WISCONSIN GAS CO - 10-Q Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q

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

For the Quarterly Period Ended September 30, 2002

Commission	Registrant; State of Incorporation		IRS Employer
File Number	Address; and Telephone Number		Identification No.



001-07530	WISCONSIN GAS COMPANY		39-0476515
		(A Wisconsin Corporation)
		231 West Michigan Street
		P.O. Box 2046
		Milwaukee, WI 53201
		(414) 221-2345

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

Indicate the number of shares outstanding of each of the Registrant's classes of common stock as of the latest practicable date (September 30, 2002):

Common Stock, $8.00 Par Value

1,125 shares outstanding

All Wisconsin Gas Company Common Stock is held by WICOR, Inc., a wholly owned subsidiary of Wisconsin Energy Corporation.

		WISCONSIN GAS COMPANY


		FORM 10-Q REPORT FOR THE QUARTER ENDED SEPTEMBER 30, 2002



		TABLE OF CONTENTS
Item			Page

	Introduction ...............................................................................................................................


	Part I -- Financial Information

1.	Financial Statements

	Condensed Income Statements .....................................................................

	Condensed Balance Sheets ............................................................................

	Condensed Statements of Cash Flows ..........................................................

	Notes to Condensed Financial Statements ....................................................

2.	Management's Discussion and Analysis of
	Financial Condition and Results of Operations ...................................................................

3.	Quantitative and Qualitative Disclosures About Market Risk ..................................................

4.	Controls and Procedures ...........................................................................................................


	Part II -- Other Information

1.	Legal Proceedings .....................................................................................................................

6.	Exhibits and Reports on Form 8-K ...........................................................................................

	Signatures ..................................................................................................................................

	Certifications .............................................................................................................................

INTRODUCTION

Wisconsin Gas Company ("Wisconsin Gas" or "the Company"), a natural gas distribution public utility, is a Wisconsin corporation and a wholly-owned subsidiary of WICOR, Inc. ("WICOR"), a diversified holding company. On April 26, 2000, a merger between Wisconsin Energy Corporation ("Wisconsin Energy") and WICOR was completed. Upon completion of the merger, WICOR, Wisconsin Gas and WICOR's other subsidiaries became wholly-owned direct or indirect subsidiaries of Wisconsin Energy.

Subsequent to the merger, Wisconsin Gas and Wisconsin Electric Power Company ("Wisconsin Electric"), another wholly-owned public utility subsidiary of Wisconsin Energy, have combined common functions. In April 2002, the two companies began doing business under the trade name of "We Energies".

The unaudited interim financial statements presented in this Form 10-Q have been prepared by Wisconsin Gas pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. Wisconsin Gas's financial statements should be read in conjunction with the financial statements and notes thereto included in Wisconsin Gas's 2001 Annual Report on Form 10-K.

PART I -- FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

WISCONSIN GAS COMPANY
CONDENSED INCOME STATEMENTS
(Unaudited)


		Three Months Ended September 30		Nine Months Ended September 30
		2002	2001	2002	2001
		(Millions of Dollars)

Operating Revenues		$56.8	$57.2	$339.6	$489.5

Operating Expenses
	Cost of gas sold	34.5	34.3	205.8	354.7
	Other operation and maintenance	19.1	15.1	61.9	54.7
	Depreciation and amortization	9.4	10.4	28.5	31.3
	Goodwill amortization	-	2.9	-	8.7
	Property and revenue taxes	1.6	1.6	5.0	4.5
Total Operating Expenses		64.6	64.3	301.2	453.9

Operating Income (Loss)		(7.8)	(7.1)	38.4	35.6

Other Income (Deductions), net		(0.6)	0.3	(1.0)	0.4

Interest Expense		2.9	3.7	9.1	11.9
Interest Expense - WICOR		-	1.7	-	11.6
Total Interest Expense		2.9	5.4	9.1	23.5

Income Before Income Taxes		(11.3)	(12.2)	28.3	12.5

Income Taxes		(5.0)	(4.1)	10.2	7.6

Net Income (Loss)		($6.3)	($8.1)	$18.1	$4.9
		====	====	====	===

The accompanying Notes to Condensed Financial Statements are an integral part of these financial statements.

WISCONSIN GAS COMPANY
CONDENSED BALANCE SHEETS

			(Unaudited)
			September 30, 2002	December 31, 2001
			(Millions of Dollars)
Assets

Property, Plant and Equipment			$954.2	$960.0
	Accumulated depreciation		(543.9)	(539.7)
		Net Property, Plant and Equipment	410.3	420.3

Current Assets
	Cash and cash equivalents		1.7	3.5
	Accounts receivable		44.5	44.3
	Accrued revenues		7.0	45.2
	Gas in storage		67.5	63.4
	Materials and supplies		5.4	6.2
	Deferred income taxes		6.6	8.7
	Prepaid taxes		22.2	19.2
	Other		0.9	1.0
		Total Current Assets	155.8	191.5

Deferred Charges and Other Assets
	Goodwill, net		441.9	441.9
	Prepaid pension costs		187.3	178.7
	Regulatory assets		39.3	36.2
	Other		47.5	42.5
		Total Deferred Charges and Other Assets	716.0	699.3

Total Assets			$1,282.1	$1,311.1
			======	======

Capitalization and Liabilities

Capitalization
	Common equity		$708.0	$691.0
	Long-term debt		150.6	149.3
		Total Capitalization	858.6	840.3

Current Liabilities
	Short-term debt		97.2	128.7
	Accounts payable		29.5	33.8
	Accounts payable - affiliated companies, net		18.8	22.1
	Refundable gas costs		-	0.2
	Other		12.0	13.2
		Total Current Liabilities	157.5	198.0

Deferred Credits and Other Liabilities
	Regulatory liabilities		173.1	186.3
	Accumulated deferred income taxes		63.2	58.7
	Other		29.7	27.8
		Total Deferred Credits and Other Liabilities	266.0	272.8

Total Capitalization and Liabilities			$1,282.1	$1,311.1
			======	======


The accompanying Notes to Condensed Financial Statements are an integral part of these financial statements.

WISCONSIN GAS COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)

				Nine Months Ended September 30
				2002	2001
				(Millions of Dollars)
Operating Activities
	Net income			$18.1	$4.9
	Reconciliation to cash
		Depreciation and amortization		30.0	41.0
		Net pension and other
			postretirement benefit (income)	(6.9)	(9.2)
		Deferred income taxes and investment tax credits, net		5.7	(0.9)
		Change in:
			Accounts receivable and accrued revenues	38.0	121.8
			Inventories	(3.3)	(19.0)
			Accounts payable	(7.6)	(64.7)
			Deferred and accrued taxes	(3.0)	(13.5)
			Refundable gas costs	(0.2)	(35.2)
			Deferred regulatory liabilities	(13.3)	(13.9)
		Other		(6.4)	3.2
Cash Provided by Operating Activities				51.1	14.5

Investing Activities
	Capital expenditures			(32.7)	(34.1)
	Proceeds from assets sales			12.2	-
	Other, net			(0.9)	1.0
Cash Used in Investing Activities				(21.4)	(33.1)

Financing Activities
	Change in short-term borrowings			(31.5)	13.3
	Other			-	(0.1)
Cash Used in Financing Activities				(31.5)	13.2

Change in Cash and Cash Equivalents				(1.8)	(5.4)
Cash and Cash Equivalents at Beginning of Period				3.5	6.0
Cash and Cash Equivalents at End of Period				$1.7	$0.6
				===	===
Supplemental Information - Cash Paid For
	Interest (net of amount capitalized)			$8.9	$23.0
	Income taxes (net of refunds)			$8.5	$23.9


The accompanying Notes to Condensed Financial Statements are an integral part of these financial statements.

WISCONSIN GAS COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)

GENERAL INFORMATION

1.	The accompanying unaudited condensed financial statements for Wisconsin Gas Company should be read in conjunction with Item 8, Financial Statements and Supplementary Data, in Wisconsin Gas's 2001 Annual Report on Form 10-K. In the opinion of management, all adjustments, normal and recurring in nature or as otherwise disclosed, necessary to a fair statement of the results of operations, cash flows and financial position of Wisconsin Gas, have been included in the accompanying income statements, statements of cash flows and balance sheets. The results of operations for the three and nine month periods ended September 30, 2002 are not necessarily indicative, however, of the results which may be expected for the entire year 2002 because of seasonal and other factors.

2.	Wisconsin Gas has modified certain financial statement presentations. Prior year financial statement amounts have been reclassified to conform to their current year presentation. These reclassifications had no effect on net income.

RECENT ACCOUNTING PRONOUNCEMENTS

3.		Business Combinations and Goodwill: The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets, effective January 1, 2002. Under SFAS 142, goodwill and other intangibles with indefinite lives are no longer subject to amortization. However, goodwill along with other intangibles are subject to new fair value-based rules for measuring impairment, and resulting write-downs, if any, are to be reflected as a change in accounting principle upon adoption and in operating expense in subsequent periods.

		Management estimated the fair value of the Company by considering public company trading multiples and merger and acquisition transaction multiples for similar companies. This evaluation utilized the information available in the circumstances, including reasonable and supportable assumptions. The Company has determined that there was no impairment to the recorded goodwill balance at the date of adoption of SFAS 142. The Company has elected to perform its annual impairment test as of August 31. There was no impairment to the recorded goodwill balance as of the annual impairment test date.

		The adoption of SFAS 142 by Wisconsin Gas on January 1, 2002 resulted in an increase in net income of $2.9 million and $8.7 million, for the three and nine month periods ended September 30, 2002, due to the elimination of goodwill amortization.

		The following table presents pro forma net income as if SFAS 142 had been adopted at the beginning of fiscal 2001.

	Three Months Ended September 30		Nine Months Ended September 30
	2002	2001	2002	2001

Net Income (Loss) (Millions of Dollars)
Reported Net Income (Loss)	($6.3)	($8.1)	$18.1	$4.9
Pro forma Net Income (Loss)	($6.3)	($5.2)	$18.1	$13.6

	Asset Retirement Obligations: In June 2001, the Financial Accounting Standards Board issued SFAS 143, Accounting for Asset Retirement Obligations. SFAS 143, which is effective January 1, 2003, requires entities to record the fair value of a legal liability for an asset retirement obligation in the period in which it is incurred. When a new liability is recorded beginning in 2003, the entity will capitalize the costs of the liability by increasing the carrying amount of the related long-lived asset. The liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity settles the obligation for its recorded amount or incurs a gain or loss upon settlement. The Company expects to adopt SFAS 143 effective January 1, 2003.

	The Company is performing a detailed assessment of the specific applicability and implications of SFAS 143. Any changes in expense due to differing assumptions between SFAS 143 and those currently required by the Public Service Commission of Wisconsin ("PSCW") are not expected to be material and the Company expects to defer the differences as regulatory assets or liabilities. The Company has not yet determined the applicability of SFAS 143 to its financial statements.

ACCOUNTING FOR BAD DEBTS

Prior to October 1, 2002, Wisconsin Gas accounted for bad debt expense on an escrow basis as prescribed by the PSCW. Under escrow accounting, Wisconsin Gas expensed bad debts based on amounts allowed in rates. To the extent that actual bad debt expense differed from amounts allowed in rates, such difference was deferred as a regulatory asset or liability. As of September 30, 2002, Wisconsin Gas had a regulatory asset of $6.9 million related to deferred bad debt expense. Effective October 1, 2002, the PSCW ordered Wisconsin Gas to end escrow accounting on a prospective basis. Such order is expected to increase volatility in bad debt expense. The regulatory asset of $6.9 million will be considered for recovery in Wisconsin Gas's next rate case.

COMMON EQUITY

5.	Comprehensive Income includes all changes in equity during a period except those resulting from investments by and distributions to owners. Wisconsin Gas had the following total Comprehensive Income during the nine month periods ended September 30, 2002 and 2001:

	Nine Months Ended September 30
Comprehensive Income	2002	2001
	(Millions of Dollars)

Net Income	$18.1	$4.9
Other Comprehensive Income (Loss)
Unrealized Losses During the Period
on Derivatives Qualified as Hedges:
Unrealized losses due to cumulative
effect of change in accounting principle	-	3.0
Change in value	(1.5)	(2.1)
Reclassification to earnings	0.5	(0.7)
Total Other Comprehensive Income (Loss)	(1.0)	0.2
Total Comprehensive Income	$17.1	$5.1
	====	====

COMMITMENTS AND CONTINGENCIES

6.	Environmental Matters: The Company periodically reviews its exposure to environmental remediation costs as evidence becomes available indicating that its remediation liability has changed. Given current information, including the following, management believes that future costs in excess of the amounts accrued and/or disclosed on all presently known and quantifiable environmental contingencies will not be material to the Company's financial position or results of operations.

	During 2000, the Company expanded a voluntary program of comprehensive environmental remediation planning for former manufactured gas plant sites. The Company has performed a preliminary assessment of two manufactured gas plant sites previously used by Wisconsin Gas as discussed below. The Company is working with the Wisconsin Department of Natural Resources in its investigation and remediation planning. At this time, the Company cannot estimate future remediation costs associated with these sites beyond those described below.

	Manufactured Gas Plant Sites: The Company has completed remediation at one former manufactured gas plant site. The Company estimates that the future costs for detailed site investigation and future remediation costs for the one remaining site may range from $3-$5 million over the next ten years. This estimate is dependent upon several variables including, among other things, the extent of remediation, changes in technology and changes in regulation. As of September 30, 2002, the Company has established reserves of $3.5 million related to future remediation costs.

	The PSCW has allowed Wisconsin utilities, including Wisconsin Gas, to defer the costs spent on the remediation of manufactured gas plant sites, and has allowed for such costs to be recovered in rates over five years. As such, the Company has recorded a regulatory asset for unrecovered remediation costs.

	Guardian Lateral: In April 2002, Wisconsin Gas announced that construction of the 35-mile lateral to connect its distribution system to the Guardian Pipeline (the "Guardian Lateral") may be delayed until the spring of 2003 in order to obtain all permits and easements.

	On August 30, 2002, Wisconsin Gas filed a request with the PSCW for approval of an increased cost estimate for the Guardian Lateral. The original cost estimate of $62 million has increased to approximately $83.5 million based on an in-service date in the fourth quarter of 2003.

	Despite this cost increase, the Guardian Lateral project remains economically feasible, and provides substantial customer benefits in gas cost savings as well as critical additional pipeline capacity. Delay in construction of the lateral is not expected to affect the 2003 in-service date and availability of the Guardian Pipeline to Wisconsin Gas.

	On August 24, 2001, Neighbors Standing United ("NSU"), a landowner group, filed petitions along with an individual landowner, for review of the PSCW order dated July 25, 2001, which approved Wisconsin Gas Company's application to construct and operate the Guardian Lateral. The petitioners allege, among other issues, that the final environmental impact statement ("FEIS") for this pipeline project did not meet legal requirements and that affected landowners' due process rights were not satisfied during the PSCW review process. After briefing of the issues and oral argument, the Jefferson County Circuit Court on October 4 and 14, 2002, rendered oral decisions denying the petitions for review and request for injunctive relief with one modification by the Court which narrowed the approved pipeline route corridor from 800 to 200 feet. A written Court Order confirming this bench decision is anticipated in November 2002.

	These two petitioners also filed on February 21 and 22, 2002, respectively, petitions for review of a January 17, 2002, WDNR decision which concluded that the FEIS for the Guardian Pipeline and Guardian Lateral projects fully complied with the Wisconsin Environmental Policy Act. These petitions for review and associated proceedings have been stayed by the Jefferson County Circuit Court pending resolution of the proceedings for the court review of the PSCW's order.

ITEM 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

RESULTS OF OPERATIONS -- THREE MONTHS ENDED SEPTEMBER 30, 2002
EARNINGS

The net loss recorded in the third quarter of 2002 was $1.8 million or 22.2% less than the third quarter of 2001, primarily reflecting reduced interest expense, and the elimination of goodwill amortization effective January 1, 2002 with the adoption of SFAS 142.

Operating Revenues, Gross Margin and Therm Deliveries

Traditionally the quarter ending September 30 has the lowest gross margin due to the lack of a heating load. A comparison follows of operating revenues, gross margin and gas deliveries during the third quarter of 2002 with similar information for the third quarter of 2001. Gross margin is a better performance indicator for the gas utility than changes in revenues because changes in the cost of gas sold flow through to revenue under gas cost recovery mechanisms that do not impact gross margin. As can be seen below, gross margin declined by $0.5 million as operating revenues decreased by $0.3 million or 0.5% and purchased gas costs increased by $0.2 million or 0.6%.

	Three Months Ended September 30
Operations	2002	2001	% Change
	(Millions of Dollars)

Operating Revenues	$56.8	$57.1	(0.5%)
Cost of Gas Sold	34.5	34.3	0.6%
Gross Margin	$22.3	$22.8	(2.2%)
	====	====

For the three months ended September 30, 2002, gas gross margins by customer class declined compared to the three months ended September 30, 2001. As can be seen in the table below, total gas sales volumes for the third quarter of 2002 decreased 5.3% compared with the third quarter of 2001. This decline was partially offset by deliveries to a higher average number of customers, which favorably impacted the fixed component of operating revenues that is not affected by decreased volumes.

The following table compares gross margins and natural gas therm deliveries by customer class during the third quarter of 2002 with similar information for the third quarter of 2001.

	Gross Margin				Therm Deliveries
		Three Months Ended September 30			Three Months Ended September 30
Operations	2002		2001	% Change	2002	2001	% Change
	(Millions of Dollars)				(Millions)
Customer Class
Residential	$12.8		$13.4	(4.5%)	27.8	31.0	(10.3%)
Commercial/Industrial	3.2		3.3	(3.0%)	17.9	19.0	(5.8%)
Interruptible	0.3		0.2	50.0%	4.4	2.9	51.7%
Total Gas Sales	16.3		16.9	(3.6%)	50.1	52.9	(5.3%)
Transported Gas	4.7		4.6	2.2%	93.7	86.9	7.8%
Other-Operating	1.3		1.3	-	-	-	-
Total Deliveries	$22.3		$22.8	(2.2%)	143.8	139.8	2.9%
	====		====		====	====

Weather -- Degree Days (a)
Heating (150 Normal)					67	162	(58.6%)

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

As noted above, total gas sales volumes decreased by 5.3% during the third quarter of 2002. This decrease was partially offset by deliveries to a higher average number of customers. The therm delivery reduction was largely due to periods of warmer weather in the third quarter of 2002 compared with the same period in 2001 and classification changes between customer classes for several customers.

Other Items

Other Operation and Maintenance Expenses: Other operation and maintenance expenses increased by $4.0 million or 26.5% during the third quarter of 2002 when compared with the third quarter of 2001. The most significant increase included higher intercompany costs related to information systems. Prior to August 2001, Wisconsin Gas utilized its own customer service system. In connection with the merger, the Company transferred its customer service function to Wisconsin Electric which resulted in increased operating and maintenance costs and reduced depreciation expense. The Company also experienced higher pension and other medical benefit expenses for the third quarter of 2002.

Depreciation, Decommissioning and Amortization: Depreciation, Decommissioning and Amortization expenses decreased by $1.0 million or 9.6% during the third quarter of 2002 due to the Company completing the amortization of its customer service system as this function is now provided by Wisconsin Electric, with the related cost recognized by the Company as other operating and maintenance expense.

Goodwill Amortization: Goodwill amortization expenses decreased by $2.9 million during the third quarter of 2002 due to the adoption on January 1, 2002 of SFAS 142, which eliminated amortization of goodwill.

Interest Expense: Interest expense decreased by $2.5 million or 46.3% during the third quarter of 2002 due primarily to intercompany notes, which were reversed in December 2001 pursuant to a PSCW order, and to lower short-term interest rates.

RESULTS OF OPERATIONS -- NINE MONTHS ENDED SEPTEMBER 30, 2002
EARNINGS

The net income for Wisconsin Gas increased by $13.2 million to $18.1 million during the first nine months of 2002 when compared to the first nine months of 2001. This increase in net income primarily reflects lower interest expense of $14.4 million during the first nine months of 2002. In addition, amortization of goodwill was discontinued effective January 1, 2002 with the adoption of SFAS 142, resulting in an increase in net income of $8.7 million.

Operating Revenues, Gross Margin and Therm Deliveries

A comparison of operating revenues, gross margin and gas deliveries follows. Gross margin is a better performance indicator than revenues because changes in the cost of gas sold flow through to revenue under gas cost recovery mechanisms that do not impact gross margin. As can be seen below, gas margins declined by $1.0 million as gas operating revenues declined by $149.9 million or 30.6% between the first nine months of 2002 and the first nine months of 2001 offset by a $148.9 million or 42.0% decrease in purchased gas costs.

	Nine Months Ended September 30
Operations	2002	2001	% Change
	(Millions of Dollars)

Operating Revenues	$339.6	$489.5	(30.6%)
Cost of Gas Sold	205.8	354.7	(42.0%)
Gross Margin	$133.8	$134.8	(0.7%)
	=====	=====

Gas operating revenues declined by $149.9 million or 30.6% between the first nine months of 2002 and the first nine months of 2001 offset by a $148.9 million or 42.0% decrease in purchased gas costs. The decline in revenues and cost of gas sold were directly related to a decline in natural gas prices. On a year to date basis, the weighted average cost of gas declined from $5.76 during 2001 to $2.88 during 2002. As noted above, such gas cost decreases do not affect the margin earned on each therm of gas delivered due to the Company's gas cost recovery mechanisms.

The following table compares gross margins and natural gas therm deliveries by customer class during the first nine months of 2002 with similar information for the first nine months of 2001.

		Gross Margin			Therm Deliveries
	Nine Months Ended September 30					Nine Months Ended September 30
Operations		2002	2001	% Change	2002		2001	% Change
		(Millions of Dollars)			(Millions)
Customer Class
Residential		$87.2	$87.8	(0.7%)	308.6		312.8	(1.3%)
Commercial/Industrial		23.0	22.0	4.5%	172.0		163.6