<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, 1997
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
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(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, 1998:
Common Stock, $8 par value 1,125 shares
Documents Incorporated by Reference.
WICOR, Inc. proxy statement dated March 13, 1998 (Part III)
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.
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TABLE OF CONTENTS
PAGE
PART I.
Forward-Looking Statements 1
Item 1. Business 1
a) General 1
b) Gas Supply, Pipeline Capacity and Storage 2
1) General 2
2) Pipeline Capacity and Storage 3
3) Term Gas Supply 3
4) Spot Market Gas Supply 3
5) Potential New Pipeline Capacity 4
c) Wisconsin Regulatory Matters 4
1) Rate Matters 4
2) Gas Cost Recovery Mechanism 4
3) Transition Cost Recovery Policy 4
4) Changing Regulatory Environment 5
d) Employees 5
Item 2. Properties 5
Item 3. Legal Proceedings 5
Item 4. Submission of Matters to a Vote of Security Holders 6
PART II. 6
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters 6
Item 6. Selected Financial Data 6
Item 7. Management's Discussion and Analysis of Results of
Operations and Financial Condition 6
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk 6
Item 8. Financial Statements and Supplementary Data 7
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 7
Part III. 7
Item 10. Directors and Executive Officers of the Registrant 7
Item 11. Executive Compensation 7
Item 12. Security Ownership of Certain
Beneficial Owners and Management 7
Item 13. Certain Relationships and Related Transactions 7
Part IV. 7
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K 7
a) Documents Filed as Part of the Report 7
1. All Financial Statements and Report of
Independent Public Accountants 7
2. Financial Statement Schedules 7
3. Exhibits 8
b) Reports on Form 8-K 9
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PART I
Forward-Looking Statements
Certain matters discussed in this annual report are "forward-looking
statements" intended to qualify for the safe harbor from liability
established by the Private Securities Litigation Reform Act of 1995.
These forward-looking statements can generally be identified as such
because the context of the statements will include such words as the
Company "believes," "anticipates" or "expects," or words of similar
import. Similarly, statements that describe the Company's future
plans, objectives or goals are also forward-looking statements. Such
forward-looking statements are subject to certain risks and
uncertainties which could cause actual results to differ materially
from those currently anticipated. Such risks and uncertainties include
general economic conditions; trends in the weather; business conditions
in the energy industry; the impact of and changes in government
regulations; changes in environmental remediation costs; and other risk
factors identified from time to time by the Company in reports filed
with the Securities and Exchange Commission. Shareholders, potential
investors and other readers are urged to consider these factors
carefully in evaluating the forward-looking statements and are
cautioned not to place undue reliance on such forward-looking
statements.
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, 1997, Wisconsin Gas distributed
gas to approximately 521,000 residential, commercial and industrial
customers in 521 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 1997. 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.
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Wisconsin Gas' business is highly seasonal, particularly as
to residential and commercial sales for space heating purposes, with a
substantial portion of its sales occurring in the winter heating
season. The following table sets forth the volumes of natural gas
delivered by Wisconsin Gas to its customers. The volumes shown as
transported represent customer-owned gas that was delivered by
Wisconsin Gas to such customers. The sales volumes represent
quantities sold and delivered to customers by the Company.
<TABLE>
<CAPTION>
Customer Class Year Ended
------------------------------------------------
December 31, 1997 December 31, 1997
-------------------- ----------------------
Thousands Thousands
Sales of Therms* Percent of Therms* Percent
- --------------------- --------- ------- ---------- -------
<S> <C> <C> <C> <C>
Residential 484,330 37.5 529,910 39.1
Commercial 219,220 17.0 242,570 17.9
Large Volume Commercial
and Industrial Firm 87,240 6.8 110,780 8.2
Commercial and
Industrial
Interruptible 72,770 5.5 196,240 14.5
--------- ------- ---------- ------
Total Sales 863,560 66.8 1,079,500 79.7
Transportation
- --------------
Transported 428,830 33.2 275,780 20.3
--------- ------- ---------- ------
Total Gas Throughput 1,292,390 100.0 1,355,280 100.0
========= ======= =========== ======
</TABLE>
*One therm equals 100,000 BTU's
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 substantially 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 workable
competition in the particular segment. The PSCW has a number of work
groups addressing gas utility restructuring issues. Work groups
recommendations to the PSCW are due over the next two years. The Company
is unable to determine what impact this proceeding may have on its
operations or financial position.
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With PSCW approval, Wisconsin Gas has implemented a small-
customer gas-supplier choice pilot program that is designed to test (1)
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 began on November 1, 1996, and has 2,114 small commercial and
residential participants. Wisconsin Gas expects to continue the pilot
program, with certain modifications.
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 now constitutes
approximately one-third of total gas distributed by the Company. In 1997,
Wisconsin Gas added over 8,000 new customers and has added more than
50,000 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, which was implemented on November 1, 1993, 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.
One of the provisions of Order No. 636 is capacity
release. Capacity release creates a secondary market for pipeline long-
line 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 1997, Wisconsin Gas continued
its active participation 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 and unseasonably warm weather.
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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.
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 2,821
Storage 4,826
NNG
Mainline 1,048
Storage 228
Viking
Mainline 77
Peaking Facilities 76
------------
Total 9,076
*One therm equals 100,000 BTU's.
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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 1,937
Canadian flowing gas 1,628
Storage withdrawals 5,054
Peaker withdrawals 76
-----------
Total 8,695
*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.
5) Potential New Pipeline Capacity
Viking Voyageur Gas Transmission LLC has filed an
application with the FERC to construct a 775-mile, 42-inch, high-pressure
natural gas pipeline from the United States - Canada border at Emerson,
Manitoba, Canada, to the Chicago area near Joliet, Illinois ("Viking
Voyageur"). The pipeline would run generally east from the Minneapolis
area to Marshfield, Wisconsin and then generally south to Chicago. The
pipeline would have a capacity of 1.4 billion cubic feet of gas per day.
The pipeline is proposed to be in service by November 1, 1999.
Wisconsin Gas is in the process of negotiating contracts
for the purchase of Canadian gas which the sellers would deliver to
various points in Wisconsin along the Viking Voyageur route. Wisconsin
Gas would file applications with the PSCW to construct one or more lateral
lines to connect the utility's distribution system on the Viking Voyageur.
The Viking Voyageur pipeline would provide benefits to
Wisconsin Gas and its customers in two major ways. First, it would
provide ongoing competition with ANR and NNG, which is likely to cause
overall gas bills to decline. Second, it would provide additional
capacity which will be necessary to meet future demand for gas and to
ensure gas service remains reliable.
Management cannot predict if or when Viking Voyageur will
be approved and constructed, nor if and when Wisconsin Gas will receive
approval for or construct laterals to connect to Viking Voyageur.
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d) Wisconsin Regulatory Matters
1) Rate Matters
Wisconsin Gas is subject to the jurisdiction of the PSCW
as to various phases of its operations, including rates, customer service
and issuance of securities.
Wisconsin Gas' rates were made subject to a three-year
total margin rate cap (through October 1997) based on the rates in effect
in November 1994. 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. The rates at
December 31, 1997, were $9.0 million below the cap because of annualized
rate reductions of $9.0 million beginning in 1995. On October 10, 1997,
the PSCW approved a one-year extension, to November 1, 1999, of the margin
cap mechanism.
2) Gas Cost Recovery
Wisconsin Gas' rates traditionally contained clauses
providing for periodic adjustment, with PSCW approval, to reflect changes
in purchased gas costs including the recovery of transition costs passed
through by pipeline suppliers. See "Wisconsin Regulatory Matters -
Transition Cost Recovery Policy."
The PSCW approved an incentive gas cost recovery mechanism
for Wisconsin Gas effective November 1, 1997. Under the mechanism,
monthly targeted gas supply costs, including upstream capacity costs, are
set. At the end of each 12-months, Wisconsin Gas' actual gas supply costs
are compared with the aggregate annual targeted costs. If Wisconsin Gas'
actual costs are written 1-1/2% (either above or below) the target costs,
Wisconsin Gas recovers its actual costs. If Wisconsin Gas' actual costs
are between 1-1/2% and 4% below the target, Wisconsin Gas and its
customers share the benefits equally. Similarly, if actual gas costs are
between 1-1/2% and 4% above the target, Wisconsin Gas and its customers
share the additional costs equally. If actual costs are outside the 4%
band either side of the target, the benefits and additional costs, as the
case may be, accrue to or are borne by customers.
3) Transition Cost Recovery Policy
Under Order No. 636, interstate pipelines are permitted to
recover certain costs incurred in the transition from the bundled sales
service to the unbundled Order No. 636 regime. ANR and NNG have filed to
recover transition costs and may file in the future to recover additional
transition costs. Wisconsin Gas will bear a portion of such additional
costs approved by the FERC. The PSCW has permitted Wisconsin Gas to
recover transition costs from customers through its rates.
In the judgment of management, the incurrence of these
transition costs will have no material effect on Wisconsin Gas' operations
or financial condition under current PSCW policy. See Note 8a to Notes to
Consolidated Financial Statements contained in Exhibit 13, consisting of
portions of the Company's 1997 Annual Report to Shareholders, which note
is hereby incorporated herein by reference.
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4) Changing Regulatory Environment
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. To date, the PSCW
has made a policy decision to deregulate gas prices for customer segments
with workably competitive market choices. The PSCW has identified
numerous issues which must be resolved before its policy can be
implemented. The PSCW has a number of work groups addressing these issues.
Work group recommendations to the PSCW are due over the next two years.
The Company is unable to determine what impact this proceeding may have on
Wisconsin Gas' operations or financial position.
e) Employees
The Company had 964 full-time equivalent active employees
at December 31, 1997
Item 2. PROPERTIES
Wisconsin Gas owns a distribution system which, on
December 31, 1997, included approximately 8,700 miles of distribution and
transmission mains, 435,700 services and 523,700 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. The
Company completed a comprehensive review of its potential environmental
liabilities stemming from these two former manufactured gas plant sites.
Significant technological developments, lower unit costs and the
recognition of the "brown fields" concept by regulatory agencies have all
resulted in a reduction in 1997 in the estimate of the probable liability
for cleanup to $12 million. This cleanup estimate considered a number of
factors, including the estimated extent and volume of contaminated soil
and/or groundwater and is based on current undiscounted costs. In
addition, management believes it is possible, but not likely, that
approximately $5 million in additional remediation costs may be incurred.
Expenditures over the next three years are expected to total approximately
$8 million.
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The cleanup estimate discussed above includes the costs of feasibility
studies, data collection, soil and groundwater remediation activities and
ongoing monitoring activities through 2017. Environmental remediation
work for one of the sites was commenced in the first quarter of 1998 and
will continue through 1999. It is reasonably possible that, due to
uncertainties associated with defining the nature and extent of
environmental contamination, application of laws and regulations by
regulatory authorities and changes in remediation technology, the ultimate
cost of remediation could change in the future. The Company periodically
reviews its accrued liabilities for such remediation costs as evidence
becomes available indicating that its remediation liability has changed.
Due to anticipated regulatory treatment, changes in the recorded cleanup
liability for manufactured gas plant sites do not immediately impact net
income. Under the current ratemaking treatment approved by the PSCW, the
costs expended in the environmental remediation of these sites, net of any
insurance proceeds, are deferred and recovered from gas customers.
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 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.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Omitted pursuant to General Instruction J (2) (c).
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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 $23.5 million of dividends
during the 12 months ending October 31, 1998. See Note 7 of Notes to
Financial Statements contained in Exhibit 13, consistency of portions of
the WICOR 1997 Annual Report to Shareholders, which note is incorporated
herein by reference. For the year ended December 31, 1997, the Company's
average common equity level was 53.3%.
The Company paid cash dividends of $22,000,000 and
$20,000,000 on common stock to WICOR in 1997 and 1996, 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 "Management's
Discussion and Analysis" set forth in the WICOR 1997 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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
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.
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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.
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3. Exhibits
3.1 Wisconsin Gas Company Restated Articles of Incorporation, as amended
(incorporated by reference to Exhibit 3.1 to the Company's Annual Report
on Form 10-K 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 Annual
Report on Form 10-K for 1994).
3.3 Wisconsin Gas Company By-laws, as amended (incorporated by reference
to Exhibit 3.3 to the Company's Annual Report on Form 10-K 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 August 6, 1997, among
Wisconsin Gas Company and Citibank, N.A., as Agent, Firstar Bank
Milwaukee, N. A., Harris Trust & Savings Bank and M&I Marshall & Ilsley
Bank (incorporated by reference to Exhibit 4.1 to the Company's Quarterly
Report on Form 10-Q dated as of October 31, 1997).
4.8 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).
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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 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. (incorporated by reference to Exhibit
4.16 to the Company's Annual Report on Form 10-K for 1996).
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 Annual Report on Form 10-K for 1995).
10.2# 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).
10.3# 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).
10.4# 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).
10.5# 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).
10.6# 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).
10.7# Form of Key Executive Employment and Severance Agreement between
the Company and certain of its executive officers (incorporated by
reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q
dated June 30, 1997).
10.8# Wisconsin Gas Company Principal Officers' Supplemental Retirement
Income Program (incorporated by reference to Exhibit 10.6 to the Company's
Annual Report on Form 10-K for 1993).
10.9# Wisconsin Gas Company 1998 Officers' Incentive Compensation Plan.
10.10# Wisconsin Gas Company Group Travel Accident Plan (incorporated by
reference to Exhibit 10.23 to the Company's Annual Report on Form 10-K for
1992).
10.11# 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 Annual Report on Form 10-K for 1991).
<PAGE>
<PAGE> 15
10.12# WICOR, Inc. 1987 Stock Option Plan, as amended (incorporated by
reference to Exhibit 4.1 to the Company's Form S-8 Registration Statement
No. 33-67134).
10.13# Form 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 Annual Report on Form 10-K for 1991).
13 "Financial Review" portions of WICOR, Inc. 1997 Annual Report to
Shareholders.
27 Financial Data Schedule. (EDGAR version only)
b) Reports on Form 8-K.
No reports on Form 8-K were filed during the fourth quarter of
1997.
<PAGE>
<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 18, 1998 By /s/ JOSEPH P. WENZLER
-----------------------
Joseph P. Wenzler
Vice President and
Chief Financial Officer
<PAGE>
<PAGE> 17
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons in
behalf of the registrant and in the capacities and in the dates
indicated.
Signature Title Date
BRONSON J. HAASE
Bronson J. Haase President and Chief Executive
Officer
(Principal Executive Officer) March 18, 1998
JOSEPH P. WENZLER
Joseph P. Wenzler Vice President and Chief March 18, 1998
Financial Officer
(Principal Financial and
Principal Accounting Officer)
WENDELL F. BUECHE
Wendell F. Bueche Director March 18, 1998
WILLIE D. DAVIS
Willie D. Davis Director March 18, 1998
JERE D. MCGAFFEY
Jere D. McGaffey Director March 18, 1998
DANIEL F. MCKEITHAN, JR.
Daniel F. McKeithan, Jr. Director March 18, 1998
GUY A. OSBORN
Guy A. Osborn Director March 18, 1998
THOMAS F. SCHRADER
Thomas F. Schrader Director March 18, 1998
STUART W. TISDALE
Stuart W. Tisdale Director March 18, 1998
GEORGE E. WARDEBERG
George E. Wardeberg Director March 18, 1998
ESSIE M. WHITELAW
Essie M. Whitelaw Director March 18, 1998
WILLIAM B. WINTER
William B. Winter Director March 18, 1998
<PAGE>
<PAGE> 18
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Wisconsin Gas Company:
We have audited the accompanying balance sheet and statements of
capitalization of WISCONSIN GAS COMPANY (a Wisconsin corporation and a
wholly owned subsidiary of WICOR, Inc.) as of December 31, 1997 and
1996, and the related statements of income, common equity and cash
flows for each of the three years in the period ended December 31,
1997. 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, 1997 and 1996, and the results of its
operations and its cash flows for each of the three years in the
period ended December 31, 1997, in conformity with generally accepted
accounting principles.
Milwaukee, Wisconsin, ARTHUR ANDERSEN LLP
March 13, 1998.
<PAGE>
<PAGE> 19
WISCONSIN GAS COMPANY
Statements of Income
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
(Thousands of Dollars)
<S> <C> <C> <C>
Operating Revenues $ 536,720 $ 573,255 $ 519,179
---------- ---------- ----------
Operating Expenses:
Cost of gas sold 342,749 365,398 318,728
Operations 84,647 91,436 95,042
Maintenance 8,535 8,767 6,932
Depreciation 31,714 32,848 28,950
Taxes, other than income taxes 9,600 9,230 9,331
---------- ---------- ----------
477,245 507,679 458,983
---------- ---------- ----------
Operating Income 59,475 65,576 60,196
---------- ---------- ----------
Interest expense 12,698 12,934 14,312
Other income and expenses (366) (662) 176
---------- ---------- ----------
Income Before Income Taxes 47,143 53,304 45,708
Income Taxes 17,808 20,580 17,311
---------- ---------- ----------
Net Income $ 29,335 $ 32,724 $ 28,397
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
<PAGE> 20
WISCONSIN GAS COMPANY
Balance Sheet
<TABLE>
<CAPTION>
As of December 31,
----------------------
1997 1996
---------- ----------
(Thousands of Dollars)
<S> <C> <C>
Assets
- ------
Property, Plant and Equipment, at cost $ 801,069 $ 786,486
Less - Accumulated depreciation 421,098 409,151
---------- ----------
379,971 377,335
---------- ----------
Current Assets:
Cash and cash equivalents 7,854 8,960
Accounts receivable, less allowance for
doubtful accounts of $12,363
and $7,955, respectively 72,238 73,540
Accounts receivable, intercompany, net 233 238
Accrued revenues 39,986 54,382
Gas in storage, at weighted average cost 40,657 32,684
Deferred income taxes 17,667 17,879
Prepaid taxes 6,162 6,411
Materials and supplies, weighted average cost 3,192 3,098
Other 1,984 1,668
---------- ----------
189,973 198,860
---------- ----------
Deferred Charges and Other:
Regulatory assets 53,910 82,259
Systems development costs 17,424 23,052
Prepaid pension costs 35,212 30,112
Other 7,398 7,372
---------- ----------
113,944 142,795
---------- ----------
$ 683,888 $ 718,990
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
<PAGE> 21
WISCONSIN GAS COMPANY
Balance Sheet
<TABLE>
<CAPTION>
As of December 31,
----------------------
1997 1996
---------- ----------
(Thousands of Dollars)
<S> <C> <C>
Capitalization and Liabilities
- ------------------------------
Capitalization (See accompanying statement):
Long-term debt $ 110,657 $ 152,453
Preferred stock - -
Common equity 215,249 206,568
---------- ----------
325,906 359,021
---------- ----------
Current Liabilities:
Accounts payable 43,491 64,548
Short-term borrowings 78,671 65,500
Current portion of long-term debt 42,000 2,000
Refundable gas costs 24,776 31,545
Accrued payroll and benefits 8,066 8,116
Accrued taxes 5,537 874
Other 3,829 4,334
---------- ----------
206,370 176,917
---------- ----------
Deferred Credits and Other:
Regulatory liabilities 36,533 43,406
Postretirement benefit obligation 48,942 51,359
Deferred income taxes 37,689 35,569
Environmental remediation costs 12,084 36,222
Unamortized investment tax credit 6,808 7,265
Other 9,556 9,231
---------- ----------
151,612 183,052
---------- ----------
Commitments and Contingencies (Note 7)
---------- ----------
$ 683,888 $ 718,990
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
<PAGE> 22
WISCONSIN GAS COMPANY
Statements of Cash Flow
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
(Thousands of Dollars) 1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Operations:
Net income $ 29,335 $ 32,724 $ 28,397
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation and amortization 39,820 41,111 36,646
Deferred income taxes 2,332 (2,183) (6,946)
Change in:
Receivables 15,698 (15,680) (29,253)
Gas in storage (7,973) (8,756) 14,121
Other current assets (410) (4,711) 688
Accounts payable (21,057) 23,469 (3,566)
Accrued taxes 5,266 (1,327) 8,546
Refundable gas costs (6,769) (2,802) 16,289
Other current liabilities (899) (950) 1,134
Other noncurrent assets and liabilities (11,228) (7,350) (1,100)
---------- ---------- ----------
44,115 53,545 64,956
---------- ---------- ----------
Investment Activities:
Capital expenditures (35,017) (36,586) (42,726)
Other,net 293 285 365
---------- ---------- ----------
(34,724) (36,301) (42,361)
---------- ---------- ----------
Financing Activities:
Change in short-term borrowings 13,171 8,000 (27,500)
Issuance of long-term debt - - 65,000
Reduction of long-term debt (2,000) (4,000) (54,000)
Cash dividends paid to WICOR, Inc. (22,000) (20,000) (16,000)
Other 332 253 89
---------- ---------- ----------
(10,497) (15,747) (32,411)
---------- ---------- ----------
Change in Cash and Cash Equivalents (1,106) 1,497 (9,816)
Cash and Cash Equivalents at beginning
of year 8,960 7,463 17,279
---------- ---------- ----------
Cash and Cash Equivalents at end of year $ 7,854 $ 8,960 $ 7,463
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
<PAGE> 23
WISCONSIN GAS COMPANY
Statements of Common Equity
<TABLE>
<CAPTION>
Accumulated
Other
Other Compre-
Common Paid-In Retained hensive
Total Stock Capital Earnings Income
---------- ------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994 $ 181,688 $ 9 $ 118,753 $ 64,233 $ (1,307)
Net income 28,397 - - 28,397 -
Other comprehensive income
Minimum pension
liability adjustment 408 - - - 408
---------- ------- ---------- ---------- ------------
Comprehensive income 28,805 - - 28,397 408
---------- ------- ---------- ---------- ------------
Cash dividends paid
to WICOR, Inc. (16,000) - - (16,000) -
Other 89 - 89 - -
---------- ------- ---------- ---------- ------------
Balance at December 31, 1995 194,582 9 118,842 76,630 (899)
Net income 32,724 - - 32,724 -
Other comprehensive income
Minimum pension
liability adjustment (307) - - - (307)
---------- ------- ---------- ---------- ------------
Comprehensive income 32,417 - - 32,724 (307)
---------- ------- ---------- ---------- ------------
Cash dividends paid
to WICOR, Inc. (20,000) - - (20,000) -
Other (431) - 253 (684) -
---------- ------- ---------- ---------- -----------
Balance at December 31, 1996 206,568 9 119,095 88,670 (1,206)
Net income 29,335 - - 29,335 -
Other comprehensive income
Minimum pension
liability adjustment (236) - - - (236)
---------- -------- --------- ---------- -----------
Comprehensive income 29,099 - - 29,335 (236)
---------- ------- ---------- ---------- -----------
Cash dividends paid
to WICOR, Inc. (22,000) - - (22,000) -
Other 1,582 - 1,582 - -
---------- ------- ---------- ---------- -----------
Balance at December 31, 1997 $ 215,249 $ 9 $ 120,677 $ 96,005 $ (1,442)
========== ======= ========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
<PAGE> 24
WISCONSIN GAS COMPANY
Statements of Capitalization
<TABLE>
<CAPTION>
As of December 31,
----------------------
1997 1996
---------- ----------
(Thousands of dollars)
<S> <C> <C>
Long-Term Debt
First mortgage bonds
Adjustable Rate Series, 9.3% and 7.4%,
respectively, due 1999 $ 2,000 $ 4,000
7-1/2% Notes due 1998 - 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 (1,343) (1,547)
---------- ----------
110,657 152,453
---------- ----------
Preferred Stock
Without 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 120,677 119,095
Retained earnings 96,005 88,670
Accumulated other comprehensive income (1,442) (1,206)
---------- ----------
215,249 206,568
---------- ----------
$ 325,906 $ 359,021
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
<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, 1997, Wisconsin
Gas served approximately 521,000 customers in 521 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'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, 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.
In October 1997, the PSCW approved Wisconsin Gas's proposed Gas
Cost Incentive Mechanism (GCIM) which became effective November 1, 1997.
The GCIM establishes a reference for the cost of gas, including pipeline
capacity and storage costs. The reference price is based on a current
month index of prices from the supply basins where the gas is purchased.
If the actual costs deviate from the reference by more than 1-1/2% but
less than 4%, the Company and its customers share equally in the amount
within the band. If actual costs deviate from the reference cost by
more than plus or minus 4%, Wisconsin Gas customers bear all the costs
above 4% and receive all the benefits of the costs below 4%.
c. Plant and Depreciation
Gas distribution property, plant and equipment is stated at
original cost, including overhead allocations. Upon ordinary retirement
of plant assets, original 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 4.3%, 4.5% and 4.2% for 1997, 1996 and 1995,
respectively.
The Company also owns equipment that it leases to customers and is
included in property, plant and equipment. This equipment is depreciated
on a straight line basis over its estimated useful life.
<PAGE>
<PAGE> 26
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).
The amounts recorded as regulatory assets and regulatory
liabilities in the balance sheet at December 31, 1997 and 1996 are as
follows:
(Thousands of Dollars) 1997 1996
---------- ----------
Regulatory assets:
Postretirement benefit costs (Note 8) $ 39,498 $ 42,275
Deferred environmental costs 76 23,025
Deferred uncollectible expenses 11,056 10,152
Income tax-related amounts
due from customers (Note 3) 2,648 3,003
Other 632 5,010
---------- ----------
$ 53,910 $ 83,465
========== ==========
Regulatory liabilities:
Income tax-related amounts
due to customers (Note 3) $ 19,725 $ 21,369
Unrecognized pension income (Note 8) 13,780 16,631
Other 3,028 5,406
---------- ----------
$ 36,533 $ 43,406
========== ==========
In the fourth quarter of 1997, Wisconsin Gas completed a
comprehensive review of its environmental clean-up liability which
ultimately resulted in a reduction of the liability to $12 million as of
December 31, 1997. The regulatory asset previously recorded was also
adjusted to reflect the results of this review. (See Note 7 for a more
detailed description of this matter.)
<PAGE>
<PAGE> 27
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 7 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 Flows, income
taxes paid (net of refunds) and interest paid were as follows for each
of the years ended December 31:
(Thousands of Dollars) 1997 1996 1995
- ----------------------- ---------- ---------- ----------
Income taxes paid $ 11,814 $ 29,048 $ 19,928
Interest paid $ 11,886 $ 11,763 $ 13,636
g. Derivative Financial Instruments
Wisconsin Gas has a limited involvement with derivative financial
instruments and does not use them for trading or speculative purposes.
Wisconsin Gas purchased derivatives in 1997 and 1996 to hedge a 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.
<PAGE>
<PAGE> 28
i. Non-Regulated Activities
Revenues and expenses associated with Wisconsin Gas's nonregulated
equipment leasing and other activities are recorded net in other income
and expense.
j. Reclassifications
Certain prior year financial statement amounts have been
reclassified to conform to their current year presentation.
2. NEW ACCOUNTING STANDARDS
During 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 130 (SFAS No. 130),
"Reporting Comprehensive Income," which became effective in fiscal year
1997. SFAS No. 130 establishes standards for the reporting and
displaying of comprehensive income and its components. Wisconsin Gas has
reported comprehensive income in the Statements of Common Equity.
American Institute of Certified Public Accountants Statement of
Position No. 96-1, "Environmental Remediation Liabilities," establishes
specific criteria for the recognition and measurement of environmental
remediation liabilities. The adoption of the statement in 1997 did not
have a significant effect on Wisconsin Gas's financial condition or
results of operation.
3. 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) 1997 1996 1995
- ------------------------ ---------- ---------- ----------
Current
Federal $ 13,198 $ 19,202 $ 23,645
State 3,216 4,724 5,851
---------- ---------- ----------
Total Current 16,414 23,926 29,496
---------- ---------- ----------
Deferred
Federal 707 (3,040) (10,101)
State 687 (306) (2,084)
---------- ---------- ----------
Total Deferred 1,394 (3,346) (12,185)
---------- ---------- ----------
Total Provision $ 17,808 $ 20,580 $ 17,311
========== ========== ==========
<PAGE>
<PAGE> 29
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:
(Thousands of Dollars)
<TABLE>
<CAPTION>
Year ended December 31, 1997 1996 1995
- ------------------------ --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Statutory U.S. tax rates $16,500 35.0% $18,656 35.0% $15,998 35.0%
State income taxes, net 2,629 5.6 2,948 5.5 2,542 5.6
Investment credit restored (451) (1.0) (453) (0.9) (457) (1.0)
Excess deferred
tax amortization (630) (1.3) (556) (1.0) (507) (1.1)
Other, net (240) (0.5) (15) - (265) (0.6)
--------------- --------------- ---------------
Effective Tax Rates $17,808 37.8% $20,580 38.6% $17,311 37.9%
=============== =============== ===============
</TABLE>
The components of deferred income tax assets and liabilities at
December 31, 1997 and 1996 are as follows:
(Thousands of Dollars) 1997 1996
- -------------------------- ---------- ----------
Current Deferred Income Tax Assets
Recoverable gas costs $ 9,712 $ 12,658
Inventory 4,036 2,080
Deferred compensation 1,907 2,011
Other 2,012 1,130
---------- ----------
$ 17,667 $ 17,879
========== ==========
Long-term Deferred Income Tax Liabilities
Property related $ 38,945 $ 37,692
Systems development costs 6,993 9,252
Pension benefits 8,649 5,458
Investment tax credit (4,503) (4,806)
Environmental (4,819) (5,297)
Postretirement benefits (3,791) (3,646)
Deferred compensation (2,921) (2,590)
Other (864) (494)
---------- ----------
$ 37,689 $ 35,569
========== ==========
<PAGE>
<PAGE> 30
4. SHORT-TERM BORROWINGS
During the third quarter of 1997, Wisconsin Gas renegotiated its
existing revolving credit agreement. Restrictive covenants under the
new five-year $30 million credit agreement which expires in August,
2002, include leverage and interest coverage ratios.
As of December 31, 1997 and 1996, Wisconsin Gas had total
unsecured lines of credit available from banks of $120.0 million and
$145.0 million, respectively. The credit lines may be used for, among
other purposes, the support of commercial paper issued by Wisconsin Gas.
At December 31, 1997, $78.7 million of commercial paper was outstanding
at a weighted average interest rate of 5.8%. At December 31, 1996,
$65.5 million of commercial paper was outstanding at a weighted average
interest rate of 5.7%.
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.
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. 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 the first mortgage bonds. At December
31, 1997, Wisconsin Gas had outstanding $2 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 $42.0 million and $2.0
million in 1998 and 1999, respectively and zero in 2000, 2001 and 2002.
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
it 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, $41.8 million of Wisconsin Gas's net assets at
December 31, 1997, 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 $5.5 million in dividends in November 1997 and expects to pay $23.5
million in dividends for the 12 months ending October, 1998. At December
31, 1997, Wisconsin Gas's equity was 53.3% of its total capitalization.
7. COMMITMENTS AND CONTINGENCIES
<PAGE>
<PAGE> 31
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 total approximately
$640 million, with annual required payments of $110 million in 1998 and
1999, $106 million in 2000, $101 million in 2001 and $97 million in
2002. Wisconsin Gas's total payments for firm pipeline and storage
capacity prior to recovery from sales of excess capacity were $126.6
million in 1997, $129.6 million in 1996 and $128.1 million in 1995. The
purchased gas adjustment provisions of Wisconsin Gas's rate schedules
permit the recovery of gas costs from its customers subject to the GCIM
sharing mechanism. 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 $4.2 million at December
31, 1997 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 (ANR) 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. Based on its contracted quantities with ANR,
Wisconsin Gas is currently paying approximately $100,000 per month of
Dakota costs.
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 1998 capital
expenditures. Wisconsin Gas capital expenditures for 1998 are estimated
at $45 million.
c. Environmental Matters
On February 21, 1997, Wisconsin Gas was named as a co-defendant in
an environmental cleanup lawsuit. 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 is vigorously defending
the suit. Although Wisconsin Gas 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.
<PAGE>
<PAGE> 32
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 completed a comprehensive review of its
potential environmental liabilities stemming from these two former
manufactured gas plant sites. Significant technological developments,
lower unit costs and the recognition of the "brown fields" concept by
regulatory agencies resulted in a reduction in 1997 in the estimate of
the probable liability for cleanup to $12 million. This cleanup estimate
considered a number of factors, including the estimated extent and
volume of contaminated soil and/or groundwater and is based on current
undiscounted costs. In addition, management believes it is possible, but
not likely, that approximately $5 million in additional remediation
costs may be incurred. Expenditures over the next three years are
expected to total approximately $8 million. These new estimates have
been reflected in Wisconsin Gas's Balance Sheet as of December 31, 1997.
The cleanup estimate discussed above includes the costs of
feasibility studies, data collection, soil and groundwater remediation
activities and ongoing monitoring activities through 2017. Environmental
remediation work for one of the sites commenced in the first quarter of
1998 and will continue through 1999. It is reasonably possible that, due
to uncertainties associated with defining the nature and extent of
environmental contamination, application of laws and regulations by
regulatory authorities and changes in remediation technology, the
ultimate cost of remediation could change in the future. Wisconsin Gas
periodically reviews its accrued liabilities for such remediation costs
as evidence becomes available indicating that its remediation liability
has changed.
Due to anticipated regulatory treatment, changes in the recorded
liability do not immediately impact net income. Under the current
ratemaking treatment approved by the PSCW, the costs expended in the
environmental remediation of these sites, net of any insurance proceeds,
would be deferred and recovered from gas customers.
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.
8. BENEFIT PLANS
a. Pension Plans
Wisconsin Gas has non-contributory pension plans which cover
substantially all its employees. 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>
<PAGE> 33
Subsequent to the 1997 measurement date, WICOR's Board of
Directors approved certain amendments to the plan for non-represented
employees of Wisconsin Gas, effective January 1, 1998. Such amendments
change the manner in which benefits accrue and the time at which
benefits become payable under the non-represented plan. Based on the
requirements of SFAS No. 87, Wisconsin Gas will measure plan assets and
liabilities at the January 1, 1998 amendment effective date. Wisconsin
Gas expects this interim 1998 measurement will result in an approximate
$14 million decrease to the accumulated benefit obligation compared to
obligations measured prior to the plan amendment. Based on this interim
measurement, Wisconsin Gas expects that 1998 pension income will
increase compared to the 1997 reported amount.
The following table sets forth the funded status of pension plans at
December 31, 1997 and 1996.
<TABLE>
<CAPTION>
Assets Exceed Accumulated Benefits
Accumulated Benefits Exceed Assets
---------------------- ----------------------
(Thousands of Dollars) 1997 1996 1997 1996
- ------------------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Accumulated benefit obligation
Vested benefits $ (71,527) $ (65,835) $ (4,139) $ (3,317)
Nonvested benefits (16,997) (15,379) (339) (1,400)
---------- ---------- ---------- ----------
(88,524) (81,214) (4,478) (4,717)
Effect of projected future
compensation levels (34,385) (30,793) (627) (581)
---------- ---------- ---------- ----------
Projected benefit obligation (122,909) (112,007) (5,105) (5,298)
Plan assets at fair value 209,160 176,991 - -
---------- ---------- ---------- ----------
Plan assets greater (less) than
projected benefit obligation 86,251 64,984 (5,105) (5,298)
Unrecognized net (asset)
liability at September 30,
1985 being recognized over
approximately 16 years (9,907) (11,380) 286 498
Unrecognized prior service costs 3,018 3,358 128 137
Unrecognized net (gain) loss (44,150) (26,850) 1,655 1,132
Additional minimum liability recorded - - (1,442) (1,206)
---------- ---------- ---------- ----------
Accrued pension asset (liability) $ 35,212 $ 30,112 $ (4,478) $ (4,737)
========== ========== ========== ==========
</TABLE>
The weighted average discount rate assumptions used in determining
the actuarial present value of the projected benefit obligation were
7.25%, 7.75% and 7.5% for 1997, 1996 and 1995, respectively. The
expected long-term rate of return on assets was 9.0% for 1997 and 1996
and 8.5% for 1995. The expected long-term rate of compensation growth
was 4.5% for 1997 and 1996 and 5.0% for 1995.
<PAGE>
<PAGE> 34
Net pension costs for each of the years ended December 31, include
the following (income) expense items:
(Thousands of Dollars) 1997 1996 1995
- --------------------------- ---------- ---------- ----------
Service costs $ 3,139 $ 3,732 $ 3,529
Interest costs on projected
benefit obligations 9,046 9,269 9,305
Actual (gain) on plan assets (40,067) (21,576) (21,057)
Net amortization and deferral 23,450 6,114 7,232
Amortization of
regulatory liability (2,851) (2,851) (2,851)
---------- ---------- ----------
Net pension income $ (7,283) $ (5,312) $ (3,842)
========== ========== ==========
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.
Subsequent to the 1997 measurement date, WICOR's Board of
Directors approved certain amendments to the plan for non-represented
employees of Wisconsin Gas, effective January 1, 1998. Such amendments
change the manner in which benefits accrue and the time at which
benefits become payable under the non-represented plan and impose a
limitation on the dollar amount of the employer's share of the cost of
covered benefits incurred by a plan participant. Wisconsin Gas expects
this interim 1998 measurement will result in an approximate $15 million
decrease to the accumulated benefit obligation compared to obligations
measured prior to the plan amendment. Based on this interim measurement,
the Company expects that the 1998 postretirement benefit cost will
decrease compared to the 1997 reported amount.
Net postretirement health care and life insurance costs for each
of the years ended December 31 consisted of the following components:
(Thousands of Dollars) 1997 1996 1995
- ---------------------- ---------- ---------- ----------
Service cost $ 1,920 $ 2,507 $ 1,847
Interest cost on projected
benefit obligation 5,388 5,836 5,336
Actual (gain) on plan assets (11,356) (4,695) (6,185)
Amortization of regulatory asset 2,778 2,778 2,778
Net amortization and deferral 5,579 460 2,477
---------- ---------- ----------
Net postretirement benefit cost $ 4,309 $ 6,886 $ 6,253
========== ========== ==========
<PAGE>
<PAGE> 35
The following table sets forth the plans' funded status,
reconciled with amounts recognized in Wisconsin Gas's Balance Sheet at
December 31, 1997 and 1996, respectively.
(Thousands of Dollars) 1997 1996
- ----------------------------------- ---------- ----------
Retirees $ (40,981) $ (36,748)
Active employees (45,005) (43,179)
---------- ----------
Accumulated benefit obligation (85,986) (79,927)
Plan assets at fair value 58,907 46,562
---------- ----------
Accumulated benefit obligation
in excess of plan assets (27,079) (33,365)
Unrecognized prior service costs (13,475) (14,432)
Unrecognized actuarial (loss) (8,388) (3,562)
---------- ----------
Postretirement benefit obligation $ (48,942) $ (51,359)
========== ==========
The postretirement benefit cost components for 1997 were
calculated assuming health care cost trend rates beginning at 11% in
1997 and decreasing to 5% in 17 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, 1997, by
$12.3 million and the aggregate of the service and interest cost
components of postretirement expense by $1.3 million.
The assumed discount rate used in determining the actuarial
present value of the accrued postretirement benefit obligation was
7.25%, 7.75% and 7.5% in 1997, 1996 and 1995, 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 9.d. Total contributions were
valued at $1.2 million in 1997, 1996 and 1995.
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 (6.2% interest rate at December 31, 1997), 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 ($3.6
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 held by the ESOP and with Wisconsin Gas
contributions to the ESOP.
<PAGE>
<PAGE> 36
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, the
Company would probably not be affected by realization of gains or losses
on extinguishment of its outstanding fixed-rate debt. Realized gains
would be refunded to and losses would be recovered from Wisconsin Gas
customers through gas rates.
The estimated fair value of Wisconsin Gas's long-term debt at
December 31 is as follows:
1997 1996
------------------ ------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
Cash and cash equivalents $ 7,854 $ 7,854 $ 8,960 $ 8,960
Accounts receivable $ 72,238 $ 72,238 $ 73,540 $ 73,540
Short-term debt $ 78,671 $ 78,671 $ 65,500 $ 65,500
Long-term debt $110,657 $111,999 $152,453 $152,154
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
- ----------------------- --------- ---------- --------- ----------
1997
Operating Revenues $226,242 $ 93,280 $ 58,537 $ 158,661
Operating Income (Loss) $ 41,671 $ 3,353 $ (7,835) $ 22,286
Net Income (Loss) $ 23,916 $ 331 $ (6,576) $ 11,664
1996
Operating Revenues $216,111 $ 107,269 $ 71,610 $ 178,265
Operating Income (Loss) $ 46,753 $ 2,734 $ (8,139) $ 24,228
Net Income (Loss) $ 26,502 $ 1 $ (6,612) $ 12,833
<PAGE>
<PAGE> 37
INDEX TO Exhibits
3.1 Wisconsin Gas Company Restated Articles of Incorporation, as
amended (incorporated by reference to Exhibit 3.1 to the Company's
Annual Report on Form 10-K 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
Annual Report on Form 10-K for 1994).
3.3 Wisconsin Gas Company By-laws, as amended (incorporated by
reference to Exhibit 3.3 to the Company's Annual Report on Form 10-K
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 August 6, 1997, among
Wisconsin Gas Company and Citibank, N.A., as Agent, Firstar Bank
Milwaukee, N. A., Harris Trust & Savings Bank and M&I Marshall &
Ilsley Bank (incorporated by reference to Exhibit 4.1 to the
Company's Quarterly Report on Form 10-Q dated as of October 31,
1997).
4.8 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>
<PAGE> 38
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 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.
(incorporated by reference to Exhibit 4.16 to the Company's Annual
Report on Form 10-K for 1996).
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 Annual Report on Form 10-K for 1995).
10.2# 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).
10.3# 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).
10.4# 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).
10.5# 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).
10.6# 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).
10.7# Form of Key Executive Employment and Severance Agreement
between the Company and certain of its executive officers
(incorporated by reference to Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q dated June 30, 1997).
10.8# Wisconsin Gas Company Principal Officers' Supplemental
Retirement Income Program (incorporated by reference to Exhibit 10.6
to the Company's Annual Report on Form 10-K for 1993).
10.9# Wisconsin Gas Company 1998 Officers' Incentive Compensation
Plan.
10.10# Wisconsin Gas Company Group Travel Accident Plan
(incorporated by reference to Exhibit 10.23 to the Company's Annual
Report on Form 10-K for 1992).
10.11# 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 Annual Report on Form 10-K for 1991).
<PAGE>
<PAGE> 39
10.12# WICOR, Inc. 1987 Stock Option Plan, as amended (incorporated
by reference to Exhibit 4.1 to the Company's Form S-8 Registration
Statement No. 33-67134).
10.13# Form 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 Annual Report on Form
10-K for 1991).
13 "Financial Review" portions of WICOR, Inc. 1997 Annual Report to
Shareholders.
27 Financial Data Schedule. (EDGAR version only)
<PAGE> 1
EXHIBIT 10-9
Wisconsin Gas Company
1998 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 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>
<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:
Performance Level 1998 Return on Capital Award as a % 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.
Performance Plus Performance Plus Award modification
Achievement Points as a % of Target
---------------- ---------------- ------------------
Below Threshold < 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>
<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.
V. Performance
Company performance goals will be for the 1998 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.
<PAGE>
<PAGE> 4
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, 1998, and
a definite time period for deferral must be specified.
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.
<PAGE>
<PAGE> 5
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, 1998.
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.
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>
<PAGE> 6
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.
<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
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.
WICOR's 1997 financial results exceeded 1996's record performance as net
income rose by 6% to $49.5 million. Basic earnings per share in 1997 rose 5%
to $2.68 compared with 1996, as the Company's manufacturing business posted
significantly improved results. Basic earnings per share in 1997 reached a
record high for the second year in a row.
The 1997 improvement in the Manufacturing Group is attributable to higher
domestic shipments within the beverage, agricultural spraying and pool/spa
markets compared to 1996. Internal cost reductions and a strengthening in the
Company's Australian operations also contributed to the improvement in
earnings.
Segment data for WICOR's operations for the last three years are summarized
below in millions of dollars.
1997 1996 1995
Operating Revenues ---------- ---------- ----------
- ------------------------
Energy $ 596.3 $ 602.7 $ 522.8
Manufacturing-Domestic 280.9 269.0 207.6
Manufacturing-Foreign 143.8 140.9 130.2
---------- ---------- ----------
$ 1,021.0 $ 1,012.6 $ 860.6
========== ========== ==========
1997 1996 1995
Depreciation and Amortization ---------- ---------- ----------
- -----------------------------
Energy $ 40.0 $ 40.9 $ 36.7
Manufacturing-Domestic 10.4 10.7 8.8
Manufacturing-Foreign 3.3 3.3 3.0
---------- ---------- ----------
$ 53.7 $ 54.9 $ 48.5
========== ========== ==========
1997 1996 1995
Operating Income ---------- ---------- ----------
- ----------------------
Energy $ 59.0 $ 64.5 $ 58.8
Manufacturing-Domestic 23.3 18.2 13.7
Manufacturing-Foreign 11.7 8.0 6.6
---------- ---------- ----------
$ 94.0 $ 90.7 $ 79.1
========== ========== ==========
<PAGE>
<PAGE> 2
Estimated
Capital Expenditures 1998 1997 1996 1995
- ---------------------- ---------- ---------- ---------- ----------
Energy $ 45.0 $ 35.1 $ 36.6 $ 42.9
Manufacturing-Domestic 13.1 13.3 11.3 8.2
Manufacturing-Foreign 2.9 3.2 3.8 5.1
---------- ---------- ---------- ----------
$ 61.0 $ 51.6 $ 51.7 $ 56.2
========== ========== ========== ==========
Identifiable Assets 1997 1996 1995
- ------------------- ---------- ---------- ----------
Energy $ 697.3 $ 730.8 $ 718.3
Manufacturing-Domestic 249.6 215.8 206.5
Manufacturing-Foreign 84.4 90.8 83.7
---------- ---------- ----------
$ 1,031.3 $ 1,037.4 $ 1,008.5
========== ========== ==========
Results of Operations
---------------------
Energy Group
- ------------
The Energy Group's primary business is the distribution of natural gas through
Wisconsin Gas. Energy Group operating income decreased by $5.5 million, or 9%,
in 1997 as compared with 1996. This decrease was due primarily to reduced
sales margins resulting from warmer weather and voluntary rate reductions.
Lower operating expenses partially offset the decrease in sales margin.
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
<PAGE>
<PAGE> 3
Revenues, margins and volumes are summarized below. Margin, defined as
revenues less cost of gas, is a better comparative performance indicator than
revenues. Historically, transportation service revenues were recorded at a
slightly higher margin than 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 has a
minimal impact on margin. In addition, prior to November 1997, changes in cost
of gas flowed through to revenue under a purchased gas adjustment clause, with
no effect on margin. The following tables set forth financial data for the
Energy Group as a whole and volume data for Wisconsin Gas on an individualized
basis for each of the years ended December 31.
Millions of Dollars 1997 1996 1995
---------- ---------- ----------
Revenues $ 573.8 $ 588.3 $ 515.0
Cost of gas sold 394.1 393.7 322.2
---------- ---------- ----------
Sales margin 179.7 194.6 192.8
Gas transportation margin 22.5 14.4 7.8
---------- ---------- ----------
Gross margin 202.2 209.0 200.6
---------- ---------- ----------
Operation and maintenance 101.8 102.3 103.5
Depreciation 31.8 32.9 29.0
Interest and other 11.7 12.2 14.2
Taxes, other than income taxes 9.6 9.3 9.3
---------- ---------- ----------
Income before income taxes 47.3 52.3 44.6
Income taxes 17.8 20.2 16.9
---------- ---------- ----------
Net earnings $ 29.5 $ 32.1 $ 27.7
========== ========== ==========
Millions of therms 1997 1996 1995
---------- ---------- ----------
Sales volumes
Firm 791 883 841
Interruptible 73 196 314
Transport volumes 428 276 145
---------- ---------- -----------
Total throughput 1,292 1,355 1,300
========== ========== ==========
Total Energy Group margin decreased by 3% in 1997 primarily as a result of a
10% decrease in firm sales volumes and a $3.0 million voluntary annual rate
reduction effective November 1996, offset in part by a decrease in operating
expenses. Utility margin rates have been reduced an aggregate of $9.0 million
as a result of a November 1994 rate order of the Public Service Commission of
Wisconsin (PSCW) through voluntary annualized rate reductions of $1.5 million,
$3.0 million and $4.5 million in 1997, 1996 and 1995, respectively. The
weather in 1997 was 1% colder than the 20-year average and 5% warmer than
1996.
<PAGE>
<PAGE> 4
Annual Degree Days Line/Area Chart
% colder (warmer) than 20-year normal
1993 1994 1995 1996 1997
---------- ---------- ---------- ---------- ----------
(4.1) (9.0) (2.8) 6.8 1.0
Energy Group margin increased by 4% in 1996. The increase in 1996 margin
compared to 1995 was largely the result of a 5% increase in firm sales volumes
which was partially offset by voluntary rate reductions. The weather in 1996
was 7% colder than the 20-year average and 9% colder than 1995.
Transportation volumes in both 1997 and 1996 increased mainly because more
customers purchased gas from sources other than Wisconsin Gas and transported
this volume over the Wisconsin Gas distribution system. Historically, the
movement to transportation from gas sales has had no impact on margin.
Effective November 1, 1997, a slightly lower margin rate was put into effect
for transportation-only customers. The future impact of this change on total
Company margin is expected to be immaterial.
Non-regulated energy operating revenues in 1997 increased by $30.1 million, or
102% to $59.5 million. This increase in non-regulated energy revenues
consisted largely of increased gas sales at WICOR Energy Services (WESCO)
primarily as a result of customer growth. The WESCO strategy has been to have
gas supply arrangements consistent with customer requirements so that the
Company is not exposed to significant commodity risk.
Total operating and maintenance expenses of $101.8 million for 1997 decreased
$0.5 million compared with the prior year. The decrease resulted primarily
from lower labor and benefit expenses, which included a reduction in post-
retirement benefit expenses reflecting improved health care cost experience.
The decrease was partially offset by higher costs associated with the
increased operating activities of FieldTech, Inc. (FieldTech) and increased
levels of outside services.
Operation and maintenance expenses decreased $1.2 million, or 1%, in 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.
Depreciation expense for 1997 decreased by $1.1 million, or 3%, compared with
1996. This decrease was due to the second year impact of the depreciation
rates approved by the PSCW, the effect of which was partially offset by
additions to property, plant and equipment. Depreciation expense in 1998 is
expected to increase due to planned capital investments.
Depreciation expense for 1996 increased by $3.9 million, or 13%, compared with
1995. The increase was due to additions to plant and increased depreciation
rates permitted by the PSCW.
<PAGE>
<PAGE> 5
Manufacturing Group
- -------------------
The Manufacturing Group had an outstanding year in 1997. Net sales for 1997
rose 4% to a record $424.8 million, outpacing sales of $409.9 million in 1996.
Net income for the year increased 38% to a record $20.1 million compared to
the prior year. Net income in 1996 includes one-time charges totaling $1.2
million relating to the settlement of a product liability lawsuit and the
consolidation of two Wisconsin manufacturing plants.
Financial data regarding the Manufacturing Group are set forth in the table
below.
Millions of Dollars 1997 1996 1995
---------- ---------- ----------
Revenues $ 424.8 $ 409.9 $ 337.8
Cost of sales 307.2 297.1 245.7
---------- ---------- ----------
Gross profit 117.6 112.8 92.1
Operating expenses 82.6 86.6 71.8
---------- ---------- ----------
Operating income 35.0 26.2 20.3
Interest expense and other 4.4 5.1 2.7
---------- ---------- ----------
Income before income taxes 30.6 21.1 17.6
Income taxes 10.5 6.5 5.8
---------- ---------- ----------
Net earnings $ 20.1 $ 14.6 $ 11.8
========== ========== ==========
Domestic manufacturing sales in 1997 increased by 4% to $280.9 million as
compared with 1996. Domestic shipments for beverage, agricultural spraying and
pool/spa markets were up from the prior year. International sales of $143.8
million increased 2% compared to 1996. The increase in international sales was
negatively impacted by currency translation related to the strengthening U.S.
dollar and the weakening of the Korean economy.
Manufacturing sales in 1996 increased $72.1 million, or 21%, to $409.9 million
compared to 1995. The increase was due partly to the incremental sales from
the acquisition of Hypro Corporation (Hypro), which accounted for $25.9
million of the increase (See Note 3 of Notes to Consolidated Financial
Statements). 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
1995. 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. International
sales accounted for 34% of total manufacturing net sales in 1997 and 1996 and
39% in 1995.
International Revenues
in millions of dollars
(CHART)
1993 1994 1995 1996 1997
---------- ---------- ---------- ---------- ----------
$ 93.8 $ 114.2 $ 130.2 $ 140.9 $ 143.8
<PAGE>
<PAGE> 6
In 1997, manufacturing operating income was $35.0 million compared with $26.2
million in 1996 and $20.3 million in 1995. The increase in 1997 operating
income is attributable to increased sales, plant consolidations and cost-
saving programs, as well as continuing productivity improvements. 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.
WICOR Operating Income
in millions of dollars
(CHART)
1993 1994 1995 1996 1997
---------- ---------- ---------- ---------- ----------
$ 64.0 $ 66.6 $ 79.1 $ 90.7 $ 94.0
Operating expenses decreased by 5% in 1997 compared to the prior year due to
cost reduction programs and improved performance of the Australian operations.
Operating expenses increased by 21% in 1996 over 1995 due primarily to
increased sales-related expenses. As a percentage of sales, 1997 operating
expenses were 19% of sales compared to 21% in both 1996 and 1995.
In order to reduce costs and improve productivity and asset utilization, the
Company has recently taken steps to consolidate certain of its manufacturing
operations. These activities resulted in the 1997 closing of a plant located
in Waterford, Wisconsin, and the closing, in 1996, of a plant located in
Detroit, Michigan. As a result of these closures, the Company recorded an
after-tax charge of $0.7 million in 1996.
Interest Expense, Other Income and Income Taxes
- -----------------------------------------------
Interest expense in 1997 decreased $0.9 million, or 5%, compared to last year.
This decrease resulted from lower average borrowing levels and slightly lower
interest rates.
Interest expense of $18.3 million for 1996 was $0.9 million, or 5%, lower than
in 1995, primarily due to lower average interest rates. The lower rates were
partially offset by increased debt incurred in connection with the Hypro
acquisition.
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 by $1.6 million in 1997, or 6%, compared to 1996
reflecting increased pre-tax income. Income tax expense increased $4.0 million
in 1996 compared to 1995 reflecting increased pre-tax income. The effective
income tax rate remained relatively unchanged in 1997, 1996 and 1995
<PAGE>
<PAGE> 7
New Accounting Standards
- ------------------------
During 1997, the Financial Accounting Standards Board (FASB) issued two new
accounting standards which the Company adopted in 1997. Statement of
Financial Accounting Standards (SFAS) No. 128 "Earnings Per Share,"
establishes standards for computing and presenting earnings per share (EPS)
for the current year and all prior period EPS data. SFAS No. 130 "Reporting
Comprehensive Income," establishes standards for the reporting and displaying
of comprehensive income.
American Institute of Certified Public Accountants Statement of Position No.
96-1, "Environmental Remediation Liabilities," establishes specific criteria
for the recognition and measurement of environmental remediation liabilities.
The adoption of these statements in 1997 did not have a significant effect on
the Company's financial condition or results of operation.
Effects of Changing Prices
- --------------------------
In management's opinion, 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 November 1997, the PSCW approved a one-year extension of the margin rate
cap through October 31, 1999. After reviewing the impact of the margin rate
cap and other factors, management believes that Wisconsin Gas's productivity
improvements have offset the impact of inflationary cost increases. This
alternative method is discussed on page 24 under "Regulatory Matters."
Liquidity and Capital Resources
- -------------------------------
The Company has access to outside capital markets and has been able to
generate funds internally to meet its investment needs. 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 $74.8 million at the end of 1997 compared to
$83.4 million and $74.6 million at the end of 1996 and 1995, respectively. The
Company's current ratio at December 31 was 1.2 in 1997 and 1.3 in both 1996
and 1995.
Because of timing differences in the receipt and disbursement of cash and the
level of construction requirements, the Energy Group may borrow on a short-
term basis. 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
<PAGE>
<PAGE> 8
Cash flows from operating activities decreased by $26.1 million to $49.3
million in 1997. The decrease is attributable to lower gas prices and warmer
weather in the fourth quarter of 1997, as compared to 1996, which resulted in
a lower accounts payable balance at December 31, 1997. Cash flows from
operating activities increased by $5.5 million to $75.4 million in 1996 as
compared with 1995.
The Company believes that cash provided from operating activities over the
next three years will satisfy normal ongoing cash requirements. The Company
may need external capital for financing acquisitions, scheduled debt
retirement and the proposed pipeline project discussed below.
Various outside parties have proposed to construct a Viking Voyageur pipeline
which will extend from the Minnesota-Canada border to Joliet, Illinois and
cross the state of Wisconsin. If the proposed pipeline is built, Wisconsin Gas
expects that it would construct lateral lines to connect to the new pipeline.
The proposed owners of Viking Voyageur filed an application to construct the
pipeline with the Federal Energy Regulatory Commission (FERC) in October 1997,
and, if approved, the pipeline is scheduled to be in service on November 1,
1999. The Company is actively supporting the project because it will provide
additional pipeline capacity to serve future growth in Wisconsin, increase the
reliability of supply for the state and create true competition for pipeline
capacity serving Wisconsin. As a result, the pipeline should reduce the cost
of gas delivered to the state. The Company anticipates that additional outside
financing may be needed to construct the lateral lines if the pipeline project
is approved.
Investment Activities
- ---------------------
Capital expenditures of $51.6 million in 1997 remained relatively flat
compared to the prior year. Consolidated capital expenditures are expected to
increase modestly in 1998, and are expected to be funded from operations.
Capital expenditures decreased by $4.5 million in 1996 compared to 1995.
During fiscal 1997, WICOR and its subsidiaries consummated four acquisitions
totaling approximately $10 million using a combination of cash and the
issuance of approximately 128,000 shares of the Company's common stock. Three
of the acquisitions involved pump, fluid processing and filtration equipment
companies. The fourth acquisition was a contract meter reading and meter
installation company. Each of the acquisitions was accounted for as a purchase
and the results of operations of the acquired companies were included in the
consolidated financial statements of the Company from their respective
acquisition dates.
In January 1995, WICOR sold its interest in Filtron Technologies Corporation,
a manufacturer of filtration products, for approximately $5.1 million.
In 1992, the PSCW issued an order prescribing an equity-based formula for
determining the limitation on nonutility investments. As of December 31, 1997,
WICOR would be permitted to invest an additional $45.7 million in nonutility
equity under this order. Nonutility subsidiaries can also borrow additional
amounts for acquisitions within certain PSCW guidelines (See Note 7 of Notes
to Consolidated Financial Statements)
<PAGE>
<PAGE> 9
Financing Activities
- --------------------
Cash flows used by financing activities were $6.3 million in fiscal 1997,
primarily resulting from scheduled repayments of long-term debt and dividend
payments. During 1997, the Company, and certain subsidiaries, renegotiated
their existing revolving credit facilities and subsequently refinanced the
remaining outstanding principal balance (approximately $27 million) of the
credit facility entered into in connection with the July 1995 acquisition of
Hypro. Restrictive covenants under the new five-year $115 million credit
facilities, which expire on August 6, 2002, include leverage and interest
coverage ratios.
The Company's ratio of long-term debt to capitalization decreased to 28% in
1997 as compared to 32% in 1996 and 34% in 1995. The utility's embedded cost
of long-term debt was 7.1%, 7.0% and 8.1% for the years ended December 31,
1997, 1996 and 1995, respectively.
WICOR raised its common stock dividend by 2.4% in both 1997 and 1996 and by
2.5% 1995. The current annual dividend rate is $1.72 per share. At December
31, 1997, the Company had $127.3 million of unrestricted retained earnings
available for dividend payments to shareholders.
WICOR Return on Average Common Stock
as a percentage
(CHART)
1993 1994 1995 1996 1997
---------- ---------- ---------- ---------- ----------
11.2% 11.6% 13.1% 12.9% 13.0%
The WICOR Plan, established in 1992, allows investors to purchase WICOR common
stock directly and through dividend reinvestment without paying fees or
service charges. Since February 1, 1995, share requirements for the WICOR Plan
have been met through open market purchases of WICOR common stock.
As described in Note 7 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 decreased to 4.5 in
1997 from 4.9 in 1996, as a result of lower earnings, the effects of which
were offset in part by fixed charges that were 2% lower in 1997 than in 1996.
Access to capital markets at a reasonable cost is determined in large part by
credit quality. Wisconsin Gas's strong financial position, as evidenced by
Moody's Investors Service 1997 upgrade of its long-term debt from Aa3 to Aa2,
provides a high degree of flexibility in obtaining funds on competitive terms.
Standard and Poor's Corporation's current rating is AA-. These ratings reflect
the views of such organizations, and an explanation of the significance of
these ratings may be obtained from each agency. Such ratings are not a
recommendation to buy, sell or hold securities, but rather an indication of
creditworthiness
<PAGE>
<PAGE> 10
The Company and its subsidiaries maintain lines of credit worldwide. The
Company's primary domestic line of credit is a $115 million unsecured
revolving credit commitment from several banks which expires August 6, 2002.
In addition, the Company has arranged lines of credit from foreign lenders
which allow it to borrow in the applicable local currency. These lines of
credit total $35.0 million and are concentrated in Australia, Canada and
Italy. The Company's lines of credit generally provide borrowing at the bank
reference rate or better which varies depending on the country where the funds
are borrowed. The Company's domestic lines of credit are subject to standard
covenants relating to leverage and interest coverage ratios. The Company was
in compliance with all financial covenants at December 31, 1997. Wisconsin Gas
and WICOR Industries finance working capital needs by issuing commercial paper
in the open market. Commercial paper outstanding, on a consolidated basis, at
December 31, 1997 and 1996 was $125.2 million and $71.6 million, respectively.
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 natural 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 also adopted standards for
transactions between a utility and its gas marketing affiliates. The PSCW has
established working groups to study and make recommendations on major
deregulation issues. These working groups are scheduled to complete their work
at various times in 1998 and 1999. The impact of these proceedings on
Wisconsin Gas's future operations is uncertain at this time.
Wisconsin Gas is actively seeking to create the competitive market conditions
necessary to exit the natural gas sales business and provide only gas
transportation services within its utility service territory. In response to
filings made by Wisconsin Gas, the PSCW approved gas supplier choice pilot
programs for segments of the utility's firm market effective November 1, 1996.
These programs, with some refinements, were extended for a second year
beginning in November 1997. Under these limited pilot programs, 216 large-
volume firm, 688 commercial and 1,426 residential customers elected to
purchase gas through third-party gas suppliers until October 31, 1998. 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 participating in
the pilot programs.
At this point, it is uncertain how long 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 what costs, if any, shareholders might be required
to bear in connection with existing contractual commitments and in
transforming Wisconsin Gas's business
<PAGE>
<PAGE> 11
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. At Wisconsin Gas's request, the PSCW extended the margin cap to
October 31, 1999. 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 $4.5 million on an annualized
basis in 1997, 1996 and 1995, respectively. With these reductions, Wisconsin
Gas's rates are designed to recover $9.0 million per year less than the
maximum margin recovery allowed by the PSCW's rate order. The Productivity-
based Alternative Ratemaking Mechanism (PARM) has certain criteria that allow
either Wisconsin Gas or the PSCW to reopen PARM at any time. These are for
significant deterioration in safety, failures to meet conservation goals,
significant changes in interest rates and "extraordinary items." To date, none
of the criteria have been triggered.
As required by the PSCW, Wisconsin Gas filed a Gas Cost Incentive Mechanism
(GCIM) specifying how Wisconsin Gas would recover in rates its costs of
acquiring gas and pipeline transportation and storage capacity. The GCIM
replaced the traditional dollar-for-dollar purchased gas adjustment clause
(PGA). The PSCW approved Wisconsin Gas's proposal, with modification,
effective November 1, 1997. Under the GCIM, Wisconsin Gas's gas and capacity
costs are compared to monthly benchmarks. If, at the end of each year, such
costs deviate by more than 1-1/2% from the benchmark cost of gas, the utility
shares such excess or reduced costs on a 50-50 basis with customers. The
sharing mechanism applies only to costs between 1-1/2% to 4% above or below
the benchmark. The new PGA mechanism provides an opportunity for Wisconsin
Gas's earnings to increase or decrease as a result of gas and capacity
acquisition activities. However, management does not believe such increases or
decreases are likely to be material. During the first two months under the
GCIM, actual costs were within 1-1/2% of the benchmark.
ANR Pipeline Company's (ANR) 1993 general rate case before the FERC was
settled by the parties in November 1997. ANR is a primary supplier to
Wisconsin Gas. The settlement provides for a reduction in the rates for most
of ANR's services. The settlement is subject to FERC's approval which is
expected in the first quarter of 1998.
Wisconsin Gas complies with the provisions of Statement of Financial
Accounting Standards (SFAS No. 71) "Accounting for the Effects of Certain
Types of Regulation," which 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. In the event Wisconsin Gas determines that it no longer meets the
criteria for following SFAS 71, the accounting impact would be an
extraordinary, non-cash charge to operations of an amount that could be
material. Criteria that give rise to the discontinuance of SFAS 71 include (1)
increasing competition that restricts Wisconsin Gas's ability to establish
prices to recover specific costs and (2) a significant change in the manner in
which rates are set by regulators from cost-based regulation to another form
of regulation. 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
<PAGE>
<PAGE> 12
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 the recovery through rates of costs that have been passed through
to Wisconsin Gas. 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 has prepared and submitted to the Wisconsin Department of
Natural Resources a remedial action options report and recommendation
concerning a previously owned site on which Wisconsin Gas operated a
manufactured gas plant. Wisconsin Gas started remediation at this site in the
first quarter of 1998. Furthermore, Wisconsin Gas will address a second such
site during 1998. 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 8 of Notes
to Consolidated Financial Statements.
Year 2000 Date Conversion
- -------------------------
The Company recognizes the need to ensure its operations will not be adversely
impacted by Year 2000 software failures. Potential software failures due to
processing errors arising from calculations using the Year 2000 date are a
risk. The Company is in the process of addressing this risk to the
availability, reliability and integrity of financial and operational systems.
The Company has established processes for evaluating and managing the risks
and costs associated with this problem. The computing portfolio was identified
and an initial assessment has been completed. The cost for the Company of
achieving Year 2000 compliance is estimated to be approximately $5 million
over the cost of normal software upgrades and replacements through fiscal
1999. As of December 31, 1997, nearly $2 million has been incurred to achieve
Year 2000 compliance.
<PAGE>
<PAGE> 13
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, 1997 and 1996, and the related consolidated statements of income,
common equity and cash flows for each of the three years in the period ended
December 31, 1997. 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, 1997 and 1996, and the results of their operations and
their cash flows for each of the three years in the period ended December 31,
1997, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Milwaukee, Wisconsin,
January 26, 1998.
<PAGE>
<PAGE> 14
WICOR, INC.
Consolidated Statements of Earnings
<TABLE>
<CAPTION>
thousands of dollars,
except per share amounts Years Ended December 31,
----------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Operating Revenues
Energy $ 596,262 $ 602,685 $ 522,840
Manufacturing 424,779 409,916 337,754
------------ ------------ ------------
1,021,041 1,012,601 860,594
------------ ------------ ------------
Operating Costs and Expenses
Cost of gas sold 394,101 393,681 322,198
Manufacturing cost of sales 307,160 297,053 245,688
Operations and maintenance 182,976 187,557 174,515
Depreciation and amortization 33,173 34,355 29,696
Taxes, other than income taxes 9,602 9,244 9,421
------------ ------------ ------------
927,012 921,890 781,518
------------ ------------ ------------
Operating Income 94,029 90,711 79,076
------------ ------------ ------------
Interest expense (17,404) (18,349) (19,299)
Other income and expenses 1,222 1,114 2,438
------------ ------------ ------------
Income Before Income Taxes 77,847 73,476 62,215
Income taxes 28,324 26,705 22,688
------------ ------------ ------------
Net Earnings $ 49,523 $ 46,771 $ 39,527
============ ============ ============
Per Share of Common Stock
- -------------------------
Basic earnings $ 2.68 $ 2.55 $ 2.32
Diluted earnings $ 2.66 $ 2.53 $ 2.31
Cash dividends paid $ 1.70 $ 1.66 $ 1.62
Average common shares
outstanding (thousands) 18,475 18,365 17,020
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
<PAGE> 15
WICOR, INC.
Quarterly Financial Data (unaudited)
<TABLE>
<CAPTION>
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
Quarters: First Second Third Fourth(b)
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
1997
- ----
Operating revenues $ 349,065 $ 221,605 $ 173,342 $ 277,029
Operating income $ 48,879 $ 14,427 $ 612 $ 30,111
Earnings available for common stock $ 27,908 $ 6,315 $ (2,071) $ 17,371
Basic earnings (loss)
per common share (a) $ 1.52 $ 0.34 $ (0.11) $ 0.93
Diluted earnings (loss)
per common share (a) $ 1.51 $ 0.34 $ (0.11) $ 0.93
1996
- ----
Operating revenues $ 328,747 $ 227,600 $ 175,139 $ 281,115
Operating income (loss) $ 54,943 $ 13,300 $ (3,416) $ 25,884
Earnings available for common stock $ 30,949 $ 5,652 $ (4,478) $ 14,648
Basic earnings (loss)
per common share (a) $ 1.69 $ 0.31 $ (0.24) $ 0.80
Diluted earnings (loss)
per common share (a) $ 1.68 $ 0.31 $ (0.24) $ 0.79
<PAGE>
</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>
<PAGE> 16
WICOR, INC.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
thousands of dollars December 31,
--------------------------
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 11,810 $ 18,784
Accounts receivable, less allowance
for doubtful accounts of $15,364
and $14,429, respectively 164,243 150,076
Accrued revenues 44,842 59,794
Manufacturing inventories 83,431 72,316
Gas in storage 41,887 33,463
Deferred income taxes 21,531 21,706
Prepayments and other 16,924 16,566
------------ ------------
384,668 372,705
------------ ------------
Property, Plant and Equipment, at cost
Energy 801,523 786,643
Manufacturing 141,610 132,342
------------ ------------
943,133 918,985
------------ ------------
Less:
Accumulated depreciation and amortization 497,239 477,577
------------ ------------
445,894 441,408
------------ ------------
Deferred Charges and Other
Regulatory assets 53,910 83,465
Goodwill 65,953 61,366
Prepaid pension costs 42,753 36,869
Systems development costs 17,424 23,052
Other 20,730 18,491
------------ ------------
200,770 223,243
------------ ------------
$ 1,031,332 $ 1,037,356
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
<PAGE> 17
WICOR, INC.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
thousands of dollars December 31,
--------------------------
1997 1996
------------ ------------
<S> <C> <C>
Liabilities and Capitalization
Current Liabilities
Short-term borrowings $ 118,900 $ 114,810
Accounts payable 75,034 98,951
Current portion of long-term debt 43,926 4,061
Refundable gas costs 24,776 31,545
Accrued payroll and benefits 17,573 17,246
Accrued taxes 9,684 1,260
Other 19,999 21,464
------------ ------------
309,892 289,337
------------ ------------
Deferred Credits and Other Liabilities
Postretirement benefit obligation 64,323 66,391
Regulatory liabilities 36,533 43,406
Deferred income taxes 43,975 39,668
Accrued environmental remediation costs 12,084 36,222
Unamortized investment tax credit 6,808 7,265
Other 18,987 19,399
------------ ------------
182,710 212,351
Commitments and Contingencies (Note 8)
Capitalization (See accompanying statement)
Long-term debt 149,110 169,169
Redeemable preferred stock - -
Common equity 389,620 366,499
------------ ------------
538,730 535,668
------------ ------------
$ 1,031,332 $ 1,037,356
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
<PAGE> 18
WICOR, INC.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
thousands of dollars Years Ended December 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Operations
Net earnings $ 49,523 $ 46,771 $ 39,527
Adjustments to reconcile net earnings to
net cash flow from operating activities:
Depreciation and amortization 53,740 54,871 48,477
Deferred income taxes 4,530 (1,103) (6,436)
Changes in:
Accounts receivable 2,046 (28,641) (33,298)
Manufacturing inventories (7,463) (3,590) (1,931)
Gas in storage (8,424) (9,512) 14,121
Other current assets (464) (1,167) 3,545
Accounts payable (25,975) 32,520 (4,652)
Refundable gas costs (6,769) (2,802) 16,289
Accrued taxes 8,561 (6,028) (7,839)
Other current liabilities (1,502) 4,225 2,939
Other noncurrent asset and liabilities (18,479) (10,128) (824)
---------- ---------- ----------
Cash provided by operating activities 49,324 75,416 69,918
---------- ---------- ----------
Investment Activities
- ---------------------
Capital expenditures (51,572) (51,744) (56,241)
Proceeds from sale of assets 3,362 1,249 5,099
Acquisitions (2,065) 22 (58,256)
Other, net 293 285 365
---------- ---------- ----------
Cash used in investing activities (49,982) (50,188) (109,033)
---------- ---------- ----------
Financing Activities
- --------------------
Change in short-term borrowings 6,115 (969) 4,059
Issuance of long-term debt 27,000 10,045 65,000
Reduction of long-term debt (11,157) (9,194) (57,700)
Issuance of common stock 2,684 3,345 40,285
Dividends paid on common stock (31,397) (30,485) (27,454)
Other 439 434 167
---------- ---------- ----------
Cash (used in) provided
by financing activities (6,316) (26,824) 24,357
---------- ---------- ----------
Change in Cash and Cash Equivalents (6,974) (1,596) (14,758)
Cash and cash equivalents
at beginning of year 18,784 20,380 35,138
---------- ---------- ----------
Cash and Cash Equivalents at End of Year $ 11,810 $ 18,784 $ 20,380
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
<PAGE> 19
WICOR, INC.
Consolidated Statements of Capitalization
<TABLE>
<CAPTION>
thousands of dollars December 31,
----------------------
1997 1996
---------- ----------
<S> <C> <C>
Long-Term Debt
Wisconsin Gas:
First mortgage bonds
Adjustable rate series, 8.1%
and 7.2%, respectively, due 1999 $ 2,000 $ 4,000
7-1/2% Notes due 1998 - 40,000
6.6% Notes due 2013 45,000 45,000
6-3/8% Notes due 2005 65,000 65,000
WICOR Industries, Inc.:
Commercial paper under
multi-year credit agreements 27,000 3,000
Securities loan agreement,11-3/4% due semi-
annually through 2000 (includes unamor-
tized bond premium of $814 and $1,078,
respectively) 6,750 7,014
First mortgage notes, adjustable rate, 4.4%
to 4.6%, due semi-annually through 2000 266 633
Industrial revenue bonds, 7.84%,
payable through 2000 830 1,320
Capital lease obligations and other - 342
Unamortized (discount), net (1,343) (1,547)
ESOP loan guarantee 3,607 4,407
---------- ----------
149,110 169,169
---------- ----------
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 18,601,000
and 18,407,000 shares, respectively 18,601 18,407
Other paid-in capital 232,702 224,041
Retained earnings 147,903 129,777
Accumulated other comprehensive income (5,377) (604)
Unearned compensation -
ESOP and restricted stock (4,209) (5,122)
---------- ----------
389,620 366,499
---------- ----------
Total Capitalization $ 538,730 $ 535,668
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
<PAGE> 20
WICOR, INC.
Consolidated Statements of Common Equity
<TABLE>
<CAPTION>
Accumulated
Unearned
Other Other Compensation-
Common Paid-in Retained Comprehensive ESOP and
thousands of dollars Stock Capital Earnings Income Restricted Stock
--------- --------- ------------ ------------- ----------------
<S> <C> <C> <C> <C> <C>
Balance December 31, 1994 $ 16,918 $180,000 $ 101,418 $ (1,550) $ (6,868)
Net earnings - - 39,527 - -
Other comprehensive income:
Translation/minimum pension
liability adjustments - - - (43) -
--------- --------- ------------ ------------- ----------------
Comprehensive income - - 39,527 (43) -
--------- --------- ------------ ------------- ----------------
Issued in connection with
underwritten public offering 1,265 37,684 - - -
Issued in connection with
dividend reinvestment,
customer stock purchase,
employ benefit plans/other 54 1,449 - - -
Dividends on common stock - - (27,454) - -
ESOP loan payments - - - - 1,055
Amortization and forfeiture
of restricted stock - - - - 218
--------- --------- ------------ ------------- ----------------
Balance December 31, 1995 18,237 219,133 113,491 (1,593) (5,595)
--------- --------- ------------ ------------- ----------------
Net earnings - - 46,771 - -
Other comprehensive income:
Translation/minimum pension
liability adjustments - - - 989 -
--------- --------- ------------ ------------- ----------------
Comprehensive income - - 46,771 989 -
--------- --------- ------------ ------------- ----------------
Issued in connection with
dividend reinvestment,
customer stock purchase,
employee benefit plans/other 170 4,908 - - -
Dividends on common stock - - (30,485) - -
ESOP loan payments - - - - 908
Issuance of restricted stock - - - - (1,208)
Amortization and forfeiture
of restricted stock - - - - 773
--------- --------- ------------ ------------- ----------------
Balance December 31, 1996 18,407 224,041 129,777 (604) (5,122)
--------- --------- ------------ ------------- ----------------
Net earnings - - 49,523 - -
Other comprehensive income:
Translation/minimum pension
liability adjustments - - - (4,773) -
--------- --------- ------------ ------------- ----------------
Comprehensive income - - 49,523 (4,773) -
--------- --------- ------------ ------------- ----------------
Issued in connection with
dividend reinvestment,
customer stock purchase,
employee benefit plans/other 194 8,661 - - -
Dividends on common stock - - (31,397) - -
ESOP loan payments - - - - 800
Issuance of restricted stock - - - - (145)
Amortization and forfeiture
of restricted stock - - - - 258
--------- --------- ------------ ------------- ----------------
Balance December 31, 1997 $ 18,601 $232,702 $ 147,903 $ (5,377) $ (4,209)
========= ========= ============ ============= ================
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
<PAGE> 21
Notes to Consolidated Financial Statements
-------------------------------------------
Note 1 Accounting Policies
- --------------------------
A - Principles of consolidation The consolidated financial statements include
the accounts of WICOR, Inc., and its wholly-owned subsidiaries: Wisconsin Gas,
WESCO, FieldTech and WICOR Industries, Inc. (WICOR Industries), an
intermediate holding company for various manufacturing subsidiaries.
Intercompany transactions and accounts are eliminated in consolidation.
B - Business The Company is a diversified holding company with two principal
business groups: energy services and pump manufacturing. Energy services
consists primarily of natural gas distribution through Wisconsin Gas, the
oldest and largest natural gas distribution utility in Wisconsin. Wisconsin
Gas is subject to regulation by the PSCW and gives recognition to ratemaking
policies substantially in accordance with the FERC System of Accounts. At
December 31, 1997, Wisconsin Gas served approximately 521,000 customers in 521
communities. The Energy Group accounted for 58% and 63% of the Company's 1997
operating revenues and operating income, respectively. Through its subsidiary,
WICOR Industries, the Company 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 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. Subject to the sharing mechanism discussed below, 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.
In October 1997, the PSCW approved Wisconsin Gas's proposed GCIM which became
effective November 1, 1997. The GCIM establishes a reference for the cost of
gas, including pipeline capacity and storage costs. The reference price is
based on a current month index of prices from the supply basins where the gas
is purchased. If the actual costs deviate from the reference by more than 1-
1/2% but less than 4%, Wisconsin Gas and its customers share equally in the
amount within the band. If actual costs deviate from the reference cost by
more than plus or minus 4%, Wisconsin Gas customers bear all the costs above
4% and receive all the benefits of the costs below 4%.
<PAGE>
<PAGE> 22
D - Income taxes The Company files a consolidated Federal income tax return
and allocates Federal current tax expense or credits to each domestic
subsidiary based on its respective separate tax computation.
For Wisconsin Gas, investment tax credits are a deferred credit on the balance
sheet and are amortized to income over the applicable service lives of the
related properties consistent with regulatory treatment.
E - Basic earnings per common share Basic earnings per common share is based
on the weighted average number of shares outstanding during the period.
F - Inventories
Energy - Substantially all gas in storage inventory in 1997 and 1996 were
priced using the weighted average method of accounting.
Manufacturing - Approximately 57% and 55% of manufacturing inventories, in
1997 and 1996, 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 $7.9 million and $8.5
million higher at December 31, 1997 and 1996, respectively.
G - Plant and depreciation Gas distribution property, plant and equipment is
stated at original cost, including overhead allocations. Upon ordinary
retirement of utility plant assets, original 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'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 were 4.3%, 4.5% and 4.2% for 1997, 1996 and
1995, 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 included in cost of
sales.
H - Regulatory accounting Wisconsin Gas accounts for its regulated operations
in accordance with 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 when 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>
<PAGE> 23
The amounts recorded as regulatory assets and regulatory liabilities in the
Consolidated Balance Sheet at December 31, are as follows:
thousands of Dollars 1997 1996
---------- ----------
Regulatory assets:
Postretirement benefit costs (Note 10) $ 39,498 $ 42,275
Deferred uncollectible expenses 11,056 10,152
Income tax-related amounts due
from customers 2,648 3,003
Deferred environmental costs 76 23,025
Other 632 5,010
---------- ----------
$ 53,910 $ 83,465
========== ==========
Regulatory liabilities:
Income tax-related amounts due to customers $ 19,725 $ 21,369
Unrecognized pension income (Note 10) 13,780 16,631
Other 3,028 5,406
---------- ----------
$ 36,533 $ 43,406
========== ==========
In the fourth quarter of 1997, the Company completed a comprehensive review of
its environmental clean-up liability which ultimately resulted in a reduction
of the liability to $12 million as of December 31, 1997. The regulatory asset
previously recorded was also adjusted to reflect the results of this review.
(See Note 8 for a more detailed description of this matter.)
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 approved a one-time charge of $3.0 million relating to uncollectible
accounts receivable expense. See Notes 8 and 10 for discussion of additional
regulatory assets.
I - Cash flows Cash equivalents consist of highly liquid investments which are
readily convertible into cash and have maturities of three months or less. 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.
<PAGE>
<PAGE> 24
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 1997 1996 1995
---------- ---------- ----------
Income taxes paid $ 17,315 $ 34,669 $ 27,801
Interest paid $ 16,352 $ 16,824 $ 18,855
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, 1997, 1996 and 1995 were not material. The Energy Group purchased
derivatives in 1997 and 1996 to hedge a portion of inventory and gas costs to
be purchased for resale. The cost of the options and gains or losses realized
do not affect income since they are recovered dollar for dollar under the
purchased gas adjustment clause and are not subject to the GCIM sharing
mechanism.
During 1997, WICOR entered into a three-year weather insurance agreement to
hedge a portion of the impact weather has on Energy Group earnings. Under this
agreement, a payment will be made or received if the heating degree days from
December 1, 1997 to March 31, 1998 fall outside a specific range. The payment
is limited to a maximum of $2.0 million per year. The counterparty has the
option to extend this agreement for the following two heating seasons with
substantially the same terms. At December 31, 1997, the fair value of this
agreement was not significant.
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.
Note 2 New Accounting Standards
- -------------------------------
During 1997, the Financial Accounting Standards Board issued two new
accounting standards effective in fiscal year 1997. SFAS No. 128, "Earnings
Per Share," establishes standards for computing and presenting earnings per
share. The Company has adopted the requirements of SFAS No. 128 for the
current year and all prior periods in the Consolidated Statements of Income
and Selected Financial Data. SFAS No. 130, "Reporting Comprehensive Income,"
establishes standards for the reporting and displaying of comprehensive income
and its components. The Company has reported comprehensive income in the
Consolidated Statements of Common Equity.
American Institute of Certified Public Accountants Statement of Position No.
96-1, "Environmental Remediation Liabilities," establishes specific criteria
for the recognition and measurement of environmental remediation liabilities.
The adoption of the statement in 1997 did not have a significant effect on the
Company's financial condition or results of operation.
<PAGE>
<PAGE> 25
Note 3 Mergers and Acquisitions
- -------------------------------
During fiscal 1997, WICOR and its subsidiaries consummated four acquisitions.
The aggregate purchase price was approximately $10 million and was financed
using cash and by issuing 127,838 shares of the Company's common stock. Three
of the acquisitions were pump, fluid processing and filtration equipment
companies. The fourth acquisition was a contract meter reading and meter
installation company. Each of the acquisitions was accounted for as a purchase
and the results of operations of the acquired companies were included in the
consolidated financial statements from their respective acquisition dates. The
excess of the purchase price over the estimated fair value of net assets
acquired amounted to approximately $7 million, which has been recorded as
goodwill and is being amortized over 40 years.
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 was 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 over 40 years on a straight-line basis.
Note 4 Income Taxes
- -------------------
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>
Year ended December 31,
---------------------------------------------------
1997 1996 1995
thousands of dollars --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Statutory U.S. tax rates $27,327 35.0% $25,717 35.0% $21,775 35.0%
State income taxes, net 3,383 4.3 3,818 5.2 3,235 5.2
Excess of foreign (benefit)
provision over U.S.
statutory tax rate (280) (0.4) (229) (0.3) 378 0.6
Investment credit restored (451) (0.6) (453) (0.6) (457) (0.7)
Amortization of excess
deferred taxes (630) (0.8) (556) (0.8) (507) (0.8)
Adjustment of prior year's
estimated liability (401) (0.5) (578) (0.8) (361) (0.6)
Other, net (624) (0.7) (1,014) (1.4) (1,375) (2.2)
--------------- --------------- ---------------
Effective Tax Rates $28,324 36.3% $26,705 36.3% $22,688 36.5%
=============== =============== ===============
</TABLE>
<PAGE>
<PAGE> 26
The components of deferred income tax classified as current assets and long-
term liabilities at December 31, are as follows:
thousands of Dollars 1997 1996
---------- ----------
Current deferred income tax assets
Recoverable gas costs $ 9,712 $ 12,658
Deferred compensation 3,407 2,968
Inventory 2,421 1,078
Product related/warranty 1,254 1,691
Other 4,737 3,311
$ 21,531 $ 21,706
Long-term deferred income tax liabilities
Property related $ 48,905 $ 46,867
Systems development costs 6,993 9,252
Investment tax credit (4,503) (4,806)
Postretirement benefits (9,217) (8,914)
Deferred compensation (4,042) (3,734)
Pension benefits 11,033 8,118
Environmental (4,819) (5,677)
Other (375) (1,438)
---------- ----------
$ 43,975 $ 39,668
========== ==========
The current and deferred components of income tax expense (benefit) for each
of the years ended December 31, are as follows:
thousands of Dollars 1997 1996 1995
---------- ---------- ----------
Current
Federal $ 19,229 $ 23,479 $ 25,728
State 4,146 6,022 6,641
Foreign 808 752 1,256
---------- ---------- ----------
Total Current 24,183 30,253 33,625
---------- ---------- ----------
Deferred
Federal 1,836 (2,610) (10,275)
State 926 (264) (1,816)
Foreign 1,379 (674) 1,154
---------- ---------- ----------
Total Deferred 4,141 (3,548) (10,937)
---------- ---------- ----------
Total Provision $ 28,324 $ 26,705 $ 22,688
========== ========== ==========
<PAGE>
<PAGE> 27
Note 5 Short-term Borrowings and Lines of Credit
- ------------------------------------------------
As of December 31, 1997 and 1996, the Company had total unsecured lines of
credit available from banks of $240.0 million and $230.5 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.
During the third quarter of 1997, the Company, and certain subsidiaries,
renegotiated their existing revolving credit facilities and subsequently
refinanced the remaining outstanding principal balance (approximately $27
million) of the credit facility entered into in connection with the July 1995
acquisition of Hypro. This amount is included as long-term debt on the
Consolidated Balance Sheet. Respective covenants under the new five-year $115
million credit facilities, which expire in August, 2002, include leverage and
interest coverage ratios.
thousands of Dollars 1997 1996
---------- ----------
Notes payable to banks
U.S. subsidiaries $ - $ 27,000
Non-U.S. subsidiaries 20,668 19,210
Commercial paper - U.S. 98,232 68,600
---------- ----------
$ 118,900 $ 114,810
========== ==========
Weighted average interest rates on debt outstanding at end of year:
thousands of Dollars 1997 1996
---------- ----------
Notes payable to banks
U.S. subsidiaries - 5.8%
Non-U.S. subsidiaries 5.8% 7.2%
Commercial paper - U.S. 5.8% 5.7%
Highest month-end balance $ 118,900 $ 114,810
Average month-end balance $ 79,701 $ 69,915
Note 6 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. Maturities and sinking fund requirements during the
succeeding five years on all long-term debt total $43.9 million, $3.9 million,
$7.6 million, $0.8 million and $27.8 million in 1998, 1999, 2000, 2001 and
2002, respectively.
<PAGE>
<PAGE> 28
Note 7 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,
$41.8 million of Wisconsin Gas's net assets at December 31, 1997, 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 $5.5 million in dividends in November 1997
and expects to pay $23.5 million in dividends for the 12 months ending October
1998. At December 31, 1997, Wisconsin Gas's equity was 53.3%.
Combined restricted common equity of the Company's subsidiaries totaled $262.4
million under the most restrictive provisions as of December 31, 1997;
accordingly, $127.3 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 WICOR's predominant
business, generally as measured by equity. Under these restrictions, the
amount allowable for future nonutility equity investment at December 31, 1997,
was $45.7 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 32% of total capitalization for the nonutility
entities at December 31, 1997.
Note 8 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 $640 million,
with annual required payments of $110 million in 1998 and 1999, $106 million
in 2000, $101 million in 2001 and $97 million in 2002. Wisconsin Gas's total
payments for firm pipeline and storage capacity prior to recovery from sales
of excess capacity were $126.6 million in 1997, $129.6 million in 1996 and
$128.1 million in 1995. The purchased gas adjustment provisions of Wisconsin
Gas's rate schedules permit the recovery of gas costs from its customers
subject to the GCIM sharing mechanism. 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 $4.2 million at December
31, 1997, 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>
<PAGE> 29
The FERC has allowed ANR Pipeline Company (ANR) to recover capacity and "above
market" supply costs associated with quantities purchased from Dakota
Gasification Company (Dakota) under a long-term contract expiring in year
2009. Consistent with guidelines set forth in Order No. 636, ANR has allocated
90% of Dakota costs to firm transportation service. Based on its contracted
quantities with ANR, Wisconsin Gas is currently paying approximately $100,000
per month of Dakota costs. Transmission 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 1998 capital expenditures. The Energy Group's capital expenditures for
1998 are estimated at $45 million. The Manufacturing Group's capital
expenditures for 1998 are estimated at $16 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 completed a comprehensive
review of its potential environmental liabilities stemming from these two
former manufactured gas plant sites. Significant technological developments,
lower unit costs and the recognition of the "brown fields" concept by
regulatory agencies have all resulted in a reduction in 1997 in the estimate
of the probable liability for cleanup to $12 million. This cleanup estimate
considered a number of factors, including the estimated extent and volume of
contaminated soil and/or groundwater and is based on current undiscounted
costs. In addition, management believes it is possible, but not likely, that
approximately $5 million in additional remediation costs may be incurred.
Expenditures over the next three years are expected to total approximately $8
million. These new estimates have been reflected in the Consolidated Balance
Sheet as of December 31, 1997.
The cleanup estimate discussed above includes the costs of feasibility
studies, data collection, soil and groundwater remediation activities and
ongoing monitoring activities through 2017. Environmental remediation work for
one of the sites was commenced in the first quarter of 1998 and will continue
through 1999. It is reasonably possible that, due to uncertainties associated
with defining the nature and extent of environmental contamination,
application of laws and regulations by regulatory authorities and changes in
remediation technology, the ultimate cost of remediation could change in the
future. The Company periodically reviews its accrued liabilities for such
remediation costs as evidence becomes available indicating that its
remediation liability has changed.
Due to anticipated regulatory treatment, changes in the recorded liability do
not immediately impact net income. Under the current ratemaking treatment
approved by the PSCW, the costs expended in the environmental remediation of
these sites, net of any insurance proceeds, would be deferred and recovered
from gas customers.
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.
<PAGE>
<PAGE> 30
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
are responsible for effecting remediation at specified sites, and (d) the
experience of other parties that 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 manufacturing-related 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.
Note 9 Common Stock and Other Paid-in Capital
- ---------------------------------------------
The Company's articles of incorporation authorize 60,000,000 shares of common
stock, of which 18,600,632 shares and 18,407,286 shares were outstanding at
December 31, 1997 and 1996, 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 3,469,604 shares is reserved for issuance under the Company's
dividend reinvestment, stock option and incentive savings plans. In addition
22,700,217 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 10 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>
<PAGE> 31
Note 10 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.
Subsequent to the 1997 measurement date, the Company's Board of Directors
approved certain amendments to the plan for non-represented employees of
Wisconsin Gas, effective January 1, 1998. Such amendments change the manner in
which benefits accrue and the time at which benefits become payable under the
non-represented plan. Based on the requirements of SFAS No. 87, the Company
will measure Plan assets and liabilities at the January 1, 1998, amendment
effective date. The Company expects this interim 1998 measurement will result
in an approximate $14 million decrease to the accumulated benefit obligation
compared to obligations measured prior to the plan amendment. Based on this
interim measurement, the Company expects that the 1998 pension income will
increase compared to the 1997 reported amount.
The following table sets forth the funded status of pension plans at December
31, 1997 and 1996.
<TABLE>
<CAPTION>
Assets Exceed Accumulated Benefits
Accumulated Benefits Exceed Assets
---------------------- ----------------------
thousands of dollars 1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Accumulated benefit obligation
Vested benefits $(112,518) $(102,638) $ (7,974) $ (6,419)
Nonvested benefits (18,795) (17,051) (631) (2,242)
---------- ---------- ---------- ----------
(131,313) (119,689) (8,605) (8,661)
Effect of projected future
compensation levels (39,976) (35,348) (1,148) (1,148)
---------- ---------- ---------- ----------
Projected benefit obligation (171,289) (155,037) (9,753) (9,809)
Plan assets at fair value 273,416 231,822 452 503
---------- ---------- ---------- ----------
Plan assets greater (less) than
projected benefit obligation 102,127 76,785 (9,301) (9,306)
Unrecognized net (asset) liability
at September 30, 1985 being
recognized over approx. 16 years (11,515) (13,269) 568 876
Unrecognized prior service costs 3,677 4,099 223 240
Unrecognized net (gain) loss (51,536) (30,746) 2,364 1,557
Additional minimum liab. recorded - - (2,351) (1,953)
---------- ---------- ---------- ----------
Prepaid asset (accrued liability) $ 42,753 $ 36,869 $ (8,497) $ (8,586)
========== ========== ========== ==========
</TABLE>
<PAGE>
<PAGE> 32
The weighted average discount rate assumptions used in determining the
actuarial present value of the projected benefit obligation were 7.25%, 7.75%
and 7.5% for 1997, 1996 and 1995, respectively. The expected long-term rate of
return on assets was 9.0% for 1997 and 1996 and 8.6% for 1995. The expected
long-term rate of compensation growth was 4.5%, 4.8% and 5.3% for 1997, 1996
and 1995, respectively.
Net pension (income) costs for each of the years ended December 31, include
the following components:
thousands of Dollars 1997 1996 1995
---------- ---------- ----------
Service costs $ 4,042 $ 4,713 $ 4,374
Interest costs on projected
benefit obligations 12,742 12,833 12,830
Actual (gain) on plan assets (52,404) (25,338) (29,107)
Net amortization and deferral 30,864 5,117 10,760
Amortization of regulatory liability (2,851) (2,851) (2,851)
---------- ---------- ----------
Net pension income $ (7,607) $ (5,526) $ (3,994)
========== ========== ==========
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.
Subsequent to the 1997 measurement date, the Company's Board of Directors
approved certain amendments to the plan for non-represented employees of
Wisconsin Gas, effective January 1, 1998. Such amendments change the manner in
which benefits accrue and the time at which benefits become payable under the
non-represented plan and impose a limitation on the dollar amount of the
employer's share of the cost of covered benefits incurred by a plan
participant. The Company expects this interim 1998 measurement will result in
an approximate $15 million decrease to the accumulated benefit obligation
compared to obligations measured prior to the plan amendment. Based on this
interim measurement, the Company expects that the 1998 postretirement benefit
cost will decrease compared to the 1997 reported amount
<PAGE>
<PAGE> 33
The following table sets forth the plans' funded status, reconciled with
amounts recognized in the Company's Statement of Financial Position at
December 31, 1997 and 1996, respectively.
Accumulated benefit obligation
thousands of dollars 1997 1996
---------- ----------
Retirees $ (56,104) $ (52,331)
Active employees (49,759) (47,204)
---------- ----------
Accumulated benefit obligation (105,863) (99,535)
Plan assets at fair value 58,907 46,562
---------- ----------
Accumulated benefit obligation
in excess of plan assets (46,956) (52,973)
Unrecognized prior service costs (13,475) (14,432)
Unrecognized actuarial (loss) gain (3,892) 1,014
---------- ----------
Accrued postretirement benefit $ (64,323) $ (66,391)
========== ==========
Net postretirement health care and life insurance costs for each of the years
ended December 31, consisted of the following components:
thousands of Dollars 1997 1996 1995
---------- ---------- ----------
Service cost $ 2,102 $ 2,712 $ 2,023
Interest cost on projected
benefit obligation 6,731 7,251 6,694
Actual (gain) on plan assets (11,356) (4,695) (6,185)
Amortization of regulatory asset 2,778 2,778 2,778
Net amortization and deferral 5,627 613 2,531
---------- ---------- ----------
Net postretirement benefit cost $ 5,882 $ 8,659 $ 7,841
========== ========== ==========
The postretirement benefit cost components for 1997 were calculated assuming
health care cost trend rates ranging up to 11% for 1997 and decreasing to 5%
over 5 to 17 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 as of December 31, 1997, by $14.6 million
and the aggregate of the service and interest cost components of
postretirement expense by $1.5 million.
The assumed discount rate used in determining the actuarial present value of
the APBO was 7.25% in 1997 and 7.75% in 1996. 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 1997 and 1996 and $1.7 million in 1995
<PAGE>
<PAGE> 34
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, three-year
adjustable rate loan (6.2% interest rate at December 31, 1997), guaranteed by
the Company, to purchase 431,266 shares of WICOR common stock. The Company has
extended the adjustable rate loan, with similar terms, until May 31, 2002. The
unpaid balance ($3.6 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.
E - Stock option plans and restricted stock The Company has a total of 134
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, 1997, 1996 and
1995 and changes during the years then ended is as follows:
1997 1996 1995
----------------- ----------------- -----------------
Wtd Avg Wtd Avg Wtd Avg
Shares Price Shares Price Shares Price
--------- ------- --------- ------- --------- -------
Outstanding at
January 1 780,149 $ 26.76 745,050 $ 25.01 664,633 $ 24.10
Granted 269,200 $ 39.50 162,700 $ 33.01 136,400 $ 28.31
Exercised (68,691) $ 24.23 (98,270) $ 23.10 (44,299) $ 20.90
Canceled (800) $ 31.31 (29,331) $ 29.39 (11,684) $ 27.34
Outstanding at
December 31 979,858 $ 30.45 780,149 $ 26.76 745,050 $ 25.01
Exercisable-End of Year 623,275 $ 27.08 538,672 $ 24.72 434,980 $ 23.46
Available for future
grant at year-end 173,990 446,907 607,200
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" (SFAS 123), became effective for the Company on January 1,
1996. The Company will continue to apply APB Opinion No. 25 and related
interpretations in accounting for its stock option plans. As required by SFAS
123, the Company has determined the pro forma information as if the Company
had accounted for stock options granted since January 1, 1995, under the fair
value method of SFAS 123. The Black-Scholes option-pricing model was used with
the following assumptions for 1997, 1996 and 1995: dividend yields of 4.8%,
5.0% and 5.7%, risk-free interest rates of 5.1%, 5.0% and 5.8%, expected
volatility of 15.9%, 16.4% and 16.8%, and an expected option life of 5.64
years for all periods. The weighted average fair value of options granted in
1997, 1996 and 1995 was $4.22, $3.83 and $3.29 per share, respectively. Had
compensation cost for the Company's 1997, 1996 and 1995 grants for stock-based
compensation plans been determined consistent with SFAS No. 123, the Company's
net income and diluted earnings per common share would have been reduced to
the pro forma amounts indicated below
<PAGE>
<PAGE> 35
1997 1996 1995
---------- ---------- ----------
Net earnings:
As reported $ 49,523 $ 46,771 $ 39,527
Pro forma $ 49,167 $ 46,557 $ 39,438
Diluted earnings per common share
As reported $ 2.66 $ 2.53 $ 2.31
Pro forma $ 2.64 $ 2.52 $ 2.31
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.
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 that are forfeited revert to the Company at no
cost.
A total of 52,950 restricted shares (net of cancellations) were issued through
1997. 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 - Director compensation plan Effective January 1, 1997, the Company
converted its director compensation plan into a new Deferred Director
Compensation Plan (Director Plan) which provides for the payment of the annual
retainer and meeting fees using a combination of hypothetical shares of
Company common stock (stock units) and cash. A portion of the annual retainer
is now paid using stock units. In addition, a director may elect to defer the
cash portion of the retainer or meeting fees, or both. The value of each stock
unit is equal to the current market price of the Company's common stock.
Retirement benefits for active directors were also converted into stock units
as of December 31, 1996. Benefits will be paid in cash and Company common
stock, at the option of the holder, over varying periods following termination
of service. The Company recognized $0.6 million of compensation expense under
the Director Plan in 1997
<PAGE>
<PAGE> 36
Note 11 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 based on the market prices
of U.S. Treasury issues having a similar term to maturity, adjusted for the
Company's bond rating and present value of future cash flows.
Because Wisconsin Gas operates in a regulated environment, shareholders
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:
1997 1996
---------------------- ----------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
thousands of dollars ---------- ---------- ---------- ----------
Cash and cash equivalents $ 11,810 $ 11,810 $ 18,784 $ 18,784
Accounts receivable $ 164,243 $ 164,243 $ 150,076 $ 150,076
Short-term debt $ 118,900 $ 118,900 $ 114,810 $ 114,810
Long-term debt $ 149,110 $ 150,159 $ 169,169 $ 169,962
Note 12 Other Financial Information
- -----------------------------------
See page 26 for unaudited quarterly financial data. See Financial Review on
page 20 for industry segment data.
<PAGE>
<PAGE> 37
Selected Financial Data
thousands of dollars, except per share amounts
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated
Operating Data:
Operating revenues (4) $1,021,041 $1,012,601 $ 860,594 $ 867,755 $ 849,528 $ 747,409 $ 716,767
Net earnings $ 49,523 $ 46,771 $ 39,527 $ 33,174 $ 29,313 $ 14,799 $ 22,966
Common Stock Data:
Basic earnings per common share (1) $ 2.68 $ 2.55 $ 2.32 $ 1.99 $ 1.82 $ 0.96 $ 1.54
Diluted earnings per share (1) $ 2.66 $ 2.53 $ 2.31 $ 1.98 $ 1.80 $ 0.95 $ 1.54
Cash dividends per common share (1) $ 1.70 $ 1.66 $ 1.62 $ 1.58 $ 1.54 $ 1.50 $ 1.46
Book value per common share (1) $ 20.95 $ 19.91 $ 18.84 $ 17.14 $ 16.47 $ 15.60 $ 15.84
Balance Sheet Data:
Long-term debt $ 149,110 $ 169,169 $ 174,713 $ 161,669 $ 165,230 $ 164,171 $ 168,366
Redeemable preferred stock - - - - - - -
Common equity 389,620 368,452 345,266 291,468 270,276 245,287 243,453
---------- ---------- ---------- ---------- ---------- ---------- ----------
Capitalization at year-end $ 538,730 $ 537,621 $ 519,979 $ 453,137 $ 435,506 $ 409,458 $ 411,819
========== ========== ========== ========== ========== ========== ==========
Total assets at year-end (2) $1,031,332 $1,057,652 $1,008,514 $ 930,708 $ 933,726 $ 825,774 $ 670,250
Other General Data:
Market-to-book ratio at YE (%) 222 179 170 165 191 175 153
Dividend payout ratio (%)(2)(3) 63.4 65.2 69.5 79.6 82.2 96.1 89.0
Yield at year-end (%) 3.7 4.7 5.1 5.6 5.0 5.6 6.1
Rtrn on ave common equity (%)(2)(3) 13.0 12.9 13.1 11.6 11.2 9.2 9.5
Price/earnings ratio at YE (2)(3) 17.3 14.1 13.9 14.3 17.3 18.5 15.7
Price range $ 33 3/8 - $ 30 1/8 - $ 26 5/8 - $25 1/2 - $25 5/8 - $22 7/8 - $18 5/8 -
$ 47 7/8 $ 37 3/4 $ 32 7/8 $ 32 5/8 $ 32 7/8 $ 27 3/8 $ 24 3/8
Registered shareholders at YE (5) 22,312 23,339 27,379 25,017 23,694 22,864 18,503
Cash flow from operations $ 49,324 $ 75,416 $ 69,918 $ 103,551 $ 3,401 $ 37,012 $ 50,413
Capital expenditures $ 51,572 $ 51,744 $ 56,241 $ 55,051 $ 51,906 $ 71,873 $ 45,113
Employees at year-end 3,625 3,475 3,368 3,214 3,222 3,178 3,196
Debt/equity ratio at year-end 28/72 31/69 34/66 36/64 38/62 40/60 41/59
</TABLE>
<PAGE>
<PAGE> 38
Selected Financial Data
thousands of dollars, except per share amounts
<TABLE>
<CAPTION>
1990 1989 1988 1987
---------- ---------- ---------- ----------
<S> C> <C> <C> <C>
Consolidated
Operating Data:
Operating revenues (4) $ 696,023 $ 741,218 $ 780,633 $ 699,418
Net earnings $ 16,651 $ 33,881 $ 34,163 $ 19,682
Common Stock Data:
Basic earnings per common share (1) $ 1.14 $ 2.33 $ 2.38 $ 1.39
Diluted earnings per share (1) $ 1.13 $ 2.32 $ 2.37 $ 1.38
Cash dividends per common share (1) $ 1.42 $ 1.37 $ 1.32 $ 1.30
Book value per common share (1) $ 16.12 $ 16.83 $ 15.82 $ 14.68
Balance Sheet Data:
Long-term debt $ 130,215 $ 122,639 $ 133,034 $ 127,833
Redeemable preferred stock - - - 8,000
Common equity 237,407 244,351 227,080 207,658
---------- ---------- ---------- ----------
Capitalization at year-end $ 367,622 $ 366,990 $ 360,114 $ 343,491
========== ========== ========== ==========
Total assets at year-end (2) $ 651,559 $ 620,548 $ 565,967 $ 536,998
Other General Data:
Market-to-book ratio at YE (%) 122 148 123 117
Dividend payout ratio (%)(2)(3) 117.2 55.0 52.0 91.1
Yield at year-end (%) 7.3 5.6 6.9 7.6
Rtrn on ave common equity (%)(2)(3) 6.8 14.3 15.3 9.3
Price/earnings ratio at YE (2)(3) 17.2 10.7 8.2 12.4
Price range $18 1/4 - $19 3/8 - $15 5/8 - $13 3/8 -
$ 25 1/4 $ 25 3/8 $ 20 7/8 $ 21 7/8
Registered shareholders at YE (5) 19,463 20,509 21,611 23,010
Cash flow from operations $ 10,022 $ 94,623 $ 73,526 $ 41,237
Capital expenditures $ 37,529 $ 40,944 $ 48,295 $ 34,264
Employees at year-end 3,152 3,696 3,927 4,040
Debt/equity ratio at year-end 35/65 33/67 37/63 37/63
</TABLE>
<PAGE>
<PAGE> 39
Selected Financial Data
thousands of dollars, except per share amounts
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Energy Operations
Operating revenues $ 596,262 $ 602,685 $ 522,840 $ 556,587 $ 574,835 $ 495,415 $ 474,702
Net earnings $ 29,443 $ 32,141 $ 27,701 $ 18,896 $ 19,870 $ 18,060 $ 17,086
Capital expenditures $ 35,148 $ 36,617 $ 42,852 $ 44,626 $ 42,253 $ 62,125 $ 34,473
Utility throughput
(thousands of dekatherms-MDth)
Residential 48,433 52,991 49,425 46,369 47,964 45,905 45,614
Commercial 21,922 24,257 21,157 18,598 19,060 17,840 17,861
Industrial firm 8,724 11,078 13,496 14,544 15,246 14,488 15,690
Industrial interruptible 7,277 19,624 31,353 28,217 20,849 17,388 17,440
Transported 42,883 27,578 14,549 11,908 17,408 21,379 19,658
---------- ---------- ---------- ---------- ---------- ---------- ----------
129,239 135,528 129,980 119,636 120,527 117,000 116,263
========== ========== ========== ========== ========== ========== ==========
Utility customers at year-end 520,975 512,868 504,746 495,129 485,103 470,956 460,549
Utility customers served/employee 534 516 471 419 352 331 323
Average cost of gas per
utility Dth purchased $ 3.99 $ 3.47 $ 2.79 $ 3.34 $ 3.76 $ 3.34 $ 3.18
Ave annual residential utility bill $ 701 $ 725 $ 686 $ 719 $ 779 $ 712 $ 677
Use/utility resident customer(Dth) 108 120 114 110 116 115 117
Degree days 7,094 7,458 6,836 6,431 6,775 6,683 6,416
% colder (warmer) than 20-yr normal 1.0 6.8 (2.8) (9.0) (4.1) (6.4) (10.8)
Manufacturing Operations (2)
Operating revenues $ 424,779 $ 409,916 $ 337,754 $ 311,168 $ 274,693 $ 251,994 $ 242,065
International/export sales
as a % of total sales 34 34 39 37 34 34 31
Net earnings (3) $ 20,080 $ 14,630 $ 11,826 $ 14,278 $ 9,443 $ 4,704 $ 5,880
Capital expenditures $ 16,424 $ 15,127 $ 13,389 $ 10,425 $ 9,653 $ 9,748 $ 10,640
</TABLE>
<PAGE>
<PAGE> 40
Selected Financial Data
thousands of dollars, except per share amounts
<TABLE>
<CAPTION>
1990 1989 1988 1987
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Energy Operations
Operating revenues $ 455,559 $ 441,477 $ 476,904 $ 424,069
Net earnings $ 13,195 $ 25,169 $ 23,223 $ 12,580
Capital expenditures $ 27,978 $ 25,813 $ 37,148 $ 24,344
Utility throughput
(thousands of dekatherms-MDth)
Residential 43,020 48,154 46,769 39,369
Commercial 16,319 18,089 17,012 14,510
Industrial firm 15,106 16,915 16,808 16,106
Industrial interruptible 6,620 5,475 3,752 4,714
Transported 16,565 29,158 29,639 26,129
---------- ---------- ---------- ----------
107,630 117,791 113,980 100,828
========== ========== ========== ==========
Utility customers at year-end 452,906 445,771 439,063 432,509
Utility customers served/employee 321 319 311 288
Average cost of gas per
utility Dth purchased $ 3.30 $ 3.15 $ 3.68 $ 3.74
Ave annual residential utility bill $ 670 $ 758 $ 770 $ 660
Use/utility resident customer(Dth) 113 129 127 108
Degree days 6,103 7,382 7,124 6,185
% colder (warmer) than 20-yr normal (16.0) 1.5 (2.0) (14.8)
Manufacturing Operations (2)
Operating revenues $ 240,464 $ 300,156 $ 303,729 $ 275,349
International/export sales
as a % of total sales 27 24 22 20
Net earnings (3) $ 3,456 $ 8,712 $ 10,940 $ 7,102
Capital expenditures $ 9,551 $ 15,131 $ 11,147 $ 9,920
</TABLE>
<PAGE>
<PAGE> 41
(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.
(4) Includes revenues (in thousands) from discontinued operations from 1987
to 1989 of $58,318, $63,552 and $56,318, respectively.
(5) Reflects WICOR Plan participants beginning with 1992.
<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, 1997 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-31-1997
<PERIOD-END> DEC-31-1997
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 379,971
<OTHER-PROPERTY-AND-INVEST> 0
<TOTAL-CURRENT-ASSETS> 189,973
<TOTAL-DEFERRED-CHARGES> 113,944
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 683,888
<COMMON> 9
<CAPITAL-SURPLUS-PAID-IN> 120,677
<RETAINED-EARNINGS> 96,005
<TOTAL-COMMON-STOCKHOLDERS-EQ> 215,249
0
0
<LONG-TERM-DEBT-NET> 110,657
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 110,000
<COMMERCIAL-PAPER-OBLIGATIONS> 78,671
<LONG-TERM-DEBT-CURRENT-PORT> 42,000
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 237,311
<TOT-CAPITALIZATION-AND-LIAB> 683,888
<GROSS-OPERATING-REVENUE> 536,720
<INCOME-TAX-EXPENSE> 17,808
<OTHER-OPERATING-EXPENSES> 477,245
<TOTAL-OPERATING-EXPENSES> 495,053
<OPERATING-INCOME-LOSS> 41,667
<OTHER-INCOME-NET> 366
<INCOME-BEFORE-INTEREST-EXPEN> 42,033
<TOTAL-INTEREST-EXPENSE> 12,698
<NET-INCOME> 29,335
0
<EARNINGS-AVAILABLE-FOR-COMM> 29,335
<COMMON-STOCK-DIVIDENDS> 22,000
<TOTAL-INTEREST-ON-BONDS> 379
<CASH-FLOW-OPERATIONS> 44,115
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
