<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-7530
WISCONSIN GAS COMPANY
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Wisconsin 39-0476515
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
626 East Wisconsin Avenue
P.O. Box 334
Milwaukee, Wisconsin 53201
---------------------------------------- ----------
(Address of Principal executive offices) (Zip Code)
Registrant's telephone number, including area code 414-291-7000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
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 the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
/X/ Yes No.
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
Aggregate market value of the voting stock held by non-affiliates of the
registrant: None
Number of shares outstanding of each of the registrant's classes of common
stock, as of February 28, 1997:
Common Stock, $8 par value 1,125 shares
Documents Incorporated by Reference.
WICOR, Inc. proxy statement dated March 13, 1997 (Part III
<PAGE> 2
Reduced Disclosure Format
The registrant meets the conditions set forth in General Instructions
(J)(1)(a) and (b) of Form 10-K and is therefore filing with the reduced
disclosure format.
<PAGE> 3
TABLE OF CONTENTS
PAGE
PART I. 1
Item 1. Business 1
(a) General 1
(b) Gas Supply, Pipeline Capacity and Storage 2
(1) General 2
(2) Pipeline Capacity and Storage 2
(3) Term Gas Supply 3
(4) Spot Market Gas Supply 3
(c) Employees 3
Item 2. Properties 3
Item 3. Legal Proceedings 4
Item 4. Submission of Matters to a Vote of
Security Holders 5
PART II. 5
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters 5
Item 6. Selected Financial Data 5
Item 7. Management's Discussion and Analysis of
Results of Operations and Financial Condition 5
Item 8. Financial Statements and Supplementary Data 5
Item 9. Changes in and Disagreements with Accountants
ON Accounting and Financial Disclosure 5
Part III. 6
Item 10. Directors and Executive Officers of the Registrant 6
Item 11. Executive Compensation 6
Item 12. Security Ownership of Certain
Beneficial Owners and Management 6
Item 13. Certain Relationships and Related Transactions 6
Part IV. 6
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K 6
(a) Documents Filed as Part of the Report 6
1. All Financial Statements and Report of
Independent Public Accountants 6
2. Financial Statement Schedules 6
3. Exhibits 6
(b) Reports on Form 8-K 9
<PAGE> 4
PART I
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.
At December 31, 1996, Wisconsin Gas distributed gas to approximately 513,000
residential, commercial and industrial customers in 514 communities
throughout Wisconsin. Wisconsin Gas' service area has an estimated
population of nearly 2,000,000 based on the State of Wisconsin's estimates
for 1996. 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.
Year Ended
-----------------------------------------
December 31, 1996 December 31, 1995
------------------- -------------------
Thousands Thousands
Customer Class of Therms* Percent of Therms* Percent
- ------------------------ ---------- ------- ---------- -------
Sales
Residential 529,910 39.1 494,250 38.0
Commercial 242,570 17.9 211,570 16.3
Large Volume Commercial
and Industrial Firm 110,780 8.2 134,960 10.4
Commercial and Industrial
Interruptible 196,240 14.5 313,530 24.1
---------- ------- ---------- -------
Total Sales 1,079,500 79.7 1,154,310 88.8
Transportation
Transported 275,780 20.3 145,490 11.2
---------- ------- ---------- -------
Total Gas Throughput 1,355,280 100.0 1,299,800 100.0
*One therm equals 100,000 BTU's
The volumes shown as transported represent customer-owned gas that was
delivered by Wisconsin Gas to such customers. The remaining volumes
represent quantities sold and delivered to customers by the Company
<PAGE> 5
Federal and state regulators continue to implement policies to bring
more competition to the gas industry. The PSCW has instituted a proceeding
to consider how its regulation of gas distribution utilities should change
to reflect the changing competitive environment in the gas industry. While
the gas utility distribution function is expected to remain a heavily
regulated, monopoly function, the sales of the natural gas commodity and
related services, which were formerly utility monopoly functions, are
expected to become increasingly subject to competition from third parties.
Given this regulatory policy and the fact that Wisconsin Gas' earnings are
the same whether it sells and distributes the gas or only distributes it,
Wisconsin Gas is pursuing a long-term strategy to no longer sell gas. WICOR
Energy Services Company, an affiliate of Wisconsin Gas, sells gas on a for-
profit basis and will seek to replace Wisconsin Gas for a significant number
of Wisconsin Gas' customers as well as those of other utilities. Wisconsin
Gas must obtain PSCW approval to implement its strategy. To date, the PSCW
has stated that it will permit utilities to discontinue the sale of gas on a
market segment by market segment basis, when it determines that there is
adequate and persistent competition in the particular segment. So far, the
PSCW has not permitted the any utility to discontinue the sale of gas.
With PSCW approval, Wisconsin Gas has implemented a small-customer gas-
supplier choice pilot program that is designed (1) to test market acceptance
of third-party gas sellers, (2) third-party seller interest in selling gas
in different market segments, and (3) Wisconsin Gas' capabilities to
administer a distribution-only business. The pilot program, which began on
November 1, 1996, was oversubscribed and has 1,460 small commercial and
residential participants. Wisconsin Gas expects to continue the pilot
program, with certain modifications, for a second year beginning November 1,
1997.
Wisconsin Gas also has taken steps to enable its large firm commercial
and industrial customers to transfer from sales and distribution to
distribution-only service. As a consequence of state regulatory policies
and Wisconsin Gas' actions, the volume of gas sold by third parties and
distributed by Wisconsin Gas increased by 90% in 1996 compared with 1995.
In 1996, Wisconsin Gas added over 8,000 new customers and has added more
than 52,000 new customers over the past five years.
(b) Gas Supply, Pipeline Capacity and Storage
(1) General
Prior to the Federal Energy Regulatory Commission's ("FERC") Order No.
636, the interstate pipelines serving Wisconsin Gas were the primary sellers
of natural gas to Wisconsin Gas. Order No. 636 required the pipelines to
discontinue the sale of gas on a delivered basis. During the transition
period prior to the issuance of Order No. 636, Wisconsin Gas gradually
assumed responsibility for the acquisition of supply in the production areas
of North America, as well as the management of transportation and storage
capacities to deliver that supply to its market area. On November 1, 1993,
Wisconsin Gas commenced full operation and responsibility for its supply and
capacity under the requirements of Order No. 636.
<PAGE> 6
One of the provisions of Order No. 636 is capacity release. Capacity
release creates a secondary market for pipeline and storage capacity and for
gas supplies. Local distribution companies, such as Wisconsin Gas, must
contract for capacity and supply sufficient to meet the firm peak day demand
of their customers. Peak or near peak days generally occur only a few times
each year, so capacity release facilitates higher utilization of capacity
and supply during those times when the capacity and supply are not needed by
the utility. Through pre-arranged agreements and day-to-day electronic
bulletin board postings, interested parties can purchase that excess
capacity and supply. The proceeds from these transactions are passed-through
to the ratepayers, thereby helping to offset the costs associated with
maintaining peak levels of capacity and gas supply. During 1996, Wisconsin
Gas was an active participant in the capacity release market.
Operating under Order No. 636, Wisconsin Gas has been able to meet its
contractual obligations with both its suppliers and its customers despite
periods of severe cold or unseasonably warm weather.
(2) Pipeline Capacity and Storage
Interstate pipelines serving Wisconsin originate in three major gas
producing areas of North America: the Oklahoma and Texas basins, the Gulf
of Mexico and western Canada. Wisconsin Gas has contracted for long-term
firm capacity on a relatively equal basis from each of these areas. This
strategy reflects management's belief that overall supply security is
enhanced by geographic diversification of the Company's supply portfolio and
that Canada represents an important long-term source of reliable,
competitively priced gas.
Because of the seasonal variations in gas usage in Wisconsin, Wisconsin
Gas has also contracted with ANR and NNG for substantial underground storage
capacity, primarily in Michigan. There are no known underground storage
formations in Wisconsin capable of commercialization. Storage enables
Wisconsin Gas to optimize its overall gas supply and capacity costs. In
summer, gas in excess of market demand is transported into the storage
fields, and in winter, gas is withdrawn from storage and combined with gas
purchased in or near the production areas ("flowing gas") to meet the
increased winter market demand. As a result, Wisconsin Gas can contract for
less long-line pipeline capacity than would otherwise be necessary, and it
can purchase gas on a more uniform daily basis from suppliers year-round.
Each of these capabilities enables Wisconsin Gas to reduce its overall
costs.
Wisconsin Gas also maintains high deliverability storage in the mid-
continent and Southeast production areas as well as the market area. This
storage capacity is designed to deliver gas when other supplies cannot be
delivered during extremely cold weather in the producing areas, which can
reduce long-line supply.
<PAGE> 7
Wisconsin Gas' firm winter daily transportation and storage capacity
entitlements from pipelines under long-term contracts are set forth below.
Maximum
(Thousands
Pipeline of Therms*)
-------------- -------------
ANR
Mainline 2,991
Storage 4,879
NNG
Mainline 1,093
Storage 150
Viking
Mainline 75
Peaking Facilities 76
-------------
Total 9,264
*One therm equals 100,000 BTU's.
(3) Term Gas Supply
Wisconsin Gas has contracts for firm supplies with terms in excess of
30 days with approximately 20 gas suppliers for gas produced in each of the
three producing areas discussed above. The term contracts have varying
durations so that only a portion of the Company's gas supply expires in any
year. Management believes the volume of gas under contract is sufficient to
meet its forecasted firm peak day demand. The following table sets forth
Wisconsin Gas' winter season maximum daily firm total gas supply.
Maximum
(Thousands
of Therms*)
--------------
Domestic flowing gas 2,370
Canadian flowing gas 1,498
Storage withdrawals 5,029
--------------
Total 8,897
*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 985 full-time equivalent active employees at December
31, 199
<PAGE> 8
Item 2. PROPERTIES
Wisconsin Gas owns a distribution system which, on December 31, 1996,
included approximately 8,500 miles of distribution and transmission mains,
427,300 services and 515,700 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. 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, 1996, the Company has accrued $36.2 million for future cleanup costs.
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. Due to anticipated
regulatory treatment, changes in the recorded liability do not immediately
impact net income
<PAGE> 9
The Wisconsin Department of Natural Resources ("WDNR") issued a
Probable Responsible Party letter to Wisconsin Gas for these two sites in
September 1994. Following receipt of this letter, Wisconsin Gas and the
WDNR held an initial meeting to discuss the sites. At the meeting it was
agreed that Wisconsin Gas would prepare a remedial action options report
from which it would select specific remedial actions for recommendation to
the WDNR. During the last several years, the Company has gathered
additional environmental data regarding these two sites, held extensive
discussions concerning remedial options with current land owners and
solicited information from environmental consulting and remediation firms on
technology and approaches that would best suit the sites. The efforts were
directed toward preparing a remedial action options report and
recommendations for presentation to the WDNR in 1997. Once such a plan is
approved, initial remediation work will begin. Expenditures over the next
three years are expected to total approximately $10 million. Although most
of the work and costs are expected to be incurred in the first few years of
the plan, monitoring of sites and other necessary actions may be undertaken
for up to 30 years.
In March 1994, Wisconsin Gas commenced suit against nine insurance
carriers seeking a declaratory judgment regarding insurance coverage for the
two sites. Settlements were reached with each of the carriers during 1994.
Additional insurance recoveries are being pursued. The Company expects full
rate recovery of incurred remediation costs, less amounts recovered from
insurance carriers. If the amount recovered from the insurance carriers is
insufficient to remediate both sites, expenditures not recovered are
expected to be allowed full recovery (other than for carrying costs) in
rates based upon recent PSCW orders. Accordingly, a regulatory asset has
been recorded for the accrued cost. 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.
On February 21, 1997, Wisconsin Gas was named by the defendant in an
environmental cleanup lawsuit as a co-defendant. The suit involves
contamination of a Milwaukee area industrial site by wood chips
characteristic of those used in the manufactured gas process. Wisconsin Gas
believes it is not he source of the contaminated wood chips and intends to
vigorously defend the suit. Although the Company is unable to predict the
outcome of the litigation, management believes that amounts recovered from
its insurance carriers and through rate relief will be sufficient to cover
any such liability.
Wisconsin Gas also owns a service center that is constructed on a site
that was previously owned by the City of Milwaukee and was used by the City
as a public dump site. The Company has conducted a site assessment at the
request of the WDNR and has sent the report of its assessment to the WDNR.
Management cannot predict whether or not the WDNR will require any
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 under the PSC orders discussed above
<PAGE> 10
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Omitted pursuant to General Instruction J (2) (c).
PART II
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 ($16 million). The Company may pay dividends in
excess of $16 million so long as the payment will not cause its common
equity ratio to fall below 48.43%. If payment of projected dividends would
cause its common equity ratio to fall below 43% of total capitalization
(including short-term debt), or if payment of additional dividends would
cause its common equity ratio to fall below 48.43%, Wisconsin Gas must
obtain PSCW approval to pay such dividends. Wisconsin Gas has projected the
payment of $21.5 million of dividends during the 12 months ending October
31, 1997. See Note 6 of Notes to Financial Statements contained in Exhibit
13, portions of the WICOR 1996 Annual Report to Shareholders, which note is
incorporated herein by reference. For the year ended December 31, 1996, the
Company's average common equity level was 53.3%.
The Company paid cash dividends of $20,000,000 and $16,000,000 on
common stock to WICOR in 1996 and 1995, respectively.
Item 6. SELECTED FINANCIAL DATA
Omitted pursuant to General Instruction J(2)(a).
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
Reference is made to the section entitled "Financial Review" set forth
in the WICOR 1995 Annual Report to Shareholders. Such section is included
in Exhibit 13, which, insofar as it pertains to the Company, is hereby
incorporated herein by reference.
Item 8. 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. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
There has been no change in or disagreement with the Company's
independent accountants on any matter of accounting principles or practices
or financial statement disclosure required to be reported pursuant to this
item.
<PAGE> 11
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Omitted pursuant to General Instruction J(2)(c).
Item 11. EXECUTIVE COMPENSATION
Omitted pursuant to General Instruction J(2)(c).
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Omitted pursuant to General Instruction J(2)(c).
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Omitted pursuant to General Instruction J(2)(c).
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Annual Report on Form
10-K:
1. All Financial Statements and Report of Independent Public
Accountants.
Statement of Income.
Balance Sheet.
Statement of Cash Flows.
Statement of Common Equity.
Statement of Capitalization.
Notes to Financial Statements.
2. Financial Statement Schedules.
Not required.
3. Exhibits
3.1 Wisconsin Gas Company Restated Articles of Incorporation, as
amended (incorporated by reference to Exhibit 3.1 to the
Company's Form 10-K Annual Report for 1988).
3.2 Amendment to Wisconsin Gas Company By-laws, effective February 28,
1995 (incorporated by reference to Exhibit 3.2 to the
Company's Form 10-K Annual Report for 1994).
3.3 Wisconsin Gas Company By-laws, as amended (incorporated by
reference to Exhibit 3.3 to the Company's Form 10-K Annual Report for
1994)
<PAGE> 12
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 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).
4.3 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).
4.4 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 dated
November 19, 1991).
4.5 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).
4.6 Officers' Certificate, dated as of November 7, 1995, setting forth
the terms of the Company's 6-3/8% Notes due 2005
(incorporated by reference to the Company's Form 8-K
Current Report dated November 7, 1995).
4.7 Revolving Credit Agreement dated as of March 29, 1993, among
Wisconsin Gas Company and the Bank of New York,
Citibank, N.A., Firstar Bank 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).
4.8 Extension of Revolving Credit Agreement dated as of March 10, 1995,
among Wisconsin Gas Company and Citibank, N.A., Firstar Bank
Milwaukee, N.A., Harris Trust and Savings Bank, M&I Marshall &
Ilsley Bank and Citibank, N.A., as Agent (incorporated by reference
to Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q dated
April 28, 1995).
4.9 Loan Agreement dated as of March 29, 1996, by and among ABN AMRO
Bank N.V., Wisconsin Gas Company Employee's Savings
Plans Trust and WICOR, Inc. (incorporated by reference
to Exhibit 4.1 to the Company's Quarterly Report on Form
10-Q dated as of April 26, 1996).
4.10 WICOR, Inc. Master Savings Trust Agreement dated as of October 1,
1996, between WICOR, Inc. and Marshall & Ilsley Trust Company
(incorporated by reference to Exhibit 4.1 to the Company's Quarterly
Report on Form 10-Q dated as of October 30, 1996)
<PAGE> 13
4.11 First Amendment, dated as of November 27, 1996, to Loan Agreement,
dated as of March 29, 1996, by and among WICOR, Inc.
Master Savings Trust (formerly the Wisconsin Gas Company
Employees' Savings Plans Trust), WICOR, Inc. and ABN
AMRO Bank, N.V.
10.1 Service Agreement dated as of June 1, 1994, among WICOR, Inc.,
Wisconsin Gas Company, WEXCO of Delaware, Inc., Sta-Rite
Industries, Inc. and SHURflo Pump Manufacturing Co.
(incorporated by reference to Exhibit 10.1 to the
Company's Form 10-K Annual Report for 1995).
10.2# WICOR, Inc. 1987 Stock Option Plan, as amended (incorporated by
reference to Exhibit 4.1 to the WICOR, Inc. Form S-8
Registration Statement No. 33-67134).
10.3# Forms of nonstatutory stock option agreement used in connection
with the WICOR, Inc. 1987 Stock Option Plan
(incorporated by reference to Exhibit 10.20 to the
Company's Form 10-K Annual Report for 1991).
10.4# WICOR, Inc. 1992 Director Stock Option Plan (incorporated by
reference to Exhibit 4.1 to WICOR, Inc.'s Form S-8
Registration No. 33-67132).
10.5# Form of nonstatutory stock agreement used in conjunction with the
WICOR, Inc. 1992 Director Stock Option Plan
(incorporated by reference to Exhibit 4.2 to WICOR,
Inc.'s Form S-8 Registration Statement No. 37-67132).
10.6# WICOR, Inc. 1994 Long-Term Performance Plan (incorporated by
reference to Exhibit 4.1 to the WICOR, Inc. Form S-8
Registration Statement No. 33-55755).
10.7# Form of nonstatutory stock option agreement used in connection
with the WICOR, Inc. 1994 Long-Term Performance Plan
(incorporated by reference to Exhibit 4.2 to the WICOR,
Inc. Form S-8 Registration Statement No. 33-55755).
10.8# Form of restricted stock agreement used in connection with the
WICOR, Inc. 1994 Long-Term Performance Plan
(incorporated by reference to Exhibit 4.3 to the WICOR,
Inc. Form S-8 Registration Statement No. 33-55755).
10.9# Wisconsin Gas Company Principal Officers' Supplemental Retirement
Income Program (incorporated by reference to Exhibit
10.6 to the Company's Form 10-K Annual Report for 1993).
10.10# Wisconsin Gas Company 1997 Officers' Incentive
Compensation Plan.
10.11# 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).
10.12# 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)
<PAGE> 14
10.13# 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. 1996 Annual Report to
Shareholders.
27 Financial Data Schedule. (EDGAR version only)
<PAGE> 15
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the fourth quarter of 1996.
# Indicates a plan under which compensation is paid or payable to directors
or executive officers of the Company.
<PAGE> 16
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly authorized.
WISCONSIN GAS COMPANY
Date: March 13, 1997 By JOSEPH P. WENZLER
Joseph P. Wenzler
Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed on the succeeding pages by the following persons
on behalf of the registrant and in the capacities and on the dates
indicated.
<PAGE> 17
WISCONSIN GAS COMPANY
Signature Title Date
THOMAS F. SCHRADER
Thomas F. Schrader President, Chief Executive
Officer and Director
(Principal Executive Officer) March 13, 1997
JOSEPH P. WENZLER
Joseph P. Wenzler Vice President and March 13, 1997
Chief Financial Officer
(Principal Financial and
Principal Accounting Officer)
WENDELL F. BUECHE
Wendell F. Bueche Director March 13, 1997
WILLIE D. DAVIS Director March 13, 1997
Willie D. Davis
JERE D. MCGAFFEY
Jere D. McGaffey Director March 13, 1997
DANIEL F. MCKEITHAN, JR.
Daniel F. McKeithan, Jr. Director March 13, 1997
GUY A. OSBORN
Guy A. Osborn Director March 13, 1997
STUART W. TISDALE
Stuart W. Tisdale Director March 13, 1997
GEORGE E. WARDEBERG
George E. Wardeberg Director March 13, 1997
ESSIE M. WHITELAW
Essie M. Whitelaw Director March 13, 1997
WILLIAM B. WINTER
William B. Winter Director March 13, 1997
<PAGE> 18
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Wisconsin Gas Company:
We have audited the accompanying balance sheet and statements of capital-
ization of WISCONSIN GAS COMPANY (a Wisconsin corporation and a wholly owned
subsidiary of WICOR, Inc.) as of December 31, 1996 and 1995, and the related
statements of income, common equity and cash flows for each of the three years
in the period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and 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, 1996 and 1995, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
Milwaukee, Wisconsin, ARTHUR ANDERSEN LLP
January 27, 1997.
<PAGE> 19
WISCONSIN GAS COMPANY
Statements of Income
Year Ended December 31,
------------------------------------
1996 1995 1994
---------- ---------- ----------
(Thousands of Dollars)
Operating Revenues $ 573,596 $ 519,398 $ 556,587
---------- ---------- ----------
Operating Expenses:
Cost of gas sold 365,398 318,728 357,482
Operations 92,386 95,795 108,397
Maintenance 8,767 6,932 7,409
Depreciation 32,848 28,950 29,260
Taxes, other than income taxes 9,230 9,331 9,675
---------- ---------- ----------
508,629 459,736 512,223
---------- ---------- ----------
Operating Income 64,967 59,662 44,364
---------- ---------- ----------
Interest expense 12,934 14,312 14,348
Other income and expenses (662) 176 127
---------- ---------- ----------
Income Before Income Taxes 52,695 45,174 29,889
Income Taxes 20,335 17,097 10,993
---------- ---------- ----------
Net Income $ 32,360 $ 28,077 $ 18,896
========== ========== ==========
The accompanying notes are an integral part of these statements.
<PAGE> 20
WISCONSIN GAS COMPANY
Balance Sheet
As of December 31,
------------------------
1996 1995
---------- ----------
(Thousands of Dollars)
Assets
- ------
Property, Plant and Equipment, at cost $ 786,486 $ 757,825
Less - Accumulated depreciation 409,151 382,424
---------- ----------
377,335 375,401
---------- ----------
Current Assets:
Cash and cash equivalents 8,960 7,463
Accounts receivable, less allowance for
doubtful accounts of $12,363
and $7,955, respectively 73,540 65,477
Accounts receivable, intercompany, net 76 (4,434)
Accrued utility revenues 54,382 46,935
Materials and supplies,
at weighted average cost 3,098 3,364
Gas in storage, at weighted average cost 32,684 23,928
Deferred income taxes 17,879 16,781
Prepaid taxes 6,411 6,420
Other 1,668 1,201
---------- ----------
198,698 167,135
---------- ----------
Deferred Charges and Other:
Regulatory assets 101,808 104,145
Systems development costs 23,052 28,868
Prepaid pension costs 30,112 27,012
Other 7,372 6,458
---------- ----------
162,344 166,483
---------- ----------
$ 738,377 $ 709,019
========== ==========
The accompanying notes are an integral part of these statements.
<PAGE> 21
WISCONSIN GAS COMPANY
Balance Sheet
As of December 31,
------------------------
1996 1995
---------- ----------
(Thousands of Dollars)
Capitalization and Liabilities
- ------------------------------
Capitalization (See accompanying statement):
Long-term debt $ 152,453 $ 154,246
Preferred stock - -
Common equity 207,774 195,161
---------- ----------
360,227 349,407
---------- ----------
Current Liabilities:
Accounts payable 64,548 41,079
Refundable gas costs 31,545 34,347
Short-term borrowings 65,500 57,500
Current portion of long-term debt 2,000 4,000
Accrued payroll and benefits 8,116 8,711
Accrued taxes 712 2,538
Other 4,334 4,689
---------- ----------
176,755 152,864
---------- ----------
Deferred Credits and Other:
Regulatory liabilities 61,749 64,896
Deferred income taxes 35,569 36,654
Postretirement benefit obligation 51,359 52,968
Environmental remediation costs 36,222 36,381
Unamortized investment tax credit 7,265 7,724
Accrued pipeline transition costs 174 261
Other 9,057 7,864
---------- ----------
201,395 206,748
---------- ----------
Commitments and Contingencies (Note 6)
---------- ----------
$ 738,377 $ 709,019
========== ==========
The accompanying notes are an integral part of these statements.
<PAGE> 22
WISCONSIN GAS COMPANY
Statements of Cash Flow
Increase (Decrease) in Cash and Cash Equivalents
Year Ended December 31,
----------------------------------
(Thousands of Dollars) 1996 1995 1994
---------- ---------- ----------
Operations:
Net income $ 32,360 $ 28,077 $ 18,896
Adj.to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 41,111 36,646 37,419
Deferred income taxes (2,183) (6,946) (8,491)
Change in:
Receivables (15,510) (29,423) 34,500
Gas in storage (8,756) 14,121 6,647
Other current assets (4,711) 688 (6,948)
systems development costs - - (841)
Accounts payable 23,469 (3,566) (1,183)
Accrued taxes (1,817) 9,036 (2,021)
Refundable gas costs (2,802) 16,289 2,462
Other current liabilities (950) 1,134 (485)
Other noncurrent assets and
liabilities (6,666) (1,100) 7,474
---------- ---------- ----------
53,545 64,956 87,429
---------- ---------- ----------
Investment Activities:
Capital expenditures (36,586) (42,726) (44,626)
Other,net 285 365 343
---------- ---------- ----------
(36,301) (42,361) (44,283)
---------- ---------- ----------
Financing Activities:
Change in short-term borrowings 8,000 (27,500) (23,000)
Issuance of long-term debt - 65,000 -
Reduction of long-term debt (4,000) (54,000) (2,000)
Donated capital from WICOR, Inc. - - 5,000
Cash dividends paid to WICOR, Inc. (20,000) (16,000) (16,000)
Other 253 89 453
---------- ---------- ----------
(15,747) (32,411) (35,547)
---------- ---------- ----------
Change in Cash and Cash Equivalents 1,497 (9,816) 7,599
Cash and Cash Equivalents at
beginning of year 7,463 17,279 9,680
---------- ---------- ----------
Cash and Cash Equivalents at
end of year $ 8,960 $ 7,463 $ 17,279
========== ========== ==========
The accompanying notes are an integral part of these statements.
<PAGE> 23
WISCONSIN GAS COMPANY
Statements of Common Equity
Year Ended December 31,
----------------------------------
1996 1995 1994
---------- ---------- ----------
(Thousands of Dollars)
Common Stock
Balance at begin and end of year $ 9 $ 9 $ 9
---------- ---------- ----------
Other Paid-In Capital
Balance at beginning of year 118,842 118,753 113,300
Donated capital from WICOR, Inc. - - 5,000
Other 253 89 453
---------- ---------- ----------
Balance at end of year 119,095 118,842 118,753
---------- ---------- ----------
Retained Earnings
Balance at beginning of year 76,310 64,233 61,337
Net income 32,360 28,077 18,896
Cash dividends paid to WICOR (20,000) (16,000) (16,000)
---------- ---------- ----------
Balance at end of year 88,670 76,310 64,233
---------- ---------- ----------
Total Common Equity at end of year $ 207,774 $ 195,161 $ 182,995
========== ========== ==========
The accompanying notes are an integral part of these statements.
<PAGE> 24
WISCONSIN GAS COMPANY
Statements of Capitalization
As of December 31,
----------------------
1996 1995
---------- ----------
(Thousands of dollars)
Long-Term Debt
First mortgage bonds
Adjustable Rate Series, 9.3% and
7.4%, respectively, due 1999 $ 4,000 $ 6,000
7-1/2% Notes due 1998 40,000 40,000
6.6% Notes due 2013 45,000 45,000
6-3/8% Notes due 2005 65,000 65,000
Unamortized debt discount and expense (1,547) (1,754)
---------- ----------
152,453 154,246
---------- ----------
Preferred Stock
W/o par value, cumulative; authorized
1,500,000 shares, none outstanding - -
---------- ----------
Common Equity
Common Stock, $8 par value, authorized
5,000,000 shares, 1,125
shares outstanding 9 9
Other paid-in capital 119,095 118,842
Retained earnings 88,670 76,310
---------- ----------
207,774 195,161
---------- ----------
$ 360,227 $ 349,407
========== ==========
The accompanying notes are an integral part of these statements.
<PAGE> 25
Wisconsin Gas Company
Notes to Financial Statements
1. ACCOUNTING POLICIES
a. Business
Wisconsin Gas Company (Wisconsin Gas), the oldest and largest natural
gas distribution utility in Wisconsin, is a public utility engaged in the
distribution of natural gas throughout Wisconsin. Most of its revenues,
however, are derived from gas delivered in southeastern Wisconsin. Wisconsin
Gas is subject to regulation by the Public Service Commission of Wisconsin
(PSCW) and gives recognition to ratemaking policies substantially in
accordance with the Federal Energy Regulatory Commission (FERC) System of
Accounts. At December 31, 1996, Wisconsin Gas served approximately 513,000
customers in 514 communities.
b. Gas Distribution Revenues and Purchased Gas Costs
Utility billings are rendered on a cycle basis. Revenues include
estimated amounts accrued for service provided but not yet billed.
Wisconsin Gas' rate schedules contain purchased gas adjustment (PGA)
provisions which permit the recovery of actual purchased gas costs incurred.
The difference between actual gas costs incurred and costs recovered through
rates, adjusted for inventory activity, is deferred as a current asset or
liability. The deferred balance is returned to or recovered from customers at
intervals throughout the year and any residual balance at the annual October
31 reconciliation date is subsequently refunded to or recovered from
customers.
The PSCW is currently permitting Wisconsin Gas to recover pipeline
supplier take-or-pay settlement costs, allocating a portion of the direct-
billed costs to each customer class, including transportation customers.
c. Plant and Depreciation
Gas distribution property, plant and equipment is stated at original
cost, including overhead allocations. Upon ordinary retirement of plant
assets, their cost plus cost of removal, net of salvage, is charged to
accumulated depreciation, and no gain or loss is recognized.
The depreciation of Wisconsin Gas' assets is computed using straight-
line rates over estimated useful lives and considers salvage value. These
rates have been consistently used for ratemaking purposes. The composite rates
are 4.5%, 4.2% and 4.5% for 1996, 1995 and 1994, respectively.
d. Regulatory Accounting
Wisconsin Gas accounts for its regulated operations in accordance with
Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the
Effects of Certain Types of Regulation." This statement sets forth the
application of generally accepted accounting principles to those companies
whose rates are determined by an independent third-party regulator. The
economic effects of regulation can result in regulated companies recording
costs that have been or are expected to be allowed in the ratemaking process
in a period different from the period in which the costs would be charged to
expense by an unregulated enterprise. When this occurs, costs are deferred as
assets in the balance sheet (regulatory assets) and recorded as expenses as
those same amounts are reflected in rates. Additionally, regulators can impose
liabilities upon a regulated company for amounts previously collected from
customers and for amounts that are expected to be refunded to customers
(regulatory liabilities).
<PAGE> 26
The amounts recorded as regulatory assets and regulatory liabilities in
the balance sheet at December 31, 1996 and 1995 are as follows:
(Thousands of Dollars) 1996 1995
---------- ----------
Regulatory assets:
Postretirement benefit costs (Note 8)$ 42,275 $ 45,054
Deferred environmental costs 41,368 41,457
Deferred uncollectible expenses 10,152 8,248
Income tax-related amounts
due from customers (Note 2) 3,003 3,357
Other 5,010 6,029
---------- ----------
$ 101,808 $ 104,145
========== ==========
Regulatory liabilities:
Income tax-related amounts
due to customers (Note 2) $ 21,369 $ 22,891
Pension costs (Note 8) 16,631 19,482
Other 23,749 22,523
---------- ----------
$ 61,749 $ 64,896
========== ==========
Wisconsin Gas is precluded from discontinuing service to residential
customers within its service area during the heating season. Any differences
between doubtful account provisions based on actual experience and provisions
allowed for ratemaking purposes by the PSCW are deferred for later recovery in
rates as a cost of service. The most recent PSCW rate order provides for a
$13.9 million allowable annual provision for doubtful accounts, including
amortization of prior deferred amounts. In the fourth quarter of 1996, the
PSCW staff approved a one-time charge of $3.0 million relating to
uncollectible accounts receivable expense. See Notes 6 and 8 for discussion of
additional deferred charges.
e. Income Taxes
Wisconsin Gas is a wholly owned subsidiary of WICOR, Inc. (WICOR) and
has elected to be included in WICOR's consolidated Federal income tax return.
WICOR allocates Federal current tax expense or credits to Wisconsin Gas based
on its respective separate tax computation.
Investment tax credits were recorded as a deferred credit on the balance
sheet and are being amortized to income over the applicable service lives of
the related properties in accordance with regulatory treatment.
f. Cash Flows
Wisconsin Gas considers all highly liquid debt instruments purchased
with an original maturity of three months or less to be cash equivalents. Due
to the short maturity of these instruments, market value approximates cost
For purposes of the Consolidated Statements of Cash Flow, income taxes
paid (net of refunds) and interest paid were as follows for each of the years
ended December 31:
(Thousands of Dollars) 1996 1995 1994
- ----------------------- ---------- ---------- ----------
Income taxes paid $ 29,048 $ 19,928 $ 30,059
Interest paid $ 11,763 $ 13,636 $ 13,374
<PAGE> 27
g. Derivative Financial Instruments
Wisconsin Gas has a limited involvement with derivative financial
instruments and does not use them for trading or speculative purposes.
The Company purchased derivatives in 1996 and 1995 to hedge an
immaterial portion of gas costs incurred for resale. The cost of
options and any gains or losses realized do not affect income since they
are accounted for under the PGA clause.
h. Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could
differ from those estimates.
i. Reclassifications
Certain prior year financial statement amounts have been
reclassified to conform to their current year presentation.
2. INCOME TAXES
The current and deferred components of income tax expense for each
of the years ended December 31 are as follows:
(Thousands of Dollars) 1996 1995 1994
- ------------------------ ---------- ---------- ----------
Current
Federal $ 19,006 $ 23,474 $ 19,245
State 4,675 5,808 4,771
---------- ---------- ----------
Total Current 23,681 29,282 24,016
---------- ---------- ----------
Deferred
Federal (3,040) (10,101) (10,789)
State (306) (2,084) (2,234)
---------- ---------- ----------
Total Deferred (3,346) (12,185) (13,023)
---------- ---------- ----------
Total Provision $ 20,335 $ 17,097 $ 10,993
========== ========== ==========
<PAGE> 28
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 pre-tax income as a result of the following differences:
<TABLE>
<CAPTION>
(Thousands of Dollars)
Year ended December 31, 1996 1995 1994
- ------------------------ --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Statutory U.S. tax rates $18,444 35.0% $15,811 35.0% $10,461 35.0%
State income taxes, net 2,915 5.5 2,515 5.6 1,707 5.7
Investment credit restored (453) (0.9) (457) (1.0) (461) (1.5)
Excess deferred
tax amortization (556) (1.0) (507) (1.1) (505) (1.7)
Other, net (15) - (265) (0.7) (209) (0.7)
--------------- --------------- ---------------
Effective Tax Rates $20,335 38.6% $17,097 37.8% $11,280 36.8%
=============== =============== ===============
</TABLE>
The components of deferred income tax assets and liabilities at
December 31, 1996 and 1995 are as follows:
(Thousands of Dollars) 1996 1995
- -------------------------- ---------- ----------
Deferred Income Tax Assets
Recoverable gas costs $ 12,658 $ 13,416
Inventory 2,080 2,614
Deferred compensation 2,011 1,667
Other 1,130 (916)
---------- ----------
$ 17,879 $ 16,781
========== ==========
Deferred Income Tax Liabilities
Property related $ 37,692 $ 37,715
Systems development costs 9,252 11,586
Pension benefits 5,458 3,070
Investment tax credit (4,806) (5,109)
Environmental (5,297) (4,725)
Postretirement benefits (3,646) (3,177)
Deferred compensation (2,590) (2,119)
Other (494) (587)
---------- ----------
$ 35,569 $ 36,654
========== ==========
3. SHORT-TERM BORROWINGS
As of December 31, 1996 and 1995, Wisconsin Gas had total
unsecured lines of credit available from banks of $145.0 million and
$120.0 million, respectively. The credit lines may be used for, among
other purposes, the support of commercial paper issued by Wisconsin Gas.
At December 31, 1996, $65.5 million of commercial paper was outstanding
at a weighted average interest rate of 5.7%. At December 31, 1995,
$57.5 million of commercial paper was outstanding at a weighted average
interest rate of 5.9%.
These borrowing arrangements may require the maintenance of
average compensating balances which are generally satisfied by balances
maintained for normal business operations and may be withdrawn at any
time
<PAGE> 29
4. LONG-TERM DEBT
In November 1995, Wisconsin Gas issued $65 million of 6 3/8% Notes
due in 2005. A portion of the proceeds were used to redeem $50 million
of 9 1/8% Notes due in 1997. The notes issued by Wisconsin Gas are
unsecured. In addition to the unsecured notes, Wisconsin Gas has
previously issued first mortgage bonds. Substantially all gas
distribution property acquired prior to January 1, 1993 is subject to a
first mortgage lien relating to these bonds. At December 31, 1996,
Wisconsin Gas had outstanding $4 million in first mortgage bonds.
Wisconsin Gas has no plans to issue any additional first mortgage bonds.
Maturities and sinking fund requirements during the succeeding five
years on all long-term debt total $2.0 million, $42.0 million, $2.0
million in 1997, 1998 and 1999, respectively, and zero in 2000 and 2001.
5. RESTRICTIONS
A November 1993 rate order issued by the PSCW sets a 13-month
average equity range of 43% to 50% for the utility and also requires
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, $39.7 million of Wisconsin Gas's net
assets at December 31, 1996, plus future earnings, were available for
such dividends without PSCW approval. In addition, the PSCW must also
approve any dividends in excess of $16 million for any 12-month period
beginning November 1 if such dividends would reduce Wisconsin Gas's 13-
month average equity below 48.43% of its total capitalization. Wisconsin
Gas paid $5 million in dividends in November 1996 and expects to pay
$21.5 million in dividends for the 12 months ending October, 1997. At
December 31, 1996, Wisconsin Gas's equity was 53.3% of its total
capitalization.
6. COMMITMENTS AND CONTINGENCIES
a. Gas Supply
Wisconsin Gas has agreements for firm pipeline and storage
capacity that expire at various dates through 2008. The aggregate
amount of required payments under such agreements totals approximately
$838 million, with annual required payments of $130 million in 1997,
$122 million in 1998, $122 million in 1999, $113 million in 2000 and
$108 million in 2001. Wisconsin Gas's total payments for firm pipeline
and storage capacity prior to recovery from sales of excess capacity
were $129.6 million in 1996, $128.1 million in 1995 and $126.0 million
in 1994. The PGA provisions of Wisconsin Gas's rate schedules permit
the recovery of gas costs from its customers. FERC Order No. 636 permits
pipeline suppliers to pass through to Wisconsin Gas any prudently
incurred transition costs, such as unrecovered gas costs, gas supply
realignment costs and stranded investment costs. Wisconsin Gas estimates
its portion of such costs from all of its pipeline suppliers would
approximate $7.7 million at December 31, 1996 based upon prior filings
with FERC by the pipeline suppliers. The pipeline suppliers will
continue to file quarterly with the FERC for recovery of actual costs
incurred
<PAGE> 30
The FERC has allowed ANR Pipeline Company to recover capacity and
"above market" supply costs associated with quantities purchased from
Dakota Gasification Company ("Dakota") under a long-term contract
expiring in the year 2009. Consistent with guidelines set forth in Order
No. 636, ANR has allocated 90% of Dakota costs to firm transportation
service recoverable through a reservation rate surcharge and 10% to
interruptible service. The FERC has approved a settlement with Dakota
governing the price of Dakota gas. Based on Wisconsin Gas contracted
quantities with ANR, Wisconsin Gas is currently paying approximately
$250,000 per month of Dakota costs. This amount varies month-to-month
and across years based on the spread between ANR contract terms with
Dakota and the market indices for pricing spot gas.
Transition costs billed to Wisconsin Gas are being recovered from
customers under the purchased gas provisions within its rate schedules.
b. Capital Expenditures
Certain commitments have been made in connection with 1997 capital
expenditures. Wisconsin Gas capital expenditures for 1997 are estimated
at $40 million.
c. Environmental Matters
On February 21, 1997, Wisconsin Gas was named by the defendant, in
an environmental cleanup lawsuit, as a co-defendant. The suit involves
contamination of a Milwaukee area industrial site by wood chips
characteristic of those used in the manufactured gas process. Wisconsin
Gas believes it is not the source of the contaminated wood chips and
intends to vigorously defend the suit. Although the Company is unable
to predict the outcome of the litigation, management believes that
amounts recovered from its insurance carriers or through rate recovery
will be sufficient to cover any such liability.
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 possible
remediation alternatives. The Company has estimated that cleanup costs
could range from $22 million to $75 million. As of December 31, 1996,
the Company has accrued $36.2 million for future cleanup costs. 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.
Due to anticipated regulatory treatment, as discussed below, changes in
the recorded liability do not immediately impact net income
<PAGE> 31
The Wisconsin Department of Natural Resources ("WDNR") issued a
Probable Responsible Party letter to Wisconsin Gas for these two sites
in September 1994. Following receipt of this letter, Wisconsin Gas and
WDNR held an initial meeting to discuss the sites. At the meeting it was
agreed that Wisconsin Gas would prepare a remedial action options report
from which it will select specific remedial actions for recommendation
to the WDNR. During 1995 and 1996, the Company gathered specific
environmental data regarding one of the sites in addition to the
previous extensive site investigation data, held extensive discussions
concerning remedial options with current landowners and solicited
information from environmental consulting and remediation firms on
technology and approaches that would best suit the sites. These efforts
were directed toward preparing a remedial action options report and
recommendations for presentation to the WDNR during 1997. Once such a
plan is approved, initial remediation work will begin. Expenditures
over the next three years are expected to total approximately $10.0
million. Although most of the work and the cost are expected to be
incurred in the first few years of the plan, monitoring of sites and
other necessary actions may be undertaken for up to 30 years.
In March 1994, Wisconsin Gas commenced suit against nine insurance
carriers seeking a declaratory judgment regarding insurance coverage for
the two sites. Settlements were reached with each of the carriers
during 1994. Additional insurance recoveries are being pursued. Under
recent PSCW rate orders, Wisconsin Gas expects full recovery of incurred
remediation costs (excluding carrying costs), less amounts recovered
from insurance carriers. Accordingly, a regulatory asset has been
recorded for the accrued cost.
d. Other
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 Wisconsin Gas's financial position or results of operation.
7. COMMON STOCK AND OTHER PAID-IN CAPITAL
During 1994, WICOR invested an additional $5 million in Wisconsin
Gas. No amounts were invested by WICOR in 1996 and 1995.
8. BENEFIT PLANS
a. Pension Plans
Wisconsin Gas has non-contributory pension plans which cover
substantially all its 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 November 1, 1992, Wisconsin Gas pension costs or
credits included in the utility cost of service have been calculated in
accordance with SFAS No. 87 and are recoverable from customers. Prior to
this date, pension costs were recoverable in rates as funded. The
cumulative difference between the amounts funded and the amounts based
on SFAS No. 87 through November 1, 1992 is recorded as a regulatory
liability and is being amortized as a reduction of pension expense over
an eight-year period effective November 1, 1994
<PAGE> 32
The following table sets forth the funded status of pension plans at
December 31, 1996 and 1995.
<TABLE>
<CAPTION>
Assets Exceed Accumulated Benefits
Accumulated Benefits Exceed Assets
---------------------- ----------------------
(Thousands of Dollars) 1996 1995 1996 1995
- ---------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Accumulated benefit obligation
Vested benefits $ (65,835) $ (72,203) $ (3,317) $ (3,979)
Nonvested benefits (15,379) (11,063) (1,400) (921)
---------- ---------- ---------- ----------
(81,214) (83,266) (4,717) (4,900)
Effect of projected future
compensation levels (30,793) (38,178) (581) (642)
---------- ---------- ---------- ----------
Projected benefit obligation (112,007) (121,444) (5,298) (5,542)
Plan assets at fair value 176,991 163,214 - -
---------- ---------- ---------- ----------
Plan assets greater (less) than
projected benefit obligation 64,984 41,770 (5,298) (5,542)
Unrecognized net (asset)
liability at September 30,
1985 being recognized over
approximately 16 years (11,380) (12,855) 498 546
Unrecognized prior service costs 3,358 3,599 137 146
Unrecognized net (gain) loss (26,850) (5,502) 1,132 721
Additional minimum
liability recorded - - (1,206) (899)
---------- ---------- ---------- ----------
Accrued pension asset (liability) $ 30,112 $ 27,012 $ (4,737) $ (5,028)
========== ========= ========== ==========
</TABLE>
The weighted average discount rate assumptions used in determining the
actuarial present value of the projected benefit obligation were 7.75%, 7.5%
and 8.25% for 1996, 1995 and 1994, respectively. The expected long-term rate
of return on assets was 9.0% for 1996 and 8.5% for 1995 and 1994. The
expected long-term rate of compensation growth was 4.5%, 5.0% and 5.5% for
1996, 1995 and 1994, respectively.
Net pension costs for each of the years ended December 31, include the
following (income) expense:
(Thousands of Dollars) 1996 1995 1994
- ------------------------------ ---------- ---------- ----------
Service costs $ 3,732 $ 3,529 $ 4,265
Interest costs on projected
benefit obligations 9,269 9,305 8,860
Actual (gain) loss
on plan assets (21,576) (21,057) 1,880
Net amortization and deferral 6,114 7,232 (15,195)
Gain on early retire incent - - (268)
Amortization of reg liab (2,851) (2,851) (475)
---------- ---------- ----------
Net pension income $ (5,312) $ (3,842) $ (933)
========== ========== ==========
<PAGE> 33
b. Postretirement Health Care and Life Insurance
In addition to providing pension benefits, Wisconsin Gas provides
certain health care and life insurance benefits for retired employees when
they reach normal retirement age while working for Wisconsin Gas. Wisconsin
Gas funds the accrual annually based on the maximum tax deductible amount.
Commencing January 1, 1992, Wisconsin Gas postretirement benefit costs
have been calculated in accordance with SFAS No. 106 and are recoverable from
customers. The cumulative difference between the amounts funded and the
amounts based on SFAS No. 106 through January 1, 1992 is recorded as a
regulatory asset and is being amortized over a twenty-year period effective
January 1, 1992.
Net postretirement health care and life insurance costs for each of the
years ended December 31 consisted of the following components:
(Thousands of Dollars) 1996 1995 1994
- ---------------------- ---------- ---------- ----------
Service cost $ 2,507 $ 1,847 $ 2,492
Interest cost on projected
benefit obligation 5,836 5,336 5,665
Actual (gain) loss on
plan assets (4,695) (6,185) 147
Amortization of regulatory asset 2,778 2,778 2,778
Net amortization and deferral 460 2,477 (2,628)
Loss on early retirement incentive - - 3,650
---------- ---------- ----------
Net postretirement benefit cost $ 6,886 $ 6,253 $ 12,104
========== ========== ==========
The 1994 postretirement benefit cost includes a charge relating to the
early retirement of 131 employees under a voluntary early retirement incentive
plan for employees age 55 and over.
The following table sets forth the plans' funded status, reconciled with
amounts recognized in Wisconsin Gas's Statement of Financial Position at
December 31, 1996 and 1995, respectively.
Accumulated benefit obligation
(Thousands of Dollars) 1996 1995
- ------------------------------------- ---------- ----------
Retirees $ (36,748) $ (38,966)
Active employees (43,179) (37,633)
---------- ----------
Accumulated benefit obligation (79,927) (76,599)
Plan assets at fair value 46,562 39,417
---------- ----------
Accumulated benefit obligation
in excess of plan assets (33,365) (37,182)
Unrecognized prior service costs (14,432) (15,915)
Unrecognized actuarial (gain) loss (3,562) 129
---------- ----------
Accrued postretirement benefit $ (51,359) $ (52,968)
========== ==========
<PAGE> 34
The postretirement benefit cost components for 1996 were calculated
assuming health care cost trend rates beginning at 11% in 1996 and decreasing
to 5.5% in 21 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 accrued postretirement
benefit as of December 31, 1996 by $12.3 million and the aggregate of the
service and interest cost components of postretirement expense by $1.6
million.
The assumed discount rate used in determining the actuarial present
value of the accrued postretirement benefit obligation was 7.75%, 7.5% and
8.25% in 1996, 1995 and 1994, respectively. Plan assets are primarily
invested in equities and fixed income securities.
c. Retirement Savings Plans
Wisconsin Gas maintains various employee savings plans, which provide
employees a mechanism to contribute amounts up to 16% of their compensation
for the year. Wisconsin Gas matching contributions may be made for up to 5% of
eligible compensation including 1% for the Employee Stock Ownership Plan
("ESOP"). See Note 8.d. Total contributions were valued at $1.2 million in
1996 and 1995, and $1.3 million in 1994.
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 (5.8% interest rate at December 31, 1996), guaranteed by WICOR, to
purchase 431,266 shares of WICOR common stock. The ESOP has extended the
adjustable rate loan, with similar terms, until May 31, 2002. Because WICOR
has guaranteed the loan, the unpaid balance ($4.4 million) is shown as long-
term debt with a like amount of unearned compensation being recorded as a
reduction of common equity on WICOR's balance sheet.
The ESOP trustee is repaying the $10 million loan with dividends on
shares of WICOR common stock in the ESOP and with Wisconsin Gas contributions
to the ESOP.
e. Postemployment Benefit Plans
Effective January 1, 1994 the Company adopted SFAS No. 112, "Employers'
Accounting for Postemployment Benefits," which requires accrual for all other
postemployment benefits. Total postemployment benefit expense was immaterial
in 1996 and $0.6 million in 1995 and 1994, including a one-time cumulative
adjustment in 1994. The incremental costs of adopting this statement are not
material on an ongoing basis
<PAGE> 35
9. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash and cash equivalents, accounts receivable and
short-term borrowings approximates fair value due to the short-term maturities
of these 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 Wisconsin Gas's bond rating and the present value of
future cash flows.
Because Wisconsin Gas operates in a regulated environment, WICOR, as the
sole shareholder of WISCONSIN Gas, would probably not be affected by
realization of gains or losses on extinguishment of Wisconsin Gas's
outstanding fixed-rate debt. Realized gains would be refunded to and losses
would be recovered from Wisconsin Gas customers through gas rates.
The estimated fair value of Wisconsin Gas's long-term debt at December
31 is as follows:
<TABLE>
<CAPTION>
1996 1995
------------------ ------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 8,960 $ 8,960 $ 7,463 $ 7,463
Accounts receivable $ 73,540 $ 73,540 $ 65,477 $ 65,477
Short-term debt $ 65,500 $ 65,500 $ 57,500 $ 57,500
Long-term debt $152,453 $152,154 $154,246 $156,041
</TABLE>
10. QUARTERLY FINANCIAL DATA (Unaudited)
Because seasonal factors significantly affect Wisconsin Gas
operations, the following data is not comparable between quarters:
(Thousands of dollars) First Second Third Fourth
- ----------------------- --------- ---------- --------- ----------
1996
Operating Revenues $216,111 $ 107,269 $ 71,951 $ 178,265
Operating Income (Loss) $ 46,753 $ 2,734 $ (8,748) $ 24,228
Net Income (Loss) $ 26,502 $ 1 $ (6,976) $ 12,833
1995
Operating Revenues $192,484 $ 93,985 $ 70,959 $ 161,970
Operating Income (Loss) $ 38,572 $ 2,226 $ (8,492) $ 27,356
Net Income (Loss) $ 21,532 $ (570) $ (7,332) $ 14,447
<PAGE> 36
Index to Exhibits Exhibits
3.1 Wisconsin Gas Company Restated Articles of Incorporation, as
amended (incorporated by reference to Exhibit 3.1
to the Company's Form 10-K Annual Report for 1988).
3.2 Amendment to Wisconsin Gas Company By-laws, effective
February 28, 1995 (incorporated by reference to
Exhibit 3.2 to the Company's Form 10-K Annual
Report for 1994).
3.3 Wisconsin Gas Company By-laws, as amended (incorporated by
reference to Exhibit 3.3 to the Company's Form 10-K Annual Report for
1994).
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 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).
4.3 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).
4.4 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 dated November 19, 1991).
4.5 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).
4.6 Officers' Certificate, dated as of November 7, 1995, setting
forth the terms of the Company's 6-3/8% Notes due
2005 (incorporated by reference to the Company's
Form 8-K Current Report dated November 7, 1995).
4.7 Revolving Credit Agreement dated as of March 29, 1993, among
Wisconsin Gas Company and the Bank of New York,
Citibank, N.A., Firstar Bank 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)
<PAGE> 37
4.8 Extension of Revolving Credit Agreement dated as of March 10,
1995, among Wisconsin Gas Company and Citibank,
N.A., Firstar Bank Milwaukee, N.A., Harris Trust and
Savings Bank, M&I Marshall & Ilsley Bank and
Citibank, N.A., as Agent (incorporated by reference
to Exhibit 4.1 to the Company's Quarterly Report on
Form 10-Q dated April 28, 1995).
4.9 Loan Agreement dated as of March 29, 1996, by and among ABN
AMRO Bank N.V., Wisconsin Gas Company Employee's
Savings Plans Trust and WICOR, Inc. (incorporated by
reference to Exhibit 4.1 to the Company's Quarterly
Report on Form 10-Q dated as of April 26, 1996).
4.10 WICOR, Inc. Master Savings Trust Agreement dated as of
October 1, 1996, between WICOR, Inc. and Marshall &
Ilsley Trust Company (incorporated by reference to
Exhibit 4.1 to the Company's Quarterly Report on
Form 10-Q dated as of October 30, 1996).
4.11* First Amendment, dated as of November 27, 1996, to Loan
Agreement, dated as of March 29, 1996, by and among
WICOR, Inc. Master Savings Trust (formerly the
Wisconsin Gas Company Employees' Savings Plans
Trust), WICOR, Inc. and ABN AMRO Bank, N.V.
10.1 Service Agreement dated as of June 1, 1994, among WICOR,
Inc., Wisconsin Gas Company, WEXCO of Delaware,
Inc., Sta-Rite Industries, Inc. and SHURflo Pump
Manufacturing Co. (incorporated by reference to
Exhibit 10.1 to the Company's Form 10-K Annual
Report for 1995).
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 connec-
tion with the WICOR, Inc. 1987 Stock Option Plan
(incorporated by reference to Exhibit 10.20 to the
Company's Form 10-K Annual Report for 1991).
10.4# WICOR, Inc. 1992 Director Stock Option Plan (incorporated by
reference to Exhibit 4.1 to WICOR, Inc.'s Form S-8
Registration No. 33-67132).
10.5# Form of nonstatutory stock agreement used in conjunction with
the WICOR, Inc. 1992 Director Stock Option Plan
(incorporated by reference to Exhibit 4.2 to WICOR,
Inc.'s Form S-8 Registration Statement No. 37-
67132).
10.6# WICOR, Inc. 1994 Long-Term Performance Plan (incorporated by
reference to Exhibit 4.1 to the WICOR, Inc. Form S-
8 Registration Statement No. 33-55755).
10.7# Form of nonstatutory stock option agreement used in
connection with the WICOR, Inc. 1994 Long-Term
Performance Plan (incorporated by reference to
Exhibit 4.2 to the WICOR, Inc. Form S-8
Registration Statement No. 33-55755).
<PAGE> 38
10.8# Form of restricted stock agreement used in connection with
the WICOR, Inc. 1994 Long-Term Performance Plan
(incorporated by reference to Exhibit 4.3 to the
WICOR, Inc. Form S-8 Registration Statement No. 33-
55755).
10.9# Wisconsin Gas Company Principal Officers' Supplemental
Retirement Income Program (incorporated by
reference to Exhibit 10.6 to the Company's Form 10-
K Annual Report for 1993).
10.10*# Wisconsin Gas Company 1997 Officers' Incentive
Compensation Plan.
10.11# 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).
10.12# 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).
10.13# 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. 1996 Annual Report
to Shareholders.
27* Financial Data Schedule. (EDGAR version only)
* Indicates document filed herewith.
# Indicates a plan under which compensation is paid or payable to directors
or executive officers of the Company
<PAGE> 1
EXHIBIT 4-11
FIRST AMENDMENT
TO
LOAN AGREEMENT
This First Amendment to the Loan Agreement is made and entered
into as of the 27 day of November, 1996, by and among the WICOR, Inc., Master
Savings Trust (formerly the Wisconsin Gas Company Employees' Saving Plans
Trust), (the "Trust"), WICOR, Inc. (the "Company") and ABN AMRO Bank N.V., a
bank organized under the laws of the Netherlands and acting through its
Chicago branch (the "Bank"). All terms not otherwise defined herein shall
have the meanings assigned to such terms in the Loan Agreement by and among
the Trust, the Company and the Bank dated as of March 29, 1996 (the
"Agreement").
W I T N E S S E T H:
WHEREAS, the stated maturity of the ESOP Note (as amended) is
August 31, 2001; and
WHEREAS, the Trust has requested that the principal repayment
schedule of the ESOP Note be revised and that the maturity date of the ESOP
Loan be extended until May 31, 2002 and the Bank is agreeable to such
extension;
NOW, THEREFORE, the parties hereto agree as follows:
1. Amendment of Subsection 2.1. Subsection 2.1 of the
Agreement shall be, and it hereby is, amended by deleting the first sentence
thereof in its entirety and, in lieu thereof, inserting the following:
"Subject to the terms and conditions hereof, the Bank
agrees to lend to the Trust, on the Effective Date, Five Million
Eleven Thousand Two Hundred Forty-Eight Dollars ($5,011,248.00),
which amount shall be payable in thirty-one (31) consecutive
principal installments, consisting of two (2) consecutive
Quarterly principal installments of Two Hundred Thirty-Five
Thousand Dollars ($235,000.00) each payable on the last business
day of May, 1996 and August, 1996; one (1) principal installment
of One Hundred Thirty-Five Thousand ($135,000.00) payable on the
last business day of November, 1996; six (6) principal
installments of Sixty-Seven Thousand Dollars ($67,000.00) each
payable on the last business day of January of each year
commencing January 31, 1997; sixteen (16) Quarterly principal
installments of Two Hundred Thousand Dollars ($200,000.00) each
payable on the last business day of February, May and August of
each year commencing on February 28, 1997; five (5) quarterly
principal installments of One Hundred Thirty-Three Thousand
Dollars ($133,000.00) each payable on the last business day of
November of each year commencing on November 28, 1997; and a final
payment in the amount of the outstanding balance of the ESOP Loan
on May 31, 2002.
<PAGE> 2
2. Amendment of Subsection 2.2. Subsection 2.2 of the
Agreement shall be, and it hereby is, amended by deleting part (b) thereof in
its entirety and, in lieu thereof, inserting the following:
"(b) be stated to mature on May 31, 2002, and be payable as
provided in subsection 2.1 hereof, and"
3. Effectiveness of Amendment. This Amendment shall become
effective upon receipt by the Bank of (i) a copy of this Amendment duly
executed by the Trust, the Bank and the Company, (ii) the Consent of
Guarantor attached to this Amendment duly executed by the Company, and (iii)
the Amended and Restated Promissory Note substantially in the form attached
hereto as Exhibit A executed by the Trust which Note shall hereinafter
constitute the ESOP Note.
4. Miscellaneous.
(a) The Trust hereby represents and warrants to the Bank that all
of the representations and warranties made by the Trust in the Loan
Documents are true and correct on the date of this Amendment and that no
Default or Event of Default under the Agreement has occurred and is
continuing as of the date of this Amendment.
(b) The Company hereby represents and warrants to the Bank that
all of the representations and warranties made by the Company in the
Loan Documents are true and correct on the date of this Amendment; that
no Default or Event of Default under the Agreement has occurred and is
continuing as of the date of this Amendment; that the making, execution
and delivery of this Amendment, and performance of and compliance with
the terms of the Agreement, as hereby amended, (i) have been duly
authorized by the Boards of Directors of Wisconsin Gas and of the
Company and by all other actions, (ii) do not and will not conflict
with, contravene or violate any provision of, or result in a breach of
or default under, or require the waiver (not already obtained) of any
provision of or the consent (not already given) of any Person under the
terms of, the Trust Agreement and (iii) will not violate, conflict with,
or constitute a default under any law, regulation, order or any other
requirement of any court, tribunal, arbitrator, or Governmental
Authority; that the Agreement, as amended hereby and the ESOP Note, as
now amended and restated by the Amended and Restated Promissory Note
constitute valid and legally binding obligations of the Trust, and are
enforceable in accordance with their respective terms, except as limited
by bankruptcy, insolvency, reorganization, moratorium or other laws
relating to or affecting generally the enforcement of creditors' rights.
(c) Each reference in the Agreement to "this Agreement" and each
reference in the ESOP Note and the Guaranty to "Agreement" shall be
deemed a reference to the Agreement as amended by this Amendment.
(d) Except as amended by this Amendment, the terms and
conditions of the Agreement shall remain in all other respects in full
force and effect
<PAGE> 3
(e) The Company acknowledges and agrees that pursuant to
subsection 11.6 of the Guaranty, the Company shall cause Wisconsin Gas
to reimburse the Bank for all of its out-of-pocket costs and expenses
incurred in connection with this Amendment, including the fees and
disbursements of the counsel to the Bank for the preparation hereof and
expenses incurred in connection herewith.
(f) This Amendment and the rights and obligations of the parties
hereto shall be governed by the laws of the State of Illinois.
IN WITNESS WHEREOF, the parties hereto have caused this First
Amendment to Loan Agreement to be executed by their respective officers as of
the date first written above.
MARSHALL & ILSLEY TRUST COMPANY,
AS TRUSTEE FOR THE WICOR, INC.
MASTER SAVINGS TRUST, (formerly the
WISCONSIN GAS COMPANY
EMPLOYEES' SAVINGS PLANS TRUST)
By:
(Title)
WICOR, INC.
By:
(Title)
ABN AMRO BANK N.V., CHICAGO BRANCH
by ABN AMRO North America Inc., as agent
By:
(Title)
By:
(Title)
<PAGE> 4 CONSENT OF GUARANTOR
The undersigned hereby (i) acknowledges and agrees that the
Guaranty executed by the undersigned related to the ESOP Note and Loan is and
remains in full force and effect subject to no defense, counterclaim or offset
of any kind, (ii) acknowledges its receipt of a copy of the foregoing
Amendment, acknowledges that it has received notice of the extension of the
time for payment of the ESOP Loan pursuant to such Amendment and hereby
consents and agrees to the terms of the forgoing Amendment, all in accordance
with Section 7 of the Guaranty and (iii) acknowledges and agrees that the
giving of the undersigned's consent to the foregoing Amendment shall not in
any way be construed to require the giving of the undersigned's consent to any
future amendment.
Dated as of November 27, 1996.
WICOR, INC.
By:
(Title
<PAGE> 1
EXHIBIT 10.10
Wisconsin Gas Company
1997 Officer's Incentive Compensation Plan
I. Objectives
The principle objectives of the Plan are:
A. To motivate and to provide incentive for officers and executive
management (EMT) of Wisconsin Gas Company to create economic value.
B To ensure a focus on earning a return on capital in excess of the
cost of capital while also achieving the performance plus goals.
C. To assist in the retention of quality senior management.
D. To yield competitive total compensation levels when performance goals
meet the cost of capital requirement.
II. Eligibility
Participation in the Plan is limited to designated officers and EMT of
Wisconsin Gas. The Chief Executive Officer of WICOR will be responsible
for recommending eligibility changes to the Compensation Committee of
the Board of Directors of WICOR, Inc.
III. Amount of Potential Award
A. The minimum, target and maximum award opportunities for each
participant, as a percentage of base salary (W-2 base salary calendar
earnings), are as follows:
Award as a Percent of Salary
----------------------------------------
Position Minimum Target Maximum
- ------------------ ------- ------ -------
President & CEO 0% 40% 87%
VP and EMT 0% 20% 43.5%
B. Each executive's award will be determined based on a combination of
WGC and individual performance, with WGC performance accounting for 75%
of the award and individual performance weighted at 25%
<PAGE> 2
IV. Performance Criteria and Objective Setting
A. Financial Component (75% Weight)
1.) Overall WGC performance will be measured by Return on Capital
(ROC), which is defined as NOPAT (Net Operating Profit After
Tax) divided by Total Capital Employed (NOPAT and Total Capital
Employed are defined in Appendix I). Threshold, Target, and
Maximum ROC performance levels, and their corresponding
incentive awards are as follows:
1997 Return Award as a %
Performance Level on Capital of Target
- ----------------- ---------------- -------------
Below Threshold Less than 6.0% 0%
Threshold 6.0% 1%
Target 7.0%* 100%
Maximum or Above 9.1% 200%
* WGC Cost of Capital = 7.0%
For performance at levels between Threshold and Target or between Target
and Maximum, award calculations will be interpolated on a linear basis.
2). ROC payouts will be further modified by performance against
budgeted criteria denoted as "Performance Plus" (the modifier).
Performance Plus consists of Rate Comparison, Customer Service,
Safety, and Cost Effectiveness. Each year management will recommend
specific goals for the aforementioned criteria. Associated with
various levels of performance for each goal will be a certain number
of award points. The cumulative total of these points will determine
the modification factor. As seen below, achievement of Performance
Plus can modify the award by +/- 20%, or eliminate the award if the
threshold number of points is not achieved.
Award
Performance Plus Performance Plus modification as
Achievement Points a % of Target
- ---------------- ------------------- ---------------
Below Threshold Less than 12 points 0%
Threshold 12 points 80%
Target 24 points 100%
Maximum 40 points 120%
For performance at levels between Threshold and Target or between
Target and
Maximum award calculations will be interpolated on a linear basis
<PAGE> 3
B. Discretionary/Individual Component (25% Weight)
The individual component of total incentive compensation will be based
on the individual's overall performance as measured against previously
identified and agreed upon goals and objectives. The award may vary
between 0% and 150% of the individual performance portion of the target
award, and will be determined and paid independently of Company
financial performance.
Combining the previously mentioned components yields the following
formula for determining annual incentive payouts:
Step 1 [ Base Salary x Eligible Target % ]
Multiplied by sum of step 2 and step 3
Step 2 [(ROC Award % x Performance Plus Modifier %) x 75%]
Plus
Step 3 [Discretionary % x 25%]
Equals
Annual Incentive Award
C. The company intends to hold the proposed financial/operational
performance standards constant for at least three years, with annual
reviews to ensure reasonableness vis-a-vis external market conditions.
This is especially relevant with regard to the cost of capital, which is
the key determinant of performance levels for the ROC measure. The cost
of capital should be re-examined if there is a 100 basis point
increase/decrease in the 30-year Treasury bond rate. (For example,
based on the current rate of 7.0%, an increase in rates to 8.0% or more
or a decrease in rates to 6.0% or less would trigger a review of the
cost of capital.)
D. If the Compensation Committee of WICOR, Inc. determines that corporate
performance was inadequate, it may exercise discretion to reduce or
eliminate any or all bonus payments
<PAGE> 4
V. Performance
Company performance goals will be for the 1997 calendar year.
VI. Treatment of Acquisitions and Investments
A. Acquisitions
The capitalized value (NOPAT/Target's Cost of Capital) of the
acquired entity's last full year's NOPAT will be added to the capital base of
the acquiring business unit in the month of acquisition. The acquisition
premium (defined as the excess of the purchase price over the capitalized
value ) will be incorporated into the capital base at a rate of 20% per year
starting at the beginning of the first calendar year after the acquisition.
B. Investments
The entire value of investments of an operating nature (capital
expenditures) will be added to the capital base. However,
investments of a significant dollar amount, whose project life
extends beyond ten years, will be reviewed by management for
potential adjustments to the capital base (similar to the treatment
for acquisitions).
VII. Form and Timing of Award Payments
A. Awards will be determined and paid as soon as practicable after the
close of the Plan year.
B. At each participant's discretion and with the concurrence of the
Compensation committee of WICOR, Inc., awards may be paid in one of
three ways:
1. Lump sum.
2. Partly in lump sum and the remainder in deferred annual
installments.
3. Completely in deferred annual installments.
C. The Company will offer a deferred payment option to those officers
who prefer not to receive their awards in current cash, following
these guidelines:
1. Deferred incentive award payments will be carried as an accrued
liability with an interest rate (three-year treasury bill rate)
credited each year.
2. Deferred elections must be made prior to June 30, 1997,
and a definite time period for deferral must be specified
<PAGE> 5
D. Additionally, if performance significantly exceeds the maximum
standard established, the Compensation Committee has the discretion
to provide an incentive payout in excess of the maximum allowable
payout. However, any exceptional performance which qualifies for
this award, must be a direct result of management efforts and not due
to external factors beyond management's control. Any awards in
excess of the maximum payout opportunity would be paid in WICOR
restricted stock which would vest ratably over five years. However,
if a participant terminates employment due to death, retirement, or
disability, any prior restricted stock awards made under this
provision would become immediately vested.
E. In the event the company's overall ROC is negatively impacted by the
inclusion of a newly acquired company's results, the compensation
committee has the discretion to make a supplemental incentive
payment. The supplemental payment will be considered if the acquired
company is meeting the financial projections established at the time
of the acquisition and the officers of the acquiring entity would
have otherwise received a higher incentive payment had it not been
for the inclusion of the acquired entity's results. The purpose of
this supplemental incentive provision is to motivate officers to
invest in value building projects. The duration of the supplemental
incentive period will be no more than three years.
VIII. Implementation
A. The effective date of the Plan is January 1, 1997.
IX. Plan Administration
A. Compensation Committee
1. The Plan will be administered by the Compensation Committee of
the Board of Directors of WICOR, Inc.
2. The Committee's administration is subject to approval of the
Board of Directors of WICOR, Inc.
3. The decisions of the Board are final and binding on all Plan
participants.
4. The Board retains the right to terminate or amend the Plan as
it may deem advisable.
<PAGE> 6
B. Partial Year Participation
1. Participants must be employed by the Company on the last day of
the Plan year in order to receive a bonus for that year.
However, once earned, a bonus will be paid to a participant
regardless of whether he/she is employed by the company on the
date payment is made.
2. Awards for part year participants will be pro-rated based on
the proportion of the year that the participant was in the
Plan. This includes participants who terminate employment due
to death, disability or retirement.
3. Participants who terminate employment with the Company prior to
the last day of the plan year shall forfeit all rights to an
incentive award payment under the Plan except for terminations
due to death, retirement or disability.
4. A participant is deemed to be disabled if he/she becomes
eligible for benefits under the Company's Long Term Disability
Plan
<PAGE> 7
Appendix 1
DEFINITION OF TERMS
Wisconsin Gas Company
NOPAT-Net Operating Profit After Taxes-is calculated as follows:
Net Income per financial statements
Plus the change in specific equity equivalents (net of tax):
Uncollectible Reserve
Regulatory Assets and liabilities (except for Environmental liability
related)
Injuries and Damage Reserve
Assets or Liabilities for Deferred Compensation Plans
Other Post Employee Benefits (Medical and Life Insurance)
Pension Expense (Qualified and non-Qualified)
Plus interest expense (net of tax)
Capital-An approximation of the economic book value of cash invested. Capital
is the sum of:
Shareholders equity
Long and short term debt
Capital Equivalents (net of tax)
Measurement of capital employed is determined using a 13 month rolling
average
9
A:\WISGAS.WPD
<PAGE> 1
EXHIBIT 13
Management's Discussion and Analysis
GENERAL OVERVIEW
WICOR, Inc. ("WICOR" or the "Company") is a diversified holding company with
Energy and Manufacturing business groups. The Energy group provides natural
gas distribution and related services and the Manufacturing group manufactures
and distributes, both domestically and abroad, pumps and equipment used to
pump, control, transfer, hold and filter water and other fluids. The Energy
group includes Wisconsin Gas Company ("Wisconsin Gas"), the oldest and largest
natural gas distribution utility in Wisconsin.
In 1996, WICOR posted record net earnings for the second consecutive year. Net
income increased 18% and earnings per share rose 10% in 1996 as compared with
1995, as both the Company's energy and manufacturing businesses posted
significantly improved results. Net income and earnings per share in 1995 rose
19% and 17%, respectively, from the previous year.
In 1996, the improvement in the Energy group was due to internal cost
reductions and increased sales caused by weather that was colder than normal
and colder than the prior year. Manufacturing operations in 1996 showed
improvement in the water systems, pool/spa, food service, industrial,
RV/marine and fire fighting product lines.
Net cash flow from operations for the years 1994 through 1996 totaled $248.9
million. During that period, the Company's cash flow provided funding for
$163.0 million of capital expenditures, $58.3 million in acquisitions and
$81.2 million of dividends. Segment data for WICOR's operations for the last
three years are summarized below in millions of dollars.
Operating Revenues 1996 1995 1994
- --------------------- -------- -------- --------
Energy $ 602.7 $ 522.8 $ 556.6
Manufacturing-Domestic 269.0 207.6 197.0
Manufacturing-Foreign 140.9 130.2 114.2
-------- -------- --------
$1,012.6 $ 860.6 $ 867.8
======== ======== ========
Depreciation and Amortization 1996 1995 1994
- ----------------------------- -------- -------- --------
Energy $ 40.9 $ 36.7 $ 37.4
Manufacturing-Domestic 10.7 8.8 7.0
Manufacturing-Foreign 3.3 3.0 2.7
-------- -------- --------
$ 54.9 $ 48.5 $ 47.1
======== ======== ========
Operating Income 1996 1995 1994
- ---------------------- -------- -------- --------
Energy $ 64.5 $ 58.8 $ 44.4
Manufacturing-Domestic 19.7 13.7 15.1
Manufacturing-Foreign 6.5 6.6 7.1
-------- -------- --------
$ 90.7 $ 79.1 $ 66.6
======== ======== =======
<PAGE> 2
Actual
Estimated ------------------------------
Capital Expenditures 1997 1996 1995 1994
- ---------------------- -------- -------- -------- --------
Energy $ 40.2 $ 36.6 $ 42.9 $ 44.6
Manufacturing-Domestic 15.3 11.3 8.2 7.1
Manufacturing-Foreign 4.5 3.8 5.1 3.4
-------- -------- -------- --------
$ 60.0 $ 51.7 $ 56.2 $ 55.1
======== ======== ======== ========
Identifiable Assets 1996 1995 1994
- ---------------------- -------- -------- --------
Energy $ 751.1 $ 718.3 $ 707.9
Manufacturing-Domestic 215.8 206.5 152.2
Manufacturing-Foreign 90.8 83.7 70.6
-------- -------- --------
$1,057.7 $1,008.5 $ 930.7
======== ======== ========
RESULTS OF OPERATIONS
Energy Group
The Energy group's primary business is the distribution of natural gas through
Wisconsin Gas. In 1995, the Company formed two non-regulated energy services-
related businesses: WICOR Energy, a gas marketing company, and FieldTech,
whose operations include contract meter reading, management of field
operations and billing services for investor owned and municipal gas, water
and electric utilities. The Company views these businesses as important
elements in meeting increased competition in the natural gas industry and as a
new source of growth for its energy related operations. Operating and net
income derived from the energy services related businesses are not material to
the Company at the present time.
The increase in Energy group operating income of $5.7 million, or 10%, in 1996
compared to 1995 was due primarily to decreased operating and maintenance
expenses and increased sales margins resulting from colder weather. The
improvements were partially offset by higher depreciation expense and
voluntary annualized rate reductions totaling $7.5 million.
Increased sales margins and lower operating expenses resulted in an increase
in operating income in 1995 as compared with 1994.
Revenues, margins and volumes are summarized below. Margin, defined as
revenues less cost of gas, is a better comparative performance indicator than
revenues. Transportation service revenues are recorded at the same margin as
sales with no corresponding cost of gas amount. Therefore, for a given rate
class within the regulated business, the volume mix between sales and
transportation service affects revenues but not margin. In addition, changes
in cost of gas flow through to revenue under a gas adjustment clause, with no
effect on margin. The following tables set forth margin and volume data for
the Energy group and utility, respectively, for each of the years ended
December 31
<PAGE> 3
[millions of dollars] 1996 1995 1994
- ------------------------- -------- -------- --------
Energy group revenue $ 588.3 $ 515.0 $ 550.0
Cost of gas sold 393.7 322.2 357.5
Sales margin 194.6 192.8 192.5
Gas transportation margin 14.4 7.8 6.6
-------- -------- --------
Total margin $ 209.0 $ 200.6 $ 199.1
======== ======== ========
[millions of therms] 1996 1995 1994
- -------------------------- -------- -------- --------
Sales volumes
Firm 883 841 795
Interruptible 196 314 282
Transport volumes 276 145 119
-------- -------- --------
Total throughput 1,355 1,300 1,196
======== ======== ========
Total Energy group margin increased by 4% and 1% in 1996 and 1995,
respectively. The increase in 1996 margin was largely the result of a 5%
increase in firm sales volumes which was partially offset by voluntary rate
reductions. Utility margin rates have been reduced an aggregate of $10.1
million as a result of a November 1994 rate order of the PSCW and voluntary
annualized rate reductions of $4.5 million in 1995 and $3.0 million in 1996.
These margin reductions have been more than offset by decreases in operating
expenses. The weather in 1996 was 7% colder than normal and 9% colder than
1995. The increase in transportation volumes in 1996 was due mainly to more
customers purchasing gas from sources other than Wisconsin Gas and
transporting the volumes over the Wisconsin Gas distribution system. The
movement in transportation from gas sales had no impact on margin. The
increase in 1995 margin was due to higher volume sales which resulted
primarily from weather which was 6% colder than 1994, offset in part by the
voluntary rate reductions discussed above.
Operation and maintenance expenses decreased $1.2 million, or 1%, for 1996 as
compared with 1995 as a result of the Company's continuing efforts to reduce
operating costs. The decrease was due mainly to lower labor and related
benefit expenses ($4.3 million) which was partially offset by a one-time $3.0
million amortization of the uncollectible accounts receivable regulatory asset
approved by the PSCW in the fourth quarter of 1996.
In 1995, operation and maintenance expenses decreased by $12.3 million, or 11%
as compared with 1994. The decrease was due primarily to lower labor and
related benefit expenses ($6.3 million), the November 1994 rate reduction
which reduced non-cash amortizations by $5.7 million, and the nonrecurrence of
a one-time charge of $2.7 million relating to a 1994 early retirement program
taken in the first quarter of 1994. Since July 1993, the Wisconsin Gas work
force has declined by 394 employees, or 29%, through early retirement,
involuntary severance and attrition
<PAGE> 4
Depreciation expense for 1996 increased by $3.9 million, or 14%, compared with
1995. The increase was due to additions to plant and increased depreciation
rates permitted by the PSCW. Depreciation expense is expected to decrease in
1997 due to the second-year impact of the 1996 PSCW approved depreciation
rates, and thereafter increase due to planned capital investments.
Depreciation expense was relatively flat in 1995 as compared with 1994.
Manufacturing Group
In December 1996, the Company established WICOR Industries, Inc., ("WICOR
Industries"), an intermediate manufacturing holding company. The establishment
of WICOR Industries improves the Company's ability to raise debt capital for
its manufacturing businesses at a lower cost and secures additional
flexibility in structuring borrowings.
Financial data regarding the Manufacturing group are set forth in the table
below.
[millions of dollars] 1996 1995 1994
- ------------------------ -------- -------- --------
Revenues $ 409.9 $ 337.8 $ 311.2
Cost of sales 297.1 245.7 222.7
-------- -------- --------
Gross profit 112.8 92.1 88.5
Operating expenses 86.6 71.8 66.3
-------- -------- --------
Operating income $ 26.2 $ 20.3 $ 22.2
======== ======== ========
Manufacturing sales in 1996 increased $72.1 million, or 21%, to $409.9 million
compared to the same period in 1995. Hypro Corporation ("Hypro"), which was
acquired by the Company in July 1995 (See Note 2 of Notes to Consolidated
Financial Statements), contributed $44.3 million and $18.4 million to the
Manufacturing group's total net sales for 1996 and 1995, respectively.
Domestic sales increased $61.4 million, or 30%, to $269.0 million. Overall
shipments for water systems, pool and spa, food service, industrial and
firefighting applications continued their upward trend from last year.
International sales increased by 8% in 1996 as compared with 1995. Although
international sales increased to $140.9, they were hampered by sluggish
economic conditions and unfavorable weather in Europe.
Manufacturing sales in 1995 were $337.8 million, an increase of 9% over 1994.
International sales increased by 14% while domestic sales increased by 5% over
the comparable period in 1994.
Manufacturing operating income in 1996 was $26.2 million compared with $20.3
million in 1995 and $22.2 million in 1994. The increase in 1996 operating
income was due to increased sales levels and strong domestic operating
performances, particularly in the water systems, pool/spa, food service,
industrial, RV/marine and firefighting segments
<PAGE> 5
The 1995 decrease in operating income was the result of soft demand in
domestic markets, sharply higher material costs in both domestic and
international operations and a falloff in the Company's Australian operations.
Furthermore, a combination of substantially reduced manufacturing inventories
in North America and lower sales domestically and in Australia resulted in
underutilized manufacturing capacity for the year.
Operating expenses increased by 20.6% in 1996 over 1995 due
primarily to increased sales-related expenses. Operating expenses increased in
1995 by 8% over 1994. As a percentage of sales, 1996 operating expenses were
slightly lower than in 1995 and 1994.
In order to reduce costs and improve productivity and asset utilization, the
Company consolidated its manufacturing operations. These activities resulted
in the 1996 closing of a manufacturing plant located in Detroit, Michigan. In
addition, the Company announced, in 1997, the closing of a second plant
located in Waterford, Wisconsin. As a result of these closures, the Company
recorded an after-tax charge of $0.7 million. The closing of the Waterford
plant is expected to be completed in 1997 and includes combining certain
manufacturing support and administrative functions which will result in a net
reduction of approximately 50 positions.
INTEREST EXPENSE, OTHER INCOME AND INCOME TAXES
Interest expense of $18.4 million for 1996 was $0.9 million, or 5%, lower than
for the prior year, primarily due to lower average interest rates. The lower
rates were partially offset by increased debt incurred to finance the Hypro
acquisition.
The 1995 increase in interest expense as compared to 1994 resulted primarily
from increased manufacturing borrowings for higher international working
capital requirements, the debt incurred for the Hypro acquisition and slightly
higher interest rates.
Other income decreased by $1.3 million in 1996 as compared with 1995. Other
income in 1995 was positively impacted by the sale of the Company's investment
in Filtron Technologies Corporation, for an after-tax gain of $0.8 million
($0.05 per share).
Income tax expense increased $4.0 million in 1996 compared to 1995 reflecting
increased pre-tax income. The effective income tax rate was lower in 1994 than
in either 1996 or 1995 largely as a result of the utilization of foreign tax
incentives and the settlement of disputed tax matters.
ACCOUNTING CHANGES
In 1996, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." The Statement establishes accounting
standards for the impairment of long-lived assets, certain identifiable
intangibles and goodwill related to those assets and regulatory assets. There
was no material effect on the financial statements from the adoption because
the Company's prior impairment recognition practice was consistent with the
major provisions of SFAS No. 121
<PAGE> 6
In 1996, the Company also adopted SFAS No. 123, "Accounting for Stock Based
Compensation." SFAS No. 123 permits either recording the estimated value of
stock-based compensation over the applicable vesting period or disclosing the
unrecorded cost and the related effect on earnings per share in the Notes to
Consolidated Financial Statements. The Company will apply the latter approach
and comply with the disclosure provisions of the new Statement (See Note 9 of
Notes to Consolidated Financial Statements).
EFFECTS OF CHANGING PRICES
It is management's view that changes in the rate of inflation have not had a
significant effect on WICOR's income over the past three years. Inflationary
increases in recent years have been recovered through productivity
improvements and/or product price increases. The Company continues to monitor
the impact of inflation in order to minimize its effects in future years
through pricing strategies, productivity improvements and cost reductions.
In November 1994, Wisconsin Gas received approval from the PSCW to use an
alternative method of rate making that includes a three-year margin rate cap.
In 1996, the PSCW approved a one-year extension of the margin rate cap. After
reviewing the impact of the margin rate cap and other factors, management
believes that Wisconsin Gas productivity improvements have offset the impact
of inflationary cost increases. This alternative method is discussed on page
23 under "Regulatory Matters."
LIQUIDITY AND CAPITAL RESOURCES
Cash flows from operations remain strong and continues to provide the
principal source of the Company's liquidity. WICOR's ability to attract the
necessary financial capital at reasonable terms is critical to the Company's
overall strategic plan. Acquisitions and investments have been initially
financed with short-term debt and later permanently funded with various long-
term debt securities or common equity, depending on market conditions. Working
capital was $83.4 million at the end of 1996 compared to $74.6 million and
$72.9 million at the end of 1995 and 1994, respectively. The current ratio was
1.3 as of December 31, 1996, 1995 and 1994.
Cash flows from operating activities increased by $5.5 million to $75.4
million in 1996 as compared with 1995. Due to the seasonal nature of the
energy business, accrued revenues, accounts receivable, accounts payable and
gas in storage levels are higher in the heating season as compared with the
summer months. The Company stores gas during the non-heating months and
withdraws the gas during the heating months. Cash used to purchase gas
injected into storage increased by $9.5 million due to timing of withdrawals
and a higher 1996 weighted average cost of gas relative to 1995. Withdrawals
from storage during 1996 were 27% lower than in 1995. As customers take
advantage of deregulation within the natural gas industry and move to purchase
their own gas supplies directly from producers or brokers, the impact of gas
purchases on the cash flow of the energy business may diminish.
Over the next three years, the Company believes that cash provided from
operating activities will satisfy anticipated cash requirements, excluding
acquisitions and scheduled debt retirements
<PAGE> 7
INVESTMENT ACTIVITIES
Capital expenditures decreased by $4.5 million in 1996 compared to 1995 and
were relatively flat in 1995 compared to 1994. Consolidated capital
expenditures are expected to increase modestly in 1997, and are expected to be
funded from operations.
In January 1995, WICOR sold its interest in Filtron Technologies Corporation,
a manufacturer of filtration products, for approximately $5.1 million.
In July 1995, the Company acquired Hypro for $58 million in cash and the
assumption of $13.3 million in operating liabilities. The purchase was
initially financed with borrowings under a credit facility entered into in
connection with the acquisition. A portion of these borrowings were repaid
during 1995 with the net proceeds from an offering of WICOR common stock. See
"Financing Activities" and Note 2 of Notes to Consolidated Financial
Statements for further information.
In 1992, the PSCW issued an order prescribing an equity-based formula for
determining the limitation on nonutility investments. As of December 31, 1996,
WICOR would be permitted to invest an additional $56.6 million in nonutility
equity under this order. Nonutility subsidiaries can also borrow additional
amounts for acquisitions within certain PSCW guidelines (See Note 6 of Notes
to Consolidated Financial Statements).
FINANCING ACTIVITIES
Capital needs in 1996 were satisfied with cash from operations. During the
latter part of each year, the energy business generally incurs short-term debt
to finance increases in gas in storage and customer accounts receivable. The
short-term debt is normally repaid by the second quarter of the year as gas in
storage is depleted and cash is received from winter heating sales.
In November 1995, Wisconsin Gas issued $65 million of 6 3\8% Notes due in
2005, the proceeds of which were used to redeem, at par, $50 million of 9 1\8%
Notes due in 1997. The remainder of the proceeds were used to retire short-
term debt which had been incurred for working capital purposes. The Company's
ratio of debt to capitalization decreased to 31% in 1996 as compared to 34% in
1995 and 36% in 1994. The utility's embedded cost of long-term debt was 7.0%
for the year ended December 31, 1996 and 8.1% for the years ended December 31,
1995 and 1994.
In December 1995, the Company completed a public offering of 1,265,000 shares
of common stock for the purpose of refinancing a portion of the borrowings
under the credit facility entered into in connection with the July 1995
acquisition of Hypro. Net proceeds to the Company from the common stock
offering, after deduction of associated expenses, were $38.9 million. Amounts
remaining outstanding under this credit facility (approximately $27 million)
accrue interest at an annual rate of approximately 5.8% as of December 31,
1996. During 1996, the maturity date was extended from July 1996 to July 1997.
In the first half of 1997, the Company, and/or one of its subsidiaries, plans
to issue long-term debt for the purpose of repaying the remaining balance
under the credit facility
<PAGE> 8
WICOR raised its dividend by 2.4%, 2.5% and 2.6% in 1996, 1995 and 1994,
respectively. The current annual dividend rate is $1.68 per share. At December
31, 1996, the Company had $120.9 million of unrestricted retained earnings
available for dividend payments to shareholders.
The WICOR Plan, established in 1992, allows customers, shareholders,
employees, Wisconsin residents and certain suppliers to purchase WICOR common
stock directly and through dividend reinvestment without paying fees or
service charges. During 1995 and 1994, 54,000 and 511,000 shares of WICOR
common stock, respectively, were newly issued through the WICOR Plan and
through various employee benefit plans. These stock issuances provided funds
to the Company of $1.2 million and $10.6 million in 1995 and 1994,
respectively. Effective February 1, 1995, share requirements for the WICOR
Plan have been met through open market purchases of WICOR common stock.
As described in Note 6 of Notes to Consolidated Financial Statements, a 1993
PSCW rate order retained certain limitations with respect to equity levels of
and dividend payments by Wisconsin Gas. Restrictions imposed by the PSCW are
not expected to have any material effect on WICOR's ability to meet its cash
obligations.
Wisconsin Gas's ratio of pre-tax earnings to fixed charges increased to 4.9 in
1996 from 4.0 in 1995, as a result of higher earnings and fixed charges that
were 11% lower in 1996 than in 1995.
Access to credit markets and the costs associated therewith can be correlated
to credit quality. Wisconsin Gas's unsecured bond rating from Moody's
Investors Service and Standard and Poor's Corporation was reaffirmed in 1996
at Aa3 and AA-, respectively. Such ratings are not a recommendation to buy,
sell or hold securities, but rather an indication of creditworthiness.
The following is a summary of the meanings of the ratings shown above and the
relative rank of the Company's rating within each agency's classification
system. Moody's top four corporate bond ratings (Aaa, Aa, A and Baa) are
considered "investment grade." Obligations which are rated "Aa" are judged to
be of high quality by all standards. A numerical modifier ranks the security
within the category with a "1" indicating the high end, a "2" indicating the
midrange and a "3" indicating the low end of the category. Standard & Poor's
top four corporate bond ratings (AAA, AA, A and BBB) are considered
"investment grade." Based on Standard & Poor's rating system, debt rated "AA"
has a very strong capacity to pay interest and repay principal and differs
from the highest rated issues only in small degree. A plus (+) or minus (-)
sign designates the relative position of a credit rating within the rating
category.
WICOR and its subsidiaries maintain multi-year revolving credit agreements,
expiring in March 1998, to provide backup funding for commercial paper and to
ensure availability of adequate resources for corporate liquidity. Separate
agreements of $25 million for WICOR, $30 million for Wisconsin Gas and $15
million for Sta-Rite Industries, Inc., a manufacturing subsidiary, exist for
such purposes. Wisconsin Gas finances working capital by issuing commercial
paper in the open market. Commercial paper outstanding, on a consolidated
basis, at December 31, 1996 and 1995 was $71.6 million and $66.0 million,
respectively
<PAGE> 9
The Company believes that it has adequate capacity to fund its operations for
the foreseeable future through its borrowing arrangements and internally
generated cash.
REGULATORY MATTERS
Wisconsin Gas is subject to the jurisdiction of the PSCW as to various phases
of its operations, including rates, service and issuance of securities. The
PSCW has instituted generic proceedings to consider how its regulation of gas
distribution utilities should change to reflect the changing competitive
environment in the gas industry. To date, the PSCW has made a policy decision
to deregulate the sale of natural gas in customer segments with workably
competitive market choices. It has adopted standards for transactions between
a utility and its gas marketing affiliates. Hearings have been held to
identify barriers to competition and to establish criteria for determining
whether markets are workably competitive. PSCW action on these issues is
anticipated during the first half of 1997. The impact of these proceedings on
Wisconsin Gas's future operations is uncertain at this time.
Under current utility regulation, Wisconsin Gas only earns a profit on the
transportation of natural gas and not its sale. Because of this and consistent
with the PSCW's policy decision, Wisconsin Gas is actively seeking to create
the competitive market conditions necessary to exit the natural gas sales
business and provide only gas transporta-tion services within its utility
service territory. In response to filings made by Wisconsin Gas, the PSCW
approved gas supplier customer choice pilot programs for the utility's firm
market segments effective November 1, 1996. Under these limited pilot
programs, 97 large-volume firm, 642 commercial and 818 residential customers
elected to purchase gas through third-party gas suppliers until October 31,
1997. Requests from customers to participate exceeded the volumes made
available under the pilot programs. These pilot programs are designed to test
market acceptance of supplier choice, the interest of third-party marketers in
serving these market segments and Wisconsin Gas's capabilities to administer
transportation-only services. WICOR Energy Services, as a gas marketer, is one
of the suppliers competing in the pilot programs.
At this point, the length of time it will take for Wisconsin Gas to fully exit
the gas sales business for all customer classes, if indeed it will be
permitted to do so, and the extent to which shareholders might be required to
bear any costs that may arise in connection with existing contractual
commitments and in transforming Wisconsin Gas's business are uncertain.
Under a November 1994 rate order, Wisconsin Gas's rates were subject to a
three-year margin rate cap (through October 1997) based upon rates approved in
November 1993. The PSCW order also specified margin rate floors for each rate
class. Wisconsin Gas has the ability to raise or lower margin rates within the
specified range on a quarterly basis. Wisconsin Gas reduced its base rates by
$1.5 million, $3.0 million and $3.0 million on an annualized basis effective
August 1, 1995, November 1, 1995 and November 1, 1996, respectively. With
these reductions, Wisconsin Gas's rates are designed to recover $7.5 million
per year less than the maximum margin recovery allowed by the PSCW's rate
order. At Wisconsin Gas's request, the PSCW extended the margin cap to October
31, 1998
<PAGE> 10
In July 1995, the PSCW initiated a proceeding to develop principles and
analyze alternatives for gas utilities to recover purchased gas costs to
replace the traditional purchased gas adjustment ("PGA") mechanism. In October
1996, the PSCW issued a decision that requires all gas utilities to file new
purchased gas cost recovery mechanisms consistent with conditions set out by
the PSCW. Wisconsin Gas filed its mechanism in January 1997, which will be
subject to hearings and PSCW approval. Wisconsin Gas anticipates approval of a
new gas cost recovery mechanism during the third quarter of 1997. It is
uncertain whether the Wisconsin Gas proposal will be accepted. Under Wisconsin
Gas's proposal, the effect of the mechanism on the Company's results of
operations is not expected to be material.
On November 1, 1993, ANR Pipeline Company ("ANR"), Wisconsin Gas's principal
pipeline supplier, filed for a general rate increase with the Federal Energy
Regulatory Commission ("FERC"). The filing proposed cost increases in many
areas of ANR's regulated services. The FERC ordered a reduction or elimination
of certain cost increases and permitted ANR to place the balance of the rate
increase into effect on May 1, 1994, subject to refund of any amounts
ultimately determined to be unjust and unreasonable. Hearings were completed
in the first quarter of 1996. The Company cannot predict when an order will be
issued by the FERC. The Company believes that any amount by which ANR is
ultimately permitted to increase its rates in this proceeding will not have a
material impact on Wisconsin Gas or the Company.
SFAS No. 71 "Accounting for the Effects of Certain Types of Regulation"
provides that rate-regulated public utilities such as Wisconsin Gas record
certain costs and credits allowed in the ratemaking process in different
periods than would be required for unregulated businesses. These costs and
credits are deferred as regulatory assets or regulatory liabilities and are
recorded on the income statement at the time they are recognized in rates.
SFAS No. 71 continues to be applicable to Wisconsin Gas in that its rates are
approved by a third party regulator and are designed to recover its cost of
service. Wisconsin Gas believes its current cost based rates are competitive
in the open market.
Pipeline companies have been allowed to pass through to local gas distributors
various costs incurred in the transition to FERC Order No. 636. The PSCW has
authorized that such costs that have been passed through to Wisconsin Gas be
recovered in rates charged to customers. Although complete assurance cannot be
given, it is believed that any additional future transition costs will also be
recoverable from customers.
ENVIRONMENTAL MATTERS
Wisconsin Gas is in the process of preparing a remedial action options report
and recommendation for presentation to the Wisconsin Department of Natural
Resources concerning two previously owned sites on which Wisconsin Gas
operated manufactured gas plants. Wisconsin Gas currently anticipates that the
costs incurred in the remediation effort will be recoverable from insurers or
through rates and will not have a material adverse effect on the Company's
liquidity or results of operations.
The manufacturing segment has provided reserves believed sufficient to cover
its estimated costs related to contamination associated with its manufacturing
facilities.
For additional disclosure regarding environmental matters, see Note 7 of Notes
to Consolidated Financial Statements
<PAGE> 11
Report of Independent Public Accountants
To the Shareholders and Board of Directors of WICOR, Inc.:
We have audited the accompanying consolidated balance sheets and statements of
capitalization of WICOR, Inc. (a Wisconsin corporation) and subsidiaries as of
December 31, 1996 and 1995, and the related consolidated statements of income,
common equity and cash flows for each of the three years in the period ended
December 31, 1996. These financial statements are the responsibility of WICOR,
Inc.'s management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and 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 WICOR, Inc. and subsidiaries
as of December 31, 1996 and 1995, and the results of their operations and
their cash flows for each of the three years in the period ended December 31,
1996, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Milwaukee, Wisconsin,
January 27, 1997
<PAGE> 12
Consolidated Statements of Income
[thousands of dollars, except per share amounts]
Years Ended December 31, 1996 1995 1994
------------ ------------ ------------
Operating Revenues
Energy $ 602,685 $ 522,840 $ 556,587
Manufacturing 409,916 337,754 311,168
------------ ------------ ------------
1,012,601 860,594 867,755
Operating Costs and Expenses
Cost of gas sold 393,681 322,198 357,482
Manufacturing cost of sales 297,053 245,688 222,679
Operations and maintenance 187,557 174,515 181,820
Depreciation and amortization 34,355 29,696 29,416
Taxes, other than income taxes 9,244 9,421 9,748
------------ ------------ ------------
921,890 781,518 801,145
------------ ------------ ------------
Operating Income 90,711 79,076 66,610
------------ ------------ ------------
Interest expense (18,349) (19,299) (16,698)
Other income and expenses 1,114 2,438 574
------------ ------------ ------------
Income Before Income Taxes 73,476 62,215 50,486
Income taxes 26,705 22,688 17,312
------------ ------------ ------------
Net Income $ 46,771 $ 39,527 $ 33,174
============ ============ ============
Per Share of Common Stock
Net income $ 2.55 $ 2.32 $ 1.99
Cash dividends paid $ 1.66 $ 1.62 $ 1.58
Average common shares
outstanding (thousands) 18,365 17,020 16,708
The accompanying notes are an integral part of these statements.
<PAGE> 13
Consolidated Balance Sheets
(thousands of dollars)
December 31, 1996 1995
------------ ------------
Assets
Current Assets
Cash and cash equivalents $ 18,784 $ 20,380
Accounts receivable, less allowance
for doubtful accounts of $14,429
and $10,343, respectively 150,076 132,203
Accrued revenues 59,794 48,847
Manufacturing inventories 72,316 68,236
Gas in storage 33,463 24,117
Deferred income taxes 21,706 20,256
Prepayments and other 16,566 14,990
------------ ------------
372,705 329,029
------------ ------------
Property, Plant and Equipment, at cost
Energy 786,643 757,950
Manufacturing 132,342 119,032
------------ ------------
918,985 876,982
------------ ------------
Less accumulated depreciation
and amortization 477,577 440,942
------------ ------------
441,408 436,040
------------ ------------
Deferred Charges and Other
Regulatory assets 101,808 104,145
Goodwill 61,366 61,096
Prepaid pension costs 36,869 33,073
Systems development costs 23,052 28,868
Other 20,444 16,263
------------ ------------
243,539 243,445
------------ ------------
$ 1,057,652 $ 1,008,514
============ ===========
<PAGE> 14
Consolidated Balance Sheets
(thousands of dollars)
December 31, 1996 1995
------------ ------------
Liabilities and Capitalization
Current Liabilities
Short-term borrowings $ 114,810 $ 106,377
Accounts payable 98,951 66,157
Refundable gas costs 31,545 34,347
Accrued payroll and benefits 17,246 16,340
Current portion of long-term debt 4,061 6,836
Accrued taxes 1,260 6,940
Other 21,464 17,401
------------ ------------
289,337 254,398
------------ ------------
Deferred Credits and Other Liabilities
Postretirement benefit obligation 66,391 67,306
Regulatory liabilities 61,749 64,896
Deferred income taxes 39,668 39,282
Accrued environmental remediation costs 36,222 36,381
Unamortized investment tax credit 7,265 7,724
Other 19,399 18,673
------------ ------------
230,694 234,262
------------ ------------
Commitments and Contingencies (Note 7)
Capitalization (See accompanying statement)
Long-term debt 169,169 174,713
Redeemable preferred stock - -
Common equity 368,452 345,141
------------ ------------
537,621 519,854
------------ ------------
$ 1,057,652 $ 1,008,514
============ ============
The accompanying notes are an integral part of these statements.
<PAGE> 15
Consolidated Statements of Cash Flows
(thousands of dollars)
Years Ended December 31, 1996 1995 1994
---------- ---------- ----------
Operations
Net income $ 46,771 $ 39,527 $ 33,174
Adjustments to reconcile net
income to net cash flow
from operating activities:
Depreciation and amortization 54,871 48,477 47,097
Deferred income taxes (1,103) (6,436) (9,091)
Changes in:
Accounts receivable (28,641) (33,298) 21,105
Manufacturing inventories (3,590) (1,931) (2,027)
Gas in storage (9,512) 14,121 6,647
Other current assets (1,167) 3,545 (4,827)
Accounts payable 32,520 (4,652) 2,943
Refundable gas costs (2,802) 16,289 2,462
Accrued taxes (6,028) (7,839) (2,412)
Other current liabilities 4,225 2,939 947
Other noncurrent assets
and liabilities (10,128) (824) 7,533
---------- ---------- ----------
Cash provided by
operating activities 75,416 69,918 103,551
---------- ---------- ----------
Investment Activities
Capital expenditures (51,744) (56,241) (55,051)
Proceeds from sale of assets 1,249 5,099 42
Acquisitions 22 (58,256) (72)
Other, net 285 365 343
---------- ---------- ----------
Cash used in investing activities (50,188) (109,033) (54,738)
---------- ---------- ----------
Financing Activities
Change in short-term borrowings (969) 4,059 (21,617)
Issuance of long-term debt 10,045 65,000 1,869
Reduction of long-term debt (9,194) (57,700) (4,795)
Issuance of common stock 3,345 40,285 10,649
Dividends paid on common stock,
less amounts reinvested (30,485) (27,454) (23,247)
Other 434 167 513
---------- ---------- ----------
Cash (used in) provided by
financing activities (26,824) 24,357 (36,628)
---------- ---------- ----------
Change in Cash and Cash Equivalents (1,596) (14,758) 12,185
Cash and cash equivalents
at beginning of year 20,380 35,138 22,953
---------- ---------- ----------
Cash and Cash Equivalents
at End of Year $ 18,784 $ 20,380 $ 35,138
========== ========== ==========
The accompanying notes are an integral part of these statements
<PAGE> 16
Consolidated Statements of Capitalization
(thousands of dollars)
December 31, 1996 1995
---------- ----------
Long-Term Debt
Wisconsin Gas:
First mortgage bonds
Adjustable rate series, 7.2% and
9.3%, respectively, due 1999 $ 4,000 $ 6,000
7-1/2% Notes due 1998 40,000 40,000
6.6% Notes due 2013 45,000 45,000
6-3/8% Notes due 2005 65,000 65,000
WICOR Industries, Inc.:
Securities loan agreement,11-3/4%
due semi-annually through 2000
(includes unamortized bond
premium of $1,078) 7,014 -
First mortgage notes, adjustable
rate, 4.4% to 4.6%, due
semi-annually through 2000 633 909
Industrial revenue bonds, 7.84%,
payable through 2000 1,320 1,770
Commercial paper under
multi-year credit agreements 3,000 11,202
Capital lease obligations and other 342 1,271
Unamortized (discount), net (1,547) (1,754)
ESOP loan guarantee 4,407 5,315
---------- ----------
169,169 174,713
---------- ----------
Redeemable Preferred Stock
WICOR:
$1.00 par value; authorized
1,500,000 shares - -
Wisconsin Gas:
Without par value, cumulative;
authorized 1,500,000 shares - -
---------- ----------
- -
---------- ----------
Common Equity
Common stock, $1.00 par value,
authorized 60,000,000 shares;
outstanding 18,407,000 and
18,237,000 shares, respectively 18,407 18,237
Other paid-in capital 224,041 219,133
Retained earnings 129,777 113,491
Cumulative currency
translation adjustment 1,349 (125)
Unearned compensation - ESOP
and restricted stock (5,122) (5,595)
---------- ----------
368,452 345,141
---------- ----------
Total Capitalization $ 537,621 $ 519,854
========== ==========
The accompanying notes are an integral part of these statements.
<PAGE> 17
Consolidated Statements of Common Equity
(thousands of dollars)
Years Ended December 31, 1996 1995 1994
---------- ---------- ----------
Common Stock
Balance at beginning of year $ 18,237 $ 16,918 $ 16,407
Issued in connection with
underwritten public offering - 1,265 -
Issued in connection with
dividend reinvestment, customer
stock purchase, employee
benefit plans and other 170 54 511
---------- ---------- ----------
Balance at end of year 18,407 18,237 16,918
---------- ---------- ----------
Other Paid-in Capital
Balance at beginning of year 219,133 180,000 166,710
Issued in connection with
underwritten public offering - 37,684 -
Received in connection with
dividend reinvestment, customer
stock purchase, employee
benefits plans and other 4,908 1,449 13,290
---------- ---------- ----------
Balance at end of year 224,041 219,133 180,000
---------- ---------- ----------
Retained Earnings
Balance at beginning of year 113,491 101,418 94,643
Net income 46,771 39,527 33,174
Dividends on common stock (30,485) (27,454) (26,399)
---------- ---------- ----------
Balance at end of year 129,777 113,491 101,418
---------- ---------- ----------
Cumulative Currency
Translation Adjustment
Balance at beginning of year (125) (243) (1,741)
Translation adjustments,
net of tax 1,474 118 1,498
---------- ---------- ----------
Balance at end of year 1,349 (125) (243)
---------- ---------- ----------
Unearned Compensation -
ESOP and Restricted Stock
Balance at beginning of year (5,595) (6,868) (7,484)
Loan payments 908 1,055 1,114
Issuance of restricted stock (1,208) - (723)
Amortization and forfeitures
of restricted stock 773 218 225
---------- ---------- ----------
Balance at end of year (5,122) (5,595) (6,868)
---------- ---------- ----------
Total Common Equity
at End of Year $ 368,452 $ 345,141 $ 291,225
========== ========== ==========
The accompanying notes are an integral part of these statements
<PAGE> 18
Quarterly Financial Data (unaudited)
Because seasonal factors significantly affect the Company's operations
(particularly at Wisconsin Gas), the following data may not be comparable
between quarters:
[thousands of dollars, except per share amounts]
<TABLE>
<CAPTION>
Quarters:
-----------------------------------------
First Second Third Fourth(b)
--------- -------- --------- ---------
<S> <C> <C> <C> <C>
1996
Operating revenues $ 328,747 $227,600 $175,139 $281,115
Operating income (loss) $ 54,943 $ 13,300 $ (3,416) $ 25,884
Income available for common stock (b) $ 30,949 $ 5,652 $ (4,478) $ 14,648
Net income(loss) per common share(a)(b) $ 1.69 $ 0.31 $ (0.24) $ 0.80
1995
Operating revenues $ 269,304 $179,199 $162,738 $249,353
Operating income (loss) $ 42,848 $ 8,456 $ (3,033) $ 30,805
Income available for common stock $ 24,789 $ 2,678 $ (4,944) $ 17,004
Net income (loss) per common share (a) $ 1.46 $ 0.16 $ (0.29) $ 0.99
</TABLE>
(a) Quarterly earnings per share may not total to the amounts reported for
the year since the computation is based on weighted average common shares
outstanding during each quarter.
(b) The fourth quarter of 1996 includes the effects of charges relating to
the settlement of a product liability lawsuit and the consolidation of two
Wisconsin manufacturing plants. These charges decreased consolidated net
income by $1.2 million or $0.07 per share
<PAGE> 19
Notes to Consolidated Financial Statements
1 | Accounting Policies
a] PRINCIPLES OF CONSOLIDATION The consolidated financial statements include
the accounts of WICOR, Inc., ("WICOR or the Company") and its wholly-owned
subsidiaries: Wisconsin Gas Company ("Wisconsin Gas"), WICOR Energy Services
Company ("WESCO"), FieldTech, Inc. ("FieldTech") and WICOR Industries, Inc.
("WICOR Industries"), an intermediate holding company for various
manufacturing subsidiaries. All appropriate intercompany transactions have
been eliminated.
b] BUSINESS The Company is a diversified holding company with two principal
business groups: energy services and manufacturing of pumps. The Company
engages in natural gas distribution through Wisconsin Gas, the oldest and
largest natural gas distribution utility in Wisconsin. Wisconsin Gas is
subject to regulation by the Public Service Commission of Wisconsin ("PSCW")
and gives recognition to ratemaking policies substantially in accordance with
the Federal Energy Regulatory Commission ("FERC") System of Accounts. At
December 31, 1996, Wisconsin Gas served approximately 513,000 customers in 514
communities. The Energy group accounted for 60% and 71% of the Company's 1996
operating revenues and operating income, respectively. Through WICOR
Industries, Inc., the Company also engages in the manufacture and sale of
pumps and processing equipment used to pump, control, transfer, hold and
filter water and other fluids. The Company's products are used primarily in
water system, pool and spa, agriculture, RV/marine and beverage/food service
applications. The Company markets its manufactured products in over 100
countries.
c] GAS DISTRIBUTION REVENUES AND PURCHASED GAS COSTS Utility billings are
rendered on a cycle basis. Revenues include estimated amounts accrued for
service provided but not yet billed.
Wisconsin Gas's rate schedules contain purchased gas adjustment ("PGA")
provisions which permit the recovery of actual purchased gas costs incurred.
The difference between actual gas costs incurred and costs recovered through
rates is deferred as a current asset or liability. The deferred balance is
returned to or recovered from customers at intervals throughout the year and
any residual balance at the annual October 31 reconciliation date is
subsequently refunded to or recovered from customers.
The PSCW is currently permitting Wisconsin Gas to recover pipeline supplier
take-or-pay settlement costs, allocating a portion of the direct-billed costs
to each customer class, including transportation customers.
d] PLANT AND DEPRECIATION Gas distribution property, plant and equipment is
stated at original cost, including overhead allocations. Upon ordinary
retirement of plant assets, their cost plus cost of removal, net of salvage,
is charged to accumulated depreciation, and no gain or loss is recognized
<PAGE> 20
The depreciation of Wisconsin Gas's assets is computed using straight-line
rates over estimated useful lives and considers estimated removal costs and
salvage value. These rates have been consistently used for ratemaking
purposes. The composite rates are 4.5%, 4.2% and 4.5% for 1996, 1995 and 1994,
respectively. Depreciation of manufacturing property is calculated under the
straight-line method over the estimated useful lives of the assets (3 to 10
years for equipment and 30 years for buildings) and is primarily reported as a
cost of sales.
e] REGULATORY ACCOUNTING The Company and Wisconsin Gas account for their
regulated operations in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 71, "Accounting for the Effects of Certain Types of
Regulation." This statement sets forth the application of generally accepted
accounting principles to those companies whose rates are determined by an
independent third-party regulator. The economic effects of regulation can
result in regulated companies recording costs that have been or are expected
to be allowed in the ratemaking process in a period different from the period
in which the costs would be charged to expense by an unregulated enterprise.
When this occurs, costs are deferred as assets in the balance sheet
(regulatory assets) and recorded as expenses in the periods those same amounts
are reflected in rates. Additionally, regulators can impose liabilities upon a
regulated company for amounts previously collected from customers and for
amounts that are expected to be refunded to customers (regulatory
liabilities).
The amounts recorded as regulatory assets and regulatory liabilities in the
Consolidated Balance Sheet at December 31, 1996 and 1995 are as follows:
[thousands of dollars] 1996 1995
---------- ----------
Regulatory assets:
Postretirement benefit costs (Note 9) $ 42,275 $ 45,054
Deferred environmental costs 41,368 41,457
Deferred uncollectible expenses 10,152 8,248
Income tax-related amounts due
from customers 3,003 3,357
Other 5,010 6,029
---------- ----------
$ 101,808 $ 104,145
========== ==========
Regulatory liabilities:
Income tax-related amounts
due to customers $ 21,369 $ 22,891
Pension costs (Note 9) 16,631 19,482
Other 23,749 22,523
---------- ----------
$ 61,749 $ 64,896
========== ==========
Wisconsin Gas is precluded from discontinuing service to residential customers
within its service area during the heating season. Any differences between
doubtful account provisions based on actual experience and provisions allowed
for ratemaking purposes by the PSCW are deferred for later recovery in rates
as a cost of service. The most recent PSCW rate order provides for a $13.
<PAGE> 21
million allowable annual provision for doubtful accounts, including
amortization of prior deferred amounts. In the fourth quarter of 1996, the
PSCW staff approved a one-time charge of $3.0 million relating to
uncollectible accounts receivable expense. See Notes 7 and 9 for discussion of
additional regulatory assets.
f] INCOME TAXES The Company files a consolidated Federal income tax return and
allocates Federal current tax expense or credits to each subsidiary based on
its respective separate tax computation.
For Wisconsin Gas, investment tax credits were recorded as a deferred credit
on the balance sheet and are being amortized to income over the applicable
service lives of the related properties consistent with regulatory treatment.
g] NET INCOME PER COMMON SHARE Net income per common share is based on the
weighted average number of shares. Employee stock options are not recognized
in the computation of earnings per common share as they are not materially
dilutive.
h] INVENTORIES
Energy - Substantially all gas in storage inventories in 1996 and 1995 was
priced using the weighted average method of accounting.
Manufacturing - Approximately 55% and 58% of manufacturing inventories, in
1996 and 1995, respectively, are priced using the last-in, first-out ("LIFO")
method (not in excess of market), with the remaining inventories priced using
the first-in, first-out ("FIFO") method. If the FIFO method had been used
exclusively, manufacturing inventories would have been $8.5 million and $7.9
million higher at December 31, 1996 and 1995, respectively.
i] CASH FLOWS The Company considers all highly liquid debt instruments
purchased with an original maturity of three months or less to be cash
equivalents. Due to the short maturity of these instruments, market value
approximates cost.
Beginning in 1995, the Company, through an agent, purchased common stock for
shareholders who elected to reinvest their dividends in common stock. The
Company's dividends reinvested (pursuant to its dividend reinvestment plan)
totaled $3.2 million for 1994.
For purposes of the Consolidated Statements of Cash Flows, income taxes paid
(net of refunds) and interest paid (net of capitalized amounts) were as
follows for each of the years ended December 31:
(thousands of dollars) 1996 1995 1994
- ------------------------- ---------- ---------- ----------
Income taxes paid $ 34,669 $ 27,801 $ 31,384
Interest paid $ 16,824 $ 18,855 $ 15,71
<PAGE> 22
j] DERIVATIVE FINANCIAL INSTRUMENTS The Company has a limited involvement with
derivative financial instruments and does not use them for trading or
speculative purposes. Foreign exchange futures and forward contracts are used
to hedge foreign exchange exposure resulting from international purchases or
sales of products. Gains and losses from open contracts are deferred until
recognized as part of the purchase transaction. Such gains and losses included
in net income in the Consolidated Statements of Income for the years ended
December 31, 1996, 1995 and 1994 were not material. Wisconsin Gas purchased
derivatives in 1996 and 1995 to hedge a small portion of gas costs to be
purchased for resale. The cost of the options and any gains or losses realized
do not affect income since they are accounted for under the purchased gas
adjustment clause.
k] USE OF ESTIMATES The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
l] RECLASSIFICATIONS Certain prior year financial statement amounts have been
reclassified to conform to their current year presentation.
2 | MERGERS AND ACQUISITIONS
Fiscal 1996 included an acquisition of an 80% interest in Hydro-Flow
Filtration Systems. The effects of this acquisition are immaterial to these
consolidated financial statements.
On July 19, 1995, the Company completed the acquisition of Hypro Corporation
("Hypro") for $58 million in cash and the assumption of operating liabilities
totaling $13.3 million. Hypro designs, manufactures and markets pumps and
water processing equipment for the agricultural, high-pressure cleaning,
marine, industrial and fire protection markets. The acquisition has been
accounted for as a purchase and the results of operations of Hypro have been
included in the consolidated financial statements commencing July 19, 1995.
The purchase price was allocated to the net assets based upon their estimated
fair market values. The excess of the purchase price over the estimated fair
value of net assets acquired amounted to approximately $58 million, which has
been recorded as goodwill and is being amortized straight line over 40 years.
3 | INCOME TAXES
The components of deferred income tax assets and liabilities at December 31,
1996 and 1995 are as follows:
(thousands of dollars) 1996 1995
- --------------------------- ---------- ----------
Deferred Income Tax Assets
Recoverable gas costs $ 12,658 $ 13,416
Deferred compensation 2,968 2,416
Inventory 1,078 1,290
Product warranties 1,691 1,384
Other 3,311 1,750
---------- ----------
$ 21,706 $ 20,256
========== =========
<PAGE> 23
Deferred Income Tax Liabilities
Property related $ 46,867 $ 44,647
Systems development costs 9,252 11,586
Investment tax credit (4,806) (5,109)
Postretirement benefits (8,914) (8,195)
Deferred compensation (3,734) (3,044)
Pension benefits 8,118 5,039
Environmental (5,677) (4,725)
Other (1,438) (917)
---------- ----------
$ 39,668 $ 39,282
========== ==========
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:
<TABLE>
<CAPTION>
(thousands of dollars)
Year ended December 31, 1996 1995 1994
-------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Statutory U.S. tax rates $25,717 35.0% $21,775 35.0% $17,670 35.0%
State income taxes, net 3,818 5.2 3,235 5.2 2,518 5.0
Excess of foreign (benefit)
provision over U.S.
statutory tax rate (229) (0.3) 378 0.6 (174) (0.3)
Investment credit restored (453) (0.6) (457) (0.7) (461) (0.9)
Amortization of excess
deferred taxes (556) (0.8) (507) (0.8) (505) (1.0)
Adjustment of prior year's
estimated liability (578) (0.8) (361) (0.6) (998) (2.0)
Other, net (1,014) (1.4) (1,375) (2.2) (738) (1.5)
-------------- -------------- --------------
Effective Tax Rates $26,705 36.3% $22,688 36.5% $17,312 34.3%
============== ============== ==============
</TABLE>
The current and deferred components of income tax expense (benefit) for each
of the years ended December 31, are as follows:
(thousands of dollars) 1996 1995 1994
---------- ---------- ----------
Current
Federal $ 23,479 $ 25,728 $ 23,516
State 6,022 6,641 5,816
Foreign 752 1,256 1,627
---------- ---------- ----------
Total Current 30,253 33,625 30,959
---------- ---------- ----------
Deferred
Federal (2,610) (10,275) (11,247)
State (264) (1,816) (2,012)
Foreign (674) 1,154 (388)
---------- ---------- ----------
Total Deferred (3,548) (10,937) (13,647)
---------- ---------- ----------
Total Provision $ 26,705 $ 22,688 $ 17,312
========== ========== =========
<PAGE> 24
4 | SHORT-TERM BORROWINGS
As of December 31, 1996 and 1995, the Company had total unsecured lines of
credit available from banks of $230.5 million and $204.2 million,
respectively. These borrowing arrangements may require the maintenance of
average compensating balances, which are generally satisfied by balances
maintained for normal business operations, and may be withdrawn at any time.
(thousands of dollars) 1996 1995
- ------------------------ ---------- ----------
Notes payable to banks
U.S. subsidiaries $ 27,000 $ 27,000
Non-U.S. subsidiaries 19,210 19,352
Commercial paper - U.S. 68,600 60,025
---------- ----------
$ 114,810 $ 106,377
========== ==========
Weighted average interest rates on debt outstanding at end of year:
(thousands of dollars) 1996 1995
- ------------------------- ---------- ----------
Notes payable to banks
U.S. subsidiaries 5.8% 5.9%
Non-U.S. subsidiaries 7.2% 9.2%
Commercial paper - U.S. 5.7% 5.9%
Highest month-end balance $ 114,810 $ 129,058
Average month-end balance $ 69,915 $ 71,911
5 | LONG-TERM DEBT
In November 1995, Wisconsin Gas issued $65 million of 6 3\8% Notes due in
2005, a portion of the proceeds were used to redeem $50 million of 9 1\8%
Notes due in 1997. Substantially all gas distribution and certain
manufacturing property and plant is subject to first mortgage liens.
Maturities and sinking fund requirements during the succeeding five years on
all long-term debt total $4.1 million, $47.2 million, $3.9 million, $7.7
million and $0.8 million in 1997, 1998, 1999, 2000 and 2001, respectively.
6 | RESTRICTIONS
A November 1993 rate order issued by the PSCW sets a 13-month average equity
range of 43% to 50% for Wisconsin Gas and also requires 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,
$39.7 million of Wisconsin Gas's net assets at December 31, 1996, plus future
earnings, were available for such dividends without PSCW approval. In
addition, the PSCW must also approve any dividends in excess of $16 million
for any 12 month period beginning November 1 if such dividends would reduce
Wisconsin Gas's 13-month average equity below 48.43% of its total
capitalization. Wisconsin Gas paid $5 million in dividends in November 1996
and expects to pay $21.5 million in dividends for the 12 months ending October
1997. At December 31, 1996, Wisconsin Gas's equity was 53.3%
<PAGE> 25
In connection with its long-term debt agreements, Sta-Rite Industries, Inc.
("Sta-Rite"), a subsidiary of WICOR Industries, is subject to restrictions on
working capital, shareholder equity and debt. These agreements also limit the
amount of retained earnings available for the payment of cash dividends to
WICOR and for certain investments. At December 31, 1996, $5.6 million of Sta-
Rite net assets plus 50% of its future earnings were available for payment of
dividends to WICOR.
Combined restricted common equity of the Company's subsidiaries totaled $247.5
million under the most restrictive provisions as of December 31, 1996;
accordingly, $120.9 million of consolidated retained earnings is available for
payment of dividends.
Historically, the PSCW has imposed restrictions on public utility holding
companies, including WICOR, relating to future nonutility investments. Under
current restrictions, Wisconsin Gas should remain the predominant business,
generally as measured by equity, within the holding company system. Under
these restrictions, the amount allowable for future nonutility equity
investment at December 31, 1996, was $56.6 million. Also, nonutility
subsidiaries can borrow additional amounts for acquisitions; however, if debt
for the combined nonutility entities exceeds 40% of total capitalization for
these entities, further PSCW actions may be necessary. Debt was 30% of total
capitalization for the nonutility entities at December 31, 1996.
7 | COMMITMENTS AND CONTINGENCIES
a] GAS SUPPLY Wisconsin Gas has agreements for firm pipeline and storage
capacity that expire at various dates through 2008. The aggregate amount of
required payments under such agreements totals approximately $838 million,
with annual required payments of $130 million in 1997, $122 million in 1998,
$122 million in 1999, $113 million in 2000 and $108 million in 2001. Wisconsin
Gas's total payments for firm pipeline and storage capacity prior to recovery
from sales of excess capacity were $129.6 million in 1996, $128.1 million in
1995 and $126.0 million in 1994. The purchased gas adjustment provisions of
Wisconsin Gas's rate schedules permit the recovery of gas costs from its
customers. FERC Order No. 636 permits pipeline suppliers to pass through to
Wisconsin Gas any prudently incurred transition costs, such as unrecovered gas
costs, gas supply realignment costs and stranded investment costs. Wisconsin
Gas estimates its portion of such costs from all of its pipeline suppliers
would approximate $7.7 million at December 31, 1996, based upon prior filings
with FERC by the pipeline suppliers. The pipeline suppliers will continue to
file quarterly with the FERC for recovery of actual costs incurred.
The FERC has allowed ANR Pipeline Company to recover capacity and "above
market" supply costs associated with quantities purchased from Dakota
Gasification Company ("Dakota") under a long-term contract expiring in the
year 2009. Consistent with guidelines set forth in Order No. 636 ANR has
allocated 90% of Dakota costs to firm transportation service recoverable
through a reservation rate surcharge and 10% to interruptible service. The
FERC has approved a settlement with Dakota governing the price of Dakota gas.
Based on Wisconsin Gas contracted quantities with ANR, Wisconsin Gas is
currently paying approximately $250,000 per month of Dakota costs. This amount
varies month-to-month and across years based on the spread between ANR
contract terms with Dakota and the market indices for pricing spot gas
<PAGE> 26
Transition costs billed to Wisconsin Gas are being recovered from customers
under the purchased gas provisions within its rate schedules.
b] CAPITAL EXPENDITURES Certain commitments have been made in connection with
1997 capital expenditures. The Energy group's capital expenditures for 1997
are estimated at $40 million. The Manufacturing group's capital expenditures
for 1997 are estimated at $20 million.
c] ENVIRONMENTAL MATTERS Wisconsin Gas has identified two previously owned
sites on which it operated manufactured gas plants. Such plants ceased
operations prior to the mid-1950's. Wisconsin Gas has engaged an environmental
consultant to help determine possible remediation alternatives. The Company
has estimated that cleanup costs could range from $22 million to $75 million.
As of December 31, 1996, the Company has accrued $36.2 million for future
cleanup costs. 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. Due to anticipated
regulatory treatment, as discussed below, changes in the recorded liability do
not immediately impact net income.
The Wisconsin Department of Natural Resources ("WDNR") issued a Probable
Responsible Party letter to Wisconsin Gas for these two sites in September
1994. Following receipt of this letter, Wisconsin Gas and the WDNR held an
initial meeting to discuss the sites. At the meeting it was agreed that
Wisconsin Gas would prepare a remedial action options report from which it
would select specific remedial actions for recommendation to the WDNR. During
1995 and 1996, the Company gathered specific environmental data regarding one
of the sites in addition to the previous extensive site investigation data,
held extensive discussions concerning remedial options with current landowners
and solicited information from environmental consulting and remediation firms
on technology and approaches that would best suit the sites. These efforts
were directed toward preparing a remedial action options report and
recommendations for presentation to the WDNR during 1997. Once such a plan is
approved, initial remediation work will begin. Expenditures over the next
three years are expected to total approximately $10.0 million. Although most
of the work and the cost are expected to be incurred in the first few years of
the plan, monitoring of sites and other necessary actions may be undertaken
for up to 30 years.
In March 1994, Wisconsin Gas commenced suit against nine insurance carriers
seeking a declaratory judgment regarding insurance coverage for the two sites.
Settlements were reached with each of the carriers during 1994. Additional
insurance recoveries are being pursued. Under recent PSCW rate orders, the
Company expects full recovery of incurred remediation costs (excluding
carrying costs), less amounts recovered from insurance carriers. Accordingly,
a regulatory asset has been recorded for the accrued cost
<PAGE> 27
The Company's manufacturing subsidiaries are involved in various environmental
matters, including matters in which the subsidiaries or alleged predecessors
have been named as potentially responsible parties under the Comprehensive
Environmental Response Compensation and Liability Act ("CERCLA"). The Company
has established accruals for all environmental contingencies of which
management is currently aware in accordance with generally accepted accounting
principles. In establishing these accruals, management considered (a) reports
of environmental consultants retained by the Company, (b) the costs incurred
to date by the Company at sites where clean-up is presently ongoing and the
estimated costs to complete the necessary remediation work remaining at such
sites, (c) the financial solvency, where appropriate, of other parties that
have been responsible for effecting remediation at specified sites, and (d)
the experience of other parties who have been involved in the remediation of
comparable sites. The accruals recorded by the Company with respect to
environmental matters have not been reduced by potential insurance or other
recoveries and are not discounted. Although the Company has and will continue
to pursue such claims against insurance carriers and other responsible
parties, future potential recoveries remain uncertain and, therefore, have not
been recorded as a reduction to the estimated gross environmental liabilities.
Based on the foregoing and given current information, management believes that
future costs in excess of the amounts accrued on all presently known and
quantifiable environmental contingencies will not be material to the Company's
financial position or results of operations.
d] OTHER 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 Company's financial position or results of operations.
8 | COMMON STOCK AND OTHER PAID-IN-CAPITAL
The Company's articles of incorporation authorize 60,000,000 shares of common
stock, of which 18,407,286 shares and 18,236,998 shares were outstanding at
December 31, 1996 and 1995, respectively. In December 1995, the Company sold
in a public offering 1,265,000 shares of its common stock which generated net
proceeds of approximately $38.9 million. The proceeds were used to pay a
portion of the debt incurred for the acquisition of Hypro. Common stock
totaling 2,503,131 shares is reserved for issuance under the Company's
dividend reinvestment, stock option and incentive savings plans. In addition
21,347,379 shares are reserved pursuant to the Company's shareholder rights
plan.
Under certain circumstances, each right entitles the shareholder to purchase
one common share at an exercise price of $75, subject to adjustment. The
rights are not exercisable until ten business days after a person or group
announces a tender offer or exchange offer which would result in their
acquiring ownership of 20% or more of the Company's outstanding common stock,
or after a person or group acquires at least 20% of the Company's outstanding
common shares. Under certain circumstances, including the existence of a 20%
acquiring party, each holder of a right, other than the acquiring party, will
have the right to purchase at the exercise price WICOR common stock having a
value of two times the exercise price. If, after 20% or more of the
outstanding shares of WICOR common stock is acquired by a person or group and
the Company is then acquired by that person or group, rights holders would be
entitled to purchase shares of common stock of the acquiring person or group
having a market value of two times the exercise price of the rights. The
rights do not have any voting rights and may be redeemed at a price of $.01
per right. The rights expire on August 29, 1999
<PAGE> 28
9 | BENEFIT PLANS
a] PENSION PLANS The Company's subsidiaries have non-contributory pension
plans which cover substantially all their 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 November 1, 1992, Wisconsin Gas pension costs or
credits have been calculated in accordance with SFAS No. 87 and are
recoverable from customers. Prior to this date, pension costs were recoverable
in rates as funded. The cumulative difference between the amounts funded and
the amounts based on SFAS No. 87 through November 1, 1992, is recorded as a
regulatory liability and is being amortized as a reduction of pension expense
over an eight-year period effective November 1, 1994.
The following table sets forth the funded status of pension plans at December
31, 1996 and 1995.
<TABLE>
<CAPTION>
Assets Exceed Accumulated Benefits
Accumulated Benefits Exceed Assets
(thousands of dollars) 1996 1995 1996 1995
- ------------------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Accumulated benefit obligation
Vested benefits $(102,638) $(110,484) $ (6,419) $ (7,239)
Nonvested benefits (17,051) (12,339) (2,242) (1,461)
---------- ---------- ---------- ----------
(119,689) (122,823) (8,661) (8,700)
Effect of projected
future compensation levels (35,348) (43,481) (1,148) (1,267)
---------- ---------- ---------- ----------
Projected benefit obligation (155,037) (166,304) (9,809) (9,967)
Plan assets at fair value 231,822 217,156 503 474
---------- ---------- ---------- ----------
Plan assets greater (less) than
projected benefit obligation 76,785 50,852 (9,306) (9,493)
Unrecognized net (asset) liability
at September 30, 1985 being
recognized over approximately
16 years (13,269) (15,024) 876 968
Unrecognized prior service costs 4,099 4,422 240 258
Unrecognized net (gain) loss (30,746) (7,177) 1,557 1,141
Additional minimum liab. recorded - - (1,953) (1,468)
---------- ---------- ---------- ----------
Prepaid pension asset
(accrued liability) $ 36,869 $ 33,073 $ (8,586) $ (8,594)
========== ========== ========== ==========
</TABLE>
The weighted average discount rate assumptions used in determining the
actuarial present value of the projected benefit obligation were 7.75%, 7.5%
and 8.25% for 1996, 1995 and 1994, respectively. The expected long-term rate
of return on assets was 9.0% for 1996 and 8.6% for 1995 and 1994. The expected
long-term rate of compensation growth was 4.8% for 1996 and 5.3% for 1995 and
1994
<PAGE> 29
Net pension (income) costs for each of the years ended December 31, include
the following components:
(thousands of dollars) 1996 1995 1994
- --------------------------------- ---------- ---------- ----------
Service costs $ 4,713 $ 4,374 $ 5,260
Interest costs on projected
benefit obligations 12,833 12,830 12,249
Actual (gain) loss on plan assets (25,338) (29,107) 1,225
Net amortization and deferral 5,117 10,760 (18,896)
Gain on early retirement incentive - - (268)
Amortization of regulatory liability (2,851) (2,851) (475)
---------- ---------- ----------
Net pension income $ (5,526) $ (3,994) $ (905)
========== ========== ==========
b] POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE
In addition to providing pension benefits, the Company provides certain health
care and life insurance benefits for retired employees when they reach normal
retirement age while working for the Company. Wisconsin Gas funds the accrual
annually based on the maximum tax deductible amount. Commencing January 1,
1992, Wisconsin Gas postretirement benefit costs have been calculated in
accordance with SFAS No. 106 and are recoverable from customers. The
cumulative difference between the amounts funded and the amounts based on SFAS
No. 106 through January 1, 1992, is recorded as a regulatory asset and is
being amortized over a twenty-year period effective January 1, 1992.
The following table sets forth the plans' funded status, reconciled with
amounts recognized in the Company's Statement of Financial Position at
December 31, 1996 and 1995, respectively.
Accumulated benefit obligation
[thousands of dollars] 1996 1995
- ----------------------------------- ---------- ----------
Retirees $ (52,331) $ (55,729)
Active employees (47,204) (42,044)
Accumulated benefit obligation (99,535) (97,773)
Plan assets at fair value 46,562 39,417
Accumulated benefit obligation
in excess of plan assets (52,973) (58,356)
Unrecognized prior service costs (14,432) (15,915)
Unrecognized actuarial gain 1,014 6,965
---------- ----------
Accrued postretirement benefit $ (66,391) $ (67,306)
========== ==========
<PAGE> 30
Net postretirement health care and life insurance costs for each of the years
ended December 31, consisted of the following components:
(thousands of dollars) 1996 1995 1994
- ------------------------------- ---------- ---------- ----------
Service cost $ 2,712 $ 2,023 $ 2,688
Interest cost on projected
benefit obligation 7,251 6,694 6,913
Actual (gain) loss on plan assets (4,695) (6,185) 147
Amortization of regulatory asset 2,778 2,778 2,778
Net amortization and deferral 613 2,531 (2,549)
Loss on early retire incentive - - 3,650
---------- ---------- ----------
Net postretirement benefit cost $ 8,659 $ 7,841 $ 13,627
========== ========== ==========
The 1994 postretirement benefit cost reflects the early retirement of 131
employees under a voluntary early retirement incentive plan at Wisconsin Gas
for employees age 55 and over.
The postretirement benefit cost components for 1996 were calculated assuming
health care cost trend rates ranging up to 11% for 1996 and decreasing to 5.0%
over 6 to 21 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 accumulated
postretirement benefit obligation ("APBO") as of December 31, 1996 by $14.4
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 APBO was 7.75% in 1996 and 7.5% in 1995. Plan assets are primarily
invested in equities and fixed income securities.
c] RETIREMENT SAVINGS PLANS Certain of the Company's operating subsidiaries
maintain various employee savings plans, which provide employees a mechanism
to contribute amounts up to 16% of their compensation for the year. Company
matching contributions may be made for up to 5% of eligible compensation
including 1% for the Employee Stock Ownership Plan ("ESOP"). Total
contributions were valued at $1.8 million in 1996, and $1.7 million in 1995
and 1994.
d] EMPLOYEE STOCK OWNERSHIP PLAN In November 1991, WICOR established an ESOP
covering non-union employees of Wisconsin Gas. The ESOP funds employee
benefits of up to 1% of compensation with Company common stock distributed
through the ESOP. The ESOP used the proceeds from a $10 million, 3-year
adjustable rate loan (5.8% interest rate at December 31, 1996), guaranteed by
the Company, to purchase 431,266 shares of WICOR common stock. The Company
extended the adjustable rate loan, with similar terms, until May 31, 2002. The
unpaid balance ($4.4 million) is shown as long-term debt with a like amount of
unearned compensation reported as a reduction of common equity on the
Company's balance sheet.
The ESOP trustee is repaying the loan with dividends on shares of WICOR common
stock in the ESOP and with Wisconsin Gas contributions to the ESOP
<PAGE> 31
e] STOCK OPTIONS Effective January 1, 1996, the Company adopted the disclosure
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," for its
stock option plans. Under SFAS No. 123, the Company is permitted to record the
estimated value of stock based compensation over the applicable vesting period
or disclose the unrecorded cost and the related effect on earnings per share.
Because the SFAS No. 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost
may not be representative of that to be expected in future years. The Company
will continue to apply APB Opinion No. 25 and related interpretations in
accounting for its stock option plans. Had compensation cost for the Company's
1996 and 1995 grants for stock-based compensation plans been determined
consistent with SFAS No. 123, the Company's net income and earnings per share
would have been reduced by less than 1%.
The Company has a total of 129 employees participating in one or more of its
common stock option plans. All options were granted at prices not less than
the fair market value on the date of grant and expire not later than eleven
years from the date of grant. A summary of the Company's stock option plans at
December 31, 1996, 1995 and 1994 and changes during the years then ended is as
follows:
1996 1995 1994
----------------- ----------------- -----------------
Wtd Avg Wtd Avg Wtd Avg
Shares Price Shares Price Shares Price
--------- ------- --------- ------- --------- -------
Outstanding at
January 1 745,050 $ 25.01 664,633 $ 24.10 794,925 $ 22.21
Granted 162,700 $ 33.01 136,400 $ 28.31 135,800 $ 30.60
Exercised (98,270) $ 23.10 (44,299) $ 20.90 (214,542) $ 20.53
Canceled (29,331) $ 29.39 (11,684) $ 27.34 (51,550) $ 26.45
--------- --------- ---------
Outstanding at
December 31 780,149 $ 26.76 745,050 $ 25.01 664,633 $ 24.10
========= ========= =========
Exercisable at
End of Year 538,672 $ 24.72 434,980 $ 23.46 382,067 $ 22.67
Available for future
grant at year-end 446,907 607,200 743,600
The weighted average fair value of options granted in 1996 and 1995 was $3.83
and $3.29, respectively.
Under the Company's 1994 Long-Term Performance Plan ("1994 Plan"), awards
covering up to 820,000 shares of common stock may be granted to certain key
employees as compensation. The types of awards that may be granted under the
1994 Plan include incentive stock options, nonqualified stock options, stock
appreciation rights and restricted stock.
Awards of restricted stock subject to performance vesting criteria have been
granted under the 1994 Plan. These awards will vest only if the Company
achieves certain financial goals over a three-year performance period
beginning in the year of grant. Recipients of restricted stock awards are not
required to provide consideration to the Company other than rendering service
and have the right to vote the shares and the right to receive dividends
thereon. Restricted shares forfeited revert to the Company at no cost
<PAGE> 32
A total of 56,000 restricted shares (net of cancellations) were issued through
1996. Initially, the total market value of the shares is treated as unearned
compensation and is charged to expense over the vesting periods. For both
restricted stock and performance option shares, adjustments are made to
expense for changes in market value and progress towards achievement of
financial goals.
f] POSTEMPLOYMENT BENEFIT PLANS Effective January 1, 1994, the Company adopted
SFAS No. 112, "Employers' Accounting for Postemployment Benefits," which
requires accrual for all other postemployment benefits. Total postemployment
benefit expense was nil in 1996 and $0.6 million in 1995 and 1994,
respectively, including a one-time cumulative adjustment in 1994. The
incremental costs of adopting this statement are insignificant on an ongoing
basis.
10 | FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash and cash equivalents, accounts receivable and
short-term borrowings approximates fair value due to the short-term maturities
of these instruments.
The fair value of the Company'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, share-holders
probably would 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 WICOR's financial instruments at December 31, is
as follows:
1996 1995
--------------------- ---------------------
Carrying Fair Carrying Fair
[thousands of dollars] Amount Value Amount Value
- -------------------------- ---------- ---------- ---------- ----------
Cash and cash equivalents $ 18,784 $ 18,784 $ 20,380 $ 20,380
Accounts receivable $ 150,076 $ 150,076 $132,203 $ 132,203
Short-term debt $ 114,810 $ 114,810 $106,377 $ 106,377
Long-term debt $ 169,169 $ 168,962 $174,713 $ 176,700
11 | OTHER FINANCIAL INFORMATION
See page 28 for unaudited quarterly financial data. See Financial Review on
page 19 for industry segment data
<PAGE> 33
Selected Financial Data
(thousands of dollars, except per share amounts)
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
CONSOLIDATED
Operating Data:
<S> <C> <C> <C> <C> <C>
Operating revenues (6) $1,012,601 $ 860,594 $ 867,755 $ 849,528 $ 747,409
NI from continuing oper. $ 46,771 $ 39,527 $ 33,174 $ 29,313 $ 22,764
Net income $ 46,771 $ 39,527 $ 33,174 $ 29,313 $ 14,799
Common Stock Data:
NI/share continuing oper $ 2.55 $ 2.32 $ 1.99 $ 1.82 $ 1.47
Net income/share (1) $ 2.55 $ 2.32 $ 1.99 $ 1.82 $ 0.96
Cash dividends/share (1) $ 1.66 $ 1.62 $ 1.58 $ 1.54 $ 1.50
Book value/share (1) $ 20.02 $ 18.93 $ 17.23 $ 16.47 $ 15.60
Balance Sheet Data:
Long-term debt $ 169,169 $ 174,713 $ 161,669 $ 165,230 $ 164,171
Redeemable preferred stock - - - - -
Common equity 368,452 345,266 291,468 270,276 245,287
---------- ---------- ---------- ---------- ----------
Capitalization at Y/E $ 537,621 $ 519,979 $ 453,137 $ 435,506 $ 409,458
========== ========== ========== ========== ==========
Total assets at Y/E (2) $1,057,652 $1,008,514 $ 930,708 $ 933,726 $ 825,774
Other General Data:
Market/book ratio Y/E (%) 179 170 165 191 175
Dvdnd payout (%)(2)(3)(4) 65.2 69.5 79.6 82.2 96.1
Yield at year-end (%) 4.7 5.1 5.6 5.0 5.6
ROE (average) (%)(2)(3)(5) 12.9 13.1 11.6 11.2 9.2
P/E ratio at YE(2)(3) 14.1 13.9 14.3 17.3 18.5
Price range $ 30 1/8 - $ 26 5/8 - $ 25 1/2 - $ 25 5/8 - $ 22 7/8 -
$ 37 3/4 $ 32 7/8 $ 32 5/8 $ 32 7/8 $ 27 3/8
Registered shrhldrs/YE (7) 23,339 27,379 25,017 23,694 22,864
Cash flow from operations $ 75,416 $ 69,918 $ 103,551 $ 3,401 $ 37,012
Capital expenditures $ 51,744 $ 56,241 $ 55,051 $ 51,906 $ 71,873
Employees at year-end 3,475 3,368 3,214 3,222 3,178
Debt/equity ratio at YE 31/69 34/66 36/64 38/62 40/60
Energy Operations
Operating revenues $ 602,685 $ 522,840 $ 556,587 $ 574,835 $ 495,415
Net income $ 32,141 $ 27,701 $ 18,896 $ 19,870 $ 18,060
Capital expenditures $ 36,617 $ 42,852 $ 44,626 $ 42,253 $ 62,125
Utility throughput MDth
Residential 52,991 49,425 46,369 47,964 45,905
Commercial 24,257 21,157 18,598 19,060 17,840
Industrial firm 11,078 13,496 14,544 15,246 14,488
Industrial interruptible 19,624 31,353 28,217 20,849 17,388
Transported 27,578 14,549 11,908 17,408 21,379
---------- ---------- ---------- ---------- ----------
135,528 129,980 119,636 120,527 117,000
========== ========== ========== ========== ==========
</TABLE>
<PAGE> 34
(thousands of dollars, except per share amounts)
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Utility customers at YE 512,868 504,746 495,129 485,103 470,956
Utility customers/employee 516 471 419 352 331
Ave cost of gas/util Dth $ 3.47 $ 2.79 $ 3.34 $ 3.76 $ 3.34
Ave residential util bill $ 725 $ 686 $ 719 $ 779 $ 712
Use/util resid cust (Dth) 120 114 110 116 115
Degree days 7,458 6,836 6,431 6,775 6,683
% colder(warmer) 20yr norm 6.8 (2.8) (9.0) (4.1) (6.4)
Manufacturing Operations (2)
Operating revenues $ 409,916 $ 337,754 $ 311,168 $ 274,693 $ 251,994
International and export
sales % of total sales 34 39 37 34 34
Net income (3) $ 14,630 $ 11,826 $ 14,278 $ 9,443 $ 4,704
Capital expenditures $ 15,127 $ 13,389 $ 1 0,425 $ 9,653 $ 9,748
</TABLE>
<PAGE> 35
Selected Financial Data
(thousands of dollars, except per share amounts)
CONSOLIDATED
OPERATING DATA:
<TABLE>
<CAPTION>
1991 1990 1989 1988 1987
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Operating revenues (6) $ 716,767 $ 696,023 $ 741,218 $ 780,633 $ 699,418
NI continuing operations $ 22,966 $ 16,651 $ 33,359 $ 30,400 $ 17,215
Net income $ 22,966 $ 16,651 $ 33,881 $ 34,163 $ 19,682
Common Stock Data:
NI/share continuing oper $ 1.54 $ 1.14 $ 2.30 $ 2.12 $ 1.22
NI per common share (1) $ 1.54 $ 1.14 $ 2.33 $ 2.38 $ 1.39
Cash dividends/ share (1) $ 1.46 $ 1.42 $ 1.37 $ 1.32 $ 1.30
Book value/common share (1)$ 15.84 $ 16.12 $ 16.83 $ 15.82 $ 14.68
Balance Sheet Data:
Long-term debt $ 168,366 $ 130,215 $ 122,639 $ 133,034 $ 127,833
Redeemable preferred stock - - - - 8,000
Common equity 243,453 237,407 244,351 227,080 207,658
---------- ---------- ---------- ---------- ----------
Capitalization at YE $ 411,819 $ 367,622 $ 366,990 $ 360,114 $ 343,491
========== ========== ========== ========== ==========
Total assets at YE (2) $ 670,250 $ 651,559 $ 620,548 $ 565,967 $ 536,998
Other General Data:
Market-to-book at YE (%) 153 122 148 123 117
Dividend payout(%)(2)(3)(4) 89.0 117.2 55.0 52.0 91.1
Yield at year-end (%) 6.1 7.3 5.6 6.9 7.6
ROE Average (%)(2)(3)(5) 9.5 6.8 14.3 15.3 9.3
PE ratio at year-end (2)(3) 15.7 17.2 10.7 8.2 12.4
Price range $ 18 5\8- $ 18 1\4- $ 19 3\8- $ 15 5\8- $ 13 3\8-
$ 24 3\8 $ 25 1\4 $ 25 3\8 $ 20 7\8 $ 21 7\8
Registered shrholder\YE (7) 18,503 19,463 20,509 21,611 23,010
Cash flow from operations $ 50,413 $ 10,022 $ 94,623 $ 73,526 $ 41,237
Capital expenditures $ 45,113 $ 37,529 $ 40,944 $ 48,295 $ 34,264
Employees at year-end 3,196 3,152 3,696 3,927 4,040
Debt/equity ratio at YE 41/59 35/65 33/67 37/63 37/63
Energy Operations
Operating revenues $ 474,702 $ 455,559 $ 441,477 $ 476,904 $ 424,069
Net income $ 17,086 $ 13,195 $ 25,169 $ 23,223 $ 12,580
Capital expenditures $ 34,473 $ 27,978 $ 25,813 $ 37,148 $ 24,344
Utility throughput (MDth)
Residential 45,614 43,020 48,154 46,769 39,369
Commercial 17,861 16,319 18,089 17,012 14,510
Industrial firm 15,690 15,106 16,915 16,808 16,106
Industrial interruptible 17,440 16,620 5,475 3,752 4,714
Transported 19,658 16,565 29,158 29,639 26,129
---------- ---------- ---------- ---------- ----------
116,263 107,630 117,791 113,980 100,828
========== ========== ========== ========== ==========
</TABLE>
<PAGE> 36
(thousands of dollars, except per share amounts)
<TABLE>
<CAPTION>
1991 1990 1989 1988 1987
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Utility customers at YE 460,549 452,906 445,771 439,063 432,509
Util customer/employee 323 321 319 311 288
Cost of gas/Dth purch. $ 3.18 $ 3.30 $ 3.15 $ 3.68 $ 3.74
Ave residential util bill $ 677 $ 670 $ 758 $ 770 $ 660
Ave use/util res cust (Dth) 117 113 129 127 108
Degree days 6,416 6,103 7,382 7,124 6,185
% cold/(warm) 20-yr norm (10.8) (16.0) 1.5 (2.0) (14.8)
Manufacturing Operations(2)
Operating revenues $ 242,065 $ 240,464 $ 300,156 $ 303,729 $ 275,349
International/export sales
as a % of total sales 31 27 24 22 20
Net income (3) $ 5,880 $ 3,456 $ 8,712 $ 10,940 $ 7,102
Capital expenditures $ 10,640 $ 9,551 $ 15,131 $ 11,147 $ 9,920
</TABLE>
<PAGE> 37
Selected Financial Data
CONSOLIDATED
OPERATING DATA:
(thousands of dollars, except per share amounts)
1986
----------
Operating revenues (6) $ 761,104
NI continuing operations $ 17,363
Net income $ 19,780
Common Stock Data:
NI/share continuing oper $ 1.34
NI per common share (1) $ 1.53
Cash dividends/ share (1) $ 1.28
Book value/common share (1)$ 15.74
Balance Sheet Data:
Long-term debt $ 144,495
Redeemable preferred stock 14,267
Common equity 203,477
----------
Capitalization at YE $ 362,239
==========
Total assets at YE (2) $ 542,036
Other General Data:
Market-to-book at YE (%) 134
Dividend payout(%)(2)(3)(4) 79.9
Yield at year-end (%) 6.1
ROE Average (%)(2)(3)(5) 10.5
PE ratio at year-end (2)(3) 13.8
Price range $ 14 3/7-
$ 23
Registered shrholder\YE (7) 23,987
Cash flow from operations $ 63,583
Capital expenditures $ 36,498
Employees at year-end 3,932
Debt/equity ratio at YE 40/60
Energy Operations
Operating revenues $ 531,970
Net income $ 14,338
Capital expenditures $ 28,353
Utility throughput (MDth)
Residential 42,837
Commercial 15,292
Industrial firm 19,379
Industrial interruptible 22,403
Transported 5,502
----------
105,413
==========
<PAGE> 38
(thousands of dollars, except per share amounts)
1986
----------
Utility customers at YE 426,481
Util customer/employee 277
Cost of gas/Dth purch. $ 3.75
Ave residential util bill $ 761
Ave use/util res cust (Dth) 120
Degree days 6,788
% cold/(warm) 20-yr norm (7.3)
Manufacturing Operations(2)
Operating revenues $ 299,134
International/export sales
as a % of total sales 16
Net income (3) $ 5,442
Capital expenditures $ 8,145
(1) Adjusted for a two-for-one stock split in March 1989.
(2) Includes continuing operations and discontinued operations up to the
year disposition was authorized.
(3) Before effects of 1992 accounting changes. Adjusted for merger with
Shurflo through (4) 1988 and (5) 1989.
(6) Includes revenues (in thousands) from discontinued operations from 1986
to 1989 of $58,209, $58,318, $63,552 and $56,318, respectively.
(7) Reflects WICOR Plan participants as of 1992.
Note: Hypro operations are reflected as of July 19, 1995.
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
This schedule contains summary financial information extracted from the
Wisconsin Gas Company FORM 10-K for the year ended December 31, 1996 and is
qualified in its entirety by reference to such financial statements and the
related footnotes.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 377,335
<OTHER-PROPERTY-AND-INVEST> 0
<TOTAL-CURRENT-ASSETS> 198,698
<TOTAL-DEFERRED-CHARGES> 162,344
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 738,377
<COMMON> 9
<CAPITAL-SURPLUS-PAID-IN> 119,095
<RETAINED-EARNINGS> 88,670
<TOTAL-COMMON-STOCKHOLDERS-EQ> 207,774
0
0
<LONG-TERM-DEBT-NET> 152,453
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 150,000
<COMMERCIAL-PAPER-OBLIGATIONS> 65,500
<LONG-TERM-DEBT-CURRENT-PORT> 2,000
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 310,650
<TOT-CAPITALIZATION-AND-LIAB> 738,377
<GROSS-OPERATING-REVENUE> 573,596
<INCOME-TAX-EXPENSE> 20,335
<OTHER-OPERATING-EXPENSES> 508,629
<TOTAL-OPERATING-EXPENSES> 528,964
<OPERATING-INCOME-LOSS> 44,632
<OTHER-INCOME-NET> 662
<INCOME-BEFORE-INTEREST-EXPEN> 45,294
<TOTAL-INTEREST-EXPENSE> 12,934
<NET-INCOME> 32,360
0
<EARNINGS-AVAILABLE-FOR-COMM> 32,360
<COMMON-STOCK-DIVIDENDS> 20,000
<TOTAL-INTEREST-ON-BONDS> 681
<CASH-FLOW-OPERATIONS> 53,545
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
