WISCONSIN ELECTRIC POWER CO - Quarter Report: 2001 September (Form 10-Q)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that each Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes [X]    No [  ]

Indicate the number of shares outstanding of each of the Registrant's classes of common stock, as of the latest practicable date (October 31, 2001):

Wisconsin Energy Corporation is the sole holder of Wisconsin Electric Power Company Common Stock.

Wisconsin Electric Power Company ("Wisconsin Electric" or "the Company"), a wholly-owned subsidiary of Wisconsin Energy Corporation ("Wisconsin Energy"), is an electric, gas and steam utility with operations in Wisconsin and the Upper Peninsula of Michigan. The unaudited interim financial statements presented in this Form 10-Q have been prepared by Wisconsin Electric pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. Wisconsin Electric's financial statements should be read in conjunction with the financial statements and notes thereto included in Wisconsin Electric's 2000 Annual Report on Form 10-K.

WISCONSIN ELECTRIC POWER COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)

Wisconsin Electric Power Company, a wholly-owned subsidiary of Wisconsin Energy Corporation, is an energy utility with electric, natural gas and steam utility operations.

Cautionary Factors:   A number of forward-looking statements are included in this document. When used, the terms "anticipate," "believe," "estimate," "expect," "objective," "plan," "possible," "potential," "project" and similar expressions are intended to identify forward-looking statements. Forward-looking statements are subject to certain risks, uncertainties and assumptions which could cause actual results to differ materially from those that are described, including the factors that are noted in "Factors Affecting Results of Operations."

Earnings increased by $16.3 million or 28.8% in the third quarter of 2001 when compared with the third quarter of 2000, primarily reflecting rate increases and increased sales volumes to higher margin electric customer classes reflective of a return to normal weather during the third quarter of 2001 and the accrual of interest income in the third quarter of 2001 related to the Giddings & Lewis Inc./City of West Allis lawsuit discussed in further detail below.

The following table compares Wisconsin Electric's total electric utility operating revenues and gross margin during the third quarter of 2001 with similar information for the third quarter of 2000.

During the third quarter of 2001, total electric utility operating revenues increased by $27.3 million or 5.7% when compared with the third quarter of 2000 reflecting an increase of $15.5 million due to higher retail electric rates under Wisconsin's fuel cost adjustment procedure that became effective in February and May 2001 and an increase of $13.9 million primarily due to increased retail electric rates in Wisconsin that became effective in August 2000 and January 2001. However, a 1.5% decrease in overall electric megawatt-hour sales during the third quarter of 2001 offset some of the revenue growth caused by the rate increases. While a return to normal weather during the summer of 2001 resulted in a $15.2 million increase in total electric operating revenues compared with 2000, this was offset by an $17.2 million decrease in operating revenues due primarily to reduced electric sales to large commercial/industrial customers, to lower sales for resale to other utilities, escrow accounting implemented during 2001 for revenue requirements associated with NOx expenditures and electric transmission revenues which are now received by the ATC.

Electric gross margin increased 4.8% between the comparative periods primarily due to the higher retail electric rates noted above and to increased electric sales to residential customers, who are more weather sensitive and contribute higher margins than other customer classes. As measured by cooling degree days, the third quarter of 2001 was 37.0% warmer than the third quarter of 2000 and 6.3% warmer than normal. The change in gross margin also reflects a $10.7 million or 7.8% increase in fuel and purchased power expenses primarily as a result of higher purchased power energy and capacity costs during the third quarter of 2001.

The following table compares Wisconsin Electric's electric utility operating revenues and electric utility megawatt-hour sales by customer class during the third quarter of 2001 with similar information for the third quarter of 2000.

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

As noted above, total electric megawatt-hour sales fell by 1.5% during the third quarter of 2001 reflecting a softening economy that is primarily affecting large commercial/industrial customers such as Wisconsin Electric's largest retail customers, two iron ore mines to whom sales decreased by 134 thousand megawatt-hours or 20.5% between the comparative periods. Excluding these two mines, total electric energy sales were unchanged but sales volumes to the remaining large commercial/industrial customers fell by 2.0% between the comparative periods. Sales for resale to other utilities, the Resale-Utilities customer class, declined 22.9% between the periods primarily due to a reduced demand for wholesale power.

A comparison of Wisconsin Electric's gas utility operating revenues, gross margins and gas deliveries during the third quarter of 2001 with similar information for the third quarter of 2000 follows. Gross margin is a better performance indicator than revenues because changes in the cost of gas sold flow through to revenue under gas cost recovery mechanisms that do not impact gross margin.

Lower prices for natural gas drove much of the 17.9% decrease in operating revenues and the 24.0% decrease in the cost of gas sold during the third quarter of 2001. As noted above, such gas cost decreases do not affect the margin earned on each therm of gas delivered as a result of the Company's gas cost recovery mechanisms. For the three months ended September 30, 2001 gas margins by customer class declined slightly when compared to the three months ended September 30, 2000. Average retail gas rates were $0.65 for the third quarter of 2001, compared to $0.79 for the third quarter of 2000. Retail gas rate increases at Wisconsin Electric that became effective in August 2000 helped mitigate the decline in gross margin between the comparative periods.

The following table compares Wisconsin Electric's gas utility gross margin and natural gas therm deliveries by customer class during the third quarter of 2001 with similar information for the third quarter of 2000.

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

Total therm deliveries of natural gas increased by 4.0% during the third quarter of 2001 due primarily to higher interdepartmental transportation deliveries to the Company's gas-fired electric generating facilities, which produced more electricity during the third quarter of 2001 as a result of hotter summer weather during 2001. Excluding interdepartmental activity, therm deliveries were unchanged between the comparative periods reflecting an increase in the average number of customers offset by the effects of a softening economy during 2001.

Other Operation and Maintenance Expenses:   Other operation and maintenance expenses increased by $3.7 million or 2.3% during the third quarter of 2001 when compared with the third quarter of 2000. Electric transmission costs were $12.0 million higher during 2001 primarily caused by a change in how these costs are recorded. On January 1, 2001, Wisconsin Electric transferred all of its electric utility transmission assets to the ATC in exchange for an equity interest in this new company. The increase in other operation and maintenance expenses associated with electric transmission operations was offset by reduced depreciation expense, reduced interest expense and increased earnings from Wisconsin Electric's equity investment in the ATC. The Company also benefited from other savings it has been able to realize with Wisconsin Energy's acquisition of WICOR on April 26, 2000. Administrative and General expenses decreased $7.2 million during the third quarter of 2001 as compared to 2000 due in part to decreased use of contracted work and reduced labor costs as a result of synergies associated with the WICOR merger.

Earnings increased $15.0 million between the comparative periods primarily due to higher electric utility gross margins, slightly higher gas utility gross margins and to interest income accrued in the third quarter of 2001 on the deposit previously tendered to the Court in the Giddings & Lewis Inc./City of West Allis lawsuit, which were partially offset by higher other operation and maintenance expenses. The Company attributes the increases in electric and gas utility gross margins primarily to rate increases that were in effect during the first nine months of 2001 but not during the first nine months of 2000, and, to a lesser extent, to cooler winter weather during the first quarter of 2001 and hotter summer weather during the third quarter of 2001, which increased electric and gas retail sales volumes to higher margin customers.

The following table compares Wisconsin Electric's total electric utility operating revenues and gross margin during the first nine months of 2001 with similar information for the first nine months of 2000.

Electric gross margin increased 3.3% between the comparative periods primarily due to the higher retail electric rates noted above and to increased sales to residential customers, who are more weather sensitive and contribute higher margins than other customer classes. The change in gross margin also reflects a $45.0 million or 12.6% increase in fuel and purchased power expenses primarily as a result of higher purchased power energy and capacity costs due in part to a scheduled refueling outage at Point Beach Nuclear Plant during the second quarter of 2001. During 2000, Wisconsin Electric did not perform a refueling outage at Point Beach until the fourth quarter.

The following table compares Wisconsin Energy's electric utility operating revenues and electric utility megawatt-hour sales by customer class during the first nine months of 2001 with similar information for the first nine months of 2000.

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

As noted above, total electric megawatt-hour sales fell by 1.8% during the first nine months of 2001 reflecting a softening economy that is primarily affecting large commercial/industrial customers such as Wisconsin Electric's largest retail customers, two iron ore mines to whom sales decreased by 362 thousand megawatt-hours or 18.9% between the comparative periods. Excluding these two mines, Wisconsin Electric's total electric energy sales fell by 0.3% and sales volumes to the remaining large commercial/industrial customers fell by 2.0% between the comparative periods. Sales for resale to other utilities, the Resale-Utilities customer class, declined 20.1% between the periods due to a reduced demand to the Company for wholesale power.

A comparison of Wisconsin Electric's gas operating revenues, gross margin and gas deliveries follows. Gross margin is a better performance indicator than revenues because changes in the cost of gas sold flow through to revenue under gas cost recovery mechanisms that do not impact gross margin. As can be seen below, gas operating revenues grew by $127.9 million or 55.2% between the first nine months of 2001 and the first nine months of 2000 offset by a $121.3 million increase in purchased gas costs.

Higher average prices for natural gas drove much of the 55.2% increase in operating revenues and the 87.5% increase in the cost of gas sold during the first nine months of 2001. As noted above, such gas cost increases do not affect the margin earned on each therm of gas delivered as a result of the Company's gas cost recovery mechanisms. However, higher gas prices can adversely affect the Company's therm deliveries to the extent that customers reduce consumption through lower thermostat settings or through fuel switching. Gas margins were up 7.1%, reflecting an increase in retail gas sales to weather sensitive customers as a result of colder weather during the winter heating months of 2001.

The following table compares Wisconsin Electric's gas utility gross margin and natural gas therm deliveries by customer class during the first nine months of 2001 with similar information for the first nine months of 2000.

Total therm deliveries of natural gas decreased by 2.9% during the first nine months of 2001, but varied within customer classes. Volume deliveries for the residential and commercial/industrial customer classes increased by 9.5% and 4.8%, respectively, reflecting colder weather experienced during the winter heating season, which was 8.3% colder as measured by heating degree days. Residential and commercial customers are more weather sensitive and contribute higher margins per therm than other customers. The increase caused by the colder weather was partially offset by customer conservation due to the higher cost of gas and to the weaker economy during 2001, which primarily affected commercial/industrial gas consumption. Transportation volumes were 12.6% lower than the prior year reflecting fuel switching to lower-cost fuel options and, to a lesser extent, the softening economy.

Other Operation and Maintenance Expenses:   Other operation and maintenance expenses increased by $42.5 million or 8.8% during the first nine months of 2001 when compared with the first nine months of 2000. The most significant changes in other operation and maintenance expenses include $17.0 million of higher non-fuel nuclear expenses, $10.0 million of which was attributable to the scheduled refueling outage at Point Beach Nuclear Plant during the second quarter of 2001 noted above, and approximately $35.1 million of higher electric transmission expenses primarily caused by a change in how electric transmission costs are recorded and reported as a result of the transfer of Wisconsin Electric's electric transmission assets to the ATC on January 1, 2001. Bad debts increased $5.2 million between the comparative periods, while administrative and general expenses decreased by $17.3 million during the nine months of 2001 as compared to 2000 due in part to decreased use of contracted work. The Company also benefited from savings it has been able to realize as a result of Wisconsin Energy's acquisition of WICOR on April 26, 2000.

The following summarizes Wisconsin Electric's cash flows during the nine month periods ended September 30, 2001 and September 30, 2000:

Cash provided by operating activities decreased to $431.0 million during the first nine months of 2001 compared with $536.3 million during the same period in 2000, reflecting higher 2001 earnings offset by (1) an increase in working capital requirements reflecting a $16 million payment to the Wisconsin Energy Foundation in the first quarter of 2001, (2) an increase in income taxes paid as a result of higher earnings during the first nine months of 2001, (3) a $35 million tax refund received in the first quarter of 2000 related to litigation, and (4) changes in how the Company accounts for electric transmission earnings and costs as a result of its transfer of electric transmission assets to the ATC in January 2001.

During the first nine months of 2001, Wisconsin Electric invested $146.4 million including capital expenditures of $235.7 million partially offset by $105.4 million of cash distributions received from the ATC. Due to different refueling outage schedules at Point Beach Nuclear Plant between the comparative periods, the Company spent $25.9 million less during 2001 on the acquisition of nuclear fuel when compared with the first nine months of 2000.

During the first nine months of 2001, Wisconsin Electric used $266.3 million of net cash for financing activities including approximately $167.5 million to reduce short-term debt and $97.5 million for the payment of dividends to Wisconsin Energy.

Cash requirements during the remaining three months of 2001 are expected to be met through a combination of internal sources of funds from operations and short-term borrowings.

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

On September 30, 2001, Wisconsin Electric had $315.4 million of total available unused short-term borrowing capacity under existing commercial paper programs and other short-term borrowing arrangements. On that date, Wisconsin Electric had $250.0 million of available unused lines of bank credit to support its outstanding short-term debt and unused commercial paper programs and other short-term borrowing arrangements.

The following table shows Wisconsin Electric's capitalization structure at September 30, 2001 and at December 31, 2000:

Access to capital markets at a reasonable cost is determined in large part by credit quality. The following table summarizes the current ratings of the debt securities of Wisconsin Electric by Standard & Poors Corporation ("S&P"), Moody's Investors Service ("Moody's") and Fitch.

S&P's, Moody's and Fitch's current outlook for Wisconsin Electric is stable.

These ratings provide a significant degree of flexibility in obtaining funds on competitive terms and reflect the views of the rating agencies. An explanation of the significance of these ratings may be obtained from each rating agency. Such ratings are not a recommendation to buy, sell or hold securities, but rather an indication of creditworthiness. 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.

On October 18, 2001, S&P announced it was lowering the rating of Wisconsin Electric. As reflected in the above table, Wisconsin Electric's commercial paper rating was changed from A-1+ to A-1. Wisconsin Electric's senior secured debt rating was changed from AA- to A, senior unsecured debt rating was changed from A+ to A- and preferred stock rating was changed from A to BBB+.

On October 26, 2001, Fitch reaffirmed the outlook and the security ratings of Wisconsin Electric.

Capital requirements during the remainder of 2001 are expected to be principally for capital expenditures and for the purchase of nuclear fuel. Wisconsin Electric's total capital expenditure budget for the remainder of 2001 is approximately $168 million.

See Item 1, Legal Proceedings -- "Utility Rates and Regulatory Matters" in Part II of this report for information related and to the transfer of the Company's electric transmission assets to the American Transmission Company and to a recent court decision regarding the PSCW's final order in Wisconsin Electric's 2000/2001 Test Year pricing proposal.

Power the Future Strategy:   In late February 2001, Wisconsin Energy announced enhancements to a 10-year, $7 billion strategy, originally proposed in September 2000, that would improve the supply and reliability of electricity in Wisconsin and that is expected to improve the Company's financial results. This Power the Future strategy is needed to meet growing load and ensure a diverse fuel mix while keeping electricity prices reasonable. According to a report issued by the governor of Wisconsin, demand for electricity in the state of Wisconsin is currently expected to outstrip supply by 7,220 megawatts by the year 2016. Wisconsin Electric's load is growing at approximately 100-150 megawatts per year. Power the Future adds new coal capacity to the power portfolio and allows Wisconsin Electric to maintain roughly the same fuel mix as today.

As part of its Power the Future strategy, Wisconsin Energy would invest in the following over the next ten years:

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

• Approximately $1.3 billion in existing electric generating assets; and

• Approximately $2.7 billion in new and existing electric utility distribution system assets and other capital projects.

Wisconsin Energy has created a new non-utility energy subsidiary that would construct and own the new generating capacity noted above. Under the enhanced Power the Future strategy, Wisconsin Electric would sign 20 to 25-year leases for each facility, approved by the PSCW, and would operate and maintain the new plants as part of the lease agreements. At the end of the original contracts, Wisconsin Electric would have the right to renegotiate and continue the leases, or acquire the associated plants outright, at market value. Smaller investor-owned or municipal utilities, cooperatives and power marketing associations would have some opportunity to expand or extend wholesale power purchases from Wisconsin Electric as a result of the additional electric generating capacity included in the proposal.

Implementation of the Power the Future strategy is subject to a number of state and federal regulatory approvals. In late February 2001, Wisconsin Energy filed its enhanced Power the Future proposal with the PSCW. Separately, the state legislature amended several laws in May of 2001, which were critical to the development of the Power the Future strategy The enhanced Power the Future proposal has benefited from a broad coalition of support including customer groups, public power, municipal and cooperative utilities and smaller investor-owned utilities in Wisconsin. On October 16, 2001, the PSCW ruled on Wisconsin Electric's request for a declaratory ruling on Power the Future. The PSCW approved the reimbursement of certain pre-certification expenses associated with the project. However, individual expenses are subject to a review, and must be approved by the PSCW in order to be recovered. The Commission also ruled that such expenses would fall within the reliability "carve-out" contained in the Commission's previous order approving the merger of WICOR and Wisconsin Energy which would allow the Company to seek recovery of such expenses. Wisconsin Energy anticipates obtaining the capital necessary to finance and execute this strategy from a combination of internal and external sources.

This report and other documents or oral presentations contain or may contain forward-looking statements made by or on behalf of Wisconsin Electric. Such statements are based upon management's current expectations and are subject to risks and uncertainties that could cause Wisconsin Electric's actual results to differ materially from those contemplated in the statements. Readers are cautioned not to place undue reliance on the forward-looking statements. When used in written documents or oral presentations, the terms "anticipate," "believe," "estimate," "expect," "objective," "plan," "possible," "potential," "project" and similar expressions are intended to identify forward-looking statements. In addition to the assumptions and other factors referred to specifically in connection with such statements, factors that could cause Wisconsin Electric's actual results to differ materially from those contemplated in any forward-looking statements include, among others, the following.

• Factors affecting utility operations such as unusual weather conditions; catastrophic weather-related or terrorism-related damage; availability of electric generating facilities; unscheduled generation outages, or unplanned maintenance or repairs; unanticipated changes in fossil fuel, nuclear fuel, purchased power, gas supply or water supply costs or availability due to higher demand, shortages, transportation problems or other developments; nonperformance by electric energy or natural gas suppliers under existing power purchase or gas supply contracts; nuclear or environmental incidents; resolution of used nuclear fuel storage and disposal issues; electric transmission or gas pipeline system constraints; unanticipated organizational structure or key personnel changes; collective bargaining agreements with union employees or work stoppages; inflation rates; or demographic and economic factors affecting utility service territories or operating environment.

• Regulatory factors such as unanticipated changes in rate-setting policies or procedures; unanticipated changes in regulatory accounting policies and practices; industry restructuring initiatives; transmission system operation and/or administration initiatives; recovery of costs of previous investments made under traditional regulation; required changes in facilities or operations to reduce the risks or impacts of potential terrorist activities; required approvals for new construction; changes in the United States Nuclear Regulatory Commission's regulations related to Point Beach Nuclear Plant; changes in the United States Environmental Protection Agency's regulations as well as regulations from the Wisconsin or Michigan Departments of Natural Resources related to emissions from fossil-fueled power plants such as carbon dioxide, sulfur dioxide, nitrogen oxide, small particulates or mercury; or the siting approval process for new generation and transmission facilities.

• The rapidly changing and increasingly competitive electric and gas utility environment as market-based forces replace strict industry regulation and other competitors enter the electric and gas markets resulting in increased wholesale and retail competition.

• Consolidation of the industry as a result of the combination and acquisition of utilities in the Midwest, nationally and globally.

• Changes in social attitudes regarding the utility and power industries.

• Customer business conditions including demand for their products or services and supply of labor and material used in creating their products and services.

• The cost and other effects of legal and administrative proceedings, settlements, investigations and claims, and changes in those matters, including the final outcome of the Giddings & Lewis, Inc./City of West Allis lawsuit against Wisconsin Electric.

• Factors affecting the availability or cost of capital such as: changes in interest rates; the Company's capitalization structure; market perceptions of the utility industry or the Company; or security ratings.

• Federal, state or local legislative factors such as changes in tax laws or rates; changes in trade, monetary and fiscal policies, laws and regulations; electric and gas industry restructuring initiatives; or changes in environmental laws and regulations.

• Authoritative generally accepted accounting principle or policy changes, such as issuance of SFAS 143 during the summer of 2001, from such standard setting bodies as the Financial Accounting Standards Board and the Securities and Exchange Commission.

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

• Factors which impede execution of Wisconsin Energy's "Power the Future" strategy announced in September 2000 and revised in February 2001, including receipt of necessary state and federal regulatory approvals, and obtaining the investment capital from outside sources necessary to implement the strategy.

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

• Unanticipated costs or difficulties related to the integration of the businesses of Wisconsin Energy and WICOR.

• Unexpected difficulties or delays in realizing anticipated net cost savings or unanticipated effects of the qualified five-year electric and gas rate freeze ordered by the Public Service Commission of Wisconsin ("PSCW") as a condition of approval of the merger.

Wisconsin Electric undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

*****

For certain other information which may impact Wisconsin Electric's future financial condition or results of operations, see Item 1, Financial Statements -- "Notes to Financial Statements," in Part I of this report as well as Item 1, Legal Proceedings, in Part II of this report.

For information concerning commodity price risks at Wisconsin Electric, see Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations -- "Factors Affecting Results of Operations," in Part I of Wisconsin Electric's Quarterly Report on Form 10-Q for the period ended June 30, 2001. For information concerning other market risk exposures, see Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations -- "Factors Affecting Results of Operations - Market Risks," in Part II of Wisconsin Electric's 2000 Annual Report on Form 10-K.

The following should be read in conjunction with Item 3, Legal Proceedings, in Part I of Wisconsin Electric's 2000 Annual Report on Form 10-K and Item 1, Legal Proceedings, in Part II of Wisconsin Electric's Quarterly Reports on Form 10-Q for the periods ended March 31, 2001 and June 30, 2001.

Giddings & Lewis, Inc./City of West Allis Lawsuit:   See Item 1, Financial Statements -- "Notes to Condensed Financial Statements -- Commitments and Contingencies" in Part I of this report for information concerning recent developments related to the Giddings & Lewis, Inc./City of West Allis lawsuit and the proposed settlement of previously reported demands to initiate a shareholder derivative proceeding, which information is incorporated herein by reference.

Electric Transmission Cost Recovery:   In September 2001, Wisconsin Electric requested that the Public Service Commission of Wisconsin approve $58.8 million of annual rate relief to recover costs associated with the formation and operation of the American Transmission Company, which was designed to enhance access and increase electric system reliability and market efficiency. The Company also is seeking to recover associated incremental transmission costs of the Midwest Independent System Operator, the multi-state organization that will monitor and control electric transmission throughout the Midwest. These increased costs are due to the implementation of capital improvement projects that will increase transmission capacity and reliability. In addition, Wisconsin Electric requested from the Michigan Public Service Commission rate recovery of estimated 2002 transmission costs over 2001 levels in the amount of $0.3 million for its operations in Michigan through the Michigan Power Supply Cost Recovery mechanism. Both the requests are pending. The Company anticipates that cost recovery of the transmission related costs will be earnings neutral subject to approval of these requests by the PSCW and MPSC.

Power the Future:   See Item 1, Factors Affecting Results, Liquidity and Capital Resources  -- "Utility Rates and Regulatory Matters" in Part 1 of this report for information concerning recent PSCW actions related to the Company's Power the Future strategy.

Wisconsin Electric Power Company's 2000/2001 Test Years:   On March 23, 2000, the PSCW approved Wisconsin Electric's request for interim price increases related to the 2000/2001 biennial period, authorizing an increase for electric operations of $25.2 million and $11.6 million for gas operations. The interim increase, which was subject to potential refund, became effective April 11, 2000.

On August 30, 2000, the PSCW issued its final order in the 2000/2001 pricing proposal. The final order authorized an annualized increase which was $3.6 million lower than authorized in the interim order for gas operations. Wisconsin Electric has refunded to gas customers revenues that resulted from the difference in gas rates between the interim and final orders.

On November 14, 2000, Wisconsin Electric filed a petition for judicial review with the Milwaukee County Circuit Court challenging the PSCW's decision to limit the final gas rate increase to $8.0 million rather than the $11.6 million found reasonable for the interim increase. On November 1, 2001, the Milwaukee County Circuit Court ruled in Wisconsin Electric's favor and remanded it back to the PSCW for action. The matter is pending.

The following Exhibit is filed with or incorporated by reference in this Form 10-Q report:

2. REPORTS ON FORM 8-K

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.