Edgar Filing: WISCONSIN ENERGY CORP

Notice & Proxy

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

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SEC 1913 (3-99)

LOGO

•

Notice of 2003 Annual Meeting of Stockholders

•

Proxy Statement

•

Annual Financial Statements and Review of Operations

Wisconsin Energy Corporation

231 W. Michigan St.

Milwaukee, WI 53203

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

March 12, 2003

To the Stockholders of Wisconsin Energy Corporation:

You are cordially invited to attend the 2003 Annual Meeting of Stockholders. The meeting will be held in Stevens Point, Wisconsin as follows:

Wednesday, April 30, 2003

10:00 a.m., Central Time

Holiday Inn Stevens Point

1501 North Point Drive

Stevens Point, WI 54481

A map showing the location of the meeting is on the reverse side of your proxy card.

During the meeting, stockholders will be asked to:

1. Elect three directors for terms expiring at the 2006 Annual Meeting of Stockholders; and

2. Consider any other matters which may properly come before the meeting.

Stockholders of record at the close of business on February 21, 2003 are entitled to vote. Your vote is important. You may vote using the Internet, by telephone, or by returning the proxy card in the envelope provided. Instructions for voting via the Internet or by telephone are included on your proxy card. Internet and telephone voting are convenient and will help us reduce costs.

The following pages provide additional details about the meeting as well as other useful information.

By Order of the Board of Directors

LOGO

Kristine Rappé

Corporate Secretary

TABLE OF CONTENTS

		Page
Notice of Annual Meeting of Stockholders
Proxy Statement
Item 1: Election of Directors		1

Other Matters		3

Voting of Shares		3

Independent Auditors		5

Corporate Governance		7

Audit and Oversight Committee Report		9

Compensation of the Board of Directors		10

Compensation Committee Report on Executive Compensation		11

Executive Officers’ Compensation		14

Employment and Severance Arrangements		16

Retirement Plans		17

Wisconsin Energy Corporation Common Stock Ownership		20

Section 16(a) Beneficial Ownership Reporting Compliance		21

Performance Graph		21

2004 Annual Meeting		22

Availability of Form 10-K		22

Appendices
Appendix A: Audit and Oversight Committee Charter		A-1

Appendix B: Annual Financial Statements and Review of Operations		B-1

PROXY STATEMENT

This proxy statement is being furnished to stockholders beginning on or about March 12, 2003, in connection with the solicitation of proxies by the Wisconsin Energy Corporation (“WEC” or the “Company”) Board of Directors (the “Board”) to be used at the Annual Meeting of Stockholders on April 30, 2003 (the “Meeting”), at the Holiday Inn Stevens Point, 1501 North Point Drive, Stevens Point, Wisconsin, and at all adjournments or postponements of the Meeting, for the purposes listed in the preceding Notice of Annual Meeting of Stockholders.

ITEM 1: ELECTION OF DIRECTORS—TERMS EXPIRING IN 2006

The WEC Bylaws provide that the directors be divided into three classes, as nearly equal in size as possible. The term of one class expires each year. The terms of Directors John F. Bergstrom, Barbara L. Bowles and Willie D. Davis expire at the Meeting.

Directors Bergstrom, Bowles and Davis have been nominated by the Board to serve for terms expiring at the 2006 Annual Meeting of Stockholders and until their respective successors are duly elected and qualified. Each nominee has consented to being nominated and to serve if elected. In the unlikely event that any nominee becomes unable to serve for any reason, the proxies will be voted for a substitute nominee selected by the WEC Board upon the recommendation of the Corporate Governance Committee.

The Board of Directors recommends that you vote “FOR” director nominees John F. Bergstrom, Barbara L. Bowles and Willie D. Davis.

Biographical data regarding each nominee and each continuing director is shown below. Ages are as of March 12, 2003. Wisconsin Electric Power Company and Wisconsin Gas Company are now doing business as We Energies and are subsidiaries of Wisconsin Energy Corporation.

Nominees for Terms Expiring in 2006
		John F. Bergstrom. Age 56. Chairman and Chief Executive Officer of Bergstrom Corporation since January 1997, and President and Chief Executive Officer of Bergstrom Corporation from 1974 through 1996. Bergstrom Corporation owns and operates numerous automobile sales and leasing businesses. Director of Wisconsin Energy Corporation since 1987. Director of Wisconsin Electric Power Company since 1985. Director of Wisconsin Gas Company since April 2000. Director of Bergstrom Corporation, Banta Corporation, Kimberly-Clark Corporation, Midwest Express Holdings, Inc., Sensient Technologies, Inc. and The Green Bay Packers.

		Barbara L. Bowles. Age 55. Chairman and Chief Executive Officer of The Kenwood Group, Inc. since July 2000, and President and Chief Executive Officer from 1989 to July 2000. The Kenwood Group is an investment advisory firm that manages pension funds for corporations, public institutions and endowments. Director of Wisconsin Energy Corporation and Wisconsin Electric Power Company since 1998. Director of Wisconsin Gas Company since April 2000. Director of Black & Decker Corporation, Dollar General Corporation and Georgia-Pacific Corporation.

		Willie D. Davis. Age 68. President and Chief Executive Officer of All Pro Broadcasting, Inc. since 1977. All Pro Broadcasting owns and operates radio stations in Los Angeles and Milwaukee. Director of Wisconsin Energy Corporation and Wisconsin Electric Power Company since April 2000. Director of Wisconsin Gas Company since 1990. Director of WICOR, Inc. from 1990 to April 2000. Director of Alliance Bank, Bassett Furniture Industries Inc., Checkers Drive-In Restaurants, Inc., Dow Chemical Co., Fidelity National Information Systems, Inc., Johnson Controls, Inc., Kmart Corp., MGM Grand, Inc., Manpower, Inc., Metro-Goldwyn-Mayer, Inc., Sara Lee Corporation and Strong Capital Management, Inc.

Directors Continuing in Office—Terms Expiring in 2004

		Robert A. Cornog. Age 62. Retired Chairman of the Board, President and Chief Executive Officer of Snap-on Incorporated. Served as Chairman, President and Chief Executive Officer of Snap-on Incorporated from 1991 and retired as President and Chief Executive Officer in April 2001. Retired as Chairman in April 2002. Snap-on Incorporated is a developer, manufacturer and distributor of professional hand and power tools, diagnostic and shop equipment, and tool storage products. Director of Wisconsin Energy Corporation since 1993. Director of Wisconsin Electric Power Company and Wisconsin Gas Company since 1994 and April 2000, respectively. Director of Johnson Controls, Inc.

		Richard R. Grigg. Age 54. Executive Vice President of Wisconsin Energy Corporation since May 2002 and President and Chief Operating Officer of Wisconsin Electric Power Company since 1995 and of Wisconsin Gas Company since July 2001. Senior Vice President of Wisconsin Energy Corporation from July 2000 to May 2002. Vice President of Wisconsin Energy Corporation from 1995 to June 2000. Chief Nuclear Officer of Wisconsin Electric Power Company from December 1996 to March 1998. Director of Wisconsin Energy Corporation since 1995. Director of Wisconsin Electric Power Company since 1994 and Director of Wisconsin Gas Company since April 2000.

		Frederick P. Stratton, Jr. Age 63. Chairman Emeritus of Briggs & Stratton Corporation since January 2003. Chairman of the Board of Briggs & Stratton Corporation from July 2001 to January 2003. Served as Chairman and Chief Executive Officer of Briggs & Stratton Corporation until June 2001. Briggs & Stratton Corporation is a manufacturer of small gasoline engines. Director of Wisconsin Energy Corporation since 1987. Director of Wisconsin Electric Power Company since 1986 and Director of Wisconsin Gas Company since April 2000. Director of Briggs & Stratton Corporation, Bank One Corporation, Midwest Express Holdings, Inc. and Weyco Group, Inc.

Directors Continuing in Office—Terms Expiring in 2005 New Director Elected. Pursuant to authority granted to the Board under the Bylaws, the Board of Directors increased the number of directors from nine to ten and elected Ulice Payne, Jr., President and Chief Executive Officer of the Milwaukee Brewers Baseball Club, Inc., as a director effective January 1, 2003. Mr. Payne was elected to serve as a director until the 2005 Annual Meeting of Stockholders and until he is reelected or his successor is duly elected and qualified.

		Richard A. Abdoo. Age 59. Chairman of the Board, President and Chief Executive Officer of Wisconsin Energy Corporation since 1991. Chairman of the Board and Chief Executive Officer of Wisconsin Electric Power Company since 1990. Chairman of the Board and Director of Wisconsin Gas Company since April 2000. Director of Wisconsin Energy Corporation since 1988. Director of Wisconsin Electric Power Company since 1989. Director of AK Steel Holding Corporation, Cobalt Corporation, Marshall & Ilsley Corporation and Sensient Technologies, Inc.


		John F. Ahearne. Age 68. Director of the Ethics Program for the Sigma Xi Center for Sigma Xi, The Scientific Research Society, an organization that publishes American Scientist, provides grants to graduate students and conducts national meetings on major scientific issues, since 1999. Executive Director of Sigma Xi from 1989 to 1997 and Director of Sigma Xi Center from 1997 to 1999. Adjunct Scholar of Resources for the Future, an economic research, non-profit institute, since 1993. Lecturer and Adjunct Professor, Duke University, since 1995. Commissioner of the United States Nuclear Regulatory Commission from 1978 to 1983, serving as its Chairman from 1979 to 1981. Member, National Academy of Engineering. Director of Wisconsin Energy Corporation and Wisconsin Electric Power Company since 1994. Director of Wisconsin Gas Company since April 2000.

		Ulice Payne, Jr. Age 47. President and Chief Executive Officer of the Milwaukee Brewers Baseball Club, Inc. since September 2002. Served as Managing Partner of the Milwaukee office of the Foley & Lardner law firm from May 2002 to September 2002 and a Partner from 1998 to May 2002. Served as a Partner with the law firm of Reinhart, Boerner, Van Deuren, Norris & Rieselbach, S.C. from 1990 to 1998. Director of Wisconsin Energy Corporation, Wisconsin Electric Power Company and Wisconsin Gas Company since January 2003. Director of Badger Meter, Inc., Midwest Express Holdings, Inc. and State Financial Services Corporation.

		George E. Wardeberg. Age 67. Retired Vice Chairman of the Board of Wisconsin Energy Corporation, Wisconsin Electric Power Company and Wisconsin Gas Company. Director of Wisconsin Energy Corporation and Wisconsin Electric Power Company since April 2000 and Wisconsin Gas Company since 1992. Mr. Wardeberg has also held numerous positions with WICOR, Inc. and its subsidiaries, including being the CEO of WICOR, Inc. from 1994 to April 2000 and Director from 1992 to April 2002. Mr. Wardeberg served as President of WICOR, Inc. from 1994 to 1997 and Chairman of the Board from 1997 to April 2000. Director of Marshall & Ilsley Corporation and Twin Disc, Inc.

OTHER MATTERS

The WEC Bylaws set forth the requirements that must be followed should a stockholder wish to propose any nominations for director or make any other proposals. The Bylaws state, among other things, that notice and certain information regarding any nomination or proposal must be provided to WEC at least 70 days and not more than 100 days before the annual meeting of stockholders. Since no such notice has been received, the Board is not aware of any other matters that may properly come before the Meeting. If any other matters do properly come before the Meeting, the persons named as the proxies in the accompanying form of proxy will vote the proxy in their discretion.

VOTING OF SHARES

Stockholders of Record. Common stockholders of record at the close of business on February 21, 2003 are entitled to vote on matters presented at the Meeting. On that date, there were 116,157,282 shares of WEC common stock outstanding.

Each outstanding share of WEC common stock is entitled to one vote upon each matter presented. A majority of the votes entitled to be cast by the shares entitled to vote, represented in person or by proxy, shall constitute a quorum. Abstentions and shares which are the subject of broker non-votes will count toward establishing a quorum. A list of stockholders of record entitled to vote at the Meeting will be available for inspection by stockholders at WEC’s principal business office at 231 West Michigan Street, Milwaukee, Wisconsin, prior to the Meeting. The list will also be available on the day of the Annual Meeting at the Meeting site.

Stockholders whose shares are held in the name of a broker, bank or other holder of record are invited to attend the Meeting, but may not vote at the Meeting unless they have first obtained a proxy, executed in the stockholder’s favor, from the holder of record.

Multiple Stockholders Sharing the Same Address. In accordance with notices sent to stockholders with multiple accounts at the same address, or multiple stockholders at the same address, we are sending a single annual report and proxy statement to that address unless we received instructions to the contrary. Each stockholder, however, will continue to receive a separate proxy card. This practice, known as “Householding,” is designed to reduce our printing and postage costs. If you wish to receive separate copies of the annual report and proxy statement now or in the future, or to discontinue Householding entirely, you may call our transfer agent, EquiServe, at 1-800-558-9663, or provide written instructions to EquiServe, P.O. Box 43004, Providence, RI 02940.

If you receive multiple copies of the annual report and proxy statement, you may contact our transfer agent, EquiServe, at 1-800-558-9663 to request Householding. If your shares are held through a bank, broker or other holder of record, you may request Householding by contacting the holder of record.

Voting by Proxy. You may vote in person or by properly appointed proxy. Electronic proxy voting by stockholders of record is also valid under Wisconsin law. As a convenience to you and as a step toward reducing costs, we are providing you with the option to vote by proxy via the Internet or via toll-free touch-tone telephone. You may still, however, cast your vote by returning your signed and dated proxy card.

Specific instructions to vote electronically are listed on your proxy card or the information forwarded by your bank or broker. These procedures are designed to authenticate your identity as a stockholder and to allow you to confirm that your instructions have been properly recorded. Please be aware that if you vote over the Internet, you may incur costs such as telephone and Internet access charges for which you will be responsible. The Internet and telephone voting facilities will close at 10:00 a.m., Central Time, on April 30, 2003.

You may revoke your proxy by voting in person at the Meeting, by written notice to WEC’s Corporate Secretary, or by executing and delivering a later-dated proxy via the Internet, via telephone or by mail, in each case prior to the closing of the polls. Attendance at the Meeting will not in itself constitute revocation of a proxy. All shares entitled to vote and represented by properly completed proxies timely received and not revoked will be voted as you direct. If no direction is given, the proxies will be voted as the Board recommends. The Corporate Secretary of WEC is Kristine Rappé, and any revocation should be filed with her at the Company’s principal executive offices, 231 West Michigan Street, P. O. Box 2949, Milwaukee, Wisconsin 53201.

If you are a participant in WEC’s Stock Plus Investment Plan (“Stock Plus”) or own shares through investments in the WEC Common Stock Fund of one of the 401(k) plans under the Wisconsin Energy Corporation Master Trust, your proxy will serve as voting instructions for your shares held in those plans. The administrator for Stock Plus and the trustee for the 401(k) plans will vote your shares as you direct. If a proxy is not returned for shares held in Stock Plus, the administrator will not vote those shares. If a proxy is not returned for shares held in a 401(k) plan, the trustee will vote those shares in the same proportion that all shares in the plan fund for which voting instructions have been received are voted.

Solicitation of Proxies. The Board of Directors of WEC is soliciting these proxies. WEC has retained Georgeson Shareholder Communications Inc. to assist in soliciting proxies from stockholders, including brokers’ accounts, at a fee anticipated not to exceed $15,000 plus reasonable out-of pocket expenses. Also, employees of WEC or its subsidiaries may solicit proxies by mail, by telephone, personally or by other communications, without compensation apart from their normal salaries.

Voting Requirements and Procedures. Directors will be elected by a plurality of the votes cast by the shares entitled to vote, as long as a quorum is present. “Plurality” means that the individuals who receive the largest number of votes are elected as directors up to the maximum number of directors to be chosen. Therefore, shares not voted, whether by withheld authority or otherwise, have no effect in the election of directors.

EquiServe Trust Company N.A., which will also serve as inspector of election, will tabulate the voted proxies.

INDEPENDENT AUDITORS

Deloitte & Touche LLP served as independent auditors for the Company for the fiscal year ended December 31, 2002. The Audit and Oversight Committee also selected the firm of Deloitte & Touche LLP as the independent auditors for the Company for the fiscal year ending December 31, 2003.

Representatives of Deloitte & Touche LLP will be present at the Meeting and will have an opportunity to make a statement, if they so desire, and to respond to appropriate questions that may be directed to them.

The Company engaged Deloitte & Touche LLP as independent auditors for the fiscal year ended December 31, 2002 on July 3, 2002 following the dismissal of Arthur Andersen LLP as independent auditor for the Company on July 3, 2002. Both the dismissal of Arthur Andersen LLP and the engagement of Deloitte & Touche LLP were based on the recommendation of the Audit and Oversight Committee. Arthur Andersen LLP was engaged by the Company, based on the recommendation of the Audit and Oversight Committee, on March 8, 2001 as independent public accountants for the Company for the fiscal year ended December 31, 2001.

The report of Arthur Andersen LLP on the financial statements for the fiscal year ended December 31, 2001 contained no adverse opinion or disclaimer of opinion and was not qualified or modified as to uncertainty, audit scope or accounting principles. Between March 8, 2001 and the termination of Arthur Andersen LLP’s appointment, there were no disagreements with Arthur Andersen LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of Arthur Andersen LLP, would have caused that firm to make reference to the subject matter of the disagreement in connection with its report on the Company’s financial statements, and there were no “reportable events” (as defined in SEC Regulation S-K Item 304(a)(1)(v)). Between January 1, 2000 and the engagement of Deloitte & Touche LLP on July 3, 2002, neither the Company nor anyone acting on behalf of the Company consulted with Deloitte & Touche LLP regarding either (i) the application of accounting principles to a specified transaction or the type of audit opinion that might be rendered on the Company’s financial statements or (ii) any matter that was either the subject of a disagreement with Arthur Andersen LLP or a “reportable event” (as defined in SEC Regulation S-K Item 304(a)(1)(v)).

Prior to March 8, 2001, PricewaterhouseCoopers LLP served as the Company’s independent public accountants. On March 8, 2001, based on the recommendation of its Audit and Oversight Committee, the Company notified PricewaterhouseCoopers LLP that its appointment would be terminated effective upon completion of the audit of the Company’s results for the fiscal year ended December 31, 2000.

The report of PricewaterhouseCoopers LLP on the financial statements for the fiscal year ended December 31, 2000 contained no adverse opinion or disclaimer of opinion and was not qualified or modified as to uncertainty, audit scope or accounting principles. Between January 1, 1999 and the termination of PricewaterhouseCoopers LLP’s appointment as independent public accountants, there were no disagreements with PricewaterhouseCoopers LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of PricewaterhouseCoopers LLP, would have caused that firm to make reference to the subject matter of the disagreement in connection with its report on the Company’s financial statements, and there were no “reportable events” (as defined in SEC Regulation S-K Item 304(a)(1)(v)). Between January 1, 1999 and the engagement of Arthur Andersen LLP on March 8, 2001, neither the Company nor anyone acting on behalf of the Company consulted with Arthur Andersen LLP regarding either (i) the application of accounting principles to a specified transaction or the type of audit opinion that might be rendered on the Company’s financial statements or (ii) any matter that was either the subject of a disagreement with PricewaterhouseCoopers LLP or a “reportable event” (as defined in SEC Regulation S-K Item 304(a)(1)(v)).

The Audit and Oversight Committee also reviewed with Deloitte & Touche LLP a list of non-audit services billed during fiscal year 2002 and concluded that the performance of such non-audit services by Deloitte & Touche LLP is compatible with maintaining its independence.

The following table shows the fees billed or expected to be billed for audit and other services provided by Deloitte & Touche LLP for fiscal year 2002.

Audit Fees			$	654,500
Financial Information Systems Design and Implementation Fees			$	0
All Other Fees:
Audit Related⁽¹⁾	$	71,575
Other⁽²⁾		205,725

Total All Other Fees			$	277,300

⁽¹⁾

Audit-related fees include benefit plan audits, acquisition due diligence, accounting consultation and services related to filings made with the Securities and Exchange Commission.

⁽²⁾

Other fees consist primarily of income tax related consultation and employee benefit plan activities.

CORPORATE GOVERNANCE

Corporate Governance Guidelines. The Board has maintained Corporate Governance Guidelines since 1996 (the “Guidelines”), which provide a framework from which it conducts business. The Guidelines are reviewed annually to ensure that the Board is providing effective governance over the affairs of the Company. Minor changes were recently approved by the Board in response to corporate governance reforms set forth in the Sarbanes-Oxley Act of 2002 and proposed changes to the New York Stock Exchange Listing Standards. To review a copy of Wisconsin Energy Corporation’s Guidelines, please refer to www.WisconsinEnergy.com/governance/. A copy may also be requested from the Corporate Secretary.

Independence of the Board. The Corporate Governance Guidelines provide that the Board should consist of at least a two-thirds majority of outside, independent directors. The Board’s standard of independence, as set forth in Appendix A to the Guidelines, is more comprehensive than the standard established by the New York Stock Exchange. The Board has reviewed the director independence criteria set forth in the Guidelines and has affirmed that seven of the ten directors do not have material relationships either directly or as a partner, shareholder or officer of an organization that has a relationship with the Company. As such, Messrs. Ahearne, Bergstrom, Cornog, Davis, Payne and Stratton and Ms. Bowles were affirmatively determined by the Board to be independent directors. Messrs. Abdoo, Grigg and Wardeberg are or were employees of the Company within the past five years and thus do not satisfy independence criteria.

Executive Sessions of Independent Directors. An executive session of independent directors is held at every regularly scheduled Board meeting without any management participation. The chair of the Corporate Governance Committee presides at these sessions. Any stockholder wishing to communicate with the presiding director or the other independent directors regarding the Company may provide correspondence to the directors in care of the Corporate Secretary, Kristine Rappé, at the Company’s principal executive offices, 231 West Michigan Street, P.O. Box 2949, Milwaukee, WI 53201. The Corporate Secretary will directly inform such directors of these communications.

Ethics and Compliance. All WEC directors and employees have a responsibility to read and familiarize themselves with the Wisconsin Energy Corporation Code of Business Conduct, comply with the policy, seek advice in doubtful situations and report suspected violations. The Code addresses ethical standards, the compliance program, conflicts with other policies, and related matters. It also covers the following specific topics which the New York Stock Exchange considers important to be included in codes of conduct of listed companies: conflicts of interest; corporate opportunities; confidentiality; fair dealing; protection and proper use of company assets; compliance with laws, rules and regulations (including insider trading laws); and encouraging the reporting of any illegal or unethical behavior. Directors and all management employees are required annually to review and submit a statement certifying that they have complied with the Code. The Company has not provided any waivers to the Code for directors or executive officers.

Evaluation of the Chief Executive Officer (CEO). The Board annually evaluates the performance of the CEO. As part of this practice, the Compensation Committee requests that independent directors provide their opinions to the Compensation Committee chair on the CEO’s performance relating to leadership and vision, financial stewardship, strategy development, management development, effective communication to constituencies, and effective representation of the Company in community and industry affairs, as well as other areas. The chair of the Compensation Committee shares the responses with the CEO. The process is also used by the Committee to determine appropriate compensation for the CEO. This procedure allows the Board to evaluate the CEO and to communicate the Board’s expectations.

Self-Evaluation of the Board. The Board also annually evaluates its own collective performance. Each director is asked to rate the performance of the Board on such things as: the establishment of appropriate corporate governance practices; providing appropriate oversight for key affairs of the Company (including its long-range goals, financial performance and strategic plans); providing necessary and timely advice and counsel to the CEO; communicating the Board’s expectations and concerns to the CEO; having in place effective processes to aid in its deliberations, monitoring of the issues and trends affecting the Company; and operating in a manner that ensures open communication, objective and constructive participation and timely resolution of issues.

The Corporate Governance Committee uses the results of this process as part of its annual review of the Corporate Governance Guidelines and to foster continuous improvement of the Board’s activities.

Committees of the Board of Directors. Committees play a significant role in the corporate governance practices of the Board. Principal responsibilities and membership of the Board’s standing committees are shown below. The Board has Audit and Oversight, Compensation, Corporate Governance, Executive, Finance and Nuclear Oversight committees. Each committee is

required to provide to the entire Board an annual performance evaluation of the committee’s activities. The evaluation is designed to compare the performance of each committee with the requirements of its charter. The Board amended several committee charters to incorporate changes as a result of recent corporate governance reforms. Except for the Executive Committee and the Nuclear Oversight Committee, all committees of the Board are comprised of independent directors. The Nuclear Oversight Committee includes non-directors who serve as ad hoc members due to their considerable expertise in nuclear matters.

Members of the Audit and Oversight Committee are Ms. Bowles (chair), Mr. Bergstrom, Mr. Cornog and Mr. Stratton. No member of the Committee sits on the audit committee of more than three public companies. The Committee operates under a charter which is attached as Appendix A to this proxy statement. Other principal functions of the Committee and its activities during fiscal year 2002 are described under the heading “Audit and Oversight Committee Report” which follows.

Members of the Compensation Committee are Mr. Bergstrom (chair), Dr. Ahearne and Mr. Davis. The Committee considers management succession planning issues and provides a competitive, performance-based executive and director compensation program that enables WEC to attract and retain key individuals and motivate them to achieve WEC’s short- and long-term goals. The Committee also produces an annual report on executive compensation for inclusion in the Company’s proxy statement in accordance with all applicable rules and regulations.

Members of the Corporate Governance Committee, formerly known as the Nominating and Board Affairs Committee, are Mr. Davis (chair), Ms. Bowles and Mr. Cornog. The Committee establishes and reviews corporate governance guidelines to ensure that the Board is effectively performing its fiduciary responsibilities to stockholders, identifies and recommends candidates to be named as nominees to the Board for election as directors, and leads the Board in its annual performance review. Stockholders may propose director candidates for consideration by the Committee.

Members of the Executive Committee are Mr. Abdoo (chair), Mr. Bergstrom, Ms. Bowles, Mr. Cornog and Mr. Stratton. The Committee may exercise all of the powers vested in the Board except action regarding dividends or other distributions to stockholders, the filling of vacancies on the Board and other powers, which by law may not be delegated to a committee or actions reserved for a committee comprised of independent directors.

Members of the Finance Committee are Mr. Stratton (chair), Mr. Bergstrom, Ms. Bowles, Mr. Cornog and Mr. Payne. The Committee reviews and monitors WEC’s current and long-range financial policies and strategies, including its capital structure and dividend policy, and authorizes issuance of corporate debt within limits set by the Board.

Members of the Nuclear Oversight Committee are Dr. Ahearne (chair), Mr. Grigg and Mr. Stratton. Ad hoc members of the Committee include three nuclear industry experts: Dr. Thomas E. Murley, former director of the Nuclear Regulatory Commission’s Office of Nuclear Reactor Regulation; Dr. C. Frederick Sears, formerly responsible for overseeing Northeast Utilities’ nuclear and environmental functions; and Mr. Leon R. Eliason, former President—Generation at Northern States Power Company, and former President—Nuclear Business Unit and Chief Nuclear Officer at Public Service Enterprise Group Incorporated. The Committee advises and assists the Board in its responsibilities relating to overseeing the Company’s nuclear operations.

Meetings of the Board and its Committees. The Board held six meetings during 2002. The number of committee meetings held in 2002 were: Audit and Oversight–12; Compensation–4; Executive–0; Finance–6; Corporate Governance–2; Nuclear Oversight–2. The average meeting attendance during the year was 98%. No director attended fewer than 93% of the total number of meetings of the Board and Board committees on which he or she served.

AUDIT AND OVERSIGHT COMMITTEE REPORT

The Wisconsin Energy Corporation Audit and Oversight Committee is comprised of four directors who are not officers of the Company. The Board of Directors has determined that all members of the Audit and Oversight Committee meet the independence standards of the New York Stock Exchange and the proposed standards of the Securities and Exchange Commission promulgated pursuant to the Sarbanes-Oxley Act of 2002. In accordance with its written charter, which was amended by the Board of Directors in February 2003, the Audit and Oversight Committee assists the Board of Directors in fulfilling its oversight responsibility regarding (i) the integrity of the Company’s financial statements, (ii) the Company’s compliance with legal and regulatory requirements, (iii) the independent auditor’s qualifications and independence, and (iv) the performance of the Company’s internal audit function and independent auditor. Management is responsible for the Company’s financial reporting process, the preparation of consolidated financial statements in accordance with generally accepted accounting principles and the system of internal controls and procedures designed to ensure compliance with accounting standards and applicable laws and regulations. WEC’s independent auditors are responsible for performing an independent audit of the Company’s consolidated financial statements in accordance with generally accepted auditing standards and to issue a report thereon.

During fiscal 2002, the Audit and Oversight Committee had twelve meetings. Meetings are designed to facilitate and encourage open communication among the members of the Committee, management, the internal auditors and the Company’s independent auditor. During these meetings, the Committee reviewed and discussed, among other items, the Company’s quarterly and annual financial statements with management and the independent auditor. The Audit and Oversight Committee believes that management maintains an effective system of internal controls that results in fairly presented financial statements. The Committee discussed with Deloitte & Touche LLP, the Company’s independent auditor, matters relating to communications with audit committees as required by Statement on Auditing Standards No. 61, as amended. Deloitte & Touche LLP also provided to the Committee the written disclosures and the letter relative to auditor independence as required by Independence Standards Board Standard No. 1, and the Committee discussed with Deloitte & Touche LLP its independence.

Based on these reviews and discussions, the Audit and Oversight Committee recommended to the Board of Directors that the audited financial statements be included in Wisconsin Energy Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002.

Respectfully submitted to Wisconsin Energy Corporation stockholders by the Audit and Oversight Committee of the Board of Directors.

Barbara L. Bowles, Committee Chair

John F. Bergstrom

Robert A. Cornog

Frederick P. Stratton, Jr.

COMPENSATION OF THE BOARD OF DIRECTORS

In order to more closely link directors’ pay to performance and to further align the Board’s interests with stockholders, a portion of directors’ fees is paid in WEC common stock. Directors can elect to receive the fee in common stock or defer the fee in a WEC phantom common stock account under the Directors’ Deferred Compensation Plan.

During 2002, each nonemployee director received one annual retainer fee of $24,000 paid half in WEC common stock and half in cash. Nonemployee chairs of the committees of the Board received a quarterly committee chair retainer of $1,250. Nonemployee directors also receive a fee of $1,500 for each Board or committee meeting attended. In addition, a per diem fee of $1,250 for travel on Company business is paid for each day on which a Board or committee meeting is not also held. The Company also reimburses nonemployee directors for all out-of-pocket travel expenses. Nonemployee directors are also paid $300 for each signed, written unanimous consent in lieu of a meeting. Employee directors receive no directors’ fees.

Although WEC directors also serve on the Wisconsin Electric Power Company and Wisconsin Gas Company boards, only single fees are paid for meetings held on the same day. In these cases, fees are allocated between WEC, Wisconsin Electric Power Company and Wisconsin Gas Company based on services rendered.

Nonemployee directors may defer fees pursuant to the Directors’ Deferred Compensation Plan. Deferred amounts are credited to one of ten measurement funds, including a WEC phantom stock account. The value of these accounts will appreciate or depreciate based on market performance, as well as through the accumulation of reinvested dividends. Deferral amounts are credited to accounts in the name of each participating director on the books of WEC, are unsecured and are payable only in cash following termination of the director’s service to WEC and its subsidiaries. The deferred amounts will be paid out of the general corporate assets or the trust described under “Retirement Plans” in this proxy statement.

Each nonemployee director annually receives an option to purchase 5,000 shares of WEC common stock under WEC’s 1993 Omnibus Stock Incentive Plan, as amended. Each option has an exercise price equal to the fair market value of the shares on the date the option is granted and is exercisable for 10 years after the date of grant. Options vest over a three-year period on the anniversary of the grant date. Upon a change in control of WEC, disability or death, or if the director leaves the Board after completing a full three-year term, these options become immediately exercisable. The exercise price of an option may, at the nonemployee director’s election, be paid in cash or with previously-owned shares of common stock or a combination thereof.

The Company has established a Directors’ Charitable Awards Program to help further its policy of charitable giving. Under the program, the Company intends to contribute up to $100,000 per year for 10 years to a charitable organization(s) chosen by each director, upon the director’s death. Directors are provided with one charitable award benefit for serving on the boards of WEC and its subsidiaries. There is a vesting period of three years of service on the Board required for participation in this program. Beneficiary organizations under the program must be approved by the Corporate Governance Committee. The program is funded by life insurance on the lives of the Board members. Directors derive no financial benefit from the program since all insurance proceeds and charitable deductions accrue solely to the Company. Because of the tax deductibility of these charitable donations and the use of insurance as a funding vehicle, the long-term cost to the Company is expected to be modest.

COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION

Compensation Philosophy and Objectives. The Compensation Committee is responsible for making decisions regarding compensation for the executives of Wisconsin Energy Corporation and its principal subsidiaries. All Committee members are independent, nonemployee directors. We seek to provide a competitive, performance-based executive compensation program that enables WEC to attract and retain key individuals and to motivate them to achieve WEC’s short- and long-term goals.

We believe that a substantial portion of executive compensation should be at risk. As a result, WEC’s compensation plans have been structured so that the level of total compensation is strongly dependent upon achievement of business results that are aligned with the interests of WEC’s stockholders and customers.

The primary elements of WEC’s executive compensation program are base salary, annual incentive compensation, and long-term incentive compensation. For WEC executives, all elements of compensation are targeted at the 50th percentile of general industry practices—that is, we target compensation at the median levels paid for similar positions at similarly sized companies.

In order to determine competitive compensation practices, we rely upon compensation surveys provided to us by Towers Perrin, an independent compensation consultant. We believe that the labor market for WEC executives is that of general industry in the United States. As a result, we principally rely upon a survey of compensation practices of similarly sized companies in general industry. However, we also recognize that a significant portion of WEC’s business is in the energy industry. Therefore, for executives whose positions principally relate to utility operations, we place a greater emphasis upon compensation practices in the energy industry.

Specific values of 2002 compensation for the Chief Executive Officer and the four other most highly compensated executive officers are shown in the Summary Compensation Table. Our basis for determining each element of compensation is described below.

Base Salary. For 2002, we adjusted base salaries to reflect updated survey results of executive compensation practices for similar positions at comparable companies. In making these adjustments, we also considered factors such as the relative levels of individual experience, performance, responsibility, and contribution to the results of Company operations.

Annual Incentive Compensation. The annual incentive plan provides for annual awards to executives based on achievement of pre-established stockholder-, customer-, and employee-focused objectives. All payments under the plan are at risk; payments are only made if performance goals are achieved, and awards may be less or greater than targeted amounts based on actual performance. Based upon a review of competitive practices for comparable positions at similarly sized companies, for 2002, awards were targeted at 35% to 100% of base salary and actual awards may range from 0% to 200% based on performance. The plan also provides the Committee with the discretion to recognize individual performance.

At the Committee’s direction, the annual performance incentive program for 2002 principally focused on the attainment of key financial measures.

•

The financial goals for Messrs. Abdoo, Donovan and Salustro were based upon earnings per share, return on equity and cash flow for WEC. The earnings per share goal was weighted at 50%; the other two measures were weighted at 25% each.

•

For Mr. Grigg, 75% of his goals were tied to utility financial performance, including net income, return on net assets and cash flow; the remaining 25% of his goals were tied to customer and employee components.

•

For Mr. Donnelly, 75% of his goals were tied to WICOR Industries, Inc. financial performance, based on return on capital and sales growth; the remaining 25% of his goals were tied to individual performance.

In February 2003, the Committee met to review the extent to which 2002 performance goals were met. The results are summarized as follows.

Wisconsin Energy Corporation’s 2002 financial performance, in aggregate, exceeded the target when adjusted for non-recurring items, as defined by the Committee. Adjusted earnings per share before non-recurring items were $2.37 per share, an increase of $0.33 per share compared to 2001. Messrs. Abdoo, Donovan and Salustro earned 113% of their target awards.

The utility group’s financial performance exceeded target performance in all three measures: net income, return on net assets and cash flow. The utility group’s overall customer satisfaction improved during 2002 and targets for its employee measure were exceeded. In aggregate, Mr. Grigg earned 122% of his target award.

In 2002, WICOR Industries, Inc.’s operating earnings were up 16% as a result of a $100 million (17%) increase in sales, continued cost improvements and facility consolidations. This was partially offset by the cost to consolidate these operations. The sales increase was primarily due to recent acquisitions, new product introductions and strong international results. Sales in almost all markets were up, with the largest gains in the water systems, pool/spa and R/V segments. Mr. Donnelly’s incentive award was 109% of his target award.

Based upon these results and any discretion to recognize individual performance, awards for 2002 were granted to the named executive officers as shown in the Summary Compensation Table.

For 2003, the Committee set goals for key officers of WEC similar to those set for 2002, except for the addition of a goal to measure the Company’s commitment to supplier diversity. For Messrs. Abdoo, Donovan and Salustro, the annual incentive is dependent upon attainment of targets for earnings per share, return on equity and cash flow, and achievement of the supplier diversity measure. We believe that this incentive structure will help focus management and help ensure attainment of WEC’s financial objectives and reinforce supplier diversity as a key strategic objective. For Mr. Grigg, 65% of his 2003 goals are tied to utility financial and customer components; 25% will be tied to the financial performance of WEC dependent upon attainment of earnings per share; the remainder is tied to supplier diversity and employee components. For Mr. Donnelly, 75% of his 2003 award is tied to WICOR Industries, Inc.’s financial performance with the remaining 25% tied to his individual performance.

Long-Term Incentive Compensation. The Committee administers WEC’s 1993 Omnibus Stock Incentive Plan, as amended. This is a stockholder-approved, long-term incentive plan designed to link the interests of executives and other key employees to long-term stockholder value. It allows for various types of awards keyed to the performance of WEC’s common stock, including stock options.

In 2002, we reviewed the long-term incentive program to ensure its effectiveness in focusing WEC executives to achieve the corporation’s long-term objectives. Awards to named executive officers were granted as indicated in the Summary Compensation Table.

Our Committee believes that an important adjunct to the long-term incentive program is significant stock ownership by participants. Accordingly, as a condition of participating in the long-term incentive plan, we have implemented stock ownership guidelines for officers of the Company. Guidelines for executive officers range from 100% to 300% of base salary.

Chief Executive Officer Compensation. The assessment of the Chief Executive Officer’s performance and determination of the CEO’s compensation are among our principal responsibilities.

In reviewing the performance of WEC’s Chief Executive Officer, we requested that all nonemployee directors evaluate the CEO’s performance. The Compensation Committee chair reviewed the evaluations, met with Mr. Abdoo to discuss them, and the Committee factored the results into our compensation determinations.

We set Mr. Abdoo’s base salary at $756,300 for 2002. This base salary is at the low end of the competitive range for CEO’s at comparably sized companies as reflected in the survey of general industry compensation practices.

Mr. Abdoo’s annual incentive compensation for 2002 was based upon achievement of the financial initiatives described above.

In view of the discretionary component of the annual incentive plan, the Committee also noted the significant accomplishments of Mr. Abdoo during 2002; including:

•

Preliminary approval given by the Public Service Commission of Wisconsin for the first phase of the Power the Future proposal to build two new 545-megawatt natural gas-fired generating facilities at the Port Washington Power Plant;

•

Completion of the Guardian Pipeline which brings natural gas to We Energies’ distribution system;

•

Successful completion of the sale of Wisvest-Connecticut assets;

•

Receipt of the Governor’s Award for Excellence in Environmental Performance for the second time in four years and the Business Friend of the Environment Award for the Pleasant Prairie Power Plant’s ash utilization pilot project;

•

Successful launch of the We Energies brand, which combines the Company’s utility operations under one name, resulting in measurable customer recognition and understanding of brand attributes within six weeks of the launch;

•

Successful introduction of a new vision for We Energies: “We enhance the quality of life of every person we touch … today, tomorrow, together” and commitment to a set of values: Respect, Excellence, Accountability, Diversity, Integrity and Safety; and

•

Reduction in Occupational Safety & Health Act recordable injury rates by approximately 10% for the second straight year.

To specifically link a portion of his compensation to the enhancement of long-term stockholder value, Mr. Abdoo was awarded long-term incentive compensation in 2002 in the form of stock options, as set forth in the “Long-Term Compensation Awards” column of the Summary Compensation Table.

Compliance With Tax Regulations Regarding Executive Compensation. Section 162(m) of the Internal Revenue Code limits tax deductions for executive compensation to $1 million, unless certain requirements are met. It is the Company’s policy to take reasonable steps to obtain the corporate tax deduction by qualifying for the exemptions from limitation on such deductibility under Section 162(m) to the extent practicable.

Respectfully submitted to WEC’s stockholders by the Compensation Committee of the Board of Directors.

John F. Bergstrom, Committee Chair

John F. Ahearne

Willie D. Davis

EXECUTIVE OFFICERS’ COMPENSATION

This table summarizes, for the last three fiscal years, compensation awarded to, earned by or paid to WEC’s Chief Executive Officer and each of WEC’s other four most highly-compensated executive officers.

Summary Compensation Table

	Year	Annual Compensation					Long-Term Compensation Awards

Name and Principal Position		Salary ($)	Bonus ($)		Other Annual Compensation ($)		Restricted Stock Awards(1) ($)	Securities Underlying Options (#)	All Other Compensation(2) ($)

Richard A. Abdoo
Chairman of the Board, President	2002	756,300	859,308		11,868		0	300,000	66,959
and Chief Executive Officer	2001	707,500	563,948		11,811		163,120	300,000	66,875
	2000	657,500	723,168		16,954		148,500	100,000	30,632

Richard R. Grigg
Executive Vice President of WEC;	2002	518,668	507,879		4,015		0	200,000	52,874
President and Chief Operating	2001	440,000	350,719		4,128		122,340	131,535	98,545
Officer of Wisconsin Electric Power Company and Wisconsin Gas Company	2000	400,000	367,446		3,723		111,375	75,000	23,932

Paul Donovan
Executive Vice President	2002	518,668	471,448		206,057	⁽³⁾	0	200,000	53,643
and Chief Financial Officer	2001	440,000	282,333		28,760		122,340	131,535	65,463
	2000	407,500	358,559		8,210		232,500	75,000	14,849

James C. Donnelly
President and Chief Executive	2002	420,000	251,790		0		0	113,130	40,068
Officer of WICOR Industries, Inc.	2001	400,000	80,000		0		61,170	113,130	51,085
(as of April 2000)	2000	236,667	163,083		0		0	0	9,867

Larry Salustro
Senior Vice President and	2002	336,000	323,331	⁽⁴⁾	2,297		0	75,000	34,075
General Counsel	2001	311,668	165,797		2,339		122,340	75,000	33,956
	2000	262,500	229,140		1,891		74,250	50,000	21,114

⁽¹⁾

There were no restricted stock awards made during fiscal 2002. As of December 31, 2002, the named executive officers held the following number of shares of restricted stock, including restricted dividends, with the following values (based on a closing price of $25.20 on December 31, 2002): Mr. Abdoo–36,701 shares ($924,865), Mr. Grigg–22,175 shares ($558,810), Mr. Donovan–19,765 shares ($498,078), Mr. Donnelly–4,970 shares ($125,244) and Mr. Salustro–23,331 shares ($587,941).

⁽²⁾

All Other Compensation for 2002 for Messrs. Abdoo, Grigg, Donovan, Donnelly and Salustro, respectively, includes:

•

employer matching of contributions for each named executive into the 401(k) plan in the amount of $6,000, $5,500, $5,850, $5,298 and $4,996, respectively,

•

“make whole” payments under the Executive Deferred Compensation Plan with respect to matching in the 401(k) plan on deferred salary or salary received but not otherwise eligible for matching in the amounts of $33,607, $13,368, $18,030, $6,900 and $9,054, respectively, and

•

the present value of the current year’s non-term portion of the insurance premium paid by the Company in January, 2002, prior to the enactment of the Sarbanes-Oxley Act of 2002, under a split-dollar life insurance program in the amounts of $27,352, $34,006, $29,763, $27,870 and $20,025, respectively; the executive pays the term insurance portion of the premium.

⁽³⁾

Other Annual Compensation for 2002 for Mr. Donovan includes $50,474 associated with the payment of legal expenses and $53,989 primarily associated with temporary housing expenses, as well as income tax payments related to these items.

⁽⁴⁾

Bonus amount for Mr. Salustro in 2002, includes $100,000 in recognition of his contributions toward resolution of the West Allis/Giddings & Lewis lawsuit.

Option Grants in Last Fiscal Year

This table shows additional data regarding the options granted in 2002 to the named executive officers.


	Individual Grants⁽¹⁾				Grant Date Value

Name	Number of Securities Underlying Options Granted (#)	Percent of Total Options Granted to Employees in Fiscal Year (%)	Exercise or Base Price ($/Share)	Expiration Date	Grant Date Present Value(2) ($)

Richard A. Abdoo	300,000	12.14	22.66	01/02/2012	1,855,200

Richard R. Grigg	131,535 68,465	5.32 2.77	22.66 25.81	01/02/2012 05/01/2012	813,412 494,865

Paul Donovan	131,535 68,465	5.32 2.77	22.66 25.81	01/02/2012 05/01/2012	813,412 494,865

James C. Donnelly	113,130	4.58	22.66	01/02/2012	699,596

Larry Salustro	75,000	3.04	22.66	01/02/2012	463,800

⁽¹⁾

Consists of incentive and non-qualified stock options to purchase shares of WEC common stock granted pursuant to the 1993 Omnibus Stock Incentive Plan, as amended, on January 2, 2002 and May 1, 2002. These options have exercise prices equal to the fair market value of the WEC shares on the date of grant and vest pro rata over a four year period beginning on the first anniversary of the grant date with full vesting on the fourth anniversary date. Upon a “change in control” of WEC, as defined in the plan, or upon retirement, permanent total disability or death of the option holder, these options shall become immediately exercisable. These options were granted for a term of ten years, subject to earlier termination in certain events related to termination of employment. In the discretion of the Compensation Committee, the exercise price may be paid by delivery or attestation of already-owned shares. Tax withholding obligations related to exercise may be satisfied by withholding shares otherwise deliverable upon exercise, subject to certain conditions. Subject to the limitations of the 1993 Omnibus Stock Incentive Plan, as amended, the Compensation Committee has the power with the participant’s consent to modify or waive the restrictions on vesting of these options, to amend these options and to grant extensions or to accelerate the vesting of these options.

⁽²⁾

An option pricing model (developed by Black-Scholes) was used to determine the options’ present value as of the date of the grant. The assumptions used in the Black-Scholes equation for options expiring January 2, 2012 are: market price of stock: $22.66; exercise price of option: $22.66; stock volatility: 25.59%; annualized risk-free interest rate: 5.64%; exercise at the end of the 10-year option term; and dividend yield: 3.53%. The assumptions for options expiring May 1, 2012 are: market price of stock: $25.81; exercise price of option: $25.81; stock volatility: 24.16%; annualized risk-free interest rate: 5.42%; exercise at the end of the 10-year option term; and dividend yield: 3.10%. WEC’s use of this model should not be construed as an endorsement of its accuracy. The ultimate value of the options, if any, will depend upon the future value of the WEC common stock, which cannot be forecast with reasonable accuracy, and on the optionee’s investment decisions.

Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values

The following table reflects options exercised in 2002 and the number and value of exercisable and unexercisable in the money options held by the named executive officers at fiscal year-end.


			Number of Securities Underlying Unexercised Options at Fiscal Year-End (#)			Value of Unexercised In the Money Options at Fiscal Year-End ($)(2)

Name	Shares Acquired on Exercise (#)	Value Realized ($) ⁽¹⁾	Exercisable		Unexercisable	Exercisable	Unexercisable

Richard A. Abdoo	0	N/A	318,498		585,002	555,295	1,906,305
Richard R. Grigg	0	N/A	156,381		341,154	335,386	948,622
Paul Donovan	0	N/A	64,141	⁽³⁾	343,651	263,597	948,701
James C. Donnelly	54,242	902,580	334,087		218,237	3,686,504	720,484
Larry Salustro	0	N/A	101,248		158,752	220,957	592,218

⁽¹⁾

Value realized is determined by subtracting the exercise price from the fair market value on the date of exercise. Fair market value is the average of the high and low prices reported in the New York Stock Exchange Composite Transaction report on the exercise date.

⁽²⁾

Value is determined by subtracting the exercise price from the year-end market price multiplied by the number of shares underlying the option.

⁽³⁾

Excludes options for 28,743 shares, with an in the money value of $72,070, that were transferred to and are held by trusts for the benefit of Mr. Donovan’s family.

EMPLOYMENT AND SEVERANCE ARRANGEMENTS

Pursuant to the merger agreement relating to WEC’s acquisition of WICOR, Inc., on June 27, 1999, WEC adopted severance policies that became effective on April 26, 2000, when the merger occurred, replacing WEC’s previous severance policy. The policies provide for severance benefits to designated executives and other key employees if within two years after the merger they are discharged without cause or resign with good reason. WEC has approved changes to the severance policies to allow for a deferral opportunity for participants who may become entitled to benefits and to continue the policies after the end of the two-year period following the WICOR merger to provide for severance benefits in the event of employment termination either in anticipation of or within a two-year period following a change in control by reason of discharge without cause or resignation with good reason.

Under the current severance policies, participants have been designated into one of four benefit levels. Of the individuals named in the Summary Compensation Table, Mr. Donnelly is a Tier 1 participant and Mr. Salustro is a Tier 2 participant. Messrs. Abdoo, Grigg and Donovan do not participate in the severance policy, but each has a separate change in control and severance agreement as described below.

Tier 1 and Tier 2 benefits provide generally for lump sum severance payments equal to three times the sum of the current base salary and the highest bonus in the last three years (or the then current target bonus, if higher), a pension lump sum for the equivalent of three years’ worth of additional service and three years’ continuation of health and life insurance coverages. An overall limit is placed on benefits to avoid federal excise taxes under the “parachute payment” provisions of the tax law. In addition, Tier 1 participants would be entitled to the same severance benefits if they resigned for any reason within the six month period following the first anniversary of a change in control.

The Company has entered into agreements with each of Messrs. Abdoo, Grigg and Donovan providing for certain employment and severance benefits as described below.

•

Under the agreement with Mr. Abdoo, severance benefits are provided if his employment is terminated (i) by the Company, other than for cause, death or disability, in anticipation of or following a change in control, (ii) by the executive for good reason following such a change in control, (iii) by the executive within six months after completing one year of service following a change in control, or (iv) in the absence of a change in control, by the Company for any

reason other than cause, death or disability or by the executive for good reason. The agreement provides for a lump sum severance payment equal to three times the sum of the executive’s highest annual base salary in effect in the last three years and highest bonus amount. The highest bonus amount would be calculated as the largest of (i) the current target bonus for the fiscal year in which employment termination occurs, (ii) the highest bonus paid in either the last three fiscal years of the Company prior to termination or the change in control, or (iii) an amount calculated by multiplying the highest bonus percentage earned during either of such three fiscal year periods times the highest yearly base salary rate in effect during the three-year period ending prior to termination. The agreement also provides for three years’ continuation of health and certain other welfare benefit coverages, eligibility for retiree health coverage thereafter, continuation of the split-dollar life insurance program until the applicable policy becomes paid up, a payment equal to the value of three additional years’ of participation in the applicable qualified and non-qualified retirement plans, full vesting in all outstanding stock options and restricted stock awards, certain financial planning services and other benefits and a “gross-up” payment should any payments or benefits under the agreements trigger federal excise taxes under the “parachute payment” provisions of the tax law. The agreement also contains a one-year non-compete provision applicable on termination of employment.

•

The agreement with Mr. Grigg is substantially similar to Mr. Abdoo’s, except as follows: (i) under the agreement, as of January 1, 2003, Mr. Grigg’s annual base salary increased to $579,600 and his target bonus compensation for 2003 was fixed at 80% of such increased salary; and (ii) Mr. Grigg’s agreement defines good reason to include certain changes in management. In addition, pursuant to the terms of the agreement, on January 2, 2003, the Company granted to Mr. Grigg an option to purchase 200,000 shares of the common stock of the Company.

•

The agreement with Mr. Donovan is similar to Mr. Abdoo’s, but provides for certain special benefits in the event his employment is terminated in the absence of a change in control either by him or the Company pursuant to (i) notice given during the period from May 1, 2003 through June 29, 2003, or (ii) the expiration of the term of his employment, which is February 29, 2004 (or, if later, on the payment date for his bonus for 2003), unless such term is renewed until March 1, 2008, when the term expires. Such special benefits include lump sum payments related to the executive’s 2002 and 2003 bonuses, base salary continuation for a minimum period of six months, a payment equal to the value of at least six months additional participation in the applicable qualified and non-qualified retirement plans, continuation of health and certain other welfare benefits for at least six months, continuation of the split-dollar life insurance program until the applicable policy becomes paid-up and full vesting in all outstanding stock options and restricted stock awards. In connection with Mr. Donovan joining the Company, he was encouraged to purchase a house in Wisconsin. In this regard, the agreement obligates the Company to repurchase, at Mr. Donovan’s request within seven years of his leaving the Company, his Wisconsin house at a price that would assure the after-tax recovery of his investment in that house or its then fair market value, whichever is greater. In addition, the agreement provides that as of January 1, 2003, Mr. Donovan’s annual base salary increased to $579,600 and his target bonus compensation was fixed at 80% of such increased salary. Pursuant to the terms of the agreement, on January 2, 2003, Mr. Donovan was granted an option to purchase 200,000 shares of the common stock of the Company.

RETIREMENT PLANS

WEC maintains a defined benefit pension plan of the cash balance type (the “WEC Plan”) for most employees, including Messrs. Abdoo, Grigg, Donovan, Donnelly and Salustro. The WEC Plan bases a participant’s defined benefit pension on the value of a hypothetical account balance. For individuals participating in the WEC Plan as of December 31, 1995, a starting account balance was created equal to the present value of the benefit accrued as of December 31, 1994, under the plan benefit formula prior to the change to a cash balance approach. That formula provided a retirement income based on years of credited service and final average compensation for the 36 highest consecutive months, with an adjustment to reflect the Social Security integrated benefit. In addition, individuals participating in the WEC Plan as of December 31, 1995 received a special one-time transition credit amount equal to a specified percentage varying with age multiplied by credited service and 1994 base pay.

The present value of the accrued benefit as of December 31, 1994, plus the transition credit, was also credited with interest at a stated rate. For 1996 and thereafter, a participant receives annual credits to the account equal to 5% of base pay (including certain incentive payments, pre-tax deferrals and other items), plus an interest credit on all prior accruals equal to 4% plus 75% of the annual time-weighted trust investment return for the year in excess of 4%. Additionally, the WEC Plan provides that up to an additional 2% of base pay may be earned based upon achievement of earnings targets.

The life annuity payable under the WEC Plan is determined by converting the hypothetical account balance credits into annuity form.

Individuals who were participants in the WEC Plan on December 31, 1995 were “grandfathered” so that they will not receive any lower retirement benefit than would have been provided under the prior formula, had it continued, if their employment terminates on or before January 1, 2011.

Wisconsin Gas Company also maintained a defined benefit pension plan of the cash balance type (the “Wisconsin Gas Plan”) for most of its employees, including Mr. Donnelly. The Wisconsin Gas Plan was merged into the WEC Plan, effective as of January 1, 2002. The cash balance formula, effective in 1997, provided an annual accrual of 6% of salary and bonus, with a guaranteed earnings rate of 4%. Further, the Wisconsin Gas Plan provided that the Company could amend it from year to year to grant a higher earnings rate for the applicable year. In order to recognize the pre-1997 service and compensation of participants as of January 1, 1997, the Wisconsin Gas Plan granted each such participant a special transition credit. Additionally, the Wisconsin Gas Plan “grandfathered” individuals who were participants as of January 1, 1998 so that they will not receive any lower retirement benefit than would have been provided under the pre-1997 final average earnings formula, had it continued, if their employment terminated before December 31, 2007. The WEC Plan continues this “grandfathered” benefit approach for all former Wisconsin Gas Plan participants (including Mr. Donnelly) who became participants in the WEC Plan as a result of the January 1, 2002 merger of the plans and continued in employment as of that date.

For the individuals listed in the Summary Compensation Table, estimated benefits under both “grandfathered” formulas are higher than under the cash balance plan formula. As a result, their benefits would currently be determined by the prior plan benefit formula. The following tables set forth estimated annual benefits payable in life annuity form on normal retirement for persons in various compensation and years of service classifications during 2002, based on the continuation of the “grandfathered” prior plan formulas for WEC and Wisconsin Gas (including supplemental amounts providing additional benefits described below in the “Other Retirement Benefits” section):

Pension Plan Table—WEC Plan (Prior Plan Formula)

Remuneration		Years of Service

		15	20	25	30	35	40

$	300,000	74,657	99,543	124,429	149,314	163,445	177,575
	500,000	126,407	168,543	210,679	252,814	276,695	300,575
	700,000	178,157	237,543	296,929	356,314	389,945	423,575
	900,000	229,907	306,543	383,179	459,814	503,195	546,575
	1,100,000	281,657	375,543	469,429	563,314	616,445	669,575

	1,300,000	333,407	444,543	555,679	666,814	729,695	792,575
	1,500,000	385,157	513,543	641,929	770,314	842,945	915,575
	1,700,000	436,907	582,543	728,179	873,814	956,195	1,038,575
	1,900,000	488,657	651,543	814,429	977,314	1,069,445	1,161,575
	2,100,000	540,407	720,543	900,679	1,080,814	1,182,695	1,284,575

Pension Plan Table—WEC Plan (Prior Wisconsin Gas Company Plan Formula)

Remuneration		Years of Service

		15	20	25	30	35	40

$	300,000	87,600	116,800	133,600	138,100	142,600	147,100
	500,000	147,000	196,000	224,200	231,700	239,200	246,700
	700,000	206,400	275,200	314,800	325,300	335,800	346,300
	900,000	265,800	354,400	405,400	418,900	432,400	445,900
	1,100,000	325,200	433,600	496,000	512,500	529,000	545,500

	1,300,000	384,600	512,800	586,600	606,100	625,600	645,100
	1,500,000	444,000	592,000	677,200	699,700	722,200	744,700
	1,700,000	503,400	671,200	767,800	793,300	818,800	844,300
	1,900,000	562,800	750,400	858,400	886,900	915,400	943,900
	2,100,000	622,200	829,600	949,000	980,500	1,012,000	1,043,500

The compensation for the individuals listed in the Summary Compensation Table in the columns labeled “Salary” and “Bonus” is virtually equivalent to the compensation considered for purposes of the retirement plans and the various supplemental plans.

Messrs. Abdoo, Grigg, Donovan, Donnelly and Salustro, currently have or are considered to have 35, 32, 30, 15 and 30 credited years of service, respectively.

Other Retirement Benefits. Designated officers of WEC and Wisconsin Electric Power Company, including Messrs. Abdoo, Grigg, Donovan and Salustro participate in the Supplemental Executive Retirement Plan (“SERP”). The SERP provides monthly supplemental pension benefits to participants, which will be paid out of unsecured corporate assets, or the grantor trust described below, as follows: (i) an amount equal to the difference between the actual pension benefit payable under the pension plan and what such pension benefit would be if calculated without regard to any limitation imposed by the Internal Revenue Code on pension benefits or covered compensation; and (ii) an amount calculated so as to provide participants with a supplemental lifetime annuity, estimated to amount to between 8% and 10% of final average compensation depending on which pension payment option is selected. Except for a “change in control” of WEC, as defined in the SERP, no payments are made until after the participant’s retirement or death.

Designated officers of Wisconsin Gas Company, including Mr. Donnelly, participate in the Wisconsin Gas Company Supplemental Retirement Income Program. This plan provides supplemental retirement benefits to take into account certain compensation that is excluded under the applicable retirement plan and to provide benefits that otherwise would have been accrued or payable, except for the limitations of the Internal Revenue Code.

WEC has entered into agreements with Messrs. Abdoo, Donovan and Salustro who cannot accumulate by normal retirement age the maximum number of years of credited service under the pension plan formula in effect immediately before the change to the cash balance formula, as described below:

•

According to Mr. Abdoo’s agreement, Mr. Abdoo at retirement will receive supplemental retirement payments which will make his total retirement benefits at age 58 or older substantially the same as those payable to employees who are age 60 or older, who are in the same compensation bracket and who became plan participants at the age of 25, offset by the value of any qualified or non-qualified defined benefit pension plans of prior employers.

•

According to Mr. Donovan’s agreement, Mr. Donovan at retirement will receive supplemental retirement payments which will make his total retirement benefits at age 55 or older substantially the same as those payable to employees who are in the same compensation bracket and who became plan participants at the age of 25, offset by the value of social security benefits and modified by early retirement reduction factors applicable to Mr. Donovan between age 55 and 58.

•

According to Mr. Salustro’s agreement, Mr. Salustro at retirement will receive supplemental retirement payments which will make his total retirement benefits at age 60 or older substantially the same as those payable to employees who are age 60 or older, who are in the same compensation bracket, and who became plan participants at the age of 25, offset by the value of any qualified or non-qualified defined benefit pension plans of prior employers.

The Company has agreed to provide Mr. Donovan certain life insurance benefits in consideration for his surrendering certain post-retirement benefits under the SERP. An independent review has verified that based on certain assumptions, the exchange is cost neutral to the Company.

The WEC Amended Non-Qualified Trust, a grantor trust, has been established to fund certain non-qualified benefits, including the SERP, the Executive Deferred Compensation Plan and the agreements with the named executive officers. The plans and agreements provide for optional lump sum payments and, in the instance of a change in control, and absent a deferral election, mandatory lump sum payments without regard to whether the executive’s employment has terminated. In each case, the interest rate benchmark formula for calculating the lump sum amount is based on the five-year U.S. Treasury Note yield as of a certain date or a 36 month average of such yields.

WEC COMMON STOCK OWNERSHIP

Directors, Nominees and Executive Officers. The following table lists the beneficial ownership of WEC common stock of each director, nominee, named executive officer, and all of the directors and executive officers as a group as of February 3, 2003. In general, “beneficial ownership” includes those shares a director or executive officer has the power to vote or transfer, and stock options that are exercisable currently or within 60 days of February 3, 2003. Included are shares owned by each individual’s spouse, minor children or any other relative sharing the same residence, as well as shares held in a fiduciary capacity or held in WEC’s Stock Plus and 401(k) plans. None of these persons beneficially own more than 1% of the outstanding common stock.


	Shares Beneficially Owned⁽¹⁾

Name	Shares Owned ^(2) (3)	Option Shares Exercisable Within 60 Days		Total

Richard A. Abdoo	70,017⁽⁴⁾	443,498		513,515
John F. Ahearne	4,171	12,667		16,838
John F. Bergstrom	3,000	12,667		15,667
Barbara L. Bowles	3,007	12,667		15,674

Robert A. Cornog	5,638	12,667		18,305
Willie D. Davis	9,141	19,901	⁽⁵⁾	29,042
James C. Donnelly	37,120⁽⁴⁾	388,878	⁽⁵⁾	425,998
Paul Donovan	87,763⁽⁴⁾	134,523		222,286
Richard R. Grigg	28,948⁽⁴⁾	226,764		255,712

Ulice Payne, Jr.	492	0		492
Larry Salustro	27,666⁽⁴⁾	151,248		178,914
Frederick P. Stratton, Jr.	8,600	12,667		21,267
George E. Wardeberg	22,616	640,000	⁽⁵⁾	662,616

All above-named individuals and other executive officers as a group (15 persons)	322,787⁽⁴⁾	2,138,492	⁽⁵⁾	2,461,279	⁽⁶⁾

⁽¹⁾

Information on beneficially-owned shares is based on data furnished by the specified persons and is determined in accordance with Rule 13d-3 under the Securities Exchange Act of 1934, as amended, as required for purposes of this proxy statement. It is not necessarily to be construed as an admission of beneficial ownership for other purposes.

⁽²⁾

Certain WEC directors and executive officers also hold share units in the WEC phantom common stock account under WEC’s deferred compensation plans as indicated: Mr. Abdoo (24,042), Mr. Bergstrom (6,767), Mr. Cornog (11,989), Mr. Davis (8,523), Mr. Donnelly (721), Mr. Donovan (9,152), Mr. Grigg (3,832), Mr. Salustro (2,824), Mr. Stratton (8,455), Mr. Wardeberg (1,714), and all directors and executive officers as a group (78,253). Share units are intended to reflect the performance of WEC common stock and are payable in cash. While these units do not represent a right to acquire WEC common stock, have no voting rights and are not included in the number of shares reflected in the “Shares Owned” column in the table above, we have listed them in this footnote because they represent an additional economic interest of the directors and executive officers tied to the performance of WEC common stock.

⁽³⁾

Each individual has sole voting and investment power as to all shares listed for such individual, except the following individuals have shared voting and/or investment power as indicated: Mr. Abdoo (10,107), Mr. Cornog (150), Mr. Donovan (55,000), Mr. Stratton (4,600), and all directors and executive officers as a group (69,857).

⁽⁴⁾

Includes shares of restricted stock over which the holders have sole voting but no investment power: Mr. Abdoo (36,701), Mr. Donnelly (4,970), Mr. Donovan (19,765), Mr. Grigg (22,175), Mr. Salustro (23,331), and all directors and executive officers as a group (115,530). Shares listed for Mr. Donnelly include restricted stock granted by WICOR, Inc. which were converted to outstanding WEC restricted stock on the effective date of the acquisition of WICOR, Inc.

⁽⁵⁾

Option shares listed include options granted by WICOR, Inc. which were converted to WEC stock options on the effective date of the acquisition of WICOR, Inc.

⁽⁶⁾

Represents 2.1% of total WEC common stock outstanding on February 3, 2003.

Owners of More than 5%. The following table shows stockholders who reported beneficial ownership of more than 5% of WEC common stock, based on the information they have reported as of February 17, 2003, on Schedule 13G or Schedule 13D filed under Rule 13d-1 of the Securities Exchange Act of 1934, as amended.

Name and Address

Voting

Authority

Dispositive

Authority

Total

Shares Beneficially Owned

Percent of WEC Common Stock

Sole

Shared

Sole

Shared

AXA Financial, Inc.⁽¹⁾

1290 Avenue of the Americas

New York, NY 10104

6,187,678

1,202,082

10,695,176

9.3%

⁽¹⁾

AXA Financial is a parent holding company.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company’s officers, directors, and persons owning more than ten percent of WEC’s common stock to file reports of ownership and changes in ownership of equity and derivative securities of WEC with the Securities and Exchange Commission and the New York Stock Exchange. Effective as of August 29, 2002, the SEC accelerated those reporting requirements, requiring most changes in ownership to be reported within two business days of the date the transaction occurred rather than within ten days after the end of the month in which the transaction occurred or on a deferred basis annually. To the Company’s knowledge, based on information provided by the reporting persons, all applicable reporting requirements for fiscal year 2002 were complied with in a timely manner, except that one acquisition of phantom stock under the Executive Deferred Compensation Plan by each of Messrs. Abdoo, Donnelly, Donovan, Grigg and Salustro, which was made as of September 30, 2002, was reported one day late.

PERFORMANCE GRAPH

The following graph shows a comparison of the cumulative total return, assuming reinvestment of dividends, over five years had $100 been invested at the close of business on December 31, 1997 in each of (i) WEC common stock, (ii) the Standard & Poor’s 500 Index (“S&P 500”), and (iii) the Edison Electric Institute Index of Investor-Owned Utilities (“EEI Index”). The stock price performance shown in the graph is not necessarily indicative of future price performance.

FIVE-YEAR CUMULATIVE RETURN CHART

Value of Investment at Year-End

	12/31/1997		12/31/1998		12/31/1999		12/31/2000		12/31/2001		12/31/2002

Wisconsin Energy Corporation	$	100	$	115	$	76	$	94	$	98	$	113
S&P 500	$	100	$	128	$	155	$	141	$	124	$	97
EEI Index	$	100	$	114	$	93	$	137	$	125	$	107

2004 ANNUAL MEETING

The Corporate Governance Committee and WEC Board have approved director candidate selection criteria which are designed to provide the Board with a diversity of experience to allow it to effectively meet the many challenges WEC faces in today’s changing environment. Stockholders wishing to propose director candidates for consideration and recommendation by the Corporate Governance Committee for election at the 2004 Annual Meeting of Stockholders must submit the name(s) and qualifications of any proposed candidate(s) to WEC’s Corporate Secretary, Kristine Rappé, at the Company’s principal executive offices, 231 West Michigan Street, P.O. Box 2949, Milwaukee, Wisconsin 53201, no later than October 15, 2003. The Bylaws state that directors shall be stockholders of WEC.

Stockholders who intend to have a proposal considered for inclusion in the Company’s proxy materials for presentation at the 2004 Annual Meeting of Stockholders must submit the proposal to the Company no later than November 12, 2003. Stockholders who intend to present a proposal at the 2004 Annual Meeting of Stockholders without inclusion of such proposal in the Company’s proxy materials, or who propose to nominate a person for election as a director at the meeting, are required to provide notice of such proposal to the Company at least 70 days and not more than 100 days prior to the scheduled date of the 2004 Annual Meeting of Stockholders.

AVAILABILITY OF FORM 10-K

A copy (without exhibits) of WEC’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002, as filed with the Securities and Exchange Commission, is available without charge to any stockholder of record or beneficial owner of WEC common stock by writing to the Corporate Secretary, Kristine Rappé, at the Company’s principal executive offices, 231 West Michigan Street, P. O. Box 2949, Milwaukee, Wisconsin 53201. In lieu of providing all stockholders with an Annual Report, the WEC consolidated financial statements and certain other information found in the Form 10-K is provided in Appendix B to this proxy statement.

APPENDIX A

WISCONSIN ENERGY CORPORATION

WISCONSIN ELECTRIC POWER COMPANY

WISCONSIN GAS COMPANY

AUDIT AND OVERSIGHT COMMITTEE OF THE BOARD OF DIRECTORS

CHARTER

Adopted: December 18, 1991; Revised: February 10, 2003

PURPOSE

The principal purpose of the Audit and Oversight Committee (Committee) is to (A) assist the Board of Directors in carrying out its oversight responsibility of (i) the integrity of the Company’s financial statements, (ii) the Company’s compliance with legal and regulatory requirements, (iii) the independent auditor’s qualifications and independence, and (iv) the performance of the Company’s internal audit function and independent auditors, and (B) prepare the report that Securities and Exchange Commission rules require to be included in the Company’s proxy statement. With respect to item (i), preparation of the financial statements is the role of Company management, not the Committee. The Committee shall report all significant findings to the Board.

COMPOSITION

The Committee shall consist of three or more independent directors who are periodically appointed by the Board. Members shall serve at the pleasure of the Board and for such term or terms as the Board may determine. Each member shall, in the judgment of the Board, meet the independence standards of the New York Stock Exchange, the Sarbanes-Oxley Act of 2002 and the Securities and Exchange Commission. Each member shall be financially literate as the Board of Directors interprets such qualification in its judgment. The Board shall determine whether any director serving on the Committee is an “audit committee financial expert,” as such term is defined in the rules and regulations promulgated by the Securities and Exchange Commission. No director may serve as a member of the Committee if such director serves on the audit committees of more than three public companies unless the Board determines that such simultaneous service would not impair the ability of such director to effectively serve on the Committee and discloses this determination in the Company’s proxy statement. No member of the Committee may receive any compensation from the Company other than (i) directors’ fees which may be received in cash, stock options or other in-kind consideration, (ii) other deferred compensation for prior service that is not contingent on future service, and (iii) any other benefits that other directors receive for their service to the Company as a director. One of the directors shall be appointed Chair for a term to be determined by the Board and shall preside over the meetings of the Committee. In the event the Committee Chair is unable to serve as Chair for a specific meeting, he/she shall designate one of the Committee members to preside.

DUTIES AND RESPONSIBILITIES

The Committee shall have unrestricted access to the independent auditor, Company personnel and documentation pertinent to the scope of its duties and responsibilities. The duties and responsibilities of the Committee shall be to:

Independent Auditor

•

Evaluate the services of the independent auditor, or other independent auditors under consideration, and approve a firm to be engaged for the coming year. The Committee shall have the sole and ultimate authority and responsibility to evaluate and, where appropriate, terminate and replace the independent auditor. The independent auditor is ultimately accountable to the Committee.

•

Review and approve proposed audit and non-audit services for the year, and any additional audit or non-audit services subsequently proposed, and assure that such services will not affect the independence of the auditor. Approve in advance any non-audit engagements of the independent auditor permitted by Section 201 of the Sarbanes-Oxley Act of 2002 and assure that approval is disclosed in the Company’s periodic reports as required by law. Authority to pre-approve services can be delegated to one or more members of the Audit and Oversight Committee, but any pre-approval decision by the delegate must be reported to the full Audit and Oversight Committee at its next regularly scheduled meeting.

•

Prior to the start of the annual audit, approve the audit plan and the terms and estimated fees for the engagement following the independent auditor’s presentation of the audit plan and objectives of the audit.

•

Review with management and the independent auditor, at least annually, recent accounting, tax, and financial reporting developments and auditing standards.

A-1

•

Ensure that the independent auditor submits, at least on an annual basis, to the Committee a formal written statement delineating all relationships between the auditor and the Company consistent with Independence Standards Board Standard No. 1. Engage in a dialogue with the independent auditor with respect to any disclosed relationships or services that may impact the objectivity and independence of the outside auditor. Take appropriate action, when necessary, to ensure the independence of the independent auditor.

•

Discuss with the independent auditor the matters to be discussed by Statement on Auditing Standards No. 61 relating to the conduct of the audit.

•

Set clear hiring policies for employees or former employees of the independent auditors.

•

Oversee the resolution of any disagreements between the Company’s independent auditors and management regarding financial reporting.

•

Review on a regular basis with the Company’s independent auditors any problems or difficulties encountered by the independent auditors in the course of any audit work, including management’s response with respect thereto, any restrictions on the scope of the independent auditors’ activities or on access to requested information, and any significant disagreements with management. In connection therewith, the Committee should review with the independent auditors:

(i)

any accounting adjustments that were noted or proposed by the independent auditors but were not recorded by management (due to immateriality or other reasons);

(ii)

any significant “management” or “internal control” comments; and

(iii)

the responsibilities, budget and staffing of the Company’s internal auditors.

•

Ensure that the audit partners scheduled to perform the current year’s audit of the Company’s financial statements satisfy the rules governing audit partner rotation.

•

Ensure that the chief executive officer, controller, chief financial officer, chief accounting officer or other person serving in an equivalent position of the Company, was not, within one year prior to the initiation of the audit, an employee of the independent auditors who participated in any capacity in the Company’s audit.

Annual and Interim Financials

•

After the annual audit, review the financial statements and other related financial information to be included in the Company’s Annual Report on Form 10-K, including the Company’s disclosure under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” with appropriate Company management and the independent auditor. Review with the independent auditor its report to the Committee regarding the audit and its opinion to be issued on the financial statements. Recommend to the Board any action considered necessary, including that audited financials be included in the Form 10-K.

•

Prior to the filing of the Company’s Quarterly Report on Form 10-Q, review the interim financial statements to be included in the 10-Q with management and the independent auditor.

•

Review the certifications of the Chief Executive Officer and Chief Financial Officer related to the annual and interim reports as required by the Sarbanes-Oxley Act of 2002 as well as any significant reports of management’s Disclosure Committee.

•

Discuss earnings press releases, as well as financial information and earnings guidance provided to analysts and rating agencies. The Committee need not discuss in advance each earnings release or each instance in which the Company may provide earnings guidance.

•

Review and discuss with management, the independent auditors and the internal auditing department:

(i)

critical accounting policies and such other accounting policies of the Company as are deemed appropriate for review by the Committee prior to any interim or year-end filings with the Securities and Exchange Commission or other regulatory body, including any financial reporting issues which could have a material impact on the Company’s financial statements;

(ii)

major issues regarding accounting principles and financial statement presentations, including (A) any significant changes in the Company’s selection or application of accounting principles and (B) any analyses prepared by management and/or the independent auditors setting forth significant financial reporting issues and judgments made

A-2

in connection with the preparation of the financial statements, including analyses of the ramifications and effects of alternative generally accepted accounting principles on the Company’s financial statements;

(iii)

all alternative treatments of financial statement presentation that have been discussed by the independent auditors and management, ramifications of the use of such alternative disclosures and treatments, and the treatment preferred by the independent auditors; and

(iv)

the effect of regulatory and accounting initiatives, as well as, off balance sheet transactions, on the financial statements of the Company.

Internal Controls

•

At least annually, obtain and review a report by the independent auditor describing: the auditor’s internal quality-control procedures; any material issues raised by the most recent internal quality-control review, or peer review, of the auditor, or by any inquiry or investigation by governmental or professional authorities, within the preceding five years, respecting one or more independent audits carried out by the auditor, and any steps taken to deal with any such issues; and (to assess the auditor’s independence) all relationships between the independent auditor and the Company.

•

Review with the Company’s chief executive officer and chief financial officer and other senior members of management, the Company’s internal auditors and independent auditors:

(i)

all significant deficiencies in the design or operation of internal controls which could adversely affect the Company’s ability to record, process, summarize, and report financial data, including any material weaknesses in internal controls identified by the Company’s independent auditor;

(ii)

any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal controls; and

(iii)

any significant changes in internal controls or in other factors that could significantly affect internal controls, including any corrective actions with regard to significant deficiencies and material weaknesses.

Internal Auditor

Meet at least semi-annually with the internal auditor to review internal audit’s independence, coordination with the independent auditor, staffing, audit scope, significant audit results, management’s responsiveness to recommendations, evaluation of internal control systems, and other relevant matters.

Code of Business Conduct

•

Review any reports submitted regarding compliance with the Company’s Code of Business Conduct and approve, as appropriate, any preapprovals or waivers thereto for directors, executive officers and senior financial officers and ensure that any waivers are disclosed in accordance with applicable laws.

•

Establish procedures for (i) the receipt, retention and treatment of complaints received by the Company regarding accounting, internal accounting controls or auditing matters, and (ii) the confidential, anonymous submission by employees of the Company of concerns regarding questionable accounting or auditing matters.

Oversight of Legal/Litigation, Regulatory and Environmental Matters

•

Meet at least annually with the general counsel, and outside counsel when appropriate, to review legal and regulatory matters, including any matters that may have a material impact on the financial statements of the Company.

•

Review and provide oversight of:

(i)

litigation matters, to ensure appropriate management and supervision is being afforded significant actual and potential litigation and insurance claims; and

(ii)

environmental compliance matters, including review of the Company’s regulatory and civil litigation exposure concerning environmental contamination and/or toxic torts and to ensure that appropriate management attention is being given to such matters.

•

The Committee shall have direct access to and meet as needed with the officer in charge of each function, without management present, as appropriate. The officers shall report all significant matters to the Committee.

A-3

Risk Assessment and Risk Management

Discuss the Company’s major risk exposures and the steps management has taken to monitor and control such exposures. In this regard, review the process used by the Board’s Finance Committee to discuss policies with respect to the Company’s risk assessment and risk management.

Annual Performance Evaluation

Produce and provide to the Board an annual performance evaluation of the Committee. The evaluation shall compare the performance of the Committee with the requirements of this Charter. Recommend to the Board any improvements to the Charter.

Other

•

Prepare the report required by the rules of the Securities and Exchange Commission to be included in the Company’s annual proxy statement.

•

Recommend to the Board special audits or studies the Committee considers necessary or advisable. Review the reports issued for such special audits or studies and recommend to the Board any action considered necessary.

•

The Committee shall also be responsible for any other matters as may from time to time be requested by the Board and/or the Chief Executive Officer.

•

The Committee may, in its discretion, delegate all or a portion of its duties and responsibilities to a subcommittee of the Committee.

The Committee shall be notified promptly by management, the internal auditor or independent auditor of the discovery of fraudulent, questionable or illegal events which could have a material impact on the financial statements or reputation of the Company.

MEETINGS

The Committee shall meet once every fiscal quarter, or more frequently if circumstances warrant. As deemed necessary by the Committee, meetings shall be attended by Company personnel. Both the internal auditor and the independent auditor shall (i) meet alone with the Committee at each regularly scheduled meeting to discuss any matters that the Committee or any of these persons or firms believe should be discussed privately and (ii) have authority and are expected to contact the Committee on any matters requiring its attention.

The Committee may obtain advice and assistance from outside legal, accounting or other advisors. The Committee may retain these advisors without seeking Board approval.

The Committee may meet separately with management and request any officer, employee or Company’s outside counsel to attend a Committee meeting or to meet with any advisors or consultants to the Committee.

A-4

APPENDIX B

WISCONSIN ENERGY CORPORATION

2002 ANNUAL FINANCIAL STATEMENTS

and

REVIEW of OPERATIONS

SELECTED FINANCIAL AND OPERATING DATA

WISCONSIN ENERGY CORPORATION

CONSOLIDATED SELECTED FINANCIAL AND STATISTICAL DATA

Financial	2002 (a)		2001		2000 (b)		1999		1998
Year Ended December 31
Net income (Millions)	$	167.0	$	219.0	$	154.2	$	209.0	$	188.1
Earnings per share of common stock
Basic	$	1.45	$	1.87	$	1.28	$	1.79	$	1.65
Diluted	$	1.44	$	1.86	$	1.27	$	1.79	$	1.65
Dividends per share of common stock	$	0.80	$	0.80	$	1.37	$	1.56	$	1.555
Operating revenues (Millions)
Utility energy	$	2,852.1	$	2,964.8	$	2,556.7	$	2,050.2	$	1,980.0
Non-utility energy		167.2		337.3		372.8		193.2		34.1
Manufacturing		685.2		585.1		382.2		—		—
Other		31.7		41.3		51.0		29.2		25.3

Total operating revenues	$	3,736.2	$	3,928.5	$	3,362.7	$	2,272.6	$	2,039.4

Manufacturing operating revenues (Millions)
Domestic	$	507.6	$	444.9	$	294.1		—		—
International		177.6		140.2		88.1		—		—

Total manufacturing operating revenues	$	685.2	$	585.1	$	382.2		—		—

At December 31 (Millions)
Total assets	$	8,364.9	$	8,328.7	$	8,406.1	$	6,061.8	$	5,185.6
Long-term debt and mandatorily redeemable trust preferred securities	$	3,230.5	$	3,437.3	$	2,932.7	$	2,334.6	$	1,749.0
Utility Energy Statistics
Electric
Megawatt-hours sold (Thousands)		30,862.6		31,062.6		32,042.4		31,257.1		29,940.4
Customers (End of year)		1,078,710		1,066,275		1,048,711		1,027,785		1,010,318
Gas
Therms delivered (Millions)		2,121.3		1,997.2		1,621.5		944.1		922.8
Customers (End of year)		982,066		966,817		952,177		398,508		388,478
Non-Utility Energy Statistics
Independent Power Production
Electric megawatt-hour sales (Thousands)		2,998.3		4,428.2		3,213.2		2,417.2		—
Energy Marketing, Trading & Services
Electric megawatt-hour sales (Thousands)		—		457.6		2,091.2		1,598.1		723.7
Gas therm sales (Millions)		—		100.3		187.6		—		—

CONSOLIDATED SELECTED QUARTERLY FINANCIAL DATA (Unaudited)

	(Millions of Dollars, Except Per Share Amounts) (c)
	March					June
Three Months Ended	2002			2001		2002		2001
Total operating revenues	$	986.0		$	1,357.2	$	870.9	$	862.2
Operating income	$	34.3		$	183.8	$	112.3	$	103.7
Net income	($	4.2	)	$	87.8	$	45.4	$	46.1
Earnings per share of common stock
Basic	($	0.04	)	$	0.74	$	0.39	$	0.39
Diluted	($	0.04	)	$	0.74	$	0.39	$	0.39
	September					December
Three Months Ended	2002			2001		2002		2001
Total operating revenues	$	869.8		$	824.9	$	1,009.5	$	884.2
Operating income	$	137.0		$	150.5	$	174.4	$	166.9
Net income	$	52.1		$	47.9	$	73.7	$	37.2
Earnings per share of common stock
Basic	$	0.45		$	0.41	$	0.64	$	0.33
Diluted	$	0.45		$	0.41	$	0.63	$	0.31

(a)

In the first quarter of 2002, Wisconsin Energy recorded a non-cash charge of $141.5 million related primarily to non-utility investments which are held for sale.

(b)

Includes WICOR, Inc. and its subsidiaries subsequent to their acquisition on April 26, 2000.

(c)

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-2

WISCONSIN ENERGY CORPORATION

CONSOLIDATED SELECTED UTILITY OPERATING DATA

Year Ended December 31	2002			2001		2000 (a)		1999			1998

Electric Utility
Operating Revenues (Millions)
Residential	$	703.0		$	654.5	$	606.7	$	584.3		$	576.2
Small Commercial/Industrial		606.3			592.9		550.0		524.9			496.2
Large Commercial/Industrial		483.1			479.7		472.8		459.4			455.3
Other—Retail/Municipal		77.7			70.6		64.7		56.7			54.7
Resale—Utilities		18.1			56.8		79.1		74.7			60.9
Other Operating Revenues		22.6			12.9		24.5		22.1			20.3

Total Operating Revenues	$	1,910.8		$	1,867.4	$	1,797.8	$	1,722.1		$	1,663.6

Megawatt-hour Sales (Thousands)
Residential		8,310.9			7,773.4		7,633.2		7,503.1			7,405.0
Small Commercial/Industrial		8,719.5			8,595.4		8,524.7		8,257.7			7,746.2
Large Commercial/Industrial		11,129.6			11,177.6		11,824.0		11,542.8			11,523.3
Other—Retail/Municipal		2,051.9			1,828.6		1,755.8		1,531.4			1,409.3
Resale—Utilities		650.7			1,687.6		2,304.7		2,422.1			1,856.6

Total Sales		30,862.6			31,062.6		32,042.4		31,257.1			29,940.4

Number of Customers (Average)
Residential		963,988			950,271		934,494		915,713			904,703
Small Commercial/Industrial		105,551			103,908		101,665		99,209			97,858
Large Commercial/Industrial		709			710		716		720			724
Other		2,389			2,363		2,327		1,978			1,899

Total Customers		1,072,637			1,057,252		1,039,202		1,017,620			1,005,184


Gas Utility
Operating Revenues (Millions)
Residential	$	591.0		$	645.9	$	450.2	$	193.8		$	176.5
Commercial/Industrial		279.7			313.4		225.2		95.1			87.9
Interruptible		12.6			17.0		13.7		5.3			7.1

Total Retail Gas Sales		883.3			976.3		689.1		294.2			271.5
Transported Customer-Owned Gas		38.3			36.7		31.3		14.6			12.0
Transported—Interdepartmental		1.1			1.2		1.5		1.8			2.5
Other Operating Revenues		(4.6	)		60.3		14.4		(3.8	)		9.9

Total Operating Revenues	$	918.1		$	1,074.5	$	736.3	$	306.8		$	295.9

Therms Delivered (Millions)
Residential		817.1			756.3		569.0		329.0			289.5
Commercial/Industrial		463.1			427.7		336.5		195.3			182.0
Interruptible		29.4			25.8		24.9		16.3			23.3

Total Retail Gas Sales		1,309.6			1,209.8		930.4		540.6			494.8
Transported Customer-Owned Gas		786.0			762.4		650.1		347.9			349.4
Transported—Interdepartmental		25.7			25.0		41.0		55.6			78.6

Total Therms Delivered		2,121.3			1,997.2		1,621.5		944.1			922.8

Number of Customers (Average)
Residential		888,626			875,339		697,570		360,084			347,747
Commercial/Industrial		82,973			79,503		62,626		32,594			31,586
Interruptible		79			82		72		89			146
Transported Customer-Owned Gas		1,502			4,463		3,247		328			271
Transported—Interdepartmental		6			5		6		6			6

Total Customers		973,186			959,392		763,521		393,101			379,756


Degree Days (b)
Heating (6,769 Normal)		6,551			6,338		6,716		6,318			5,848
Cooling (703 Normal)		897			711		566		753			800

(a)

Includes Wisconsin Gas subsequent to the acquisition of WICOR, Inc. on April 26, 2000. Average gas customers are weighted for the eight months when Wisconsin Gas was a part of Wisconsin Energy.

(b)

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

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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, a non-utility energy segment and a manufacturing segment. Unless qualified by their context, when used in this document the terms “Wisconsin Energy” or the “Company” refer to the holding company and all of its subsidiaries.

The utility energy segment, consisting of Wisconsin Electric Power Company (“Wisconsin Electric”) and Wisconsin Gas Company (“Wisconsin Gas”), both doing business under the trade name of “We Energies”, and Edison Sault Electric Company (“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. The non-utility energy segment primarily consists of Wisvest Corporation (“Wisvest”) and W.E. Power, LLC (“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 and other utilities. The manufacturing segment consists of companies which manufacture pumps as well as fluid processing and pump filtration equipment.

Acquisition of WICOR, Inc.: On April 26, 2000, Wisconsin Energy acquired WICOR, Inc. (“WICOR”). WICOR is the parent of Wisconsin Gas, the largest natural gas distribution utility in Wisconsin, and of WICOR Industries, Inc. (“WICOR Industries”), an intermediate holding company which owns several manufacturers of pumps as well as fluid processing and pump filtration equipment. This business combination was accounted for as a purchase and, therefore, is reflected prospectively in Wisconsin Energy’s consolidated financial statements from and after the date of the acquisition.

Cautionary Factors: Certain statements contained herein are “Forward Looking Statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward Looking Statements may be identified by reference to a future period or periods or by the use of forward looking terminology such as “may,” “intends,” “anticipates,” “believes,” “estimates,” “expects,” “forecasts,” “objectives,” “plans,” “possible,” “potential,” “project” or similar terms or variations of these terms. Actual results may differ materially from those set forth in Forward Looking Statements as a result of certain risks and uncertainties, including but not limited to, changes in political and economic conditions, equity and bond market fluctuations, varying weather conditions, governmental regulation and supervision, as well as other risks and uncertainties detailed from time to time in filings with the Securities and Exchange Commission (“SEC”) including factors described throughout this document and below in “Factors Affecting Results, Liquidity and Capital Resources”.

CORPORATE STRATEGY

Business Opportunities

With the acquisition of WICOR in April of 2000, the Company redefined its core competencies to include electric generation within the Midwest, electric and gas distribution, and manufacturing. In 2000, as part of an internal strategic planning process, management and the Board concluded that it was not practical to continue the strategy of competing in the non-regulated energy market outside of the Midwest.

The Company seeks to increase shareholder value by leveraging on the core competencies within its business segments. Wisconsin Energy’s key corporate strategy is Power the Future which was announced in September 2000. This strategy is designed to increase the electric generating capacity in the state of Wisconsin while maintaining a fuel diverse, reasonably priced electric supply. It also is designed to improve the delivery of energy within the Company’s distribution systems to meet increasing customer demands, and it is committed to improved environmental performance. The Power the Future strategy, which is discussed further below, is expected to have a significant impact on the Company’s utility and non-utility energy segments.

Utility Energy Segment: This segment is realizing operating efficiencies through the integration of the operations of Wisconsin Electric and Wisconsin Gas. These operating efficiencies should increase customer satisfaction and reduce operating costs. In connection with the Power the Future strategy, over the next decade, the Company plans to invest approximately $2.7 billion to improve the existing energy distribution system and approximately $1.3 billion to upgrade existing electric generating assets. This segment is also planning to invest approximately $150 million over the next three years to improve the availability of natural gas supplies to the state of Wisconsin.

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Manufacturing Segment: This segment continues to build on the strong name recognition and customer relationships that were developed under WICOR. This segment intends to continue its growth through international expansion, acquiring value-adding businesses, capturing cost efficiencies, implementing operating process improvements, and increasing sales through new product introductions and expanded market share.

Non-Utility Energy Segment: This segment will primarily focus on improving the supply of electric generation in Wisconsin. We Power has been formed to design, construct, own, finance and lease new generation assets and improvements in Wisconsin Electric’s existing generation assets under the Power the Future strategy. The majority of Wisvest’s assets have been divested in order to direct the capital and management attention to Power the Future.

Power the Future Strategy: In February 2001, Wisconsin Energy announced enhancements to a 10-year, $7 billion strategy, originally proposed in September 2000, to improve the supply and reliability of electricity in Wisconsin. This Power the Future strategy is intended to meet the growing demand for electricity and ensure a diverse fuel mix while keeping electricity prices reasonable. According to a report issued in June 2001, by the Wisconsin Governor’s Office, demand for electricity in the state of Wisconsin is currently expected to outstrip supply by 7,220 megawatts by the year 2016. Power the Future would add new coal and natural gas capacity to the state’s power portfolio and would allow Wisconsin Electric to roughly maintain its current fuel mix.

As part of its Power the Future strategy, Wisconsin Energy plans to make the following investments over the next decade:

•

Approximately $3 billion in 2,800 megawatts of new natural gas-based and coal-based generating capacity at existing sites;

•

Approximately $1.3 billion in upgrades to existing electric generating assets; and

•

Approximately $2.7 billion in new and existing energy distribution system assets.

In November 2001, Wisconsin Energy created a new non-utility energy subsidiary, We Power, that will design, construct, own, finance and lease the new generating capacity. Under the enhanced Power the Future strategy, Wisconsin Electric, subject to approval by the Public Service Commission of Wisconsin (“PSCW”), would lease each new facility and would operate and maintain the new plants under 25 to 30-year lease agreements. At the end of the leases, Wisconsin Electric could have the right to acquire the plants outright at market value or renew the lease, depending on tax considerations at that time. Smaller investor-owned or municipal utilities, cooperatives and power marketing associations would have the opportunity to participate in the project, including expanding or extending wholesale power purchases from Wisconsin Electric as a result of the additional electric generating capacity included in the proposal. Wisconsin Electric expects that all lease payments and operating costs of the plants will be recoverable in rates.

Implementation of the Company’s Power the Future strategy is subject to a number of regulatory approvals. In February 2001, Wisconsin Energy made preliminary filings for its enhanced Power the Future proposal with the PSCW. Subsequently, the state legislature amended several laws, making changes which are critical to the implementation of Power the Future. On October 16, 2001, the PSCW issued a declaratory ruling finding, among other things, that it was prudent to proceed with Power the Future and for the Company to incur the associated pre-certification expenses. However, individual expenses are subject to review by the PSCW in order to be recovered.

The Midwest Independent Power Suppliers Coordination Group (“MWIPS”) filed a Petition for Judicial Review with the Dane County Circuit Court asking the Circuit Court to reverse and remand the PSCW’s declaratory ruling. Wisconsin Electric filed a Notice of Appearance and Statement of Position asking that the declaratory ruling be upheld and the Petition for Judicial Review be dismissed. Upon motion of the PSCW and with the consent of MWIPS the judicial review proceeding was dismissed on its merits on January 2, 2003.

The application for a Certificate of Public Convenience and Necessity (“CPCN”) for the Power the Future project was filed with the PSCW in February of 2002. In April of 2002 the PSCW authorized the CPCN approval process to be bifurcated by fuel source, which would expedite the issuance of a CPCN certificate for the Port Washington combined cycle gas project. Correspondingly, on April 25, 2002 the CPCN application for the Port Washington Generating Station was deemed complete by the PSCW. Hearings for the Port Washington Generating Station were held in September 2002, and a written order approving the issuance of a CPCN for the project was received in December 2002. The CPCN filing for the generating station at the Company’s existing Oak Creek Power Plant site was deemed complete by the PSCW on November 15, 2002. In January 2003, certain intervenors filed with the PSCW a Petition for Review of the completeness determination seeking its reversal. The Company is opposing the petition and believes that the PSCW will reject the petition and reaffirm its completeness determination. Under the current schedule, Wisconsin

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Energy anticipates receiving a decision from the PSCW on the Oak Creek site in late 2003. Wisconsin Energy continues to work with the PSCW and the Wisconsin Department of Natural Resources (“WDNR”) to obtain all required permits and project approvals.

Wisconsin Energy anticipates obtaining the capital necessary to finance and execute Power the Future from a combination of internal and external sources. For further information concerning the Power the Future strategy, see “Factors Affecting Results, Liquidity and Capital Resources” below.

Divestiture of Non-Core Assets

The Power the Future strategy led to a decision to divest non-core businesses. These non-core businesses primarily include non-utility generation assets located outside of the Midwest and a substantial amount of Wispark LLC’s real estate portfolio. Since 2000, the Company has received total proceeds of approximately $1 billion from the divestiture of non-core assets as follows:

Proceeds from:	(Millions of Dollars)
Non-Utility Energy	$	542
Transmission		120
Real Estate		332
Other		19

Total Assets Divested	$	1,013

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RESULTS OF OPERATIONS

CONSOLIDATED EARNINGS

The following table compares Wisconsin Energy’s diluted earnings per share by business segment for 2002 and 2001 with similar information for 2000 on an actual and pro forma basis.

Diluted Earnings Per Share	2002			2001			Actual 2000			Pro forma 2000(a)
Utility Energy Segment	$	2.63		$	2.38		$	1.82		$	2.00
Manufacturing Segment		0.31			0.25			0.18			0.24
Non-Utility Energy Segment		(0.11	)		0.01			0.01			—
Other and Merger-related Costs (b)		(0.51	)		(0.53	)		(0.38	)		(0.55	)

Adjusted Earnings		2.32			2.11			1.63			1.69
Valuation Charges (c)		(0.79	)		(0.21	)		(0.26	)		(0.26	)
Gains on Asset Sales, net (d)		—			0.14			0.45			0.45
Goodwill Amortization (e)		—			(0.18	)		(0.12	)		(0.18	)
Litigation Charges (f)		(0.09	)		—			—			—
Non-Recurring Charges (g)		—			—			(0.43	)		(0.43	)

Net Earnings—GAAP	$	1.44		$	1.86		$	1.27		$	1.27

(a)

Pro forma assumes that the WICOR acquisition had occurred on January 1, 2000 and includes estimated merger-related costs from January through April 2000.

(b)

Includes the holding company, other non-utility companies and merger-related costs. Merger-related costs in 2001 and 2000 include primarily interest expense net of tax related to the WICOR merger.

(c)

During 2002, the valuation charge consists of a $0.79 per share write-down primarily attributable to the non-utility energy segment. During 2001, the valuation charge consists of a $0.21 per share write-down of non-utility assets. During 2000, valuation charges consist of $0.26 per share related to the valuation of non-core investments.

(d)

During 2001, the gain on asset sales consists of $0.14 per share of gains on the sale of the Company’s interests in Blythe Energy, LLC, and FieldTech, Inc. During 2000, the gain on assets sales consists of a $0.45 per share gain on the sale of the Company’s interests in SkyGen Energy Holdings, LLC.

(e)

The Company adopted SFAS 142 effective January 1, 2002 which eliminated the amortization of goodwill and other intangibles with indefinite lives.

(f)

During 2002, the litigation charges consist of $0.09 per share for the settlement of litigation with the City of West Allis in the second quarter of 2002 and Giddings & Lewis Inc. and Kearney & Trecker Corporation (now part of Giddings & Lewis) in the third quarter of 2002.

(g)

During 2000, non-recurring charges consist of $0.33 per share related to severance and employee benefits, and a $0.10 per share contribution to the Wisconsin Energy Foundation.

Wisconsin Energy had net income of $1.44 per share during 2002 compared with net income of $1.86 per share during 2001. Adjusted earnings, which exclude a non-cash impairment charge and gains on asset sales, litigation charges and goodwill amortization increased to $2.32 per share during 2002 as compared to $2.11 per share for the same period in 2001. The Company had net income of $1.86 per share during 2001 compared with pro forma net income of $1.27 per share during 2000. Adjusted earnings, which exclude non-cash losses on investments and gains on asset sales and non-recurring charges, increased to $2.11 per share during 2001 as compared to $1.69 per share for 2000 on a pro forma basis. These changes in adjusted earnings are primarily due to the following items:

	2002-2001 per share			2001-2000 Pro forma per share
Electric utility margins	$	0.34		$	0.34
Gas utility margins		0.11			(0.08	)
Interest expense		0.12			0.15
Manufacturing earnings		0.06			0.01
Non-utility energy segment earnings (losses)		(0.12	)		0.01
2002 second outage nuclear expenses		(0.08	)		—
ATC incremental transmission expenses, net		(0.05	)		—
2001 interest income accrual on litigation		(0.05	)		0.05
2002 costs for early repayment of $103.4 million of long-term debt		(0.03	)		—
Other, net		(0.09	)		(0.06	)

Total change in adjusted earnings per share	$	0.21		$	0.42

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An analysis of contributions to earnings by segment follows.

UTILITY ENERGY SEGMENT CONTRIBUTION TO EARNINGS

Net earnings for the utility energy segment increased by $20.8 million or 7.6% in 2002 compared to reported 2001 earnings. The increase is primarily attributable to improved electric and gas margins, a strong focus on managing financial resources and reduced financing costs. Offsetting these items were $17.3 million for litigation settlements, $10.5 million in reduced interest income, $5.3 million in costs in 2002 for the early repayment of $103.4 million of long-term debt and additional expenses related to nuclear operations.

Utility net earnings during 2001 increased by $114.4 million to $274.4 million compared to reported 2000 earnings. The primary causes for the growth in utility earnings were $90.0 million attributable to price increases to recover higher fuel, purchased power and other operating costs primarily from the electric business, a $24.5 million increase attributable to Wisconsin Gas operations as a result of the seasonality of the gas heating business, the timing of the acquisition of Wisconsin Gas as part of the acquisition of WICOR in April 2000 and $10.5 million of interest income accrued on the deposit tendered in the Giddings & Lewis, Inc./City of West Allis lawsuit.

Utility net earnings during 2001 increased by $54.0 million when compared to 2000 pro forma earnings. The primary causes for this increase were $65.8 million attributable to higher electric utility gross margins and $10.5 million of interest income accrued on the deposit in the Giddings & Lewis, Inc./City of West Allis lawsuit offset partially by a decrease of $15.6 million of gas utility gross margins.

The following table summarizes the utility energy segment’s earnings during 2002 and 2001 with similar information for 2000 on an actual and pro forma basis.

Utility Energy Segment	2002		2001		Actual 2000(b)			Pro forma 2000(a)
	(Millions of Dollars)
Operating Revenues
Electric	$	1,910.8	$	1,867.4	$	1,797.8		$	1,797.8
Gas		918.1		1,074.5		736.3			952.3
Other		23.2		22.9		22.6			22.9

Total Operating Revenues		2,852.1		2,964.8		2,556.7			2,773.0
Fuel and Purchased Power		496.7		517.3		513.5			513.5
Cost of Gas Sold		574.9		751.6		486.7			613.8

Gross Margin		1,780.5		1,695.9		1,556.5			1,645.7
Other Operating Expenses
Other Operation and Maintenance		830.2		765.5		757.9			742.3
Depreciation, Decommissioning and Amortization		308.3		320.1		308.5			321.1
Property and Revenue Taxes		79.9		75.4		71.0			71.1

Operating Income		562.1		534.9		419.1			511.2
Other Income (Deductions)		24.5		36.8		(13.6	)		6.3
Financing Costs		107.3		116.4		140.5			150.5

Income Before Income Taxes		479.3		455.3		265.0			367.0
Income Taxes		184.1		180.9		105.0			146.6

Net Earnings	$	295.2	$	274.4	$	160.0		$	220.4

Adjusted Earnings (c)	$	305.8	$	280.5	$	220.2		$	242.2

(a)

Includes Wisconsin Gas as if it had been part of Wisconsin Energy since January 1, 2000.

(b)

Wisconsin Energy’s financial statements reflect the operations of Wisconsin Gas subsequent to the WICOR merger on April 26, 2000.

(c)

During 2002, adjusted earnings exclude $10.6 million after tax related to the Giddings & Lewis, Inc./City of West Allis lawsuit. During 2001, adjusted earnings exclude a net loss on investments of $1.2 million and WICOR acquisition purchase accounting entries, primarily goodwill amortization and interest expense. During 2000, adjusted earnings exclude $45.9 million of net non-recurring charges primarily associated with the WICOR merger. In addition, 2000 adjusted earnings exclude the WICOR acquisition purchase accounting entries.

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Electric Utility Revenues, Gross Margins and Sales

The following table compares Wisconsin Energy’s electric utility operating revenues and its gross margin during 2002 with similar information for 2001 and 2000.

	Electric Revenues and Gross Margin						Megawatt-Hour Sales
Electric Utility Operations	2002		2001		2000		2002	2001	2000
	(Millions of Dollars)						(Thousands)
Operating Revenues
Residential	$	703.0	$	654.5	$	606.7	8,310.9	7,773.4	7,633.2
Small Commercial/Industrial		606.3		592.9		550.0	8,719.5	8,595.4	8,524.7
Large Commercial/Industrial		483.1		479.7		472.8	11,129.6	11,177.6	11,824.0
Other-Retail/Municipal		77.7		70.6		64.7	2,051.9	1,828.6	1,755.8
Resale-Utilities		18.1		56.8		79.1	650.7	1,687.6	2,304.7
Other Operating Revenues		22.6		12.9		24.5	—	—	—

Total Operating Revenues		1,910.8		1,867.4		1,797.8	30,862.6	31,062.6	32,042.4

Fuel and Purchased Power
Fuel		278.9		308.8		325.3
Purchased Power		211.1		202.3		182.0

Total Fuel and Purchased Power		490.0		511.1		507.3

Gross Margin	$	1,420.8	$	1,356.3	$	1,290.5

Weather—Degree Days (a)
Heating (6,769 Normal)							6,551	6,338	6,716
Cooling (703 Normal)							897	711	566

(a)

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

2002 vs 2001: During 2002, total electric energy sales decreased by 0.6% compared with 2001, primarily reflecting a decline in sales for resale to other utilities due to a reduced demand for wholesale power. Most of the remaining customer classes had increased sales in 2002 reflecting favorable weather and the growth in the average number of customers. Sales to Wisconsin Electric’s largest commercial/industrial customers, two iron ore mines, declined by 2.8% between the comparative periods due to the shutdown of a mine in the first quarter of 2002. Excluding these mines, total commercial/industrial electric sales increased by 0.8% and sales to the remaining large commercial/industrial customers increased by 0.1% between the comparative periods.

During 2002, Wisconsin Energy’s total electric utility operating revenues increased by $43.4 million or 2.3% compared with 2001 due to favorable weather, the full year impact of price increases related to fuel and purchased power and a surcharge related to transmission costs. As measured by cooling degree days, 2002 was 26.2% warmer than 2001 and 27.6% warmer than normal. In February and May 2001, Wisconsin Electric received increases in rates to cover increased fuel and purchased power costs. On a year to year basis, the fuel surcharge resulted in $10.0 million of additional revenue. For additional information concerning the rate increases, see “Factors Affecting Results, Liquidity and Capital Resources” below. Even with the increased fuel revenues, the Company estimates that it under-recovered fuel and purchased power costs by $2.3 million and $0.1 million for 2002 and 2001, respectively. In addition, in October 2002, the Company implemented a PSCW approved surcharge for recovery of increased annual transmission costs associated with American Transmission Company LLC (“ATC”) which increased 2002 revenues by approximately $8.7 million.

Between the comparative periods, fuel and purchased power expenses decreased by $21.1 million or 4.1% primarily due to lower natural gas prices, lower wholesale power prices, and lower megawatt sales. These reductions were partially offset by higher costs due to a larger number of planned outages including a second refueling outage at the Point Beach Nuclear Plant during 2002. The lower fuel and purchased power expenses and increased sales to higher margin customers offset the impact on electric revenues of the decline in electric megawatt-hours such that the total gross margin on electric operating revenues increased by $64.5 million or 4.8% during 2002 compared with the same period in 2001.

2001 vs 2000: During 2001, total electric sales fell by 3.1% compared with 2000, reflecting a softening economy that especially affected large commercial and industrial customers such as Wisconsin Electric’s largest retail customers, two iron ore mines. Sales

B-9

to these mines decreased by 17.7% during 2001. Excluding the two mines, total electric sales decreased 1.8% during 2001 and sales to the remaining large commercial/industrial customers decreased by 2.3% when compared with 2000. Due to warmer weather during the summer of 2001, a 1.8% increase in sales to residential customers, who are more weather sensitive and contribute higher margins than other customer classes, partially offset the effects of the soft economy on electric sales during 2001. As measured by cooling degree days, 2001 was 25.6% warmer than 2000 and 3.8% warmer than normal. Sales for resale to other utilities, the Resale-Utilities customer class, declined 26.8% during 2001 primarily as a result of reduced demand for wholesale power.

During 2001, Wisconsin Energy’s total electric utility operating revenues increased by $69.6 million or 3.9% compared with 2000. Wisconsin Energy attributes this growth mostly to incremental rate increases in effect during 2001 related to higher fuel, purchased power and other operating costs. For additional information concerning these rate increases, see “Factors Affecting Results, Liquidity and Capital Resources” below. Higher electric cooling load during the summer of 2001 caused by a return to normal summer weather also contributed to the growth in electric operating revenues. These revenue increases were partially offset by a reduction in total electric sales during 2001 due in large part to a softening economy in the region.

Purchased power expenses increased by $20.3 million or 11.2% during 2001 primarily as a result of higher natural gas prices and, to a lesser extent, as a result of higher demand costs during 2001 associated with purchased power contracts. A $16.5 million or 5.1% decline in fuel costs during 2001, primarily driven by a change in the Company’s electric supply mix to lower cost nuclear generation and by an overall reduction in demand for electric energy during 2001, resulted in a net increase in fuel and purchased power expenses of $3.8 million or 0.7% when compared with 2000. Due to the 3.9% increase in operating revenues partially offset by the slightly higher fuel and purchased power costs, electric gross margin (total electric utility operating revenues less fuel and purchased power expenses) grew by $65.8 million or 5.1% during 2001 when compared with 2000.

Gas Utility Revenues and Gross Margins

The following table compares Wisconsin Energy’s gas utility operating revenues and its gross margin (total gas utility operating revenues less cost of gas sold) during 2002 and 2001 with similar information for 2000 on an actual and pro forma basis.

Gas Utility Operations	2002		2001		Actual 2000(b)		Pro forma 2000(a)
	(Millions of Dollars)
Gas Operating Revenues	$	918.1	$	1,074.5	$	736.3	$	952.3
Cost of Gas Sold		574.9		751.6		486.7		613.8

Gross Margin	$	343.2	$	322.9	$	249.6	$	338.5

(a)

Includes Wisconsin Gas as if it had been part of Wisconsin Energy since January 1, 2000. For further information concerning gas utility operations during the comparative periods, see “Gas Utility Gross Margins and Therm Deliveries” below.

(b)

Wisconsin Energy’s financial statements reflect the operations of Wisconsin Gas subsequent to the WICOR merger on April 26, 2000.

2002 vs 2001: During 2002, total gas utility operating revenues decreased by $156.4 million or 14.6% compared to 2001, due to lower gas costs offset in part by increased deliveries resulting from colder winter weather. This decline primarily reflects a decrease in natural gas costs in 2002 which are passed on to customers under gas cost recovery mechanisms.

2001 vs 2000: During 2001, Wisconsin Energy’s gas operating revenues increased by $122.2 million or 12.8% when compared with 2000 pro forma revenues. This increase reflected a $137.8 million increase due to increases in the cost of gas sold offset in part by warmer weather which reduced volumes sold.

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Gas Utility Gross Margins and Therm Deliveries

The following table compares gas utility gross margin and therm deliveries during 2002, 2001 and pro forma 2000 as if Wisconsin Gas had been part of Wisconsin Energy since January 1, 2000.

	Gross Margin						Therm Deliveries
Gas Utility Operations	2002		2001		2000(a)		2002	2001	2000(a)
	(Millions of Dollars)						(Millions)
Customer Class
Residential	$	224.6	$	209.0	$	216.0	817.1	756.3	803.8
Commercial/Industrial		67.4		62.3		64.4	463.1	427.7	462.1
Interruptible		2.1		2.0		2.5	29.4	25.8	35.2

Total Gas Sold		294.1		273.3		282.9	1,309.6	1,209.8	1,301.1
Transported Gas		41.9		41.4		47.0	811.7	787.4	897.1
Other Operating		7.2		8.2		8.6	—	—	—

Total	$	343.2	$	322.9	$	338.5	2,121.3	1,997.2	2,198.2

Weather—Degree Days (b)
Heating (6,769 Normal)							6,551	6,338	6,716

(a)

Pro forma—as if Wisconsin Gas had been part of Wisconsin Energy since January 1, 2000.

(b)

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

2002 vs 2001: Gas gross margin for 2002 totaled $343.2 million, or an increase of $20.3 million from 2001. This increase was primarily due to a return to colder winter weather in 2002 which increased the heating degree days compared to 2001. In addition, the Company had a rate increase which became effective December 20, 2001 which contributed $3.2 million in 2002. The average number of customers also increased in 2002 which favorably impacted the fixed component of operating revenues that is not affected by volumes fluctuations.

2001 vs 2000 pro forma: Gas margins totaled $322.9 million in 2001, or a $15.6 million decline from 2000 pro forma amounts. This decline was directly related to warmer winter weather which reduced the heating load. Total therm deliveries of natural gas decreased by 9.1% during 2001, but varied within customer classes. Volume deliveries for the residential and commercial/industrial customer classes decreased by 5.9% and 7.4%, respectively, reflecting warmer weather. Residential and commercial customers are more weather sensitive and contribute higher margins per therm than other customers. Transportation volumes were 12.2% lower than the prior year reflecting fuel switching to lower-cost fuel options and a softening economy.

Other Utility Segment Items

Other Operation and Maintenance Expenses: Other operation and maintenance expenses increased by $64.7 million or 8.5% during 2002 compared with 2001. The most significant change in other operation and maintenance expenses between 2002 and 2001 resulted from $17.3 million for the settlements of litigation with the City of West Allis in the second quarter of 2002 and Giddings & Lewis Inc. and Kearney & Trecker Corporation (now part of Giddings & Lewis) in the third quarter of 2002. Increased other operation and maintenance expenses during 2002, were also attributable to $9.8 million of higher electric transmission expenses associated with ATC which were offset by increased revenues recorded due to the surcharge which became effective in October of 2002, $9.2 million of increased scheduled maintenance at several steam generation plants, and $15.4 million associated with the second scheduled outage and incremental costs associated with reactor vessel head inspections at Point Beach Nuclear Plant in 2002. In 2002, both Point Beach nuclear units had scheduled outages. In 2001, only one nuclear unit had a scheduled outage. One outage is scheduled for 2003. The Company also experienced an increase of $17.4 million for employee benefit and pension costs and $4.8 million in property insurance costs which were partially offset by cost reduction efforts during 2002.

Other operation and maintenance expenses increased by $23.2 million during 2001 when compared with 2000 pro forma amounts. The most significant change in other operation and maintenance expenses between the comparative periods resulted from $44.9 million of higher electric transmission expenses caused by a change in how electric transmission costs are recorded as a result of the transfer of Wisconsin Electric’s and Edison Sault’s electric transmission assets to ATC on January 1, 2001. Partially offsetting this was a reduction in costs as a result of the WICOR merger, which led to the consolidation of common operating and support areas.

B-11

Depreciation, Decommissioning and Amortization Expenses: Depreciation, decommissioning and amortization expenses decreased by $11.8 million during 2002 compared with 2001. This decrease was primarily due to the impact of the retirement of several shorter-lived intangible assets and the adoption on January 1, 2002 of SFAS 142 which eliminated the amortization of goodwill.

Depreciation, decommissioning and amortization expenses were $1.0 million lower during 2001 compared with 2000 pro forma. The transfer of electric transmission assets to the ATC resulted in a reduction in depreciation expense, which was partially offset by increased capital asset additions for electric generation and for electric and gas distribution systems.

MANUFACTURING SEGMENT CONTRIBUTION TO EARNINGS

The manufacturing segment contributed $35.8 million to earnings during 2002, excluding costs related to the WICOR merger, compared to $29.1 million during 2001. Including WICOR merger costs, earnings were $24.0 million, or $14.3 million better than 2001.

During 2001, the manufacturing segment contributed $29.1 million to earnings before merger costs, which was slightly better than the prior year pro forma amounts. Including WICOR merger costs, earnings were $9.7 million, or $1.7 million better than 2000 pro forma amounts. Prior to the WICOR acquisition, Wisconsin Energy did not have a manufacturing segment. The following table summarizes the manufacturing segment’s earnings during 2002, 2001 and 2000 on an actual and pro forma basis.

Manufacturing Segment	2002		2001		Actual 2000(b)			Pro forma 2000(a)
	(Millions of Dollars)
Operating Revenues
Domestic	$	507.6	$	444.9	$	294.1		$	433.9
International		177.6		140.2		88.1			141.3

Total Operating Revenues		685.2		585.1		382.2			575.2
Cost of Goods Sold		513.2		428.0		274.5			415.8

Gross Margin		172.0		157.1		107.7			159.4
Other Operating Expenses		115.8		116.0		75.2			115.2

Operating Income		56.2		41.1		32.5			44.2
Other Income (Deductions)		0.3		0.3		(3.7	)		(5.7	)
Financing Costs		18.2		22.0		14.1			21.4

Income Before Income Taxes		38.3		19.4		14.7			17.1
Income Taxes		14.3		9.7		7.2			9.0

Net Earnings	$	24.0	$	9.7	$	7.5		$	8.1

Adjusted Earnings(c)	$	35.8	$	29.1	$	21.5		$	28.9

(a)

Includes operations of the manufacturing segment as if it had been part of Wisconsin Energy since January 1, 2000.

(b)

Wisconsin Energy’s financial statements reflect operations of the manufacturing segment subsequent to the WICOR merger on April 26, 2000.

(c)

Adjusted Earnings for 2002, 2001 and 2000 exclude merger-related costs which represent WICOR acquisition purchase accounting entries, primarily goodwill amortization and interest expense.

2002 vs 2001: Manufacturing operating revenues increased by $100.1 million or 17.1% between 2002 and 2001. Recent acquisitions contributed incremental sales of $56.8 million in 2002. Excluding the impact of recent acquisitions, the Company experienced an 8.0% growth in its manufacturing business. Sales in almost all markets were up with the largest increases in water systems, pool/spa, R/V, and beverage and food markets. Domestic sales were up $62.7 million, and international sales increased $37.4 million for the twelve months ended December 31, 2002, or 14.1% and 26.7% respectively, compared to the same period in 2001. The increases were due to acquisitions in 2002 and 2001, market share/customer growth, drought conditions in the United States and Australia, and new product introductions. Gross profit margin decreased to 25.1% in 2002 from 26.9% in 2001 due primarily to changes in the customer/product mix as a result of acquisitions and increased customer rebates due to sales

growth. Operating income was up 36.7% primarily due to recent acquisitions, cost savings achieved through consolidation of operations, the continuation of cost improvement programs, and the adoption of SFAS 142 which eliminated amortization of goodwill and certain intangible assets, offset by one-time costs associated with consolidation of facilities in the first quarter of 2002.

B-12

2001 vs 2000 pro forma: Operating revenues were up by $9.9 million during 2001 as compared to pro forma operating revenues in 2000 primarily due to acquisitions, offset partially by the effects of a decline in the economy on base-business sales and unfavorable foreign currency translations. The manufacturing segment’s modest decline reflects the steadiness and diversification of the markets it serves. For the year, operating income of $41.1 million was down $3.1 million compared with 2000 on a pro forma basis. Operating expenses increased slightly in 2001 primarily from additional operations due to the acquisitions offset in part by aggressive cost reduction initiatives implemented early in the year. The manufacturing segment’s results for 2000 were impacted by a series of expenses associated with the defense of intellectual property rights, development of a new beverage dispensing technology and the integration of an acquisition.

NON-UTILITY ENERGY SEGMENT CONTRIBUTION TO EARNINGS

As part of its ongoing efforts to divest non-core assets, the Company significantly reduced certain of Wisvest’s operations during 2002 and 2001. The following table compares the non-utility energy segment’s earnings during 2002, 2001 and actual and pro forma information for 2000.

Non-Utility Energy Segment	2002			2001			Actual 2000			Pro forma 2000(c)
	(Millions of Dollars)
Wisvest-Connecticut Operations	($	1.4	)	$	20.8		$	2.4		$	2.4
SFAS 133, net		12.6			(12.6	)		—			—
We Power costs		(4.1	)		—			—			—
Other Non-utility energy operations		(20.2	)		(6.0	)		(1.6	)		(2.0	)
Asset Sales/Valuation Charges (a)		(81.3	)		16.5			54.6			54.6
Non recurring Charges (b)		—			—			(16.0	)		(16.0	)

Net Earnings (Loss)	($	94.4	)	$	18.7		$	39.4		$	39.0

(a)

During the first quarter of 2002, the Company recorded an impairment charge of $0.79 per share after-tax primarily related to the decline in value in non-utility assets held for sale. During 2001, the gain on asset sales consists of $0.14 per share of gains on the sale of the Company’s interests in Blythe and FieldTech. During 2000, the gain on asset sales consists of a $0.45 per share gain on the sale of the Company’s interests in SkyGen Energy Holdings, LLC (“SkyGen”).

(b)

During 2000, non-recurring charges consist of $0.13 per share related to severance and employee benefits.

(c)

Includes the operations of the WICOR subsidiaries as if they had been part of Wisconsin Energy since January 1, 2000. In addition, earnings during 2000 include $16.1 million of net non-recurring charges relating to severance costs associated with the divestiture of non-core businesses and to write-downs associated with certain investments.

2002 vs 2001: The decrease in earnings at Wisvest-Connecticut, LLC can be broken down between operation of the assets and SFAS 133 gains or charges. During 2002, Wisvest-Connecticut had an operating loss of $1.4 million compared to earnings of $20.8 million in 2001. This decline is directly related to lower wholesale market prices for electricity in the Northeast United States and an extended unscheduled outage at one of its major generating units from the last half of August through November 2002. In addition, on December 6, 2002, Wisvest completed the sale of Wisvest-Connecticut to Public Service Enterprise Group.

Under SFAS 133, Wisvest-Connecticut recorded the changes in fair market value related to fuel oil contracts associated with its plants in the Northeast. During 2002, the Company recorded an after-tax gain of $12.6 million on these contracts due to settlement of contract transactions and increases in fuel oil prices. During 2001, the Company recorded an after-tax gain of $10.5 million related to the cumulative effect of a change in accounting upon the adoption of SFAS 133 offset by after-tax charges of $23.1 million related to settlement of contract transactions and decreases in fuel oil prices.

The loss from We Power operations in 2002 primarily relates to increased start-up costs as it continues to develop power plants for the Power the Future initiative.

The loss from other non-utility energy segment operations for 2002 primarily relates to Wisvest’s Calumet natural gas-based peaking power plant in Chicago, which was placed in service in June of 2002, and to an equity method investment in a power plant in Maine. The Calumet plant experienced start-up costs and limited power production due to lower wholesale market prices for electricity in the Midwest during the last six months of 2002. The Maine plant also was negatively impacted by lower than expected wholesale electric prices.

B-13

Asset Sales / Valuation Charges: During the first quarter of 2002, the Company recorded a non-cash impairment charge of $92.0 million after-tax or $0.79 per share. The impairment charge primarily related to two non-utility energy assets classified as “Assets Held for Sale” as of December 31, 2001: the Wisvest-Connecticut power plants and costs associated with a 500 megawatt power island consisting of gas turbine generators and related equipment.

During the first quarter of 2002, the Company determined that the carrying value of these assets exceeded market values due to a significant decline in the non-regulated energy markets resulting from many factors, including the collapse of Enron Corporation and the resulting tightening and downgrading of credit related to independent power producers. In addition, the electric forward price curves for the region declined due to the decline in natural gas costs and increased generating capacity. With the decline in market values, the non-utility energy assets held for sale were written down $0.71 per share to current fair value less costs to sell.

2001 vs 2000: During 2001, earnings of Wisvest-Connecticut increased by $18.4 million when compared with 2000 due primarily to both of Wisvest-Connecticut’s plants operating for the full year resulting in improved operating results. Beginning in the fourth quarter of 2000, the Wisvest-Connecticut assets were accounted for as assets held for sale. Under this accounting, no depreciation expense of long-lived assets is reported. This change in accounting benefited the operating results by approximately $0.05 per share when compared to 2000. During 2000, one of Wisvest-Connecticut’s plants experienced an extended outage which increased purchased power and maintenance costs.

The earnings from other non-utility energy segment operations for 2001 decreased by $4.4 million on an actual basis or by $4.0 million when compared with 2000 on a pro forma basis. During 2001, the operations of WICOR Energy Services Company were merged into an unconsolidated affiliate of Wisconsin Energy, ending direct gas marketing activities by the non-utility energy segment.

During the second quarter of 2001, the Company sold FieldTech, Inc. and Wisvest’s interest in Blythe Energy, LLC, an independent power production project in the state of California, in separate transactions. Wisconsin Energy realized after-tax gains of approximately $16.5 million or $0.14 per share as a result of the sales of FieldTech and Blythe. In October 2000, the Company closed on the sale of its interest in SkyGen Energy Holdings, LLC., which resulted in cash proceeds totaling approximately $332 million (including approximately $112 million for the repayment of certain advances, short-term notes receivable and interest) and an after tax gain of $54.6 million or $0.45 per share.

CONSOLIDATED OTHER INCOME AND DEDUCTIONS

Other income and deductions increased by $43.3 million in 2002 compared to 2001. This increase is primarily due to $12.6 million in SFAS 133 gains for 2002 compared with charges of $12.6 million in 2001 discussed above, and $22.9 million due to a reduction in the level of write-downs in the Witech Corporation venture capital portfolio offset in part by a decline in interest income during 2002 of $12.4 million primarily due to an interest accrual recorded in 2001 related to litigation.

During 2001, the Company incurred $73.0 million of charges, which are recorded as “Other” in Other Income and Deductions. These charges primarily represented $38.5 million of SFAS 133 charges related to the decline in oil prices discussed above and $37.6 million in write-downs in the Witech venture capital portfolio. During 2000, the Company incurred $39.3 million of charges which are recorded in “Other” in Other Income and Deductions. These charges primarily represented write-downs of non-core assets.

CONSOLIDATED FINANCING COSTS

Total financing costs decreased by $17.4 million in 2002 compared to 2001. This decline was primarily due to lower interest rates, and the early repayment of $103.4 million of long-term debt. During 2001, total financing costs were $246.6 million, up slightly from 2000 amounts but mitigated by the decline in short-term interest rates in 2001. During 2000, financing costs were $244.8 million. The 2000 financing costs were influenced by the April 2000 acquisition of WICOR, which resulted in almost $1.5 billion of additional debt for the Company.

CONSOLIDATED INCOME TAXES

The Company’s consolidated effective income tax rate was 38.8%, 41.9%, and 44.9% for each of the three years ending December 31, 2002, 2001, and 2000, respectively. The lower rate in 2002 reflects the elimination of goodwill amortization and the recognition of historical rehabilitation tax credits. The 2001 effective income tax rate reflects the amortization of the WICOR goodwill which is not deductible for income tax purposes. The 2000 effective income tax rate includes the amortization of WICOR goodwill for eight months, as well as the impact of a net unrealized capital loss. The effective income tax rate is negatively impacted by the inability to obtain a state tax benefit for state taxable losses of some of the separate legal entities within the Company. Those state taxable losses result primarily from interest expense. If the prospects for future taxable income for these legal entities should improve, the effective tax rate in years subsequent to 2002 may be favorably impacted.

B-14

LIQUIDITY AND CAPITAL RESOURCES

CASH FLOWS

The following table summarizes Wisconsin Energy’s cash flows during 2002, 2001 and 2000:

Wisconsin Energy Corporation	2002			2001			2000(a)
	(Millions of Dollars)
Cash Provided by (Used in)
Operating Activities	$	711.3		$	570.6		$	461.0
Investing Activities	($	365.8	)	($	479.1	)	($	1,520.5	)
Financing Activities	($	348.9	)	($	85.0	)	$	1,026.5

(a)

Includes the operations of the WICOR subsidiaries subsequent to the merger on April 26, 2000.

Operating Activities

During 2002, cash flow from operations increased to $711.3 million, or a $140.7 million improvement over 2001. This increase was primarily attributable to the return of a $100 million deposit plus accrued interest as a result of a favorable court ruling. During 2001, cash flow from operations increased to $570.6 million or $109.6 million over 2000 levels primarily attributable to increased operating income and higher non-cash charges.

Investing Activities

During 2002, Wisconsin Energy had net cash outflows for investing activities of $365.8 million as compared to $479.1 million in 2001. For 2002 and 2001, capital expenditures totaled $556.8 million and $672.5 million, respectively. This decline in capital expenditures is due to less spending in the non-utility energy segment. During 2001, the Company spent $672.5 million on capital expenditures, which was a $61.5 million increase over 2000. The largest increase in capital expenditures came within the utility energy segment for electric and gas distribution assets. During 2002 and 2001, the Company’s manufacturing segment also made acquisitions totaling $16.5 million and $35.7 million, respectively. In 2000, the Company completed the WICOR acquisition at a purchase price of $1.2 billion, as well as a small manufacturing acquisition. These acquisitions were initially financed with short-term commercial paper.

In 2002 and 2001, the Company continued its strategy of divesting non-core assets. During 2002 and 2001, the Company received proceeds from asset divestitures of $310.0 million and $294.4 million, respectively, related to the sale of the Wisvest-Connecticut power plants in 2002, the transfer in 2001 of electric transmission assets to ATC, and the successful sale in 2001 of the Wisvest Blythe project and FieldTech. During 2000, the Company received proceeds from asset sales of approximately $408.4 million which primarily reflects the sale of Wisvest’s investment in SkyGen, an independent power producer. The SkyGen sale resulted in a gain of $0.45 per share in 2000. From 2000 through 2002, there were real estate sales totaling approximately $332.0 million.

Financing Activities

In September 2000, the Company initiated a share repurchase program. Since inception, the Company has repurchased and retired 13.1 million shares through December 31, 2002 at a cost of $286.7 million. In December 2002 the Board of Directors extended the program through December 31, 2004. There were no share repurchases in the fourth quarter of 2002 due to the delay in the sale of non-utility assets. Also, during 2002, Wisconsin Energy issued approximately 2.7 million of new shares of common stock and received payments aggregating $52.6 million under the Company’s dividend reinvestment plan, other benefit plans and from the exercise of stock options. In September 2000, the Company also announced a reduction in the quarterly dividend from $0.39 per share to $0.20 per share. This action reduced the dividends paid in 2001 as compared to 2000 and also reduced the proceeds from the issuance of common stock under the Company’s stock plans.

During 2001, the Company refinanced approximately $1.3 billion of commercial paper through the issuance of intermediate-term senior notes. In January 2002, the Company redeemed $100 million of 8³/8% long-term debt and $3.4 million of 9¹/8% long-term debt. In December 2002, Wisconsin Electric retired $150.0 million of 6⁵/8% debentures at maturity. These redemptions and maturity were financed with short-term commercial paper bearing rates of approximately 2%. In 2002, Wisvest-Connecticut paid down $180.5 million of nonrecourse variable rate notes following the sale of Wisvest-Connecticut.

B-15

CAPITAL RESOURCES AND REQUIREMENTS

As Wisconsin Energy continues to implement its strategy of leveraging on the core competencies of its business segments and building financial strength, Wisconsin Energy expects to continue to divest of non-core assets, invest in core assets, buy back common stock and pay down debt.

Capital Resources

The Company anticipates meeting its capital requirements during 2003 primarily through internally generated funds, short-term borrowings, existing lines of credit supplemented through the issuance of debt securities and the issuance of common stock under the Company’s stock plans. Beyond 2003, Wisconsin Energy anticipates meeting its capital requirements through internally generated funds supplemented, when required, through the issuance of debt securities.

Wisconsin Energy has previously filed a shelf registration statement with the Securities and Exchange Commission, under which $200 million of securities remained unissued at year-end 2002. Depending on market conditions and other factors, Wisconsin Energy may issue up to $200 million of debt securities during 2003 under this shelf registration statement. The Company’s largest utility subsidiary, Wisconsin Electric, is planning to issue $575 million of debt securities in 2003 under an existing $800 million shelf registration statement, depending on market conditions and other factors, and use the proceeds to redeem four series of its outstanding debt securities aggregating $425.0 million and to repay short-term debt incurred to retire $150 million of debt that matured in December 2002.

The Company has access to the capital markets and has been able to generate funds internally and externally to meet its capital requirements. Wisconsin Energy’s ability to attract the necessary financial capital at reasonable terms is critical to the Company’s overall strategic plan. Wisconsin Energy believes that it has adequate capacity to fund its operations for the foreseeable future through its borrowing arrangements and internally generated cash.

On December 31, 2002, Wisconsin Energy had approximately $1.2 billion of available unused lines of bank back-up credit facilities on a consolidated basis. The Company had approximately $1.0 billion of total consolidated short-term debt outstanding on such date.

Wisconsin Energy and its subsidiaries review their bank back-up credit facility needs on an ongoing basis and expect to be able to maintain adequate credit facilities to support their operations. The following table summarizes such facilities at December 31, 2002:

Company	Total Facility		Drawn		Credit Available		Facility Maturity	Facility Term
	(Millions of Dollars)
Wisconsin Energy	$	300.0	$	—	$	300.0	Apr-2003	364 day
Wisconsin Energy		500.0	$	—		500.0	Apr-2003	3 year
Wisconsin Electric		230.0	$	—		230.0	June-2003	364 day
Wisconsin Gas		185.0	$	—		185.0	Dec-2003	364 day

On April 9, 2002, Wisconsin Energy entered into an unsecured 364 day $300 million bank back-up credit facility to replace a credit facility that was expiring. The credit facility may be extended for an additional 364 days, subject to lender agreement. Assuming certain conditions are met, any outstanding loans under the facility can be converted to a one-year term loan. In addition to the Wisconsin Energy 364 day bank back-up credit facility, the Company has an unsecured three year $500 million bank back-up credit facility that will expire in April, 2003.

On June 26, 2002, Wisconsin Electric entered into an unsecured 364 day $230 million bank back-up credit facility to replace a credit facility that was expiring. The credit facility may be extended for an additional 364 days, subject to lender agreement.

On December 11, 2002, Wisconsin Gas entered into an unsecured 364 day $175 million bank back-up credit facility to replace a credit facility that was expiring. On December 18, 2002, the credit facility was increased from $175 million to $185 million. The credit facility may be extended for an additional 364 days, subject to lender agreement.

During 2003, the Company intends to make arrangements for the construction financing of the We Power gas-based Port Washington Generating Station project. The exact nature of the financing arrangements have not yet been determined.

B-16

The following table shows Wisconsin Energy’s consolidated capitalization structure at December 31:

Capitalization Structure	2002			2001
	(Millions of Dollars)
Common Equity	$	2,139.4	33.5%	$	2,056.1	31.4%
Preferred Stock of Subsidiaries		30.4	0.5%		30.4	0.5%
Trust Preferred Securities		200.0	3.1%		200.0	3.0%
Long-Term Debt (including current maturities)		3,070.8	48.0%		3,721.6	56.7%
Short-Term Debt		953.1	14.9%		550.4	8.4%

Total	$	6,393.7	100.0%	$	6,558.5	100.0%

As described in “Note A—Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements, certain restrictions exist on the ability of Wisconsin Energy’s subsidiaries to transfer funds to Wisconsin Energy. The Company does not expect these restrictions to have any material effect on its operations or ability to meet its cash obligations.

Access to capital markets at a reasonable cost is determined in large part by credit quality. The following table summarizes the ratings of the debt securities of Wisconsin Energy and its subsidiaries by Standard & Poors Corporation (“S&P”), Moody’s Investors Service (“Moody’s”) and Fitch as of December 31, 2002. Commercial paper of WICOR Industries is unrated.

	S&P	Moody’s	Fitch
Wisconsin Energy
Commercial Paper	A-2	P-1	F1
Unsecured Senior Debt	A–	A2	A

Wisconsin Electric
Commercial Paper	A-1	P-1	F1+
Secured Senior Debt	A	Aa2	AA
Unsecured Debt	A–	Aa3	AA–
Preferred Stock	BBB+	A2	AA–

Wisconsin Gas
Commercial Paper	A-1	P-1	F1+
Unsecured Senior Debt	A	Aa2	AA–

Wisconsin Energy Capital Corporation
Unsecured Debt	A–	A2	A

WEC Capital Trust I
Trust Preferred Securities	BBB	A3	A–

In February 2003, Moody’s placed under review for possible downgrade the security ratings of Wisconsin Energy and Wisconsin Energy Capital Corporation. Moody’s also placed under review for possible downgrade the long-term security ratings of Wisconsin Electric and Wisconsin Gas and confirmed the commercial paper rating of Wisconsin Electric and Wisconsin Gas. S&P’s and Fitch’s current outlook for Wisconsin Energy and its subsidiaries is stable.

Wisconsin Energy believes 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.

B-17

Capital Requirements

Total capital expenditures, excluding the purchase of nuclear fuel and any manufacturing acquisitions, are currently estimated to be $693 million during 2003 attributable to the following operating segments:

Capital Expenditures	Estimated 2003		Actual 2002
	(Millions of Dollars)
Utility Energy	$	455	$	405
Non-Utility Energy
Power the Future		186		53
Other		5		40
Manufacturing		20		15
Other		27		44

Total	$	693	$	557

Due to changing environmental and other regulations such as air quality standards or electric reliability initiatives that impact the Company’s utility energy segments, future long-term capital requirements may vary from recent capital requirements. The utility energy segment currently expects capital expenditures, excluding the purchase of nuclear fuel and expenditures for new generating capacity contained in the Power the Future strategy described below, to be between $400 million and $500 million per year during the next five years.

Capital requirements over the next decade for Power the Future include approximately $3.0 billion to construct 2,800 megawatts of new natural gas-based and coal-based generating capacity, approximately $1.3 billion to upgrade existing electric generating assets and approximately $2.7 billion for energy distribution system upgrades.

The capital required to support the $3.0 billion of new generation over the next decade is expected to come from a combination of internal and external sources. With the dividend reduction that began in 2001, the Company is expected to retain almost $90 million per year of additional cash flows, which will provide substantial funding for new generation. The Company is also divesting non-utility assets which will provide additional cash. The new generating plants will be constructed by We Power, a non-utility subsidiary, and leased to Wisconsin Electric under 25–30 year lease agreements. It is expected that Wisconsin Electric will recover the lease payments in its utility rates. It is anticipated that the Company will need external financing as the plants are constructed, but the cash flows from the lease payments, the asset divestitures and the additional cash retained within the Company as a result of the dividend reduction are expected to eliminate the need for additional equity financing.

Pension Investments: The Company has funded its pension obligations in outside trusts. During 2002, the pension investments in the trusts have performed consistent with the stock market which has resulted in double digit negative returns. In addition, interest rates have fallen, which results in a higher discounted pension obligation. The Company has recorded a minimum pension liability as of December 31, 2002 for $113.5 million due to the negative returns on pension assets and lower discount rates.

Guardian Pipeline: As previously disclosed, the Company’s subsidiary WICOR, Inc., is an equal one third joint venture partner in the Guardian Pipeline project (“Guardian”). In November 2001, Guardian Pipeline, L.L.C. obtained $170 million of fixed rate financing for the project, secured by guarantees severally from each partner, or an affiliate of each of the partners, for their one third share of the debt financing. The guarantees are effective during the construction of the project and approximately the first six months of commercial operation. Guardian began commercial operation during the fourth quarter of 2002.

Financial Instruments: Wisconsin Energy is a party to various financial instruments with off-balance sheet risk as a part of its normal course of business, including financial guarantees and letters of credit which support construction projects, commodity contracts and other payment obligations. The Company’s estimated maximum exposure under such agreements is approximately $135 million as of December 31, 2002. However, the Company believes the likelihood is remote that material payments will be required under these agreements. See “Note O—Guarantees” in the Notes to Consolidated Financial Statements for more information.

B-18

Contractual Obligations/Commercial Commitments: The Company has the following contractual obligations and other commercial commitments as of December 31, 2002:

	Payments Due by Period
Contractual Obligations (a)	Less than 1 yr.		1-3 years		3-5 years		After 5 years		Total
	(Millions of Dollars)
Long-Term Debt (b)	$	15.2	$	231.0	$	761.3	$	1,880.7	$	2,888.2
Capital Lease Obligations (c)		56.1		89.9		71.1		437.5		654.6
Operating Lease Obligations (d)		33.6		77.0		77.8		88.2		276.6
Unconditional Purchase Obligations (e)		8.9		81.3		3.3		11.8		105.3
Other Long-Term Obligations (f)		268.2		351.0		151.8		245.4		1,016.4

Total Contractual Cash Obligations	$	382.0	$	830.2	$	1,065.3	$	2,663.6	$	4,941.1

(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.

(b)

Principal payments on Long-Term Debt of Wisconsin Energy and affiliates (excluding capital lease obligations).

(c)

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

(d)

Operating Leases Obligations for purchased power for Wisconsin Energy and affiliates.

(e)

Unconditional Purchase Obligations for information technology and other services for utility and We Power operations.

(f)

Primarily other Long-Term Obligations under various contracts of Wisconsin Energy and affiliates for the procurement of fuel, power, gas supply and associated transportation, primarily related to utility operations.

Obligations for utility operations by Wisconsin Energy’s utility affiliates have historically been included as part of the rate making process and therefore are generally recoverable from customers.

Guarantees: Wisconsin Energy provides various guarantees supporting certain of its subsidiaries. The guarantees issued by Wisconsin Energy guarantee payment or performance by its subsidiaries under specified agreements or transactions. As a result, the Company’s exposure under the guarantees is based upon the net liability of the relevant subsidiary under the specified agreements or transactions. The majority of the guarantees issued by Wisconsin Energy limit the exposure of the Company to a maximum amount stated in the guarantees. See “Note O—Guarantees” in the Notes to Consolidated Financial Statements for more information.

FACTORS AFFECTING RESULTS, LIQUIDITY AND CAPITAL RESOURCES

MARKET RISKS AND OTHER SIGNIFICANT RISKS

The Company is exposed to market and other significant risks as a result of the nature of its businesses and the environment in which those businesses operate. Such risks, described in further detail below, include but are not limited to:

Commodity Price Risk: In the normal course of business, the Company’s utility and non-utility power generation subsidiaries utilize contracts of various duration for the forward sale and purchase of electricity. This is done to effectively manage utilization of their available generating capacity and energy during periods when available power resources are expected to exceed the requirements of their obligations. This practice may also include forward contracts for the purchase of power during periods when the anticipated market price of electric energy is below expected incremental power production costs. The Company manages its fuel and gas supply costs through a portfolio of short and long-term procurement contracts with various suppliers for the purchase of coal, uranium, natural gas and fuel oil.

Wisconsin’s retail electric fuel cost adjustment procedure mitigates some of Wisconsin Electric’s risk of electric fuel cost fluctuation. On a prospective basis, if cumulative fuel and purchased power costs for electric utility operations deviate from a prescribed range when compared to the costs projected in the most recent retail rate proceeding, retail electric rates may be adjusted, subject to risks associated with the regulatory approval process including regulatory lag. The PSCW has authorized dollar for dollar recovery of natural gas costs for the gas utility operations of Wisconsin Electric and Wisconsin Gas through gas cost recovery mechanisms, which mitigates most of the risk of gas cost variations. For additional information concerning the electric utility fuel cost adjustment procedure and the natural gas utilities’ gas cost recovery mechanisms, see “Rates and Regulatory Matters” below.

B-19

Regulatory Recovery Risk: The electric operations of Wisconsin Electric burn natural gas in several of its peaking power plants or as a supplemental fuel at several coal-based plants, and the cost of purchased power is tied to the cost of natural gas in many instances. Wisconsin Electric bears some regulatory risk for the recovery of such fuel and purchased power costs when they are higher than the base rate established in its rate structure.

As noted above, the electric operations of Wisconsin Electric operate under a fuel cost adjustment clause in the Wisconsin retail jurisdiction for fuel and purchased power costs associated with the generation and delivery of electricity. This clause establishes a base rate for fuel and purchased power, and Wisconsin Electric assumes the risks and benefits of fuel cost variances that are within 3% of the base rate. For 2002, 2001 and 2000, actual fuel and purchased power costs at Wisconsin Electric exceeded base fuel rates by $2.3 million, $0.1 million and $25.9 million, respectively. In 2002 and 2001, the rates included a fuel surcharge.

Weather: The rates of Wisconsin Electric and Wisconsin Gas are set by the PSCW based upon estimated temperatures which approximate 20-year averages. Wisconsin Electric’s electric revenues are sensitive to the summer cooling season, and to some extent, to the winter heating season. The gas revenues of Wisconsin Electric and Wisconsin Gas are sensitive to the winter heating season. A summary of actual weather information in the utility segment’s service territory during 2002, 2001 and 2000, as measured by degree-days, may be found above in “Results of Operations”.

Temperature can also impact demand for electricity in regions where the Company has invested in non-utility energy assets or projects. In addition, to the extent weather conditions incurred in various regions are extreme rather than normal or mild the manufacturing segment demand for products can be impacted.

Interest Rate Risk: The Company, including its affiliates, has various short-term borrowing arrangements to provide working capital and general corporate funds. Wisconsin Energy also has variable rate long-term debt outstanding at December 31, 2002. Borrowing levels under such 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.

The Company performed an interest rate sensitivity analysis at December 31, 2002 of its outstanding portfolio of $953.1 million short-term debt with a weighted average interest rate of 1.51% and $176.6 million of variable-rate long-term debt with a weighted average interest rate of 1.88%. A one-percentage point change in interest rates would cause the Company’s annual interest expense to increase or decrease by approximately $9.5 million before taxes from short-term borrowings and $1.8 million before taxes from variable rate long-term debt outstanding.

On September 24, 2002, Wisconsin Energy entered into a treasury lock agreement in order to mitigate Wisconsin Energy’s interest rate risk associated with the anticipated issuance of fixed-rate debt. This treasury lock agreement locked in the underlying Treasury yield for $100 million of an anticipated $200 million debt issuance expected by the end of the first quarter 2003. Under a treasury lock agreement, Wisconsin Energy agrees to pay or receive an amount equal to the difference between the net present value of the cash flows for the notional amount of the instrument based on: a) the yield of a U.S. treasury bond at the date when the agreement is established and b) the yield of a U.S. treasury bond at the date when the agreement is settled, which typically coincides with the debt issuance. The treasury rate lock agreement was entered into with a major financial institution in order to minimize counterparty credit risk.

Marketable Securities Return Risk: The Company funds its pension, other postretirement benefit and nuclear decommissioning obligations through various trust funds, which in turn invest in debt and equity securities. Changes in the market price of the assets in these trust funds can affect future pension, other postretirement benefit and nuclear decommissioning expenses. Future annuity payments to these trust funds can also be affected by changes in the market price of trust fund assets. Wisconsin Energy expects that the risk of expense and annuity payment variations as a result of changes in the market price of trust fund assets would be mitigated in part through future rate actions by the Company’s various utility regulators. However, the Company is currently operating under a PSCW ordered, qualified five-year rate restriction period through 2005. For further information about the rate restriction, see “Rates and Regulatory Matters” below.

At December 31, 2002, the Company 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	$	861.2
Nuclear decommissioning trust fund	$	550.0
Other postretirement benefits trust funds	$	137.8

B-20

The Company manages its fiduciary oversight of the pension and other postretirement plan trust fund investments through a Board-appointed Investment Trust Policy Committee. Qualified external investment managers are engaged to manage the investments. The Company conducts asset/liability studies periodically through an outside investment advisor. The current study projects long-term, annualized returns of approximately 9%.

Fiduciary oversight for the nuclear decommissioning trust fund investments is also the responsibility of the Board-appointed Investment Trust Policy Committee. Qualified external investment managers are also engaged to manage these investments. An asset/liability study is periodically conducted by 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. The allocation to equities is expected to be reduced as the date for decommissioning Point Beach Nuclear Plant approaches in order to increase the probability of sufficient liquidity at the time the funds will be needed.

Wisconsin Electric insures various property and outage risks through Nuclear Electric Insurance Limited (“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.

Non-Utility Wholesale Price Risk: The Company is exposed to non-utility wholesale price risks in the operations of its non-utility segment. Some of the markets in which the Company operates non-utility energy generation assets have become oversaturated. The Company has experienced a decline in capacity contracts in these markets. The Company uses diversification in its portfolio of businesses to reduce its exposure to wholesale electric price fluctuations.

Independent Power Project (“IPP”) Market Risk: Prior to the September 2000 Power the Future strategic announcement, the Company made significant commitments to develop, build and own non-utility power plants. Subsequent to September 2000, the Company made significant progress in exiting many of these projects, which resulted in gains during 2001 and 2000 and losses in 2002. As of December 31, 2002, the Company had approximately $350 million of investments in non-utility energy assets. Management believes that the projected cash flows from these investments over the life of these assets will exceed the recorded carrying value. However, the market value of some of these investments is currently believed not to exceed cost. In the fourth quarter of 2001 and continuing into 2002, the IPP market experienced a significant decline driven by several factors, including the softening economy, the financial viability of energy companies with large IPP investments, lower forward electric price curves and a significant tightening of credit to this market. These factors may adversely impact the timing, proceeds and the gain or loss on future sales of non-utility energy assets.

Foreign Currency Exchange Rate Risk: The Company manages foreign currency market risks through the use of a variety of financial and derivative instruments. The Company uses forward exchange contracts and other activities to hedge the U.S. dollar value resulting from anticipated foreign currency transactions. The notional amount of these contracts is not significant to the Company.

The Company generally uses natural hedges to minimize exposures to the revaluation of assets and liabilities denominated in foreign currencies. The Company’s net exposure at December 31, 2002 was immaterial.

Economic Risk: The Company is exposed to market risks in the regional Midwest economy for the utility energy segment and worldwide economic trends for the manufacturing segment. The Company uses diversification in its portfolio of businesses to reduce its exposure to economic fluctuations.

Inflationary Risk: The Company continues 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 the Company’s medical and post retirement benefit plans, the Company has expectations of low-to-moderate inflation. Wisconsin Energy does not believe the impact of general inflation will have a material effect on its future results of operations.

For additional information concerning risk factors, including market risks, see “Cautionary Factors” below.

RATES AND REGULATORY MATTERS

The PSCW regulates retail electric, natural gas, steam and water rates in the state of Wisconsin, while the Federal Energy Regulatory Commission (“FERC”) regulates wholesale power, electric transmission and interstate gas transportation service rates.

B-21

The Michigan Public Service Commission (“MPSC”) regulates retail electric rates in the state of Michigan. 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/.

Wisconsin Jurisdiction

WICOR Merger Order: As a condition of its March 2000 approval of the WICOR acquisition, the PSCW ordered a five-year rate restriction period in effect freezing electric and natural gas rates for Wisconsin Electric and Wisconsin Gas effective January 1, 2001. The Company may seek biennial rate reviews during the five-year rate restriction period limited to “carve out” changes in revenue requirements as a result of:

•

Governmental mandates;

•

Abnormal levels of capital additions required to maintain or improve reliable electric service; and

•

Major gas lateral projects associated with approved natural gas pipeline construction projects.

To the extent that natural gas rates and rules need to be modified during the integration of the gas operations of Wisconsin Electric and Wisconsin Gas, the Company’s total gas revenue requirements are to remain revenue neutral under the merger order. In its order, the PSCW found that electric fuel cost adjustment procedures as well as gas cost recovery mechanisms would not be subject to the five-year rate restriction period and that it was reasonable to allow the Company to retain efficiency gains associated with the merger. A full rate review will be required by the PSCW at the end of the five-year rate restriction period.

Wisconsin Electric Power Company: The table below summarizes the anticipated annualized revenue impact of recent rate changes, primarily in the Wisconsin jurisdiction, authorized by regulatory commissions for Wisconsin Electric’s electric, natural gas and steam utilities. See “Rates and Regulatory Matters” above for the web site addresses where the related rate orders can be found.

Service—Wisconsin Electric	Incremental Annualized Revenue Increase (Decrease)		Percent Change in Rates	Authorized Return on Common Equity	Effective Date
	(Millions)		(%)	(%)
Retail electric, WI (a)	$	48.1	3.2%	—	10/22/02
Retail electric, MI (b)	$	3.2	7.8%	11.0%	9/16/02
Fuel electric, MI	$	1.6	3.8%	—	1/01/02
Retail gas (c)	$	3.6	0.9%	12.2%