.	Notices in Writing	42
15.2.	Date of Notification	43
15.3.	Oral Notice in Emergency	43
ARTICLE XVI: CONFIDENTIALITY		43
16.1.	Non-Disclosure to Third Parties	43
16.2.	Definition of Proprietary Information	44
16.3.	Limitations on Required Disclosure	44
16.4.	Remedies	44
16.5.	Survival of Confidentiality	45
ARTICLE XVII: INSURANCE		45
17.1.	Coverage and Amounts of Seller	45
17.2.	Insurance Certificates	46
17.3.	Coverage For Full Term	47
ARTICLE XVIII: ASSIGNMENT		47
18.1.	Binding Effect	47
18.2.	Assignment	47
18.3.	Change in Control	48
ARTICLE XIX: DISPUTE RESOLUTION		48
19.1.	General Provisions	48
19.2.	Negotiation	48
19.3.	Binding Upon Parties	49
19.4.	Continued Performance	49
ARTICLE XX: COMPLIANCE WITH LAWS; TAXES		49
20.1.	Compliance with Laws	49
20.2.	Mobile-Sierra	49
20.3.	Taxes and Other Charges	49
ARTICLE XXI: CHANGE IN LAW		50
21.1.	Change in Law	50
21.2.	Future Attributes	50
21.3.	MISO Changes	51
ARTICLE XXII: MISCELLANEOUS		51
22.1.	Recording Telephone Conversations	51
22.2.	Governing Law	51
22.3.	Entire Agreement; Amendment	52
22.4.	No Implied Waiver	52
22.5.	Severability	52
22.6.	No Exclusivity/Dedication of Assets	53
22.7.	Expenses	53

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22.8.	Counterparts	53
22.9.	Survival	53
22.10.	Individual Responsibility	53
22.11.	No Duty To Third Parties	53
22.12.	Forward Contract	54
22.13.	Press Releases	54

Exhibits
Exhibit A	Delivered Energy Charges
Exhibit B	Buyer’s Capacity Amount
Exhibit C	Delivered Energy Charge Shaping Factor
Exhibit D	Diagram of Metering Devices
Exhibit E	Form of Seller’s Guaranty
Exhibit F	Form of Letter of Credit
Exhibit G	Peak Adjustment Payment
Exhibit H	Scheduling Provisions
Exhibit I	MAIN Guide No. 3A Standards

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POWER PURCHASE AGREEMENT

This POWER PURCHASE AGREEMENT is made and entered into as of December 19, 2006, by and between FPL ENERGY POINT BEACH, LLC, a Wisconsin limited liability company (“Seller”), and WISCONSIN ELECTRIC POWER COMPANY, a Wisconsin corporation (“Buyer”) (hereinafter the parties hereto are sometimes referred to collectively as the “Parties,” or individually as a “Party”).

W I T N E S S E T H:

WHEREAS, Buyer is a public utility which operates a system for generation and distribution of electric power in the States of Wisconsin and Michigan; and

WHEREAS, Buyer intends to transfer to Seller all of its rights, title, and interests in and to the Point Beach Nuclear Plant, a nuclear-powered electric generating facility consisting of two generating units and facilities, equipment, supplies and improvements (including the CT) located in Two Rivers, Wisconsin, NRC Operating License Nos. Unit 1 – DPR 24 and Unit 2 – DPR 27, as more specifically described in the Asset Sale Agreement (“Point Beach”); and

WHEREAS, in order to continue serving its customers following transfer of Buyer’s interests in the Facilities to Seller, Buyer desires to purchase, and Seller desires to sell, Capacity, Energy, and all associated Ancillary Services on the terms, and subject to the conditions, set forth below.

NOW, THEREFORE, in consideration of the recitals and the mutual promises, covenants and agreements contained herein and in the Asset Sale Agreement and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties hereto hereby agree as follows:

ARTICLE I: DEFINITIONS

1.1. Defined Terms

As used in this Agreement, the following terms shall have the following meanings:

“Accredited Capacity” means Capacity or Replacement Capacity that (a) meets the resource adequacy requirements in Module E of the Transmission Provider Tariff (“Module E”) for Buyer’s Network Load, a portion of which may include Capacity or Replacement Capacity that satisfies the requirement for a Local Capacity Resource for Buyer’s Network Load and (b) is measured in accordance with the MAIN Guide No. 3A standards; provided, however, that if either or both requirements in (a) or (b) is inapplicable, then Accredited Capacity means Capacity or Replacement Capacity that meets the applicable requirements for Capacity (the “Effective Capacity Requirements”) of any Governing Authority having jurisdiction over Buyer, including any Capacity from the Facilities that may be deemed available under the Effective Capacity Requirements even if the Facilities are not operating.

“Administrative Committee” has the meaning set forth in Article XIV.

CONFIDENTIAL AND PROPRIETARY

EXECUTION VERSION

“Affiliate” has the meaning given such term in Rule 12b-2 under the Securities Exchange Act of 1934.

“Agreement” means this Power Purchase Agreement entered into by Seller and Buyer.

“Ancillary Services” means those services that during the Term are necessary to support the transmission of electric capacity and energy, or support the generation or transmission of Energy from the Facilities or Replacement Capacity, as applicable, while maintaining reliable operation of the transmission system, associated with or otherwise corresponding to the Capacity of the Facilities or Replacement Capacity, as applicable, and/or output of Energy at such time, which Ancillary Services shall include reactive power and frequency response service.

“Asset Sale Agreement” means that certain Asset Sale Agreement between Buyer and Seller, dated as of the date hereof.

“Associate” means, with respect to any Party, any officer, director, trustee, fiduciary, employee, agent, representative, contractor or subcontractor of such Party and any shareholder, partner, member or other owner of such Party.

“ATC” means the American Transmission Company LLC.

“Authorization” means any license, permit, approval, consent, filing, waiver, exemption, variance, clearance, entitlement, allowance, franchise or other authorization, whether corporate, governmental, regulatory or otherwise.

“Balancing Authority Function” means the operating authority that maintains the load resource balancing and reliability for the balancing authority area in which the Facilities are located.

“Billing Cycle” means each calendar month during the Term and any partial calendar month at the beginning or end of the Term.

“Business Day” means any day other than Saturday, Sunday, or any NERC holiday or any other day on which commercial banks in Milwaukee, Wisconsin are required to be closed.

“Buyer” has the meaning set forth in the preamble hereto.

“Buyer Performance Security” means any performance security that may be required to be posted by Buyer pursuant to Section 8.2.

“Buyer’s Capacity Amount” means, for any given time, the applicable amount set forth in Exhibit B. The Capacity of the Facilities, and the associated amounts in the column in Exhibit B entitled “Capacity of the Facilities,” shall be revised during the Term upon written notice from Seller to Buyer providing the results of any Performance Testing of the Facilities conducted in accordance with the MAIN Guide No. 3A Standards (or with the Effective Capacity Requirements, if applicable).

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“Buyer’s Energy Amount” means, for any period of time, an aggregate amount of Energy (including Replacement Energy) associated with the Buyer’s Capacity Amount (excluding the CT Capacity) for such period of time.

“Buyer’s Guarantor” means a Person that, at the time of the execution and delivery of any guaranty issued pursuant to Section 8.2, is a direct or indirect owner of Buyer and (a) has an Investment Grade Credit Rating and a consolidated Net Worth of at least five hundred million dollars ($500,000,000.00); or (b) is reasonably acceptable to Seller as having a verifiable creditworthiness and Net Worth sufficient to secure Buyer’s Guarantor’s obligations under any guaranty issued pursuant to Section 8.2.

“Calculation Reconstitution Program” means the specific project to validate and integrate calculations and setpoints at Point Beach described in that certain Point Beach Nuclear Plant Calculation Review and Reconstruction Project Plan, CRR-PB-PP, Revision 3, dated January 27, 2006.

“Calendar Year” means a twelve-month period beginning January 1 and ending December 31.

“Capacity” means, on or as of any date of determination, a power generation unit’s capability to generate a specific amount of electrical energy at a given point in time.

“Change in Control” means any one or more of the following events that occurs with respect to Seller, or with respect to any Person which is a direct or indirect owner of a majority of the ownership interests in Seller: (i) a transfer of a majority of the ownership interests in Seller or such Person; (ii) a change in the general partner of any such Person; (iii) any consolidation or merger of Seller or any such Person in which Seller or such Person, as the case may be, is not the continuing or surviving entity, other than a consolidation or merger of a Person in which the holders of such Person’s ownership interests immediately before the consolidation or merger shall, upon consummation of the consolidation or merger, own at least 50% of the equity of the surviving entity; or (iv) any other event or circumstance in which “control” (as defined in Rule 12b-2 under the Securities Exchange Act of 1934) of Seller or of any such Person is transferred to another Person.

“Change in Law” has the meaning set forth in Section 21.1.

“Claims” means all third party claims or actions, threatened or filed and, whether groundless, false, fraudulent or otherwise, that directly or indirectly relate to the subject matter of an indemnity, and the resulting losses, damages, expenses, reasonable attorneys’ fees and court costs.

“Communications Protocol” has the meaning set forth in Section 5.3(b)(i).

“CPNode” means the commercial pricing nodes established by the Transmission Provider for both Unit 1 and Unit 2 (as of the Effective Date, such nodes are WEC.PTBHGB1 (for Unit 1) and WEC.PTBHGB2 (for Unit 2)); provided, that if this Agreement only applies to one Unit, then the CPNode shall be the applicable commercial pricing node for such Unit.

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EXECUTION VERSION

“CPT” or “Central Prevailing Time” means, with respect to any particular time in question, Central Standard Time or Central Daylight Time in effect at such time.

“Credit Rating” means, with respect to an entity, the rating assigned to such entity’s unsecured, senior long-term debt obligations (not supported by third party credit enhancements) by Moody’s or S&P or, in the event such rating is not assigned, then the issuer rating assigned by S&P or Moody’s with respect to such entity.

“CT” means the existing No. 2 fuel oil-fired combustion turbine generator located at the Facilities site.

“Delivered Energy” means, for any period of time, the sum of the Net Energy Output plus Replacement Energy delivered to the Delivery Point and confirmed by Buyer in accordance with the scheduling provisions in Exhibit H, part (b)(iii).

“Delivered Energy Charge” has the meaning set forth in Section 3.1(a).

“Delivered Energy Payment” has the meaning set forth in Section 3.1(a).

“Delivery Point” has the meaning set forth in Section 2.7.

“Derate” means an event or condition which causes the Net Energy Output to be less than [**] of the associated Buyer’s Capacity Amount (excluding the CT Capacity), or causes the MISO FinSched to be less than [**] of the associated Buyer’s Capacity Amount (excluding the CT Capacity), unless such event or condition resulting in a reduction in the MISO FinSched was agreed to by Buyer, excluding any ramp up or ramp down of the Facilities associated with Seller’s nuclear fuel management procedures scheduled in accordance with Section 5.1.

“Derate Notice” has the meaning set forth in Section 5.2.

“Designated Network Resource” or “DNR” means a resource deliverable to the Buyer’s Network Load designated as a “Network Resource” as defined under the applicable Transmission Provider Tariff and related documents. The term DNR shall apply to the Facilities and to the resource selected by Seller, and accepted by MISO as a WEPCO Designated Network Resource, and accepted by the applicable regional reliability council, to provide Replacement Capacity for Buyer in accordance with the terms and conditions of this Agreement.

“Dispatch Authority Function” means the Buyer’s Trading and Operations Group in its Wholesale Energy & Fuels department.

“Dispute” means any controversy, claim or dispute of whatsoever nature, arising out of or relating to this Agreement or the making, validity, execution, performance, discharge, termination, or breach hereof.

“Dispute Resolution Procedures” means the dispute resolution procedures for Disputes set forth in Article XIX.

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EXECUTION VERSION

“Early Termination Date” has the meaning set forth in Section 10.2.

“Effective Capacity Requirements” has the meaning set forth in the definition of Accredited Capacity.

“Effective Date” means the Closing Date, as defined in the Asset Sale Agreement.

“Electric Reliability Organization” or “ERO” has the meaning set forth in 18 C.F.R. § 39.1.

“Energy” means electric energy expressed in MWh.

“Event of Default” has the meaning set forth in Section 10.1.

“Facilities” means Point Beach excluding any Uprate not accepted by Buyer pursuant to Section 2.9(a); provided, that after the Unit 1 Termination Date (if not the same as the Unit 2 Termination Date), the term “Facilities” shall exclude Unit 1 for the remainder of the Term of this Agreement; provided, further, that if for any reason this Agreement terminates earlier with respect to Unit 2, but not Unit 1, then after the Unit 2 Termination Date, the term “Facilities” shall exclude Unit 2 for the remainder of the Term of this Agreement.

“FASB” means the Financial Accounting Standards Board.

“FERC” means the Federal Energy Regulatory Commission.

“Financial Bilateral Transaction” has the meaning ascribed to such term by the Transmission Provider in the applicable Transmission Provider Tariff or related documents, as such relevant meaning or relevant term may be modified from time to time.

“Force Majeure” means any cause or occurrence beyond the reasonable control of and without the fault or negligence of the Party claiming Force Majeure which causes the Party to be unable to, or otherwise materially impairs its ability to, perform its obligations hereunder and which by the exercise of reasonable foresight such Party could not have been reasonably expected to avoid and could not have been prevented or avoided by such Party through the exercise of reasonable diligence. Subject to the foregoing, such causes or occurrences may include any acts of God; acts of the public enemy; wars; blockades; insurrections; riots; epidemics; landslides; lightning; earthquakes; fires; storms; floods; washouts; civil disturbances; strikes, lockouts, work stoppages or other labor actions that affect the U.S. electric generation or utility industry as a whole, including operation of the Facilities; shutdowns or reductions in the Facilities’ output or capabilities required, caused by, or related to directives, orders or requirements of the NRC or any other Governing Authority that affect the U.S. nuclear generation industry as a whole; shutdowns or reductions in the Facilities’ output directly related to the Calculation Reconstitution Program, but only if such shutdown or reduction occurs 12 months after the Effective Date; and any other cause, whether of the kind herein enumerated or otherwise, which, despite all reasonable efforts of such Party to prevent or mitigate its effects, prevents or delays the performance of a Party, or prevents the obtaining of the benefits of performance by the other Party, and is not within the control of the Party claiming excuse. The following acts, events

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or causes shall in no event constitute an event of Force Majeure: (i) any lack of profitability to a Party or any losses incurred by a Party or any other financial consideration of a Party; (ii) unavailability of funds or financing; (iii) an event caused by conditions of national or local economics or markets; (iv) any failure of equipment which is not itself directly caused by an event which would otherwise independently constitute a Force Majeure; (v) strikes, lockouts, work stoppages or other labor actions that affect the operation of the Facilities but do not affect the U.S. electric generation or utility industry as a whole; (vi) changes in market conditions that affect the cost or availability of equipment, materials, supplies or services, including the Facilities’ fuel supply or the cost of power from resources other than the Facilities; (vii) failures of third parties, unless such failures are caused by an event which would otherwise constitute a Force Majeure event hereunder, if experienced by a Party and the Party claiming Force Majeure is relying on such third party in order to discharge any of such Party’s duties or obligations hereunder; (viii) climatic temperature and humidity conditions; and (ix) shutdowns or reductions in the Facilities output or capabilities required, caused by, or related to, directives, orders or requirements of the NRC or any other Governing Authority that do not apply to the U.S. nuclear electric generation industry as a whole. The curtailment, unavailability or interruption of transmission service shall not constitute a Force Majeure event unless the Transmission Provider directs the curtailment or interruption of transmission service over all, or substantially all, of the transmission system owned and/or controlled by the Transmission Owner in the State of Wisconsin.

“GAAP” means generally accepted accounting principles in the United States, as in effect from time to time, consistently applied, except as to consistency for mandated changes imposed by appropriate accountancy administrative bodies (including the FASB) or regulatory authorities.

“Generation Offer” has the meaning ascribed to such term by MISO in the applicable Transmission Provider Tariff or related documents, as such relevant meaning or relevant term may be modified from time to time.

“Governing Authority” means the federal government of the United States, and any state, county or local government, and any regulatory department, body, political subdivision, commission, bureau, administration, agency, instrumentality, ministry, court, judicial or administrative body, taxing authority, or other authority of any of the foregoing (including, without limitation, any corporation or other entity owned or controlled by any of the foregoing), MISO, ERO, NRC, any other regional reliability council, the Transmission Provider and any other regional transmission organization, in each case having jurisdiction over any or all of the Parties, the Facilities or the Transmission Provider’s transmission system, whether acting under express or delegated authority.

“Gross Receipts Tax” means the tax imposed by the State of Wisconsin pursuant to Sections 76.28 and 76.29 of the Wisconsin Statutes as amended.

“Gross Receipts Tax Payment” has the meaning set forth in Section 20.3(d).

“Indemnified Person” has the meaning set forth in Section 12.5.

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“Indemnifying Person” has the meaning set forth in Section 12.5.

“Insufficient Credit Status” means, as to Buyer or Seller, or if Buyer is providing collateral in the form of a guaranty, the Buyer’s Guarantor, or if Seller is providing collateral in the form of a guaranty, Seller’s Guarantor, that: (a) such Person does not have a Credit Rating or such Person’s Credit Rating is not Investment Grade or is determined by either Moody’s or S&P to not be Investment Grade; or (b) the maturity of any indebtedness of such Person which in the aggregate exceeds one hundred million dollars ($100,000,000) or five percent of the shareholders’ equity of such Person, whichever is less, is accelerated by the holder or holders thereof as a result of a default thereunder, or such holders have the right to accelerate such indebtedness (without regard to any requirements relating to notice, the passage of time or both) as a result of a payment default or a default with respect to a failure by Buyer or Seller (or Buyer’s Guarantor or Seller’s Guarantor), as applicable, to comply with a financial covenant.

“Interconnection Agreement” means the Generation Transmission Interconnection Agreement by and between Buyer and ATC dated as of November 1, 2000, as revised by the Second Revision issued on January 2, 2002.

“Investment Grade” means a Credit Rating of at least BBB- by S&P and Baa3 by Moody’s; provided, that if an entity is rated by only S&P or Moody’s, as applicable, then such Credit Rating shall be at least the rating stated above by S&P or Moody’s, as applicable. In the event that a Credit Rating from one of S&P or Moody’s is at or above Investment Grade and the Credit Rating from the other rating agency is below Investment Grade with respect to a Person or its obligations, then such Person and its obligations shall be considered to not have an Investment Grade Credit Rating.

“Law” means any federal, state and local laws, statutes, regulations, rules, codes, orders, judgments, decrees or ordinances enacted, adopted, issued or promulgated by any Governing Authority, including any Authorizations issued to a Party or by which a Party or the Facilities may be bound (including any of the foregoing pertaining to electrical, building, zoning, environmental and occupational safety and health requirements) or any published directive, guideline, requirement or other governmental restriction which has the force of law or any determination by, or interpretation of, any of the foregoing by any Governing Authority, binding on a given Person in a relevant jurisdiction.

“Letter of Credit” means an irrevocable standby letter of credit, substantially in the form attached hereto as Exhibit F and which (i) is issued by a U.S. commercial bank or the U.S. branch of a foreign bank with total assets of at least ten billion U.S. dollars ($10,000,000,000) having a Credit Rating of A- or higher by S&P or A3 or higher by Moody’s; and (ii) permits presentation for drawing at a bank located in Milwaukee, Wisconsin.

“LMP” means the “Locational Marginal Price” at the relevant CPNode for the relevant hour(s) and day(s) for the MISO Day-Ahead Market or MISO Real-Time Market, as applicable, as posted by the Transmission Provider.

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“Local Capacity Resource” has the meaning set forth in the Transmission Provider Tariff.

“MAIN Guide No. 3A Standards” means the standards attached as Exhibit I.

“Maintenance Schedule” has the meaning set forth in Section 5.1(a).

“Metering Devices” has the meaning set forth in Section 6.1(a).

“MISO” means the Midwest Independent Transmission System Operator, Inc.

“MISO Day-Ahead Market” means the Day-Ahead Market as defined in the applicable Transmission Provider Tariff.

“MISO FinSched” means a Financial Bilateral Transaction for a given Operating Day that is subsequently settled in the MISO Day Ahead Market with a source point, delivery point and sink point at the CPNode.

“MISO FinSched Energy” means the quantity of MWh Scheduled on MISO FinScheds for a given Operating Day.

“MISO Market” means the MISO Real-Time Market or the MISO Day-Ahead Market.

“MISO Market Time” means Eastern Standard Time or as otherwise set forth in the Transmission Provider Tariff.

“MISO Real-Time Market” means the Real-Time Market as defined in the applicable Transmission Provider Tariff.

“Module E” has the meaning set forth in the definition of Accredited Capacity.

“Moody’s” means Moody’s Investor Services, Inc.

“MW” means a megawatt.

“MWh” means megawatt-hours.

“NEIL” means Nuclear Electric Insurance Limited.

“NERC” means the North American Electric Reliability Council.

“Net Energy Output” means, for any hour during a Billing Cycle and with respect to the Facilities (excluding the CT), (a) if the Facilities (excluding the CT) are operating, total Energy output of the Facilities (excluding the CT) as measured at the Delivery Point, less Station Service Load (provided such Station Service Load is netted as provided in Section 2.12), which amounts shall be calculated at the applicable Metering Devices, multiplied by a fraction, the numerator of which is the Capacity of the Facilities (excluding the CT) and the denominator of which is the sum of (i) the Capacity of the Facilities (excluding the CT) and (ii) the Capacity of any Uprate not accepted by Buyer pursuant to Section 2.9(a) (provided that Net Energy Output can in no event be less than zero), or (b) if the Facilities (excluding

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the CT) are not operating, zero. For the avoidance of doubt, all Energy generated by the Units must first satisfy Buyer’s Energy Amount before any Energy from the Units is made available to third parties.

“Net Worth” means the dollar value calculated by subtracting liabilities from total assets (excluding goodwill and other intangible assets described in FASB Statement 142) as such terms are determined in accordance with GAAP.

“Network Load” has the meaning set forth in the Transmission Provider Tariff.

“Non-Defaulting Party” has the meaning set forth in Section 10.2.

“Notice Time” means the time no later than two (2) hours prior to the deadline for submission to the Transmission Provider of Generation Offers for the next Operating Day.

“NRC” means the United States Nuclear Regulatory Commission.

“Off-Peak” means all hours that are not On-Peak hours.

“Offer” has the meaning given such term in Section 2.10.

“On-Peak” means hour ending 0700 CPT through hour ending 2200 CPT, Monday through Friday, excluding NERC holidays.

“Operating Contact” has the meaning set forth in Section 14.2.

“Operating Day” has the meaning ascribed to such term by MISO in the applicable Transmission Provider Tariff or related documents, as such relevant meaning or relevant term may be modified from time to time.

“Party” has the meaning set forth in the preamble hereto.

“Peak Adjustment Payment” has the meaning set forth in Section 3.2.

“Peak Period” has the meaning set forth in Exhibit G.

“Performance Test” has the meaning set forth in Section 5.3(d)(ii).

“Permitted Assignee” has the meaning set forth in Section 18.2.

“Person” means any legal or natural person, including any individual, corporation, partnership, limited liability company, joint stock company, association, joint venture, trust, Governing Authority or international body or agency, or other entity.

“Planned Uprate” means the extended power uprate, based on licensing and engineering evaluations completed by Westinghouse Electric Company (nuclear steam supply system supplier for Point Beach), Stone & Webster Engineering Corporation, and Siemens-Westinghouse (turbine-generator original equipment manufacturer), designed to

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increase the reactor thermal output of each Unit by approximately 8.6% (or approximately 45 MWe per Unit).

“Point Beach” has the meaning given such term in the second recital to this Agreement.

“Prime Rate” means, for any period, the rate per annum expressed as a daily percentage, in effect on the first day of such period, as published from time to time in the money rates section of The Wall Street Journal representing the base rate on corporate loans posted by at least seventy-five percent (75%) of the nation’s thirty (30) largest banks. If for any reason such rate is not available, “Prime Rate” means the rate per annum which JPMorgan Chase Bank announces in New York from time-to-time as its prime or base lending rate for corporate customers.

“Proprietary Information” has the meaning set forth in Section 16.2.

“Prudent Utility Practice” means any applicable practices, methods and acts engaged in or approved by a significant portion of (a) as to Seller, the nuclear power electric generating industry in the United States of America, or (b) as to Buyer, the electric utility industry in the United States of America, during the relevant time period, or the practices, methods and acts which, in the exercise of reasonable judgment by a prudent nuclear operator (or prudent utility operator, if applicable to Buyer) in light of the facts known or which should reasonably have been known at the time the decision was made, could have been expected to accomplish the desired result consistent with good business practices, reliability, safety, expedition and the requirements of any Governing Authority having jurisdiction. “Prudent Utility Practice” is not intended to be limited to the optimum practice, method or act to the exclusion of all others, but rather to the acceptable practices, methods or acts generally accepted (a) as to Seller, by the nuclear power electric generating industry in the United States of America or (b) as to Buyer, by the electric utility industry in the United States of America.

“PSCW” means the Public Service Commission of Wisconsin.

“Reactive Power” means the reactive power capability of the Facilities as set forth in the Interconnection Agreement.

“Related Entity” has the meaning set forth in Section 18.2(c).

“Replacement Capacity” means, at any time, Accredited Capacity supplied to Buyer by Seller from any DNR (other than the Facilities) or from any other generation resource satisfying the requirements of a Local Capacity Resource associated with Buyer’s Network Load (other than the Facilities) to fulfill, in whole or in part, Seller’s obligation to supply Accredited Capacity under this Agreement. Replacement Capacity, when combined with Accredited Capacity from the Facilities, shall not exceed the Buyer’s Capacity Amount. In addition, Replacement Capacity shall (a) not be committed for sale to any third party, and (b) be accredited at all times to serve Buyer’s Capacity requirements.

“Replacement Energy” means, at any time, Energy supplied to Buyer by Seller from any resource other than the Facilities to fulfill, in part or in whole, Seller’s obligation hereunder

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to deliver Energy which, when combined with the Net Energy Output of the Facilities, shall not exceed the Buyer’s Energy Amount applicable to Buyer at such time under this Agreement.

“S&P” means Standard & Poor’s Ratings Group (A Division of The McGraw-Hill Companies).

“SCADA” means supervisory, control and data acquisition technology and equipment.

“Schedule”, “Scheduled” or “Scheduling” means the actions of Seller, Buyer and/or their designated representatives, of notifying, requesting and confirming to each other and to any third party the quantity and type of Energy to be delivered on any Operating Day (a) submitted to MISO by Seller as Seller’s Generation Offer from the Facilities for a relevant Operating Day during the Term pursuant to this Agreement, or (b) submitted to MISO by Seller and accepted by Buyer as a Financial Bilateral Transaction for a relevant Operating Day during the Term pursuant to this Agreement.

“Scheduled Maintenance Outage” has the meaning set forth in Section 5.1(a).

“Seller” has the meaning set forth in the preamble hereto.

“Seller Performance Security” means the performance security required to be posted by Seller pursuant to Section 8.1.

“Seller’s Guarantor” means a Person that, at the time of the execution and delivery of the Seller’s Guaranty, is a direct or indirect owner of Seller and (a) has an Investment Grade Credit Rating and a consolidated Net Worth of at least five hundred million dollars ($500,000,000.00); or (b) is reasonably acceptable to Buyer as having a verifiable creditworthiness and Net Worth sufficient to secure Seller’s Guarantor’s obligations under the Seller’s Guaranty.

“Seller’s Guaranty” has the meaning set forth in Section 8.1.

“Senior Executives” has the meaning set forth in Section 19.2.

“Senior Financial Officer” means an officer of Seller or of an Affiliate of Seller having financial and accounting expertise reasonably satisfactory to Buyer.

“Station Service Load” means all electric service requirements used in connection with the operation and maintenance of the Facilities and any improvements thereto, including auxiliary, stand-by, supplemental, back-up maintenance and interruptible power.

“Target Capacity Factor” means [**].

“Tax” means (i) any tax (including but not limited to franchise tax), charge, fee, levy or other assessment imposed by any Governing Authority and based on or measured with respect to net income or profits, including any interest, penalties or additions attributable or imposed with respect thereto, and (ii) any other tax, charge, levy, fee or other assessment

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imposed by any Governing Authority, including any transfer, gross receipts, sales, use, service, occupation, ad valorem, property, payroll, personal property, excise, severance, premium, stamp, documentary, license, registration, social security, employment, unemployment, disability, environmental (including but not limited to taxes under Section 59A of the Internal Revenue Code of 1986), add-on, value added, withholding (whether payable directly or by withholding and whether or not requiring the filing of a tax return therefor), commercial rent and occupancy tax, and (iii) any estimated tax, deficiency assessment, interest, penalties and additions to tax or additional amounts in connection with any of the foregoing, imposed by any Governing Authority; provided, that “Tax” does not include any Gross Receipts Tax.

“Term” means the period from and after the Effective Date to and including the date and time of the later of the Unit 1 Termination Date or the Unit 2 Termination Date.

“Transferee” has the meaning set forth in Section 16.1.

“Transferor” has the meaning set forth in Section 16.1.

“Transmission Owner” means ATC.

“Transmission Provider” means MISO with respect to its function as the regional transmission organization and/or with respect to its function as market operator of the MISO Market, as applicable; in the event either of such functions is performed by a separate entity, “Transmission Provider” shall refer to such entity as and where applicable in this Agreement.

“Transmission Provider Tariff” means the “Open Access Transmission and Energy Market Tariff for the Midwest Independent Transmission System Operator, Inc.,” or any tariff of a successor to the MISO, and any related procedures or rules published by the Transmission Provider, including the “Business Practice Manual” related thereto.

“Unit” means Unit 1 or Unit 2.

“Unit 1” means Point Beach Nuclear Plant Unit 1 and related facilities as more specifically described in the Asset Sale Agreement.

“Unit 1 Termination Date” has the meaning set forth in Section 13.1.

“Unit 2” means Point Beach Nuclear Plant Unit 2 and related facilities as more specifically described in the Asset Sale Agreement.

“Unit 2 Termination Date” has the meaning set forth in Section 13.1.

“Unscheduled Outage” means any Derate of the Facilities other than a Scheduled Maintenance Outage.

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“Uprate” means, with respect to each Unit, an increase in the maximum thermal power level at which such Unit may operate under its NRC license as such license may be amended after the date hereof.

“VAR” or “VARs” means Volt-Amps-Reactive, a measure of reactive power.

“Variable Interest Entity” or “VIE” has the meaning set forth in the FASB Interpretation No. 46 (Revised December 2003) as issued and amended from time to time by FASB.

“Weekly Schedule” has the meaning set forth in Section 2.4(a).

“Wisconsin Energy Group” means the collective group of companies identified as affiliates in the most recent Form 10-K filed at the U.S. Securities and Exchange Commission by Wisconsin Energy Corporation.

“Worker’s Compensation Laws” means all Laws relating to employment-related accidents and diseases and the benefits, insurance and other compensation required in relation thereto.

1.2. Rules of Interpretation

In this Agreement and in any Appendices, Exhibits or Schedules attached hereto, except to the extent that the context requires otherwise:

(a) The Table of Contents and the headings of the Articles and Sections herein have been inserted as a matter of convenience for reference only and shall not control or affect the meaning or construction of any of the terms or provisions hereof;

(b) The singular includes the plural and the masculine includes the feminine and neuter unless the context requires otherwise;

(c) References to any document, agreement or Law, including this Agreement, shall be deemed to include references to (i) all appendices, exhibits, and schedules attached thereto and (ii) such document, agreement or Law as amended, modified, supplemented, replaced or restated from time to time in accordance with its terms (if applicable) and (where applicable) subject to compliance with the requirements set forth therein;

(d) The Exhibits hereto are incorporated herein by this reference and are intended to be a part of this Agreement; provided, however, that in the event of a conflict between the terms of an Exhibit and the terms of the remainder of this Agreement, the terms of the remainder of the Agreement shall take precedence;

(e) References to “Articles,” “Sections,” clauses, “Paragraphs,” “Appendices,” “Exhibits,” or “Schedules,” are to articles, sections, clauses, paragraphs, appendices, exhibits or schedules of this Agreement;

(f) All references to a particular Person shall include a reference to such Person’s successors and permitted assigns;

(g) The words “herein,” “hereof” and “hereunder” shall refer to this Agreement as a whole and not to any particular section or subsection of this Agreement; the

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words “include,” “includes” or “including” shall mean “including, but not limited to;”

(h) The term “day” shall mean a calendar day commencing at 12:00 a.m. CPT and whenever an event is to be performed or a payment is to be made by a particular date and the date in question falls on a day that is not a Business Day, the event shall be performed or the payment shall be made on the next succeeding Business Day; the term “week” shall mean a seven consecutive day period; the term “month” shall mean a calendar month; provided, that when a period measured in months commences on a date other than the first day of a month, the period shall run from the date on which it starts to the corresponding date in the next month and, as appropriate, to succeeding months thereafter; and the term “year” shall mean a Calendar Year; and

(i) All monetary references contained herein refer to U.S. dollars.

1.3. Accounting Terms

All accounting terms used herein shall be construed in accordance with GAAP unless the context or use requires a different interpretation.

1.4. Legal Representation

This Agreement was negotiated and prepared by both Parties with the advice of counsel to the extent deemed necessary by each Party; the Parties have agreed to the wording of this Agreement; and none of the provisions hereof shall be construed against one Party on the ground that such Party is the author or drafter of this Agreement or any part hereof.

ARTICLE II: PURCHASE OF CAPACITY, ENERGY, AND

ANCILLARY SERVICES

2.1. Capacity Sale and Purchase

Subject to the terms and conditions of this Agreement, Seller agrees to sell and supply to Buyer, and Buyer agrees to accept and purchase from Seller, all Accredited Capacity (i) from the Facilities for the duration of the Term and (ii) associated with Replacement Capacity that Seller supplies to Buyer pursuant to the terms of this Agreement. Furthermore, except as otherwise specifically provided for herein, Seller shall not sell or commit to sell the Capacity of the Facilities during the Term to any party other than Buyer.

2.2. Energy Sale and Purchase

(a) Subject to the terms and conditions of this Agreement, for the duration of the Term, Seller shall sell and deliver to Buyer at the Delivery Point, and Buyer shall accept and purchase, (i) the Net Energy Output and (ii) all Replacement Energy that Seller delivers to Buyer pursuant to the terms of this Agreement. The amount of all Energy sold to Buyer as Scheduled by Seller and purchased by Buyer from Seller as confirmed by Buyer in accordance with Exhibit H, for any period of time, shall be the aggregate amount of Delivered Energy for such period of time. Furthermore, except as otherwise specifically provided for herein, Seller shall not

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sell or commit to sell the Net Energy Output during the Term to any party other than Buyer.

(b) The Parties acknowledge and agree that any increases in Capacity, Energy or Ancillary Services from the Facilities (excluding the Energy (and Ancillary Services related thereto) from the CT), whether due to changes in ambient conditions or otherwise (other than that attributable to Uprates not accepted by Buyer in accordance with Sections 2.9(a) or (b), as applicable), are included in the Buyer’s Capacity Amount and Net Energy Output to be provided hereunder.

2.3. Ancillary Services

(a) The sale of Capacity and Energy hereunder from the Facilities (or in respect of any Replacement Capacity as provided in Section 2.4(c)) to Buyer shall include the Ancillary Services associated with such Capacity and Energy from the Facilities (or in respect of any Replacement Capacity as provided in Section 2.4(c)). Seller agrees to provide and/or execute any documents or agreements necessary to transfer to Buyer any revenue and any other benefits and rights received from third parties by Seller in providing such Ancillary Services. For all periods during which such documents and agreements are not in effect, Seller agrees to credit to Buyer such revenues as provided in Section 3.1(b) until such time as an agreement is executed. Further, to the extent permitted by Law, Seller hereby assigns and delegates to Buyer all rights and obligations Seller may have to reach agreement with the Transmission Provider or Transmission Owner, as applicable, as to the appropriate entitlement of revenues for Ancillary Services provided by the Facilities (or in respect of any Replacement Capacity as provided in Section 2.4(c)) under the applicable Transmission Provider Tariff and/or under the Interconnection Agreement, as applicable.

(b) To the extent that Seller’s unexcused failure to deliver Ancillary Services to Buyer results in any increased cost, damage or penalty incurred by Buyer, Seller shall reimburse Buyer for any such increased cost, damage or penalty within 10 Business Days of invoice receipt therefor. Any invoice submitted by Buyer to Seller pursuant to this Section 2.3(b) shall include a written statement explaining in reasonable detail the calculation of the amount owed by Seller. The amount of such cost, damages or penalty to be reimbursed shall not exceed an amount equal to the increased costs or penalties actually incurred by Buyer. Notwithstanding the preceding sentence, in the event that during the Term there exists a market for the purchase and sale of Ancillary Services, then (i) if Seller fails to provide an Ancillary Service required to be delivered hereunder from the Facilities, Seller shall use commercially reasonable efforts to provide Buyer with a replacement for such Ancillary Service and (ii) if Seller is unsuccessful in satisfying its obligation under clause (i), Seller shall reimburse Buyer for the market-clearing price for such undelivered Ancillary Service.

(c) Notwithstanding the foregoing, in no event shall Seller be required to reduce its Net Energy Output below the Energy associated with the Target Capacity Factor for the purpose of providing Ancillary Services to Buyer.

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2.4. Replacement Energy and Replacement Capacity

(a) Replacement Energy. Subject to the provisions of this Agreement, Seller may provide Buyer with Replacement Energy as set forth below in this Section 2.4(a) during a Scheduled Maintenance Outage or an Unscheduled Outage, but only to the extent of any associated Derate. Seller may provide Replacement Energy from a source that differs from the DNR selected by Seller to supply Replacement Capacity, if any.

(i) Unscheduled Outage Replacement Energy Notices

If the event or condition constituting the Derate is an Unscheduled Outage, Seller shall telephonically notify the Dispatch Authority Function of Seller’s election in accordance with Section 2.4(a)(iii) below (to provide or not to provide Replacement Energy) as soon as practicable but no later than the Notice Time on the day following the day the Derate commenced with confirmation (by email or facsimile) within 24 hours. Seller’s election shall be effective based on a “Weekly Schedule”, which means seven consecutive days beginning at 00:00 MISO Market Time on any day of the week following the appropriate Notice Time and ending at 23:59 MISO Market Time on the seventh day. Seller shall provide Buyer notice of its intent to continue or discontinue its Replacement Energy election no later than two (2) Business Days prior to the commencement of the applicable Weekly Schedule.

(ii) Scheduled Maintenance Replacement Energy Notices

If the event or condition constituting the Derate is a Scheduled Maintenance Outage, Seller shall telephonically notify the Dispatch Authority Function of Seller’s election in accordance with Section 2.4(a)(iii) below to provide or not to provide Replacement Energy no later than two (2) Business Days prior to the scheduled commencement of such Scheduled Maintenance Outage with confirmation (by email or facsimile) within 24 hours. Seller’s election shall be effective based on a Weekly Schedule. Seller shall provide Buyer notice of its intent to continue or discontinue its Replacement Energy election no later than two (2) Business Days prior to the commencement of the applicable Weekly Schedule.

(iii) Replacement Energy Scheduling

Any Replacement Energy Scheduled hereunder shall be Scheduled in accordance with Article IV, subject to the following: Replacement Energy may only be Scheduled and delivered on a continuous basis in either (A) a single, fixed quantity or (B) a quantity varied to reflect expected changes in the Net Energy Output (e.g., changes in output or ramp rates or expected resolution of outages with respect to the Facilities) such that the aggregate of such Replacement Energy and the Net Energy Output will result in a single, fixed quantity.

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(b) Replacement Capacity

(i) Subject to the provisions of this Agreement, if at any time the Accredited Capacity of the Facilities is less than the Buyer’s Capacity Amount, then Seller may provide Buyer with Replacement Capacity but only to the extent that the Accredited Capacity of the Facilities is less than the Buyer’s Capacity Amount. In no event shall Seller provide Replacement Capacity for a period of less than 12 months; provided, that if the MISO market provides for a capacity product of less than 12 months, Seller may provide Replacement Capacity for such shorter period of capacity product, but in no event less than one month or less than the Peak Period in the event Accredited Capacity is unavailable for any month in the applicable Peak Period; provided, further, that if the applicable regional reliability council or any other Governing Authority requires Replacement Capacity to be provided for a period of time greater than as set forth in the preceding proviso in order for such Replacement Capacity to be deemed Accredited Capacity, then Seller may only provide Replacement Capacity for a period no less than as mandated by such Governing Authority. Seller shall notify the Dispatch Authority Function of the source of such Replacement Capacity as soon as practicable. Subject to the terms of this Agreement, if at any time Seller does not deliver Accredited Capacity from the Facilities or Replacement Capacity, in either case in an amount equal to Buyer’s Capacity Amount, Seller shall be required to pay Buyer liquidated damages equal to [**] (“Accredited Capacity Liquidated Damages”) for each MW-month (or portion thereof) of each such shortfall. At Buyer’s election, Seller shall be required to pay Accredited Capacity Liquidated Damages within five (5) Business Days of invoice receipt therefor.

(ii) The amount, if any, by which the Accredited Capacity Liquidated Damages incurred in any calendar month exceed the Delivered Energy Payment due and payable for such month is referred to as the “Monthly Excess Accredited Capacity Liquidated Damages Amount”. In no event shall the sum of the Monthly Excess Accredited Capacity Liquidated Damages Amounts accrued during any Calendar Year exceed [**].

(c) When supplying Replacement Capacity, to the extent there are Ancillary Services associated with the Replacement Capacity obtained by Seller, Seller shall supply such Ancillary Services to Buyer at no additional cost or expense to Buyer.

2.5. Financial Transmission Rights

Buyer shall be entitled to all financial transmission rights and all other rights and benefits with and from the Transmission Provider associated with the Capacity, Energy and Ancillary Services being purchased from the Facilities. Seller shall cooperate in good faith with Buyer to ensure that such financial transmission rights and other rights and benefits are effectively assigned and transferred to Buyer at no additional cost to Buyer. Further, Seller hereby assigns and delegates to Buyer all rights and obligations Seller may have to reach agreement with the Transmission Provider as to the appropriate entitlement of such financial transmission rights under the applicable Transmission Provider Tariff.

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2.6. Title and Risk of Loss

Title to and risk of loss related to the Capacity, Energy and Ancillary Services being purchased hereunder shall transfer from Seller to Buyer at the Delivery Point. Seller warrants that it will deliver to Buyer such Capacity, Energy and Ancillary Services free and clear of all liens, security interests, claims and encumbrances or any interest therein or thereto by any Person.

2.7. Delivery Point

The “Delivery Point” for Energy (including Replacement Energy) delivered pursuant to this Agreement is the CPNode.

2.8. Capacity Accreditation

Seller shall, at its sole cost and expense, take all reasonable actions required to cause the Buyer’s Capacity Amount and any Replacement Capacity to be Accredited Capacity, including the satisfaction of all applicable requirements to establish and maintain the DNR status (as defined under the applicable Transmission Provider Tariff and acceptable to the applicable regional reliability council and the Transmission Provider, as applicable), and including Local Capacity Resource status in relation to Buyer’s Network Load, of the Facilities or the source of the Replacement Capacity for Buyer.

2.9. Uprates

(a)         (i) Seller shall use its commercially reasonable efforts to complete the Planned Uprate by June 1, 2012; provided, however, that Seller shall have the right, consistent with Prudent Utility Practice, to change the date for the completion of the Planned Uprate so long as Seller provides Buyer with advance written notice of such change no later than June 1, 2010 and at least two years prior to the expected completion date of the Planned Uprate. Upon completion of the Planned Uprate the actual Capacity increase associated with the Planned Uprate, as determined by Performance Tests pursuant to Section 5.3(d)(ii), shall become a part of the Buyer’s Capacity Amount, and Exhibit B shall be adjusted to include the increase in Capacity related to such Planned Uprate. The procedures for Uprates described in Section 2.9(b) shall not apply to the Planned Uprate. The Planned Uprate shall not be included in Delivered Energy until the transmission upgrades, if any, required for the Planned Uprate have been completed in accordance with the applicable transmission studies performed by ATC and/or MISO.

(ii) Any transmission upgrade costs to be assessed upon Seller as a direct result of the Capacity increase of the Planned Uprate (the “Planned Uprate Transmission Upgrade Costs”) shall be reimbursed by Buyer. Buyer’s payment therefor shall be due within 10 days after Seller’s actual payment of such costs and the receipt by Buyer of an invoice for such payment together with documentation setting forth such Planned Uprate Transmission Upgrade Costs in reasonable detail.

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(iii) Notwithstanding subsection (ii), Buyer may, in its discretion, by written notice to Seller, within 120 days after receipt of notification of the amount of such Planned Uprate Transmission Upgrade Costs to be assessed upon Seller, decline to accept the Capacity, Energy and Ancillary Services of the Planned Uprate under this Agreement, in which case Buyer shall not be obligated to purchase any of such products associated with the Planned Uprate or to reimburse Seller for any such Planned Upgrade Transmission Upgrade Costs. In the event that Buyer declines the Planned Uprate as provided above, Seller shall have the right to sell to any third party the incremental Capacity, Energy and associated Ancillary Services generated at the Facilities as a direct result of the Planned Uprate; provided, that all Energy generated by the Units must first satisfy Buyer’s Energy Amount before any Energy from the Units is made available to third parties.

(iv) In the event of any Uprate project proposed by Seller that consists both of the Planned Uprate and any other Uprate, Seller shall cause one or more transmission studies to be performed that separately identify the transmission requirements and associated costs for the Planned Uprate and any such other Uprate proposed by Seller. The transmission costs associated with the Planned Uprate shall be determined based on a transmission study that assumes no other Uprate has been or will be completed.

(b) Seller agrees to sell and Buyer agrees to purchase any Capacity, Energy and Ancillary Services related to any Uprate (other than the Planned Uprate) upon the same terms and conditions as provided in this Agreement, effective upon the completion of any such Uprate; provided, however, Buyer may, by written notice to Seller, within 120 days after receipt of notification of the amount of such transmission costs to be assessed upon Seller, decline to purchase the Capacity, Energy and Ancillary Services of any such Uprate that Buyer determines, in its discretion, would either (1) cause transmission disruptions or impose incremental transmission costs on the Buyer or (2) materially diminish the capacity factor of the Facilities, in which case Buyer shall not be obligated to purchase any such products from such Uprate. Unless Buyer declines such Uprate as provided above, the Parties shall promptly adjust the Buyer’s Capacity Amount on Exhibit B to account for the Capacity of such Uprate, as determined pursuant to Performance Tests pursuant to Section 5.3(d)(ii), to take effect upon the completion of such Uprate. An Uprate (other than the Planned Uprate) shall not be included as Delivered Energy until the transmission upgrades, if any, required for such Uprate have been completed in accordance with the applicable transmission studies performed by ATC and/or MISO. In the event that Buyer declines any Uprate as provided above, Seller shall have the right to sell to any third party the incremental Capacity, Energy and associated Ancillary Services generated at the Facilities as a direct result of such Uprate not accepted by the Buyer; provided, that all Energy generated by the Units must first satisfy Buyer’s Energy Amount before any Energy from the Units is made available to third parties.

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(c) Notwithstanding anything to the contrary in this Agreement, changes to the Buyer’s Capacity Amount resulting from the Planned Uprate or any other Uprate shall be conditioned upon the receipt of all requisite regulatory approvals, applicable to such Planned Uprate or any other Uprate, by the Party to whom such regulatory approvals apply.

(d) In the event any Uprate is not accepted by Buyer, then Net Energy Output shall be provided as follows: (i) Buyer shall first receive Buyer’s Energy Amount; (ii) Seller shall receive an amount of Energy associated with any unaccepted Uprate second; and (iii) if any of the Net Energy Output exceeds the sum of (i) and (ii) above, such additional Energy shall be prorated as provided in the definition of Net Energy Output.

2.10. Right of First Offer

Except as otherwise specifically provided for in this Agreement, during the Term, Seller shall not have the right to sell or otherwise transfer any Capacity, Energy or Ancillary Services from the Facilities to another Person (whether by way of a power purchase agreement or otherwise) without first offering (the “Offer”), subject to all requisite regulatory approvals, such Capacity, Energy or Ancillary Services to the Buyer at least 18 months prior to the Unit 1 Termination Date and at least 18 months prior to the Unit 2 Termination Date. Such Offer shall be for the full output of the Unit (including any Uprate affected during the Term), made in the form of a proposed contract to the Buyer and shall be open for acceptance to the Buyer for a period of ninety (90) days. In the event the Buyer accepts such Offer, the Seller and Buyer shall proceed to the execution of such proposed contract in an expeditious manner; provided, Buyer must procure all of its requisite regulatory approvals at least six (6) months prior to the Unit 1 Termination Date or Unit 2 Termination Date, as applicable, or such Offer shall be deemed to have expired.

2.11. Reactive Power

Without limiting the general application of Section 2.3:

(a) Seller agrees that it shall not have any rights to the production or absorption, if applicable, of Reactive Power and that Seller shall, consistent with the requirements of any Governing Authority, not operate the Facilities to produce real power at a level or in a manner that compromises its ability to operate the Facilities to produce or absorb, if applicable, Reactive Power to maintain the output voltage or power factor at the applicable CPNode in any agreement governing Seller’s obligation to produce or absorb, if applicable, Reactive Power consistent with the Interconnection Agreement.

(b) If requested by the Transmission Provider, without additional charge under this Agreement, Seller shall adjust Reactive Power (as so requested), subject to Prudent Utility Practice. As between the Parties, Buyer shall have the right to receive any compensation paid by any third party for Reactive Power (including for any increases in reactive power output or capability of the Facilities after the Effective Date) produced or absorbed by the Facilities. Any disagreement about

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the amount of such compensation shall be resolved in accordance with the Dispute Resolution Procedures.

2.12. Station Service

During any period in which any Unit is operating, Seller shall be permitted to satisfy the Station Service Load using Energy generated by any such Unit. If Seller is not able to self-supply Energy to satisfy Station Service Load, Seller shall compensate Buyer for Energy to serve the Station Service Load at the MISO Real-Time Market LMP for the appropriate CPNode, including any transmission or settlement charges associated with such Energy, during any period of time in which the Facilities are not operating or are not generating sufficient Energy to meet the Station Service Load of the Facilities. In the event that any fees, damages, penalties or transmission charges are assessed against Buyer by any Governing Authority in connection with the Station Service Load or any Energy obtained to serve the Station Service Load, Seller shall reimburse Buyer for such fees, damages, penalties or transmission charges within 10 Business Days of invoice receipt therefor. Any invoice submitted by Buyer to Seller pursuant to this Section 2.12 shall include a written statement explaining in reasonable detail the calculation of the amount due from Seller. As of the date of execution of this Agreement, the Station Service Load related to each Unit is calculated as approximately five MW. In the event such amount is materially changed for any reason, Seller shall give Buyer prompt written notice of such change.

2.13. CT Capacity

The CT Capacity shall be provided by the Seller to the Buyer under this Agreement as part of the Accredited Capacity delivered from the Facilities. Seller shall be responsible for all costs associated with the CT in Seller’s operation and maintenance of the Facilities as provided herein, and the operation and maintenance of the CT and the provision to Buyer of the Accredited Capacity therefrom will not result in any additional cost to the Buyer. Seller shall use commercially reasonable efforts to ensure that the Accredited Capacity associated with the CT shall be at least fifteen (15) MW during the Peak Period. Seller is responsible for all payments to (and is entitled to all revenue from) Transmission Provider associated with the dispatch of Energy from the CT. The Seller shall not replace or retire the CT without first giving to Buyer at least two (2) years prior written notice.

ARTICLE III: PAYMENTS

3.1. Purchase Payments

The amounts to be paid to the Seller by the Buyer for purchases of Capacity, Energy and Ancillary Services under this Agreement shall be determined as follows:

(a) Delivered Energy Payment. With respect to each Billing Cycle, Buyer shall make a payment to Seller equal to the sum of (i) the product of: (A) the applicable “Delivered Energy Charge” set forth in Exhibit A; (B) the applicable Delivered Energy Charge Shaping Factor set forth in Exhibit C; and (C) the sum of the MISO FinSched Energy (on-peak and off-peak as appropriate) for the Operating Days in such Billing Cycle, and (ii) any Gross Receipts Tax Payment applicable

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to the invoice for such Billing Cycle (pursuant to Section 20.3(d))(each, a “Delivered Energy Payment”).

(b) Ancillary Services. The Delivered Energy Payment includes payment for any and all Ancillary Services received by Buyer, and no additional payment from Buyer in respect thereof shall be due at any time. For the avoidance of doubt, Seller specifically agrees that it shall not be entitled to any payment for reactive power under this Agreement, notwithstanding its obligation to operate the Facilities in accordance with Section 2.10. Any and all revenues Seller receives from the Transmission Provider for Ancillary Services from the Facilities in each Billing Cycle shall be credited to Buyer and offset with any other payments due from Buyer to Seller under this Agreement (unless otherwise directly transferred to Buyer as provided in Section 2.3).

(c) Accredited Capacity. The Delivered Energy Payment includes payment for any and all Accredited Capacity constituting Buyer’s Capacity Amount provided to Buyer under this Agreement based on the aggregate amount of Delivered Energy for such Billing Cycle, and no additional payment from Buyer in respect thereof shall be due at any time. The sole purchase price for such Accredited Capacity shall be the Delivered Energy Payment for such Delivered Energy. For the avoidance of doubt, no payment shall be owed by Buyer for Accredited Capacity if the Delivered Energy Payment for any Billing Cycle is zero; provided, however, that, notwithstanding the foregoing, Seller shall be obligated to provide Accredited Capacity as provided in this Agreement.

3.2. Peak Adjustment Payment

If applicable, Seller shall make a payment to Buyer as determined in accordance with Exhibit G (each, a “Peak Adjustment Payment”).

ARTICLE IV: SCHEDULING

4.1. Scheduling

Seller shall submit its Generation Offers and Financial Bilateral Transactions in accordance with applicable Transmission Provider rules and procedures and must offer Unit 1 and Unit 2 in the MISO Day-Ahead Market and the MISO Real-Time Market for dispatch as must run generation units with a dispatch minimum for each hour equal to no less than the full expected Net Energy Output of Unit 1 and Unit 2 (consistent with the Transmission Provider Tariff). Notwithstanding the foregoing, Seller shall have the option to not Schedule Energy from Unit 1 and/or Unit 2 in the MISO Day-Ahead Market in instances when Unit 1 and Unit 2 are being ramped up to return to service following a Scheduled Maintenance Outage or an Unscheduled Outage; provided, however, that Seller shall hold harmless, defend and indemnify Buyer from and against any charges or fees, including Revenue Sufficiency Guaranty (as defined in the Transmission Provider Tariff) charges, levied on Buyer as a result of Seller’s Scheduling in the MISO Real-Time Market. Seller shall offer the CT in the MISO Day-Ahead Market and the MISO Real-Time Market in accordance with the Transmission Provider Tariff. Exhibit H includes other scheduling provisions applicable to this Agreement.

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4.2. Failure to Schedule

(a) If Seller fails to Schedule Energy (including Replacement Energy) in accordance with Section 2.4(a)(iv) or Section 4.1, as applicable, and such failure is not excused under the terms of this Agreement, then Seller shall pay to Buyer, within five (5) Business Days of receipt of an invoice therefor, an amount equal to (i) the MISO Day-Ahead Market LMP for such applicable period multiplied by the Energy that Seller failed to Schedule, plus any charges, penalties, damages, fees and other costs, including Transmission Provider charges, incurred by Buyer resulting from such failure, minus (ii) the amount of the Delivered Energy Payment that Buyer would have incurred under this Agreement had the Energy been Scheduled. Any invoice submitted by Buyer to Seller pursuant to this Section 4.2(a) shall include a written statement explaining in reasonable detail the calculation of the amount due from Seller.

(b) If Buyer fails to Schedule Energy (including Replacement Energy) that is Scheduled by Seller in accordance with Exhibit H of this Agreement, and such failure is not excused under the terms of this Agreement, then Buyer shall pay to Seller, within five (5) Business Days of receipt of an invoice therefor, an amount equal to (i) the amount of the Delivered Energy Payment that Seller would have received under this Agreement had the Energy been Scheduled by Buyer, minus (ii) the MISO Day-Ahead Market LMP for such applicable period multiplied by the Energy that Buyer failed to Schedule, plus any charges, penalties, damages, fees and other costs, including Transmission Provider charges, incurred by Seller resulting from such failure. Any invoice submitted by Seller to Buyer pursuant to this Section 4.2(b) shall include a written statement explaining in reasonable detail the calculation of the amount due from Buyer.

ARTICLE V: MAINTENANCE AND OPERATION

5.1. Scheduled Maintenance

(a) Scheduling Procedure.

Subject to subsection (b) below, Seller shall submit to Buyer a schedule of maintenance of the Facilities (each, a “Maintenance Schedule” and each item thereon a “Scheduled Maintenance Outage”) for each Calendar Year and a projection of scheduled outages for the following four years thereafter no later than twelve (12) months before the beginning of any year (or not later than three (3) months prior to the deadline for submittal of any such schedule to the Transmission Provider or any other applicable Governing Authority, if earlier); except that within thirty (30) days following the Effective Date, Seller shall submit to Buyer a Maintenance Schedule for the remainder of the Calendar Year in which the Effective Date occurs and for the following Calendar Year. Each Maintenance Schedule shall meet the requirements set forth in Section 5.1(b).

Within thirty (30) days of receipt of such Maintenance Schedule, Buyer may request reasonable modifications therein to the extent the requested modifications are not contrary to Prudent Utility Practice. Subject to subsection (b) below,

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Buyer and Seller shall work together to schedule Scheduled Maintenance Outages to meet their mutual requirements and the requirements of the Transmission Provider and/or Transmission Owner, it being understood that Buyer shall consider, among other things, its reserve requirements, energy delivery commitments, costs of replacement power and other generating resources and expected loads in requesting such reasonable modifications; provided, that in the event of a disagreement, such scheduling shall be resolved by the Administrative Committee. All Scheduled Maintenance Outages shall be of a duration that is no longer than that reasonably necessary to carry out the required maintenance activities. Seller shall provide notice to Buyer as soon as practicable but in any event no later than forty-eight (48) hours prior to the expected cessation of maintenance activities and shall promptly inform Buyer of the completion of such activities.

Scheduled Maintenance Outages for the subsequent three (3) year period of the Maintenance Schedule may only be rescheduled within a period of time from 30 days prior to the projected start of such Scheduled Maintenance Outage to 30 days after the projected end of such Scheduled Maintenance Outage; provided, however, that no Scheduled Maintenance Outage in such subsequent three (3) year period may be rescheduled so that all or any portion of such Scheduled Maintenance Outage falls within a different Calendar Year; and provided, further, that if Seller experiences an extended Unscheduled Outage and desires to move a Scheduled Maintenance Outage into a prior or subsequent Calendar Year, any such rescheduling shall require the consent of Buyer, not to be unreasonably withheld.

(b) Limitations on Scheduled Maintenance Outages

Scheduled Maintenance Outages may not occur during the Peak Period.

5.2. Derate Notices

In the event of any Derate, Seller must notify the Dispatch Authority Function and the Balancing Authority Function telephonically of such Derate as soon as practicable after Seller becomes aware of the necessity or occurrence thereof (each, a “Derate Notice”), with written confirmation within 24 hours of such oral notice. During any ongoing Derate, Seller shall provide updates as often as practicable, but no less than daily, to the Dispatch Authority Function of the nature and expected duration of such Derate as well as the magnitude and timing of actual and expected output changes of the Facilities and such other information as may assist Buyer in assessing the reliability and expected quantity of output from the Facilities, and Seller shall provide the Dispatch Authority Function with oral notice (confirmed promptly by email or facsimile) as much prior notice as practicable of when the Derate is expected to be remedied.

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5.3. Operation

(a) Operation

Seller shall manage, control, operate and maintain all parts of the Facilities in a manner consistent with Prudent Utility Practice and the terms and conditions of this Agreement and the Interconnection Agreement. As between the Parties, Seller shall bear the sole responsibility for complying with all applicable Laws associated with operating the Facilities, including all environmental, permitting and zoning requirements in effect during the Term of this Agreement.

(b) Communications Protocol

(i) Seller and Buyer have developed, or will develop within a reasonable period of time after the Effective Date, written communications procedures for the Facilities (the “Communications Protocol”), which include processes related to Seller’s interface with MISO, ATC, ERO and other Governing Authorities, operating communications between and among the Dispatch Authority Function and the Balancing Authority Function and testing procedures. The Communications Protocol is deemed incorporated herein by this reference.

(ii) The Communications Protocol shall be reviewed by the Administrative Committee no less than annually and any mutually agreed changes shall be made. In the event the Parties are unable to agree upon any changes to the Communications Protocol, such disagreement shall be resolved in accordance with the Dispute Resolution Procedures.

(c) Authorizations

Seller shall, at its own expense, acquire and maintain, comply with and, as necessary, renew and modify from time to time, any and all permits, licenses, approvals and other Authorizations of any Governing Authority required for the lawful operation and maintenance of the Facilities. Copies of said Authorizations shall be made available to Buyer for review upon Buyer’s written request. Buyer shall not be liable for any violation by Seller of any Authorization required to be obtained by Seller pursuant to this Section 5.3(c).

(d) Testing

(i) Notice of Testing

Seller shall notify Buyer in writing at least thirty (30) days prior to the expected date of any Performance Test or any other testing of the net capability of the Facilities (including for any Uprate); provided, that Seller may postpone any such test until such test is able to be performed with prior written notice to Buyer of such postponement and of the date and time such test is actually to be performed. Buyer may have a representative present at the time of each Performance Test, although the failure to have such a representative present shall not invalidate the result of the applicable test; provided, that the above required notices were given.

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(ii) Performance Tests

Seller shall perform (A) a performance test each year, on a date mutually agreed by the Parties, at Seller’s expense, which shall measure the net capability of the Facilities (including the CT and any Uprate) and (B) a performance test as soon as practicable, consistent with the MAIN Guide No. 3A Standards, (I) prior to the outage during which an Uprate is performed but prior to any coastdown and (II) following start-up from an outage during which an Uprate is performed (each, a “Performance Test”). In addition to the required Performance Test, either Party may request a Performance Test at any reasonable time, at the expense of the Party requesting such test. All Performance Tests shall be conducted in accordance with testing procedures (A) to confirm the Accredited Capacity constituting Buyer’s Capacity Amount (pursuant to Transmission Provider requirements) or (B) as otherwise mutually agreed by the Parties. For the avoidance of doubt, as of the execution of this Agreement the current Performance Test standards are the MAIN Guide No. 3A Standards.

(e) Other Operations Obligations

(i) Information Requirements

Seller shall provide Buyer with the following real-time telemetered data (scanned no less frequently than once every four seconds) for the duration of the Term: (A) net Unit output (MW and VARs), (B) status (i.e., open or closed) of generator breakers and generator disconnect switches, (C) MW and VARs at each metering point, and (D) transformer neutral currents. Seller shall provide Buyer with copies of any scheduling notices or requests submitted to the Transmission Provider concurrently with the submission thereof. In addition, Seller shall provide Buyer with any other information Buyer may reasonably request regarding the operation of the Facilities in order to allow Buyer to maintain reliability for Buyer’s Network Load.

(ii) SCADA Data

Seller shall provide and make available to Buyer, on a real-time basis, all data generated by the SCADA system at the Facilities, including all four-second meter data.

(iii) Quality of Energy

All Energy delivered hereunder shall be three-phase, 60 Hertz (plus or minus variations as may be required or allowed by the Transmission Provider), alternating current, at a voltage acceptable to the Transmission Provider, or shall otherwise comply with such other specifications of the Transmission Provider, regional reliability council or other authority responsible for the safety and reliability of the electric grid with authority over the Delivery Point as may be in effect at the time of delivery.

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(iv) Buyer’s Right of Access to Facilities

Seller shall provide Buyer with the right to enter Seller’s premises at the Facilities during normal business hours to (i) review records maintained pursuant to this Agreement, (ii) obtain information regarding operation of the Facilities, (iii) visually inspect the Facilities, (iv) observe the testing, operation and maintenance of the Facilities and (v) undertake any other activities reasonably necessary for Buyer to fulfill its rights and obligations hereunder. Buyer shall provide prior written notice to Seller of the date and time of such proposed entry and the identity of all Persons conducting such entry, which prior written notice shall in no event be provided less than three Business Days prior to the date of such entry. Seller shall schedule Buyer’s entries upon Seller’s premises at the Facilities so as to minimize any disruption of the operation of the Facilities due to such entries or to any activities carried out by Buyer at the Facilities during any such entry. Each such Person conducting any such entry shall observe and comply with all of Seller’s applicable safety and security rules at all times during such entry, as such rules shall have been presented to such Person by Seller or by any operator on behalf of Seller prior to or at the time of such visit.

(v) Maintenance of Books and Records

Seller shall maintain at the Facilities site for a period of not less than five (5) years from the date of preparation thereof: (i) all measurements by Metering Devices of Energy delivered from the Facilities pursuant to this Agreement; (ii) all data and information necessary to calculate payments as provided in this Agreement, including invoices, receipts, charts, printouts, electronic media, magnetic tapes and other materials and documents; and (iii) an accurate and up-to-date operating log at the Facilities with records of: real and reactive power production from the Facilities for each hour, changes in operating status of the Facilities and scheduled outages of the Facilities. Buyer shall be permitted to inspect such operating log upon prior written request during normal business hours and copies of such log shall be provided, if requested, at Buyer’s expense, within ten (10) days of such request.

(vi) Interconnection

As between the Parties, Seller shall be responsible to maintain and operate Seller’s electric interconnection facilities in accordance with the Interconnection Agreement. Seller shall not permit any action or inaction under the Interconnection Agreement that could adversely affect Buyer’s rights, benefits, liability or obligations under this Agreement and shall not consent to (unless required by a Governing Authority) any modification of the Interconnection Agreement that would adversely affect Buyer’s rights hereunder without Buyer’s prior written consent, such consent not to be unreasonably withheld. Furthermore, subject to any prohibitions of a Governing Authority, Seller shall:

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(A) promptly advise Buyer of all communications and notices to be made by or to Seller under the Interconnection Agreement; and

(B) use commercially reasonable efforts to ensure that the Transmission Owner’s and/or Transmission Provider’s planned maintenance schedules for the transmission system are coordinated with the Scheduled Maintenance Outages for the Facilities.

ARTICLE VI: METERING

6.1. Metering

(a) The electric watt-hour meters and any other Energy measuring devices and equipment used for purposes of this Agreement (“Metering Devices”), shall at all times during the Term meet the requirements set by the Transmission Provider and all applicable Governing Authorities and as set forth in the Interconnection Agreement. Seller shall own, operate, maintain and replace Metering Devices, including those Metering Devices shown on Exhibit D, sufficient to permit an accurate determination of the quantity and time of delivery of Energy delivered to the Delivery Point. Seller’s Metering Devices shall be used for measurements under this Agreement. Seller shall calibrate the Metering Devices in accordance with Prudent Utility Practice, but no less than once during each refueling outage on the Maintenance Schedule. Buyer or Buyer’s representative shall have the right to be present during any calibration of the Metering Devices and Seller shall provide reasonable notice to Buyer of any such calibration.

(b) The Buyer shall have the right to inspect and require a test of the Metering Devices (to be performed by Seller) from time to time at its discretion, and any inaccuracy disclosed by such tests shall be promptly corrected. If errors greater than one-half of one percent (0.5%) are discovered, the test shall be at Seller’s expense. Upon reasonable notice, Seller shall provide the Buyer access to the Metering Devices at Buyer’s expense during normal business hours and from time to time for the purposes of reading, inspecting and witnessing any testing of such equipment.

(c) If any Metering Device used to determine the amount of Delivered Energy is found to be in error by more than three quarters of one percent (0.75%), the payments for Delivered Energy made since the previous test of such Metering Device shall be adjusted to reflect the corrected measurements determined pursuant to this Article VI. The amount of such adjustment payment shall be equal to the total adjustment that would be due if the inaccurate Metering Device were deemed to be equally inaccurate during the entire period since the previous test of such Metering Device, divided by two (2); provided, however, that if the period of inaccuracy can be ascertained, then the Parties shall adjust the payments for Delivered Energy for that ascertained period of inaccuracy. Any amount payable as a result of such correction shall be paid to the Party entitled to such payment within thirty (30) days of notice of such correction.

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ARTICLE VII: BILLING AND PAYMENT

7.1. Billing and Payment

(a) Seller shall send a billing statement to Buyer on or before the tenth (10^th) day after the end of each Billing Cycle. If any net amount is due to Seller with respect to any such billing statement, Buyer shall pay such amount to Seller within ten (10) days after receipt of such billing statement. If any net amount is due to Buyer with respect to any such billing statement, Seller shall pay such amount to Buyer on or before the fifteenth (15^th) day after the end of such Billing Cycle. The billing statement shall show (i) the megawatt-hours of Delivered Energy for such Billing Cycle as Scheduled by the Seller and confirmed by the Buyer pursuant to Exhibit H; (ii) the amounts due Seller for that Billing Cycle in respect of (A) the Delivered Energy Payment and (B) any other amounts due to Seller hereunder; (iii) the amounts due Buyer for that Billing Cycle in respect of (A) the Peak Adjustment Payment, if applicable, (unless Buyer makes the election provided for in Exhibit G) and (B) any other amounts due to Buyer hereunder; and (iv) the data reasonably pertinent to the calculation of the payments due to Seller or Buyer. For purposes of billing for Replacement Capacity and Replacement Energy, the Capacity of the resources providing Replacement Capacity and Replacement Energy shall be determined in accordance with Module E, such determination to be submitted by Seller to Buyer in accordance with Section 2.4. Any amounts due and payable and not paid by the due date will be deemed delinquent and will accrue interest at the Prime Rate, such interest to be calculated from and including the due date to but excluding the date the delinquent amount is paid in full.

(b) In the event of a dispute as to the amount of any bill, the disputing Party shall notify the other Party of the amount in dispute and Buyer or Seller, as applicable, shall pay to the other Party the undisputed portion of the bill on or prior to the due date therefor, as identified in Section 7.1(a). Buyer or Seller, as applicable, shall pay, with an interest charge computed at the Prime Rate, from and including the date payment was due to but excluding the date payment is made, any portion of the disputed amount ultimately found to be proper. In the event of a refund, Buyer or Seller, as applicable, shall pay, with an interest charge computed at the Prime Rate, from and including the date the disputed payment was made to but excluding the date the refund payment is made, any refund amount ultimately found to be due to the other Party.

(c) Neither the Buyer nor Seller shall have the right to challenge any billing statement rendered or received hereunder after a period of the longer of (A) two (2) years from the date such statement was rendered or (B) ten (10) days after the last MISO settlement statement for the last Operating Day included in the billing statement. In the event that any such billing statement depends in whole or in part upon estimated data, this two (2) year limitation period shall be deemed to begin on the first day of the Billing Cycle in which such estimated data is adjusted to actual.

(d) Each Party reserves to itself all rights, setoffs, counterclaims, recoupment, combination of accounts, liens and other remedies, rights and defenses which

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such Party has or may be entitled to (whether by operation of law or in equity, under contract or otherwise). The obligations of each Party to make payments under this Agreement may be offset against each other, setoff or recouped therefrom.

ARTICLE VIII: PERFORMANCE SECURITY

8.1. Seller Performance Security

If at any time Seller (or Seller’s Guarantor) has Insufficient Credit Status, Seller shall deliver to Buyer within two (2) Business Days following the commencement of such Insufficient Credit Status either (a) a Letter of Credit; (b) a guaranty from a Seller’s Guarantor (substantially in the form attached hereto as Exhibit E) (so long as such Insufficient Credit Status is not with respect to such Seller’s Guarantor) or (c) other collateral in form and substance reasonably acceptable to Buyer, in each case in an amount equal to [**]; provided, that if Seller has Insufficient Credit Status as of the date of execution of this Agreement, then Seller shall be obligated to provide Seller Performance Security as of the date of execution of this Agreement. Costs of a Letter of Credit posted hereunder shall be borne by the applicant for such Letter of Credit.

8.2. Buyer Performance Security

If at any time Buyer (or Buyer’s Guarantor) has Insufficient Credit Status, Buyer shall deliver to Seller within two (2) Business Days following the commencement of such Insufficient Credit Status either (a) a Letter of Credit; (b) a guaranty from a Buyer’s Guarantor (substantially in the form attached hereto as Exhibit E) (so long as such Insufficient Credit Status is not with respect to such Buyer’s Guarantor) or (c) other collateral in form and substance reasonably acceptable to Seller, in each case in the same amount as the Seller Performance Security; provided, that if Buyer has Insufficient Credit Status as of the date of execution of this Agreement, then Buyer shall be obligated to provide Buyer Performance Security as of the date of execution of this Agreement. Costs of a Letter of Credit posted hereunder shall be borne by the applicant for such Letter of Credit.

8.3. Draws; Replenishments

A Non-Defaulting Party may draw upon the Buyer Performance Security or Seller Performance Security, as applicable, following the occurrence of an Event of Default by such other Party or pursuant to the other provisions of this Agreement in order to recover any damages to which such Non-Defaulting Party is entitled under this Agreement. In the event of such a draw on the Buyer Performance Security or Seller Performance Security, as applicable, then, except in the circumstance when the Non-Defaulting Party establishes an Early Termination Date pursuant to Section 10.2 or this Agreement otherwise terminates, the Defaulting Party shall within two (2) Business Days replenish the Seller Performance Security or Buyer Performance Security, as applicable, to the full amount required by Sections 8.1 or 8.2, as applicable.

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8.4. Reporting

(a) Seller shall promptly notify Buyer of any Insufficient Credit Status relating to Seller or to Seller’s Guarantor or any circumstance that results in Seller’s failure to be in compliance with the Seller Performance Security requirements of this Article VIII. From time to time, at Buyer’s written request, Seller shall provide Buyer promptly with such evidence as Buyer may reasonably request that any Seller Performance Security is in full compliance with this Agreement.

(b) Buyer shall promptly notify Seller of any Insufficient Credit Status relating to Buyer or any circumstance that results in Buyer’s failure to be in compliance with the Buyer Performance Security requirements of this Article VIII. From time to time, at Seller’s written request, Buyer shall provide Seller promptly with such evidence as Seller may reasonably request that Buyer and any Buyer Performance Security is in full compliance with this Agreement.

ARTICLE IX: FORCE MAJEURE

9.1. Conditions of Excuse for Seller

If, as a result of an event of Force Majeure, Seller is rendered wholly or partly unable to perform its obligations under this Agreement, Seller shall be excused except as specifically provided elsewhere in this Agreement, from only that portion of its performance that is prevented by such Force Majeure event to the extent so prevented; provided, that:

(a) Seller gives Buyer prompt written notice, and in any event within twenty-four (24) hours after Seller obtains actual knowledge thereof, describing the particulars of the event of, and how such event qualifies as a, Force Majeure;

(b) the permitted suspension of performance is of no greater scope and of no longer duration than is required by the event of Force Majeure and the effects thereof; and

(c) Seller exercises its reasonable best efforts to eliminate or mitigate the effects of the Force Majeure condition.

9.2. Conditions of Excuse for Buyer

If, as a result of an event of Force Majeure, Buyer is rendered wholly or partly unable to perform its obligations under this Agreement, Buyer shall be excused except as specifically provided elsewhere in this Agreement, from only that portion of its performance that is prevented by such Force Majeure event to the extent so prevented, provided that:

(a) Buyer gives Seller prompt written notice, and in any event within twenty-four (24) hours after the day that Buyer obtains actual knowledge thereof, describing the particulars of the event of, and how such event qualifies as a, Force Majeure;

(b) the permitted suspension of performance is of no greater scope and of no longer duration than is required by the event of Force Majeure and the effects thereof; and

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(c) Buyer exercises its reasonable best efforts to eliminate or mitigate the effects of the Force Majeure condition.

9.3. Burden of Proof

The burden of proof as to whether a Force Majeure has occurred shall be upon the Party claiming Force Majeure.

9.4. Payment and Security Obligations Not Excused

Notwithstanding anything in this Agreement to the contrary, no payment obligation arising under this Agreement prior to the date of an event of Force Majeure, and no obligation to provide Buyer Performance Security or Seller Performance Security, as applicable, shall be excused by such event of Force Majeure.

9.5. Time Limits

(a) If at any time during the period of Force Majeure the non-performing Party fails to undertake or ceases undertaking its reasonable best efforts to remedy its inability to perform, then the non-performing Party shall no longer be excused from its performance.

(b) Seller shall, within sixty (60) days of the occurrence of a Force Majeure affecting Seller’s performance under this Agreement that Seller reasonably anticipates will last more than twelve (12) months after the commencement thereof, deliver to Buyer a detailed plan for the remedy of the Force Majeure condition, which plan shall include a detailed specification of Seller’s proposal (including a timetable) to remedy the Force Majeure condition and restore the Facilities to maximum attainable operating status.

(c) If an event of Force Majeure has prevented Seller from performing all, or a significant portion of, its material obligations under this Agreement for a period of eighteen (18) months, Buyer may terminate this Agreement by written notice to Seller. Effective upon any such termination, neither Party shall have any continuing obligations for performance under this Agreement except for the satisfaction of liabilities that arose prior to such termination and except for those obligations which survive such termination in accordance with Section 22.9.

(d) Notwithstanding anything to the contrary in this Agreement, if, as a result of an event of Force Majeure, Buyer is rendered wholly or partly unable to perform its obligations under this Agreement, Seller may offer and sell the Energy and Ancillary Services from the Facilities to any third party until such time as the Buyer can resume performance under this Agreement.

9.6. Deadline Extended

Whenever either Party is required to commence or complete any action within a specified period, the performance of which action is excused under the terms of this Agreement by reasons of an event of Force Majeure, such period shall be extended by an amount equal to the duration of the period such performance was excused by such event of Force Majeure occurring or continuing during such period; provided, however, that the Term shall not be extended.

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ARTICLE X: EVENTS OF DEFAULT; REMEDIES

10.1. List of Events of Default

Each of the following events, unless and to the extent expressly excused under the terms of this Agreement, shall constitute an “Event of Default” of the defaulting party (“Defaulting Party”), the other Party being the non-defaulting party (“Non-Defaulting Party”):

(a) The failure of a Party to make any undisputed payment due hereunder and such failure shall continue for five (5) Business Days after written notice demanding such payment is received.

(b) Any representation or warranty made by a Party herein or in any certificate or other document delivered by such Party pursuant hereto was false or misleading in any material respect when made, unless such false or misleading representation or warranty is capable of being cured or remedied and (i) the representation and warranty is contained in Sections 11.1(a) and 11.2(a) hereof and such Party shall promptly commence and diligently pursue action to cause such representation and warranty to become true in all material respects within two (2) Business Days or (ii) as to any other representation or warranty such Party shall promptly commence and diligently pursue action to cause such representation or warranty to become true in all material respects and does so within thirty (30) days after notice thereof has been given to such Party by the other Party.

(c) In the event a Party shall cease doing business as a going concern, shall generally not pay its debts as they become due or admit in writing its inability to pay its debts as they become due, shall file a voluntary petition in bankruptcy or shall be adjudicated a bankrupt or insolvent, or shall file any petition or answer seeking any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under the present or any future federal bankruptcy code or any other present or future applicable Law, or shall seek or consent to or acquiesce in the appointment of any trustee, receiver, custodian or liquidator of such Party or of all or any substantial part of its properties, or shall make an assignment for the benefit of creditors, or such Party shall take any corporate action to authorize or that is in contemplation of the actions set forth above in this Section 10.1(c).

(d) In the event that within thirty (30) days after the commencement of any proceeding against a Party seeking any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under the present or any future federal bankruptcy code or any other statute or Law, such proceeding shall not have been dismissed, or if, within thirty (30) days after the appointment without the consent or acquiescence of such Party of any trustee, receiver, custodian or liquidator of such Party or of all or any substantial part of its properties, such appointment shall not have been vacated or stayed on appeal or otherwise, or if, within thirty (30) days after the expiration of any such stay, such appointment shall not have been vacated.

(e) A Party fails to comply or cause compliance with the Seller Performance Security or Buyer Performance Security, as applicable, requirements of Article VIII, or

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Buyer’s Guarantor, if any, or Seller’s Guarantor, if any, breaches any of its obligations under the Buyer’s Guaranty or Seller’s Guaranty, as applicable, or if any representation or warranty made by Buyer’s Guarantor or Seller’s Guarantor, as applicable, in the Buyer’s Guaranty or Seller’s Guaranty, as applicable, shall prove to be incorrect in any material respect when made, unless any of the foregoing is cured by the end of the next Business Day following receipt of a written notice from the other Party of a failure under this Section 10.1(e).

(f) The failure of Seller to provide the Buyer’s employees, agents and other representatives reasonable access to witness testing of or to examine the Metering Devices after receiving notice to do so by the Buyer as required under this Agreement.

(g) Seller, or any of its employees, contractors, subcontractors, agents or representatives willfully adjusts the Metering Devices or the interconnection facilities without Buyer’s written consent and which adjustment has the effect of falsely increasing the amounts owed by Buyer under this Agreement.

(h) A Party violates the requirements of Article XVIII through an attempted or purported assignment or transfer of this Agreement or an ownership interest in the Facilities or through a Change of Control transaction or breach of the terms and conditions of Section 2.10.

(i) A material default in performance or observance of any agreement, undertaking, covenant or other obligation (other than as specified in the other provisions of this Section 10.1) contained in this Agreement by a Party unless, within thirty (30) days after written notice from the other Party specifying the nature of such material default, such Party cures such default or, if such cure cannot reasonably be completed within thirty (30) days and if such Party within such thirty (30) day period commences, and thereafter diligently and continuously proceeds to cure such default, said period shall be extended for such further period as shall be necessary for such Party diligently and continuously to cure such default, provided that the extended cure period shall not exceed ninety (90) days from the date of the original notice.

10.2. Remedies

If an Event of Default occurs at any time during the Term, the Non-Defaulting Party may, for so long as the Event of Default is continuing, subject to the provisions of Article XIX, take one or more of the following actions: (i) establish a date (which date shall be no more than ten (10) Business Days after the Non-Defaulting Party delivers written notice of such date to the Defaulting Party) on which this Agreement shall terminate (the “Early Termination Date”), (ii) proceed by appropriate proceedings in accordance with this Agreement at law, in equity or otherwise, to protect and enforce its right to damages (actual or liquidated) or, where the Event of Default is one other than the failure to pay money, equitable relief, including specific performance, and (iii) immediately cease performance or withhold any payments, or both, due in respect of this Agreement. For avoidance of doubt, in the event the Non-Defaulting Party ceases performance or withholds payment as provided in (iii) above, the Defaulting Party shall continue to be obligated to pay damages relating to the Defaulting Party’s failure to perform during such cessation or period of withholding.

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Notwithstanding anything to the contrary in this Agreement, if an Event of Default under Section 10.1(a) with respect to Buyer has occurred and is continuing, Seller may offer and sell Energy and Ancillary Services from the Facilities to any third party until such time as the Buyer can resume performance under this Agreement. The proceeds of any such sale shall be applied as an offset to amounts otherwise owed by Buyer to Seller under this Agreement.

10.3. Rights of Specific Performance

In the case of an Event of Default, the Parties recognize that any remedy at law may be inadequate because this Agreement is unique and/or because the actual damages of the Non-Defaulting Party may be difficult to reasonably ascertain and/or may exceed the amount of any guaranty or other collateral available to the Non-Defaulting Party. Therefore, the Parties agree that the Non-Defaulting Party shall be entitled to pursue an action for specific performance, and the Defaulting Party waives all of its rights to assert as a defense to such action that the Non-Defaulting Party’s remedy at law is adequate.

10.4. Limitation of Liability

THE PARTIES CONFIRM THAT THE EXPRESS REMEDIES AND MEASURES OF DAMAGES PROVIDED IN THIS AGREEMENT SATISFY THE ESSENTIAL PURPOSES HEREOF FOR BREACH OF ANY PROVISION FOR WHICH AN EXPRESS REMEDY OR MEASURE OF DAMAGES IS PROVIDED. UNLESS EXPRESSLY HEREIN OTHERWISE PROVIDED, AND EXCEPT FOR THE PAYMENT OF LIQUIDATED DAMAGES SPECIFIED HEREIN, NEITHER PARTY NOR THEIR AFFILIATES SHALL BE LIABLE FOR CONSEQUENTIAL, INCIDENTAL, PUNITIVE, EXEMPLARY OR INDIRECT DAMAGES, LOST PROFITS (WHICH DOES NOT INCLUDE RECOVERY FOR ACCRUED DELIVERED ENERGY PAYMENTS) OR OTHER BUSINESS INTERRUPTION DAMAGES, BY STATUTE, IN TORT OR CONTRACT; PROVIDED, HOWEVER, THAT THIS SENTENCE SHALL NOT APPLY (A) TO LIMIT THE LIABILITY OF A PARTY WHOSE ACTIONS GIVING RISE TO SUCH LIABILITY CONSTITUTE WILLFUL MISCONDUCT OR (B) TO ANY INDEMNITY OBLIGATION PROVIDED HEREIN. TO THE EXTENT ANY DAMAGES REQUIRED TO BE PAID HEREUNDER ARE LIQUIDATED, THE PARTIES ACKNOWLEDGE THAT THE ACTUAL DAMAGES ARE DIFFICULT OR IMPOSSIBLE TO DETERMINE, OTHERWISE OBTAINING AN ADEQUATE REMEDY IS INCONVENIENT, AND THE LIQUIDATED DAMAGES DO NOT CONSTITUTE A PENALTY AND ARE A REASONABLE ADVANCE APPROXIMATION OF THE HARM OR LOSS. THE PARTIES FURTHER EXPRESSLY AGREE THAT NEITHER SHALL HAVE THE RIGHT, AND EACH WAIVES ALL RIGHTS, TO BRING AN ACTION AGAINST THE OTHER (INCLUDING ANY AFFILIATE OF THE OTHER) IN TORT OR STRICT LIABILITY FOR ANY ACT(S) OR OMISSIONS CONSTITUTING A BREACH OR ALLEGED BREACH OF CONTRACT.

10.5. Disclaimer of Warranties

NEITHER PARTY TO THIS AGREEMENT MAKES ANY REPRESENTATION, WARRANTY OR INDEMNITY, EXPRESS OR IMPLIED, TO THE OTHER PARTY TO

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THIS AGREEMENT EXCEPT FOR THE REPRESENTATIONS, WARRANTIES AND INDEMNITIES EXPRESSLY SET FORTH IN THIS AGREEMENT.

ARTICLE XI: REPRESENTATIONS, WARRANTIES AND COVENANTS

11.1. Representations and Warranties of Buyer

Buyer makes the following representations and warranties to Seller, each of which is true and correct as of the Effective Date:

(a) Buyer is a corporation duly organized, validly existing and in good standing under the Laws of the State of Wisconsin.

(b) Buyer possesses all requisite power and authority to enter into and perform this Agreement and to carry out the transactions contemplated herein. Buyer has all legal power and authority to own and use its properties and to transact the business in which it engages or proposes to engage and holds or will obtain on or before the time required all Authorizations necessary and required therefor.

(c) Buyer’s execution, delivery and performance of this Agreement have been duly authorized by, or are in accordance with, its articles of incorporation and by-laws; this Agreement has been duly executed and delivered for it by the signatories so authorized; and this Agreement constitutes Buyer’s legal, valid and binding obligation, enforceable against it in accordance with the terms hereof, except as such enforceability may be limited by applicable bankruptcy laws from time to time in effect that affect creditors’ rights generally or by general principles of equity (regardless of whether such enforcement is considered in equity or at law).

(d) Buyer’s execution, delivery and performance of this Agreement (i) will not result in a breach or violation of, or constitute a default under, or conflict with any material Authorization, or any material contract, lease or other agreement or instrument to which it is a party, or by which it or its properties may be bound or affected; and (ii) does not require any Authorization, or the consent, authorization or notification of any other Person, or any other action by or with respect to any other Person (except for Authorizations and consents or authorizations of other Persons already obtained, notifications already delivered, or other actions already taken or necessary or required Authorizations it will obtain on or before the time required).

(e) No suit, action or arbitration, or legal, administrative or other proceeding is pending or, to Buyer’s knowledge, has been threatened against Buyer that purports to materially adversely affect the validity or enforceability of this Agreement or the ability of Buyer to perform its obligations hereunder, or that would, if adversely determined, have a material adverse effect on the business or financial condition of Buyer. There are no bankruptcy, insolvency, reorganization, receivership or other proceedings pending against or being contemplated by Buyer, or, to Buyer’s knowledge, threatened against it.

(f) Buyer is not in breach of, in default under, or in violation of, any applicable Law, or the provisions of any Authorization, or in breach of, in default under, or in

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violation of, or in conflict with any provision of any promissory note, indenture or any evidence of indebtedness or security therefor, lease, contract, or other agreement by which it is bound, except for any such breaches, defaults, violations or conflicts which, individually or in the aggregate, could not reasonably be expected to have a material adverse effect on the business or financial condition of Buyer or its ability to perform its obligations hereunder.

11.2. Representations and Warranties of Seller

Seller makes the following representations and warranties to Buyer as of the Effective Date:

(a) Seller is a limited liability company duly organized, validly existing and in good standing under the Laws of the State of Wisconsin and qualified to do business in the State of Wisconsin, and is the sole owner of the Facilities.

(b) Seller possesses all requisite power and authority to enter into and perform this Agreement and to carry out the transactions contemplated herein. Seller has all legal power and authority to own and use its properties and to transact the business in which it engages or proposes to engage and holds or will obtain on or before the time required all Authorizations necessary and required therefor.

(c) Seller’s execution, delivery and performance of this Agreement have been duly authorized by, or are in accordance with, its articles of organization and operating agreement; this Agreement has been duly executed and delivered for it by the signatories so authorized; and this Agreement constitutes Seller’s legal, valid and binding obligation, enforceable against it in accordance with the terms hereof, except as such enforceability may be limited by applicable bankruptcy laws from time to time in effect that affect creditors’ rights generally, or by general principles of equity (regardless of whether such enforcement is considered in equity or at law).

(d) Seller’s execution, delivery and performance of this Agreement (i) will not result in a breach or violation of, or constitute a default under, or conflict with any Authorization, or any contract, lease or other agreement or instrument to which it is a party, or by which it or its properties may be bound or affected; and (ii) does not require any Authorization, or the consent, authorization or notification of any other Person, or any other action by or with respect to any other Person (except for Authorizations and consents or authorizations of other Persons already obtained, notifications already delivered, or other actions already taken or necessary or required Authorizations it will obtain on or before the time required).

(e) No suit, action or arbitration, or legal, administrative or other proceeding is pending or, to Seller’s knowledge, has been threatened against Seller that purports to materially adversely affect the validity or enforceability of this Agreement or the ability of Seller to perform its obligations hereunder, or that would, if adversely determined, have a material adverse effect on the business or financial condition of Seller. There are no bankruptcy, insolvency, reorganization, receivership or other proceedings pending against or being contemplated by Seller, or, to Seller’s knowledge, threatened against it.

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(f) Seller is not in breach of, in default under, or in violation of, or in conflict with any applicable Law, or the provisions of any Authorization, or in breach of, in default under, or in violation of, or in conflict with, any provision of any promissory note, indenture or any evidence of indebtedness or security therefor, lease, contract, or other agreement by which it is bound, except for any such breaches, defaults, violations or conflicts which, individually or in the aggregate, could not reasonably be expected to have a material adverse effect on the business or financial condition of Seller or its ability to perform its obligations hereunder.

11.3. Covenants of Seller

Seller hereby covenants and agrees that throughout the Term:

(a) No modifications to, or expansion of, the Facilities that would have a material adverse effect on Buyer’s rights or obligations under this Agreement will occur without the prior written consent of Buyer, such consent not to be unreasonably withheld.

(b) Seller will not convey, sell, lease, transfer or otherwise dispose of all or substantially all of its business or assets, whether now owned or hereafter acquired, to the extent that such conveyance, sale, lease, transfer or other disposition would have a material adverse effect on Buyer’s rights or obligations under this Agreement without the prior written consent of Buyer, such consent not to be unreasonably withheld.

(c) Seller shall provide to Buyer all financial statements, documents evidencing Seller’s capital structure and any other financial information reasonably requested by Buyer on the Effective Date and thereafter as reasonably requested by Buyer. Seller shall furnish to Buyer such certifications to such information from a Senior Financial Officer as Buyer may reasonably request from time to time. Seller covenants to promptly notify Buyer following any determination made by Seller or its independent auditor that Seller constitutes a VIE.

ARTICLE XII: INDEMNITY

12.1. By Seller

(a) Seller shall defend, indemnify and hold harmless Buyer and its officers, directors, employees and agents from and against any and all costs, expense, damage, liability or loss, including reasonable attorneys’ fees, resulting from or arising out of any Claims arising from the failure of Seller to fulfill its obligations under this Agreement.

(b) Seller shall defend, indemnify and hold harmless Buyer and its officers, directors, employees and agents from and against all loss, damage, expense, costs and liability, including reasonable attorneys’ fees, arising from any Claims against Buyer arising from injury to or death of Persons or damage to or destruction of property occurring at the Facilities to the extent such injury, death or damage is not caused by the willful misconduct of Buyer, its Affiliates or Associates while on Seller’s premises at the Facilities.

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12.2. Indemnification by Buyer

Buyer shall defend, indemnify and hold harmless Seller and its officers, directors, employees and agents from and against all loss, damage, expense, costs and liability, including reasonable attorneys’ fees, resulting from or arising out of any Claims arising from the failure of Buyer to fulfill its obligations under this Agreement.

12.3. Joint Negligence

In the case of joint or concurring negligence or other fault of the Parties giving rise to a loss or Claim against either one or both of them, each shall have rights of contribution against the other Party in proportion to their comparative negligence as determined by the court trying the matter in dispute. Each Party shall promptly notify the other Party of the assertion of any Claim against which such other Party may be required to provide indemnity hereunder and shall give the other Party an opportunity to defend such Claim. These indemnification provisions are for the protection of the Parties hereto only and shall not establish, of themselves, any liability to third parties.

12.4. Responsibility for Employees

The Parties agree that, as between themselves, each Party shall be responsible for the acts and omissions of, and any Claims by, its employees and agents, irrespective of any limitation on the amount or type of damages, compensation or benefits payable by or for such Party under Workers’ Compensation Laws, disability benefit acts or other employee benefit acts; provided, however, that the foregoing is not intended to create third party beneficiary rights in any party not a Party to this Agreement. Each Party shall indemnify the other Party from and against all liabilities, Claims, damages, suits, fines or judgments for injury or death to any third party and damage to or destruction of property of any third party, to the extent caused by such Party’s employees’ or agents’ negligence or willful misconduct.

12.5. Notice and Participation

If any Party entitled to indemnification hereunder (the “Indemnified Party”) intends to seek indemnification under this Article XII from any other Party (the “Indemnifying Party”) with respect to any Claim, the Indemnified Party shall give the Indemnifying Party notice of such Claim upon the receipt of actual knowledge or information by the Indemnified Party of any possible Claim or of the commencement of such Claim, which period shall in no event be later than the lesser of (i) fifteen (15) Business Days prior to the last day for responding to such Claim or (ii) one-half of the period allowed for responding to such Claim. The Indemnifying Party shall have no liability under this Article XII for any Claim for which such notice is not provided, to the extent that the failure to give such notice prejudices the Indemnifying Party. The Indemnifying Party shall have the right to assume the defense of any such Claim, at its sole cost and expense, with counsel designated by the Indemnifying Party and reasonably satisfactory to the Indemnified Party; provided, however, that if the defendants in any such Claim include both the Indemnified Party and the Indemnifying Party, and the Indemnified Party shall have reasonably concluded that there may be legal defenses available to it which are different from or additional to those available to the Indemnifying Party, the Indemnified Party shall have the right to select separate counsel, at the Indemnifying Party’s expense, to assert such legal defenses and to otherwise participate

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in the defense of such Claim on behalf of such Indemnified Party. Should any Indemnified Party be entitled to indemnification under this Section 12.5 as a result of a Claim, and should the Indemnifying Party fail to assume the defense of such Claim, the Indemnified Party may, at the expense of the Indemnifying Party, contest (or, with or without the prior consent of the Indemnifying Party, settle) such Claim. Except to the extent expressly provided herein, no Indemnified Party shall settle any Claim with respect to which it has sought or intends to seek indemnification pursuant to this Section without the prior written consent of the Indemnifying Party, which consent shall not be unreasonably withheld. Except to the extent expressly provided herein, no Indemnifying Party shall settle any Claim with respect to which it may be liable to provide indemnification pursuant to this Section without the prior written consent of the Indemnified Party, which consent shall not be unreasonably withheld; provided, however, that if the Indemnifying Party has reached a bona fide monetary settlement agreement with the plaintiff(s) in any such Claim and the Indemnified Party does not consent to such settlement agreement, then the dollar amount specified in the settlement agreement, plus the Indemnified Party’s legal fees and other costs related to the defense of the Claim prior to the date of such settlement agreement, shall act as an absolute maximum limit on the indemnification obligation of the Indemnifying Party.

12.6. Payment of Indemnification Claims

The Indemnifying Party shall pay any amount due pursuant to this Article XII within ten (10) Business Days after the determination of the amount of any such indemnification, to the extent that the existence and entitlement to indemnification is not disputed by the Indemnifying Party, or within ten (10) Business Days after the conclusion of any Dispute Resolution Procedures, to the extent that the existence or entitlement to indemnification is disputed by the Indemnifying Party and is established pursuant to such Dispute Resolution Procedures.

12.7. Survival of Obligation

The duty to indemnify under this Article XII shall continue in full force and effect notwithstanding the expiration or termination of this Agreement, with respect to any loss, liability, damage, claim or other expense based on facts or conditions which occurred prior to such termination.

ARTICLE XIII: TERM

13.1. Term

Subject to the terms and conditions of this Agreement, this Agreement shall commence on the Effective Date and, unless terminated earlier as expressly provided herein, shall continue in effect until 11:59:59 p.m. (CPT) on the day before (a) with respect to Unit 1, the 16th anniversary of the Effective Date (the “Unit 1 Termination Date”) and (b) with respect to Unit 2, the 17th anniversary of the Effective Date (the “Unit 2 Termination Date”); provided, however, that in the event that the Unit 1 Termination Date or Unit 2 Termination Date is scheduled to fall during any Peak Period, the Unit 1 Termination Date or Unit 2 Termination Date, as applicable, shall be extended until the day after the end of such Peak Period.

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13.2. Termination

If the continued operation of a Unit pursuant to this Agreement has become materially adverse to Seller such that the continued operation of such Unit is no longer feasible, prudent or sustainable, Seller shall have the right to elect to permanently shut down such Unit upon written notice of termination of this Agreement in relation to such Unit effective on the later of (a) twenty-four (24) months after such notice and (b) the permanent shutdown of such Unit; provided, that this Agreement shall be in full force and effect and Seller shall continue to perform its obligations under this Agreement, and shall be liable for any failure to perform as provided herein, through such remaining effectiveness of this Agreement (as to such Unit and through the remainder of the Term as to the other Unit). Neither Party shall have any further liability upon the effectiveness of the termination provided above except for those obligations that by their express terms are to survive termination of this Agreement.

13.3. Effect of Termination

Termination of this Agreement shall not terminate the rights or duties of either Party hereunder with respect to any obligations due to be performed on or before the effective date of termination.

ARTICLE XIV: ADMINISTRATIVE COMMITTEE

14.1. Purpose

From time to time various administrative and technical matters may arise in connection with the terms and conditions of this Agreement which will require the cooperation and consultation of the Parties and the exchange of information. As a means of providing for such cooperation, consultation and exchange, an Administrative Committee is hereby established with the functions described in Section 14.4. However, the Administrative Committee shall not (a) have the authority to amend this Agreement or (b) diminish in any manner the authority or responsibility of either Party as set forth in the various sections of this Agreement.

14.2. Membership

The Administrative Committee shall have two (2) members, each an “Operating Contact”. Within sixty (60) days after execution of this Agreement, each Party shall designate its Operating Contact (and alternate) and shall promptly give written notice thereof to the other Party. Thereafter, each Party shall promptly give written notice to the other Party of any change in the designation of its Operating Contact. All actions taken by the Administrative Committee must be approved by both Operating Contacts.

14.3. Meetings

Meetings as are reasonably required may be called by either Operating Contact with as much advance notice as is practicable. Meetings may be attended by other representatives of the Parties.

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14.4. Functions

The Administrative Committee shall have the following functions:

(a) Provide liaison between the Parties at the management level and exchange information with respect to significant matters arising under this Agreement.

(b) Appoint ad hoc committees, the members of which need not be the Operating Contacts, as necessary to perform detailed work and conduct studies regarding matters requiring investigation.

(c) Review, discuss and attempt to resolve disputes arising under this Agreement; provided, that the Administrative Committee shall not limit the provisions of Article XIX.

(d) Provide liaison between the Parties concerning the status and operation of the Facilities.

14.5. Expenses

Each Party shall be responsible for the salary and out-of-pocket expenses of its Operating Contact and its other attendees. All other expenses incurred in connection with the performance by the Administrative Committee of its functions shall be allocated and paid as determined by the Administrative Committee.

ARTICLE XV: NOTICES

15.1. Notices in Writing

All notices or other communications which are required or permitted under this Agreement shall be effective if they are in writing and delivered personally or by certified mail (postage prepaid and return receipt requested), reputable overnight delivery service, or telecopy or other confirmable form of electronic delivery, to the following address (except as to notices which are required by this Agreement to be delivered to a Party’s Operating Contact or to the Dispatch Authority Function or the Balancing Authority Function, which shall be delivered to such Party’s Operating Contact or to the Dispatch Authority Function or the Balancing Authority Function, as the case may be):

(a) if to Seller:

FPL Energy Point Beach, LLC

700 Universe Boulevard

Juno Beach, FL 33408

Attention: Vice President, Business Management

Facsimile: 561-304-5161

(b) With a copy to:

FPL Energy, LLC

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700 Universe Boulevard

Juno Beach, FL 33408

Attention: Managing Attorney

Facsimile: 561-691-7305

(c) if to the Buyer:

Wisconsin Electric Power Company

333 West Everett Street, Room A214

Milwaukee, Wisconsin 53203

Attention: Trading and Operations

Facsimile: 414-221-4210

or to such other person or address as the addressee may have specified in a notice duly given to the sender as provided herein.

15.2. Date of Notification

All notices or communications duly delivered or mailed and postmarked to a Party hereto as provided in Section 15.1 shall be effective as of the date of receipt.

15.3. Oral Notice in Emergency

Notwithstanding the provisions of Section 15.1, any notice required hereunder with respect to an occurrence or event requiring immediate attention may be made orally, by telephone or otherwise, provided such notice shall be confirmed in writing within 24 hours thereafter. Each Party shall make any such oral notice directly to the Operating Contact of the other Party.

ARTICLE XVI: CONFIDENTIALITY

16.1. Non-Disclosure to Third Parties

Any Proprietary Information of a Party (the “Transferor”) which is disclosed to or otherwise received or obtained by the other Party (the “Transferee”) in connection with this Agreement is disclosed, and shall be held, in confidence, and the Transferee shall not publish or otherwise disclose any Proprietary Information to any Person for any reason or purpose whatsoever, or use any Proprietary Information for its own purposes (other than in connection with this Agreement) or for the benefit of any Person, without the prior written approval of the Transferor, which approval may be granted or withheld by the Transferor in its sole discretion; provided, however, that nothing herein shall limit the right of the Transferee to provide any Proprietary Information to any Governing Authority having jurisdiction over or asserting a right to obtain such information (including as part of the application for any Authorization); provided, that (i) such Governing Authority requests that such Proprietary Information be provided, and (ii) the Transferee promptly advises the Transferor of any request for such information by such Governing Authority and cooperates in giving the Transferor an opportunity to present objections, requests for limitation or a protective order, and/or requests for confidentiality or other restrictions on disclosure or

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access, to such Governing Authority. Each Party’s obligation to maintain Proprietary Information in confidence shall be deemed performed if such Party observes, with respect thereto, the same safeguards and precautions which such Party observes with respect to its own proprietary information of the same or similar kind.

16.2. Definition of Proprietary Information

The term “Proprietary Information” means all information, written or oral, which has been or is disclosed by the Transferor, or by any Affiliate or Associate of the Transferor, or which otherwise becomes known to the Transferee, or to any Affiliate, Associate or other party in a confidential relationship with, the Transferee, and which (x) relates to matters such as patents, trade secrets, research and development activities, draft or final contracts or other business arrangements, books and records, budgets, cost estimates, pro forma calculations, engineering work product, environmental compliance, vendor lists, suppliers, manufacturing processes, energy consumption, pricing information, private processes, and other similar information, as may exist from time to time, or (y) the Transferor expressly designates in writing to be confidential. However, Proprietary Information shall exclude information falling into any of the following categories:

(a) Information that, at the time of disclosure hereunder, is in the public domain, other than information that entered the public domain by breach of this or any other agreement, or in violation of any other applicable Law;

(b) Information that, after disclosure hereunder, enters the public domain, other than information that entered the public domain by breach of this or any other agreement, or in violation of any other applicable Law;

(c) Information, other than that obtained from third parties, that prior to disclosure hereunder, was already in the recipient’s possession, either without limitation on disclosure to others or subsequently becoming free of such limitation;

(d) Information obtained by the recipient from a third party having an independent right to disclose the information; or

(e) Information that is available through independent research without use of or access to the Proprietary Information.

16.3. Limitations on Required Disclosure

Each Party agrees that it will make available Proprietary Information received from the other Party to its own Affiliates and Associates only on a need-to-know basis, and that all Persons to whom such Proprietary Information is made available will be made aware of the confidential nature of such Proprietary Information, and will be required to agree to hold such Proprietary Information in confidence under terms substantially identical to the terms hereof.

16.4. Remedies

In the event of a breach or threatened breach of the provisions of Section 16.1 above by any Transferee, the Transferor shall be entitled to an injunction restraining such Party from such breach. Nothing contained in this Agreement (including Section 10.4) shall be construed as

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prohibiting the Transferor from pursuing any other remedies available at law or in equity for such breach or threatened breach of this Agreement.

16.5. Survival of Confidentiality

The provisions of this Article XVI shall survive the expiration or termination of this Agreement for a period of three (3) years.

ARTICLE XVII: INSURANCE

17.1. Coverage and Amounts of Seller

During the Term, Seller shall procure, pay premiums for and maintain in full force and effect the insurance coverages described below.

(a) Worker’s Compensation Insurance with statutory limits as required by the Laws of the State of Wisconsin, and Employer’s Liability with minimum limits of $1 million or as established by state or federal Law, if applicable. This insurance shall include all applicable maritime coverages as required by Law. This policy is to be endorsed to include a waiver of subrogation in favor of the Buyer.

(b) Commercial General and Umbrella/Excess Liability insurance, including coverage for (i) premises/operations, (ii) independent contractor, (iii) products and completed operations, (iv) broad form contractual liability, (v) broad form property damage, (vi) explosion, collapse and underground damage exclusion deletion, and (vii) personal injury, all with limits of not less than $25,000,000 each occurrence and in the aggregate.

(c) Business Auto Liability Insurance, covering all vehicles and automobiles whether owned, leased, or rented when used by Seller in connection with performance of this Agreement and including commercially reasonable coverage for each accident of bodily injury and property damage.

(d) Nuclear primary and excess property insurance in the amount that is reasonably consistent with the custom in the commercial nuclear power industry and which, at a minimum, satisfies the requirements of 10 CFR 50.54(w), currently $1.06 billion. Deductibles shall be reasonably consistent with the custom in the commercial nuclear power industry, but shall not exceed $5,000,000 without the written consent of Buyer, such consent not to be unreasonably withheld.

(e) Nuclear liability insurance from American Nuclear Insurers in accordance with the Price Anderson Act until such time as the NRC shall release Seller from this obligation. Should the Price Anderson Act be repealed, the Seller shall at its cost, provide insurance or other similar financial protection affording coverage consistent with coverages maintained for other nuclear power plants from the commercial marketplace to the extent such coverage is commercially available and to the extent that such coverage is available at commercially reasonable rates. Such insurance shall include, at a minimum, the following policies (as such are in effect for Unit 1 and Unit 2 as of the Effective Date):

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(i) Facility Form

(ii) Secondary Financial Protection

(iii) Master Worker

(iv) Suppliers and Transporters

(f) NEIL nuclear business interruption and extra expense insurance in an amount that is reasonably consistent with the custom in the commercial nuclear power industry, but only to the extent of available limits remaining and in coordination with the amount purchased by the Buyer. Seller hereby agrees that the Buyer has an insurable interest in business interruption and extra expense created by the insurable events making power from the plant unavailable. Seller acknowledges that NEIL insurance covers this exposure and agrees that Buyer is entitled to purchase NEIL coverage on its own behalf in an amount up to 5% of the total available limit offered by NEIL; provided, however, that Buyer shall be entitled to increase such coverage up to a minimum of 10%, but no greater than 25%, of the total available limit offered by NEIL in the event that Buyer’s participation in NEIL’s non-nuclear insurance program is terminated by NEIL; provided, further, that the amount of coverage which Buyer is entitled to obtain shall be no greater than the amount reasonably necessary to permit Buyer to realize the full benefits of Buyer’s NEIL member policyholder percentage.

(g) Notwithstanding the foregoing, Seller may self-insure to meet the minimum insurance requirements above to the extent it maintains a self-insurance program; provided that Seller (or its guarantor’s) Credit Rating is rated Investment Grade or better and that its self-insurance program meets the above minimum insurance requirements. Self-insurance shall be approved and recognized by the State of Wisconsin for workers compensation and automobile liability. Self-insurance amounts shall not exceed the maximum for each line of coverage or $5 million in the aggregate. For any period of time that Seller (or its guarantor’s) does not have an Investment Grade Credit Rating, Seller shall comply with the above minimum insurance requirements. In the event that Seller is permitted to self-insure pursuant to this section, Seller shall notify Buyer that Seller meets the requirements to self-insure and that its self-insurance program meets the above minimum insurance requirements.

17.2. Insurance Certificates

On the Effective Date, and thereafter from time to time at the request of Buyer, Seller shall provide certificates of insurance from insurance companies having a Best rating of A minus or better confirming that the insurance coverages required herein are maintained. Such certificates shall provide that Buyer be given thirty (30) days prior written notice by the insurer, or its authorized representative, of any cancellation and ten (10) days’ prior written notice due to cancellation for non-payment of premiums for any required coverage provided by such insurer as evidenced by the certificates. In addition, Seller agrees to provide notice to Buyer of any material change in the insurance coverages or policies required hereby.

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17.3. Coverage For Full Term

All required coverages shall remain in full force and effect during the Term. Seller’s liability under this Agreement shall not be limited to or by the insurance coverages required by this Agreement.

ARTICLE XVIII: ASSIGNMENT

18.1. Binding Effect

This Agreement shall be binding upon and shall inure to the benefit of the Parties and their respective successors and permitted assignees.

18.2. Assignment

(a) Subject to Section 2.10, Seller may assign its rights or delegate its duties under this Agreement with the prior written consent of Buyer in connection with any assignment or sale of the Facilities; provided, that the assignee, either directly or through Affiliates, is approved as a licensee to own and/or operate the Facilities by the NRC; provided, further, that Seller shall not assign this Agreement or sell the Facilities (or any portion thereof) to any Person that (i) does not have a Credit Rating equal to or better than Investment Grade, or (ii) cannot replace the Seller Performance Security with replacement security consisting of (A) a guaranty or guaranties from a guarantor with a Credit Rating equal to or better than Investment Grade, or (B) other Seller Performance Security; and provided, further, that the assigning Party shall provide prompt prior written notice of such assignment to the other Party and the assuming Person agrees in writing to assume all obligations under this Agreement. An assignee that meets the requirements of all of the foregoing provisos in the preceding sentence shall be deemed a “Permitted Assignee.” Once a Permitted Assignee provides such replacement security, any Seller Performance Security provided by Seller/assignor shall be promptly returned to Seller/assignor.

(b) Seller shall also have the right, without the consent of Buyer, to assign its rights or delegate its duties under this Agreement to an Affiliate of Seller, provided that all Seller Performance Security requirements under this Agreement remain satisfied. An Affiliate that meets the requirements of the preceding sentence shall be deemed a “Permitted Assignee.”

(c) Seller shall have the right to assign all or a portion of its rights or obligations under this Agreement to any lender providing financing for Seller’s acquisition of the Facilities as collateral security for obligations under the financing documents entered into with such lenders; provided, that (a) Seller first provides Buyer with written notice of not less than 60 days of such collateral assignment; and (b) Buyer consents in good faith to the form of collateral assignment and related documentation.

(d) Buyer shall have the right, with the prior written consent of Seller (such consent not to be unreasonably withheld), to assign its rights or delegate its duties under this Agreement to a non-Affiliate, provided that such assignee has a Credit Rating

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equal to or better than Investment Grade, or provides Seller with other evidence reasonably satisfactory to Seller of its financial ability to perform Buyer’s obligations hereunder.

(e) Buyer shall have the right, without the consent of Seller, to assign its rights or delegate its duties under this Agreement (A) to an Affiliate of Buyer or an entity that is part of the Wisconsin Energy Group (a “Related Entity”); provided, that such Affiliate or Related Entity is an entity with an Investment Grade Credit Rating or (B) if it shall merge into, be consolidated with, or reorganized pursuant to a divestiture in such a way that the surviving entity is, or on the date of the merger, consolidation, or reorganization, will be bound by all of the obligations under this Agreement; provided, further, that if such assignee (or parent or affiliate of such assignee) does not possess an Investment Grade Credit Rating at the time of such assignment, then Buyer, or any Affiliate of Buyer with an Investment Grade Credit Rating, shall provide to Seller a guaranty of assignee’s payment obligations under this Agreement.

18.3. Change in Control

Seller covenants and agrees that without the express written consent of Buyer any Change in Control of Seller shall be prohibited; provided, however, that notwithstanding the foregoing, if the Person acquiring the control of Seller meets the requirements of a Permitted Assignee, Buyer’s consent shall not be required.

ARTICLE XIX: DISPUTE RESOLUTION

19.1. General Provisions

Every Dispute between the Parties arising out of or in connection with this Agreement shall be resolved in accordance with this Article XIX, to the extent permitted by law.

19.2. Negotiation

In the event of a Dispute, the Parties shall in good faith attempt to resolve such Dispute by negotiations through the Administrative Committee. Either Operating Contact may request the other to meet within seven (7) days at a mutually agreed upon time and place. Such request must be in the form of a written notice that sets forth the nature of the controversy or claim. If the Dispute that gave rise to such controversy or claim is not resolved within thirty (30) days from the date of the first meeting of the Administrative Committee (or, if the Administrative Committee fails to meet within the applicable period required by this Section 19.2), the Administrative Committee shall refer the Dispute to senior executives, who shall have authority to settle the Dispute (the “Senior Executives”). Thereupon, each Operating Contact shall in no later than fifteen (15) days prepare and deliver to the Senior Executives and the other Operating Contact a memorandum stating the issues in dispute and their positions, summarizing any negotiations which have taken place and attaching relevant documents. The Senior Executives shall meet for negotiations within fifteen (15) days from the exchange of such memoranda, at a mutually agreed time and place. If the Dispute is not resolved under this Section 19.2 within ten (10) days of the first meeting of the Senior

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Executives, then, in accordance with this Agreement, either Party may pursue any remedy it may have at law or in equity.

19.3. Binding Upon Parties

In the resolution of any Dispute pursuant to this Article XIX, each of the Parties, their Operating Contacts and Senior Executives shall give effect to this Article XIX.

19.4. Continued Performance

Subject to the provisions of Section 10.2, notwithstanding any Dispute between the Parties and pending the final decision of a Dispute, each Party shall continue to perform its respective obligations under this Agreement.

ARTICLE XX: COMPLIANCE WITH LAWS; TAXES

20.1. Compliance with Laws

Each Party shall at all times comply with all applicable Laws relating to the performance of its obligations under this Agreement. Each Party shall give all required notices, shall procure and maintain all necessary Authorizations and inspections necessary for its performance of this Agreement, and shall pay all charges and fees in connection therewith.

20.2. Mobile-Sierra

It is the intent of the Parties that the rates and all other terms and conditions of the services provided hereunder shall not be subject to change under Sections 205 or 206 of the Federal Power Act of 1935, 16 U.S.C. § 791 et seq., (or any successor legislation) without the consent of both Parties. Each of the Parties hereto agrees not to unilaterally file with the FERC a change in the rates, terms or conditions of this Agreement. Moreover, absent agreement of all Parties to a proposed change, the standard of review for changes to any rate, term or condition of this Agreement proposed by a non-Party or the FERC or any other Governing Authority acting sua sponte shall be the “public interest” standard of review set forth in United Gas Pipe Line Co. v. Mobile Gas Services Corp., 350 U.S. 332 (1956) and Federal Power Commission v. Sierra Pac Power Co., 350 U.S. 348 (1956). To the extent that the FERC adopts specific language that parties must incorporate into agreements in order to bind FERC, third parties and themselves to a public interest standard of review, the Parties hereby incorporate such language herein by reference.

20.3. Taxes and Other Charges

(a) Seller’s Taxes

Seller is liable for and shall pay, or cause to be paid, or reimburse Buyer if Buyer has paid, all Taxes applicable to any transaction arising out of this Agreement at or prior to the Delivery Point on the sale of Energy, Capacity or Ancillary Services to Buyer. Seller shall indemnify, defend and hold harmless Buyer from any Claims for such Taxes applicable at or prior to the Delivery Point.

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(b) Buyer’s Taxes

Buyer is liable for and shall pay, or cause to be paid, or reimburse Seller if Seller has paid, all Taxes applicable to any transaction arising out of this Agreement after the Delivery Point on the sale by Buyer of Energy, Capacity or Ancillary Services. Buyer shall indemnify, defend and hold harmless Seller from any Claims for such Taxes applicable after the Delivery Point.

(c) Certificate of Tax Exemption

Either Party, upon written request of the other, shall provide a certificate of exemption or other reasonably satisfactory evidence of exemption if either Party is exempt from Taxes.

(d) Gross Receipts Tax

The Buyer is liable for any Gross Receipts Tax applicable to any transaction arising out of this Agreement. If Seller pays any such Gross Receipts Tax, then Seller shall include such amounts so paid in the next Billing Cycle invoice as provided in Sections 3.1(a) and 7.1 (the “Gross Receipts Tax Payment”).

ARTICLE XXI: CHANGE IN LAW

21.1. Change in Law

In the event there is a change or changes in any Laws or interpretations thereof, enacted or adopted after execution of this Agreement or any Law or interpretation thereof, enacted or adopted after the Effective Date results in the application of any Law to a new or different class of parties (a “Change in Law”), the Party affected by such Change in Law shall be responsible for the burden and, except as provided in Section 21.2 or elsewhere in this Agreement, shall be permitted to retain the benefits of such Change in Law. For the avoidance of doubt, except as specifically provided elsewhere in this Agreement, the terms and conditions of this Agreement shall not be subject to change due to a Change in Law.

21.2. Future Attributes

In the event that, at any time during the Term, a Change in Law occurs that causes any aspect of the Facilities as in existence on the date hereof to become a tradable attribute (e.g., emission credit, renewable energy credit, environmental credit, “Green” credit, etc.) or otherwise to have a market value, Buyer shall be entitled to 100% of such tradable attribute and the benefits of such attribute for the first seven Calendar Years following the Effective Date and thereafter 50% for the remainder of the Term (with the other 50% belonging to Seller), and the Parties shall in good faith negotiate to reflect such allocation to Buyer at no additional cost to Buyer. Seller agrees to execute a separate agreement to transfer to Buyer any revenue, or any other benefit received by Seller for such tradable attributes, and to execute all documents and agreements and take all steps necessary to permit Buyer to market Buyer’s tradable attributes. Failing any such agreement, Seller agrees to credit to Buyer such revenues as provided in Section 3.1(b) until such time as an agreement is executed.

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21.3. MISO Changes

In the event that, at any time during the Term, the applicable Transmission Provider or Transmission Provider Tariff is changed or if an applicable regional reliability council issues a directive, rule or regulation that materially adversely affects Seller or Buyer so that the benefits and burdens of this Agreement are no longer as contemplated by the original intentions of the Parties, the Parties shall use their commercially reasonable efforts to reform this Agreement in order to give effect to the original intentions of the Parties regarding the appropriate allocation of benefits and burdens to each Party.

ARTICLE XXII: MISCELLANEOUS

22.1. Recording Telephone Conversations

Each Party agrees that the other Party or its representatives may record any or all telephone conversations between representatives of the two Parties pursuant to or relating to this Agreement. Each Party is hereby advised that telephone conversations with Buyer’s personnel relating to Section 2.4 and Article IV are routinely recorded and each Party agrees to obtain any necessary consent of its personnel regarding such recording. Each Party further agrees that such recorded telephone conversations shall not be deemed inadmissible in any arbitration proceeding or court of law by virtue of the recorded nature of the conversations. Each Party hereby waives any objection to the introduction of such recorded telephone conversations as evidence in any court of law to the extent such objections are based on the recorded nature of such conversations.

22.2. Governing Law

(a) This Agreement shall be governed by and construed in accordance with the law of the State of Wisconsin as to all matters, including but not limited to matters of validity, construction, effect, performance and remedies.

(b) The Parties hereby irrevocably submit to the exclusive jurisdiction of the United States District Court for the Eastern District of Wisconsin or, in the event that jurisdiction for any matter cannot be established in the United States District Court for the Eastern District of Wisconsin, in the Circuit Court for Manitowoc County, solely in respect of the interpretation and enforcement of the provisions of this Agreement and of the documents referred to in this Agreement, and in respect of the transactions contemplated hereby, and hereby waive, and agree not to assert, as a defense in any action, suit or proceeding for the interpretation or enforcement hereof or of any such document, that it is not subject thereto or that such action, suit or proceeding may not be brought or is not maintainable in said courts or that the venue thereof may not be appropriate or that this Agreement or any such document may not be enforced in or by such courts, and the Parties hereto irrevocably agree that all claims with respect to such action or proceeding shall be heard and determined in such a court. The Parties hereby consent to and grant any such court jurisdiction over the Person of such Parties solely for such purpose and over the subject matter of such dispute and agree that mailing of process or other papers in connection with any such action or proceeding in the

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manner provided in Article XV hereof or in such other manner as may be permitted by Law shall be valid and sufficient service thereof.

(c) EACH PARTY ACKNOWLEDGES AND AGREES THAT ANY CONTROVERSY WHICH MAY ARISE UNDER THIS AGREEMENT IS LIKELY TO INVOLVE COMPLICATED AND DIFFICULT ISSUES, AND THEREFORE EACH PARTY HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY RIGHT A PARTY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION RESULTING FROM, ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. EACH PARTY CERTIFIES AND ACKNOWLEDGES THAT (i) NO REPRESENTATIVE, AGENT OR ATTORNEY OF THE OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER, (ii) EACH PARTY UNDERSTANDS AND HAS CONSIDERED THE IMPLICATIONS OF THIS WAIVER, (iii) EACH PARTY MAKES THIS WAIVER VOLUNTARILY AND (iv) EACH PARTY HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 22.2(c).

22.3. Entire Agreement; Amendment

This Agreement constitutes the entire agreement between the Parties pertaining to the subject matter of this Agreement, and supersedes and terminates any letters of intent and all prior and contemporaneous agreements, understandings, negotiations and discussions with the Parties, whether oral or written, regarding said subject matter, and there are no warranties, representations or other agreements between the Parties in connection with the subject matter of this Agreement, except as specifically set forth in this Agreement. No amendment, supplement, modification, waiver or termination of this Agreement shall be binding unless executed in writing by the Party to be bound thereby. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provision of this Agreement, whether or not similar, nor shall such waiver constitute a continuing waiver unless otherwise expressly provided.

22.4. No Implied Waiver

The failure or delay of any Party hereto to enforce at any time any of the provisions of this Agreement, or to require at any time performance of the other Party hereto of any of the provisions hereof, shall neither be construed to be a waiver of such provisions nor affect the validity of this Agreement or any part hereof or the right of such Party thereafter to enforce each and every such provision.

22.5. Severability

If any provision of this Agreement shall be determined to be unenforceable, void or otherwise contrary to any Law, such condition shall in no manner operate to render any other provision of this Agreement unenforceable, void or contrary to any Law, and this Agreement shall continue in force in accordance with the remaining terms and provisions hereof, unless such condition invalidates the purpose or intent of this Agreement. In the

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event that any of the provisions, or portions or applications thereof, of this Agreement are held unenforceable or invalid by any court of competent jurisdiction, Seller and Buyer shall negotiate in good faith to attempt to implement a reformation of the provisions of this Agreement with a view toward effecting the purposes of this Agreement by replacing the offending provision with a valid provision the economic effect of which comes as close as possible to that of the offending provision.

22.6. No Exclusivity/Dedication of Assets

This Agreement is not intended to be an exclusive arrangement between Buyer and Seller. No undertaking by a Party hereto to the other Party hereto under any provision of this Agreement shall constitute the dedication of that Party’s assets or any portion thereof to the public.

22.7. Expenses

Each Party shall pay the fees and expenses of its respective counsel, accountants, brokers, consultants, investment bankers and other experts incident to the negotiation and preparation of this Agreement.

22.8. Counterparts

This Agreement may be executed simultaneously in two (2) or more counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument.

22.9. Survival

The applicable provisions of this Agreement shall continue in effect after the termination of this Agreement, to the extent necessary to provide for final billing and adjustment, and to make other appropriate settlements hereunder. Those provisions hereof that by their express terms are intended to survive this Agreement shall so survive for the periods indicated. Without limitation of the foregoing, Article VII, Article VIII, Article X, Article XII and Article XIX shall survive the termination of this Agreement.

22.10. Individual Responsibility

This Agreement shall not be construed to create or give rise to any partnership, joint venture, agency or other relationship between Seller and Buyer other than that of purchaser and seller. Each Party shall be solely and individually responsible for its own covenants, obligations and liabilities as herein provided, and the Parties do not intend to create any joint, several or joint and several obligations to any third party. Neither this Agreement, nor any grant, lease or license related thereto, shall create or be construed to create any new entity, such as a partnership, association or joint venture.

22.11. No Duty To Third Parties

This Agreement is for the sole benefit of the Parties hereto, and except as specifically provided herein nothing in this Agreement or any action taken hereunder shall be construed to create any duty, liability or standard of care to any Person not a party to this Agreement. Except as specifically provided herein, no Person shall have any rights or interest, direct or

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indirect, in this Agreement or the services to be provided hereunder, or both, except Buyer and Seller. The Parties specifically disclaim any intent to create any rights in any Person as a third-party beneficiary to this Agreement or the services to be provided hereunder, or both.

22.12. Forward Contract

The Parties acknowledge and agree that this Agreement, the transactions contemplated hereby, and any instrument(s) that may be provided by either Party hereunder (including any guaranty) shall each, and together, constitute one and the same “forward contract” within the meaning of the United States Bankruptcy Code, and Seller, Seller’s Guarantor and Buyer shall each constitute a “forward contract merchant” under the United Stated Bankruptcy Code.

22.13. Press Releases

Neither Buyer nor Seller shall, without the approval of the other, make any press release or other public announcement which describes the substantive terms of this Agreement; provided, that subject to Article XVI the foregoing shall not preclude communications or disclosures (i) necessary to implement the provisions of this Agreement, (ii) to comply with accounting and United States Securities and Exchange Commission disclosure obligations or (iii) in connection with the application for any Authorization.

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IN WITNESS WHEREOF, each of the Parties hereto has caused this Agreement to be duly executed on its behalf by its duly authorized officer as of the date first set forth above.

FPL ENERGY POINT BEACH, LLC
By:	/s/ Michael O’Sullivan
Name:	Michael O’Sullivan
Title:	Vice-President
WISCONSIN ELECTRIC POWER COMPANY
By:	/s/ Frederick D. Kuester
Name:	Frederick D. Kuester
Title:	Executive Vice President and
	Chief Operating Officer

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EXHIBIT A

Delivered Energy Charges

Year	Delivered Energy Charge (in $/MWh)
2007	[**]
2008	[**]
2009	[**]
2010	[**]
2011	[**]
2012	[**]
2013	[**]
2014	[**]
2015	[**]
2016	[**]
2017	[**]
2018	[**]
2019	[**]
2020	[**]
2021	[**]
2022	[**]
2023	[**]
2024	[**]

For each month during the Term, the Delivered Energy Charge set forth above shall apply to all Capacity, Energy and Ancillary Services purchased by Buyer under the Power Purchase Agreement, including any Uprate accepted hereunder. The Delivered Energy Charge shall be adjusted by multiplying the amount of such charge by the Delivered Energy Charge Shaping Factor for such month as set forth on Exhibit C hereto.

A-1

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EXHIBIT B

Buyer’s Capacity Amount

For any given month during the Term, the Buyer’s Capacity Amount shall be as set forth in the table below:

Column A	Column B			Column C
Month	Capacity of the Facilities (MW)			Buyer’s Capacity Amount
	Unit 1	Unit 2	CT
January	517	519	19	1055
February	517	519	18	1054
March	517	519	17	1053
April	517	519	16	1052
May	517	519	16	1052
June	517	519	15	1051
July	512	514	15	1041
August	512	514	15	1041
September	512	514	15	1041
October	517	519	16	1052
November	517	519	17	1053
December	517	519	18	1054

Column A – Depicts the month of the year.

Column B – Will be updated over the Term of this Agreement to reflect the Capacity of the Facilities (including the Planned Uprate, but excluding Capacity related to any Uprate not accepted by Buyer pursuant to Section 2.9(a)), as determined in accordance with the MAIN Guide No. 3A Standards (or with the Effective Capacity Requirements, if applicable). CT Capacity will be included in Buyer’s Capacity Amount only in the event that Buyer has documented to the reasonable satisfaction of the applicable regional reliability council and/or MISO, as applicable, that the CT is interconnected and available to provide Capacity and Energy to the Transmission Owner’s system.

Column C – Shall be the sum of the subcolumns of Column B as those values may be revised during the Term of this Agreement.

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EXHIBIT C

Delivered Energy Charge Shaping Factor

Month	On-Peak Hours	Off-Peak Hours
January	[**]	[**]
February	[**]	[**]
March	[**]	[**]
April	[**]	[**]
May	[**]	[**]
June	[**]	[**]
July	[**]	[**]
August	[**]	[**]
September	[**]	[**]
October	[**]	[**]
November	[**]	[**]
December	[**]	[**]

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EXHIBIT D

DIAGRAM OF METERING DEVICES

The Metering Devices identified above as numbers 3, 4, 7 and 8 are revenue quality meters.

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EXHIBIT E

FORM OF SELLER’S GUARANTY

GUARANTY AGREEMENT

THIS GUARANTY made as of the      day of December, 2006 (the “Guaranty”), from FPL GROUP CAPITAL INC., a corporation organized and existing under the laws of the State of Florida and having its principal place of business in 700 Juno Universe Boulevard, Juno Beach, FL 33408 being hereinafter referred to as the “Guarantor,” to WISCONSIN ELECTRIC POWER COMPANY, a Wisconsin corporation with a principal place of business in Milwaukee, Wisconsin (“WEPCO”).

WITNESSETH:

WHEREAS, WEPCO and FPL ENERGY POINT BEACH, LLC, a limited liability company organized under the laws of Wisconsin (“Seller”) have entered into a Power Purchase Agreement dated as of the date hereof (the “PPA”); and

WHEREAS, Seller is an affiliate of the Guarantor and the Guarantor will benefit from the transactions contemplated by the PPA; and

WHEREAS, WEPCO has agreed to sign the PPA on the condition, among others, that the Guarantor executes and delivers this Guaranty; and

NOW, THEREFORE, to induce WEPCO to sign the PPA and consummate the transactions contemplated thereby and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Guarantor does hereby warrant to and covenant and agree with WEPCO as follows:

ARTICLE 1—DEFINITIONS

1.1 Definitions. Unless otherwise defined in this Guaranty, capitalized terms have the meanings specified or referred to in the PPA.

ARTICLE 2—GUARANTY

2.1 Guaranty. Subject to the provisions of Section 2.3(c) hereof, Guarantor hereby unconditionally and irrevocably guarantees to WEPCO and its successors and permitted assigns, the prompt and full payment and performance of any and all obligations of the Seller to WEPCO when due, whether by acceleration or otherwise, with such interest as may accrue thereon, under the PPA or under any other documents or instruments now or hereafter evidencing, securing or otherwise relating to the PPA (the “Guaranteed Obligations”); provided, however, that Guarantor’s liability under this Guaranty, and the maximum recovery from the Guarantor

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pursuant to this Guaranty, shall in no event exceed [**] in the aggregate (the “Maximum Recovery Amount”), plus any reasonable expenses required to be paid by Guarantor pursuant to Section 4.4 herein. If Seller fails to pay or perform any Guaranteed Obligation, following the date the same becomes due and payable (and after giving effect to all applicable periods of grace and notice), then, subject to the limit of the Maximum Recovery Amount, Guarantor will pay or perform such obligation within three Business Days following written demand by WEPCO to the Guarantor.

2.2 Guaranty Absolute. (a) Subject to the provisions hereof, the Guarantor absolutely guarantees that the Guaranteed Obligations will be paid and performed strictly in accordance with the terms of the PPA, regardless of any law or regulation now or hereafter in effect in any jurisdiction affecting any of such terms or the rights of WEPCO with respect thereto. This Guaranty constitutes a guarantee of payment and performance and not of collection. The obligations of the Guarantor hereunder are several from the Seller or any other person, and are primary obligations concerning which the Guarantor is the principal obligor. The liability of Guarantor under this Guaranty shall be direct and immediate and not conditional or contingent upon the pursuit of any remedies against the Seller or any other person, nor against securities or liens available to WEPCO, its successors or permitted assigns. Subject to the provisions hereof, the liability of the Guarantor under this Guaranty shall be irrevocable, absolute and unconditional irrespective of, and the Guarantor hereby irrevocably waives any defenses it may now have or hereafter acquire in any way relating to, any or all of:

(i) any change in the time, manner or place of payment of, or in any other term of, all or any of the Guaranteed Obligations, or any other amendment, modification or waiver of, or any consent to departure from, the terms of such Guaranteed Obligations;

(ii) any change, restructuring or termination of the corporate structure or existence of the Seller or any of its subsidiaries;

(iii) any lack of validity or enforceability of the PPA or any agreement or instrument relating thereto;

(iv) any failure of WEPCO to disclose to either the Seller or the Guarantor any information relating to the business, condition (financial or otherwise), operations, performance, properties or prospects of either the Seller or any of its subsidiaries now or hereafter known to WEPCO (the Guarantor waiving any duty on the part of WEPCO to disclose such information);

(v) any lack of due diligence by WEPCO in the collection or protection of or realization upon any collateral securing the Guaranteed Obligations; or

(vi) any circumstance whatsoever or any act of WEPCO or any existence of or reliance on any representation by WEPCO that might otherwise constitute

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a legal or equitable defense available to, or a discharge of, a guarantor or surety.

This Guaranty shall continue to be effective or be reinstated, as the case may be, if at any time any payment of any of the Guaranteed Obligations is rescinded or must otherwise be returned by WEPCO or any other Person upon the insolvency, bankruptcy, or reorganization of the Seller or otherwise, all as though such payment had not been made.

(b) No action which WEPCO shall take or fail to take in connection with the Guaranteed Obligations, or any security for the payment or performance of any of the Guaranteed Obligations, nor any course of dealing with Seller or any other person, shall release Guarantor’s obligations hereunder, affect this Guaranty in any way, or afford Guarantor any recourse against WEPCO.

(c) In the case of an Event of Default under the PPA or with regard to any of the Guaranteed Obligations, Guarantor hereby consents and agrees that WEPCO shall have the right to enforce its rights, powers, and remedies thereunder or hereunder or under any other instrument now or hereafter evidencing, securing, or otherwise relating to the Guaranteed Obligations, and apply any payments or credits received by the Seller or Guarantor or realized from any security, in any manner and in any order as WEPCO, in its sole discretion, shall see fit, and all rights, powers, and remedies available to WEPCO in such event shall be nonexclusive and cumulative of all other rights, powers, and remedies provided thereunder or hereunder or by law or in equity. If the Guaranteed Obligations are partially paid by reason of the election of WEPCO, its successors or assigns, to pursue any of the remedies available to WEPCO, or if such indebtedness is otherwise partially paid, this Guaranty shall nevertheless remain in full force and effect, and Guarantor shall ,subject to the Maximum Recovery Amount, remain liable for the entire balance of the Guaranteed Obligations even though any rights which Guarantor may have against the Seller may be destroyed or diminished by the exercise of any such remedy.

2.3 Waivers and Acknowledgments. (a) Guarantor hereby waives promptness, diligence, presentment, demand of payment, acceptance, notice of acceptance, protest, notice of dishonor and any other notices with respect to any of the Guaranteed Obligations and this Guaranty.

(b) The Guarantor hereby unconditionally and irrevocably waives any right to revoke this Guaranty and acknowledges that this Guaranty is continuing in nature and applies to all Guaranteed Obligations, whether existing now or in the future, subject however to the limit of the Maximum Recovery Amount; provided, however, that this Guaranty shall automatically terminate upon receipt by WEPCO of replacement Seller Performance Security meeting the requirements of Section 8.1 of the PPA. The provisions of this Guaranty shall extend and be applicable to all renewals, amendments, extensions, consolidations, and modifications of the PPA.

(c) The Guarantor hereby unconditionally and irrevocably waives any defense based on any right of set-off or counterclaim against or in respect of the obligations of the Guarantor

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hereunder; provided, however, that Guarantor shall have, and expressly reserves to itself, the same defenses available to the Seller with respect to any payment obligations arising under the PPA, except for defenses arising out of bankruptcy, insolvency, dissolution or liquidation of the Seller.

2.4 Subrogation. Notwithstanding any payment or payments or performance made by the Guarantor hereunder, the Guarantor hereby irrevocably waives any and all rights of subrogation to the rights of WEPCO against the Seller and any and all rights of reimbursement, assignment, indemnification or implied contract or any similar rights (including without limitation any statutory rights of subrogation under Section 509 of the Bankruptcy Code, 11 U.S.C. § 509) against the Seller or against any other guarantor of all or any part of the Guaranteed Obligations until such time as the Guaranteed Obligations have been indefeasibly paid or performed in full. If, notwithstanding the foregoing, any amount shall be paid to the Guarantor on account of such subrogation or similar rights at any time when all of the Guaranteed Obligations shall not have been indefeasibly paid in full, such amount shall be held by the Guarantor in trust for WEPCO and shall be turned over to WEPCO in the exact form received by the Guarantor, to be applied against the Guaranteed Obligations in such order as WEPCO may determine in its sole discretion.

2.5 Reporting. Guarantor shall promptly notify WEPCO of any Insufficient Credit Status relating to Guarantor or any circumstance that results in Seller’s failure to be in compliance with the Seller Performance Security requirements of Article VIII of the PPA. From time to time, at WEPCO’s written request, Guarantor shall provide WEPCO promptly with such evidence as WEPCO may reasonably request that this Guaranty is in full compliance with the PPA.

ARTICLE 3—REPRESENTATIONS AND WARRANTIES

The Guarantor hereby represents and warrants as follows:

3.1 Organization. The Guarantor is a corporation duly organized, validly existing and in good standing under the laws of the state of Florida.

3.2 Authorization; No Conflict. The execution and delivery by the Guarantor of this Guaranty, and the performance by the Guarantor of its obligations hereunder (i) are within the Guarantor’s corporate powers, (ii) have been duly authorized by all necessary corporate action, (iii) do not contravene its Articles of Incorporation or any law or regulation applicable to or binding on the Guarantor or any of its properties and (iv) do not require the consent or approval of any person which has not already been obtained or the satisfaction or waiver of any conditions precedent to the effectiveness of this Guaranty that have not been satisfied or waived.

3.3 Enforceability. This Guaranty constitutes the legal, valid and binding obligation of the Guarantor enforceable against the Guarantor in accordance with its terms, except to the extent that such enforceability may be limited by applicable bankruptcy, insolvency, dissolution, reorganization, moratorium, liquidation or other similar laws affecting creditors’ rights generally

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and by general principles of equity (regardless of whether enforcement is sought in a proceeding in equity or at law).

3.4 No Bankruptcy Proceedings. There are no bankruptcy proceedings pending or being contemplated by Guarantor or, to its knowledge, threatened against it.

3.5 No Legal Proceedings. There are no legal proceedings pending against the Guarantor that would be reasonably likely to materially adversely affect the legality, validity or enforceability of this Guaranty.

ARTICLE 4—MISCELLANEOUS

4.1 Continuing Guaranty; Assignment. This Guaranty is a continuing guaranty and shall (i) remain in full force and effect until all of the Guaranteed Obligations have been satisfied, (ii) consistent with the terms hereof, apply to all Guaranteed Obligations whenever arising, (iii) be binding upon the Guarantor, its successors and assigns, and (iv) inure to the benefit of, and be enforceable by, WEPCO and its permitted assignees hereunder. The WEPCO may not assign or delegate its rights or obligations under this Guaranty without the prior written consent of the Guarantor, which consent shall not be unreasonably delayed or withheld. The Guarantor may not assign or delegate its rights or obligations under this Guaranty without (x) the prior written consent of WEPCO, which consent may be withheld in WEPCO’s sole discretion, and (y) a written assignment and assumption agreement in form and substance reasonably acceptable to WEPCO. Without prejudice to the survival of any of the other agreements of the Guarantor under this Guaranty, the agreements and obligations of the Guarantor contained in Section 4.4 (with respect to enforcement expenses) and the last sentence of Section 2.2(a) shall survive the payment in full of the Guaranteed Obligations and all of the other amounts payable under this Guaranty.

4.2 Notices. All notices, requests, demands and other communications which are required or may be given under this Guaranty shall be in writing and shall be deemed to have been duly given when actually received if (a) personally delivered; (b) transmitted by facsimile, electronic or digital transmission method; or (c) if sent by certified or registered mail, return receipt requested. In each case notice shall be sent:

(i) if to WEPCO:

Wisconsin Electric Power Company

333 West Everett Street, Room A214

Milwaukee, Wisconsin 53203

Attention: Treasurer

(ii) if to the Guarantor:

FPL Group Capital Inc

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700 Universe Boulevard

Juno Beach, FL 33408

Attention: Treasurer

or to such other place and with such other copies as WEPCO or the Guarantor may designate as to itself by written notice to the other pursuant to this Section 4.2. Delivery by facsimile of an executed counterpart of a signature page to any amendment or waiver of any provision of this Guaranty shall be effective as delivery of an original executed counterpart thereof.

4.3 Delay and Waiver. No failure on the part of WEPCO to exercise, and no delay in exercising, any right hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right hereunder preclude any other or further exercise thereof or the exercise of any other right. The remedies herein provided are cumulative and not exclusive of any remedies provided by law.

4.4 Expenses. The Guarantor agrees to pay or reimburse WEPCO and any permitted assignees of WEPCO on demand for its reasonable costs, charges and expenses (including reasonable fees and expenses of counsel) incurred in connection with the enforcement of this Guaranty or occasioned by any breach by the Guarantor of any of its obligations under this Guaranty should Guarantor be required to pay under this Guaranty.

4.5 Entire Agreement; Amendments. This Guaranty and any agreement, document or instrument attached hereto or referred to herein integrate all the terms and conditions mentioned herein or incidental hereto and supersede all oral negotiations and prior writings in respect to the subject matter hereof. In the event of any conflict between the terms, conditions and provisions of this Guaranty and any such agreement, document or instrument, the terms, conditions and provisions of this Guaranty shall prevail. This Guaranty may only be amended or modified by an instrument in writing signed by each of the Guarantor and WEPCO and any permitted assignees of WEPCO.

4.6 Headings. The headings of the various Sections of this Guaranty are for convenience of reference only and shall not modify, define or limit any of the terms or provisions hereof.

4.7 Governing Law; Consent to Jurisdiction. (a) This Guaranty shall be construed and interpreted, and the rights of the parties determined, in accordance with the law of the State of Wisconsin, without giving effect to principles of conflicts of law that would require the application of the laws of another jurisdiction.

(b) Each party hereto irrevocably and unconditionally agrees to the exclusive jurisdiction of the United States District Court for the Eastern District of Wisconsin or, in the event that jurisdiction for any matter cannot be established in the United States District Court for the Eastern District of Wisconsin, in the Circuit Court for Manitowoc County, solely in respect of the interpretation and enforcement of the provisions of this Guaranty and hereby waive, and agree not to assert, as a defense in any action, suit or proceeding for the interpretation or

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enforcement hereof that it is not subject thereto or that such action, suit or proceeding may not be brought or is not maintainable in said courts or that the venue thereof may not be appropriate or that this Guaranty may not be enforced in or by such courts, and the parties hereto irrevocably agree that all claims with respect to such action or proceeding shall be heard and determined in such a court. The parties hereby consent to and grant any such court jurisdiction over the person of such parties solely for such purpose and over the subject matter of such dispute and agree that mailing of process or other papers in connection with any such action or proceeding in the manner provided in Section 4.2 hereof or in such other manner as may be permitted by Law shall be valid and sufficient service thereof.

(c) THE GUARANTOR AND, BY ITS ACCEPTANCE OF THIS GUARANTY, WEPCO, HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR RELATING TO, THIS GUARANTY, OR THE ACTIONS OF ANY PARTY IN THE NEGOTIATION, ADMINISTRATION, PERFORMANCE OR ENFORCEMENT THEREOF.

4.8 Severability. Any provision of this Guaranty that shall be prohibited or unenforceable shall be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof.

IN WITNESS WHEREOF, the Guarantor has caused this Guaranty to be duly executed and delivered by its duly authorized representative as of the day and year first above written.

FPL Group Capital Inc.
By:
Name:	James L. Robo
Title:	Vice President

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WEPCO EXHIBIT F

FORM OF LETTER OF CREDIT

IRREVOCABLE STANDBY LETTER OF CREDIT No.             

[Date]

[Credit No.]

[Name and Address

of Beneficiary]

Dear Sirs:

We hereby establish in your favor, for the account of [NAME OF ACCOUNT PARTY] (“Account Party”), with respect to the Power Purchase Agreement dated as of [                    ] between [Account Party] and you (“Beneficiary”) (the “PPA”), our irrevocable standby letter of credit no. (the “Standby Letter of Credit”) whereby we hereby irrevocably authorize you to draw on us, in accordance with the terms and conditions hereinafter set forth, by your draft or drafts at sight, in the aggregate in an amount not to exceed                                          United States Dollars (U.S. $                     ).

Funds against this Standby Letter of Credit are available to you against your sight draft(s) drawn on us, referring thereon to the number and date of this Standby Letter of Credit, accompanied by a written and completed certificate executed by you in the form attached as Annex 1 hereto, with appropriate insertions. Multiple, partial drafts may be drawn hereunder. Such available funds shall not directly or indirectly constitute funds or collateral deposited with or for the bank account by the [Account Party], or pledged with or for the bank’s account by the [Account Party].

Presentation of such drafts, and such certificates shall be made on any day which is a business day for us at or prior to 5:00 p.m. (CPT) at our office located at Milwaukee, Wisconsin, or at any other office in the United States of America which may be designated by us in a written notice delivered to you. If such sight draft and such certificate are received at any such office, all in strict conformity with the terms and conditions of this Standby Letter of Credit, on or prior to the expiration date hereof, we hereby agree with you that we will duly honor the same within three (3) business days of such presentation. Notwithstanding the foregoing, Beneficiary may demand payment under this Standby Letter of Credit by telecopy or e-mail when promptly confirmed by written demand; however, actual disbursement of funds pursuant to a demand presented by telecopy or e-mail shall not occur until we are presented with the original Standby Letter of Credit.

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This Standby Letter of Credit is effective immediately and expires at 5:00 p.m. (CPT) on                     , 20    . It is a condition of this Standby Letter of Credit that it will be deemed automatically extended for successive periods of one year each from the present or any future expiration date under clause (b) above (but in no event later than                     , 20    ), unless we notify you, in writing, by certified or registered mail at your respective addresses, not less than ninety (90) days prior to any such date, that we have elected not to extend such expiration date for such additional period. Notwithstanding Article 16 of the UCP (as such term is defined below), any notice of our election not to extend the expiration date of this Standby Letter of Credit shall be effective only upon actual receipt by you and no such notice shall have any effect absent such actual receipt. In the event that the expiration date of this Standby Letter of Credit occurs at such time as the events described in Article 17 of the UCP (as such term is defined below) are occurring, said expiration date shall be automatically extended by a period of time equal to the duration of such events.

We hereby undertake that we will not modify, revoke or terminate this Standby Letter of Credit without your written consent. Except as stated herein, payment of drafts drawn under this Standby Letter of Credit is not subject to any condition or qualification. This Standby Letter of Credit sets forth in full the terms of our undertaking, and such undertaking shall not be modified, annulled or amplified by reference to any other document, instrument or agreement referred to herein or in which the Standby Letter of Credit is referred or to which the Standby Letter of Credit relates, and any such reference shall not be deemed to incorporate herein by reference any document, instrument or agreement. Our obligations hereunder are primary obligations that shall not be affected by the performance or non-performance by [Account Party] of any obligations under any loan agreement or under any agreement between [Account Party] and you or between [Account Party] and us or between [Account Party] and its agents.

We hereby waive any right to set off and apply any and all deposits (general or special, time or demand, provisional or final) or collateral at any time held and other indebtedness at any time owing by us to or for the credit of or the account of Account Party against any and all of the obligations of Account Party now or hereafter existing to reimburse us for our disbursements under this Standby Letter of Credit; provided, however, that each such right shall be reinstated if it is determined that such right would not lead to our being released, prevented or restrained from or delayed in, honoring any draft presented in accordance with this Standby Letter of Credit. The foregoing waiver is intended to defeat any possible claim that honor of this Standby Letter of Credit, or of any draft presented hereunder, may constitute a preferential transfer of the bankrupt account party’s property securing our right of reimbursement. Nothing herein shall be construed to support the validity of any such claim, to support any delay in our obligation to honor this Standby Letter of Credit or to detract from the independence of our obligation to honor this Standby Letter of Credit at the times and in accordance with the terms stated and incorporated by reference herein.

This Standby Letter of Credit is transferable in its entirety (but not in part). Each letter of credit issued upon any such transfer and assignment may be successively transferred and assigned. Transfer of this Standby Letter of Credit to any transferee shall be effected by the presentation to us of this Standby Letter of Credit accompanied by a certificate in the form attached as Annex 2 hereto, with appropriate insertions. Upon such presentation we shall forthwith issue an irrevocable

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letter of credit to such transferee with provisions therein consistent with this Standby Letter of Credit.

To the extent not contrary to the express terms hereof, this Standby Letter of Credit shall be governed by the Uniform Customs and Practice for Documentary Credits (1993 Revision), International Chamber of Commerce Publication No. 500 (herein referred to as the “UCP”), or by subsequent Uniform Customs and Practice fixed by subsequent Congresses of the International Chamber of Commerce. This Standby Letter of Credit shall be deemed to be a contract made under the laws of the State of Wisconsin and shall, as to matters not governed by the UCP, be governed by and construed in accordance with the laws of the State of Wisconsin.

Yours very truly,

[ISSUING BANK]

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ANNEX 1

CERTIFICATE

Re: Point Beach Nuclear Plant Power Purchase Agreement dated                     , 20     between [Name of Account Party] (“[Account Party]”) and [Name of Beneficiary] (“[Beneficiary]”) (the “PPA”).

The undersigned, each a duly authorized officer of [Beneficiary], hereby certify to [ISSUING BANK] (the “Bank”) with reference to irrevocable standby letter of credit no.     (the “Standby Letter of Credit”), issued by the Bank for the account of [Account Party] in favor of [Beneficiary] that:

(1) (Insert one of the following, as applicable)

Pursuant to the provisions of the PPA, an event has occurred under the PPA that entitles Beneficiary to draw on the Standby Letter of Credit in the amount of the sight draft (after giving effect to all applicable periods of grace and notice), which event remains uncured or unwaived as of the date of this Certificate (an example of such an event includes, without limitation, an Event of Default described in the PPA).

or

[Beneficiary] has received written notice from the Bank in accordance with the terms of the Standby Letter of Credit that the Bank has elected not to extend the expiration date of the Standby Letter of Credit for an additional period past its then-expiration date and the Account Party has failed to replace this Standby Letter of Credit with other [Seller Performance Security][Buyer Performance Security] meeting the requirements of the PPA at least thirty (30) days prior to the then-expiration date of the Standby Letter of Credit.

(2) The undersigned are each a duly elected and incumbent officer of [Beneficiary] and are authorized to execute and deliver this certificate and to draw upon the Standby Letter of Credit.

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IN WITNESS WHEREOF, the undersigned have executed and delivered this Certificate as of this day of         , 20    .

[BENEFICIARY]

By:

Title:

By:

Title:

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ANNEX 2

INSTRUCTION TO ASSIGN IN ENTIRETY

                , 20

Re: Irrevocable Standby Letter of Credit No.

Gentlemen:

For value received, the undersigned beneficiary hereby irrevocably assigns to:

(Name of Assignee)

(Address)

all rights of the undersigned beneficiary to draw under the above Standby Letter of Credit in its entirety.

By this assignment, all rights of the undersigned beneficiary in such Standby Letter of Credit are transferred to the assignee and the assignee shall hereafter have the sole rights as beneficiary thereof.

The Standby Letter of Credit is returned herewith and in accordance therewith we ask you to issue a new irrevocable Standby Letter of Credit in favor of the assignee with provisions consistent with the Standby Letter of Credit.

Very truly yours

[Beneficiary]

By:

Title:

By:

Title:

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EXHIBIT G

PEAK ADJUSTMENT PAYMENT

During each month of June, July and August for each Calendar Year of the Term (the “Peak Period”), Seller must achieve the Target Capacity Factor for the Facilities as set forth in this Exhibit G. If Seller fails to achieve such Target Capacity Factor for any such month, Seller shall be responsible for a payment to Buyer (the “Peak Adjustment Payment”) calculated in accordance with the following formula:

(TEM – DEM) x [**] (in 2007 dollars escalating by three percent (3%) for each year of the Term)

where

TEM = Targeted Energy for the month, which shall be the product of: (i) the applicable Buyer’s Capacity Amount for the month (excluding the CT Capacity); (ii) the number of hours in the month; and (iii) the Target Capacity Factor.

DEM = Delivered Energy for the month.

If the resulting product of the above formula is positive, then such positive amount shall equal the Peak Adjustment Payment for the month in question and Seller shall pay that Peak Adjustment Payment in accordance with this Exhibit G. If the resulting product is zero or negative, then neither Seller nor Buyer shall owe a Peak Adjustment Payment for the month.

If it is determined that Seller owes Buyer a Peak Adjustment Payment for a particular month, Buyer shall have the right to either (a) demand payment of that Peak Adjustment Payment in writing, in which case Seller shall make such payment to Buyer within five (5) Business Days after the written demand for payment is received, or (b) include the Peak Adjustment Payment on the invoices for such Billing Cycle pursuant to Section 7.1(a).

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EXHIBIT H

SCHEDULING PROVISIONS

(a) Scheduling of Generation Offers. Seller shall submit its Generation Offer, as a DNR, for the Facilities (other than the CT) into the MISO Day-Ahead Market and the MISO Real-Time Market for dispatch as a must-run generation unit with a dispatch minimum for each hour of the Operating Day equal to no less than the full expected Net Energy Output (consistent with the Transmission Provider Tariff) except as agreed otherwise by Buyer, provided, however, that during any Derate, Seller shall be obligated to schedule Generation Offers under Section 4.1 and this Exhibit H with respect to the full expected Net Energy Output, and provided further that Seller shall reasonably coordinate with Buyer in responding to a negative LMP. Seller shall offer the CT in the MISO Day-Ahead Market and MISO Real-Time Market in accordance with the Transmission Provider Tariff.

(b) Scheduling of Financial Bilateral Transactions. Unless otherwise mutually agreed by the Parties, for each Operating Day, Seller shall submit one or more MISO FinScheds that reflect the Net Energy Ouptut plus any Replacement Energy for such Operating Day and Buyer shall accept each such MISO FinSched no later than the deadline established by MISO for such acceptance, with each utilizing the appropriate MISO electronic scheduling system and protocols in accordance with the following Scheduling parameters:

(i) Seller and Buyer shall work together using commercially reasonable efforts to provide the necessary documentation to MISO to facilitate the processing of MISO FinScheds;

(ii) At least 48 hours prior to the deadline established by MISO, but no later than two Business Days after the relevant Operating Day (the “Scheduling Window”), Seller shall submit a MISO FinSched for settlement in the MISO Day-Ahead Market for the actual Net Energy Output or Replacement Energy or both, as applicable, for the relevant Operating Day;

(iii) At least two (2) hours prior to the deadline established by MISO, Buyer shall confirm such MISO FinSched submitted by Seller in accordance with paragraph (i) above; provided, that if Buyer disputes any component of any such MISO FinSched submitted by Seller, Buyer shall promptly notify Seller and Buyer and Seller shall cooperate to resolve any discrepancies in a timely manner; and

(iv) No true-up to the MISO FinSched shall be made; provided, that Seller may make revisions to any MISO FinSched during the applicable Scheduling Window by giving Buyer telephonic notice of such revision(s) with confirmation (by e-mail or fax) as soon as practicable.

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EXHIBIT I

MAIN GUIDE NO. 3A STANDARDS

(as attached)

I-1

EX-21.1

Exhibit 21.1

WISCONSIN ENERGY CORPORATION

SUBSIDIARIES AS OF DECEMBER 31, 2006

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, 2006:

Subsidiary (a)		State of Incorporation or Organization	Percent Ownership
Wisconsin Electric Power Company		Wisconsin	100%
	ATC Management Inc.	Wisconsin	29.41%
	American Transmission Company LLC	Wisconsin	25.81%
	Bostco LLC	Wisconsin	100%
	Blue Sky Wind Farm, LLC	Minnesota	100%
	Green Field Wind Farm, LLC	Minnesota	100%
	Lake Breeze Wind Farm, LLC	Wisconsin	100%
Wisconsin Gas LLC		Wisconsin	100%
Edison Sault Electric Company		Michigan	100%
	American Transmission Company LLC	Wisconsin	3.59%
W.E. Power, LLC		Wisconsin	100%
	Elm Road Generating Station Supercritical, LLC	Wisconsin	100%
	Elm Road Services, LLC	Wisconsin	100%
	Port Washington Generating Station, LLC	Wisconsin	100%
WEC Nuclear Corporation		Wisconsin	100%
	Nuclear Management Company, LLC	Wisconsin	33.33%
WISVEST Corporation		Wisconsin	100%
	CET Two, LLC	Delaware	100%
Minergy Corp.		Wisconsin	100%
	GlassPack, LLC	Wisconsin	100%
WISPARK LLC		Wisconsin	100%
	CenterPoint Wispark Land Company LLC	Wisconsin	35.83%
Wisconsin Energy Capital Corporation		Wisconsin	100%
	Riverfront Power LLC	Wisconsin	99%

(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, 2006. Indirectly owned subsidiaries are listed under the subsidiaries through which Wisconsin Energy Corporation holds ownership.

EX-23.1

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in Registration Statement Nos. 333-35798, 333-35800, 333-65356, and 333-86467 on Form S-8 and Registration Statement No. 333-34854 on Form S-3 of our reports dated February 22, 2007 relating to the consolidated financial statements and financial statement schedules of Wisconsin Energy Corporation and subsidiaries and management’s report on the effectiveness of internal control over financial reporting, appearing in this Annual Report on Form 10-K of Wisconsin Energy Corporation and subsidiaries for the year ended December 31, 2006.

/s/DELOITTE & TOUCHE LLP

Deloitte & Touche LLP

Milwaukee, Wisconsin

February 22, 2007

EX-31.1

Exhibit 31.1

Certification Pursuant to Rule 13a-14(a) or 15d-14(a),

as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Gale E. Klappa, certify that:

1. I have reviewed this annual report on Form 10-K of Wisconsin Energy Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:	February 28, 2007
	/s/ GALE E. KLAPPA
	Gale E. Klappa Chief Executive Officer

EX-31.2

Exhibit 31.2

Certification Pursuant to Rule 13a-14(a) or 15d-14(a),

as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Allen L. Leverett, certify that:

1. I have reviewed this annual report on Form 10-K of Wisconsin Energy Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:	February 28, 2007
	/s/ ALLEN L. LEVERETT
	Allen L. Leverett
	Chief Financial Officer

EX-32.1

Exhibit 32.1

Certification Pursuant to 18 U.S.C. Section 1350,

As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Annual Report of Wisconsin Energy Corporation (the “Company”) on Form 10-K for the period ended December 31, 2006, as filed with the Securities and Exchange Commission on February 28, 2007 (the “Report”), I, Gale E. Klappa, as Chief Executive Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of

operations of the Company.

/s/ GALE E. KLAPPA

Gale E. Klappa

Chief Executive Officer

February 28, 2007

EX-32.2

Exhibit 32.2

Certification Pursuant to 18 U.S.C. Section 1350,

As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Annual Report of Wisconsin Energy Corporation (the “Company”) on Form 10-K for the period ended December 31, 2006, as filed with the Securities and Exchange Commission on February 28, 2007 (the “Report”), I, Allen L. Leverett, as Chief Financial Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of

operations of the Company.

/s/ ALLEN L. LEVERETT

Allen L. Leverett

Chief Financial Officer

February 28, 2007

COVER

Letter to the S.E.C.