Annual Report (Form 10-K), fiscal year 1994

Item 1. BUSINESS
(a) General
Wisconsin Gas Company (the "Company" or "Wisconsin Gas") is a Wisconsin corporation and a wholly-owned subsidiary of WICOR, Inc. ("WICOR") and maintains its principal executive offices in Milwaukee, Wisconsin. The Company is the largest natural gas distribution public utility in Wisconsin, where all of its business is conducted. At December 31, 1994, Wisconsin Gas distributed gas to approximately 495,000 residential, commercial and industrial customers in 496 communities throughout Wisconsin having an estimated population of 1,458,000 based on the State of Wisconsin's estimates for 1994. The Company is subject to the jurisdiction of the Public Service Commission of Wisconsin ("PSCW") as to various phases of its operations, including rates, service and issuance of securities.
Wisconsin Gas' business is highly seasonal, particularly as to residential and commercial sales for space heating purposes, with a substantial portion of its sales occurring in the winter heating season. The following table sets forth the volumes of natural gas delivered by Wisconsin Gas to its customers.
*One therm equals 100,000 BTU's
The volumes shown as transported represent customer-owned gas that was delivered by Wisconsin Gas to such customers. The remaining volumes represent quantities sold to customers by the Company.
(b) Gas Supply and Pipeline Capacity
(1) General
Prior to the Federal Energy Regulatory Commission's ("FERC") Order No. 636, the interstate pipelines serving Wisconsin Gas were the primary suppliers of natural gas to Wisconsin Gas. During the transition period prior to the issuance of Order No. 636, Wisconsin Gas gradually assumed responsibility for the acquisition of supply in the production areas of North America, as well as the management of transportation and storage capacities to deliver that supply to its market area. On November 1, 1993, Wisconsin Gas commenced full operation and responsibility for its supply and capacity under the requirements of Order No. 636.
One of the provisions of Order No. 636 is capacity release. Capacity release creates a secondary market for pipeline capacity and gas supplies. Local distribution companies, such as Wisconsin Gas, must contract for capacity and supply sufficient to meet the peak day firm demand of their customers. Peak or near peak days occur only a few times each year, so capacity release facilitates higher utilization of capacity during those times when the capacity is not needed by the utility. Through pre-arranged agreements and day-to-day electronic bulletin board postings, interested parties can purchase that capacity. The proceeds from these transactions are passed-through to the ratepayers, thereby helping to offset the costs associated with holding the capacity. During 1994, Wisconsin Gas was an active participant in the capacity release market.
During 1993-94, the first year of operating under Order No. 636, the Company was able to meet its contractual obligations with both its suppliers and its customers despite unseasonably cold weather in January and February 1994 and unseasonably warm weather in November and December 1994. The following table sets forth the volumes of natural gas purchased by Wisconsin Gas and the volumes transported for customers.
*One therm equals 100,000 BTU's.
Wisconsin Gas purchased no gas from ANR, NNG and Viking in 1994 because Order No. 636 prohibits pipelines from selling gas as they did historically.
(2) Pipeline Capacity
Interstate pipelines serving Wisconsin originate in three major gas producing areas of North America: the Oklahoma and Texas basins, the Gulf of Mexico and western Canada. Wisconsin Gas has contracted for long-term firm capacity on a relatively equal basis from each of these areas. This strategy reflects management's belief that overall supply security is enhanced by geographic diversification of the Company's supply portfolio and that Canada represents an important long-term source of reliable, competitively priced gas.
Because of the seasonal variations in gas usage in Wisconsin, Wisconsin Gas has also contracted with ANR and NNG for substantial underground storage capacity, primarily in Michigan. There are no known underground storage formations in Wisconsin capable of commercialization. Storage enables Wisconsin Gas to optimize its overall gas supply and capacity costs. In summer, gas in excess of market demand is transported into the storage fields, and in winter, gas is withdrawn from storage and combined with gas purchased in or near the production areas ("flowing gas") to meet the increased winter market demand. As a result, Wisconsin Gas can contract for less pipeline capacity than would otherwise be necessary, and it can purchase gas on a more uniform daily basis from suppliers year-round. Each of these capabilities enables Wisconsin Gas to reduce its overall costs.
Wisconsin Gas' firm winter daily transportation and storage capacity entitlements from pipelines under long-term contracts are set forth below.
Maximum (Thousands Pipeline of Therms*) ------------------ ----------- ANR Mainline 2,999 Storage 4,879 NNG Mainline 1,077 Storage 150 Viking Mainline 64 Peaking Facilities 54 ----------- Total 9,223 ===========
*One therm equals 100,000 BTU's.
(3) Term Gas Supply
Wisconsin Gas has term firm contracts (initial terms in excess of 30 days) with approximately 30 gas suppliers for gas produced in each of the three producing areas discussed above. The term contracts have varying durations so that only a portion of the Company's gas supply expires in any year. the Company believes the volume of gas under contract is sufficient to meet its forecasted firm peak day demand. The following table sets forth Wisconsin Gas' winter season maximum daily firm total gas supply.
Maximum (Thousands of Therms*) ----------- Domestic flowing gas 2,387 Canadian flowing gas 1,396 Storage withdrawals 5,029 ----------- Total 8,812 ===========
*One therm equal 100,000 BTU's.
(4) Spot Market Gas Supply
Wisconsin Gas expects to continue to make gas purchases in the 30-day spot market as price and other circumstances dictate. The Company has purchased spot market gas since 1985 and has supply relationships with a number of sellers from whom it purchases spot gas.
(c) Employees
The Company had 1,166 full-time equivalent active employees at December 31, 1994.
Item 2.



Item 2. PROPERTIES
Wisconsin Gas owns a distribution system which, on December 31, 1994, included approximately 8,100 miles of distribution and transmission mains, 407,000 services and 498,000 active meters. The Company's distribution system consists almost entirely of plastic and coated steel pipe. The Company owns its main office building in Milwaukee, office buildings in certain other communities in which it serves, gas regulating and metering stations, peaking facilities and its major service centers, including garage and warehouse facilities. The Milwaukee and other office buildings, the principal service facilities and the gas distribution systems of Wisconsin Gas are owned by it in fee subject to the lien of its Indenture of Mortgage and Deed of Trust, dated as of November 1, 1950, under which its first mortgage bonds are issued, and to permissible encumbrances as therein defined.
Item 3.

Item 3. LEGAL PROCEEDINGS
There are no material legal proceedings pending, other than ordinary routine litigation incidental to the Company's business, to which the Company is a party, except as discussed below. There are no material legal proceedings to which any officer or director is a party or has a material interest adverse to the Company's. There are no material administrative or judicial proceedings arising under environmental quality or civil rights statutes pending or known to be contemplated by governmental agencies to which the Company is or would be a party.
Wisconsin Gas has identified two previously owned sites on which it operated manufactured gas plants that are of environmental concern. Such plants ceased operations prior to the mid-1950's. Wisconsin Gas has engaged an environmental consultant to help determine the nature and extent of the contamination at these sites. Based on the test results obtained and the possible restoration alternatives available, the Company has estimated that cleanup costs could range from $22 million to $75 million. As of December 31, 1994, the Company has accrued $37.2 million for cleanup costs in addition to $4.0 million of costs already incurred. These estimates are based on current undiscounted costs. It should also be noted that the numerous assumptions such as the type and extent of contamination, available restoration techniques, and regulatory requirements which are used in developing these estimates are subject to change as new information becomes available. Any such changes in assumptions could have a significant impact on the potential liability.
The Wisconsin Department of Natural Resources ("WDNR") issued a Potentially Responsible Party letter to Wisconsin Gas for these two sites in September 1994. Following receipt of this letter, Wisconsin Gas and WDNR held an initial meeting to discuss the sites. At the meeting it was agreed that Wisconsin Gas would prepare a remedial action options report from which it will select specific restoration actions for recommendation to the WDNR. This information will be prepared in the first quarter of 1995. Barring unforeseen delays, expenditures by Wisconsin Gas on restoration work could commence as early as 1995 and will increase in future years as plan approvals are obtained. Expenditures over the next several years are expected to total approximately $20 million. Although most of the work and costs are expected to be incurred in the first several years of the plan, monitoring of sites and other necessary actions may be undertaken for up to 30 years.
In February 1994, Wisconsin Gas commenced suit against nine insurance carriers seeking a declaratory judgment regarding insurance coverage for the two sites. Settlements were reached with each of the carriers during 1994. If the amount recovered from the insurance carriers is insufficient to remediate both sites, expenditures not recovered will be allowed full recovery (other than for carrying costs) in rates based upon recent PSCW orders. Accordingly, the accrual for future restoration costs has been deferred as a regulatory asset. Certain related investigation costs incurred to date are currently being recovered in utility rates.
Wisconsin Gas also owns a service center that is constructed on a site that was previously owned by the City of Milwaukee and was used by the City as a public dump site. The Company has conducted a site assessment at the request of the WDNR and has sent the report of its assessment to the WDNR. Management cannot predict whether or not the WDNR will require any restoration action, nor the extent or cost of any restoration actions that may be required. In the judgment of management, any restoration costs incurred by the Company will be recoverable from the City of Milwaukee or in Wisconsin Gas' rates under the PSC orders discussed above.
Item 4.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Omitted pursuant to General Instruction J (2) (c).
PART II
Item 5.

Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
WICOR owns all the issued and outstanding common stock of the Company. The Wisconsin Business Corporation Law, the Company's Indenture of Mortgage and Deed of Trust and the indentures supplemental thereto, and the agreements under which debt is outstanding each contain certain restrictions on the payment of dividends on common stock. By order of the PSCW, Wisconsin Gas is generally permitted to pay dividends up to the amount projected in its rate case. The Company may pay dividends in excess of the projected dividend amount so long as payment will not caused the equity ratio to fall below 48.43%. If payment of projected dividends would cause its equity ratio to fall below 43% or if payment of additional dividends would cause its equity ratio to fall below 48.43%, Wisconsin Gas must obtain PSCW approval to pay such dividends. Wisconsin Gas has projected the payment of $16 million of dividends during the 12 months ending October 31, 1995. See Note 6 of Notes to Financial Statements contained in Exhibit 13, the WICOR 1994 Annual Report to Shareholders, which note is incorporated herein by reference. The PSCW desires Wisconsin Gas to target its common equity level at 43% to 50% of total capitalization. For the year ended December 31, 1994, the Company's average common equity level was 48.82%. The Company paid cash dividends of $16,000,000 on common stock to WICOR in 1994 and 1993, respectively.
Item 6.

Item 6. SELECTED FINANCIAL DATA
Omitted pursuant to General Instruction J(2)(a).
Item 7.

Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Reference is made to the section entitled "Financial Review" set forth in the WICOR 1994 Annual Report to Shareholders. Such section is included in Exhibit 13, which, insofar as it pertains to the Company, is hereby incorporated herein by reference.
Item 8.


Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements for the Company together with the report of independent public accountants are included in Part IV of this report.
Item 9.

Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There has been no change in or disagreement with the Company's independent auditors on any matter of accounting principles or practices or financial statement disclosure required to be reported pursuant to this item.
PART III
Item 10.



Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Omitted pursuant to General Instruction J(2)(c).
Item 11.

Item 11. EXECUTIVE COMPENSATION
Omitted pursuant to General Instruction J(2)(c).
Item 12.

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Omitted pursuant to General Instruction J(2)(c).
Item 13.

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Omitted pursuant to General Instruction J(2)(c).
PART IV
Item 14.

Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Annual Report on Form 10-K:
1. All Financial Statements and Report of Independent Public Accountants. Statement of Income. Balance Sheet. Statement of Cash Flows. Statement of Common Equity. Statement of Capitalization. Notes to Financial Statements.
2. Financial Statement Schedules.
Not required.
3. Exhibits
3.1 Wisconsin Gas Company Restated Articles of Incorporation, as amended (incorporated by reference to Exhibit 3.1 to the Company's Form 10-K Annual Report for 1988).
3.2 Amendment to Wisconsin Gas Company By-laws, effective February 28, 1995.
3.3 Wisconsin Gas Company By-laws, as amended.
4.1 Indenture of Mortgage and Deed of Trust dated as of November 1, 1950, between Milwaukee Gas Light Company and Mellon National Bank and Trust Company and D. A. Hazlett, Trustees (incorporated by reference to Exhibit 7-E to the Company's Registration Statement No. 2-8631).
4.2 Eleventh Supplemental Indenture dated as of February 15, 1982, between Wisconsin Gas Company and Mellon Bank, N.A., and N. R. Smith, Trustees (incorporated by reference to Exhibit 4.5 to the Company's Form S-3 Registration Statement No. 33-43729).
4.3 Bond Purchase Agreement dated December 31, 1981, between Wisconsin Gas Company and Teachers Insurance and Annuity Association of America relating to the issuance and sale of $30,000,000 principal amount of First Mortgage Bonds, Adjustable Rate Series due 2002 (incorporated by reference to Exhibit 4-6 to the Company's Form S-3 Registration Statement No. 33-43729).
4.4 Indenture dated as of September 1, 1990, between Wisconsin Gas Company and First Wisconsin Trust Company, Trustee (incorporated by reference to Exhibit 4.11 to the Company's Form S-3 Registration Statement No. 33- 36639).
4.5 Officers' Certificate dated as of November 28, 1990, setting forth the terms of the Company's 9-1/8% Notes due 1997 (incorporated by reference to Exhibit 4.1 to the Company's Form 8-K Current Report for November 30, 1990).
4.6 Officers' Certificate dated as of November 19, 1991, setting forth the terms of Wisconsin Gas Company's 7- 1/2% Notes due 1998 (incorporated by reference to Exhibit 4.1 to Wisconsin Gas Company's Form 8-K Current Report for November 19, 1991).
4.7 Officers' Certificate, dated as of September 15, 1993, setting forth the terms of the Company's 6.60% debentures due 2013 (incorporated by reference to Exhibit 4.1 to the Company's Form 8-K Current Report for September, 1993).
4.8 Revolving Credit and Term Loan Agreement dated as of March 29, 1993, among Wisconsin Gas Company and the Bank of New York, Citibank, N.A., Firstar Bank of Milwaukee, N. A. Harris Trust & Savings Bank, M&I Marshall & Ilsley Bank and Citibank, N.A., as Agent (incorporated by reference to Exhibit 4.2 to the Company's Quarterly Report on Form 10-Q dated as of August 9, 1993).
4.9 Extension of Revolving Credit and Term Loan Agreement dated as of February 18, 1994, among Wisconsin Gas Company and Citibank, N.A., Firstar Bank Milwaukee, Harris Trust and Savings Bank, M&I Marshall & Ilsley Bank and Citibank, N.A., as Agent.
4.10 Loan Agreement dated as of November 4, 1991, by and among M&I Marshall & Ilsley Bank, Wisconsin Gas Company Employee's Savings Plans Trust and WICOR, Inc. (incorporated by reference to Exhibit 4.16 to the Company's Form 10-K Annual Report for 1991).
10.1 Service Agreement dated as of January 1, 1988, among WICOR, Inc., Wisconsin Gas Company, Sta-Rite Industries, Inc. and WEXCO of Delaware, Inc. (incorporated by reference to Exhibit 10.1 the Company's Form 10-K Annual Report for 1988).
10.2# WICOR, Inc. 1987 Stock Option Plan, as amended (incorporated by reference to Exhibit 4.1 to the WICOR, Inc. Form S-8 Registration Statement No. 33-67134).
10.3# Forms of nonstatutory stock option agreement used in connection with the WICOR, Inc. 1987 Stock Option Plan (incorporated by reference to Exhibit 10.20 to the Company's Form 10-K Annual Report for 1991).
10.4# WICOR, Inc. 1992 Director Stock Option Plan (incorporated by reference to Exhibit 4.1 to WICOR, Inc.'s Form S-8 Registration No. 33-67132).
10.5# Form of nonstatutory stock agreement used in conjunction with the WICOR, Inc. 1992 Director Stock Option Plan (incorporated by reference to Exhibit 4.2 to WICOR, Inc.'s Form S-8 Registration Statement No. 37-67132).
10.6# WICOR, Inc. 1994 Long-Term Performance Plan (incorporated by reference to Exhibit 4.1 to the WICOR, Inc. Form S-8 Registration Statement No. 33-55755).
10.7# Form of nonstatutory stock option agreement used in connection with the WICOR, Inc. 1994 Long-Term Performance Plan (incorporated by reference to Exhibit 4.2 to the WICOR, Inc. Form S-8 Registration Statement No. 33-55755).
10.8# Form of restricted stock agreement used in connection with the WICOR, Inc. 1994 Long-Term Performance Plan (incorporated by reference to Exhibit 4.3 to the WICOR, Inc. Form S-8 Registration Statement No. 33-55755).
10.9# Wisconsin Gas Company Principal Officers' Supplemental Retirement Income Program (incorporated by reference to Exhibit 10.6 to the Company's Form 10-K Annual Report for 1993).
10.10# Wisconsin Gas Company 1995 Officers' Incentive Compensation Plan.
10.11# Wisconsin Gas Company Officers' Medical Expense Reimbursement Plan (incorporated by reference to Exhibit 10.22 to the Company's Form 10-K Annual Report for 1992).
10.12# Wisconsin Gas Company Group Travel Accident Plan (incorporated by reference to Exhibit 10.23 to the Company's Form 10-K Annual Report for 1992).
10.13# Form of Deferred Compensation Agreement between Wisconsin Gas Company and certain of its officers (incorporated by reference to Exhibit 10.25 to the Company's Form 10-K Annual Report for 1991).
10.14# WICOR, Inc. Retirement Plan for Directors, as amended (incorporated by reference to Exhibit 10.25 to the Company's Form 10-K Annual Report for 1992).
13 "Financial Review" portions of WICOR, Inc. 1994 Annual Report to Shareholders.
27 Financial Data Schedule.
(b) Reports on Form 8-K.
No Current Report on Form 8-K was filed during the fourth quarter of 1994.
# Indicates a plan under which compensation is paid or payable to directors or executive officers of the Company.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
WISCONSIN GAS COMPANY
Date: March 13, 1995 By JOSEPH P. WENZLER ----------------------- Joseph P. Wenzler Vice President and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed on the succeeding pages by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
WISCONSIN GAS COMPANY
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Wisconsin Gas Company:
We have audited the accompanying balance sheet and statement of capital-
ization of WISCONSIN GAS COMPANY (a Wisconsin corporation and a wholly owned subsidiary of WICOR, Inc.) as of December 31, 1994 and 1993, and the related statements of income, common equity and cash flows for each of the three years in the period ended December 31, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and signi-
ficant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Wisconsin Gas Company as of December 31, 1994 and 1993, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles.
As discussed in Notes 2 and 8 to Wisconsin Gas Company's Financial Statements, effective January 1, 1992, Wisconsin Gas Company changed its methods of accounting for income taxes and postretirement benefits other than pensions.
ARTHUR ANDERSEN LLP
Milwaukee, Wisconsin, February 2, 1995
The accompanying notes are an integral part of this statement.
The accompanying notes are an integral part of this statement.
The accompanying notes are an integral part of this statement.
The accompanying notes are an integral part of this statement.
The accompanying notes are an integral part of this statement.
The accompanying notes are an integral part of this statement.
Wisconsin Gas Company Notes to Financial statements
1. ACCOUNTING POLICIES
a. Business
Wisconsin Gas is a public utility engaged in the distribution of natural gas throughout Wisconsin. Most of its revenues, however, are derived from gas delivered in southeastern Wisconsin. Wisconsin Gas is subject to regulation by the Public Service Commission of Wisconsin (PSCW) and gives recognition to ratemaking policies substantially in accordance with the Federal Energy Regulatory Commission (FERC) System of Accounts.
b. Gas Distribution Revenues and Purchased Gas Costs
Utility billings are rendered on a cycle basis. Revenues include estimated amounts accrued for service provided but not yet billed. Wisconsin Gas' rate schedules contain purchased gas adjustment (PGA) provisions which permit the recovery of actual purchased gas costs incurred. The difference between actual gas costs incurred and costs recovered through rates, adjusted for inventory activity, is deferred as a current asset or liability. The deferred balance is returned to or recovered from customers at intervals throughout the year and any residual balance at the annual October 31 reconciliation date is subsequently refunded to or recovered from customers. The PSCW is currently permitting Wisconsin Gas to recover pipeline supplier take-or-pay settlement costs, allocating a portion of the direct- billed costs to each customer class, including transportation customers.
c. Plant and Depreciation
Gas distribution property, plant and equipment is stated at original cost, including overhead allocations. Upon ordinary retirement of plant assets, their cost plus cost of removal, net of salvage, is charged to accumulated depreciation, and no gain or loss is recognized. The depreciation of Wisconsin Gas' assets is computed using straight-line rates over estimated useful lives and considers salvage value. These rates have been consistently used for ratemaking purposes. The composite rates are 4.5% for 1994 and 4.7% for 1993 and 1992.
d. Regulatory Accounting and Deferred Charges
Wisconsin Gas accounts for its regulated operations in accordance with Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation." This statement sets forth the application of generally accepted accounting principles to those companies whose rates are determined by an independent third-party regulator. The economic effects of regulation can result in regulated companies recording costs that have been or are expected to be allowed in the ratemaking process in a period different from the period in which the costs would be charged to expense by an unregulated enterprise. When this occurs, costs are deferred as assets in the balance sheet (regulatory assets) and recorded as expenses as those same amounts are reflected in rates. Additionally, regulators can impose liabilities upon a regulated company for amounts previously collected from customers and for amounts that are expected to be refunded to customers (regulatory liabilities). The amounts recorded as regulatory assets and regulatory liabilities in the balance sheet at December 31, 1994 and 1993 are as follows:
(Thousands of Dollars) 1994 1993 ---------- ---------- Regulatory assets: Deferred environmental costs $ 41,942 $ 41,641 Income tax-related amounts due from customers (Note 2) 3,711 5,650 Postretirement benefit costs (Note 8) 47,832 51,561 Gas transition costs 7,411 15,485 Other 16,000 14,499 ---------- ---------- $ 116,896 $ 128,836 ========== ========== Regulatory liabilities: Income tax-related amounts due to customers (Note 2) $ 18,792 $ 21,762 Pension costs (Note 8) 22,333 22,808 Refundable gas costs 18,058 15,596 Other 14,469 4,658 ---------- ---------- $ 73,652 $ 64,824 ========== ==========
Consistent with PSCW regulation, Wisconsin Gas has capitalized computer systems development costs which are to be amortized over a five- to ten- year period, generally as the respective systems become operational. Wisconsin Gas is precluded from discontinuing service to residential customers within its service area during a certain portion of the heating season. Any differences between doubtful account provisions based on actual experience and provisions allowed for ratemaking purposes by the PSCW are deferred for later recovery in rates as a cost of service. The most recent PSCW rate order provides for a $13.9 million allowable annual provision for doubtful accounts, including amortization of prior deferred amounts. See Notes 6 and 8 for discussion of additional deferred charges.
e. Income Taxes
Wisconsin Gas as a wholly owned subsidiary of WICOR, Inc. is included in WICOR's consolidated Federal income tax return and allocates Federal current tax expense or credits to Wisconsin Gas based on its respective separate tax computation. Beginning with 1992, the Wisconsin Gas has provided deferred income taxes in accordance with SFAS 109 "Accounting for Income Taxes," to reflect tax effects of reporting book and taxable income in different periods (See Note 2). Investment tax credits were recorded as a deferred credit on the balance sheet and are being amortized to income over the applicable service lives of the related properties in accordance with regulatory treatment.
f. Cash Flows
Wisconsin Gas considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. Due to the short maturity of these instruments, market value approximates cost. For purposes of the Consolidated Statements of Cash Flow, income taxes paid (net of refunds) and interest paid (excluding capitalized interest) were as follows for each of the years ended December 31, 1994, 1993 and 1992:
(Thousands of Dollars) 1994 1993 1992 ----------------------- ---------- ---------- ---------- Income taxes paid $ 30,059 $ 8,188 $ 4,824 Interest paid $ 13,374 $ 15,043 $ 14,334
g. Reclassifications
Certain prior year financial statement amounts have been reclassified to conform to their current year presentation.
2. INCOME TAXES
In the fourth quarter of 1992, Wisconsin Gas adopted SFAS No. 109, "Accounting for Income Taxes," retroactive to January 1, 1992. Under the liability method prescribed by SFAS No. 109, deferred taxes are provided based upon enacted tax laws and rates applicable to the periods in which the taxes become payable. Changes in Wisconsin Gas' deferred income taxes arising from the adoption represent amounts recoverable or refundable through future rates and have been recorded as regulatory assets and liabilities on the balance sheet. The current and deferred components of income tax expense for each of the years ended December 31, are as follows:
(Thousands of Dollars) 1994 1993 1992 ------------------------ ---------- ---------- ---------- Current Federal $ 19,245 $ 15,082 $ 1,916 State 4,771 3,761 811 ---------- ---------- ---------- Total Current 24,016 18,843 2,727 ---------- ---------- ---------- Deferred Federal (10,789) (6,432) 5,916 State (2,234) (1,131) 1,568 ---------- ---------- ---------- Total Deferred (13,023) (7,563) 7,484 ---------- ---------- ---------- Total Provision $ 10,993 $ 11,280 $ 10,211 ========== ========== ==========
The provision for income taxes differs from the amount of income tax determined by applying the applicable U.S. statutory federal income tax rate to pretax income as a result of the following differences:
The weighted average discount rate assumptions used in determining the actuarial present value of the projected benefit obligation were 8.25%, 7.5% and 7.75% for 1994, 1993 and 1992, respectively. For 1994, the expected long- term rate of return on assets was 8.5% and the long-term rate of compensation growth was 5.5%. For both 1993 and 1992, the expected long-term rate of return on assets and long-term rate of compensation growth were 8.0% and 6.0%, respectively. Net pension costs for each of the years ended December 31, include the following (income) expense:
(Thousands of Dollars) 1994 1993 1992 --------------------------- ---------- ---------- ---------- Service costs $ 4,265 $ 4,872 $ 3,882 Interest costs on projected benefit obligations 8,860 9,023 7,512 Actual loss (gain) on plan assets 1,880 (13,474) (11,879) Net amortization and deferral (15,195) (1,424) (993) Gain on early retirement incentive (268) - - Amortization of regulatory liability (475) - - Adjustment to utility funded amount - - 1,513 ---------- ---------- ---------- Net pension (income) cost $ (933) $ (1,003) $ 35 ========== ========== ==========
The decrease in pension cost from 1992 to 1993 was due to the adoption by the PSCW of SFAS No. 87 for ratemaking purposes, effective November 1, 1992.
b. Postretirement Health Care and Life Insurance In addition to providing pension benefits, Wisconsin Gas provides certain health care and life insurance benefits for retired employees when they reach normal retirement age while working for the Company. Wisconsin Gas funds the accrual annually based on the maximum tax deductible amount. Effective January 1, 1992, Wisconsin Gas adopted SFAS No. 106, "Employers Accounting for Postretirement Benefits Other Than Pensions", for its retiree benefit plans. Under SFAS No. 106, the Company is required to accrue the estimated cost of retiree benefit payments, other than pensions, during the employees' active service period. In 1992, Wisconsin Gas recognized the accumulated benefit obligation (APBO) and a related regulatory asset, as mandated by the PSCW. Amortization of the regulatory asset is recoverable in rates over a 20-year period. Accordingly, the cumulative effect for the Company of adopting SFAS No. 106 as of December 31, 1992, was an increase in the APBO of $54.7 million which was offset by the related regulatory asset. Net postretirement health care and life insurance costs for each of the years ended December 31, consisted of the following components:
(Thousands of Dollars) 1994 1993 1992 ---------------------- ---------- ---------- ---------- Service cost $ 2,492 $ 2,575 $ 2,475 Interest cost on projected benefit obligation 5,665 5,396 5,173 Actual loss (gain) on plan assets 147 (1,414) (895) Amortization of regulatory asset 2,778 2,651 2,778 Net amortization and deferral (2,628) - - Loss on early retirement incentive 3,650 - - Adjustment to utility funded amount - - (2,108) ---------- ---------- ---------- Net postretirement benefit cost $ 12,104 $ 9,208 $ 7,423 ========== ========== ==========
The 1994 postretirement benefit cost was increased due to the early retirement of 131 employees under a voluntary early retirement incentive plan for employees age 55 and over. The following table sets forth the plans' funded status, reconciled with amounts recognized in the Company's Statement of Financial Position at December 31, 1994 and 1993, respectively.
Accumulated benefit obligation (Thousands of Dollars) 1994 1993 -------------------------------- ---------- ---------- Retirees $ (40,510) $ (32,855) Active employees (26,716) (48,009) ---------- ---------- Accumulated benefit obligation (67,226) (80,864) Plan assets at fair value 30,666 25,753 ---------- ---------- Accumulated benefit obligation in excess of plan assets (36,560) (55,111) Unrecognized prior service costs (16,347) - Unrecognized actuarial (gain) loss (2,717) 1,216 ---------- ---------- Accrued postretirement benefit $ (55,624) $ (53,895) ========== ==========
The postretirement benefit cost components for 1994 were calculated assuming health care cost trend rates beginning at 11% in 1994 and decreasing to 6% in 25 years. The health care cost trend rate has a significant effect on the amounts reported. Increasing the assumed health care cost trend rates by one percentage point in each year would increase the APBO as of December 31, 1994 by $10.3 million and the aggregate of the service and interest cost components of postretirement expense by $1.4 million. The assumed discount rate used in determining the actuarial present value of the accumulated postretirement benefit obligation was 8.25% and 7.50% in 1994 and 1993, respectively. Plan assets are primarily invested in equities and fixed income securities.
c. Retirement Savings Plans Wisconsin Gas maintains various employee savings plans, which provide employees a mechanism to contribute amounts up to 16% of their compensation for the year. Company matching contributions may be made for up to 5% of eligible compensation including 1% for the Employee Stock Ownership Plan (ESOP). See Note 8.d. Total contributions were valued at $1.3 million in 1994, $1.3 million in 1993 and $1.2 million in 1992.
d. Employee Stock Ownership Plan In November 1991, WICOR established an ESOP covering non-union employees of Wisconsin Gas. The ESOP funds employee benefits of up to 1% of compensation with Company common stock distributed through the ESOP. The ESOP used the proceeds from a $10 million, 3-year adjustable rate loan with a 6.56% interest rate at December 31, 1994, guaranteed by WICOR, to purchase 431,266 shares of original issue WICOR common stock. The ESOP extended the adjustable rate loan, with similar terms, until November 3, 1995. Because WICOR has guaranteed the loan, the unpaid balance ($6.4 million) is shown as long-term debt with a like amount of unearned compensation being recorded as a reduction of common equity on WICOR's balance sheet. The ESOP trustee is repaying the $10 million loan with dividends on shares of WICOR common stock in the ESOP and with Wisconsin Gas contributions to the ESOP.
e. Postemployment Benefit Plans Effective January 1, 1994 the Company adopted SFAS No. 112, "Employers' Accounting for Postemployment Benefits," which requires accrual for all other postemployment benefits. Total postemployment benefit expense in 1994 was $0.6 million including a one-time cumulative adjustment. The incremental costs of adopting this statement are insignificant on an ongoing basis.
9. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of Wisconsin Gas' long-term debt is estimated based on the quoted market prices of U.S. Treasury issues having a similar term to maturity, adjusted for the Company's bond rating and the present value of future cash flows. Because Wisconsin Gas operates in a regulated environment, shareholders would probably not be affected by realization of gains or losses on extinguishment of its outstanding fixed-rate debt. Realized gains would be refunded to and losses would be recovered from customers through gas rates. The estimated fair value of Wisconsin Gas' long-term debt at December 31, is as follows:
(Thousands of Dollars) 1994 1993 ------------------------ ---------- ---------- Carrying amount $ 143,831 $ 147,644 Fair value $ 141,335 $ 158,578
10. QUARTERLY FINANCIAL DATA (Unaudited)
Because seasonal factors significantly affect Wisconsin Gas operations, the following data is not comparable between quarters: