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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, 1998
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
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(Exact name of registrant as specified in its charter)
Wisconsin 39-0476515
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(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 March 1, 1999:
Common Stock, $8 par value 1,125 shares
----- Documents Incorporated by Reference -----
WICOR, Inc. proxy statement dated March 15, 1999 (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
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PART I. 1
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 2
(3) Term Gas Supply 3
(4) Spot Market Gas Supply 3
(c) Wisconsin Regulatory Matters 4
(1) Rate Matters 4
(2) Gas Cost Recovery Mechanism 4
(3) Proposed New Pipeline 4
(4) Transition Cost Recovery Policy 4
(5) Changing Regulatory Environment 4
(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 6
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 6
Part III. 6
Item 10. Directors and Executive Officers of the Registrant 6
Item 11. Executive Compensation 6
Item 12. Security Ownership of Certain
Beneficial Owners and Management 7
Item 13. Certain Relationships and Related Transactions 7
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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 7
(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 harbors 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. The factors include general economic conditions; changes
in natural gas prices and supply availability; 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
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(a) General
Wisconsin Gas Company (the "Company" or "Wisconsin Gas") is a Wisconsin
corporation and is a wholly-owned subsidiary of WICOR, Inc. ("WICOR").
The Company maintains its principal executive offices in Milwaukee, Wisconsin.
The Company is the largest natural gas distribution public utility in
Wisconsin. At December 31, 1998, Wisconsin Gas distributed gas to
approximately 529,000 residential, commercial and industrial customers in 524
communities throughout Wisconsin. Wisconsin Gas' service area has a population
of approximately 2,000,000 based on the State of Wisconsin's estimates for 1998.
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, 1998 December 31, 1997
--------------------- ---------------------
Thousands Thousands
Sales of Therms* Percent of Therms* Percent
- --------------------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C>
Residential 408,550 35.7 484,330 37.5
Commercial 193,000 16.8 219,220 17.0
Large Volume Commercial
and Industrial Firm 47,620 4.2 87,240 6.8
Commercial and
Industrial
Interruptible 36,580 3.2 72,770 5.5
---------- ------- ---------- ------
Total Sales 685,750 59.9 863,560 66.8
Transportation
- --------------
Transported 460,170 40.1 428,830 33.2
---------- ------- ---------- ------
Total Gas Throughput 1,145,920 100.0 1,292,390 100.0
========== ======= ========== ======
</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 are currently utility monopoly functions, are expected to become
increasingly subject to competition from third parties. However, it remains
uncertain if and when the Company may face competition for selling gas to its
smaller firm customers. Consequently, the Company is positioning itself to
react quickly if and when regulation changes to permit customer choice.
With PSCW approval, Wisconsin Gas 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 about 2,300 small commercial and residential participants. Wisconsin Gas
expects to continue the pilot program, with certain modifications.
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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 40% of total gas distributed by
the Company. In 1998, Wisconsin Gas added over 8,000 new customers and has
added more than 43,000 new customers over the past five years.
(b) Gas Supply, Pipeline Capacity and Storage
(1) 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 in 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*)
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ANR
Mainline 2,848
Storage 4,826
NNG
Mainline 1,040
Storage 236
Viking
Mainline 105
Peaking Facilities 76
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Total 9,131
============
*One therm equals 100,000 BTU's.
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(2) Term Gas Supply
Wisconsin Gas has contracts for firm supplies with terms in excess of 30
days with 18 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 maximum daily
total firm gas deliverability.
Maximum
(Thousands
of Therms*)
------------
Domestic flowing gas 1,949
Canadian flowing gas 1,628
Storage withdrawals 5,062
Peaker withdrawals 76
------------
Total 8,715
============
*One therm equal 100,000 BTU's.
(3) Secondary Market Transactions
Capacity release is a mechanism by which pipeline long-line and storage
capacity and for gas supplies under contract may be sold in the secondary
market. 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 demand days generally occur only a few times each
year, so capacity release facilitates higher utilization of contracted capacity
and supply during those times when the capacity and supply are not needed by
the utility thereby helping to offset the costs associated with maintaining
peak levels of capacity and gas supply. 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, subject to the incentive gas cost mechanism
pursuant to which the Company's shareholders have an opportunity to share in
the gas cost savings. See "Wisconsin Regulatory Matters - Gas Cost Recovery"
for information on the incentive gas cost recovery mechanism. During 1998,
Wisconsin Gas continued its active participation in the capacity release
market.
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.
(4) Spot Market Gas Supply
Wisconsin Gas expects to continue to make gas purchases in the 30-day
spot market as price and other circumstances dictate. The Company has
purchased spot market gas since 1985 and has supply relationships with a number
of sellers from whom it purchases spot gas.
(c) 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.
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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 approved two one-year extensions of the margin cap mechanism in 1996 and
1997. In 1998, the PSCW granted a two-year extension until November 1, 2001.
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, 1998, were
$1.5 million below the cap because of annualized rate reductions of $9.0
million beginning in 1995 offset by an increase of $7.5 million in 1998.
(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 a three-year 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 1.5% (either above or below) the target costs, Wisconsin Gas recovers
its actual costs. If Wisconsin Gas' actual costs are between 1.5% and 4% below
the target, Wisconsin Gas and its customers share the benefits equally.
Similarly, if actual gas costs are between 1.5% 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. For
the year November 1, 1997 through October 31, 1998, Wisconsin Gas accrued $3.8
million of benefits under the mechanism.
(3) Proposed New Pipeline
On March 10, 1999, WICOR announced the formation of a joint venture
to construct the Guardian interstate natural gas pipeline from the Chicago
market hub near Joliet, Illinois to southeastern Wisconsin. Subsidiaries of
CMS Energy, a Dearborn, Michigan based international energy company, and
Northern States Power Company, a Minneapolis based diversified energy company,
are the sponsors of the project with WICOR. The three partners will have equal
ownership interests in the project.
The Guardian Pipeline will consist of approximately 150 miles of 36-inch
pipe and related compression equipment and will be designed to carry about
750,000 Dekatherms per day of gas. The total cost of the project, which
requires Federal Energy Regulatory Commission ("FERC") approval, is
approximately $230 million. The pipeline is scheduled to be in service by
November 1, 2002. Wisconsin Gas has committed to purchase 650,000 Dekatherms
per day of capacity on the pipeline and will construct a 35-mile lateral at a
cost of approximately $45 million to connect its distribution system to the
Guardian Pipeline. Wisconsin Gas must obtain approvals from the PSCW to
contract for capacity on the Guardian pipeline and to construct the lateral
to connect to Guardian.
The project, if approved by FERC and placed in service, is expected to
increase the availability and reliability of gas transportation service in
Northern Illinois and southeastern Wisconsin as well as introduce or increase
competition among pipelines serving the area.
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(4) Transition Cost Recovery Policy
Interstate pipelines are permitted to recover certain costs incurred in
the transition from the bundled sales service to the FERC unbundled Order No.
636 regime. ANR and NNG have made filings since 1992 to recover transition
costs. The Company expects any future filings to recover additional transition
costs will be immaterial. Wisconsin Gas will bear a portion of any such
additional costs approved by the FERC. The PSCW has permitted Wisconsin Gas to
recover transition costs from customers through its rates.
(5) 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 at various times
during 1999. The Company is unable to determine what impact this proceeding
may have on Wisconsin Gas' operations or financial position.
(d) Employees
The Company had 954 full-time equivalent active employees at December
31, 1998.
Item 2. PROPERTIES
- -------------------------
Wisconsin Gas owns a distribution system which, on December 31, 1998,
included approximately 9,100 miles of distribution and transmission mains,
447,700 services and 561,400 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.
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. In 1997 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 the
estimate of the probable liability for cleanup to $7.9 million. Expenditures
over the next three years are expected to total approximately $5 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 1998 and will continue through 1999.
Wisconsin Gas is evaluating potential remediation options at the second site.
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 (less carrying costs).
On February 21, 1997, Wisconsin Gas was named by the defendant in an
environmental cleanup lawsuit as a codefendant. 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 and the Company's Indenture and the
agreements under which debt is outstanding 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 $25.5 million of dividends during the 12 months
ending October 31, 1999. See Note 7 of Notes to Financial Statements contained
in Exhibit 13, consistency of portions of the WICOR 1998 Annual Report to
Shareholders, which note is incorporated herein by reference. For the year
ended December 31, 1998, the Company's average common equity level was 53.2%.
The Company paid cash dividends of $24,000,000 and $22,000,000 on common
stock to WICOR in 1998 and 1997, 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 1998 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
- -------------------------------------------------------------------------
The Company uses derivative financial instruments to manage commodity
risk associated with the price of natural gas. The Company's policy prohibits
the use of derivative financial instruments for trading purposes.
The Company has a risk management program that has been approved by the
PSCW. This program allows the Company to utilize call and put option contracts
to reduce market risk associated with fluctuations in the price of natural gas
purchases and gas in storage. Under this program, the Company has the ability
to hedge up to 50% of its planned gas deliveries for the heating season. The
PSCW has also allowed the Company to hedge gas purchased for storage during
non-heating months. The cost of the call and put option contracts, as well as
gains or losses realized under the contracts do not affect net income as they
are recovered dollar for dollar under the purchased gas adjustment clause. As
of December 31, 1998, the Company had options covering approximately 33% of the
volumes of gas in storage, and call options covering 15% of the expected
natural gas purchases for the remainder of the 1998-1999 heating season.
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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.
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 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, dated as of September 1, 1990, between Wisconsin Gas
Company and Firstar Bank Milwaukee, N.A., Trustee (incorporated by reference
to Exhibit 4.11 to Wisconsin Gas Company's Form S-3 Registration Statement No.
33-36639).
4.2 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).
4.3 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).
4.4 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).
4.5 WICOR, Inc. Master Savings Trust Agreement, dated as of October
1, 1996, between WICOR, Inc. and Marshall & Ilsley Trust Company (incorporated
by reference to Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q
dated as of October 30, 1996).
4.6 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).
4.7 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, as amended.
10.3# Form of nonstatutory stock option 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).
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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 Supplemental Retirement Income Program.
10.9#* Wisconsin Gas Company 1999 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).
13* "Financial Review" portions of WICOR, Inc. 1998 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 1998.
# Indicates a plan under which compensation is paid or payable to directors or
executive officers of the Company.
* Indicates a document filed herewith.
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SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
WISCONSIN GAS COMPANY
Date: March 18, 1999 By /s/ JOSEPH P. WENZLER
-------------------------------
Joseph P. Wenzler
Vice President and
Chief Financial Officer
<PAGE>
<PAGE> 16
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, 1999
JOSEPH P. WENZLER
- -----------------
Joseph P. Wenzler Vice President and March 18, 1999
Chief Financial Officer
(Principal Financial and
Principal Accounting Officer)
WENDELL F. BUECHE
- -----------------
Wendell F. Bueche Director March 18, 1999
WILLIE D. DAVIS
- ---------------
Willie D. Davis Director March 18, 1999
JERE D. MCGAFFEY
- ----------------
Jere D. McGaffey Director March 18, 1999
DANIEL F. MCKEITHAN, JR.
- ------------------------
Daniel F. McKeithan, Jr. Director March 18, 1999
GUY A. OSBORN
- -------------
Guy A. Osborn Director March 18, 1999
THOMAS F. SCHRADER
- ------------------
Thomas F. Schrader Director March 18, 1999
STUART W. TISDALE
- -----------------
Stuart W. Tisdale Director March 18, 1999
GEORGE E. WARDEBERG
- -------------------
George E. Wardeberg Director March 18, 1999
ESSIE M. WHITELAW
- -----------------
Essie M. Whitelaw Director March 18, 1999
WILLIAM B. WINTER
- -----------------
William B. Winter Director March 18, 1999
<PAGE>
<PAGE> 17
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Wisconsin Gas Company:
We have audited the accompanying balance sheets and statements of
capitalization of WISCONSIN GAS COMPANY (a Wisconsin corporation and a wholly
owned subsidiary of WICOR, Inc.) as of December 31, 1998 and 1997, and the
related statements of income, common equity and cash flows for each of the
three years in the period ended December 31, 1998. 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, 1998 and 1997, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
Milwaukee, Wisconsin, ARTHUR ANDERSEN LLP
January 25, 1999.
<PAGE>
<PAGE> 18
WISCONSIN GAS COMPANY
Statements of Income
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1998 1997 1996
(Thousands of Dollars) ---------- ---------- ----------
<S> <C> <C> <C>
Operating Revenues $ 428,562 $ 536,720 $ 573,255
---------- ---------- ----------
Operating Expenses:
Cost of gas sold 252,181 342,749 365,398
Operations 79,178 84,647 91,436
Maintenance 8,393 8,535 8,767
Depreciation 33,568 31,714 32,848
Taxes, other than income taxes 9,038 9,600 9,230
---------- ---------- ----------
382,358 477,245 507,679
---------- ---------- ----------
Operating Income 46,204 59,475 65,576
---------- ---------- ----------
Interest Expense 12,448 12,698 12,934
Other Income and (Expenses), net (2,125) (366) (662)
---------- ---------- ----------
Income Before Income Taxes 35,881 47,143 53,304
Income Tax Provision 13,213 17,808 20,580
---------- ---------- ----------
Net Earnings $ 22,668 $ 29,335 $ 32,724
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
<PAGE> 19
WISCONSIN GAS COMPANY
Balance Sheet
<TABLE>
<CAPTION>
As of December 31,
--------------------------
1998 1997
(Thousands of Dollars) ----------- ------------
<S> <C> <C>
Assets
- ------
Property, Plant and Equipment, at cost $ 828,748 $ 801,069
Less - Accumulated depreciation 448,270 421,098
----------- ------------
380,478 379,971
----------- ------------
Current Assets:
Cash and cash equivalents 6,690 7,854
Accounts receivable, less allowance for doubtful
accounts of $10,170 and $13,306, respectively 39,580 72,238
Accounts receivable - intercompany, net 440 233
Accrued revenues 42,524 39,986
Gas in storage, at weighted average cost 36,751 40,657
Materials and supplies, at weighted average cost 3,590 3,192
Deferred income taxes 12,579 17,667
Prepaid taxes 3,480 6,162
Other 2,330 1,984
----------- ------------
147,964 189,973
----------- ------------
Deferred Charges and Other:
Regulatory assets 59,319 53,910
Prepaid pension costs 42,396 35,212
Systems development costs 12,901 17,424
Other 8,434 7,398
----------- ------------
123,050 113,944
----------- ------------
$ 651,492 $ 683,888
=========== ============
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
<PAGE> 20
Wisconsin Gas Company
Balance Sheets
<TABLE>
<CAPTION>
As of December 31,
----------------------------
1998 1997
(Thousands of Dollars) ------------- ------------
<S> <C> <C>
Capitalization and Liabilities
- ------------------------------
Capitalization (See accompanying statement):
Long-term debt $ 158,839 $ 110,657
Preferred stock - -
Common equity 213,346 215,249
------------- ------------
372,185 325,906
------------- ------------
Current Liabilities:
Accounts payable 36,844 43,491
Short-term borrowings 65,000 78,671
Current portion of long-term debt 2,000 42,000
Refundable gas costs 18,570 24,776
Accrued payroll and benefits 8,394 8,066
Accrued taxes 1,675 5,537
Other 3,077 3,829
------------- ------------
135,560 206,370
------------- ------------
Deferred Credits and Other Liabilities:
Postretirement benefit obligation 44,741 48,942
Deferred income taxes 40,375 37,689
Regulatory liabilities 32,153 36,533
Environmental remediation costs 7,922 12,084
Unamortized investment tax credit 6,357 6,808
Other 12,199 9,556
------------- ------------
143,747 151,612
------------- ------------
$ 651,492 $ 683,888
============= ============
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
<PAGE> 21
WISCONSIN GAS COMPANY
Statements of Cash Flows
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------
1998 1997 1996
(Thousands of Dollars) ---------- ---------- ----------
<S> <C> <C> <C>
Operations:
Net earnings $ 22,668 $ 29,335 $ 32,724
Adjustments to reconcile net earnings
to net cash flows:
Depreciation and amortization 40,335 39,820 41,111
Deferred income taxes 7,775 2,332 (2,183)
Net pension and other postretirement
benefit (income) cost (8,001) (2,974) 1,574
Change in:
Receivables 20,130 15,698 (15,680)
Gas in storage 3,905 (7,973) (8,756)
Other current assets (743) (410) (4,711)
Accounts payable (6,647) (21,057) 23,469
Accrued taxes (1,180) 5,266 (1,327)
Refundable gas costs (6,206) (6,769) (2,802)
Other current liabilities (632) (899) (950)
Other non-current assets and liabilities (9,240) (8,254) (8,924)
---------- ---------- ----------
62,164 44,115 53,545
---------- ---------- ----------
Investment Activities:
Capital expenditures (35,492) (35,017) (36,586)
Acquisition of water utility (509) - -
Proceeds from sale of assets 1,762 - -
Other, net 301 293 285
---------- ---------- ----------
(33,938) (34,724) (36,301)
---------- ---------- ----------
Financing Activities:
Change in short-term borrowings (13,671) 13,171 8,000
Issuance of long-term debt 50,000 - -
Reduction of long-term debt (42,000) (2,000) (4,000)
Cash dividends paid to WICOR, Inc. (24,000) (22,000) (20,000)
Other 281 332 253
---------- ---------- ----------
(29,390) (10,497) (15,747)
---------- ---------- ----------
Change in Cash and Cash Equivalents (1,164) (1,106) 1,497
Cash and Cash Equivalents at Beginning of Period 7,854 8,960 7,463
---------- ---------- ----------
Cash and Cash Equivalents at End of Period $ 6,690 $ 7,854 $ 8,960
========== ========== ==========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for:
Income taxes, net of refunds $ 8,694 $ 11,814 $ 29,048
Interest $ 12,303 $ 11,886 $ 11,763
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
<PAGE> 22
WISCONSIN GAS COMPANY
Statements of Common Equity
(Thousands of Dollars)
<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, 1995 $ 194,582 $ 9 $ 118,842 $ 76,630 $ (899)
Net earnings 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 earnings 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)
Net earnings 22,668 - - 22,668 -
Other comprehensive income:
Minimum pension
liability adjustment (782) - - - (782)
---------- --------- ----------- ----------- ------------
Comprehensive income 21,886 - - 22,668 (782)
---------- --------- ----------- ----------- ------------
Cash dividends paid
to WICOR, Inc. (24,000) - - (24,000) -
Other 211 - 211 - -
---------- --------- ----------- ----------- ------------
Balance at December 31, 1998 $ 213,346 $ 9 $ 120,888 $ 94,673 $ (2,224)
========== ========= =========== =========== ============
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
<PAGE> 23
Wisconsin Gas Company
Statements of Capitalization
<TABLE>
<CAPTION>
As of December 31,
-------------------------------
1998 1997
(Thousands of Dollars) --------------- --------------
<S> <C> <C>
Long-Term Debt
- --------------
Commercial paper (See Note 5 of the Notes $ 50,000 $ -
to the Financial Statements)
First mortgage bonds
Adjustable Rate Series, 7.2% and 8.1%,
respectively, due 1999 - 2,000
6.6% Notes due 2013 45,000 45,000
6.375% Notes due 2005 65,000 65,000
Unamortized debt discount and expense (1,161) (1,343)
--------------- --------------
158,839 110,657
--------------- --------------
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 120,888 120,677
Retained earnings 94,673 96,005
Accumulated other comprehensive income (2,224) (1,442)
--------------- --------------
213,346 215,249
--------------- --------------
$ 372,185 $ 325,906
=============== ==============
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
<PAGE> 24
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, 1998, Wisconsin Gas served approximately 529,000
customers in 524 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. 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 gas cost incentive mechanism (GCIM) approved by the PSCW in October
1997 became effective on November 1, 1997, for each of the three years ending
October 31, 1998, 1999 and 2000. Under the GCIM, Wisconsin Gas's gas commodity
and capacity costs are compared to monthly benchmarks. If at the end of each
GCIM year, such costs deviate by more than 1.5% 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 1.5% and 4%
above or below the benchmark. The GCIM provides an opportunity for Wisconsin
Gas's earnings to increase or decrease as a result of gas and capacity
acquisition activities. Reduced gas costs under the GCIM have been shared
between the Company and its customers.
c. Plant and Depreciation
Gas distribution property, plant and equipment is stated at original
cost, including overhead allocations. Upon ordinary retirement of plant
assets, 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
were 4.4%, 4.3% and 4.5% for 1998, 1997 and 1996, 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> 25
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 in
the period 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).
The amounts recorded as regulatory assets and regulatory liabilities in
the balance sheet at December 31, 1998 and 1997 are as follows:
(Thousands of Dollars) 1998 1997
---------- ----------
Regulatory assets:
Postretirement benefit costs (Note 8) $ 36,720 $ 39,498
Deferred uncollectible expenses 19,960 11,056
Income tax-related amounts
due from customers (Note 3) 2,295 2,648
Other 344 708
---------- ----------
$ 59,319 $ 53,910
========== ==========
Regulatory liabilities:
Income tax-related amounts
due to customers (Note 3) $ 18,058 $ 19,725
Unrecognized pension income (Note 8) 10,929 13,780
Other 3,166 3,028
---------- ----------
$ 32,153 $ 36,533
========== ==========
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 and recovered in future
rates. The most recent PSCW rate order provides for a $21.4 million allowable
annual provision for doubtful accounts, including amortization of prior
deferred amounts. 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.
<PAGE>
<PAGE> 26
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.
g. Derivative Financial Instruments
Wisconsin Gas uses derivative financial instruments to manage commodity
risks associated with the price of natural gas. The Company's policy
prohibits the use of derivative financial instruments for trading purposes.
Wisconsin Gas has a commodity risk management program that has been
approved by the PSCW. This program allows Wisconsin Gas to utilize call and
put option contracts to reduce market risk associated with fluctuations in the
price of natural gas purchases and gas in storage. Under this program,
Wisconsin Gas has the ability to hedge up to 50% of its planned gas deliveries
for the heating season The PSCW has also allowed Wisconsin Gas to hedge gas
purchased for storage during non-heating months. The cost of the call and put
option contracts, as well as gains or losses realized under the contracts do
not affect net income as they are recovered dollar for dollar under the
purchased gas adjustment clause. As of December 31, 1998, Wisconsin Gas had
put options covering approximately 33% of the volumes of gas in storage, and
call options covering 15% of the expected natural gas purchases for the
remainder of the 1998-1999 heating season.
h. Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
i. 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
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 133 (SFAS 133), "Accounting for
Derivitive Instruments and Hedging Activities", effective in the first quarter
of 2000. SFAS 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the balance sheet
and measure those instruments at fair value. The Company is currently
evaluating the impact of the provisions of SFAS 133 on its financial
statements. The Company does not believe that SFAS 133 will materially
increase volatility in earnings and other comprehensive income.
<PAGE>
<PAGE> 27
During 1998, the Company adopted Statement of Position No. 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use," which provides guidance on accounting for the costs of computer
software developed or obtained for internal use. The impact of adopting this
statement on the Company's financial statements was immaterial.
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) 1998 1997 1996
- ------------------------ ---------- ---------- ----------
Current
Federal $ 7,017 $ 13,198 $ 19,202
State 1,698 3,216 4,724
---------- ---------- ----------
Total Current 8,715 16,414 23,926
---------- ---------- ----------
Deferred
Federal 3,193 707 (3,040)
State 1,305 687 (306)
---------- ---------- ----------
Total Deferred 4,498 1,394 (3,346)
---------- ---------- ----------
Total Provision $ 13,213 $ 17,808 $ 20,580
========== ========== ==========
The provision for income taxes differs from the amount of income tax
determined by applying the applicable U.S. statutory federal income tax rate
to pre-tax income as a result of the following differences:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------
(Thousands of Dollars) 1998 1997 1996
- ------------------------ --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Statutory U.S. tax rates $12,559 35.0% $16,500 35.0% $18,656 35.0%
State income taxes, net 2,047 5.7 2,629 5.6 2,948 5.5
Investment credit restored (445) (1.2) (451) (1.0) (453) (0.9)
Excess deferred
tax amortization (645) (1.8) (630) (1.3) (556) (1.0)
Other, net (303) (0.9) (240) (0.5) (15) -
--------------- --------------- ---------------
Effective Tax Rates $13,213 36.8% $17,808 37.8% $20,580 38.6%
=============== =============== ===============
</TABLE>
<PAGE>
<PAGE> 28
The components of deferred income tax assets and liabilities at December
31, 1998 and 1997 are as follows:
(Thousands of Dollars) 1998 1997
- -------------------------- ---------- ----------
Current Deferred Income Tax Assets
Recoverable gas costs $ 7,176 $ 9,712
Inventory 3,790 4,036
Deferred compensation 2,039 1,907
Other (426) 2,012
---------- ----------
$ 12,579 $ 17,667
========== ==========
Long-term Deferred Income Tax Liabilities
Property related $ 37,772 $ 38,945
Pension benefits 12,259 8,649
Systems development costs 5,178 6,993
Investment tax credit (4,205) (4,503)
Environmental (3,180) (4,819)
Postretirement benefits (3,220) (3,791)
Deferred compensation (3,055) (2,921)
Other (1,174) (864)
---------- ----------
$ 40,375 $ 37,689
========== ==========
4. SHORT-TERM BORROWINGS
As of December 31, 1998 and 1997, Wisconsin Gas had total unsecured
lines of credit available from banks of $135.0 million and $120.0 million,
respectively. The credit lines may be used for, among other purposes, the
support of commercial paper issued by Wisconsin Gas. At December 31, 1998,
$115.0 million of commercial paper was outstanding at a weighted average
interest rate of 5.7%. Commercial paper totaling $50.0 million was classified
as long-term. At December 31, 1997, $78.7 million of commercial paper was
outstanding at a weighted average interest rate of 5.8%.
During 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.
5. LONG-TERM DEBT
In January 1999, Wisconsin Gas issued $50 million of 5.5% Unsecured
Notes due 2009. The proceeds of the offering were used in part to reduce
commercial paper issued in November 1998, in connection with the maturity of
$40.0 million 7.5% Notes. In addition to the unsecured notes, Wisconsin Gas
has previously issued first mortgage bonds which matured during the first
quarter of 1999.. Substantially all gas distribution property acquired prior
to January 1, 1993, is subject to a first mortgage lien pursuant to the
indenture under which these first mortgage bonds were issued. Wisconsin Gas
has no plans to issue any additional first mortgage bonds. Maturities and
sinking fund requirements during the succeeding five years on all long-term
debt total $2.0 million in 1999, nil in 2000, 2001, 2002 and 2003 and $160.0
million, thereafter.
<PAGE>
<PAGE> 29
6. RESTRICTIONS
The PSCW has established 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, $41.4 million of Wisconsin Gas's net
assets at December 31, 1998, 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 $6.0 million in
dividends in November 1998 and expects to pay $25.5 million in dividends for
the 12 months ending October, 1999. At December 31, 1998, Wisconsin Gas's
equity was 53.2% of its total capitalization.
7. ACQUISITIONS
During 1998, Wisconsin Gas acquired a small municipal water utility, at
book value, for $0.5 million in cash. The acquisition was accounted for as a
purchase and the results of operations were included in the Company's
financial statements from the date of acquisition.
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 total approximately $505.9 million, with annual
required payments of $105.5 million in 1999, $97.5 million in 2000, $95.6
million in 2001, $93.5 million in 2002 and $74.9 million in 2003. Wisconsin
Gas's total payments for firm pipeline and storage capacity prior to recovery
from sales of excess capacity were $113.9 million in 1998, $126.6 million in
1997 and $129.6 million in 1996.
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.
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 1999 capital
expenditures. Wisconsin Gas capital expenditures for 1999 are estimated at $45
million.
<PAGE>
<PAGE> 30
c. Environmental Matters
In 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.
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. During 1997, Wisconsin Gas completed a comprehensive review of its
potential environmental accrual 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 of the estimated probable liability for cleanup to $7.9
million. Expenditures over the next three years are expected to total
approximately $5 million.
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. Wisconsin Gas is evaluating potential remediation options at the
second site. 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 operations.
9. BENEFIT PLANS
a. Pension and Other Postretirement Benefit Plans
The Company provides defined benefit pension and postretirement benefit
plans to employees. Effective January 1, 1998, the Company adopted SFAS 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits". The
following provides a reconciliation of benefit obligations, plan assets and
funded status of the plans at December 31, 1998 and 1997.
<PAGE>
<PAGE> 31
<TABLE>
<CAPTION>
Other Postretirement
Pension Benefits Benefits
---------------------- ----------------------
(Thousands of dollars) 1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Change in benefit obligation
Benefit obligation at January 1 $ 128,014 $ 117,305 $ 85,986 $ 79,927
Service cost 3,008 3,139 989 1,920
Interest cost 9,088 9,046 4,505 5,388
Amendments and settlements (848) (634) (11,264) -
Actuarial loss (gain) 10,415 7,461 (16,182) 1,676
Benefits paid (10,666) (8,303) (3,187) (2,925)
---------- ---------- ---------- ----------
Benefit obligation at December 31 139,011 128,014 60,847 85,986
---------- ---------- ---------- ----------
Change in plan assets
Fair value of plan assets
at January 1 209,161 176,992 54,957 40,846
Actual return on plan assets 11,556 40,067 2,732 11,320
Employer contributions - - 3,948 5,717
Benefits paid from plan assets (10,261) (7,898) (3,186) (2,926)
---------- ---------- ---------- ----------
Fair value of plan assets
at December 31 210,456 209,161 58,451 54,957
---------- ---------- ---------- ----------
Funded status of the plans 71,445 81,147 (2,396) (31,029)
Unrecognized net actuarial (gain) (27,234) (42,495) (20,909) (8,386)
Unrecognized prior service cost 2,187 3,145 (23,355) (13,476)
Unrecognized net transition (asset) (8,170) (9,621) 1,919 3,949
---------- ---------- ---------- ----------
Net amount recognized $ 38,228 $ 32,176 $ (44,741) $ (48,942)
========== ========== ========== ==========
Amounts recognized in the Balance Sheet
Prepaid benefit cost $ 42,396 $ 35,212 $ - $ -
Accrued benefit liability (4,168) (3,036) (44,741) (48,942)
Additional minimum liability (2,224) (1,442) - -
Accumulated other
comprehensive income 2,224 1,442 - -
---------- ---------- ---------- ----------
Net amount recognized $ 38,228 $ 32,176 $ (44,741) $ (48,942)
========== ========== ========== ==========
Assumptions as of December 31
Discount rate (weighted average) 6.50% 7.25% 6.50% 7.25%
Expected return on plan assets 9.00% 9.00% 9.00% 9.00%
Rate of compensation increase 4.50% 4.50% 4.50% 4.50%
</TABLE>
<PAGE>
<PAGE> 32
Net pension (income) costs and other postretirement benefit costs for each of
the years ended December 31 include the following components:
<TABLE>
<CAPTION>
Pension Benefits Other Postretirement Benefits
-------------------------- --------------------------------
(Thousands of Dollars) 1998 1997 1996 1998 1997 1996
-------- -------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Service costs $ 3,008 $ 3,139 $ 3,732 $ 989 $ 1,920 $ 2,507
Interest costs on projected
benefit obligations 9,088 9,046 9,269 4,505 5,388 5,915
Expected (gain) on assets (16,342) (15,136) (14,391) (5,168) (4,053) (3,412)
Amortization of:
Transition obligation (asset) (1,437) (1,443) (1,466) - - -
Prior service cost 114 300 301 (1,384) (957) (957)
Actuarial (gain) loss (78) (338) 94 (1,223) (767) 55
-------- -------- -------- ---------- ---------- ----------
(5,647) (4,432) (2,461) (2,281) 1,531 4,108
Amortization of regula-
tory (liability) asset (2,851) (2,851) (2,851) 2,778 2,778 2,778
-------- -------- -------- ---------- ---------- ----------
Net benefit (income) expense $(8,498) $(7,283) $(5,312) $ 497 $ 4,309 $ 6,886
======== ======== ======== ========== ========== ==========
</TABLE>
Pension plans. 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 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 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.
In 1998, 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.
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 106
and are recoverable from customers. The cumulative difference between the
amounts funded and the amounts based on SFAS 106 through January 1, 1992, is
recorded as a regulatory asset and is being amortized over a twenty-year
period beginning January 1, 1992.
In 1998, 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.
<PAGE>
<PAGE> 33
The postretirement benefit cost components for 1998 were calculated assuming
health care cost trend rates ranging from up to 10% for 1999 and decreasing to
5% in 2004. The health care cost trend rate has a significant effect on the
amounts reported. An increase of one percentage point in the assumed health
care cost trend rate in each year would increase the accumulated
postretirement benefit obligation as of December 31, 1998, by $3.4 million and
the aggregate of the service and interest cost components of postretirement
expense by $0.2 million. A corresponding decrease would decrease the
accumulated postretirement benefit obligation by $2.9 million and the
aggregate of the service and interest cost components of postretirement
expense by $0.2 million.
Plan assets are primarily invested in equities and fixed income securities.
b. 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). Total contributions were valued at $1.3 million in 1998 and $1.2
million in 1997 and 1996.
c. 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, adjustable rate loan
(5.6% interest rate at December 31, 1998), guaranteed by WICOR, to purchase
862,532 shares of WICOR common stock (adjusted for the two-for-one stock split
effected in May 1998). The ESOP has extended the adjustable rate loan, with
similar terms, until May 31, 2002. Because WICOR has guaranteed the loan, the
unpaid balance ($2.8 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 loan with dividends on shares of WICOR
common stock held by the ESOP and with Wisconsin Gas contributions to the
ESOP.
<PAGE>
<PAGE> 34
10. Year 2000 Date Conversion
Issues relating to Year 2000 conversion are the result of computer
software programs being written using two digits rather than four to define
the applicable year. Any of the Company's software programs, computer
hardware or equipment that have date sensitive software or embedded chips may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices, distribute natural gas or engage in other normal
business activities.
The Company has developed a formal plan to ensure that its significant
date-sensitive computer software and hardware systems (Information Technology)
and other equipment utilized in its various activities (Operating Equipment)
will be Year 2000 compliant and operational on a timely basis. The plan
addresses all of the Company's locations, and includes a review of computer
applications that connect elements of the Company's business directly to its
customers and suppliers. The plan also includes an assessment process to
determine if the Company's significant customers and suppliers will be Year
2000 compliant.
The Company's plan to resolve issues relating to Year 2000 conversion
includes four major phases - assessment, remediation, testing, and
implementation. To assist the Company in reaching Year 2000 compliance, the
Company has retained third party consultants. The Company has substantially
completed the assessment phase of its plan for all of its significant
Information Technology and Operating Equipment that it believes could be
affected by the Year 2000 conversion. Based upon its assessment, the Company
concluded that it would be necessary to reprogram and/or replace certain of
its Information Technology. The Company also determined that certain of its
Operating Equipment would also require modifications to ensure it remains
operational.
For its Information Technology applications as of December 31, 1998, the
Company believes it is approximately 72% compliant on all of its significant
systems, and estimates that it will complete software reprogramming and/or
replacement in the second quarter of 1999. The Company believes that the
Operating Equipment at December 31, 1998 was approximately 61% compliant, and
expects to complete remediation during the second quarter of 1999.
With respect to operations that involve third parties, the Company has
made inquiries of its significant customers and suppliers and, at the present
time and based on such inquiries, is not aware of Year 2000 issues facing
these third parties that would materially impact the Company's operations.
However, the Company has no means of ensuring that these customers and
suppliers (and, in turn, their customers and suppliers) will be Year 2000
compliant in a timely manner. The inability of these parties to successfully
resolve their Year 2000 issues could have a material adverse effect on the
Company.
Despite the efforts that the Company has undertaken, there can be no
assurances that every Year 2000 related issue will be identified and addressed
before January 1, 2000. An unexpected failure as a result of a Year 2000
compliance issue could result in an interruption in certain normal business
activities or operations. For that reason, the Company is currently
developing contingency plans to address alternatives in the event certain Year
2000 compliance failures occur.
Through December 31, 1998, the Company had spent approximately $3.2
million for Year 2000 remediation. The amount of additional development and
remediation costs necessary for the Company to prepare for Year 2000 is
estimated to be approximately $0.6 million and is expected to be funded
through operating cash flow.
The estimates of and timetable for becoming Year 2000 compliant
constitute "forward looking statements" as defined in the Private Securities
Legislation Reform Act of 1995.
<PAGE>
<PAGE> 35
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 estimated based on the
quoted market prices of U.S. Treasury issues having a similar term to
maturity, adjusted for the Company's bond rating and the present value of
future cash flows.
Because the Company 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 the Company's customers through
gas rates.
The estimated fair value of the Company's financial instruments at
December 31 is as follows:
1998 1997
------------------ ------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
Cash and cash equivalents $ 6,690 $ 6,690 $ 7,854 $ 7,854
Accounts receivable $ 39,580 $ 39,580 $ 72,238 $ 72,238
Short-term debt $ 65,000 $ 65,000 $ 78,671 $ 78,671
Long-term debt $158,839 $162,739 $110,657 $111,999
12. QUARTERLY FINANCIAL DATA (Unaudited)
Because seasonal factors significantly affect the Company's operations,
the following data is not comparable between quarters:
(Thousands of dollars) First Second Third Fourth
- ----------------------- --------- ---------- --------- ----------
1998
Operating Revenues $169,447 $ 78,190 $ 53,987 $ 126,938
Operating Income (Loss) $ 32,626 $ (335) $ (7,871) $ 21,784
Net Income (Loss) $ 18,502 $ (1,716) $ (6,095) $ 11,977
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
<PAGE>
<PAGE> 36
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 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, dated as of September 1, 1990, between Wisconsin Gas
Company and Firstar Bank Milwaukee, N.A., Trustee (incorporated by reference
to Exhibit 4.11 to Wisconsin Gas Company's Form S-3 Registration Statement No.
33-36639).
4.2 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).
4.3 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).
4.4 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).
4.5 WICOR, Inc. Master Savings Trust Agreement, dated as of October
1, 1996, between WICOR, Inc. and Marshall & Ilsley Trust Company (incorporated
by reference to Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q
dated as of October 30, 1996).
4.6 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).
4.7 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, as amended.
10.3# Form of nonstatutory stock option 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).
<PAGE>
<PAGE> 37
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 Supplemental Retirement Income Program
10.9# Wisconsin Gas Company 1999 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).
13 "Financial Review" portions of WICOR, Inc. 1998 Annual Report to
Shareholders.
27 Financial Data Schedule. (EDGAR version only)
<PAGE> 1
WICOR, Inc.
1992 DIRECTOR STOCK OPTION PLAN
AS AMENDED DECEMBER 15, 1998
I. PURPOSE.
The purpose of the WICOR, Inc. 1992 Director Stock Option Plan (the
"Plan") is to promote the best interests of WICOR, Inc. (the "Company") and
its shareholders by providing a means to attract and retain directors of
exceptional competence who are not employees of the Company or any subsidiary
or affiliate thereof ("Eligible Directors") and to provide opportunities for
stock ownership by such Eligible Directors which will increase their
proprietary interest in the Company and, consequently, their identification
with the interests of the Company's shareholders.
II. SECURITIES SUBJECT TO THE PLAN.
Subject to adjustment as provided in Section XI hereof, an aggregate of
300,000 shares of the Company's common stock, $1 par value ("Common Stock"),
may be issued to Eligible Directors upon the exercise of options granted under
the Plan ("Options"). The shares of Common Stock deliverable upon the
exercise of Options may be from authorized but unissued shares of the Company
or shares reacquired by the Company and held as treasury shares; provided,
however, that shares of Common Stock deliverable upon the exercise of Options
bearing Grant Dates (as hereinafter defined) on or after December 31, 1998,
shall be shares of Common Stock reacquired by the Company and held as
treasury shares. In the event that an Option granted under the Plan expires,
is cancelled or terminates unexercised as to any shares of Common Stock
covered thereby, if shares of Common Stock are used to satisfy the Company's
tax withholding obligations, or if shares of Common Stock are delivered to the
Company as payment of the Purchase Price (as hereinafter defined) upon
exercise, such shares shall thereafter be available for the granting of
additional Options under the Plan.
III. EFFECTIVE DATE: DURATION OF PLAN.
The Plan shall become effective as of the date of its adoption by the
Company's Board of DirectorsThe Plan shall terminate (a) when the total number
of shares of Common Stock with respect to which Options may be granted have
been issued, or (b) by action of the Board of Directors pursuant to Section
XIV hereof, whichever shall first occur.
IV. ADMINISTRATION.
The Plan shall be administered by the Compensation Committee (the
"Committee") of the Company's Board of Directors. Grants of Options under the
Plan and the amount and nature of the awards to be granted shall be automatic
as described in Section VI hereof.
However, all questions regarding interpretation, administration and
application of the Plan, any related agreements and instruments, and the value
of shares of Common Stock subject to Options shall be subject to the good
faith determination of the Committee, which determination shall be final and
binding
<PAGE>
<PAGE> 2
VI. OPTIONS.
(a) Grant of Options. Subject to adjustment as provided in Section
XI, as long as this Plan is effective and has not been terminated, on the
fourth Tuesday in February of each year, commencing February 23, 1993, each
Eligible Director shall automatically receive an Option to purchase Four
Thousand (4,000)shares of Common Stock. Any date on which an Eligible
Director receives an Option shall be referred to as a "Grant Date".
(b) Purchase Price. The purchase price at which shares of Common
Stock may be purchased pursuant to Options granted under the Plan shall be
equal to the mean of the high and low prices for shares of Common Stock as
reported in consolidated trading for securities traded on the New York Stock
Exchange (or in the principal market on which the Common Stock is traded, if
other than on the New York Stock Exchange) on the Grant Date (or if no sales
occurred on such date, the average of the high and low prices for shares of
Common Stock as reported in consolidated trading for securities traded on the
New York Stock Exchange or on such other principal market on the last
preceding date on which sales of Common Stock occurred) (the "Purchase
Price").
(c) Option Period. Subject to the following sentence, an Option
granted under the Plan may be exercised at any time while the Eligible
Director holding the Option remains a director of the Company and within two
(2) years after an Eligible Director ceases to be a director of the Company.
No Option granted under the Plan shall be exercisable after the expiration of
ten (10) years from the Grant Date of such Option.
(d) Exercise of Options. An Option shall be exercised in whole or in
part only by delivery of written notice to the Company setting forth the
number of shares with respect to which the Option is to be exercised and the
address to which the certificates for such shares are to be mailed, together
with cash or its equivalents (including checks, bank drafts or postal or
express money orders payable to the order of the Company) and/or such other
consideration (including previously acquired shares of Common Stock or shares
of Common Stock issuable upon exercise of the Option) as may be approved by
the Committee, in an amount equal to the aggregate Purchase Price of such
shares. Any shares of Common Stock tendered by an Eligible Director in
connection with the exercise of an Option shall be valued as of the date of
exercise in accordance with Section VI(b) of the Plan. As soon as practicable
after receipt of such written notification and payment, the Company shall
deliver to the Eligible Director certificates for the number of the shares
with respect to which such Option has been so exercised, issued in the
Eligible Director's name.
(e) Transferability of Options. Options shall not be transferable
otherwise than by will or the laws of descent and distribution and shall be
exercisable during the Eligible Director's lifetime only by such Eligible
Director or by his or her guardian or legal representative.
(f) Termination. Except as expressly provided herein, an Option shall
terminate on the earlier of:
(i) its expiration date as provided above; or
(ii) two (2) years after the Eligible Director
ceases to be a director of the Company.
<PAGE>
<PAGE> 3
VII. MANDATORY HOLDING PERIOD FOR COMMON STOCK.
Shares of Common Stock delivered by the Company upon the exercise of an
Option may not be sold by the Eligible Director or other holder thereof within
the six- (6) month period following the Grant Date of such Option unless such
a sale is consummated with the written consent of the Committee. The Company
may place a legend which sets forth this six- (6) month transfer restriction
on any certificate representing shares of Common Stock delivered upon the
exercise of an Option within six (6) months of the Grant Date.
VIII. REQUIREMENTS IMPOSED BY LAW.
The Company is not required to sell or issue any shares of Common Stock
under any Option if the issuance of such shares constitutes a violation by the
Eligible Director or by the Company of any provisions of any law or regulation
of any governmental authority or national securities exchange. Any such
determination by the Committee shall be final, binding and conclusive.
IX. NO RIGHTS AS SHAREHOLDERS WITH RESPECT TO OPTIONS.
An Eligible Director shall not have rights as a shareholder with respect
to shares of Common Stock covered by an Option except to the extent that an
Option has been exercised, the Purchase Price paid and a stock certificate
issued therefor.
X. NO RIGHT TO CONTINUE AS A DIRECTOR.
The granting of any Option shall not impose upon the Company or its
shareholders any obligation to continue to retain an Eligible Director as a
member of the Company's Board of Directors, and the right of the Company or
its shareholders to remove an Eligible Director shall not be diminished or
affected in any way by reason of the fact that an Option has been granted to
such director.
XI. ADJUSTMENT OF AND CHANGES IN COMMON STOCK.
In the event of a reorganization, recapitalization, stock split, stock
dividend, combination of shares, merger, consolidation, distribution of
assets, or any other changes in the corporate structure or stock of the
Company, the aggregate number and kinds of shares of Common Stock authorized
by the Plan, the number and kind of shares covered by outstanding options
granted under the Plan and the Purchase Price for each Option shall be
automatically adjusted.
XII. NON-STATUTORY OPTIONS.
All Options granted under the Plan shall be non-statutory options not
intended to qualify under Section 422A of the Internal Revenue Code of 1986,
as amended.
<PAGE>
<PAGE> 4
XIII. WITHHOLDING.
In the event the Company determines that it is required to withhold
Federal or state income tax as a result of the exercise of any Option, it may
require the Eligible Director to make arrangements satisfactory to the Company
to enable it to satisfy such withholding requirements as a condition to the
exercise of the Option.
XIV. AMENDMENT, SUSPENSION OR TERMINATION OF THE PLAN.
The Company's Board of Directors may, subject to applicable law and the
shareholder approval requirements of the New York Stock Exchange, suspend,
terminate, revise or amend the Plan in any respect whatsoever (including
amending the Plan from time to time to cause it to continue to comply with the
rules of the Securities and Exchange Commission under Section 16 of the
Securities Exchange Act of 1934, as amended (the "Section 16 Rules"));
provided, however, that no such suspension, termination, revision or amendment
shall become effective if it would cause the Plan to cease to comply with the
Section 16 Rules. Without limitation, the Board of Directors shall have the
right from time to time to amend the first sentence of Section VI(a) of the
Plan to provide that each of the Options to be automatically granted at the
times specified in the Plan to the Eligible Directors shall cover such number
of shares of Common Stock not less than Two Hundred (200) and not more than
Four Thousand (4,000) shares as determined at the time of amendment of
Section VI(a) by the Board of Directors. Notwithstanding the foregoing, the
provisions of Sections V and VI of the Plan may not be amended more than once
in any six (6)-month period other than to comply with changes in the Internal
Revenue Code or the rules thereunder.
XV. NOTICE.
Any written notice to the Company required by any of the provisions of
the Plan shall be addressed to the Secretary of the Company at the Company's
principal executive office, and shall become effective upon receipt.
XVI. FRACTIONAL SHARES.
No fractional share of Common Stock shall be issued pursuant to the
exercise of an Option, but in lieu thereof, the cash value of such fractional
share shall be paid.
XVII. SECTION 16 COMPLIANCE.
Transactions under the Plan are intended to comply with all applicable
conditions of Rule 16b-3 or its successors under the Securities Exchange Act
of 1934, as amended. To the extent any provision of the Plan or action by the
Committee or the Company's Board of Directors fail to so comply, it shall be
deemed null and void, to the extent permitted by law and deemed advisable by
the Committee or the Company's Board of Directors.
<PAGE>
<PAGE> 1
EXHIBIT 10-8
WISCONSIN GAS COMPANY
SUPPLEMENTAL RETIREMENT INCOME PROGRAM
1. Purpose of the Program
The purpose of the Wisconsin Gas Company Supplemental Retirement Income
Program (the "Program") is fivefold: (i) to reimburse each designated
corporate officer of Wisconsin Gas Company (the "Company"), WICOR, Inc.,
and/or WICOR Energy Services Company (in the aggregate, the "Employer") for
any reduction in his benefit payments under the Wisconsin Gas Company Pension
Plan for Non-Union Employees (the "Pension Plan") which may be caused by the
limitations imposed thereon by Internal Revenue Code Section 415 (the "415
Limit") or Internal Revenue Code Section 401(a)(17) (the "Compensation Limit")
and/or by the exclusion from the definition of compensation under the Pension
Plan of any earnings paid by Sta-Rite Industries, Inc. to its corporate
officers, and any such earnings voluntarily deferred pursuant to a non-
qualified deferred compensation arrangement (the "Sta-Rite Exclusion"), any
amounts voluntarily deferred from Employer salary pursuant to a non-qualified
deferred compensation arrangement (the "Deferred Compensation Exclusion") or
any bonuses (provided that any bonus payments shall be pro-rated on a monthly
basis over the calendar year for which the bonus payments are applicable) (the
"Bonus Exclusion"); (ii) to reimburse a corporate officer of the Company for
any reduction in his employer or employee contribution allocations under the
Wisconsin Gas Company Employees' Savings Plan (the "Savings Plan") which may
be caused by the 415 Limit, the Compensation Limit, and/or by the Deferred
Compensation Exclusion; (iii) to provide retirement income for any designated
corporate officer retiring on or after January 1, 1987 to replace the post-
retirement life insurance benefit program which will not be available to
anyone retiring after December 31, 1986; (iv) to provide incentive and reward
to such officer through additional retirement income in recognition of his
meritorious service and material contribution to the Employer's continued
growth and development; and (v) to assist the Employer in retaining and
attracting high caliber key executives upon whose efforts the future
successful and profitable operation of its business is dependent.
2. Effective Date
The Program was originally adopted effective as of January 1, 1983 as
the replacement for the Wisconsin Gas Company Corporate Officer Post-
Retirement Benefit Plan in effect prior to that date. This is an amendment
and restatement of the Program and is effective January 1, 1997 for current
and future participants. The terms of the Program in effect prior to
January 1, 1997 shall apply to any former participants who retired or
otherwise terminated employment prior to that date. Prior to January 1, 1997,
the Program was known as the Wisconsin Gas Company Principal Officers'
Supplemental Retirement Income Program.
3. Participants in the Program
As of January 1, 1997, the Program covers Messrs. Wardeberg, Wenzler,
Schrader, Donnelly, Nuernberg, Zeddun and Osborne. Any officer of the
Employer may be added as a participant by action of the Compensation Committee
of the Board of Directors of WICOR, Inc
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<PAGE> 2
4. Savings Plan Benefits
The Company shall establish a Savings Plan Bookkeeping Reserve Account
(the "Reserve Account") for each participant as follows:
(a) As of each December 31 during the participant's employment with
the Employer as an officer commencing December 31, 1983, an amount
shall be credited to the Reserve Account equal to the difference
between (i) four percent (4%) of the participant's aggregate
compensation as defined in the Savings Plan and the amount by
which such compensation is reduced by the Deferred Compensation
Exclusion and Compensation Limit for such calendar year; and (ii)
the actual employer contribution to the Savings Plan allocable to
the account of the participant for such calendar year, excluding
any participant deposits thereunder and excluding the one percent
(1%) additional match commencing November 1, 1991 as a result of
the ESOP provision. Notwithstanding the foregoing, in the event a
participant fails to make deposits equal to four percent (4%) of
his Compensation as defined in the Savings Plan during a calendar
year and such failure was not caused by the 415 Limit or the
discrimination test of Internal Revenue Code Section 401(k)(3) as
estimated by the Company, the reference to four percent (4%) in
(i) above shall be reduced to the percentage of the participant's
compensation as defined in the Savings Plan contributed by the
participant to the Savings Plan for such year.
(b) Pursuant to a salary reduction agreement, if any, executed by the
Company and a participant in the form attached hereto as Exhibit A
(the "Salary Reduction Agreement"), an amount shall be credited by
the Company to the Reserve Account for such participant equal to
the amount, if any, by which the participant's salary is reduced
by the Salary Reduction Agreement (the "Pre-Tax Employee
Contribution"). The credit to the Reserve Account for the Pre-Tax
Employee Contribution shall be made as of the time specified in
the Salary Reduction Agreement. The Pre-Tax Employee Contribution
under the Salary Reduction Agreement is a non-qualified deferred
compensation agreement for purposes of computing the Deferred
Compensation Exclusion under the Program.
(c) The Salary Reduction Agreement may also provide that the
participant will contribute an amount to the Company to be
credited to the Reserve Account for such participant (the "Post-
Tax Employee Contribution"). The credit to the Reserve Account
for the Post-Tax Employee Contribution shall be made as of the
time specified in the Salary Reduction Agreement and may be made
by payroll deduction or other method provided therein.
(d) As of the last day of each month, commencing January 31, 1984, and
prior to any distribution pursuant to subparagraphs (e) and (f)
below, an additional amount shall be credited to the Reserve
Account as an interest equivalent on the balance credited to the
Reserve Account as of the last day of the previous month. The
interest rate earned will be that rate earned for such month by
the "Stable Value Fund" under the Savings Plan
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<PAGE> 3
(e) Payment of the amounts credited to the Reserve Account for each
participant shall commence during the month of January immediately
following the calendar year in which occurs the participant's
termination of employment with the Employer and shall be made in a
lump sum. A transfer of employment to Sta-Rite Industries, Inc.
or other affiliated entity shall not be treated as a termination
of employment causing a required distribution hereunder.
(f) In the event of a participant's death before benefits hereunder
have been paid to him, any amount allocated to the Reserve Account
shall be paid in a lump sum in the month following such death to
such beneficiary or beneficiaries as the participant shall
designate by written instrument delivered to the Secretary of the
Company, or if no such written instrument is properly delivered or
if such designated beneficiary predeceases the participant, to the
executors, administrators, or personal representatives of the
participant's estate.
(g) The Reserve Account shall be utilized solely as a device for the
measurement and determination of the amount to be paid to a
participant at the times specified above for the payment of
Savings Plan benefits. Neither the Reserve Account nor any other
reserve established on the Company's books to reflect the
liabilities under this Program shall constitute or be treated as a
trust fund of any kind. On the contrary, it is expressly agreed
and understood that the Company shall not be required to set aside
any assets with respect hereto and that any assets actually held
by the Company with reference to this Program shall be and remain
the sole property of the Company, and that neither a participant
nor a participant's beneficiaries, heirs, legal representatives or
assigns shall have ownership rights of any nature with respect
thereto, unless and until such time as such assets are paid over
and transferred to the participant or the participant's
beneficiaries, as herein provided.
(h) The Program shall accept a transfer from the Sta-Rite Industries
Officers' Supplemental Retirement Income Program ("Sta-Rite
Supplemental Plan") for Joseph P. Wenzler of the obligations and
liabilities under Section 4 thereof with respect to a deferred
savings plan account, which amount shall be treated as the opening
balance of said individual's Reserve Account.
5. Pension Plan Benefits
(a) Eligibility. This paragraph applies to (i) Messrs. Wardeberg,
Wenzler, Schrader and Donnelly and (ii) any other officer who was
a named Program participant on January 1, 1997 in paragraph 3 who
is a corporate officer immediately prior to his eligibility for
normal or early retirement from the Employer under the terms of
the Pension Plan
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<PAGE> 4
(b) Definitions. For purposes of this paragraph, "Unrestricted
Pension Benefit" means the amount which would have been payable
from the Pension Plan if the (i) 415 Limit, (ii) Compensation
Limit, (iii) Sta-Rite Exclusion, (iv) Bonus Exclusion, and (v)
Deferred Compensation Exclusion did not apply, calculated as of
the participant's date of retirement or pre-retirement death, as
applicable, based on the applicable optional payment method, but
subject to adjustment from time to time for applicable cost of
living increases. "Restricted Benefit Amount" means the amount
actually payable from the Pension Plan calculated as of the
participant's date of retirement or pre-retirement death based on
the applicable optional payment method, but subject to adjustment
from time to time for applicable cost of living increases and for
reductions in the 415 Limit.
(c) Married Participants - Joint and Survivor Annuity. A participant
who is lawfully married at his retirement date and elects to
receive his benefits from the Pension Plan in any joint and
survivor annuity form available thereunder with his spouse
designated as the survivor annuitant, shall receive a monthly
supplement for his lifetime. The supplement shall be equal to the
difference between (i) the Unrestricted Pension Benefit payable on
a life only annuity basis under the terms of the Pension Plan and
(ii) the Restricted Benefit Amount payable on a joint and fifty
percent (50%) survivor annuity basis under the terms of the
Pension Plan. If the participant predeceases his spouse, fifty
percent (50%) of such difference shall then be paid monthly to his
surviving spouse during her lifetime. If both the participant and
his spouse die prior to the end of the ten (10) year period
commencing on his retirement date, fifty percent (50%) of the
aggregated monthly amount received by him under the Pension Plan
and this subparagraph 5(a) shall be paid for the balance of such
ten (10) year period to the beneficiary designated in writing by
him for that purpose or, in the absence of such a designated
beneficiary, to the estate of the last survivor of the participant
and his spouse.
(d) Unmarried Participants - Ten-Year Certain Annuity. A participant
who is unmarried at his retirement date and elects to receive his
benefits from the Pension Plan in the ten (10) year period certain
annuity form available thereunder, shall receive a monthly
supplement for his lifetime. The supplement shall be equal to the
difference between (i) the Unrestricted Pension Benefit payable on
a life only annuity basis under the terms of the Pension Plan and
(ii) the Restricted Benefit Amount payable in a ten (10) year
period certain annuity form under the terms of the Pension Plan.
If the participant dies prior to the end of the ten (10) year
period commencing on his retirement date, the supplement shall be
paid for the balance of such ten (10) year period to the
beneficiary designated in writing by him for the purpose or, in
the absence of such a designated beneficiary, to the estate of the
participant.
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<PAGE> 5
(e) Lump Sum Pension Plan Distribution. A participant who elects to
receive his benefits from the Pension Plan in a lump sum
distribution at his retirement date shall receive a supplement
hereunder based on the difference between (i) the Unrestricted
Pension Benefit, and (ii) the Restricted Benefit Amount, both
calculated on a life only annuity basis. In the event the lump
sum value of such difference payable on a monthly life only
annuity basis calculated using the Pension Plan factors is less
than $100,000, such amount shall be paid to the participant in a
lump sum with no survivor benefits. In the event the lump sum
value is $100,000 or more, the difference between (i) and (ii)
above shall be paid monthly to the participant for his lifetime.
If the participant predeceases the spouse to whom he was married
at his retirement date, if any, fifty percent (50%) of such
monthly supplement shall be paid monthly to his surviving spouse
during her lifetime. If both the participant and his spouse, if
applicable, die prior to the end of the ten (10) year period
commencing on his retirement date, fifty percent (50%) of such
supplement to the participant shall be paid for the balance of
such ten (10) year period to the beneficiary designated in writing
by him for that purpose or, in the absence of such a designated
beneficiary, to the estate of the last survivor of the participant
and his spouse as of his retirement date, if any.
6. Pension Plan Benefits-Other Participants
(a) Eligibility. All Program participants who are not eligible for
benefits under paragraph 5 shall be eligible under this paragraph
if they are vested under the Pension Plan with five (5) years of
vesting service.
(b) Definitions. For purposes of this paragraph, "Unrestricted
Pension Benefit" means the amount which would have been payable
from the Pension Plan if the (i) Compensation Limit and (ii)
Deferred Compensation Exclusion did not apply, calculated as of
the participant's date of retirement or pre-retirement death, as
applicable, based on the applicable optional payment method, but
subject to adjustment from time to time for applicable cost of
living increases. Notwithstanding the foregoing, for any Program
participant who is a corporate officer immediately prior to his
eligibility for normal or early retirement from the Employer under
the terms of the Pension Plan, the applicable limits shall also
include the (i) 415 Limit, (ii) Sta-Rite Exclusion and (iii) Bonus
Exclusion. "Restricted Benefit Amount" has the meaning provided
in subparagraph 5(b).
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<PAGE> 6
(c) Benefit. An eligible participant shall receive a monthly
supplement equal to the difference between (i) the Unrestricted
Pension Benefit and (ii) the Restricted Benefit Amount, both
calculated according to the form of payment elected for his
Pension Plan benefits. The supplement shall be paid for the
participant's lifetime, and in the event the participant's death
and payment election form cause a Pension Plan payment to a
beneficiary, a portion of the supplement shall be paid to such
beneficiary during the period of any related Pension Plan payment.
The portion of the supplement to be paid shall equal the portion
of the participant's Pension Plan benefit which is continued for
such beneficiary.
7. Pension Plan Benefits-Pre-Retirement Death
(a) Eligibility. In the event of the pre-retirement death of a
Program participant, the beneficiary or beneficiaries of any death
benefits under the Pension Plan shall be eligible for death
benefits under this paragraph.
(b) Definitions. For purposes of this paragraph, "Unrestricted
Pension Benefit" means the amount which would have been payable to
the beneficiary from the Pension Plan if the applicable limits did
not apply, calculated as of the participant's date of pre-
retirement death, based on the applicable optional payment method,
but subject to adjustment from time to time for applicable cost of
living increases. The applicable limits for the beneficiaries
shall be those applicable to the participant pursuant to paragraph
5(b) or 6(b). Notwithstanding the foregoing, for purposes of the
supplemental benefit related to the 20% and 5% benefits under
Section 6.07 of the Pension Plan, the Bonus Exclusion shall not be
an applicable limit.
8. Supplemental Retirement Benefits
Supplemental retirement benefits shall be available to an eligible
participant who is a corporate officer immediately prior to his normal or
early retirement from the Employer under the terms of the Pension Plan. The
eligible participants are Messrs. Schrader, Nuernberg, Osborne, and Zeddun.
The monthly supplement is equal to $2,083.33 ($25,000 annually) and shall
commence to the participant at the later of attainment of age sixty-five (65)
or retirement. Payments shall be made as of the first day of the month
commencing with the month following the qualifying event and shall continue
for one hundred eighty (180) months. If the participant dies (i) after
commencement of benefits but prior to the end of the fifteen (15) year period
or (ii) after retirement but prior to attainment of age sixty-five (65), the
supplement shall be paid for the balance of such period to the beneficiary
designated in writing by him for that purpose or, in the absence of such a
designated beneficiary, to the estate of the participant. Payments under (ii)
above shall commence as of the month following the participant's death and
shall continue for the fifteen (15) year period.
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<PAGE> 7
9. Administration of the Program
The Program shall be administered by the Wisconsin Gas Company Employee
Benefit Plan Committee (the "Committee"); provided that a participant in the
Program who is a Committee member may not participate in any Committee action
regarding his benefits hereunder. The Committee shall have all such powers
that may be necessary to carry out the provisions of the Program in the
absence of any action by the Board, including without limitation, the power to
delegate administrative matters to other persons, to construe and interpret
the Program, to adopt and revise rules, regulations and forms relating to and
consistent with the Program's terms and to make any other determinations which
it deems necessary or advisable for the implementation and administration of
the Program; provided, however, that the right and power to amend and/or
terminate the Program are reserved exclusively to the Board. Subject to the
foregoing, all decisions and determinations by the Committee shall be final,
binding and conclusive as to all parties, including without limitation the
Company, any participant hereunder and all other employees and persons.
10. Source of Benefit Payments
No funds or other assets of the Company shall be segregated and
attributable to any benefit payments to be made at a later time as hereinabove
provided, but rather benefit payments under the Program shall be made from the
general assets of the Company at the time any such payment becomes due and
payable. Benefit payments under the Program are to be taken as deductions for
income tax purposes in the Company's fiscal year that they are actually made.
At such time as any benefit payments are made, it shall be determined by the
Company whether any portion thereof is allocable to WICOR, Inc., or other
affiliates because of their recipient having also served as a corporate
officer of any or all of those corporations; and, if such is the case, the
Company shall obtain reimbursement from such entities, as appropriate, for
such allocable portion. No participant or surviving spouse or beneficiary
thereof shall have any proprietary rights of any nature whatsoever with
respect to any benefit payments, unless and until such time a benefit payment,
and then only as to the amount of such payment, is made to such participant or
the surviving spouse or beneficiaries thereof, as the case may be.
11. Non-Alienation of Payments
Any benefits payable under the Program shall not be subject in any
manner to alienation, sale, transfer, assignment, pledge, attachment,
garnishment or encumbrance of any kind, by will, or by inter vivos instrument.
Any attempt to alienate, sell, transfer, assign, pledge or otherwise encumber
any such benefit payment, whether currently or thereafter payable, shall not
be recognized by the Committee or the Company. Any benefit payment due
hereunder shall not in any manner be liable for or subject to the debts or
liabilities of any participant or the surviving spouse or beneficiary thereof,
as the case may be. If any such participant, surviving spouse or beneficiary
shall attempt to alienate, sell, transfer, assign, pledge or otherwise
encumber any benefit payments to be made to that person under the Program or
any part thereof, or if by reason of such person's bankruptcy or other event
happening at any time, such payments would devolve upon anyone else or would
not be enjoyed by such person, then the Committee, in its discretion, may
terminate such person's interest in any such benefit payment, and hold or
apply it to or for the benefit of that person, the spouse, children, or other
dependents thereof, or any of them, in such manner as the Committee may deem
proper.
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<PAGE> 8
12. Incompetency
Every person receiving or claiming benefit payments under the Program
shall be conclusively presumed to be mentally competent until the date on
which the Committee receives a written notice, in a form and manner acceptable
to the Committee, that such person is incompetent and that a guardian,
conservator, or other person legally vested with the care of his estate has
been appointed. In the event a guardian or conservator of the estate of any
person receiving or claiming benefit payments under this Program shall be
appointed by a court of competent jurisdiction, payments may be made to such
guardian or conservator; provided that proper proof of appointment and
continuing qualification is furnished in a form and manner acceptable to the
Committee. Any such payment so made shall be a complete discharge of any
liability therefor.
13. Limitation of Rights against the Employer
Participation in this Program, or any modifications thereof, or the
payments of any benefits hereunder, shall not be construed as giving to any
participant any right to be retained in the service of the Employer, limiting
in any way the right of the Employer to terminate such participant's
employment at any time, evidencing any agreement or understanding express or
implied, that the Employer will employ such participant in any particular
position or at any particular rate of compensation and/or guaranteeing such
participant any right to receive any other form or amount of remuneration from
the Employer.
14. Construction
The Program shall be construed, administrated and governed in all
respects under and by the laws of the State of Wisconsin. Wherever any words
are used herein in the masculine, they shall be construed as though they were
used in the feminine for all cases where they would so apply; and wherever any
words are used herein in the singular or the plural, they shall be construed
as though they were used in the plural or the singular, as the case may be, in
all cases where they would so apply. The words "hereof", "herein",
"hereunder" and other similar compounds of the word "here" shall mean and
refer to this entire document and not to any particular paragraph.
15. Liability
Neither the Company nor any shareholder, director, officer or other
employee of the Company or any member of the Committee or any other person
shall be jointly or severally liable for any act or failure to act hereunder,
except for gross negligence or fraud
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<PAGE> 9
16. Amendment or Termination of the Program
The Company, by action of the Board, reserves the right to amend,
modify, terminate or discontinue the Program at any time; and such action
shall be final, binding and conclusive as to all parties, including any
participant hereunder, any surviving spouse or beneficiary thereof and all
other Employer employees and persons; provided, however, that any such Board
action to terminate or discontinue the Program or to change the monthly
payment amount or the time and manner of payment thereof as then provided in
the Program shall not be effective and operative unless and until written
consent thereto is obtained from each participant affected by such action or,
if any such participant is not then living, from the surviving spouse or
beneficiary thereof, as the case may be.
17. Successors or Assigns
The terms and conditions of the Program, as amended and in effect from
time to time, shall be binding upon the successors and assigns of the Company,
including without limitation any entity into which the Company may be merged
or with which the Company may be consolidated.
<PAGE>
<PAGE> 10
WISCONSIN GAS COMPANY
SUPPLEMENTAL RETIREMENT INCOME PROGRAM
Exhibit A
Salary Reduction Agreement
This Agreement is being made and entered into as of this ______ day of
______________, 19__, by and between Wisconsin Gas Company, a Wisconsin
corporation (the "Company") and _____________________________ (the
"Participant").
1. Effective with respect to salary earned on and after
_______________________ (a payroll period commencement date after the
execution of this Agreement), the Company and the Participant agree to defer
$_____________ per payroll period from the Participant's salary. Such
deferred amount shall be credited to the Reserve Account as a Pre-Tax Employee
Contribution as of the time the deferred amount would have been paid to the
Employee but for this Agreement.
2. Effective on and after _______________________ (a payroll
period commencement date after the execution of this Agreement), the
Participant directs the Company to deduct from the Participant's salary
$____________ per payroll period on an after-tax basis as a Post-Tax Employee
Contribution. Such deducted amount shall be credited to the Reserve Account
as of the time the deducted amount would have been paid to the participant but
for this Agreement.
3. On _____________________, the Participant shall give to the
Company in a lump sum $_______________ as a Post-Tax Employee Contribution.
Such amount shall be credited to the Reserve Account as of the first day of
the month following the date of receipt.
Any election under paragraphs 1 or 2 above may be changed on a
prospective basis by action of either the Company or the Participant.
WISCONSIN GAS COMPANY
By:
Participant
Instructions
- ------------
This form is an optional election by corporate officers participating under
the Program. Company-paid benefits are provided under the Program whether or
not Pre-Tax Employee Contributions or Post-Tax Employee Contributions are
elected. An officer can elect any combination of 1, 2 or 3 (or none of them),
but the maximum amount of such contribution will be determined from time to
time by the Company.
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* * * *
CERTIFICATION
The undersigned, as Administrator of the Wisconsin Gas Company
Supplemental Retirement Income Program, hereby certifies that the foregoing
document is a true and accurate copy of the restatement of said Plan as
amended effective January 1, 1997, by authorization of the Board of Directors
of Wisconsin Gas Company.
Dated this ______ day of _____________________, 1998.
WISCONSIN GAS COMPANY EMPLOYEE
BENEFIT PLANS COMMITTEE
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<PAGE> 1
EXHIBIT 10-9
Wisconsin Gas Company
1999 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%
Senior VP 0% 35% 76.125%
VP and Direct Reports 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%.
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<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 1999 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.
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<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.
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 1999 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.
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<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, 1999, 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.
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<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, 1999.
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>
<PAGE> 1
MANAGEMENT'S DISCUSSION AND ANALYSIS
Forward-Looking Statements
- --------------------------
Certain matters discussed in this 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 generally can be identified as such because they include words
such as the Company "believes," "anticipates," "expects," or words of
similar import. Similarly, statements that describe the Company's future
plans, objectives or goals also are considered forward-looking. Such
statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from current expectations. These
factors include but are not limited to the risks and uncertainties listed
below. All of these factors are difficult to predict and generally beyond
management's control.
* the impact of warmer- or colder-than-normal weather on the
energy business
* the impact of cool or wet weather on the pump
manufacturing markets
* economic conditions, including the availability of individual
discretionary income and changes in interest rates and foreign
currency valuations
* changes in natural gas prices and supply availability
* increased competition in deregulated energy markets
* the pace and extent of energy industry deregulation
* regulatory, government and court decisions
* increases in costs to clean up environmental contamination
* the Company's ability to increase prices
* market demand for the Company's products and services
* unanticipated expenses or outcomes associated with year 2000
date conversion
General Overview
- ----------------
WICOR's 1998 financial results fell short of 1997's record performance as
net earnings decreased by 8% to $45.5 million. Diluted earnings per share
in 1998 decreased 9% to $1.21 compared to a record $1.33 per share in 1997.
Continued strength in and contributions from the Manufacturing Group
partially offset the impact of extremely unfavorable weather on Energy
Group earnings.
WICOR's 1997 financial results exceeded 1996's record performance as net
income rose by 6% to $49.5 million. Diluted earnings per share in 1997 rose
5% to $1.33 compared with 1996, as the Company's manufacturing business
posted significantly improved results.
<PAGE>
<PAGE> 2
Results of Operations
- ---------------------
Energy Group - 1998 Compared with 1997
- --------------------------------------
The Energy Group's primary business is the distribution of natural gas
through Wisconsin Gas Company (Wisconsin Gas), the oldest and largest
natural gas distribution utility in Wisconsin, which represented 89% of
Energy Group revenues in 1998. The Energy Group also includes WICOR Energy
Services (WESCO), an energy marketer, and FieldTech, a utility services
company.
Margin, defined as revenues less cost of gas sold, is a better comparative
performance indicator than revenues because the mix of utility volumes
between sales and transportation service affects revenues but not margin.
In addition, changes in the cost of gas sold to utility customers are
flowed through to revenue under a gas adjustment clause.
Energy Group net earnings declined by $7.8 million, or 26%, in 1998 as
compared with 1997. During 1998, heating degree days were 17% lower than
1997 and 16% lower than the 20-year average (as published by the United
States Weather Bureau). This decline in heating degree days negatively
impacted Wisconsin Gas margins from heating customers. The lower gas
margins were driven by unseasonably warm weather in the first quarter,
combined with extremely mild weather in November and early December. Net
earnings were positively affected by a gain from a weather insurance
agreement, revenues derived from the gas cost incentive mechanism (GCIM)
and gains realized on the sale of non-utility land.
<PAGE>
<PAGE> 3
The following tables set forth financial data for the Energy Group and
volume data for Wisconsin Gas for each of the years ended December 31.
<TABLE>
<CAPTION>
Energy Group
- ------------
MILLIONS OF DOLLARS 1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Revenues $ 459.0 $ 573.8 $ 588.3
Cost of gas sold 295.6 394.1 393.7
-------- -------- --------
Sales margin 163.4 179.7 194.6
Gas transportation margin 22.5 22.5 14.4
-------- -------- --------
Gross margin 185.9 202.2 209.0
Operation and maintenance 100.1 101.8 102.3
Depreciation and amortization 33.7 31.8 32.9
Taxes, other than income taxes 9.0 9.6 9.3
-------- -------- --------
Operating income 43.1 59.0 64.5
Interest expense 12.5 12.3 12.9
Other (income) expenses, net (3.6) (0.6) (0.7)
-------- -------- --------
Income before income taxes 34.2 47.3 52.3
Income taxes 12.5 17.8 20.2
-------- -------- --------
Net earnings $ 21.7 $ 29.5 $ 32.1
======== ======== ========
Wisconsin Gas Company
MILLIONS OF THERMS 1998 1997 1996
-------- -------- --------
Sales volumes
Firm 649.2 790.8 883.3
Interruptible 36.5 72.8 196.2
Transport volumes 460.2 428.8 275.8
-------- -------- --------
Total throughput 1,145.9 1,292.4 1,355.3
======== ======== ========
Heating degree days 5,865 7,094 7,458
======== ======== ========
</TABLE>
<PAGE>
<PAGE> 4
The decrease in firm sales volumes in 1998 was caused principally by the
extremely mild heating season, lower average use per customer and firm
customers switching from sales to transportation service. Transportation
volumes increased mainly because more customers purchased gas from sources
other than Wisconsin Gas and transported volumes through 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. During 1998, Wisconsin Gas realized $3.8 million of margin
under a gas cost incentive mechanism (GCIM). In August 1998, Wisconsin Gas
raised its rates $7.5 million on an annual basis. This rate increase is
expected to offset increased operating expenses.
Non-regulated energy operating revenues in 1998 decreased to $52.9 million
from $59.5 million in 1997. This decrease in non-regulated energy revenues
consisted largely of decreased gas sales volumes and lower prices. The
WESCO gas supply strategy is to match purchase commitments with customer
requirements so that the Company is not exposed to significant commodity
price risk.
Total operating and maintenance expenses of $100.1 million for 1998 were
$1.7 million lower than the prior year. The decrease resulted primarily
from lower labor and benefit expenses and weather related spending
reductions at Wisconsin Gas.
Depreciation and amortization expense for 1998 increased by $1.9 million,
or 6%, compared with 1997, due to additions to depreciable plant balances.
Depreciation expense in 1999 is expected to increase due to planned capital
investments.
Interest expense in 1998 increased $0.2 million compared to 1997. The
increase reflects slightly higher average borrowing levels offset partially
by lower interest rates.
Other income, net of expenses, increased by $3.0 million in 1998 compared
to 1997. Other income was positively impacted by a $1.2 million gain
relating to a weather insurance agreement and $1.2 million in gains
realized on the sale of non-utility property.
Income tax expense decreased $5.3 million in 1998 compared to 1997,
reflecting lower pre-tax income. The effective income tax rate remained
relatively unchanged between 1998 and 1997.
Energy Group - 1997 Compared with 1996
- --------------------------------------
Energy Group net earnings decreased by $2.6 million, or 8%, 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.
<PAGE>
<PAGE> 5
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 had 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) and 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.
Transportation volumes in 1997 increased mainly because more customers
purchased gas from sources other than Wisconsin Gas and transported that
volume through the Wisconsin Gas distribution system. Historically, the
movement to transportation from gas sales has had no impact on margin.
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 WESCO primarily as a result of
customer growth.
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 and the impact of a one-time $3.0 million amortization of the
uncollectible accounts receivable regulatory asset approved by the PSCW in
the fourth quarter of 1996. The decrease was partially offset by higher
costs associated with the increased operating activities of FieldTech and
increased levels of outside services.
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.
Interest expense in 1997 decreased $0.6 million, or 5%, compared with 1996.
This decrease resulted from lower average borrowing levels and slightly
lower interest rates.
Income tax expense decreased $2.4 million in 1997 compared to 1996,
reflecting lower pre-tax income. The effective income tax rate remained
relatively unchanged between 1997 and 1996.
<PAGE>
<PAGE> 6
Manufacturing Group - 1998 Compared with 1997
- ---------------------------------------------
The Manufacturing Group net sales increased 9% to a record $462.7 million
during 1998, outpacing sales of $424.8 million in 1997. In addition, net
earnings increased 18% to a record $23.8 million during the year.
Financial data regarding the Manufacturing Group is set forth in the table
below.
MILLIONS OF DOLLARS 1998 1997 1996
-------- -------- --------
Revenues $ 462.7 $ 424.8 $ 409.9
Cost of sales 329.2 307.2 297.1
-------- -------- --------
Gross profit 133.5 117.6 112.8
Operating expenses 92.0 82.6 86.6
Operating income 41.5 35.0 26.2
Interest expense 4.4 5.1 5.8
Other (income) expenses, net (0.3) (0.7) (0.7)
-------- -------- --------
Income before income taxes 37.4 30.6 21.1
Income taxes 13.6 10.5 6.5
-------- -------- --------
Net earnings $ 23.8 $ 20.1 $ 14.6
======== ======== ========
Domestic manufacturing sales in 1998 increased by 15% to $323.2 million as
compared with 1997. Overall shipments within the water systems, pool/spa,
filtration, industrial and the food and beverage markets in North America
were up from last year due mainly to customer growth and new product
introductions.
International sales of $139.5 million decreased by 3% compared to 1997.
International sales were negatively impacted by currency translation
related to the strengthening U.S. dollar and continued weakness in the
Asian economy. International sales accounted for 30% of total manufacturing
net sales in 1998.
Gross profit margins improved to 29% in 1998, as compared to 28% in the
previous year, due primarily to improved manufacturing productivity.
Operating expenses, as a percentage of sales, increased slightly compared
to 1997. Operating expenses in total increased by $9.4 million, or 11%, due
in part to the impact of higher support spending for acquisitions,
introductions of new products and customer development.
Interest expense in 1998 decreased $0.7 million, or 14%, compared to 1997.
The decrease reflects lower borrowing levels to fund working capital
requirements and lower interest rates.
Income tax expense increased $3.1 million in 1998 compared to 1997,
reflecting higher pre-tax income. The effective income tax rate remained
relatively unchanged between 1998 and 1997.
<PAGE>
<PAGE> 7
Manufacturing Group - 1997 Compared with 1996
- ---------------------------------------------
Net sales for 1997 rose 4% to a record $424.8 million as compared with
sales of $409.9 million in 1996. Net income for 1997 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.
Domestic manufacturing sales in 1997 increased by 4% to $281.0 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.
International sales accounted for 34% of total manufacturing net sales in
1997 and 1996.
In 1997, manufacturing operating income was $35.0 million compared with
$26.2 million in 1996. The increase in 1997 operating income is
attributable to increased sales, plant consolidations and cost-saving
programs, as well as continuing productivity improvements.
Operating expenses decreased by 5% in 1997 compared to the prior year due
to cost reduction programs and improved performance of the Australian
operations. As a percentage of sales, 1997 operating expenses were 19% of
sales compared to 21% in 1996.
The Company initiated efforts to reduce costs and improve productivity and
asset utilization by consolidating certain of its manufacturing operations.
These activities resulted in the 1997 closing of a plant located in
Waterford, Wisconsin, and the 1996 closing of a plant located in Detroit,
Michigan. As a result of these plant closings, the Company recorded an
after-tax charge of $0.7 million in 1996.
Interest expense in 1997 decreased $0.7 million, or 12%, compared to last
year. This decrease resulted from lower average borrowing levels and
slightly lower interest rates.
Income tax expense increased by $4.0 million in 1997, or 62%, compared to
1996 reflecting increased pre-tax income and a higher effective income tax
rate.
<PAGE>
<PAGE> 8
New Accounting Standards
- ------------------------
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 133 (SFAS 133), "Accounting for
Derivative Instruments and Hedging Activities," effective in the first
quarter of 2000. SFAS 133 establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
balance sheet and measure those instruments at fair value. The Company is
currently evaluating the impact of the provisions of SFAS 133 on its
financial statements and does not believe that SFAS 133 will materially
increase volatility in earnings and other comprehensive income.
The Company adopted the American Institute of Certified Public Accountants
Statement of Position No. 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use," in 1998 which provides
guidance on accounting for the costs of computer software developed or
obtained for internal use. The after-tax impact of adopting this statement
on the Company's consolidated financial statements was less than $0.01 per
share.
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.
Wisconsin Gas rates are set under an alternative method of rate making (see
page 23 under "Regulatory Matters"). 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.
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 $109.5 million at the end of 1998
compared to $77.0 million and $83.4 million at the end of 1997 and 1996,
respectively. The Company's current ratio at December 31 was 1.4, 1.2 and
1.3 in 1998, 1997 and 1996, respectively.
<PAGE>
<PAGE> 9
Because of timing differences in the receipt and disbursement of cash and
the level of construction requirements, the Energy Group borrows on a
short-term basis. As customers 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.
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 and scheduled debt
retirement.
Investment Activities
- ---------------------
Consolidated capital expenditures in 1998 decreased slightly to $49.3
million. Consolidated capital expenditures are expected to increase
modestly in 1999 due to water utility expenditures, and are expected to be
funded from operations. Capital expenditures of $51.6 million in 1997
remained relatively flat compared to the prior year.
In May 1998, the PSCW approved an increase in the amount the Company may
invest in nonutility businesses. The new investment limitation permits
nonutility investments to constitute up to 60% of the Company's total
capitalization. Under these new restrictions, the amount available to WICOR
for future nonutility investment at December 31, 1998 is $351.7 million.
(See Note 7 of Notes to Consolidated Financial Statements.)
Financing Activities
- --------------------
In November 1998, Wisconsin Gas used its existing lines of credit to issue
commercial paper, the proceeds of which were used to redeem, at par, $40
million of 7.5% Notes due in 1998. In January 1999, Wisconsin Gas issued
$50 million of 5.5% Notes due in 2009, to replace the commercial paper.
The Company's ratio of long-term debt to capitalization was 32% in 1998 as
compared to 28% in 1997 and 32% in 1996. The utility's embedded cost of
long-term debt was 6.9%, 7.1% and 7.0% for the years ended December 31,
1998, 1997 and 1996, respectively.
WICOR raised its common stock dividend by 2.3% in 1998 and by 2.4% in both
1997 and 1996. The current annual dividend rate is $0.88 per share. At
December 31, 1998, the Company had $136.8 million of unrestricted retained
earnings available for dividend payments to shareholders.
The Board of Directors approved a two-for-one stock split of the Company's
common stock to make the stock more accessible to the individual investor
(See Note 9 of Notes to the Consolidated Financial Statements). The stock
split was effective in May 1998.
<PAGE>
<PAGE> 10
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 3.8
in 1998 from 4.5 in 1997, as a result of lower earnings, the effects of
which were offset in part by fixed charges that were 2% lower in 1998 than
in 1997.
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 upgrading 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.
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 facility with several banks which expires August 6, 2002.
Financial covenants under these facilities include leverage and interest
coverage ratios. In addition, the Company arranges domestic seasonal lines
of credit to support its commercial paper borrowing program. The Company
also has arranged lines of credit from foreign lenders which allow it to
borrow in the applicable local currency. These lines of credit total $36.6
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 was in compliance with all financial covenants at December 31,
1998. 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, 1998 and 1997 was $158.7 million
and $125.2 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.
<PAGE>
<PAGE> 11
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 through the year 2000.
Presumably, the PSCW will use the work group reports as the basis for
recommendations to the state legislature. The impact of these proceedings
on Wisconsin Gas's future operations is uncertain at this time.
On November 1, 1996, with PSCW approval, Wisconsin Gas began a one-year
pilot supplier choice program for firm gas customers located in a small
geographic area of the Company's service territory. The program was
modified and extended for the 1997-98 and 1998-99 program years. The
Company has filed with the PSCW to further modify and extend the program
for the 1999-2000 program year, and expects to continue the program from
year to year until it is superseded by a generic PSCW order or state
legislative mandate. The pilot program was designed to test market
acceptance of supplier choice, the interest of third-party marketers in
serving firm markets, including residential, and Wisconsin Gas's
capabilities to administer transportation-only services. WICOR Energy
Services is one of the gas suppliers participating in the pilot program.
It is unclear how long it will take for customer choice to become available
in Wisconsin, and it is unknown what the impacts of customer choice may be
on the Company.
Wisconsin Gas rates are set within the framework of the Productivity-based
Alternative Ratemaking Mechanism (PARM), which was established in 1994 and
has been extended through October 31, 2001. Under PARM, Wisconsin Gas has
the ability to raise or lower margin rates within a specified range on a
quarterly basis. The PARM order also specifies margin rate floors for each
rate class. In 1997, 1996 and 1995, Wisconsin Gas reduced its base rates by
$1.5 million, $3.0 million and $4.5 million on an annualized basis,
respectively. Effective August 1, 1998, Wisconsin Gas increased its base
rates by $7.5 million on an annualized basis. With this increase, Wisconsin
Gas's rates recover $1.5 million per year less than the maximum amount
allowed by the PSCW's rate order. The rate increase is expected to offset
increased operating costs. The PARM has certain criteria that allow it to
be reopened at any time 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.
<PAGE>
<PAGE> 12
The PSCW approved a gas cost incentive mechanism (GCIM) which became
effective on November 1, 1997, for each of the three years ending October
31, 1998, 1999 and 2000. Under the GCIM, Wisconsin Gas's gas commodity and
capacity costs are compared to monthly benchmarks. If, at the end of each
GCIM year, such costs deviate by more than 1.5% 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 1.5% and 4%
above or below the benchmark. The new GCIM provides an opportunity for
Wisconsin Gas's earnings to increase or decrease as a result of gas and
capacity acquisition activities.
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 71 continues to be
applicable to Wisconsin Gas in that its rates are approved by a third party
regulator and are designed to recover its cost of service. Wisconsin Gas
believes its current cost-based rates are competitive in the open market.
Pipeline companies have been allowed to pass through to local gas
distributors various costs incurred in the transition to FERC Order No.
636. The PSCW has authorized 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 identified two previously owned manufactured gas plant
sites where it is responsible for environmental remediation. Wisconsin Gas
started remediation at one site in the first quarter of 1998 and the work
should be completed during 1999. Wisconsin Gas is currently evaluating
potential remedial options at the second site. 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.
<PAGE>
<PAGE> 13
Year 2000 Date Conversion
- -------------------------
Issues relating to Year 2000 conversion are the result of computer software
programs being written using two digits rather than four to define the
applicable year. Any of the Company's software programs, computer hardware
or equipment that have date sensitive software or embedded chips may
recognize a date using "00" as the year 1900 rather than the year 2000.
This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary
inability to process transactions, send invoices, distribute natural gas,
manufacture products or engage in other normal business activities.
The Company has developed a formal plan to ensure that its significant
date-sensitive computer software and hardware systems (Information
Technology) and other equipment utilized in its various activities
(Operating Equipment) will be Year 2000 compliant and operational on a
timely basis. The plan addresses all of the Company's locations throughout
the world, and includes a review of computer applications that connect
elements of the Company's business directly to its customers and suppliers.
The plan also includes an assessment process to determine if the Company's
significant customers and suppliers will be Year 2000 compliant.
The Company's plan to resolve issues relating to Year 2000 conversion
includes four major phases - assessment, remediation, testing, and
implementation. To assist the Company in reaching Year 2000 compliance, the
Company has retained third party consultants. The Company has substantially
completed the assessment phase of its plan for all of its significant
Information Technology and Operating Equipment that it believes could be
affected by the Year 2000 conversion. Based upon its assessment, the
Company concluded that it would be necessary to reprogram and/or replace
certain of its Information Technology. The Company also determined that
certain of its Operating Equipment would also require modification to
ensure it remains operational.
For its Information Technology applications as of December 31, 1998, the
Company believes it is approximately 72% compliant on all of its
significant systems, and estimates that it will complete software
reprogramming and/or replacement in the second quarter of 1999. The Company
believes that the Operating Equipment at December 31, 1998 is approximately
64% compliant, and the Company is targeting completion during the second
quarter of 1999.
With respect to operations that involve third parties, the Company has made
inquiries of its significant customers and suppliers and, at the present
time and based on such inquiries, is not aware of Year 2000 issues facing
these third parties that would materially impact the Company's operations.
However, the Company has no means of ensuring that these customers and
suppliers (and, in turn, their customers and suppliers) will be Year 2000
compliant in a timely manner. The inability of these parties to
successfully resolve their Year 2000 issues could have a material adverse
effect on the Company.
<PAGE>
<PAGE> 14
Despite the efforts that the Company has undertaken, there can be no
assurances that every Year 2000 related issue will be identified and
addressed before January 1, 2000. An unexpected failure as a result of a
Year 2000 compliance issue could result in an interruption in certain
normal business activities or operations. For that reason, the Company is
currently developing contingency plans to address alternatives in the event
certain Year 2000 compliance failures occur.
Through December 31, 1998, the Company had spent approximately $3.9 million
for Year 2000 remediation. The amount of additional development and
remediation costs necessary for the Company to prepare for Year 2000 is
estimated to be approximately $0.9 million and is expected to be funded
through operating cash flow.
The estimated costs of, and timetable for, becoming Year 2000 compliant
constitute "forward looking statements" as defined in the Private
Securities Litigation Reform Act of 1995.
Annual Degree Days Bar Chart
% COLDER (WARMER) THAN 20-YEAR AVERAGE
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(16.4) 1.0 6.8 (2.8) (9.0)
International Revenues Bar Chart
$ IN MILLIONS
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
$ 139.5 $ 143.8 $ 140.9 $ 130.2 $ 114.2
WICOR Operating Income Bar Chart
$ IN MILLIONS
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
Energy $ 43.1 $ 59.0 $ 64.5 $ 58.8 $ 44.4
Manufacturing 41.5 35.0 26.2 20.3 22.2
-------- -------- -------- -------- --------
Total $ 84.6 $ 94.0 $ 90.7 $ 79.1 $ 66.6
======== ======== ======== ======== ========
WICOR Return on Average Common Equity Bar Chart
AS A PERCENTAGE
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
11.3 13.0 12.9 13.1 11.6
<PAGE>
<PAGE> 15
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, 1998 and 1997, and the related consolidated statements
of earnings, common equity and cash flows for each of the three years in
the period ended December 31, 1998. 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, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Milwaukee, Wisconsin,
January 25, 1999.
<PAGE>
<PAGE> 16
WICOR, INC.
CONSOLIDATED STATEMENT OF EARNINGS
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Operating Revenues
Energy $ 481,489 $ 596,262 $ 602,685
Manufacturing 462,694 424,779 409,916
------------ ------------ ------------
944,183 1,021,041 1,012,601
------------ ------------ ------------
Operating Costs and Expenses
Cost of gas sold 295,601 394,101 393,681
Manufacturing cost of sales 329,248 307,160 297,053
Operations and maintenance 190,674 182,976 187,557
Depreciation and amortization 35,038 33,173 34,355
Taxes, other than income taxes 9,039 9,602 9,244
------------ ------------ ------------
859,600 927,012 921,890
------------ ------------ ------------
Operating Income 84,583 94,029 90,711
Interest expense (16,746) (17,404) (18,349)
Other income, net 3,706 1,222 1,114
------------ ------------ ------------
Income before income taxes 71,543 77,847 73,476
Income tax provision 26,048 28,324 26,705
------------ ------------ ------------
Net earnings $ 45,495 $ 49,523 $ 46,771
============ ============ ============
Per Share of Common Stock*
Basic earnings $ 1.22 $ 1.34 $ 1.27
Diluted earnings $ 1.21 $ 1.33 $ 1.27
Cash dividends paid $ 0.87 $ 0.85 $ 0.83
Average common shares outstanding 37,311 36,950 36,730
Average diluted shares outstanding 37,608 37,239 36,955
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
<PAGE> 17
WICOR, INC.
CONSOLIDATED STATEMENT OF EARNINGS
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
QUARTERLY FINANCIAL DATA (UNAUDITED)
Because seasonal factors significantly affect the Company's operations
(particularly at Wisconsin Gas), the following data may not be comparable
between quarters:
<TABLE>
<CAPTION>
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
QUARTERS:
------------------------------------------------
First Second Third Fourth
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
1998
- ----
Operating revenues $ 303,327 $ 219,879 $ 172,746 $ 248,231
Operating income $ 42,985 $ 13,904 $ 797 $ 26,897
Earnings available for
common stock $ 24,963 $ 6,024 $ (1,211) $ 15,719
Basic earnings (loss) per
common share* $ 0.67 $ 0.16 $ (0.03) $ 0.42
Diluted earnings (loss)
per common share* $ 0.66 $ 0.16 $ (0.03) $ 0.42
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* $ 0.76 $ 0.17 $ (0.06) $ 0.47
Diluted earnings (loss)
per common share* $ 0.75 $ 0.17 $ (0.06) $ 0.46
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.
*Adjusted for a two-for-one stock split in May 1998
</TABLE>
<PAGE>
<PAGE> 18
WICOR, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
THOUSANDS OF DOLLARS 1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 13,383 $ 11,810
Accounts receivable, less allowance for doubtful
accounts of $12,511 and $15,364, respectively 137,321 164,243
Accrued revenues 47,483 44,842
Manufacturing inventories 86,312 83,431
Gas in storage 36,919 41,887
Deferred income taxes 17,195 21,531
Prepayments and other 15,542 16,924
------------ ------------
354,155 384,668
------------ ------------
Property, Plant and Equipment, at cost:
Energy 829,286 801,523
Manufacturing 153,381 141,610
------------ ------------
982,667 943,133
Less accumulated depreciation and amortization 535,002 497,239
------------ ------------
447,665 445,894
------------ ------------
Deferred Charges and Other:
Regulatory assets 59,319 53,910
Goodwill 67,552 65,953
Prepaid pension costs 50,011 42,753
Other 36,494 38,154
------------ ------------
213,376 200,770
------------ ------------
$ 1,015,196 $ 1,031,332
============ ============
</TABLE>
<PAGE>
<PAGE> 19
WICOR, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
THOUSANDS OF DOLLARS 1998 1997
------------ ------------
<S> <C> <C>
LIABILITIES AND CAPITALIZATION
Current Liabilities:
Short-term borrowings $ 107,653 $ 118,900
Current portion of long-term debt 3,528 43,926
Accounts payable 70,000 75,034
Refundable gas costs 18,570 24,776
Accrued payroll and benefits 20,490 18,599
Accrued taxes 7,885 9,684
Other 16,526 16,757
------------ ------------
244,652 307,676
------------ ------------
Deferred Credits and Other Liabilities:
Postretirement benefit obligation 60,627 64,323
Regulatory liabilities 32,153 36,533
Deferred income taxes 49,065 43,975
Accrued environmental remediation costs 11,215 14,300
Unamortized investment tax credit 6,357 6,808
Other 19,217 18,987
------------ ------------
178,634 184,926
------------ ------------
Commitments and Contingencies (Note 8)
Capitalization (See accompanying statement):
Long-term debt 188,470 149,110
Redeemable preferred stock - -
Common equity 403,440 389,620
------------ ------------
591,910 538,730
------------ ------------
$ 1,015,196 $ 1,031,332
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
<PAGE> 20
WICOR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
THOUSANDS OF DOLLARS ----------------------------------
1998 1997 1996
Operations: ---------- ---------- ----------
<S> <C> <C> <C>
Net earnings $ 45,495 $ 49,523 $ 46,771
Adjustments to reconcile net earnings to
net cash flow from operating activities:
Depreciation and amortization 54,531 53,740 54,871
Deferred income taxes 9,425 4,530 (1,103)
Net pension/postretirement benefit/(income) (6,955) (1,725) 3,133
Changes in:
Accounts receivable 14,292 2,046 (28,641)
Manufacturing inventories (2,881) (7,463) (3,590)
Gas in storage 4,968 (8,424) (9,512)
Other current assets 623 (464) (1,167)
Accounts payable (5,033) (25,975) 32,520
Refundable gas costs (6,206) (6,769) (2,802)
Accrued taxes (1,039) 8,561 (6,028)
Other current liabilities 2,745 (1,502) 4,225
Other noncurrent assets/liabilities (12,965) (16,754) (13,261)
---------- ---------- ----------
Cash provided by operating activities 97,000 49,324 75,416
Investment Activities: ---------- ---------- ----------
Capital expenditures (49,279) (51,572) (51,744)
Proceeds from sale of assets 1,762 3,362 1,249
Acquisitions (7,288) (2,065) 22
Other, net 301 293 285
---------- ---------- ----------
Cash used in investing activities (54,504) (49,982) (50,188)
Financing Activities: ---------- ---------- ----------
Change in short-term borrowings (14,284) 6,115 (969)
Issuance of long-term debt 52,828 27,000 10,045
Reduction of long-term debt (50,368) (11,157) (9,194)
Issuance of common stock 2,878 2,684 3,345
Dividends paid on common stock (32,461) (31,397) (30,485)
Other 484 439 434
---------- ---------- ----------
Cash used in financing activities (40,923) (6,316) (26,824)
---------- ---------- ----------
Change in Cash and Cash Equivalents 1,573 (6,974) (1,596)
Cash and cash equivalents at beginning of year 11,810 18,784 20,380
---------- ---------- ----------
Cash and Cash Equivalents at End of Year $ 13,383 $ 11,810 $ 18,784
========== ========== ==========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for:
Income taxes, net of refunds $ 17,847 $ 17,315 $ 34,669
Interest $ 16,590 $ 16,352 $ 16,824
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
<PAGE> 21
WICOR, INC.
CONSOLIDATED STATEMENTS OF CAPITALIZATION
<TABLE>
<CAPTION>
THOUSANDS OF DOLLARS DECEMBER 31,
----------------------
1998 1997
---------- ----------
<S> <C> <C>
Long-Term Debt
Wisconsin Gas:
Commercial paper (See Note 6 of Notes to the
Consolidated Financial Statements) $ 50,000 $ -
6.6% Notes due 2013 45,000 45,000
6.375% Notes due 2005 65,000 65,000
First mortgage bonds
Adjustable rate series, 7.2% and 8.1%,
respectively, due 1999 - 2,000
WICOR Industries, Inc.:
Commercial paper under multi-
year credit agreements 17,000 27,000
Securities loan agreement, 11.75% due semi-
annually through 2000 (includes unamortized
bond premium of $550 and $814, respectively) 6,486 6,750
First mortgage notes, adjustable rate, 4.6%
to 6.5%, due semi-annually through 2000 3,043 266
Industrial revenue bonds, 7.84%,
payable through 2000 295 830
Unamortized (discount), net (1,161) (1,343)
ESOP loan guarantee 2,807 3,607
---------- ----------
188,470 149,110
---------- ----------
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
120,000,000 shares; outstanding 37,359,000
and 18,601,000 shares, respectively 37,359 18,601
Other paid-in capital 216,821 232,702
Retained earnings 160,937 147,903
Accumulated other comprehensive income (7,905) (5,377)
Unearned comp. - ESOP and restricted stock (3,772) (4,209)
---------- ----------
403,440 389,620
---------- ----------
Total Capitalization $ 591,910 $ 538,730
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
<PAGE> 22
WICOR, INC.
CONSOLIDATED STATEMENTS OF COMMON EQUITY
<TABLE>
<CAPTION>
Unearned
Accumulated Compensation
Other Other ESOP and
Common Paid-in Retained Comprehensive Restricted
THOUSANDS OF DOLLARS Stock Capital Earnings Income Stock
--------- --------- ---------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Balance December 31, 1995 $ 18,237 $219,133 $ 113,491 $ (1,593) $ (5,595)
Net earnings - - 46,771 - -
Other comprehensive income:
Foreign currency translation - - - 1,474 -
Minimum pension liability - - - (485) -
--------- --------- ---------- ------------- ------------
Comprehensive income - - 46,771 989 -
--------- --------- ---------- ------------- ------------
Issued in connection with
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:
Foreign currency translation - - - (4,375) -
Minimum pension liability - - - (398) -
--------- --------- ---------- ------------- ------------
Comprehensive income - - 49,523 (4,773) -
--------- --------- ---------- ------------- ------------
Issued in connection with
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>
<PAGE>
<PAGE> 23
WICOR, INC.
CONSOLIDATED STATEMENTS OF COMMON EQUITY
<TABLE>
<CAPTION>
Unearned
Accumulated Compensation
Other Other ESOP and
Common Paid-in Retained Comprehensive Restricted
THOUSANDS OF DOLLARS Stock Capital Earnings Income Stock
--------- --------- ---------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Balance December 31, 1997 $ 18,601 $232,702 $ 147,903 $ (5,377) $ (4,209)
Net earnings - - 45,495 - -
Other comprehensive income:
Foreign currency translation - - - (1,405) -
Minimum pension liability - - - (1,123) -
--------- --------- ---------- ------------- ------------
Comprehensive income - - 45,495 (2,528) -
--------- --------- ---------- ------------- ------------
Issued in connection with
employee benefit plans/other 96 2,781 - - -
Two-for-one common stock split 18,662 (18,662) - - -
Dividends on common stock - - (32,461) - -
ESOP loan payments - - - - 800
Issuance of restricted stock - - - - (884)
Amortization and forfeiture of
restricted stock - - - - 521
--------- --------- ---------- ------------- ------------
Balance December 31, 1998 $ 37,359 $216,821 $ 160,937 $ (7,905) $ (3,772)
========= ========= ========== ============= ============
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
<PAGE> 24
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, WICOR Energy Services Company (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 Public Service Commission of
Wisconsin (PSCW) and gives recognition to ratemaking policies substantially
in accordance with the FERC System of Accounts. At December 31, 1998,
Wisconsin Gas served approximately 529,000 customers in 524 communities.
The Energy Group accounted for 51% of the Company's 1998 operating revenues
and operating income. 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 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.
A GCIM approved by the PSCW in October 1997 became effective on November 1,
1997, for each of the three years ending October 31, 1998, 1999 and 2000.
Under the GCIM, Wisconsin Gas's gas commodity and capacity costs are
compared to monthly benchmarks. If, at the end of each GCIM year, such
costs deviate by more than 1.5% 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 1.5% and 4% above or below
the benchmark. The GCIM provides an opportunity for Wisconsin Gas's
earnings to increase or decrease as a result of gas and capacity
acquisition activities. Reduced gas costs during the first year under the
GCIM have been shared between the Company and its customers.
<PAGE>
<PAGE> 25
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 amortized to income over the
applicable service lives of the related properties consistent with
regulatory treatment.
E Earnings per common share Effective December 31, 1997, SFAS 128
"Earnings per Share" requires a dual presentation of earnings per share -
basic and diluted. Basic earnings per common share has been computed by
dividing net earnings by the weighted average number of common shares
outstanding. Diluted earnings per share has been computed by dividing net
earnings by the weighted average number of common shares outstanding,
including the dilutive effects of stock options.
F Inventories
ENERGY - Substantially all gas in storage inventory is priced using the
weighted average method of accounting.
MANUFACTURING - Approximately 61% and 57% of manufacturing inventories, in
1998 and 1997, 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 $7.7 million
and $7.9 million higher at December 31, 1998 and 1997, 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 4.4%, 4.3% and 4.5% for 1998, 1997 and
1996, 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.
<PAGE>
<PAGE> 26
H Regulatory accounting Wisconsin Gas accounts for its regulated
operations in accordance with SFAS 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).
The amounts recorded as regulatory assets and regulatory liabilities in the
Consolidated Balance Sheet at December 31 are as follows:
THOUSANDS OF DOLLARS 1998 1997
---------- ----------
Regulatory assets:
Postretirement benefit costs (Note 10) $ 36,720 $ 39,498
Deferred uncollectible expenses 19,960 11,056
Income tax-related amounts due from customers 2,295 2,648
Other 344 708
---------- ----------
$ 59,319 $ 53,910
========== ==========
Regulatory liabilities:
Income tax-related amounts due to customers $ 18,058 $ 19,725
Unrecognized pension income (Note 10) 10,929 13,780
Other 3,166 3,028
---------- ----------
$ 32,153 $ 36,533
========== ==========
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 and
recovered in future rates.
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 in
the open market for shareholders who elected to reinvest their dividends in
common stock.
<PAGE>
<PAGE> 27
J Derivative financial instruments The Company uses derivative financial
instruments to manage commodity risks associated with the price of natural
gas and to manage foreign exchange risks. The Company's policy prohibits
the use of derivative financial instruments for trading purposes.
Wisconsin Gas has a commodity risk management program that has been
approved by the PSCW. This program allows Wisconsin Gas to utilize call and
put option contracts to reduce market risk associated with fluctuations in
the price of natural gas purchases and gas in storage. Under this program,
Wisconsin Gas has the ability to hedge up to 50% of its planned gas
deliveries for the heating season. The PSCW has also allowed Wisconsin Gas
to hedge gas purchased for storage during non-heating months. The cost of
the call and put option contracts, as well as gains or losses realized
under the contracts do not affect net income as they are recovered dollar
for dollar under the purchased gas adjustment clause. As of December 31,
1998, Wisconsin Gas had put options covering approximately 33% of the
volumes of gas in storage, and call options covering 15% of the expected
natural gas purchases for the remainder of the 1998-1999 heating season.
WESCO utilizes gas futures contracts to manage commodity price risk
associated with firm customer sales commitments. Unrealized gains or losses
on these instruments are deferred and recognized in earnings in the period
the sales occurs. As of December 31, 1998, WESCO had natural gas futures
contracts with a notional value of $6.6 million. Substantially all of the
futures contracts expire in 1999.
Certain manufacturing subsidiaries use foreign exchange futures and forward
contracts 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 transaction. These contracts were
not material.
During 1998 and 1997, WICOR entered into weather insurance agreements to
hedge a portion of the impact weather has on Energy Group earnings. Under
the agreements, a payment will be made or received if the heating degree
days during the heating season fall outside a specific range. The payment
is limited to a maximum of $2.0 million per year. At December 31, 1998, the
fair value of the agreement entered into for the 1998-1999 heating season
was not significant. During 1998, the Company recorded income of $1.2
million in connection with the agreement entered into for the 1997-1998
heating season.
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.
<PAGE>
<PAGE> 28
Note 2 New Accounting Standards
- ----------------------------------
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 133 (SFAS 133), "Accounting for
Derivative Instruments and Hedging Activities," effective in the first
quarter of 2000. SFAS 133 establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
balance sheet and measure those instruments at fair value. The Company is
currently evaluating the impact of the provisions of SFAS 133 on its
financial statements. The Company does not believe that SFAS 133 will
materially increase volatility in earnings and other comprehensive income.
During 1998, the Company adopted Statement of Position No. 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use," which provides guidance on accounting for the costs of
computer software developed or obtained for internal use. The impact of
adopting this statement on the Company's consolidated financial statements
was immaterial.
Note 3 Mergers and Acquisitions
- ----------------------------------
During 1998, WICOR and its subsidiaries acquired a small municipal water
utility, made an additional equity investment in an Italian subsidiary and
entered into a joint venture arrangement with an existing Chinese pump
manufacturer. Total funds invested as a result of these activities amounted
to $7.3 million during 1998.
During 1997, WICOR and its subsidiaries completed four acquisitions. The
aggregate purchase price was approximately $10 million and was financed
using cash and by issuing 255,676 shares of the Company's common stock.
Three of the acquisitions were pump, fluid processing and filtration
equipment companies. The fourth acquisition was a utility 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 has
been recorded as goodwill and is being amortized over 40 years.
<PAGE>
<PAGE> 29
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>
YEARS ENDED DECEMBER 31,
----------------------------------------------------
THOUSANDS OF DOLLARS 1998 1997 1996
---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Statutory U.S. tax rates $ 25,064 35.0% $ 27,327 35.0% $ 25,717 35.0%
State income taxes, net 3,151 4.4 3,383 4.3 3,818 5.2
Other, net (2,167) (3.0) (2,386) (3.0) (2,830) (3.9)
---------------- ---------------- ----------------
Effective Tax Rates $ 26,048 36.4% $ 28,324 36.3% $ 26,705 36.3%
================ ================ ================
</TABLE>
The current and deferred components of income tax expense (benefit) for
each of the years ended December 31 are as follows:
<TABLE>
<CAPTION>
THOUSANDS OF DOLLARS 1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Current:
Federal $ 15,960 $ 19,229 $ 23,479
State 3,640 4,146 6,022
Foreign 1,432 808 752
---------- ---------- ----------
Total Current 21,032 24,183 30,253
---------- ---------- ----------
Deferred:
Federal 3,698 1,836 (2,610)
State 1,262 926 (264)
Foreign 56 1,379 (674)
---------- ---------- ----------
Total Deferred 5,016 4,141 (3,548)
---------- ---------- ----------
Total Provision $ 26,048 $ 28,324 $ 26,705
========== ========== ==========
</TABLE>
<PAGE>
<PAGE> 30
The components of deferred income tax classified as current assets and
long-term liabilities at December 31 are as follows:
<TABLE>
<CAPTION>
THOUSANDS OF DOLLARS 1998 1997
---------- ----------
<S> <C> <C>
Current deferred income tax assets:
Recoverable gas costs $ 7,176 $ 9,712
Deferred compensation 3,246 3,407
Inventory 2,398 2,421
Product related/warranty 1,123 1,254
Other 3,252 4,737
---------- ----------
$ 17,195 $ 21,531
========== ==========
Long-term deferred income tax liabilities:
Property related $ 49,427 $ 48,905
Systems development costs 5,178 6,993
Investment tax credit (4,205) (4,503)
Postretirement benefits (8,064) (9,217)
Deferred compensation (4,019) (4,042)
Pension benefits 14,798 11,033
Environmental (3,180) (4,819)
Other (870) (375)
---------- ----------
$ 49,065 $ 43,975
========== ==========
</TABLE>
Note 5 Short-term Borrowings and Lines of Credit
- ---------------------------------------------------
As of December 31, 1998 and 1997, the Company had total unsecured lines of
credit available from banks of $266.6 million and $240.0 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 1997, the Company, and certain subsidiaries, renegotiated their
existing revolving credit facilities. Financial covenants under the
Company's five-year $115 million credit facilities, which expire in August,
2002, include leverage and interest coverage ratios.
<PAGE>
<PAGE> 31
The components of short-term borrowings at December 31 are as follows:
THOUSANDS OF DOLLARS 1998 1997
---------- ----------
Notes payable to banks
Non-U.S. subsidiaries $ 15,976 $ 20,668
Commercial paper - U.S. 91,677 98,232
---------- ----------
$ 107,653 $ 118,900
========== ==========
Weighted average interest rates on debt outstanding at end of year:
THOUSANDS OF DOLLARS 1998 1997
---------- ----------
Notes payable to banks
Non-U.S. subsidiaries 4.6% 5.8%
Commercial paper - U.S. 5.7% 5.8%
Highest month-end balance $ 107,653 $ 118,900
Average month-end balance $ 63,480 $ 79,701
Note 6 Long-term Debt
- ------------------------
In January 1999, Wisconsin Gas issued $50 million of 5.5% Unsecured Notes
due 2009. The proceeds of this offering were used in part to reduce
commercial paper issued in November 1998, in connection with the maturity
of $40 million of 7.5% Notes.
Maturities and sinking fund requirements during the succeeding five years
on all long-term debt total $3.5 million, $7.6 million, $1.2 million, $18.6
million and $0.4 million in 1999, 2000, 2001, 2002 and 2003.
Note 7 Restrictions
- ----------------------
On May 7, 1998, the PSCW approved an increase in the amount the Company
may invest in nonutility businesses. The new investment limitation permits
nonutility investments to constitute up to 60% of the Company's total
capitalization. The PSCW also found that the utility does not have to be
WICOR's predominant business. The PSCW conditioned the change on the
utility maintaining at least a single A bond rating and its continued
compliance with the customer service and safety standards included in the
PARM order. Failure to comply with these conditions could trigger a
reopening of the investment limitation. Under the new investment
limitation, the amount available for future nonutility investments at
December 31, 1998, was $351.7 million.
<PAGE>
<PAGE> 32
The PSCW has established a 13-month average equity ratio 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 the
Company if the payment would reduce its common equity (net assets) below
43% of total capitalization (including short-term debt). Under this
requirement, $41.4 million of Wisconsin Gas's net assets at December 31,
1998, 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 $6.0 million in dividends
in November 1998 and expects to pay $25.5 million in dividends for the 12
months ending October 1999. At December 31, 1998, Wisconsin Gas's equity
ratio was 53.2%.
Combined restricted common equity of the Company's subsidiaries totaled
$266.7 million under the most restrictive provisions as of December 31,
1998; accordingly, $136.8 million of consolidated retained earnings is
available for payment of dividends.
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 $505.9
million, with annual required payments of $105.5 million in 1999, $97.5
million in 2000, $95.6 million in 2001, $93.5 million in 2002 and $74.9
million in 2003. Wisconsin Gas's total payments for firm pipeline and
storage capacity prior to recovery from sales of excess capacity were
$113.9 million in 1998, $126.6 million in 1997 and $129.6 million in 1996.
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.
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 1999 capital expenditures. The Energy Group's capital expenditures for
1999 are estimated at $45.3 million. The Manufacturing Group's capital
expenditures for 1999 are estimated at $18.7 million.
<PAGE>
<PAGE> 33
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. During 1997, Wisconsin Gas
completed a comprehensive review of its potential environmental accrual
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 all resulted in a reduction
of the estimated probable liability for cleanup to $7.9 million.
Expenditures over the next three years are expected to total approximately
$5 million.
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 1998 and will continue through 1999.
Wisconsin Gas is evaluating potential remedial options at the second site.
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.
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.
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.
<PAGE>
<PAGE> 34
The Company periodically reviews its accrued liabilities for such
remediation costs as evidence becomes available indicating that its
remediation liability has changed. Based on the foregoing and given current
information, management believes that future costs in excess of the amounts
accrued on all presently known and quantifiable environmental contingencies
will not be material to the Company's financial position or results of
operations.
D Other The Company is party to various legal proceedings arising in the
ordinary course of business which are not expected to have a material
effect on the Company's financial position or results of operations.
Note 9 Common Stock and Other Paid-in Capital
- ------------------------------------------------
In April 1998, the Company's Board of Directors approved a two-for-one
split of the Company's common stock to be effected by the distribution of
one share for each share outstanding. Such distribution was made on May 29,
1998, to shareholders of record as of the close of business on May 14,
1998. The par value of the additional shares of common stock issued ($1 per
share) in connection with the stock split has been credited to common stock
and a like amount charged to other paid-in capital. Per share amounts
throughout the financial statements and footnotes have been restated.
In connection with stock split, the Company increased its authorized shares
of common stock from 60,000,000 to 120,000,000 of which 37,359,413 shares
and 37,201,264 shares were outstanding at December 31, 1998 and 1997,
respectively. Common stock totaling 8,273,295 shares is reserved for
issuance under the Company's dividend reinvestment, stock option and
incentive savings plans. In addition 45,661,308 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 $37.50, 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> 35
Note 10 Benefit Plans
- ------------------------
A Pension and other postretirement benefit plans The Company provides
defined benefit pension and postretirement benefit plans to employees.
Effective January 1, 1998, the Company adopted SFAS 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits." The
following provides a reconciliation of benefit obligations, plan assets and
funded status of the plans, at December 31, 1998 and 1997.
<TABLE>
<CAPTION>
OTHER POSTRETIREMENT
PENSION BENEFITS BENEFITS
--------------------- ---------------------
THOUSANDS OF DOLLARS 1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Change in benefit obligation
Benefit obligation at January 1 $ 181,018 $ 164,701 $ 105,863 $ 99,535
Service cost 4,014 4,042 1,176 2,102
Interest cost 12,782 12,742 5,822 6,731
Amendments and settlements (943) (879) (14,382) -
Actuarial loss (gain) 15,733 11,929 (15,913) 1,730
Benefits paid (13,975) (11,517) (4,266) (4,235)
---------- ---------- ---------- ----------
Benefit obligation at December 31 198,629 181,018 78,300 105,863
---------- ---------- ---------- ----------
Change in plan assets
Fair value of plan assets at January 1 273,871 232,284 54,958 40,846
Actual return on plan assets 14,804 52,446 2,732 11,320
Employer contributions - - 3,948 5,717
Benefits paid from plan assets (13,270) (10,868) (3,187) (2,925)
---------- ---------- ---------- ----------
Fair value of plan assets at December 31 275,405 273,862 58,451 54,958
---------- ---------- ---------- ----------
Funded status of the plans 76,776 92,844 (19,849) (50,905)
Unrecognized net actuarial (gain) (26,734) (49,161) (16,223) (3,890)
Unrecognized prior service cost 2,762 3,900 (26,474) (13,476)
Unrecognized net transition (asset) (9,253) (10,950) 1,919 3,948
---------- ---------- ---------- ----------
Net amount recognized $ 43,551 $ 36,633 $ (60,627) $ (64,323)
========== ========== ========== ==========
Amounts recognized in the
Consolidated Balance Sheets
Prepaid benefit cost $ 50,011 $ 42,753 $ - $ -
Accrued benefit liability (6,460) (6,120) (60,627) (64,323)
Additional minimum liability (3,474) (2,351) - -
Accumulated other
comprehensive income 3,474 2,351 - -
---------- ---------- ---------- ----------
Net amount recognized $ 43,551 $ 36,633 $ (60,627) $ (64,323)
========== ========== ========== ==========
Assumptions as of December 31
Discount rate (weighted average) 6.50% 7.25% 6.50% 7.25%
Expected return on plan assets 9.00% 9.00% 9.00% 9.00%
Rate of compensation increase 4.50% 4.50% 4.50% 4.50%
</TABLE>
<PAGE>
<PAGE> 36
Net pension (income) costs and other postretirement benefit costs for each
of the years ended December 31, include the following components:
<TABLE>
<CAPTION>
OTHER POSTRETIREMENT
PENSION BENEFITS BENEFITS
-------------------------- --------------------------
THOUSANDS OF DOLLARS 1998 1997 1996 1998 1997 1996
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Service costs $ 4,014 $ 4,042 $ 4,713 $ 1,176 $ 2,102 $ 2,712
Interest costs on projec-
ted benefit obligations 12,782 12,742 12,833 5,822 6,731 7,330
Expected (gain) on assets (21,443) (19,884) (19,028) (5,168) (4,053) (3,412)
Amortization of:
Transition obli-
gation (asset) (1,693) (1,693) (1,723) - - -
Prior service cost 195 389 389 (1,384) (957) (957)
Actuarial (gain) loss (40) (352) 141 (1,143) (719) 208
-------- -------- -------- -------- -------- --------
(6,185) (4,756) (2,675) (697) 3,104 5,881
Amortization of regula-
tory (liability) asset (2,851) (2,851) (2,851) 2,778 2,778 2,778
-------- -------- -------- -------- -------- --------
Net benefit (income)/exp. $(9,036) $(7,607) $(5,526) $ 2,081 $ 5,882 $ 8,659
======== ======== ======== ======== ======== ========
</TABLE>
Pension plans 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 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 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.
In 1998, 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.
<PAGE>
<PAGE> 37
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 106 and are recoverable from customers. The cumulative
difference between the amounts funded and the amounts based on SFAS 106
through January 1, 1992, is recorded as a regulatory asset and is being
amortized over a twenty-year period effective January 1, 1992.
In 1998, 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 postretirement benefit cost components for 1998 were calculated
assuming health care cost trend rates ranging up to 10% for 1999 and
decreasing to 5% in 2004. An increase of one percentage point in the
assumed health care cost trend rate in each year would increase the
accumulated postretirement benefit obligation as of December 31, 1998, by
$3.6 million and the aggregate of the service and interest cost components
of postretirement expense by $0.3 million. A corresponding decrease of one
percentage point would decrease the accumulated postretirement benefit
obligation by $3.1 million and the aggregate of the service and interest
cost components of postretirement expense by $0.2 million.
Plan assets are primarily invested in equities and fixed income securities.
B 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 $1.9 million in 1998 and $1.8
million in 1997 and 1996.
C 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, adjustable
rate loan (5.6% interest rate at December 31, 1998), guaranteed by the
Company, to purchase 862,532 shares of WICOR common stock. The Company has
extended the adjustable rate loan, with similar terms, until May 31, 2002.
The unpaid balance ($2.8 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 the
Company's common stock held in the ESOP and with Wisconsin Gas
contributions to the ESOP.
<PAGE>
<PAGE> 38
D Stock option plans and restricted stock The Company has a total of 131
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 no later than eleven years from the date of
grant.
<TABLE>
<CAPTION>
1998 1997 1996
------------------ ------------------ ------------------
WTD AVG WTD AVG WTD AVG
THOUSANDS OF DOLLARS SHARES PRICE SHARES PRICE SHARES PRICE
---------- ------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at January 1 1,959,716 $ 15.22 1,560,298 $ 13.38 1,490,100 $ 12.51
Granted 744,200 $ 23.61 538,400 $ 19.75 325,400 $ 16.50
Exercised (120,749) $ 13.23 (137,382) $ 12.11 (196,540) $ 11.55
Canceled (21,604) $ 21.13 (1,600) $ 15.66 (58,662) $ 14.69
---------- ---------- ----------
Outstanding at December 31 2,561,563 $ 17.70 1,959,716 $ 15.22 1,560,298 $ 13.38
========== ========== ==========
Exercisable at December 31 1,423,174 $ 14.30 1,246,550 $ 13.54 1,077,344 $ 12.36
========== ========== ==========
Available for future
grant at year-end 1,437,984 347,980 893,814
========== ========== ==========
</TABLE>
SFAS 123, "Accounting for Stock-Based Compensation," 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 1998, 1997 and 1996, respectively: dividend yields of 3.6%, 4.8% and
5.0%, risk-free interest rates of 5.3%, 5.1% and 5.0%, expected volatility
of 15.1%, 15.9% and 16.4%, and an expected option life of 5.64 years for
all periods. The weighted average fair value of options granted in 1998,
1997 and 1996 was $3.59, $4.22 and $3.83 per share, respectively. Had
compensation cost for the Company's 1998, 1997 and 1996 grants for
stock-based compensation plans been determined consistent with SFAS 123,
the Company's net income and diluted earnings per common share would have
been reduced to the pro forma amounts indicated below:
1998 1997 1996
-------- -------- --------
Net earnings:
As reported $45,495 $49,523 $46,771
Pro forma $44,594 $49,167 $46,557
Diluted earnings per common share
As reported $ 1.21 $ 1.33 $ 1.27
Pro forma $ 1.19 $ 1.32 $ 1.26
<PAGE>
<PAGE> 39
Under the Company's 1994 Long-Term Performance Plan (1994 Plan), awards
covering up to 3,490,000 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
theCompany at no cost.
A total of 142,700 restricted shares (net of cancellations) were issued
through 1998. 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.
E 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 no
compensation expense in 1998 and $0.6 million of compensation expense under
the Director Plan in 1997.
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.
<PAGE>
<PAGE> 40
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.
Likewise, any gains or losses on gas commodity instruments used by
Wisconsin Gas are refunded to or recovered from customers under the PGAC.
The estimated fair value of WICOR's financial instruments at December 31,
is as follows:
1998 1997
CARRYING FAIR CARRYING FAIR
THOUSANDS OF DOLLARS AMOUNT VALUE AMOUNT VALUE
---------- ----------- ----------- -----------
Cash and cash equivalents $ 13,383 $ 13,383 $ 11,810 $ 11,810
Accounts receivable $ 137,321 $ 137,321 $ 164,243 $ 164,243
Short-term debt $ 107,653 $ 107,633 $ 118,900 $ 118,900
Long-term debt $ 188,470 $ 192,412 $ 149,110 $ 150,159
Note 12 Business Segment Information
- ---------------------------------------
Effective December 31, 1998, the Company adopted SFAS 131, "Disclosures
About Segments of an Enterprise and Related Information" which changes the
way the Company reports information about its operating segments.
The Company is a diversified holding company with two principal business
segments: an Energy Group responsible for natural gas distribution and
related services, and a Manufacturing Group responsible for the manufacture
of pumps and processing equipment used to pump, control, transfer, hold and
filter water and other fluids.
The Company's reportable segments are managed separately because each
business requires different technology and marketing strategies. Most of
the businesses were acquired as a unit, and the management at the time of
the acquisition was retained. The accounting policies of the reportable
segments are the same as those described in Note 1 of Notes to the
Consolidated Financial Statements. The Company evaluates the performance of
its operating segments based on income from continuing operations.
Intersegment sales and transfers are not significant.
Information regarding products and services and geographic areas are not
presented as they are not included in measures that are reviewed by the
Company.
<PAGE>
<PAGE> 41
Summarized financial information concerning the Company's reportable
segments is shown in the following table. The other category includes the
results of the parent company only and non-regulated energy operations
involved in energy and risk management services, automated meter reading
and other related services.
<TABLE>
<CAPTION>
ENERGY
-------------------------------
THOUSANDS OF DOLLARS REGULATED OTHER TOTAL MANUFACTURING CONSOLIDATED
--------- --------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C>
1998
- ----
Revenues $428,562 $ 52,927 $ 481,489 $ 462,694 $ 944,183
Depreciation and
amortization $ 40,336 $ 134 $ 40,470 $ 14,061 $ 54,531
Net earnings $ 22,668 $ (1,012) $ 21,656 $ 23,839 $ 45,495
Total assets $651,492 $ 14,284 $ 665,776 $ 349,420 $ 1,015,196
Capital expenditures $ 34,995 $ 170 $ 35,165 $ 14,114 $ 49,279
1997
- ----
Revenues $536,720 $ 59,542 $ 596,262 $ 424,779 $ 1,021,041
Depreciation and
amortization $ 39,820 $ 139 $ 39,959 $ 13,781 $ 53,740
Net earnings $ 29,335 $ 108 $ 29,443 $ 20,080 $ 49,523
Total assets $683,888 $ 13,780 $ 697,668 $ 333,664 $ 1,031,332
Capital expenditures $ 35,017 $ 131 $ 35,148 $ 16,424 $ 51,572
1996
- ----
Revenues $573,255 $ 29,430 $ 602,685 $ 409,916 $ 1,012,601
Depreciation and
amortization $ 41,111 $ 43 $ 41,154 $ 13,717 $ 54,871
Net earnings $ 32,724 $ (879) $ 31,845 $ 14,926 $ 46,771
Total assets $718,990 $ 13,418 $ 732,408 $ 304,948 $ 1,037,356
Capital expenditures $ 36,586 $ 31 $ 36,617 $ 15,127 $ 51,744
</TABLE>
<PAGE>
<PAGE> 42
SELECTED FINANCIAL DATA THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS
<TABLE>
<CAPTION>
THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS
1998 1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED
Operating Data:
Operating revenues(4) $ 944,183 $1,021,041 $1,012,601 $ 860,594 $ 867,755 $ 849,528
Net earnings $ 45,495 $ 49,523 $ 46,771 $ 39,527 $ 33,174 $ 29,313
Common Stock Data:
Basic earnings per
common share(1) $ 1.22 $ 1.34 $ 1.27 $ 1.16 $ 0.99 $ 0.91
Diluted earnings
per share(1) $ 1.21 $ 1.33 $ 1.27 $ 1.16 $ 0.99 $ 0.90
Cash dividends per
common share(1) $ 0.870 $ 0.850 $ 0.830 $ 0.810 $ 0.790 $ 0.770
Book value per
common share(1) $ 10.80 $ 10.47 $ 9.96 $ 9.42 $ 8.57 $ 8.24
Balance Sheet Data:
Long-term debt $ 188,470 $ 149,110 $ 169,169 $ 174,713 $ 161,669 $ 165,230
Common equity 403,440 389,620 366,499 343,673 289,918 270,276
---------- ---------- ---------- ---------- ---------- ----------
Capitalization at Y/E $ 591,910 $ 538,730 $ 535,668 $ 518,386 $ 451,587 $ 435,506
========== ========== ========== ========== ========== ==========
Total assets Y/E(2) $1,015,196 $1,031,332 $1,057,652 $1,008,514 $ 930,708 $ 933,726
Other General Data:
Market-to-book ratio
at year-end (%) 202 222 179 170 165 191
Dividend payout
ratio (%)(2)(3) 71.4 63.4 65.2 69.5 79.6 82.2
Yield at year-end (%) 4.0 3.7 4.7 5.1 5.6 5.0
Return on average com-
mon equity (%)(2)(3) 11.3 13.0 12.9 13.1 11.6 11.2
Price/earnings ratio
at year-end(2)(3) 17.8 17.3 14.1 13.9 14.3 17.3
Price range(1) $ 19-5/8- $16-11/16- $ 15-1/16- $ 13-5/16- $ 12-3/4- $12-13/16-
$ 25-1/2 $ 23-15/16 $ 18-7/8 $ 16-7/16 $ 16-5/16 $ 16-7/16
Registered share-
holders at Y/E(5) 21,373 22,312 23,339 27,379 25,017 23,694
Cash flow-operations $ 97,000 $ 49,324 $ 75,416 $ 69,918 $ 103,551 $ 3,401
Capital expenditures $ 49,279 $ 51,572 $ 51,744 $ 56,241 $ 55,051 $ 51,906
Employees at year-end 3,524 3,625 3,475 3,368 3,214 3,222
Debt/equity ratio Y/E 32/68 28/72 32/68 34/66 36/64 38/62
Energy Operations
Operating revenues $ 481,489 $ 596,262 $ 602,685 $ 522,840 $ 556,587 $ 574,835
Net earnings $ 21,656 $ 29,443 $ 32,141 $ 27,701 $ 18,896 $ 19,870
Capital expenditures $ 35,165 $ 35,148 $ 36,617 $ 42,852 $ 44,626 $ 42,253
</TABLE>
<PAGE>
<PAGE> 43
SELECTED FINANCIAL DATA THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS
<TABLE>
<CAPTION>
THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS
1998 1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Utility throughput
(000'S of dekatherms)
Residential 40,856 48,433 52,991 49,425 46,369 47,964
Commercial 17,967 21,922 24,257 21,157 18,598 19,060
Industrial firm 6,095 8,724 11,078 13,496 14,544 15,246
Ind. interruptible 3,657 7,277 19,624 31,353 28,217 20,849
Transported 46,017 42,883 27,578 14,549 11,908 17,408
---------- ---------- ---------- ---------- ---------- ----------
114,592 129,239 135,528 129,980 119,636 120,527
========== ========== ========== ========== ========== ==========
Utility customers Y/E 528,963 520,975 512,868 504,746 495,129 485,103
Utility customers
served per employee 549 534 516 471 419 352
Ave. cost of gas/util-
ity Dth purchased $ 3.62 $ 3.99 $ 3.47 $ 2.79 $ 3.34 $ 3.76
Ave. annual residen-
tial utility bill $ 561 $ 701 $ 725 $ 686 $ 719 $ 779
Ave. use/utility resi-
dential customer(Dth) 90 108 120 114 110 116
Degree days 5,865 7,094 7,458 6,836 6,431 6,775
% colder (warmer) than
20-year average (16.4) 1.0 6.8 (2.8) (9.0) (4.1)
Manufacturing Oper.(2)
Operating revenues $ 462,694 $ 424,779 $ 409,916 $ 337,754 $ 311,168 $ 274,693
International/export
% of total sales 30 34 34 39 37 34
Net earnings(3) $ 23,834 $ 20,080 $ 14,630 $ 11,826 $ 14,278 $ 9,443
Capital expenditures $ 14,115 $ 16,424 $ 15,127 $ 13,389 $ 10,425 $ 9,653
</TABLE>
<PAGE>
<PAGE> 44
SELECTED FINANCIAL DATA THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS
<TABLE>
<CAPTION>
THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS
1992 1991 1990 1989 1988
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED
Operating Data:
Operating revenues (4) $ 747,409 $ 716,767 $ 696,023 $ 741,218 $ 780,633
Net earnings $ 14,799 $ 22,966 $ 16,651 $ 33,881 $ 34,163
Common Stock Data:
Basic earnings
per common share(1) $ 0.48 $ 0.77 $ 0.57 $ 1.17 $ 1.19
Diluted earnings
per share(1) $ 0.47 $ 0.77 $ 0.57 $ 1.16 $ 1.19
Cash dividends per
common share(1) $ 0.750 $ 0.730 $ 0.710 $ 0.685 $ 0.660
Book value per
common share(1) $ 7.80 $ 7.92 $ 8.06 $ 8.42 $ 7.91
Balance Sheet Data:
Long-term debt $ 164,171 $ 168,366 $ 130,215 $ 122,639 $ 133,034
Common equity 245,287 243,453 237,407 244,351 227,080
---------- ---------- ---------- ---------- ----------
Capitalization at year-end $ 409,458 $ 411,819 $ 367,622 $ 366,990 $ 360,114
========== ========== ========== ========== ==========
Total assets at Y/E(2) $ 825,774 $ 670,250 $ 651,559 $ 620,548 $ 565,967
Other General Data:
Market-to-book ratio Y/E(%) 175 153 122 148 123
Dividend payout
ratio (%)(2)(3) 96.1 89.0 117.2 55.0 52.0
Yield at year-end (%) 5.6 6.1 7.3 5.6 6.9
Return on average
common equity (%)(2)(3) 9.2 9.5 6.8 14.3 15.3
Price/earnings ratio
at year-end(2)(3) 18.5 15.7 17.2 10.7 8.2
Price range(1) $11-7/16- $ 9-5/16- $ 9-1/8- $9-11/16- $7-13/16-
$13-11/16 $ 12-3/16 $ 12-5/8 $12-11/16 $ 10-7/16
Registered shareholders
at year-end(5) 22,864 18,503 19,463 20,509 21,611
Cash flow from operations $ 37,012 $ 50,413 $ 10,022 $ 94,623 $ 73,526
Capital expenditures $ 71,873 $ 45,113 $ 37,529 $ 40,944 $ 48,295
Employees at year-end 3,178 3,196 3,152 3,696 3,927
Debt/equity ratio Y/E 40/60 41/59 35/65 33/67 37/63
Energy Operations
Operating revenues $ 495,415 $ 474,702 $ 455,559 $ 441,477 $ 476,904
Net earnings $ 18,060 $ 17,086 $ 13,195 $ 25,169 $ 23,223
Capital expenditures $ 62,125 $ 34,473 $ 27,978 $ 25,813 $ 37,148
</TABLE>
<PAGE>
<PAGE> 45
SELECTED FINANCIAL DATA THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS
<TABLE>
<CAPTION>
THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS
1992 1991 1990 1989 1988
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Utility throughput (000's
of dekatherms-MDth)
Residential 45,905 45,614 43,020 48,154 46,769
Commercial 17,840 17,861 16,319 18,089 17,012
Industrial firm 14,488 15,690 15,106 16,915 16,808
Indus. interruptible 17,388 17,440 16,620 5,475 3,752
Transported 21,379 19,658 16,565 29,158 29,639
---------- ---------- ---------- ---------- ----------
117,000 116,263 107,630 117,791 113,980
========== ========== ========== ========== ==========
Utility customers at Y/E 470,956 460,549 452,906 445,771 439,063
Utility customers
served per employee 331 323 321 319 311
Average cost of gas per
utility Dth purchased $ 3.34 $ 3.18 $ 3.30 $ 3.15 $ 3.68
Average annual resi-
dential utility bill $ 712 $ 677 $ 670 $ 758 $ 770
Average use per utility
residential customer(Dth) 115 117 113 129 127
Degree days 6,683 6,416 6,103 7,382 7,124
% colder (warmer) than
20-year average (6.4) (10.8) (16.0) 1.5 (2.0)
Manufacturing Operations(2)
Operating revenues $ 251,994 $ 242,065 $ 240,464 $ 300,156 $ 303,729
International/export sales
as a % of total sales 34 31 27 24 22
Net earnings(3) $ 4,704 $ 5,880 $ 3,456 $ 8,712 $ 10,940
Capital expenditures $ 9,748 $ 10,640 $ 9,551 $ 15,131 $ 11,147
</TABLE>
(1) Adjusted for a two-for-one stock split effected in May 1998.
(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 1988
and 1989 of $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, 1998 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-31-1998
<PERIOD-END> DEC-31-1998
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 380,478
<OTHER-PROPERTY-AND-INVEST> 0
<TOTAL-CURRENT-ASSETS> 147,964
<TOTAL-DEFERRED-CHARGES> 123,050
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 651,492
<COMMON> 9
<CAPITAL-SURPLUS-PAID-IN> 120,888
<RETAINED-EARNINGS> 94,673
<TOTAL-COMMON-STOCKHOLDERS-EQ> 213,346
0
0
<LONG-TERM-DEBT-NET> 158,839
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 110,000
<COMMERCIAL-PAPER-OBLIGATIONS> 65,000
<LONG-TERM-DEBT-CURRENT-PORT> 2,000
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 212,307
<TOT-CAPITALIZATION-AND-LIAB> 651,492
<GROSS-OPERATING-REVENUE> 428,562
<INCOME-TAX-EXPENSE> 13,213
<OTHER-OPERATING-EXPENSES> 382,358
<TOTAL-OPERATING-EXPENSES> 395,571
<OPERATING-INCOME-LOSS> 32,991
<OTHER-INCOME-NET> 2,125
<INCOME-BEFORE-INTEREST-EXPEN> 35,116
<TOTAL-INTEREST-EXPENSE> 12,448
<NET-INCOME> 22,668
0
<EARNINGS-AVAILABLE-FOR-COMM> 22,668
<COMMON-STOCK-DIVIDENDS> 24,000
<TOTAL-INTEREST-ON-BONDS> 234
<CASH-FLOW-OPERATIONS> 62,164
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
