ITEM 1. BUSINESS
Wisconsin Natural Gas Company ("Wisconsin Natural" or "company"), incorporated in the State of Wisconsin in 1866, is a wholly-owned subsidiary of Wisconsin Energy Corporation ("Wisconsin Energy") and is an affiliated company to Wisconsin Electric Power Company ("Wisconsin Electric"), the electric utility subsidiary of Wisconsin Energy.
Wisconsin Natural's operations are presently limited to a single business: the purchase, distribution and sale of natural gas to retail customers and transportation of customer-owned gas in its three distinct service areas in Wisconsin: west and south of the City of Milwaukee; the Appleton area and the Prairie du Chien area. The gas service territory has an estimated population of over 1,100,000. There were 347,080 customers at December 31, 1994, an increase of 3.1 percent since December 31, 1993.
Effective January 1, 1994, Wisconsin Southern Gas Company, Inc. ("Wisconsin Southern") was acquired by Wisconsin Energy through a statutory merger of Wisconsin Southern into Wisconsin Natural. Wisconsin Natural continues to use the acquired facilities of Wisconsin Southern for the distribution and transportation of natural gas. During 1994, the administrative and operating function of the companies were combined. For additional information, see Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
On October 11, 1994, Wisconsin Electric and Wisconsin Natural filed a joint application with the Public Service Commission of Wisconsin ("PSCW") to merge Wisconsin Natural into Wisconsin Electric. Wisconsin Electric also filed an application to obtain the Michigan Public Service Commission's ("MPSC") consent to assume Wisconsin Natural's liabilities in connection with the merger. The merger, which was approved by the stockholders of Wisconsin Electric in December 1994, is anticipated to be effective by year-end 1995. The merger of Wisconsin Natural into Wisconsin Electric is expected to improve customer service and reduce future operating costs.
GAS UTILITY OPERATIONS
Total gas therms delivered by Wisconsin Natural, including customer-owned gas transported by Wisconsin Natural, increased 0.2 percent in 1994 compared to 1993, reflecting the offsetting effects of 5 percent warmer than normal weather during 1994 and increased sales associated with a record number of new customer additions.
Approximately 30 percent of total 1994 deliveries were on interruptible rates. Wisconsin Natural's maximum daily send-out in 1994 was 651,643 Dths. A dekatherm ("Dth") is equivalent to ten therms or one million British Thermal Units ("BTU"). Sales of the gas utility fluctuate with the heating cycle of the year and are also impacted by varying weather conditions from year-to- year.
On November 1, 1993, FERC Order 636 went into effect, unbundling the interstate pipeline industry. The unbundling forced Wisconsin Natural to take on the responsibility of selecting and administering a complete portfolio of gas supply contracts sufficient to supply sales customers.
Wisconsin Natural has entered into more than 50 gas service contracts for supply, pipeline capacity, underground storage and balancing services. Contracts vary in term from less than one year to ten years. Gas supply
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ITEM 1. BUSINESS - Gas Utility Operations (Cont'd)
contracts contain pricing options that allow pricing at market rates or the ability to fix future prices for varying terms which Wisconsin Natural can exercise to manage the risk of substantial market price fluctuations. The gas from these contracts is used to meet customer requirements on a daily basis and to fill storage during the warm months to be withdrawn from storage during the heating season in order to meet system gas demands.
The use of storage increases the load factor of supply contracts and allows Wisconsin Natural to take advantage of seasonal price differentials. Wisconsin Natural has 14 firm gas storage and associated firm transportation agreements that allow daily withdrawals of 285,025 Dths and an annual capacity of 22 million Dths. The initial terms of these contracts vary, with the first one expiring in March 1995, and the last in October 2003. This storage effectively replaces storage used by the pipeline companies to provide gas sales service to Wisconsin Natural in the pre-FERC Order 636 environment. Gas stored at these facilities is purchased by Wisconsin Natural from a number of suppliers.
Wisconsin Natural has 11 transportation contracts. Seven contracts expire prior to 2002, one contract expires in 2002 and the remaining three contracts expire in 2003. In each case, subject to certain provisions, Wisconsin Natural can extend the terms of these contracts at the time the agreements would otherwise expire.
Wisconsin Natural transports gas for its customers who purchase gas directly from other suppliers. Transported gas accounted for approximately 30% of the company's total therms delivered during 1994, 31% during 1993, and 33% during 1992.
Wisconsin Natural is the supplier of natural gas for Wisconsin Electric's Concord Combustion Turbine Power Plant and Paris Combustion Turbine Power Plant that will begin operation in 1995. Delivery of the Paris facility's fuel requirements is made possible by a pipeline extension completed in 1994.
On March 9, 1995, the PSCW issued Wisconsin Natural a certificate to construct a gas pipeline to provide gas transportation service to LSP - Whitewater Limited Partnership's proposed 215 megawatt cogeneration facility. Wisconsin Electric has signed a long term agreement to purchase the electricity that would be generated from the facility which at this time is planned for mid- 1996.
Major industries served by Wisconsin Natural include the paper industry, the food products industry and the machinery production industry. No single customer of Wisconsin Natural accounted for more than 3.2 percent of total gas therms sold and transported in 1994.
In response to increasing competitive pressures in the markets for electricity and natural gas, Wisconsin Electric and Wisconsin Natural are implementing a revitalization process to increase efficiencies and improve customer service by reengineering and restructuring their organizations. The new structures consolidate many business functions and simplify work processes. Due to productivity improvements, staffing levels at Wisconsin Natural have been reduced; 56 employees elected to retire under an early retirement option and 78 employees have enrolled in severance packages. For additional information, see Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - "Wisconsin Electric and Wisconsin Natural Revitalization".
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ITEM 1. BUSINESS - (Cont'd)
REGULATION
Wisconsin Natural is subject to the jurisdiction of the PSCW as to gas rates, standards of service, issuance of securities, construction of new facilities, transactions with affiliates, billing practices and various other matters. Wisconsin Natural is also participating in a generic investigation, initiated by the PSCW, addressing the extent to which traditional regulation of the natural gas distribution function could be replaced.
RATE MATTERS
See Item 3. LEGAL PROCEEDINGS - "RATE MATTERS" for a discussion of rate matters, including a discussion of the tariffs with respect to the adjustment for the cost of gas purchased for resale.
ENERGY EFFICIENCY
The management of Wisconsin Natural believes that a strong and continuing emphasis must be placed on energy management and efficient energy use. Wisconsin Natural is continuing to develop programs to meet the identified needs of its customers and to assist customers and inform them about energy efficiency options. This policy is regarded by Wisconsin Natural as in the best interests of its customers and security holders.
ENVIRONMENTAL COMPLIANCE
Environmental regulations have had no material impact on the financial position of Wisconsin Natural.
Solid Waste Landfills
Wisconsin Natural provides for the disposal of hazardous wastes through licensed independent contractors, but federal statutory provisions impose joint and several liability on the generators of waste for certain clean-up costs. Remediation-related activity pertaining to specific sites is discussed below.
Lenz Oil: A request for information or potentially responsible party ("PRP") letter was received from U.S. Environmental Protection Agency ("EPA") on March 25, 1994. Wisconsin Southern was identified as the PRP because of used oil sent to the Lenz Oil facility. Wisconsin Southern was acquired by Wisconsin Energy on January 1, 1994. A response was filed with EPA. No known cleanup schedule has been set or remediation costs identified.
Manufactured Gas Sites
As have other public utilities, Wisconsin Natural and/or its predecessors, have operated manufactured gas plants. Operations at these manufactured gas sites ceased over 40 years ago with remediation activities having been conducted at certain of these sites, while other sites are scheduled for investigation. A plan to investigate and remediate these sites was presented to the DNR. The plan, estimated to cost approximately $12 million over the next six years, will result in the majority of the sites restored to commercial use. Costs associated with these types of efforts, to the extent not covered by insurance, historically have been allowed to be recovered in rates for utility service. Wisconsin Natural believes any such future costs will continue to be considered appropriate for inclusion in rates and therefore will not have a material adverse impact on its financial condition.
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ITEM 1. BUSINESS - (Cont'd)
OTHER
Wisconsin Natural is authorized to provide gas service in designated territories in the state of Wisconsin, as established by indeterminate permits, certificates of public convenience and necessity, or boundary agreements with other utilities.
Research and development expenditures of Wisconsin Natural amounted to $167,000 in 1994, $144,000 in 1993 and $50,000 in 1992. In addition to the foregoing amounts, Wisconsin Natural paid $766,000 in 1994, $1,300,000 in 1993 and $767,000 in 1992 for support of the Gas Research Institute ("GRI"). The GRI surcharge, currently assessed on all gas deliveries, is calculated on pipeline utilization.
At December 31, 1994, Wisconsin Natural employed 645 persons, of which 9 were part-time.
ITEM 2.
ITEM 2. PROPERTIES
As of December 31, 1994, the gas distribution system of Wisconsin Natural includes approximately 6,786 miles of mains connected at 18 gate stations to the pipeline transmission systems of: ANR Pipeline Company, ANR; Natural Gas Pipeline Company of America, NGPL; and Northern Natural Pipeline Company, Northern Natural. Wisconsin Natural has a liquefied natural gas storage plant which converts and stores in liquefied form natural gas received during periods of low consumption. The liquefied natural gas storage plant has a send-out capability of 70,000 Dths per day. Through the acquisition of Wisconsin Southern, Wisconsin Natural acquired propane tanks for peaking purposes. These tanks will provide approximately 10,000 Dths of supply to the system. For additional information see Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The liquefied natural gas plant is located on land owned in fee by Wisconsin Natural. The gas distribution mains and services are located, for the most part, in public streets and highways and on land owned by others. Substantially all utility property is subject to a first mortgage lien.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
ENVIRONMENTAL MATTERS
Wisconsin Natural is subject to federal, state and certain local laws and regulations governing the environmental aspects of its operations. Wisconsin Natural believes that, with immaterial exceptions, its existing facilities are in compliance with applicable environmental requirements.
See Item 1. BUSINESS - ENVIRONMENTAL COMPLIANCE - "Solid Waste Landfills" for a discussion of matters related to certain solid waste landfills and manufactured gas plant sites.
RATE MATTERS
Wisconsin Retail Gas Jurisdiction
1994/1995 Test Year: In 1993, the PSCW adopted a biennial rate case schedule. As a result, no filing was made with respect to the 1994/1995 test year.
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ITEM 3. LEGAL PROCEEDINGS - Rate Matters (Cont'd)
1996/1997 Test Year: The company received approval from the PSCW to change its test year from a biennial period ending August 31 to a biennial period ending December 31, which coincides with Wisconsin Electric's rate case schedule. Wisconsin Natural and Wisconsin Electric may make a single combined filing covering electric, steam and gas operation in May 1995 for the test year beginning January 1, 1996. On March 27, 1995, Wisconsin Electric and Wisconsin Natural sent a letter to the PSCW proposing a one year deferral of their upcoming rate case filing. The matter is pending.
Purchased Gas Adjustment Tariffs: Sales of natural gas are subject to adjustment tariffs designed to pass on to gas customers increases or decreases in the cost of natural gas purchased for resale. For additional information see Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
FERC Order 636 Transition Costs
As a result of FERC Order 636, pipeline companies are no longer in the merchant business and have begun billing transition costs, such as Gas Supply Realignment and stranded capacity costs, to their customers. The transition costs to be billed to Wisconsin Natural are currently estimated to be about $7.5 million for 1995, $6.0 million annually during 1996-1997 and $2.0 million each year thereafter until 2008. These estimates include the components attributable to Wisconsin Southern, which was merged into Wisconsin Natural effective January 1, 1994. The PSCW is allowing the local gas distribution companies to pass these costs on to their customers through the purchased gas adjustment mechanism.
OTHER LITIGATION
Personal Injury Suit: On October 1, 1994 a jury returned a $2.85 million verdict against Wisconsin Natural in a case in Circuit Court for Milwaukee County, involving a gas pipe fire which injured the plaintiff. On December 23, 1994, Wisconsin Natural resolved the litigation between itself and plaintiff with a payment of $2.55 million to plaintiff, of which $550,000 was covered by Wisconsin Natural's general liability insurer. The contract with the construction company that installed the gas pipe provides for indemnification of Wisconsin Natural and notice has been given to the construction company and its insurers that Wisconsin Natural intends to pursue its indemnification rights. The matter is pending.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report.
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PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The amount of cash dividends declared on Wisconsin Natural's Common Stock during the two most recent fiscal years are set forth below. Dividends were paid to Wisconsin Natural's sole common stockholder, Wisconsin Energy.
Total Quarter Dividend ---------------------------------------------------------------------------- 1993* 1 $2,442,119 2 2,442,835 3 2,442,835 4 2,442,835 ---------------------------------------------------------------------------- 1994 1 $2,625,000 2 2,625,000 3 2,625,000 4 2,625,000 ---------------------------------------------------------------------------- * Restated to reflect the merger of Wisconsin Southern Gas Company Inc. into Wisconsin Natural Gas Company effective on January 1, 1994.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
Information required by Item 6 is omitted pursuant to General Instruction J(2)(a) of Form 10-K.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Information required by Item 7 is omitted pursuant to General Instruction J(2)(a) of Form 10-K and in lieu thereof Wisconsin Natural provides the following:
Acquisition of Wisconsin Southern Gas Company, Inc.
Effective January 1, 1994, Wisconsin Southern was acquired by Wisconsin Energy through a merger of Wisconsin Southern into Wisconsin Natural. In the transaction, structured as a tax-free reorganization, all outstanding shares of Wisconsin Southern common stock were converted into 1,637,935 shares of Wisconsin Energy common stock, with fractional interests paid in cash, based on an exchange ratio of 1.6330 shares of Wisconsin Energy common stock for each outstanding share of Wisconsin Southern common stock. The merger was structured to qualify as a pooling of interests for accounting and financial reporting purposes. Accordingly, financial and statistical information for prior years has been restated to reflect the acquisition.
Wisconsin Southern was a gas utility engaged in the purchase, distribution, transportation and sale of natural gas for residential, commercial and industrial consumption in a service territory contiguous to Wisconsin Natural's service territory located in southeastern Wisconsin. Wisconsin Natural is Wisconsin's second largest gas distribution company.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Cont'd)
Wisconsin Electric and Wisconsin Natural Revitalization
In response to increasing competitive pressures in the markets for electricity and natural gas, Wisconsin Electric and Wisconsin Natural have developed and are implementing a revitalization process to increase efficiencies and improve customer service.
Wisconsin Electric and Wisconsin Natural are "reengineering" and restructuring their organizations. The new structures consolidate many business functions and simplify work processes. Due to productivity improvements, staffing levels at Wisconsin Natural have been reduced; 56 employees elected to retire under an early retirement option and 78 employees have enrolled in severance packages. See Note F to the Financial Statements - Benefits Other Than Pensions, for additional information.
As part of the revitalization effort, Wisconsin Energy intends to merge Wisconsin Electric and Wisconsin Natural to form a single combined utility subsidiary. The proposed merger will improve customer service and reduce operating costs. The merger, which is anticipated to be effective by year-end 1995, is subject to a number of conditions, including requisite regulatory and other approvals. Wisconsin Electric and Wisconsin Natural filed a joint application on October 11, 1994, to obtain the PSCW approval of the merger. Wisconsin Electric also filed an application to obtain the MPSC consent to assume Wisconsin Natural's liabilities in connection with the merger. Both approvals are expected by year-end 1995.
RESULTS OF OPERATIONS
Total gas therms delivered by Wisconsin Natural were flat in 1994 compared to 1993. Increased gas deliveries in the first quarter of 1994, compared to the same period in 1993, due to colder winter weather, were offset by a decline in deliveries in the fourth quarter due to unseasonably mild weather. Financial and statistical information has been restated where appropriate to reflect the January 1, 1994, acquisition of Wisconsin Southern. Gas revenues decreased $7 million, or 2.1 percent, in 1994 compared to 1993. This reflects the flat gas deliveries and reduced purchased gas costs.
The $15 million decrease in the cost of gas sold during 1994 compared to 1993 reflects the slight increase in natural gas therm sales offset by the lower average delivered cost of gas during 1994. Changes in the cost of natural gas purchased at market prices are passed through to customers via Wisconsin Natural's purchased gas adjustment clause.
Other operation expenses were $3 million lower during 1994 compared to 1993 largely reflecting payroll related savings as a result of workforce reductions. Deferred Income Taxes decreased $5 million during 1994 compared to 1993 due, in part, to tax matters related to the timing of payments made in connection with the severance and early retirement packages associated with the company's organizational restructuring program. Deferred Income Taxes also reflect a prior period reclassification between current and deferred income taxes.
In January 1992, Wisconsin Natural issued $10 million of 5-5/8% Series and $10 million of 6-5/8% Series First Mortgage Bonds, using the proceeds to refund its 8-3/4% and 8-3/8% Series First Mortgage Bonds.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Cont'd)
In August 1992, Wisconsin Natural issued $25 million of 6-1/8% Debentures due September 1, 1997, using the proceeds to redeem $24 million of its 9-1/4% Series First Mortgage Bonds.
Depending on market conditions and other factors, additional debt refundings may occur.
In December 1992, Wisconsin Natural issued $25 million of 8-1/4% Debentures due December 15, 2022, using the proceeds to repay short-term borrowings which had been incurred to finance part of the company's on-going capital requirements.
Wisconsin Natural's parent, Wisconsin Energy, made a capital contribution of $10 million to Wisconsin Natural in 1993 which was used to reduce short-term debt.
Like numerous other utilities, Wisconsin Natural is investigating the remediation of a number of former manufactured gas plant sites. Operations at these manufactured gas sites ceased over 40 years ago with remediation activities having been conducted at certain of these sites, while other sites are scheduled for investigation. With estimated remediation costs of approximately $12 million during the next five-year period, based on today's costs, remediation activities are not expected to have a material adverse impact on Wisconsin Natural's financial condition.
In 1994, the PSCW continued a generic investigation of the natural gas industry in Wisconsin and addressed the extent to which traditional regulation should be replaced with a different approach. In conjunction with the generic investigation, the PSCW staff is reviewing the use of the current purchased gas adjustment mechanism which is designed to pass on to gas customers increases or decreases in the cost of natural gas purchased for resale. A separate docket has been established to review the purchasing gas adjustment manhours. Wisconsin Natural is participating in these PSCW investigations.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Cont'd)
The following details the principal changes in revenues and expenses contributing to the increase in net income in 1994.
Thousands of Dollars -------------------- Aggregate increase in gas therm sales net of increase in gas therms purchased $ 74
Aggregate decrease in revenue per therm sold net of decrease in cost of gas per therm purchased 7,595 --------- $ 7,669 Decrease in other operation expenses $ 3,141 Decrease in maintenance 374 Increase in revitalization (10,400) Increase in depreciation (621) Increase in taxes other than income taxes (195) Decrease in operating income taxes 148 Decrease in other income (83) Decrease in interest charges 621 --------- (7,015) ------- Increase in net income $ 654 =======
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WISCONSIN NATURAL GAS COMPANY
STATEMENT OF CASH FLOWS Year Ended December 31
1994 1993 1992 ---- ---- ---- (Thousands of Dollars)
Operating Activities Net income $14,809 $14,155 $14,208 Reconciliation to cash Depreciation 16,856 16,235 15,400 Revitalization - net 6,607 - - Deferred income taxes - net (3,792) 1,062 (104) Investment tax credit - net (544) (503) (509) Change in Accounts receivable 5,429 (986) 882 Inventories 9,876 (26,367) (3,343) Accounts payable (5,986) (3,741) 6,453 Other current assets 5,266 (2,192) (4,373) Other current liabilities 8,195 3,819 (3,549) Other 2,327 371 1,387 ------- ------- ------- Cash Provided by Operating Activities 59,043 1,853 26,452
Investing Activities Construction expenditures (25,481) (24,419) (25,188) Other (2,398) (470) (451) ------- ------- ------- Cash Used in Investing Activities (27,879) (24,889) (25,639)
Financing Activities Sale of long-term debt 9,290 - 69,032 Retirement of long-term debt (13,696) (4,091) (55,348) Change in short-term debt (19,830) 26,825 (1,740) Stockholder capital contribution - 10,000 - Dividends on common stock (10,500) (9,771) (9,761) Other - 135 266 ------- ------- ------- Cash Provided by (Used in) Financing Activities (34,736) 23,098 2,449
Change in Cash and Cash Equivalents $(3,572) $ 62 $ 3,262 ======= ======= =======
Supplemental information disclosures Cash Paid for Interest (net of amount capitalized) $ 7,597 $ 7,942 $ 7,720 Income taxes 9,946 7,113 10,769
See Notes to Financial Statements.
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WISCONSIN NATURAL GAS COMPANY
BALANCE SHEET
December 31
ASSETS
1994 1993 ---- ---- (Thousands of Dollars)
Utility Plant $468,224 $444,453 Accumulated provision for depreciation (220,192) (205,247) -------- -------- Net Utility Plant 248,032 239,206
Other Property and Investments 2,344 1,013
Current Assets Cash and cash equivalents 3,392 6,964 Accounts receivable, net of allowance for doubtful accounts - $1,531 and $1,209 22,286 27,715 Accrued utility revenues 33,056 39,153 Materials and supplies (at average cost) 3,582 3,197 Natural gas stored (at first-in, first-out cost) 29,631 39,892 Prepayments and other assets 4,599 3,768 -------- -------- Total Current Assets 96,546 120,689
Deferred Charges and Other Assets Accumulated deferred income taxes (Note G) 18,799 14,370 Deferred regulatory assets (Note A) 8,977 8,680 Other 1,920 1,502 -------- -------- Total Deferred Charges and Other Assets 29,696 24,552 -------- -------- Total Assets $376,618 $385,460 ======== ========
See Notes to Financial Statements.
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WISCONSIN NATURAL GAS COMPANY
BALANCE SHEET
December 31
CAPITALIZATION AND LIABILITIES
1994 1993 ---- ---- (Thousands of Dollars) Capitalization (See Capitalization Statement) Common stock equity $132,122 $127,813 Long-term debt (Note I) 66,519 80,482 -------- -------- Total Capitalization 198,641 208,295
Current Liabilities Long-term debt due currently (Note I) 12,290 2,653 Notes payable (Note J) 55,478 75,308 Accounts payable 23,575 29,561 Payroll and vacation accrued 2,835 3,099 Taxes accrued - income and other 7,685 4,920 Interest accrued 1,793 1,899 Other 9,248 3,448 -------- ------- Total Current Liabilities 112,904 120,888
Deferred Credits and Other Liabilities Accumulated deferred income taxes (Note G) 32,182 30,083 Accumulated deferred investment tax credits 6,740 7,284 Deferred regulatory liabilities (Note A) 11,687 12,998 Other 14,464 5,912 -------- ------- Total Deferred Credits and Other Liabilities 65,073 56,277
Commitments and Contingencies (Note K) -------- -------- Total Capitalization and Liabilities $376,618 $385,460 ======== ========
See Notes to Financial Statements.
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WISCONSIN NATURAL GAS COMPANY
CAPITALIZATION STATEMENT
December 31
1994 1993 ---- ---- (Thousands of Dollars) Common Stock Equity Common stock - $1 par value; authorized 38,000,000 shares; outstanding - 1,725,000 shares $ 1,725 $ 1,725 Other paid in capital 79,291 79,291 Retained earnings 51,106 46,797 -------- -------- Total Common Stock Equity 132,122 127,813
Long-Term Debt First mortgage bonds Series Due ------ --- 5-5/8% 1995 10,000 10,000 9-5/8% 1995 - 403 11 % 1995 - 480 6-5/8% 1997 10,000 10,000 10-1/4% 1998 - 2,860 9.47 % 2006 - 7,000 9-1/4% 2016 - 3,000 -------- -------- 20,000 33,743
Debentures (unsecured) 6-1/8% Series due 1997 25,000 25,000 10-1/4% Series due 1998 2,290 - 9.47 % Series due 2006 7,000 - 8-1/4% Series due 2022 25,000 25,000 Unamortized discount - net (481) (608) Long-term debt due currently (12,290) (2,653) -------- -------- Total Long-Term Debt 66,519 80,482 -------- -------- Total Capitalization $198,641 $208,295 ======== ========
See Notes to Financial Statements.
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WISCONSIN NATURAL GAS COMPANY
NOTES TO FINANCIAL STATEMENTS
A - Summary of Significant Accounting Policies ----------------------------------------------
General -------
The accounting records of the company are kept as prescribed by the Public Service Commission of Wisconsin (PSCW).
Revenues --------
Utility revenues are recognized on the accrual basis and include estimated amounts for service rendered but not billed.
Property --------
Property is recorded at cost. Additions to and significant replacements of utility property are charged to utility plant at cost; minor items are charged to maintenance expense. Cost includes material and labor. Effective 1993, allowance for funds used during construction is no longer accrued; all construction work in progress is allowed to earn a current return. The cost of depreciable utility property, together with removal cost less salvage, is charged to accumulated provision for depreciation when property is retired.
Deferred Regulatory Assets and Liabilities ------------------------------------------
Pursuant to Statement of Financial Accounting Standards No. 71, Accounting for the Effects of Certain Types of Regulation, the company capitalizes as deferred regulatory assets incurred costs which are expected to be recovered in future utility rates. The company also records as deferred regulatory liabilities the current recovery in utility rates of costs which are expected to be paid in the future. A significant portion of the company's deferred regulatory assets and liabilities relate to the amounts recorded due to the adoption of Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes (FAS 109). See Note G.
Statement of Cash Flows -----------------------
Cash and cash equivalents includes marketable debt securities acquired three months or less from maturity.
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B - Utility Mergers -------------------
Effective January 1, 1994 Wisconsin Energy Corporation (WEC) acquired all of the outstanding common stock of Wisconsin Southern Gas Company, Inc. (WSG) through a statutory merger of WSG into the company in which all of WSG's common stock was converted into common stock of WEC. WSG was a gas utility engaged in the purchase, distribution, transportation and sale of natural gas primarily in a section of southeastern Wisconsin which is contiguous to the company's service territory. WSG was merged into the company using the pooling of interests method of accounting. Accordingly, historical financial data has been restated to include WSG.
In January 1994, WEC announced plans to merge the company into Wisconsin Electric Power Company (WE), a wholly-owned utility subsidiary of WEC. The completion of the merger, which is subject to a number of conditions including requisite regulatory approvals, is currently anticipated to occur by year-end 1995.
C - Depreciation ----------------
Depreciation expense is accrued at straight line rates, certified by the PSCW, which include estimates of salvage and removal costs.
Depreciation as a percent of average depreciable utility plant was 3.9% in 1994, and 4.0% in 1993 and 1992.
D - Transactions With Associated Companies ------------------------------------------
Managerial, financial, accounting, legal, data processing and other services may be rendered between associated companies and are billed in accordance with service agreements approved by the PSCW. The company also delivers gas to WE for electric generation at rates approved by the PSCW. The company received from WEC a stockholder capital contribution of $10,000,000 in 1993.
E - Pension Plans -----------------
Effective in 1993, the PSCW adopted Statement of Financial Accounting Standards No. 87, Employers' Accounting for Pensions (FAS 87), for ratemaking. For 1992, the PSCW recognized funded amounts for ratemaking and the company charged $165,000 to expense as paid.
The company has several noncontributory pension plans covering all eligible employees. Pension benefits are based on years of service and the employee's compensation. The majority of the plans' assets are equity securities; other assets include corporate and government bonds and real estate. The plans are funded to meet the requirements of the Employee Retirement Income Security Act of 1974.
In the opinion of the company, current pension trust assets and amounts which are expected to be paid to the trust in the future will be adequate to meet future pension payment obligations to current and future retirees.
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E - Pension Plans - (Cont'd) ----------------------------
Pension Cost calculated per FAS 87 1994 1993 1992 ---------------------------------- ------ ------ ------ (Thousands of Dollars) Components of Net Periodic Pension Cost, Year Ended December 31 - Cost of pension benefits earned by employees $ 1,506 $ 1,657 $ 1,568 Interest cost on projected benefit obligation 5,024 4,685 4,263 Actual (return) loss on plan assets 1,662 (5,380) (2,689) Net amortization and deferral (7,424) (109) (3,718) ------- ------- ------- Total pension cost (credit) calculated under FAS 87 $ 768 $ 853 $ (576) ======= ======= ======= Actuarial Present Value of Accumulated Benefit Obligation, at December 31 - Vested benefits-employees' right to receive benefit no longer contingent upon continued employment $55,549 $50,262 Nonvested benefits-employees' right to receive benefit contingent upon continued employment 113 455 ------- ------- Total obligation $55,662 $50,717 ======= ======= Funded Status of Plans: Pension Assets and Obligations at December 31 - Pension assets at fair market value $67,726 $71,869 Projected benefit obligation at present value (65,220) (64,793) Unrecognized transition asset (1,571) (1,714) Unrecognized prior service cost 2,488 2,964 Unrecognized net gain (5,540) (6,585) ------- ------- Projected status of plans $(2,117) $ 1,741 ======= =======
Rates used for calculations (%) - Discount Rate-interest rate used to adjust for the time value of money 8.25 7.5 8.0 Assumed rate of increase in compensation levels 5.0 5.0 5.0 Expected long-term rate of return on pension assets 9.0 9.0 9.0
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F - Benefits Other Than Pensions --------------------------------
Postretirement Benefits -----------------------
Effective in 1993, the company adopted prospectively Statement of Financial Accounting Standards No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions (FAS 106), and elected the 20 year option for amortization of the previously unrecognized accumulated postretirement benefit obligation. The PSCW has issued an order recognizing FAS 106 for ratemaking; therefore adoption has no material impact on net income. Prior to 1993, the cost of these postretirement benefits was expensed when paid and was $614,000 in 1992.
The company sponsors defined benefit postretirement plans that cover both salaried and nonsalaried employees who retire at age 55 or older with at least 10 years of credited service. The postretirement medical plan provides coverage to retirees and their dependents. Most retirees contribute to the medical plan. The group life insurance benefit is based on employee compensation and is reduced upon retirement.
Employees' Benefit Trusts (Trusts) are used to fund a major portion of postretirement benefits. The funding policy for the Trusts is to maximize tax deductibility. The majority of the Trusts' assets are mutual funds.
Postretirement Benefit Cost calculated per FAS 106 1994 1993 -------------------------------------------------- -------- -------- (Thousands of Dollars) Components of Net Periodic Postretirement Benefit Cost, Year Ended December 31 - Cost of postretirement benefits earned by employees $ 369 $ 814 Interest cost on projected benefit obligation 1,425 1,991 Actual return on plan assets (218) (292) Net amortization and deferral 118 921 -------- -------- Total postretirement benefit cost calculated $ 1,694 $ 3,434 under FAS 106 ======== ========
Funded Status of Plans: Postretirement Obligations and Assets at December 31 - Accumulated Postretirement Benefit Obligation at December 31 - Retirees $(12,108) $ (9,800) Fully eligible active plan participants (1,232) (6,046) Other active plan participants (5,181) (11,577) -------- -------- Total obligation (18,521) (27,423)
Postretirement assets at fair market value 6,453 5,882 -------- -------- Accumulated postretirement benefit obligation in excess of plan assets (12,068) (21,541)
Unrecognized transition obligation 18,273 19,528 Unrecognized prior service cost (1,169) - Unrecognized net (gain) loss (8,127) 412 -------- -------- Accrued Postretirement Benefit Obligation $ (3,091) $ (1,601) ======== ======== - 20 -
F - Benefits Other Than Pensions - (Cont'd) -------------------------------------------
Rates used for calculations (%) - Discount Rate-interest rate used to adjust for the time value of money 8.25 7.5 Assumed rate of increase in compensation levels 5.0 5.0 Expected long-term rate of return on postretirement assets 9.0 9.0 Health care cost trend rate 12.0 declining to 5.0 in year 2002
Changes in health care cost trend rates will affect the amounts reported. For example, a 1% increase in rates would increase the accumulated postretirement benefit obligation as of December 31, 1994 by $977,000 and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year then ended by $117,000.
Revitalization --------------
In the first quarter of 1994, the company recorded a $10.4 million charge related to its revitalization program. This charge includes $5.4 million for Early Retirement Incentive Packages (ERIP) and $3.9 million for Severance Packages (SP). These plans are being used to reduce employee staffing levels. ERIP provided for a monthly income supplement, medical benefits, and waiver of an early retirement pension reduction. The SP included a severance payment, medical/dental insurance, outplacement services, personal financial planning and tuition support. Availability of these plans to various bargaining units was based upon agreements made between the company and the bargaining units. These plans have been available to most management employees but not elected officers.
Under ERIP, 56 employees elected to retire and 78 employees have enrolled in SP. It is anticipated that the revitalization charge will be offset by the end of 1995 through savings in operation and maintenance costs. ERIP supplemental income costs are being paid from pension plan trusts and medical/dental benefits from employee benefit trusts. Remaining ERIP and SP costs are being paid from general corporate funds. The ultimate timing of cash flows for revitalization will depend in part upon the funding limitations of the company's pension plans. Through December 31, 1994, about $3.8 million have been paid against the revitalization liability.
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G - Income Taxes ----------------
Comprehensive interperiod income tax allocation is used for federal and state temporary differences. The federal investment tax credit is accounted for on the deferred basis and is reflected in income ratably over the life of the related property.
Following is a summary of income tax expense and a reconciliation of total income tax expense with the tax expected at the federal statutory rate.
1994 1993 1992 ------- ------- ------- (Thousands of Dollars)
Current tax expense $12,705 $ 8,002 $ 8,545 Investment tax credit-net (544) (503) (509) Deferred tax expense (3,792) 1,062 (104) ------- ------- ------- Total tax expense $ 8,369 $ 8,561 $ 7,932 ======= ======= =======
Income before income taxes $23,178 $22,716 $22,140 ======= ======= ======= Expected tax at federal statutory rate $ 8,112 $ 7,951 $ 7,527 State income tax net of federal tax reduction 1,212 1,270 1,234 Investment tax credit restored (544) (503) (509) Deferred tax restored - rate differential (285) (318) (339) Other (no item over 5% of expected tax) (126) 161 19 ------- ------- ------- Total tax expense $ 8,369 $ 8,561 $ 7,932 ======= ======= =======
FAS 109 requires the recording of deferred assets and liabilities to recognize the expected future tax consequences of events that have been reflected in the company's financial statements or tax returns, the adjustment of deferred tax balances to reflect tax rate changes and the recognition of previously unrecorded deferred taxes. Following is a summary of deferred income taxes under FAS 109. December 31 1994 1993 ------- ------- (Thousands of Dollars) Deferred Income Tax Assets Construction advances $ 8,713 $ 8,720 ERIP Accrual 3,441 - Other 6,645 5,650 ------- ------- Total Deferred Income Tax Assets $18,799 $14,370 ======= ======= Deferred Income Tax Liabilities Plant related $30,194 $27,746 Other 1,988 2,337 ------- ------- Total Deferred Income Tax Liabilities $32,182 $30,083 ======= ======= - 22 -
G - Income Taxes - (Cont'd) ---------------------------
The company also has recorded the following deferred regulatory assets and liabilities which represent the future expected impact of deferred taxes on utility revenues.
December 31 1994 1993 -------- -------- (Thousands of Dollars)
Deferred regulatory assets $ 4,030 $ 3,879
Deferred regulatory liabilities 11,687 12,998
H - Preferred Stock -------------------
Serial Preferred Stock authorized but unissued is cumulative, $100 par value, 120,000 shares.
I - Long-Term Debt ------------------
The maturities and sinking fund requirements through 1999 for the aggregate amount of long-term debt outstanding at December 31, 1994 are shown below.
(Thousands of Dollars) 1995 $12,290 1996 - 1997 35,700 1998 700 1999 700
Sinking fund requirements for the years 1995 through 1999, included in the table above, are $2,670,000. Substantially all utility plant is subject to the applicable mortgage.
Long-term debt premium or discount and expense of issuance are amortized by the straight line method over the lives of the debt issues and included as interest expense. Unamortized amounts pertaining to reacquired debt are written off currently, when acquired for sinking fund purposes, or amortized in accordance with PSCW orders, when acquired for early retirement.
Fair value of long-term debt is estimated based upon the market value of the same or similar issues. The fair value of the company's long-term debt was $77,036,000 and $88,916,000 at December 31, 1994 and 1993, respectively.
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J - Notes Payable -----------------
Short-term notes payable balances and their corresponding weighted average interest rates consist of:
December 31 1994 1993 ----------------- ----------------- Interest Interest Balance Rate Balance Rate ------- -------- ------- -------- (Thousands of Dollars)
Banks $36,999 6.04% $46,799 3.49% Commercial paper 18,479 5.89% 28,509 3.31% ------- ------- $55,478 $75,308 ======= =======
Unused lines of credit for short-term borrowings amounted to $62,000,000 at December 31, 1994. In support of various informal lines of credit from banks, the company has agreed to pay commitment fees; these commitment fees are not significant.
K - Commitments and Contingencies ---------------------------------
The company's review of potential environmental remediation efforts for old manufactured gas plant sites can be found elsewhere in this report in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7.
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and the Stockholder of Wisconsin Natural Gas Company
In our opinion, the financial statements listed under Item 14(a)(1) on page 26 present fairly, in all material respects, the financial position of Wisconsin Natural Gas Company at 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. 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 of these financial statements in accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
/s/Price Waterhouse LLP ----------------------- PRICE WATERHOUSE LLP
Milwaukee, Wisconsin January 25, 1995
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ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information called for by Item 10 is omitted pursuant to General Instruction J(2)(c) to Form 10-K.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Information called for by Item 11 is omitted pursuant to General Instruction J(2)(c) to Form 10-K.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information called for by Item 12 is omitted pursuant to General Instruction J(2)(c) to Form 10-K.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information called for by Item 13 is omitted pursuant to General Instruction J(2)(c) to Form 10-K.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
Included in Part II of this report:
Statement of Income and Retained Earnings for the three years ended December 31, 1994
Statement of Cash Flows for the three years ended December 31, 1994
Balance Sheet at December 31, 1994 and 1993
Capitalization Statement at December 31, 1994 and 1993
Notes to Financial Statements
Report of Independent Accountants
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ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (Cont'd)
(a) 2. Financial Statement Schedules
Schedules are omitted because of the absence of conditions under which they are required or because the required information is given in the financial statements or notes thereto.
3. Exhibits
The following Exhibits are filed with this report:
Exhibit No.
(23) Consent of Independent Accountants, dated March 30, 1995 appearing on page 30 of this Annual Report on Form 10-K for the year ended December 31, 1994.
(27) Wisconsin Natural Gas Company Financial Data Schedule for the fiscal year ended December 31, 1994.
In addition to the Exhibits shown above, which are filed herewith, Wisconsin Natural hereby incorporates the following Exhibits pursuant to Exchange Act Rule 12b-32 and Regulation Section 201.24 by reference to the filings set forth below:
(2)-1 Agreement and Plan of Reorganization, dated as of July 30, 1993, by and among Wisconsin Energy Corporation, Wisconsin Natural Gas Company and Wisconsin Southern Gas Company, Inc., including the related Plan and Agreement of Merger between Wisconsin Natural and Wisconsin Southern. (Exhibit A to the Proxy Statement/Prospectus dated October 20, 1993 contained in the Registration Statement of Wisconsin Energy Corporation on Form S-4, No. 33-50653.)
2 Plan and Agreement of Merger, dated June 30, 1994, by and between Wisconsin Electric Power Company and Wisconsin Natural Gas Company. (Appendix A to Wisconsin Electric's Proxy Statement dated October 31, 1994 in File No. 1-1245.)
(3)-1 Restated Articles of Incorporation of Wisconsin Natural Gas Company, as adopted on December 1, 1982. (Exhibit (3)-1 to Wisconsin Natural's 1982 Form 10-K in File No. 2-2066.)
2 Bylaws of Wisconsin Natural Gas Company, as amended to May 18, 1994. (Exhibit (3)-1 to Wisconsin Natural's June 30, 1994 Form 10-Q in File No. 2-2066.)
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Mortgage, Indenture or Under Supplemental Indenture Date Exhibit # File No. ------------------------------------------------------------ (4)-1 Mortgage and Deed of 6/1/50 7-C 2-8457 Trust 2 Third 9/1/57 2-D 2-13563 3 Fourth 10/15/61 2-E 2-18922 4 Fifth 11/1/62 2-F 2-20799 5 Sixth 10/1/65 2-G 2-24012 6 Seventh 9/15/67 2-H 2-27101 7 Eighth 9/15/69 4-J 2-34303 8 Ninth 7/1/71 (4)-1 2-2066 (1980 Form 10-K) 9 Tenth 9/15/86 (4)-9 2-2066 (1986 Form 10-K) 10 Eleventh 1/15/92 (4)-1 2-2066 (1991 Form 10-K) 11 Twelfth 11/1/92 (4)-1 2-2066 (9/30/92 Form 10-Q) 12 Thirteenth 1/1/94 (4)-1 2-2066 (1/01/94 Form 8-K) 13 Indenture for Debt 9/1/92 (4)-2 2-2066 Securities (9/30/92 (the "Indenture") Form 10-Q) 14 Securities 9/1/92 (4)-3 2-2066 Resolution No. 1 (9/30/92 under the Indenture Form 10-Q) 15 Securities 12/1/92 (4)-1 2-2066 Resolution No. 2 (1992 under the Indenture Form 10-K) 16 Thirteenth Supplemental Indenture, dated January 1, 1994, to Indenture dated September 1, 1950 of Wisconsin Southern Gas Company, Inc. (to reflect the assumption of bonds 1/1/94 (4)-2 2-2066 by Wisconsin Natural in (1/01/94 connection with merger) Form 8-K) 17 Securities 3/29/94 (4)-1 2-2066 Resolution No. 3 (3/31/94 under the Indenture Form 10-Q) 18 Securities 3/29/94 (4)-2 2-2066 Resolution No. 4 (3/31/94 under the Indenture Form 10-Q)
All agreements and instruments with respect to long-term debt not exceeding 10% of the total assets of the Registrant have been omitted as permitted by related instructions. The Registrant agrees pursuant to Item 601(b)(4) of Regulation S-K to furnish to the Securities and Exchange Commission, upon request, a copy of all such agreements and instruments.
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10-1 Service Agreement dated January 1, 1987 between Wisconsin Natural Gas Company, Wisconsin Energy Corporation and other non-utility affiliated companies. (Exhibit (10)-(a) to Wisconsin Natural's Form 8-K dated January 2, 1987 in File No. 2-2066)
2 Executive Non-Qualified Trust by and between Wisconsin Energy Corporation and Firstar Trust Company, dated May 12, 1994, established to provide a source of funds to assist in the meeting of the liabilities under various nonqualified deferred compensation plans made between Wisconsin Energy or its subsidiaries and various plan participants. (Exhibit 10-1 to Wisconsin Energy's Quarterly Report on Form 10-Q for the quarter ended June 30, 1994, File No. 1-9057.)*
* Management contracts and executive compensation plans or arrangements required to be filed as exhibits pursuant to Item 14(c) of Form 10-K. Certain compensatory plans in which directors or executive officers of the Registrant are eligible to participate are not filed in reliance on the exclusion in Item 601(b)(10)(iii)(B)(6) of Regulation S-K.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of the year ended December 31, 1994.
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CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration Statements and Prospectuses constituting part of the Registration Statements on Form S-3 (Nos. 33-41368 and 33-48927) of Wisconsin Natural Gas Company of our report dated January 25, 1995 appearing on page 25 of this Form 10-K.
/s/Price Waterhouse LLP ----------------------- PRICE WATERHOUSE LLP
Milwaukee, Wisconsin March 30, 1995
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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 NATURAL GAS COMPANY
/s/R. A. Abdoo By ------------------------------------- Date March 30, 1995 (R. A. Abdoo, Chairman of the Board and Chief Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature and Title Date
/s/R. A. Abdoo ----------------------------------------------- March 30, 1995 (R. A. Abdoo, Chairman of the Board and Chief Executive Officer and Director - Principal Executive Officer)
/s/R. R. Grigg ----------------------------------------------- March 30, 1995 (R. R. Grigg, Jr., President and Chief Operating Officer and Director)
/s/J. G. Remmel ----------------------------------------------- March 30, 1995 (J. G. Remmel, Chief Financial Officer and Director - Principal Financial Officer)
/s/A. K. Klisurich ----------------------------------------------- March 30, 1995 (A. K. Klisurich, Controller - Principal Accounting Officer)
/s/D. K. Porter ----------------------------------------------- March 30, 1995 (D. K. Porter, Vice President and Director)
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Wisconsin Natural Gas Company
EXHIBIT INDEX -------------
1994 Annual Report on Form 10-K
Exhibit Number -------
(23) Consent of Independent Accountants, dated March 30, 1995 appearing on page 30 of this Annual Report on Form 10-K for the year ended December 31, 1994.
(27) Wisconsin Natural Gas Company Financial Data Schedule for the fiscal year ended December 31, 1994.
The foregoing Exhibits are filed with this report. The additional Exhibits which are incorporated by reference are listed in Item 14(a)(3) of this report.
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