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, 1993, Wisconsin Gas distributed gas to approximately 485,000 residential, commercial and industrial customers in 487 communities throughout Wisconsin with an estimated population of 1,867,000 based on the State of Wisconsin's estimates for 1993. 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.
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
In recent years, the natural gas industry has undergone structural changes designed to increase competition. In 1992, the Federal Energy Regulatory Commission ("FERC") issued Order No. 636 which fundamentally restructured the interstate natural gas pipeline industry. Prior to Order No. 636, the pipelines serving Wisconsin Gas were major sellers of gas to Wisconsin Gas. They sold gas on a "bundled" or delivered-to-Wisconsin basis. Under Order No. 636, the pipelines are required to "unbundle" the sale of gas from the related transportation service. Consequently, pipelines may no longer provide the delivered-to-Wisconsin gas sales service. Rather, they must sell gas at or near the point of production in competition with other gas sellers. Under Order No. 636, purchasers such as Wisconsin Gas contract separately with one or more sellers for gas supply and with pipelines for capacity to move the gas to markets or into market area storage for future delivery. In the opinion of management, Order No. 636 will not have a material impact on Wisconsin Gas' earnings.
The Company's principal pipeline suppliers, ANR Pipeline Company ("ANR") and Northern Natural Gas Company ("NNG"), completed the transition to unbundled service on November 1, 1993. Consequently, Wisconsin Gas has replaced all of its "bundled" pipeline services with "unbundled" firm pipeline transportation and storage services and long-term contracts with producers and marketers for firm gas supply. Thus, 1993 was a transition year in which Wisconsin Gas purchased gas supply and capacity under interim arrangements with pipeline suppliers for much of the year and under the Order No. 636 restructured regime described above for the last two months of the year. The following table sets forth the sources and volumes of gas purchased by Wisconsin Gas and volumes of customer-owned gas transported by Wisconsin Gas.
*One therm equals 100,000 BTU's.
(2) Pipeline Capacity
Interstate pipelines serving Wisconsin originate in three major gas producing areas of North America: the traditional Oklahoma and Texas basins; the Gulf of Mexico off-shore from Texas and Louisiana and the adjacent on-shore producing areas of those states 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 is no known underground storage capability in Wisconsin. 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-around. 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 3,175 Storage 4,996 NNG Mainline 1,226 Storage 149 Viking Mainline 64 ----------- Total 9,610
*One therm equals 100,000 BTU's.
(3) Long-Term Gas Supply
Wisconsin Gas has long-term firm contracts with approximately 30 gas suppliers for gas produced in each of the three producing areas discussed above. The following table sets forth Wisconsin Gas' winter season maximum daily firm total gas supply.
Maximum Daily (Thousands of Therms*) ------------ Domestic flowing gas 2,259 Canadian flowing gas 1,396 Storage withdrawals 5,157 ------------ 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 1,353 full-time equivalent active employees at December 31, 1993.
Item 2.
Item 2. PROPERTIES
Wisconsin Gas owns a distribution system which, on Decem- ber 31, 1993, included approximately 7,800 miles of distribution and transmission mains, 399,000 services and 488,000 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 remediation alternatives available, the Company has estimated that cleanup costs could range from $22 million to $75 million. As of December 31, 1993, the Company has accrued $40 million for cleanup costs in addition to $1.6 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 remediation 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.
A formal remediation plan is currently being developed for presentation to the Wisconsin Department of Natural Resources ("DNR"). Following plan approval and pilot studies, remediation will commence. Barring unforeseen delays, expenditures by Wisconsin Gas on this remediation work will commence in 1994 and increase in future years as plan approvals are obtained. Expenditures over the next three years are expected to total approximately $20 million. Although most of the work and costs will be incurred in the first few years of the plan, monitoring of the sites and other necessary actions may last up to 30 years.
Wisconsin Gas is pursuing recovery of these costs from insurance carriers. Any amounts not recoverable from insurance carriers will be allowed full recovery in rates, based on recent PSCW orders. Accordingly, the accrual has been offset by a deferred charge to a regulatory asset. Certain related investigation costs incurred to date are currently being recovered in utility rates. However, any incurred costs not yet recovered in rates are not allowed by the PSCW to earn a return. As of December 31, 1993, $1.6 million of such costs have been incurred.
In 1992, the owner of a portion of one of the properties on which manufactured gas operations were conducted commenced suit in Federal district court against Wisconsin Gas. The suit, which was settled in 1993, generally sought indemnity and contribution under Federal statutes and alleges that Wisconsin Gas is liable for remediating the environmental conditions found to be caused by any releases of hazardous substances from the gasification activities at the site. Under the settlement, Wisconsin Gas agreed to indemnify the owner from any remediation costs attributable to the release of hazardous substances from the gasification activities on the site. In the judgment of management, the suit will not materially change Wisconsin Gas' responsibility as required by Federal and State statutes for remediating the environmental conditions found to be caused by any releases of hazardous substances from the gasification activities at the site, which ceased about 40 years ago, the cost of any remediation actions that may be required, or its ability to recover such costs in its rates or from insurers.
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 DNR and has sent the report of its assessment to the DNR. Management cannot predict whether or not the DNR will require any remediation action, nor the extent or cost of any remediation actions that may be required. In the judgment of management, any remediation costs incurred by the Company will be recoverable from the City of Milwaukee or in Wisconsin Gas' rates.
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, 1994. See Note 6 to Notes to Financial Statements. The PSCW desires Wisconsin Gas to target its common equity level at 43% to 50% of total capitalization. For the year ended December 31, 1993, the Company's average common equity level was 45.16%.
The Company paid cash dividends of $16,000,000 and $14,000,000 on common stock to WICOR in 1993 and 1992, 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 "Financial Review" 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 the report:
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.
Schedule V -- Property, Plant and Equipment for the Years Ended December 31, 1993, 1992 and 1991.
Schedule VI -- Accumulated Depreciation for the Years Ended December 31, 1993, 1992 and 1991.
Schedule VIII -- Valuation and Qualifying Accounts for the Years Ended December 31, 1993, 1992 and 1991.
Schedule IX -- Short-term Borrowings for the Years Ended December 31, 1993, 1992 and 1991.
Schedule X -- Supplemental Income Statement Information for the Years Ended December 31, 1993, 1992 and 1991.
Schedules other than those referred to above have been omitted as not applicable or 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 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 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 No. 37-67132).
10.6# Wisconsin Gas Company Principal Officers' Supplemental Retirement Income Program.
10.7# Wisconsin Gas Company 1994 Officers' Incentive Compensation Plan.
10.8# Wisconsin Gas Company Officers' Medical Expense Reimbursement Plan (incorporated by reference to Exhibit 10.22 to the Company's Form 10-K Annual Report in 1992).
10.9# 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).
10.10# 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).
10.11# 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. 1993 Annual Report to Shareholders.
(b) Reports on Form 8-K.
No Form 8-K Current Report was filed in the fourth quarter of 1993.
# 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 29, 1994 By 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 capitalization of WISCONSIN GAS COMPANY (a Wisconsin corporation and a wholly owned subsidiary of WICOR, Inc.) as of December 31, 1993 and 1992, and the related statements of income, common equity and cash flows for each of the three years in the period ended December 31, 1993. These financial statements and the schedules referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules 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 significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Wisconsin Gas Company as of December 31, 1993 and 1992, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1993, in conformity with generally accepted accounting principles.
As discussed in Notes 5 and 10 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.
Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. Supplemental Schedules V, VI, VIII, IX, and X are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic financial statements. These schedules have been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN & CO.
Milwaukee, Wisconsin, February 11, 1994.
g. Reclassifications
Certain prior year financial statement amounts have been reclassified to conform to their current year presentation.
2. Short-Term Borrowings
As of December 31, 1993, Wisconsin Gas had lines of credit available from banks of $110.0 million. At December 31, 1993, $108.0 million of commercial paper was outstanding at a weighted average interest rate of 3.3%. At December 31, 1992, $49.0 million of commercial paper was outstanding at a weighted average interest rate of 3.6%. These borrowing arrangements may require the maintenance of average compensating balances, which are generally satisfied by balances maintained for normal business operations, and which may be withdrawn at any time. 3. Long-Term Debt
In September 1993, Wisconsin Gas issued $45 million of 6.6% Notes due in 2013, the proceeds of which were used to refinance $45 million of outstanding higher cost first mortgage bonds due in 1994 and 1995. In November, 1991, Wisconsin Gas issued $40 million of 7-1/2% Notes due 1998. A portion of the proceeds was used to redeem the remaining $10.4 million of 6-5/8% First Mortgage Bonds at their maturity dates. Substantially all property and plant is subject to a first mortgage lien. Maturities and sinking fund requirements during the succeeding five years on all long-term debt are $2.0 million, $2.0 million, $2.0 million, $52.0 million and $42.0 million in 1994, 1995, 1996, 1997 and 1998, respectively.
4. Preferred Stock
Authorized preferred stock consists of 1.5 million shares of cumulative preferred stock, without par; as of December 31, 1993 and 1992 no such shares were issued or outstanding.
5. 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 totalling $4.6 million and regulatory liabilities totalling $29.7 million on the balance sheet for 1992. Prior years' financial statements have not been restated to apply the provisions of SFAS No. 109.
The current and deferred components of income tax expense are as follows:
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:
6. Restrictions
A November 1993 PSCW rate order set an equity range of 43% to 50% and also require Wisconsin Gas to request PSCW approval prior to the payment of dividends on its common stock to WICOR if the payment would reduce its common equity (net assets) below 43% of total capitalization (including short-term debt). Under this requirement, $8.1 million of Wisconsin Gas' net assets at December 31, 1993, plus future earnings, were available for such dividends without PSCW approval. In addition, the PSCW imposed certain limitations on the ability of Wisconsin Gas to pay dividends to WICOR in excess of the level indicated in the projected test year if such dividends would dilute Wisconsin Gas' total equity below 48.43% of its total capitalization. The utility dividend payout indicated in the projected test year ending October 31, 1994 is $16 million, of which $4 million was paid in November, 1993.
7. Commitments and Contingencies
Certain commitments have been made in connection with 1994 capital expenditures. Wisconsin Gas capital expenditures for 1994 are estimated at $57.4 million. Wisconsin Gas has variable-term contracts with its interstate pipelines and gas suppliers to purchase transportation capacity and natural gas. PGA provisions permit the recovery of actual purchased capacity and gas costs incurred. 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-1950s. 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 remediation alternatives available, the Company has estimated that cleanup costs could range from $22 million to $75 million. As of December 31, 1993 the Company has accrued $40 million for cleanup costs in addition to $1.6 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 remediation 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. A formal remediation plan is being developed for presentation to the Wisconsin Department of Natural Resources. Following plan approval and pilot studies, remediation work will commence. Barring unforeseen delays, expenditures by Wisconsin Gas on this remediation will commence in 1994 and increase in future years as plan approvals are obtained. Expenditures over the next three years are expected to total approximately $20 million. Although most of the work and costs will be incurred in the first few years of the plan, monitoring of the sites and other necessary techniques may last up to 30 years. Wisconsin Gas is pursuing recovery of these costs from insurance carriers. Any amounts not recoverable from insurance carriers will be allowed full recovery in rates based on recent PSCW orders. Accordingly, the accrual has been offset by a deferred charge to a regulatory asset. Certain related investigation costs incurred to date are currently being recovered in utility rates. However, any incurred costs not yet recovered in rates are not allowed by the PSCW to earn a return. As of December 31, 1993, $1.6 million of such costs have been incurred. The Company is party to various legal proceedings arising in the ordinary course of business which are not expected to have a material effect on the financial statements of the Company. 8. FERC Order No. 636
On April 8, 1992, the FERC issued Order No. 636 which restructured the interstate natural gas pipeline business. Pipeline suppliers will be allowed to recover significant transition costs from Wisconsin Gas necessary to implement "unbundled" services such that gas supplies would be sold separately from interstate transportation services. Wisconsin Gas' liability for certain of these costs is being contested at FERC and in court. The extent of this future liability is not estimable at this time due to a number of factors including the future cost of gas and the outcome of ongoing litigation. However, on the basis of previous PSCW ratemaking relative to the recovery of gas purchased and related costs, Wisconsin Gas anticipates that pipeline transition cost billings will also be recoverable from ratepayers.
9. Common Stock and Other Paid-In Capital
During the first, third and fourth quarters of 1993, WICOR invested $2 million, $8 million and $2 million, respectively, in Wisconsin Gas. In the first and third quarters of 1992, WICOR invested $5 million and $10 million, respectively, in Wisconsin Gas.
10. Benefit Plans
a. Pension Plans
Wisconsin Gas has non-contributory pension plans which cover substantially all employees and include benefits based on levels of compensation and years of service. Employer contributions and funding policies are consistent with funding requirements of Federal law and regulations. Commencing on November 1, 1992, Wisconsin Gas pension costs or credits are calculated in accordance with SFAS No. 87 and are recoverable from or refunded to customers. Prior to this date, pension costs were recoverable in rates as funded.
The following table sets forth the funded status of pension plans at December 31, 1993 and 1992:
The weighted average discount rate assumptions used in determining the actuarial present value of the projected benefit obligation were 7.5%, 7.75% and 7.75% for 1993, 1992 and 1991, respectively. For 1991 through 1993, 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 include the following (income) expense:
The following table sets forth the plans' funded status, reconciled with amounts recognized in the Company's Statement of Financial Position at December 31, 1993 and 1992. The Company funds its postretirement benefit plans based on the maximum tax deductible amount.
The postretirement benefit cost components for 1993 were calculated assuming health care cost trend rates beginning at 11% in 1993 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, 1993 by $13.2 million and the aggregate of the service and interest cost components of postretirement expense by $1.8 million. The assumed discount rate used in determining the actuarial present value of the accumulated postretirement benefit obligation was 7.5% and 7.75% in 1993 and 1992, respectively. Plan assets are primarily invested in common stock and fixed income securities.
c. Retirement Savings Plans
Wisconsin Gas maintains various employee saving plans including 401(k) plans which provide employees a mechanism to contribute amounts up to 16% of their compensation for the year. Company matching contributions may be made up to 5% of eligible compensation including 1% for the Employee Stock Ownership Plan (ESOP). Total contributions were $1.3 million, $1.2 million and $.9 million in 1993, 1992 and 1991, respectively.
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 WICOR common stock distributed through the ESOP. The ESOP used the proceeds from a $10 million, 3-year adjustable rate loan with a 3.98% interest rate at December 31, 1993, guaranteed by WICOR, to purchase 431,266 shares of original issue WICOR common stock. Because WICOR has guaranteed the loan, the unpaid balance 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 paid on shares of WICOR common stock in the ESOP and with Wisconsin Gas contributions to the ESOP. e. Postemployment Benefit Plans
The FASB has issued a new statement SFAS No. 112, "Employers' Accounting for Postemployment Benefits," to be adopted no later than January 1, 1994, which requires accrual for all other postemployment benefits. In management's opinion, any unrecorded liabilities are expected to be recoverable in future rates and are not significant.
11. Fair Value of Financial Instruments
The fair value of Wisconsin Gas's 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, WICOR 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's long-term debt at December 31, is as follows:
12. Quarterly Financial Data (Unaudited)
Because seasonal factors significantly affect Wisconsin Gas operations, the following data is not comparable between quarters (thousands of dollars):
TO EXHIBITS
PAGE 3.1 Wisconsin Gas Company Restated Articles of Incorporation, as amended (incorporated by reference)
3.2* 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)
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)
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)
4.4 Indenture dated as of September 1, 1990, between Wisconsin Gas Company and First Wisconsin Trust Company, Trustee (incorporated by reference)
4.5 Officers' Certificate dated as of November 28, 1990, setting forth the terms of Wisconsin Gas Company's 9-1/8% Notes due 1997 (incorporated by reference)
4.6 Officers' Certificate dated as of November 19, 1991, setting forth the terms of Wisconsin Gas Company's 7-1/2% Notes due 1988 (incorporated by reference)
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)
4.8 Revolving Credit and Term Loan Agreement dated as of March 29, 1993, among Wisconsin Gas Company and 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)
4.9 Loan Agreement dated as of November 4, 1991, by and among M&I Marshall & Ilsley Bank, Wisconsin Gas Company Employees' Savings Plan Trust and WICOR, Inc. (incorporated by reference).
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) (i) PAGE
10.2# WICOR, Inc. 1987 Stock Option Plan, as amended (incorporated by reference)
10.3# Form of nonstatutory stock option agreement used in connection with WICOR, Inc. 1987 Stock Option Plan (incorporated by reference)
10.4# WICOR, Inc. 1992 Director Stock Option Plan (incorporated by reference)
10.5# Form of nonstatutory stock option agreement used in conjunction with the WICOR, Inc. 1992 Director Stock Option Plan (incorporated by reference)
10.6#* Wisconsin Gas Company Principal Officers' Supplemental Retirement Income Program
10.7#* Wisconsin Gas Company 1994 Officers' Incentive Compensation Plan
10.8# Wisconsin Gas Company Officers' Medical Expense Reimbursement Plan (incorporated by reference)
10.9# Wisconsin Gas Company Group Travel Accident Plan (incorporated by reference)
10.10# Form of Deferred Compensation Agreement between Wisconsin Gas Company and certain of its officers (incorporated by reference)
10.11# WICOR, Inc. Retirement Plan for Directors, as amended (incorporated by reference)
13* "Financial Review" portion of WICOR, Inc. 1993 Annual Report to Shareholders
* Indicates document filed herewith
# Indicates a plan under which compensation is paid or payable to directors or executive officers of the Company.
(ii)