WISCONSIN ELECTRIC POWER CO - Quarter Report: 2002 June (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 (July 31, 2002):

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.

In April 2000, Wisconsin Energy acquired WICOR, Inc., which had a wholly-owned subsidiary, Wisconsin Gas Company ("Wisconsin Gas"). Subsequent to the acquisition, Wisconsin Electric and Wisconsin Gas have combined common functions. In April 2002, the two companies began doing business under the trade name of "We Energies".

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 2001 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," "forecast," "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 throughout this document and below in "Factors Affecting Results, Liquidity and Capital Resources".

Earnings for the second quarter of 2002 increased by $12.3 million or 35.4% when compared to the second quarter of 2001, primarily reflecting improved electric and gas margins during 2002 principally due to periods of favorable weather in the quarter, a shorter refueling outage at Point Beach than in the second quarter of 2001 and lower interest rates offset in part by a charge of $8.7 million related to settlement of litigation with the City of West Allis.

During the second quarter of 2002, total electric utility operating revenues increased by $17.5 million or 4.0% when compared with the second quarter of 2001. The increase was primarily due to higher overall electric megawatt-hour sales during the second quarter of 2002, especially to higher margin customers resulting from the effects of warmer weather.

Electric gross margin increased 6.7% between the comparative periods primarily due to lower fuel and purchased power costs and favorable weather conditions in the second quarter of 2002. Between the comparative periods, total fuel and purchased power expenses decreased by $3.8 million or 3.1%. These reductions primarily resulted from lower gas prices and improved efficiencies in generation. Completion of the refueling outage at the Point Beach Nuclear Plant Unit 2 resulted in increased unit availability in the second quarter of 2002 and reduced fuel costs for the Company. A second refueling outage for Point Beach is scheduled to begin in September of 2002 for Unit 1. In addition, due to lower gas prices and additional availability of electricity in the Midwest, the cost of purchased power in the second quarter of 2002 was lower than it was in the second 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 second quarter of 2002 with similar information for the second quarter of 2001.

As noted above, total electric megawatt-hour sales increased by 2.4% during the second quarter of 2002 primarily reflecting the impacts of warmer weather conditions in April and June, especially with respect to residential customers, who are more weather sensitive than other customer classes. During the second quarter of 2002, the region experienced periods of unseasonably hot weather. As measured by cooling degree days, the second quarter of 2002 was 43.5% warmer than the second quarter of 2001 and 38.5% warmer than normal. Sales to large commercial/industrial customers, including Wisconsin Electric's largest customers, two iron ore mines, increased 4.0% between the comparative periods. Excluding these two mines, Wisconsin Electric's total sales volumes to the remaining large commercial/industrial customers decreased by 1.0% between the comparative periods. Sales for resale to other utilities, the Resale-Utilities customer class, declined 50.5% between the periods due to a reduced demand for wholesale power.

A comparison follows of Wisconsin Electric's gas utility operating revenues, gross margin and gas deliveries during the second quarter of 2002 with similar information for the second quarter of 2001. Gross margin is a better performance indicator for the gas utility 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. Due to a decline in the delivered cost of natural gas between the comparative periods, gas operating revenues decreased by $2.0 million or 2.8% offset by a $6.8 million or 14.3% decrease in purchased gas costs.

For the three months ended June 30, 2002, gas gross margin increased by $4.8 million or 20.5% when compared to the three months ended June 30, 2001 due primarily to a weather-related increase in therm deliveries, especially to residential customers who are more weather sensitive and contribute higher margins per therm than other customer classes. In addition to the unseasonably warm weather discussed above, the region experienced periods of unusually cold weather during April and May of 2002. As measured by heating degree days, the second quarter of 2002 was 25.6% cooler than the second quarter of 2001 and 12.0% cooler than normal. Total gas margin was also favorably impacted by $0.5 million for the second quarter of 2002 by a rate increase that became effective December 20, 2001 compared to the second quarter of 2001.

The following table compares Wisconsin Electric's gas utility gross margins and natural gas therm deliveries by customer class during the second quarter of 2002 with similar information for the second quarter of 2001.

Other Operation and Maintenance Expenses:   Other operation and maintenance expenses increased by $8.0 million or 4.3% during the second quarter of 2002 when compared with the second quarter of 2001. In the second quarter of 2002, the Company expensed $8.7 million for the settlement of litigation with the City of West Allis. In addition during the second quarter of 2002, bad debt expense increased $4.4 million compared to the second quarter of 2001 as state and federal funds for low income energy assistance were reduced from previous levels. The Company also experienced higher pension and other medical benefit expenses for the second quarter of 2002. Reductions in general administrative expenses partially offset cost increases in other areas of the Company.

Other Income:   Other Income increased by $2.6 million or 60.5% during the second quarter of 2002 due primarily to increases in equity in earnings of an unconsolidated affiliate.

Financing Costs:   Financing costs decreased by $4.0 million or 14.8% during the second quarter of 2002 due primarily to lower outstanding short-term debt balances and lower interest rates.

Earnings increased by $16.0 million to $113.1 million during the first six months of 2002 when compared to the first six months of 2001. This increase reflects improved electric and gas utility margins during 2002 principally due to the effects of weather offset in part by costs associated with a settlement of litigation paid to the City of West Allis and costs associated with the early repayment of $103.4 million of long-term debt with a weighted average interest rate of 8.4%.

The Company's total revenues decreased by $103.8 million or 8.5% for the first six months of 2002 compared to the first six months of 2001. The primary reason for this decrease reflects the decline in purchased gas costs that flow through to customers and do not impact margins.

The following table compares Wisconsin Electric's actual total electric utility operating revenues and gross margin during the first six months of 2002 with similar information for the first six months of 2001.

During the first six months of 2002, total electric utility operating revenues increased by $4.8 million or 0.5% when compared with the first six months of 2001. In February and May 2001, Wisconsin Electric received emergency increases in revenues to cover increased fuel and purchased power costs. These increases favorably impacted revenues in the first six months of 2002 by $28.2 million when compared to the same period in 2001. The increase in electric utility operating revenues was offset partially by a decrease in megawatt-hour sales during the first six months of 2002 resulting from the effects of the weakening economy and warm winter weather in the first quarter of 2002.

Between the comparative periods, total fuel and purchased power expenses decreased by $20.3 million or 8.0% primarily due to lower natural gas prices and improved efficiencies in generation. Completion of the Point Beach refueling outage during 2002, noted earlier, resulted in increased unit availability and reduced fuel costs. The lower fuel and purchased power expenses offset much of the impact on electric revenues of the decline in electric megawatt-hour sales such that total gross margin on electric operating revenues increased by $25.1 million or 3.9% during the first six months of 2002. Even with the emergency increase in rates as described above, the Company estimates that it under-recovered fuel and purchased power costs by $4.5 million and $12.8 million for the six months ended June 30, 2002 and 2001 respectively.

The following table compares Wisconsin Electric's electric utility operating revenues and electric utility megawatt-hour sales by customer class during the first six months of 2002 with similar information for the first six months of 2001.

As noted above, total electric megawatt-hour sales decreased by 4.1% during the first six months of 2002 but varied within customer classes. Sales to residential customers increased by 5.8%. Residential customers are more weather sensitive and contribute higher margins per megawatt-hour than other customer classes. Sales to Wisconsin Electric's largest retail customers, two iron ore mines, declined by 191.2 thousand megawatt-hours or 18.5% between the comparative periods. Excluding these two mines, Wisconsin Electric's sales volumes to the remaining large commercial/industrial customers decreased by 2.6% between the comparative periods. Sales for resale to other utilities, the Resale-Utilities customer class, declined 55.6% between the periods due to a reduced demand for wholesale power.

A comparison of Wisconsin Electric's gas utility 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 declined by $108.3 million or 33.9% between the first six months of 2002 and the first six months of 2001 offset by a $110.0 million or 46.4% decrease in purchased gas costs.

Lower prices for natural gas drove most of the 33.9% decrease in operating revenues and the 46.4% decrease in the cost of gas sold during the first six months of 2002. As noted above, such gas cost decreases do not affect the margin earned on each therm of gas delivered as a result of Wisconsin Electric's gas cost recovery mechanisms. Gas gross margin reflects an increase of $2.0 million due to a rate increase that became effective December 20, 2001.

The following table compares Wisconsin Electric's gas utility gross margins and natural gas therm deliveries by customer class during the first six months of 2002 with similar information for the first six months of 2001.

During the first six months of 2002, total therm deliveries of natural gas increased by 3.7% but varied within customer classes. Volume deliveries for the residential class increased by 2.4% and the commercial/industrial customer class decreased by 4.8%, respectively. Residential customers are more weather sensitive and contribute higher margins per therm than other customers. Transportation volumes were 12.4% higher during the first six months of 2002 than the same period in the prior year. These variations to total therm deliveries were primarily caused by a combination of fluctuations in weather, the economy and changes in the customer counts.

Other Operation and Maintenance Expenses:   Other operation and maintenance expenses increased by $2.5 million or 0.7% during the first six months of 2002 when compared with the first six months of 2001. The most significant changes in other operation and maintenance expenses include costs of $8.7 million for a settlement of litigation with the City of West Allis, $4.4 million of higher bad debt expenses, and increased employee benefit costs which were partially offset by cost reduction efforts during 2002.

Other Income:   Other Income decreased by $3.8 million during the first six months of 2002 due primarily to one-time costs of $5.3 million ($3.5 million net of tax) from the early repayment of $103.4 million of long-term debt.

Financing Costs:   Financing costs decreased by $8.8 million or 15.7% during the first six months of 2002 due partially to lower outstanding short-term debt balances and lower interest rates.

The following summarizes Wisconsin Electric's cash flows during the first six months of 2002 and 2001:

Cash provided by operating activities increased to $382.0 million during the first six months of 2002 compared with $266.2 million during the same period in 2001. This increase was due in part to the return of a $100 million deposit plus accrued interest as a result of a favorable court ruling (See Note 7 in Item 1). The Company expects to pay income taxes of approximately $46.8 million related to the return of the deposit. In addition, lower natural gas prices and weather conditions during the first six months of 2002 resulted in a decline in working capital needs.

During the first six months of 2002, Wisconsin Electric had cash outflows for investing activities of $179.9 million including total capital expenditures of $156.7 million. Due to the timing of refueling outage schedules at Point Beach Nuclear Plant, the Company spent $6.2 million more on the acquisition of nuclear fuel between the comparative periods. In addition, during the first six months of 2001, the Company received $105.4 million as a return of investment in the American Transmission Company LLC, the entity to which the Company transferred its electric utility transmission system assets on January 1, 2001.

During the six months ended June 30, 2002, Wisconsin Electric used $205.2 million for financing activities compared with $189.6 million during the first six months of 2001. The primary uses of cash in the first six months of 2002 included $122.8 million for the repayment of long-term debt and $10.3 million for the repayment of short-term debt. In January of 2002 the Company retired early $103.4 million of long-term debt with a weighted average interest rate of 8.4% and refinanced it through short-term debt at lower interest rates.

Cash requirements during the remaining six months of 2002 are expected to be met through a combination of internal sources of funds from operations and short-term borrowings supplemented, if necessary, through the sale of debt securities. In the first quarter of 2002, a $100 million deposit plus accrued interest related to litigation made in 1999 was returned to Wisconsin Electric with interest (See Note 7 in Item 1).

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 June 30, 2002, Wisconsin Electric had $230.0 million of available unused lines of bank back-up credit facilities. The Company had approximately $162 million of total short-term debt outstanding on such date.

Wisconsin Electric reviews its bank back-up credit facility needs on an ongoing basis and expects to be able to maintain adequate credit facilities to support the Company's operations.

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.

The following table shows Wisconsin Electric's capitalization structure at June 30, 2002 and at December 31, 2001:

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.

Wisconsin Electric believes these 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. An explanation of the significance of these ratings may be obtained from each rating agency. Such ratings are not a recommendation to buy, sell or hold securities, but rather an indication of creditworthiness. Any rating can be revised upward or downward or withdrawn at any time by a rating agency if it decides that the circumstances warrant the change. Each rating should be evaluated independently of any other rating.

Capital requirements during the remainder of 2002 are expected to be principally for capital expenditures, for long- and short-term debt retirements, and for the purchase of nuclear fuel. Wisconsin Electric's 2002 annual capital expenditure budget is approximately $370 million.

Wisconsin Electric is a party to various financial instruments with off-balance sheet risk as a part of its normal course of business, which may include, from time to time, financial guarantees and letters of credit which support construction projects, commodity contracts and other payment obligations. As of June 30, 2002, the Company's estimated maximum exposure under such agreements has not changed significantly compared to December 31, 2001. In addition, the Company believes the likelihood is remote that material payments will be required under these agreements.

Total contractual obligations and other commercial commitments for Wisconsin Electric as of June 30, 2002 declined compared with December 31, 2001 due to normal periodic payments related to these types of obligations and the early repayment of $103.4 million of long-term debt . There were no significant new contracts entered into in the first six months of 2002. Obligations for utility operations by Wisconsin Electric have historically been included as part of the rate making process and were therefore generally recoverable from customers.

Power the Future Strategy:   Implementation of Wisconsin Energy's Power the Future strategy is subject to a number of regulatory approvals. On October 16, 2001, the PSCW issued a declaratory ruling finding, among other things, that it was prudent to proceed with Power the Future prior to receiving a Certificate of Public Convenience and Necessity ("CPCN") and for Wisconsin Electric to incur the associated pre-certification expenses, which are then subject to review by the PSCW prior to recovery. Midwest Independent Power Suppliers Coordination Group ("MWIPS"), an unincorporated association of independent power producers, has filed a Petition for Judicial Review with the Dane County Circuit Court. MWIPS has asked the Circuit Court to reverse and remand to the PSCW the declaratory ruling, alleging, among other things, that:

• the declaratory ruling constitutes, contrary to Wisconsin law, an increase in rates without following Wisconsin statutory procedures for rate increases
• such "rate increase" is unreasonable and unjust;
• the declaratory ruling authorizes, contrary to Wisconsin law, a material subsidization by the consumers of a public utility of a non-utility affiliate if Power the Future does not go forward; and
• the declaratory ruling is arbitrary and capricious because it does not require bidding for the proposed facilities.

Wisconsin Electric has filed its Notice of Appearance and Statement of Position denying the allegations and asking that the declaratory ruling be upheld and the Petition for Judicial Review be dismissed. Wisconsin Electric and the PSCW both filed a Motion to Dismiss on the grounds that MWIPS did not have standing to bring the review proceeding. The Dane County Circuit Court concluded that MWIPS had standing to bring the review proceeding. The Dane County Circuit has not addressed the merits of the Petition nor established a briefing schedule. The Company believes these claims lack merit and does not believe that this proceeding will adversely affect implementation of Power the Future.

On February 1, 2002, Wisconsin Electric filed applications for a CPCN with the PSCW for a generating facility at the gas-based Port Washington Power Plant site and a coal-based generating facility at the Oak Creek Power Plant site, a certificate for a gas lateral to serve the Port Washington plant and related affiliated interest approvals. Supplemental information requested by the PSCW was filed in April 2002. On April 9, 2002, the PSCW authorized the bifurcation of its consideration of the Company's CPCN application along the lines of fuel source. On April 25, 2002, the PSCW determined that the Company's CPCN application with respect to the gas-based generation facilities to be constructed in the City of Port Washington was complete. The Company continues to file material related to the CPCN application for the coal-based Elm Road Generating Station at the Oak Creek Power Plant site. The Company expects that the PSCW will make a decision on the Port Washington Generating Station by the end of 2002. The Company anticipates that the PSCW will complete its consideration of the proposal for the Elm Road Generating Station in 2003. Wisconsin Energy continues to work with the PSCW and the Wisconsin Department of Natural Resources to obtain all required permits and project approvals.

The MOU also reaches an agreement on key cost issues included in the lease. Under the agreement, Wisconsin Energy would receive a 12.9% return on equity based on a capital structure of 55% equity for the two gas-fired units. Two of the three coal-fired units would also receive a 12.9% return on equity on a capital structure with 58% equity. The MOU solidifies support for the project among coalition members and may further facilitate PSCW approval of the Power the Future project.

Fuel Cost Adjustment Procedure:   As previously reported, Wisconsin Electric operates under a fuel cost adjustment clause for fuel and purchased power costs associated with the generation and delivery of electricity and with purchase power contracts. During the second quarter of 2002, the PSCW issued an order authorizing new fuel cost adjustment rules to be implemented in the Wisconsin retail jurisdiction. The new rules will not be effective for Wisconsin Electric until January 1, 2006, the end of a five year rate freeze associated with the WICOR Merger Order. Until such time, Wisconsin Electric will operate under an approved transaction mechanism similar to the old fuel cost adjustment procedure.

In addition, as previously reported, on June 4, 2001, two consumer advocacy groups had petitioned the Dane County Circuit Court for review of decisions related to authorization by the PSCW for Wisconsin Electric to add a surcharge to its electric rates to recover its expected 2001 power supply costs. The petitioners alleged that the PSCW made various material errors of law and procedure as a result of which the Court should set aside both interim and final orders and remand the case to the PSCW. The case was settled, and on May 30, 2002 the Dane County Circuit Court issued a final order dismissing the petition.

Wisconsin Electric Power Company:   In mid-November 2000, Wisconsin Electric submitted an application with the Michigan Public Service Commission ("MPSC") requesting an electric retail rate increase of $3.7 million or 9.4% on an annualized basis. Hearings on this rate relief request were completed in June of 2001. In December of 2001, the MPSC issued an order reopening the case on a limited basis to incorporate the rate effects of the transfer of Wisconsin Electric transmission assets to American Transmission Company. Hearings were completed on April 10, 2002. A Supplemental Proposal for Decision was issued on May 23, 2002. The Supplemental Proposal for Decision by the MPSC recommended an increase of $3.2 million or 8%. A MPSC final order is anticipated by in the fall of 2002.

Point Beach Nuclear Plant:   On July 12, 2002, the United States Nuclear Regulatory Commission ("NRC") issued a Notice of Violation and provided its final significance determination upholding its April 8, 2002 preliminary red finding for Point Beach related to the plant's auxiliary feedwater system. In November 2001, as part of a comprehensive risk assessment, plant employees had discovered the potential for a common mode failure of the plant's auxiliary feedwater pumps. The matter was immediately reported to the NRC and prompt interim corrective actions were implemented. Point Beach has completed equipment modifications and updated its procedures to ensure operators have explicit guidance that matches training and to ensure plant personnel take appropriate actions when necessary. The NRC plans to conduct an additional inspection this fall to gather additional information needed to complete the NRC's evaluation of whether or not it is appropriate to treat this issue as an old design issue. If the NRC agrees with the NMC and We Energies that treatment as an old design issue is appropriate, then the NRC will not use this finding in consideration of Point Beach's current overall performance. However, if treatment as an old design issue is not determined to be appropriate, this issue will be considered in Point Beach's overall NRC performance assessment for four calendar quarters, and likely result in increased regulatory interaction and inspection during that period.

Used Fuel Storage & Disposal:   On May 8, 2002, the U.S. House of Representatives endorsed President Bush's recommendation to develop the Yucca Mountain site, as the nation's long-term geological repository for used nuclear fuel overriding the state of Nevada's objections. On July 9, 2002, the U.S. Senate approved Yucca Mountain as such a repository. President Bush signed the resolution on July 23, 2002 which now clears the way for the U.S. Department of Energy to begin preparation of the application to the NRC for a license to design and build the repository.

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," "forecast," "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, or gas 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 or a permanent repository for used nuclear fuel; 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.

• Unexpected difficulties or unanticipated effects of the qualified five-year electric and gas rate freeze ordered by the Public Service Commission of Wisconsin as a condition of its approval in 2000 of the merger of Wisconsin Energy Corporation and WICOR, Inc.

• 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. 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; changes in the Price-Anderson Act; or changes in environmental laws and regulations.

• Authoritative generally accepted accounting principle or policy changes, such as adoption of SFAS 143, Accounting for Asset Retirement Obligations; 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, local opposition to siting of new generating facilities 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 Securities and Exchange Commission filings or in other publicly disseminated written documents.

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 Condensed Financial Statements," in Part 1 of this report as well as Item 1, Legal Proceedings, in Part II of this report.

For information concerning market risk exposures, see Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations -- "Factors Affecting Results, Liquidity and Capital Resources - Market Risks and Other Significant Risks," in Part II of Wisconsin Electric's 2001 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 2001 Annual Report on Form 10-K and Item I, Legal Proceedings, in Part II of Wisconsin Electric's Quarterly Report on Form 10-Q for the period ended March 31, 2002.

Giddings & Lewis, Inc./City of West Allis Lawsuit:   See Note 7 in Item 1, Financial Statements -- "Notes to Condensed Financial Statements" in Part I of this report for information concerning recent developments related to the Giddings & Lewis, Inc./City of West Allis lawsuit, which information is incorporated herein by reference.

Power the Future:   See Item 2, Management's Discussion & Analysis of Financial Condition and Results of Operations -" Factors Affecting Results, Liquidity and Capital Resources" in Part I of this report for information concerning recent PSCW actions related to the Company's Power the Future strategy.

Information on the items shareholders voted on and the voting results from Wisconsin Electric's 2002 Annual Meeting of Stockholders held on April 26, 2002 was previously reported in Item 4 in Part II of Wisconsin Electric's Quarterly Report on Form 10-Q for the period ended March 31, 2002.

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

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.