<PAGE>
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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, 1999
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
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
626 East Wisconsin Avenue
P.O. Box 334
Milwaukee, Wisconsin 53201
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 414-291-7000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
/X/ Yes No.
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ X ]
Aggregate market value of the voting stock held by non-affiliates of
the registrant: None
Number of shares outstanding of each of the registrant's classes of
common stock, as of February 29, 2000:
Common Stock, $8 par value 1,125 shares
----- Documents Incorporated by Reference -----
None
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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PAGE
PART I. 1
Forward-Looking Statements 1
Item 1. Business 2
(a) General 2
(b) General Information About the Company's Business. 2
(c) Gas Supply, Pipeline Capacity and Storage 3
(1) Pipeline Capacity and Storage 3
(2) Term Gas Supply 4
(3) Secondary Market transactions 5
(4) Spot Market Gas Supply 5
(5) Proposed New Pipeline 5
(d) Wisconsin Regulatory Matters 5
(1) Rate Matters 5
(2) Gas Cost Recovery Mechanism 5
(3) Proposed New Pipeline 5
(4) Transition Cost Recovery Policy 5
(5) Changing Regulatory Environment 6
(e) Employees 6
Item 2. Properties 6
Item 3. Legal Proceedings 6
Item 4. Submission of Matters to a Vote of Security Holders 7
PART II. 7
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters 7
Item 6. Selected Financial Data 7
Item 7. Management's Discussion and Analysis of Results of
Operations and Financial Condition 7
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk 13
Item 8. Financial Statements and Supplementary Data 15
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 34
Part III. 34
Item 10. Directors and Executive Officers of the Registrant 34
Item 11. Executive Compensation 34
Item 12. Security Ownership of Certain
Beneficial Owners and Management 34
Item 13. Certain Relationships and Related Transactions 34
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TABLE OF CONTENTS (Continued) Page
Part IV. 34
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K 34
(a) Documents Filed as Part of the Report 34
1. All Financial Statements and Report of
Independent Public Accountants 34
2. Financial Statement Schedules 35
3. Exhibits 35
(b) Reports on Form 8-K 36
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PART I
Forward-Looking Statements
--------------------------
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report and other material to which the Company refers or
incorporates by reference contains forward-looking statements made by or on
behalf of Wisconsin Gas Company. These are statements of opinion, intention
or belief about future events or conditions, rather than historical facts.
The forward-looking statements are based upon management's current
expectations and are subject to risks and uncertainties that could cause
the actual results of Wisconsin Gas to differ materially from those
contemplated in the statements. You should not place undue reliance on the
forward-looking statements. The terms "anticipate," "believe," "estimate,"
"expect," "objective," "plan," "possible," "potential," "project" and
similar expressions are intended to identify forward-looking statements. In
addition to the assumptions and other factors we mention specifically in
connection with the forward-looking statements, factors that could cause
Wisconsin Gas' actual results to differ materially from those contemplated
in any forward-looking statements include, among others, the following:
>> Unanticipated difficulties related to completing the merger with
Wisconsin Energy Corporation, regulatory delays or conditions imposed by
regulatory bodies in approving the merger, or adverse regulatory treatment
of the merger.
>> Factors affecting utility operations such as unusual weather
conditions; unanticipated changes in gas supply or water supply costs or
availability due to higher demand, shortages, transportation problems or
other developments; nonperformance by natural gas suppliers under existing
gas supply contracts; environmental incidents; gas pipeline system
constraints; unanticipated organizational structure or key personnel
changes; collective bargaining agreements with union employees or work
stoppages; inflation rates; or demographic and economic factors affecting
utility service territories or operating environment.
>> Regulatory factors such as unanticipated changes in rate-setting
policies or procedures; unanticipated changes in regulatory accounting
policies and practices; industry restructuring initiatives; distribution
system operation and/or administration initiatives; recovery of costs of
previous investments made under traditional regulation; required approvals
for new construction;
>> The rapidly changing and increasingly competitive and gas utility
environment as market-based forces replace strict industry regulation and
other competitors enter the gas markets resulting in increased wholesale
and retail competition.
>> Consolidation of the industry as a result of the combination and
acquisition of utilities in the Midwest, nationally and globally.
>> Restrictions imposed by various financing arrangements and
regulatory requirements on the ability of the utility and other
subsidiaries to transfer funds to their parent companies in the form of
cash dividends, loans or advances.
>> Changes in social attitudes regarding the utility industry.
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>> Customer business conditions including demand for their products and
services and supply of labor and material used in creating their products
and services.
>> The cost and other effects of legal and administrative proceedings,
settlements, and investigations, claims and changes in those matters.
>> Factors affecting the availability or cost of capital such as
changes in interest rates; market perceptions of the utility industry,
Wisconsin Gas, WICOR or any of its subsidiaries; or security ratings.
>> Federal, state or local legislative factors such as changes in tax
laws or rates; changes in trade, monetary and fiscal policies, laws and
regulations; gas industry restructuring initiatives; or changes in
environmental laws and regulations.
>> Authoritative generally accepted accounting principle or policy
changes from such standard setting bodies as the Financial Accounting
Standards Board and the Securities and Exchange Commission.
>> Unanticipated technological developments that result in competitive
disadvantages and create the potential for impairment of existing assets.
>> Other business or investment considerations that may be disclosed
from time to time in filings with the Securities and Exchange Commission or
in other publicly disseminated written documents.
The Company undertakes no obligation to update or revise any forward-
looking statements, whether as a result of new information, future events,
or otherwise.
Item 1. BUSINESS
(a) General Development of the Business
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, 1999, Wisconsin Gas distributed gas to
approximately 538,000 residential, commercial and industrial customers in
529 communities throughout Wisconsin. Wisconsin Gas' service area has a
population of approximately 2,000,000 based on the State of Wisconsin's
estimates for 1999. 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.
In November, 1998, the Company entered the water utility business by
acquiring the water distribution system of a Milwaukee suburb serving about
500 customers. The Company acquired another small water utility in
November, 1999, and served approximately 1,500 customers by the end of 1999.
On June 27, 1999, WICOR entered into an Agreement and Plan of Merger with
Wisconsin Energy Corporation ("Wisconsin Energy"), pursuant to which all of
the outstanding common stock of WICOR would be acquired by Wisconsin Energy
and WICOR would become a wholly-owned subsidiary of Wisconsin Energy. The
shareholders of each company approved the merger in October, 1999. The
merger requires approval from several federal and State of Wisconsin
regulatory bodies, the last of which approvals is expected to be received in
April, 2000. The merger is expected to close on April 26, 2000.
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(b) General Information About the Company's Business
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.
[CAPTION]
<TABLE>
Year Ended
-------------------------------------------
Customer Class December 31, 1999 December 31, 1998
- -------------- -------------------- --------------------
Thousands Thousands
Sales of Therms* Percent of Therms* Percent
- ----- ---------- ------- ---------- -------
<S> <C> <C> <C> <C>
Residential 440,390 36.0 408,550 35.7
Commercial 205,470 16.8 193,000 16.8
Large Volume Commercial
and Industrial Firm 45,180 3.7 47,620 4.2
Commercial and Industrial Interruptible 28,830 2.4 36,580 3.2
---------- ------- ---------- -------
Total Sales 719,870 58.9 685,750 59.9
Transportation
- --------------
Transported 502,600 41.1 460,170 40.1
---------- ------- ---------- -------
Total Gas Throughput 1,222,470 100.0 1,145,920 100.0
========== ======= ========== =======
</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 3,300 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 41% of total gas
distributed by the Company.
(c) 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 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 holds firm daily transportation and storage capacity
entitlements from pipelines and other service providers under long-term
contracts. In combination, these entitlements provide a level of firm
winter city gate deliverability set forth below.
Maximum Daily
Pipeline (Thousands of Therms*)
----------- ----------------------
ANR
Mainline 2,968
Storage 4,849
NNG
Mainline 1,006
Viking
Mainline 68
----------------------
Total 8,891
======================
*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 20 gas suppliers for gas produced in each of the three producing
areas discussed above. The term contracts have varying durations so that
only a portion of the Company's gas supply expires in any year. Management
believes the volume of gas under contract is sufficient to meet its
forecasted firm peak day demand. The following table sets forth Wisconsin
Gas' winter maximum daily total firm gas deliverability.
Maximum Daily
(Thousands of Therms*)
----------------------
Domestic flowing gas 2,232
Canadian flowing gas 1,378
Storage withdrawals 4,849
Peaker withdrawals 76
----------------------
Total 8,535
======================
*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 1999, 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.
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(5) Proposed New Pipeline
On March 10, 1999, a joint venture, Guardian Pipeline, L.L.C., was formed
to construct the Guardian interstate natural gas pipeline from the Chicago
market hub near Joliet, Illinois to southeastern Wisconsin ("Guardian
Pipeline"). 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 have equal ownership interests in
the project. On November 30, 1999, Guardian Pipeline filed an application
with the FERC to construct, place in service and operate the pipeline
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 is
approximately $234 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 $54 million to connect its distribution
system to the Guardian Pipeline.
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.
(d) Wisconsin Regulatory Matters
(1) Rate Matters
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. Currently, Wisconsin Gas' rates recover $1.5 million per
year less than the maximum amount allowed by the PSCW's rate order. PARM
has certain criteria, including significant deterioration in safety,
failures to meet conservation goals, significant changes in interest rates
and "extraordinary items", which if not met, permit the PSCW to reopen the
rate proceeding. To date, none of the criteria has been triggered.
(2) Gas Cost Recovery
Wisconsin Gas' rates traditionally contained clauses providing for
periodic rate adjustments, 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".
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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' 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' earnings to increase or decrease as a result of gas and
capacity acquisition activities. Wisconsin Gas intends to file with the
PSCW to modify and extend the GCIM beyond October 31, 2000.
(3) Transition Cost Recovery Policy
Interstate 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 incurred
by Wisconsin Gas will also be recoverable from its customers.
(4) Changing Regulatory Environment
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.
The PSCW may use the work group reports as the basis for instituting
regulatory changes to enable customer choice or for recommending such
changes to the state legislature. The impact of these proceedings on
Wisconsin Gas' future operations is uncertain at this time. See "Gas
Markets and Competition".
(5) Customer Choice Pilot Program
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, 1998-99 and 1999-2000 program years.
The Company has filed with the PSCW to further modify and extend the
program for the 2000-2001 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'
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 generally
available in Wisconsin, and it is unknown what the impacts of customer
choice may be on the Company.
(e) Employees
The Company had 1,010 full-time equivalent active employees at December
31, 1999.
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Item 2. PROPERTIES
Wisconsin Gas owns a distribution system which, on December 31, 1999,
included approximately 9,300 miles of distribution and transmission mains,
455,000 service laterals and 535,000 active meters. Wisconsin Gas'
distribution system consists almost entirely of plastic and coated steel
pipe. Wisconsin Gas 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.
Where distribution mains and services occupy private property, Wisconsin
Gas in some, but not all, instances has obtained consents, permits or
easements for such installations from the apparent owners or those in
possession, generally without an examination of title.
Item 3. LEGAL PROCEEDINGS
There are no material legal proceedings pending, other than ordinary
routine litigation incidental to the Company's businesses, to which the is a
party, except as discussed below. There are no material legal proceedings
to which any officer or director of the Company or any of its subsidiaries
is a party or has a material interest adverse to the Company. 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 or any of its subsidiaries is or
would be a party.
The Company has identified two previously owned sites on which it
operated manufactured gas plants. Such plants ceased operations prior to
the mid-1950's. Environmental remediation work for one of the sites was
completed during the third quarter of 1999. The Company is evaluating
potential remedial options at the second site. The Company has established
a reserve of approximately $2.1 million at December 31, 1999, to cover the
remediation and maintenance costs of the remaining site.
The Company periodically reviews its reserves 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. See
Note 8(c) of "Notes to Financial Statements".
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
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 $26.0 million of
dividends during the 12 months ending October 31, 2000. See Note 6 of
"Notes to Financial Statements". For the year ended December 31, 1999, the
Company's average common equity level was 52.3%.
The Company paid cash dividends of $26,000,000 and $24,000,000 on common
stock to WICOR in 1999 and 1998, 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
Proposed Merger with Wisconsin Energy Corporation
- -------------------------------------------------
WICOR and Wisconsin Energy Corporation (WEC) have entered into an
agreement and plan of merger, dated as of June 27, 1999, as amended (the
Merger Agreement), providing for a strategic business combination of WICOR
and WEC. The transaction contemplated by the Merger agreement has been
approved by the boards of directors and the shareholders of WICOR and WEC,
the Public Service Commission of Wisconsin and the Federal Trade
Commission. Consummation of the merger is subject to the satisfaction of
certain closing conditions including approval by federal regulators.
Wisconsin Gas will continue to file periodic reports under the Securities
Exchange Act of 1934 as amended.
Results of Operations - 1999 Compared with 1998
- -----------------------------------------------
Net earnings during 1999 increased by $3.8 million, or 17%, to $26.4
million compared to $22.7 million for the same period last year. The
Company's earnings are heavily dependent upon cold weather, which is
measured by heating degree days (HDD). Rates have been set based on 20-
year HDD averages. In 1999 and 1998, Wisconsin Gas experienced
significantly warmer than normal weather which had a negative impact on
earnings. The improvement in earnings in 1999 was driven by increased
sales caused by more favorable weather compared to 1998 and a $7.5 million
annual rate increase effective August 1, 1998. These items were offset in
part by higher operating expenses.
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Margin, defined as revenues less cost of gas sold, is a better
comparative performance indicator than revenues because changes in the cost
of gas sold are flowed through to revenue under a gas adjustment clause
that does not impact margin. The Company operates under a gas cost
incentive mechanism (GCIM) which allows it to share in the risk and rewards
of purchasing gas. The GCIM favorably impacted margins by $3.3 million and
$3.8 million in 1999 and 1998, respectively.
The following tables set forth margin and sales volumes for each of
the years ended December 31.
MILLIONS OF DOLLARS 1999 1998 1997
---------- ---------- ----------
Revenues $ 416,021 $ 406,043 $ 514,201
Cost of gas sold 250,226 252,181 342,749
---------- ---------- ----------
Sales margin 165,795 153,862 171,452
Gas transportation margin 23,456 22,519 22,519
---------- ---------- ----------
Total margin $ 189,251 $ 176,381 $ 193,971
========== ========== ==========
MILLIONS OF THERMS
- ------------------
Sales volumes
Firm 690.9 649.2 790.8
Interruptible 29.0 36.5 72.8
Transport volumes 502.6 460.2 428.8
---------- ---------- ----------
Total throughput 1,222.5 1,145.9 1,292.4
========== ========== ==========
Heating degree days 6,318 5,865 7,094
========== ========== ==========
% (warmer) colder
than 20-year average (9.1) (16.4) 1.0
========== ========== ==========
The increase in firm sales volumes in 1999 was driven by colder
weather during the heating season in 1999 compared to 1998. However, the
weather in 1999 was warmer than the 20-year average. During the year,
transportation volumes increased, compared to the same period in 1998,
mainly because more customers purchased gas from sources other than
Wisconsin Gas and transported the volumes over the Wisconsin Gas
distribution system.
Operating and maintenance expenses increased $4.7 million, or 5%, in
1999, compared with the prior year. The increase reflects the impact of an
annualized $7.5 million charge relating to PSCW-approved additional
uncollectible accounts receivable expense, which became effective November
1, 1998. The increase during the year was partially offset by lower
benefit expenses due to changes in various benefit plans and favorable plan
experience.
Depreciation expense in 1999, increased by $2.0 million, or 6%,
compared with 1998 due to increases in depreciable plant balances.
Depreciation expense in 2000 is expected to increase due to planned capital
investments.
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Interest expense in 1999 increased $0.2 million compared to 1998. The
increase reflects higher borrowing levels offset in part by lower interest
rates.
Taxes, other than income taxes decreased by $1.2 million, or 13%, to
$7.9 million due to lower gross receipts tax for Wisconsin Gas. Gross
receipt taxes are based on the previous year's operating revenues.
Other income decreased by $1.0 million in 1999 compared to 1998.
Other income in 1998 was positively impacted by a $1.2 million pretax gain
associated with the sales of non-utility property.
Income tax expense increased $2.4 million in 1999 compared to 1998,
reflecting higher pre-tax income. The effective income tax rate remained
relatively unchanged between 1999 and 1998.
Results of Operations - 1998 Compared with 1997
- -----------------------------------------------
Wisconsin Gas' net earnings declined by $6.7 million, or 23%, in 1998
as compared with 1997. During 1998, heating degree days were 17% lower than
1997 and 16% lower than the 20-year average. 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 revenues derived
from the GCIM and gains realized on the sale of non-utility land.
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. During 1998, Wisconsin Gas realized $3.8 million of
margin under a GCIM. In August 1998, Wisconsin Gas raised its rates $7.5
million on an annual basis. This rate increase offset increased operating
expenses.
Total operating and maintenance expenses of $87.6 million for 1998
were $5.6 million lower than the prior year. The decrease resulted
primarily from lower labor and benefit expenses and weather related
spending reductions.
Depreciation and amortization expense for 1998 increased by $1.9
million, or 6%, compared with 1997, due to additions to depreciable plant
balances.
Interest expense in 1998 decreased $0.3 million compared to 1997. The
decrease reflects slightly lower borrowing levels.
Other income, net of expenses, increased by $1.8 million in 1998
compared to 1997. Other income was positively impacted by $1.2 million in
gains realized on the sales of non-utility property.
Income tax expense decreased $4.6 million in 1998 compared to 1997,
reflecting lower pre-tax income. The effective income tax rate remained
relatively unchanged between 1998 and 1997.
<PAGE>
<PAGE> 15
New Accounting Standards
- ------------------------
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, "Accounting For
Derivative Instruments and Hedging Activities (SFAS No. 133)". In June
1999, the FASB issued Statement No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133". SFAS 133 establishes accounting and reporting
standards requiring that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value.
SFAS 133 requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met.
Special accounting for qualifying hedges allows a derivative's gains and
losses to offset related results on the hedged item in the income
statement, and requires that a company must formally document, designate,
and assess the effectiveness of transactions that receive hedge accounting.
SFAS 133, as amended, is effective for fiscal years beginning after
June 15, 2000. A company may also implement SFAS 133 as of the beginning of
any fiscal quarter after issuance. SFAS 133 cannot be applied
retroactively. SFAS 133 must be applied to (a) derivative instruments and
(b) certain derivative instruments embedded in hybrid contracts. With
respect to hybrid instruments, a company may elect to apply SFAS 133, as
amended, to (1) all hybrid contracts, (2) only those hybrid instruments
that were issued, acquired, or substantially modified after December 31,
1997, or (3) only those hybrid instruments that were issued, acquired, or
substantially modified after December 31, 1998.
The fair value of our freestanding held or issued derivatives is
presented in Note 1(j) to the financial statements included herein,
"Derivative Financial Instruments". SFAS 133 would require that those
derivative instruments be recognized in our balance sheet as assets or
liabilities at their fair value. The Company has not yet quantified the
other effects of adopting SFAS 133 on our financial statements. However,
the SFAS could increase volatility in earnings and other comprehensive
income.
Effects of Changing Prices
- --------------------------
In management's opinion, changes in the rate of inflation have not
had a significant effect on Wisconsin Gas' 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 "Management's Discussion and Analysis of Results of Operations
and Financial Condition - 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.
<PAGE>
<PAGE> 16
Liquidity and Capital Resources
- -------------------------------
Cash flows from operations during 1999 decreased by $10.6 million, or
17%, to $51.5 million from the comparable period in 1998. Due to the
seasonal nature of the energy business, accrued revenues, accounts
receivable and accounts payable amounts are higher in the heating season as
compared with the summer months.
The Company has access to outside capital markets and has been able
to generate funds internally to meet its investment needs. Wisconsin Gas'
ability to attract the necessary financial capital at reasonable terms is
critical to the Company's overall strategic plan.
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 the Guardian Pipeline lateral
project.
Investment Activities
- ---------------------
Capital expenditures in 1999 increased by $7.5 million, or 21%,
compared to 1998. Capital expenditures are expected to increase modestly
in 2000 and are expected to be funded from operations. Capital expenditures
in 1998 increased slightly to $35.5 million compared to 1997.
During 1999 and 1998, Wisconsin Gas acquired small municipal water
utilities, at book value, for $1.2 million and $0.5 million in cash,
respectively. Each of the acquisitions was accounted for as a purchase and
the results of operations of the acquired companies were included in the
Company's financial statements from their respective acquisition dates.
On March 10, 1999, WICOR announced the formation of a joint venture,
Guardian Pipeline, L.L.C., to construct the Guardian interstate natural gas
pipeline from the Chicago market hub near Joliet, Illinois to southeastern
Wisconsin (Guardian Pipeline). 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. On November 30, 1999, Guardian Pipeline filed an
application with the Federal Energy Regulatory Commission (FERC) to
construct, place in service and operate the pipeline.
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 project requires FERC approval.
The Guardian Pipeline, 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. Wisconsin Gas
expects to fund the lateral project using long-term debt financing.
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 $54 million to connect its distribution system to the Guardian
Pipeline. The construction of the lateral will require PSCW approval. On
November 30, 1999, Wisconsin Gas filed an application with the PSCW to
construct, place in service and operate the lateral.
<PAGE>
<PAGE> 17
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.
Wisconsin Gas' embedded cost of long-term debt was 6.4%, 6.9% and
7.1% for the years ended December 31, 1999, 1998 and 1997, respectively.
The Company paid cash dividends to WICOR of $26.0 million, $24.0
million and $22.0 million in 1999, 1998 and 1997, respectively. At
December 31, 1999, the Company had $38.3 million of unrestricted retained
earnings available for dividend payments to shareholders.
As described in Note 6 of Notes to the Company's Financial
Statements, a 1993 PSCW rate order retained certain limitations with
respect to equity levels of and dividend payments by Wisconsin Gas.
Restrictions imposed by the PSCW are not expected to have any material
effect on WICOR's ability to meet its cash obligations.
Wisconsin Gas's ratio of pre-tax earnings to fixed charges increased
to 4.2 in 1999 from 3.8 in 1998, as a result of increased net earnings.
Access to capital markets at a reasonable cost is determined in large
part by credit quality. Moody's Investors Service and Standard and Poor's
Corporation reaffirmed the rating of Wisconsin Gas' long-term debt at Aa2
and AA-, respectively. These rating actions follow the June 28, 1999
announcement that WEC will acquire WICOR for approximately $1.3 billion.
These ratings provide a high degree of flexibility in obtaining funds on
competitive terms and reflect the views of such organizations. 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's primary line of credit is a $30 million unsecured
revolving credit facility with several banks which expires August 6, 2002.
Financial covenants under the facility 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
was in compliance with all financial covenants at December 31, 1999.
Wisconsin Gas finances working capital needs by issuing commercial paper in
the open market. Commercial paper outstanding at December 31, 1999 and 1998
was $89.8 million and $65.0 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> 18
Regulatory Matters
- ------------------
Wisconsin Gas is subject to the jurisdiction of the PSCW as to various
phases of its operations, including rates, customer service and issuance of
securities.
Wisconsin Gas 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.
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. 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 has 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 has been triggered.
Wisconsin Gas' rates traditionally contained clauses providing for
periodic rate adjustments, with PSCW approval, to reflect changes in
purchased gas costs, including the recovery of transition costs passed
through by pipeline suppliers.
Interstate 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
incurred by Wisconsin Gas will also be recoverable from its customers.
<PAGE>
<PAGE> 19
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 GCIM provides an opportunity for
Wisconsin Gas's earnings to increase or decrease as a result of gas
acquisition activities and transportation costs. PSCW rules mandate that
utilities within a holding company use a uniform gas cost recovery
mechanism. Under the proposed merger, Wisconsin Gas may need to make
changes to its GCIM.
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 1998-99 and 1999-2000 program years. The
Company has filed with the PSCW to further modify and extend the program
for the 2000-01 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. 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.
Quantitative and Qualitative Disclosures About Market Risk
- ----------------------------------------------------------
The Company's market risk includes the potential loss arising from
adverse changes in the price of natural gas. The Company's objective in
managing these risks is to reduce fluctuations in earnings and cash flows
associated with changes in natural gas prices. 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
purchased 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.
<PAGE>
<PAGE> 20
Environmental Matters
- ---------------------
Wisconsin Gas has identified two previously owned manufactured gas
plant sites where it is responsible for environmental remediation.
Remediation at one site was completed during the third quarter of 1999.
Wisconsin Gas is currently evaluating potential remedial options at the
second site and 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.
For additional disclosure regarding environmental matters, see Note
8c of "Notes to Financial Statements".
Year 2000 Date Conversion
- -------------------------
The Company 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) were Year 2000 compliant and operational on a timely
basis. The plan addressed all of the Company's locations, and included a
review of computer applications that connect elements of the Company's
business directly to its customers and suppliers. The plan also included
an assessment process to determine if the Company's significant customers
and suppliers were Year 2000 compliant.
The Company's plan to resolve issues relating to Year 2000 conversion
included four major phases - assessment, remediation, testing, and
implementation. To assist the Company in reaching Year 2000 compliance, the
Company retained third party consultants. The Company 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.
Substantially all of the Company's Information Technology
applications and Operating Equipment were compliant at December 31, 1999.
During the transition weekend of December 31, 1999, through January 3,
2000, the Company had personnel on-site to monitor its gas distribution
network operations and to verify that the Company's computer systems did
not experience any Year 2000 impacts. Wisconsin Gas did not experience any
failures that resulted in the loss of gas service to its customers or that
posed any safety-related issues to the public or its employees.
With respect to operations that involve third parties, the Company
made inquiries of its significant customers and suppliers regarding Year
2000 issues facing these third parties that would materially impact the
Company's operations. Wisconsin Gas did not experience any Year 2000
failures from its significant customers or suppliers.
Wisconsin Gas intends to continue to monitor the readiness status of
its systems during 2000 for other potential date related failures.
<PAGE>
<PAGE> 21
The Company developed contingency plans addressing Year 2000 concerns
in mission critical areas of the Company, and for other areas as deemed
practicable and advisable by the Company. The Company also developed a
Year 2000 event plan that outlined the staffing requirements and the system
verification procedures that were utilized during the transition weekend.
The plan included a Command and Control Center that was managed by one of
Wisconsin Gas' senior executives. Personnel in the center monitored the
system verification activities and coordinated the communication of
Wisconsin Gas' status to state regulatory agencies, the American Gas
Association and the media.
In an effort to reduce risk from staff shortages, the Company
established a policy which limited employee vacations during December 1999
and January 2000. The policy provided for certain exceptions and reserved
the right for management to determine final work or vacation schedules
based on the needs of the Company's business and customers.
During the past three years, the Company has spent approximately $4.0
million for Year 2000 remediation. Total costs associated with Year 2000
readiness did not significantly impact Wisconsin Gas' financial position or
results of operations.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's market risk includes the potential loss arising from
adverse changes in the price of natural gas. The Company's objective in
managing this risk is to reduce fluctuations in earnings and cash flows
associated with changes in natural gas prices. The Company's policy
prohibits the use of derivative financial instruments for trading purposes.
The Company has a commodity risk management program that has been
approved by the PSCW. This program allows Wisconsin Gas to utilize
purchased 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.
<PAGE>
<PAGE> 22
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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 Wisconsin Gas Company (a Wisconsin corporation and a
wholly owned subsidiary of WICOR, Inc.) as of December 31, 1999 and 1998,
and the related consolidated statements of earnings, common equity and cash
flows for each of the three years in the period ended December 31, 1999.
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, 1999 and 1998, and the results of their operations and
their cash flows for each of the three years in the period ended December
31, 1999, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Milwaukee, Wisconsin,
January 24, 2000.
<PAGE>
<PAGE> 23
WISCONSIN GAS COMPANY
Statements of Income
[CAPTION]
<TABLE>
Year Ended December 31,
----------------------------------
1999 1998 1997
---------- ---------- ----------
(Thousands of Dollars)
<S> <C> <C> <C>
Operating Revenues $ 439,477 $ 428,562 $ 536,720
---------- ---------- ----------
Operating Expenses:
Cost of gas sold 250,226 252,181 342,749
Operations 83,902 79,178 84,647
Maintenance 8,336 8,393 8,535
Depreciation and amortization 35,596 33,568 31,714
Taxes, other than income taxes 7,851 9,038 9,600
---------- ---------- ----------
385,911 382,358 477,245
---------- ---------- ----------
Operating Income 53,566 46,204 59,475
---------- ---------- ----------
Interest Expense 12,601 12,448 12,698
Other (Income), net (1,078) (2,125) (366)
---------- ---------- ----------
Income Before Income Taxes 42,043 35,881 47,143
Income Tax Provision 15,609 13,213 17,808
---------- ---------- ----------
Net Earnings $ 26,434 $ 22,668 $ 29,335
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
<PAGE> 24
WISCONSIN GAS COMPANY
Balance Sheet
[CAPTION]
<TABLE>
As of December 31,
----------------------
1999 1998
---------- ----------
(Thousands of Dollars)
<S> <C> <C>
Assets
- ------
Property, Plant and Equipment, at cost $ 865,109 $ 828,748
Less - Accumulated depreciation 477,493 448,270
---------- ------------
387,616 380,478
---------- ------------
Current Assets:
Cash and cash equivalents 11,368 6,690
Accounts receivable, less allowance for doubtful
accounts of $10,149 and $10,170, respectively 40,448 39,580
Accounts receivable - intercompany, net 632 440
Accrued revenues 44,887 42,524
Gas in storage, at weighted average cost 40,415 36,751
Materials and supplies, at weighted average cost 6,211 3,590
Deferred income taxes 15,106 12,579
Prepaid taxes 5,965 1,805
Other 1,826 2,330
---------- ------------
166,858 146,289
---------- ------------
Deferred Charges and Other:
Regulatory assets 51,686 59,319
Prepaid pension costs 49,661 42,396
Systems development costs 8,601 12,901
Other 9,357 8,434
---------- ------------
119,305 123,050
---------- ------------
$ 673,779 $ 649,817
========== ============
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
<PAGE> 25
Wisconsin Gas Company
Balance Sheets
[CAPTION]
<TABLE>
As of December 31,
----------------------
1999 1998
---------- ----------
(Thousands of Dollars)
<S> <C> <C>
Capitalization and Liabilities
- ------------------------------
Capitalization (See accompanying statement):
Long-term debt $ 158,244 $ 158,839
Preferred stock - -
Common equity 215,558 213,346
---------- ----------
373,802 372,185
---------- ----------
Current Liabilities:
Accounts payable 40,208 36,844
Short-term borrowings 89,759 65,000
Current portion of long-term debt - 2,000
Refundable gas costs 24,043 18,570
Accrued payroll and benefits 9,195 8,394
Other 4,696 3,077
---------- ----------
167,901 133,885
---------- ----------
Deferred Credits and Other Liabilities:
Postretirement benefit obligation 38,690 44,741
Deferred income taxes 46,409 40,375
Regulatory liabilities 27,742 32,153
Environmental remediation costs 2,110 7,922
Unamortized investment tax credit 5,909 6,357
Other 11,216 12,199
---------- ----------
132,076 143,747
---------- ----------
$ 673,779 $ 649,817
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
<PAGE> 26
WISCONSIN GAS COMPANY
Statements of Cash Flows
[CAPTION]
<TABLE>
Years Ended December 31,
----------------------------------
1999 1998 1997
---------- ---------- ----------
(Thousands of Dollars)
<S> <C> <C> <C>
Operations:
Net earnings $ 26,434 $ 22,668 $ 29,335
Adjustments to reconcile net earnings
to net cash flows:
Depreciation and amortization 42,291 40,335 39,820
Deferred income taxes 3,507 7,775 2,332
Net pension and other postretirement
benefit income (11,768) (8,001) (2,974)
Change in:
Receivables (3,231) 20,130 15,698
Gas in storage (3,664) 3,905 (7,973)
Other current assets (442) (743) (410)
Accounts payable 3,364 (6,647) (21,057)
Accrued taxes (4,160) (1,180) 5,266
Refundable gas costs 5,473 (6,206) (6,769)
Other current liabilities 2,228 (632) (899)
Other non-current assets and liabilities (8,512) (9,240) (8,254)
---------- ---------- ----------
51,520 62,164 44,115
---------- ---------- ----------
Investment Activities:
Capital expenditures (42,970) (35,492) (35,017)
Acquisition of water utility (1,187) (509) -
Proceeds from sale of assets - 1,762 -
Other, net 146 301 293
---------- ---------- ----------
(44,011) (33,938) (34,724)
---------- ---------- ----------
Financing Activities:
Change in short-term borrowings 24,759 (13,671) 13,171
Issuance of long-term debt - 50,000 -
Reduction of long-term debt (2,000) (42,000) (2,000)
Cash dividends paid to WICOR, Inc. (26,000) (24,000) (22,000)
Other 410 281 332
---------- ---------- ----------
(2,831) (29,390) (10,497)
---------- ---------- ----------
Change in Cash and Cash Equivalents 4,678 (1,164) (1,106)
Cash and Cash Equivalents at Beginning of Period 6,690 7,854 8,960
---------- ---------- ----------
Cash and Cash Equivalents at End of Period $ 11,368 $ 6,690 $ 7,854
========== ========== ==========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for:
Income taxes, net of refunds $ 17,306 $ 8,694 $ 11,814
Interest $ 10,156 $ 12,303 $ 11,886
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
<PAGE> 27
WISCONSIN GAS COMPANY
Statements of Common Equity
(Thousands of Dollars)
[CAPTION]
<TABLE>
Accumulated
Other Other
Common Paid-In Retained Comprehensive
Total Stock Capital Earnings Income
---------- ------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C>
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)
Net earnings 26,434 - - 26,434 -
Other comprehensive income:
Minimum pension
liability adjustment 688 - - - 688
---------- ------- ---------- ---------- ------------
Comprehensive income 27,122 - - 26,434 688
---------- ------- ---------- ---------- ------------
Cash dividends paid
to WICOR, Inc. (26,000) - - (26,000) -
Other 1,090 - 1,090 - -
---------- ------- ---------- ---------- ------------
Balance at December 31, 1999 $ 215,558 $ 9 $ 121,978 $ 95,107 $ (1,536)
========== ======= ========== ========== ============
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
<PAGE> 28
Wisconsin Gas Company
Statements of Capitalization
[CAPTION]
<TABLE>
As of December 31,
----------------------
1999 1998
---------- ----------
(Thousands of Dollars)
<S> <C> <C>
Long-Term Debt
- --------------
6.375% Notes due 2005 $ 65,000 $ 65,000
5.5% Notes due 2009 50,000 -
6.6% Notes due 2013 45,000 45,000
Commercial paper (See Note 5 of the Notes
to the Financial Statements) - 50,000
Unamortized debt discount and expense (1,756) (1,161)
---------- ----------
158,244 158,839
---------- ----------
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 121,978 120,888
Retained earnings 95,107 94,673
Accumulated other comprehensive income (1,536) (2,224)
---------- ----------
215,558 213,346
---------- ----------
$ 373,802 $ 372,185
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
<PAGE> 29
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. Wisconsin Gas is a
wholly-owned subsidiary of WICOR, Inc. (WICOR). Most of Wisconsin Gas'
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, 1999, Wisconsin Gas served
approximately 538,000 customers in 529 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 provisions which permit,
subject to the sharing mechanism discussed below, the recovery of actual
purchased gas costs incurred. The difference between actual gas costs
incurred (adjusted for the sharing mechanism) and costs recovered through
rates is deferred as a current asset or liability. The deferred balance is
returned to or recovered from customers at intervals throughout the year
and any residual balance at the annual October 31 reconciliation date is
subsequently refunded to or recovered from customers.
A 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% for 1999 and 1998 and 4.3% for 1997.
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> 30
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, 1999 and 1998 are as follows:
(Thousands of Dollars) 1999 1998
---------- ----------
Regulatory assets:
Postretirement benefit costs (Note 8) $ 33,941 $ 36,720
Deferred uncollectible expenses 15,364 19,960
Income tax-related amounts
due from customers (Note 3) 1,941 2,295
Other 440 344
---------- ----------
$ 51,686 $ 59,319
========== ==========
Regulatory liabilities:
Income tax-related amounts
due to customers (Note 3) $ 16,293 $ 18,058
Unrecognized pension income (Note 8) 8,078 10,929
Other 3,371 3,166
---------- ----------
$ 27,742 $ 32,153
========== ==========
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> 31
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 fully recovered
under the purchased gas adjustment clause. In addition, under the GCIM,
Wisconsin Gas uses derivative financial instruments to reduce the cost of
gas. The cost of these financial instruments, as well as any gains or
losses on the contracts are subject to the GCIM sharing mechanism. As of
December 31, 1999, Wisconsin Gas had put options covering approximately 34%
of the volumes of gas in storage, and call options covering 27% of the
expected natural gas purchases for the remainder of the 1999-2000 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 in Other (Income), net.
j. Reclassifications
Certain prior year financial statement amounts have been reclassified
to conform to their current year presentation.
2. PROPOSED MERGER WITH WISCONSIN ENERGY CORPORATION
- -----------------------------------------------------
WICOR and Wisconsin Energy Corporation (WEC) have entered into an
Agreement and Plan of Merger, dated as of June 27, 1999, as amended (the
Merger Agreement), providing for a strategic business combination of WICOR
and WEC through a merger of WICOR and a wholly-owned subsidiary of WEC (
the Merger).
The accompanying financial statements do not reflect any adjustments which
may occur in the future as a result of the proposed merger with Wisconsin
Energy.
<PAGE>
<PAGE> 32
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) 1999 1998 1997
- ------------------------ ---------- ---------- ----------
Current
Federal $ 11,515 $ 7,017 $ 13,198
State 2,820 1,698 3,216
---------- ---------- ----------
Total Current 14,335 8,715 16,414
---------- ---------- ----------
Deferred
Federal 592 3,193 707
State 682 1,305 687
---------- ---------- ----------
Total Deferred 1,274 4,498 1,394
---------- ---------- ----------
Total Provision $ 15,609 $ 13,213 $ 17,808
========== ========== ==========
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:
[CAPTION]
<TABLE>
Years Ended December 31,
-------------------------------------------------
(Thousands of Dollars) 1999 1998 1997
- ------------------------ --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Statutory U.S. tax rates $14,715 35.0% $12,559 35.0% $16,500 35.0%
State income taxes, net 2,358 5.6 2,047 5.7 2,629 5.6
Investment credit restored (441) (1.0) (445) (1.2) (451) (1.0)
Excess deferred
tax amortization (706) (1.7) (645) (1.8) (630) (1.3)
Other, net (317) (0.8) (303) (0.9) (240) (0.5)
--------------- --------------- ---------------
Effective Tax Rates $15,609 37.1% $13,213 36.8% $17,808 37.8%
=============== =============== ===============
</TABLE>
<PAGE>
<PAGE> 33
The components of deferred income tax assets and liabilities at
December 31, 1999 and 1998 are as follows:
(Thousands of Dollars) 1999 1998
- -------------------------- ---------- ----------
Current Deferred Income Tax Assets
Recoverable gas costs $ 5,987 $ 7,176
Inventory 3,353 3,790
Deferred compensation 2,062 2,039
Other 3,704 (426)
---------- ----------
$ 15,106 $ 12,579
========== ==========
Long-term Deferred Income Tax Liabilities
Property related $ 37,775 $ 37,772
Pension benefits 16,465 12,259
Systems development costs 3,452 5,178
Investment tax credit (3,909) (4,205)
Deferred compensation (2,865) (3,055)
Postretirement benefits (1,906) (3,220)
Environmental (1,313) (3,180)
Other (1,290) (1,174)
---------- ----------
$ 46,409 $ 40,375
========== ==========
4. SHORT-TERM BORROWINGS
- -------------------------
As of December 31, 1999 and 1998, Wisconsin Gas had total unsecured
lines of credit available from banks of $100.0 million and $135.0 million,
respectively. The credit lines may be used for, among other purposes, the
support of commercial paper issued by Wisconsin Gas. 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.
At December 31, 1999, $89.8 million of commercial paper was
outstanding at a weighted average interest rate of 6.1%. 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.
Restrictive covenants under Wisconsin Gas' five-year $30 million
revolving 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. All maturities and sinking fund requirements
are due subsequent to 2004.
<PAGE>
<PAGE> 34
6. RESTRICTIONS
- ----------------
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, $38.3 million of Wisconsin Gas's net assets at December 31,
1999, 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 $6.5 million in dividends
in November 1999 and expects to pay $26.0 million in dividends for the 12
months ending October 2000. At December 31, 1999, Wisconsin Gas's equity
ratio was 52.3%.
7. ACQUISITIONS
- ----------------
During both 1999 and 1998, Wisconsin Gas acquired small municipal
water utilities, at book value, for $1.2 million and $0.5 million in cash,
respectively. Each of the acquisitions 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 $389.0 million,
with annual required payments of $98.4 million in 2000, $93.7 million in
2001, $86.9 million in 2002, $71.6 million in 2003 and $9.6 million in
2004. Wisconsin Gas's total payments for firm pipeline and storage
capacity prior to recovery from sales of excess capacity were $108.4
million in 1999, $113.9 million in 1998 and $126.6 million in 1997. 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.
<PAGE>
<PAGE> 35
b. Capital Expenditures
Certain commitments have been made in connection with 2000 capital
expenditures. Wisconsin Gas capital expenditures for 2000 are estimated at
$50 million.
During 1999, WICOR announced its participation in 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 project requires FERC approval and 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 $54 million to connect its distribution
system to the Guardian Pipeline. The Company expects to finance this
lateral project using long-term debt.
The Guardian Pipeline, 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.
c. Environmental Matters
In 1997, Wisconsin Gas was named by the defendant in an environmental
cleanup lawsuit as a co-defendant. The suit involves contamination of a
Milwaukee area industrial site by wood chips characteristic of those used
in the manufactured gas process. In July, 1999 a jury found that Wisconsin
Gas was not responsible for placing the contaminated waste on the site, and
therefore, was not liable for any cleanup costs associated with the site.
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. Environmental remediation work for one of the sites was
completed during the third quarter of 1999. Wisconsin Gas is evaluating
potential remedial options at the second site. Wisconsin Gas has
established a reserve of approximately $2.1 million at December 31, 1999,
to cover the remediation and maintenance costs of the remaining site.
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 certain employees. Under the Merger Agreement, the
Company's existing pension and other postretirement benefit plans or plans
substantially comparable in the aggregate will be maintained for the
benefit of Company employees or former employees for at least one year
following completion of the Merger.
<PAGE>
<PAGE> 36
The following provides a reconciliation of benefit obligations, plan assets
and funded status of the plans at December 31, 1999 and 1998.
[CAPTION]
<TABLE>
Other Postretirement
Pension Benefits Benefits
---------------------- ----------------------
(Thousands of dollars) 1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Change in Benefit Obligation:
Benefit obligation at January 1 $ 139,011 $ 128,014 $ 60,847 $ 85,986
Service cost 2,995 3,008 398 989
Interest cost 8,746 9,088 3,390 4,505
Amendments and settlements - (848) (5,491) (11,264)
Actuarial (gain) loss (19,527) 10,415 (8,076) (16,182)
Benefits paid (13,296) (10,666) (2,118) (3,187)
---------- ---------- ---------- ----------
Benefit obligation at December 31 117,929 139,011 48,950 60,847
---------- ---------- ---------- ----------
Change in Plan Assets:
Fair value of plan assets at January 1 210,456 209,161 58,451 54,957
Actual return on plan assets 38,009 11,556 8,994 2,732
Employer contributions - - 1,919 3,948
Benefits paid from plan assets (12,864) (10,261) (2,118) (3,186)
---------- ---------- ---------- ----------
Fair value of plan assets
at December 31 235,601 210,456 67,246 58,451
---------- ---------- ---------- ----------
Funded status of the plans 117,672 71,445 18,296 (2,396)
Unrecognized net actuarial (gain) (67,477) (27,234) (31,296) (20,909)
Unrecognized prior service
cost (benefit) 2,008 2,187 (26,866) (23,355)
Unrecognized net transition
(asset) liability (6,725) (8,170) 1,176 1,919
---------- ---------- ---------- ----------
Net amount recognized $ 45,478 $ 38,228 $ (38,690) $ (44,741)
========== ========== ========== ==========
Amounts Recognized in the Balance Sheet:
Prepaid benefit cost $ 49,661 $ 42,396 $ - $ -
Accrued benefit liability (4,183) (4,168) (38,690) (44,741)
Additional minimum liability (1,536) (2,224) - -
Accumulated other
comprehensive income 1,536 2,224 - -
---------- ---------- ---------- ----------
Net amount recognized $ 45,478 $ 38,228 $ (38,690) $ (44,741)
========== ========== ========== ==========
Assumptions as of December 31:
Discount rate (weighted average) 7.50% 6.50% 7.50% 6.50%
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> 37
Net pension (income) costs and other postretirement benefit costs for each
of the years ended December 31 include the following components:
[CAPTION]
<TABLE>
Other
Pension Benefits Postretirement Benefits
-------------------------- --------------------------
(Thousands of Dollars) 1999 1998 1997 1999 1998 1997
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Service costs $ 2,995 $ 3,008 $ 3,139 $ 398 $ 989 $ 1,920
Interest costs on projected
benefit obligations 8,746 9,088 9,046 3,390 4,505 5,388
Expected (return) on assets (17,264) (16,342) (15,136) (5,246) (5,168) (4,053)
Amortization of:
Transition obligation (asset) (1,445) (1,437) (1,443) - - -
Prior service cost (benefit) 179 114 300 (1,980) (1,384) (957)
Actuarial (gain) (31) (78) (338) (1,437) (1,223) (767)
-------- -------- -------- -------- -------- --------
(6,820) (5,647) (4,432) (4,875) (2,281) 1,531
Amortization of regula-
tory (liability) asset (2,851) (2,851) (2,851) 2,778 2,778 2,778
-------- -------- -------- -------- -------- --------
Net benefit (income) expense $(9,671) $(8,498) $(7,283) $(2,097) $ 497 $ 4,309
======== ======== ======== ======== ======== ========
</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.
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.
<PAGE>
<PAGE> 38
The postretirement benefit cost components for 1999 were calculated
assuming health care cost trend rates ranging from up to 10% for 2000 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, 1999, by
$2.8 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 $1.6 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 1999 and 1998
and $1.2 million in 1997.
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 (6.5%
interest rate at December 31, 1999), guaranteed by WICOR, 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 ($2.0 million) is shown as long-term debt with a like amount of
unearned compensation reported as a reduction of common equity on WICOR's
balance sheet.
The ESOP trustee is repaying the loan with dividends on shares of
WICOR's common stock held in the ESOP and with Wisconsin Gas contributions
to the ESOP. As of December 31, 1999, the value of the unallocated shares
of stock exceeded the loan balance by $3.6 million.
On November 22, 1999 Wisconsin Gas Company filed a request for
determination with respect to termination of the ESOP as called for in the
Merger agreement. The WICOR common stock held by the plan will be
exchanged for cash or shares of Wisconsin Energy common stock, or both, on
the same terms as for other WICOR shareholders. The cash or Wisconsin
Energy common stock received by the plan will then be distributed to the
participants of the plan.
10. Year 2000 Date Conversion
- ------------------------------
The Company 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) were Year 2000 compliant and operational on a timely
basis. The plan addressed all of the Company's locations, and included a
review of computer applications that connect elements of the Company's
business directly to its customers and suppliers. The plan also included
an assessment process to determine if the Company's significant customers
and suppliers were Year 2000 compliant.
<PAGE>
<PAGE> 39
The Company's plan to resolve issues relating to Year 2000 conversion
included four major phases - assessment, remediation, testing, and
implementation. To assist the Company in reaching Year 2000 compliance, the
Company retained third party consultants. The Company 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.
Substantially all of the Company's Information Technology applications and
Operating Equipment were compliant at December 31, 1999. During the
transition weekend of December 31, 1999, through January 3, 2000, the
Company had personnel on-site to monitor its gas distribution network and
to verify that our computer systems did not experience any Year 2000
impacts. The Company did not experience any failures that resulted in the
loss of gas service to our customers or that posed any safety-related
issues to the public or our employees.
With respect to operations that involve third parties, the Company made
inquiries of its significant customers and suppliers regarding Year 2000
issues facing these third parties that would materially impact the
Company's operations. The Company did not experience any Year 2000
failures from our significant customers or suppliers.
The Company will continue to monitor the readiness status of our systems
during 2000 for other potential date related failures.
The Company developed contingency plans addressing Year 2000 concerns in
mission critical areas of the Company, and for other areas as deemed
practicable and advisable by the Company. The Company also developed a
Year 2000 event plan that outlined the staffing requirements and the system
verification procedures that were utilized during the transition weekend.
The plan included a Command and Control Center that was managed by one of
our senior executives. Personnel in the center monitored the system
verification activities and coordinated the communication of our status to
state regulatory agencies, the American Gas Association and the media.
In an effort to reduce our risk from staff shortages, the Company
established a policy which limited employee vacations during December 1999
and January 2000. The policy provides for certain exceptions and reserves
the right for management to determine final work or vacation schedules
based on the needs of our business and customers.
Through December 31, 1999, the Company has spent approximately $4.0 million
for Year 2000 remediation. Total costs associated with Year 2000 readiness
did not significantly impact our financial position or results of
operations.
<PAGE>
<PAGE> 40
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. 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 the Company's financial instruments at
December 31 is as follows:
1999 1998
------------------ ------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
Cash and cash equivalents $ 11,368 $ 11,368 $ 6,690 $ 6,690
Accounts receivable $ 40,448 $ 40,448 $ 39,580 $ 39,580
Short-term debt $ 89,759 $ 89,759 $ 65,000 $ 65,000
Long-term debt $158,244 $148,898 $158,839 $162,739
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
- ----------------------- --------- ---------- --------- ----------
1999
- ----
Operating Revenues $170,397 $ 75,322 $ 56,827 $ 136,931
Operating Income (Loss) $ 39,926 $ (1,560) $ (7,047) $ 22,247
Net Income (Loss) $ 22,970 $ (2,440) $ (6,018) $ 11,922
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
<PAGE>
<PAGE> 41
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.
<PAGE>
<PAGE> 42
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 3.1 to the Company's Quarterly Report on Form 10-Q
dated as of November 12, 1999).
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
(incorporated by reference to Exhibit 10.2 to the Company's Annual Report
on Form 10-K for 1998).
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).
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).
<PAGE>
<PAGE> 43
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
(incorporated by reference to Exhibit 10-8 to the Company's Annual Report
on Form 10-K for 1998).
10.9# Wisconsin Gas Company 2000 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).
10.12# Form of amendment to the Deferred Compensation Agreement between
Wisconsin Gas Company and Thomas F. Schrader (incorporated by reference to
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q dated November
12, 1999.)
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 1999.
# Indicates a plan under which compensation is paid or payable to
directors or executive officers of the Company.
<PAGE>
<PAGE> 44
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 28, 2000 By JOSEPH P. WENZLER
-----------------------------
Joseph P. Wenzler
Senior Vice President and
Chief Financial Officer
<PAGE>
<PAGE> 45
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 28, 2000
JOSEPH P. WENZLER
Joseph P. Wenzler Senior Vice President and March 28, 2000
Chief Financial Officer
(Principal Financial and
Principal Accounting Officer)
WENDELL F. BUECHE
Wendell F. Bueche Director March 28, 2000
WILLIE D. DAVIS
Willie D. Davis Director March 28, 2000
JERE D. MCGAFFEY
Jere D. McGaffey Director March 28, 2000
DANIEL F. MCKEITHAN, JR.
Daniel F. McKeithan, Jr. Director March 28, 2000
GUY A. OSBORN
Guy A. Osborn Director March 28, 2000
THOMAS F. SCHRADER
Thomas F. Schrader Director March 28, 2000
GEORGE E. WARDEBERG
George E. Wardeberg Director March 28, 2000
ESSIE M. WHITELAW
Essie M. Whitelaw Director March 28, 2000
<PAGE>
<PAGE> 46
TABLE OF CONTENTS
TO EXHIBITS
3.1 Wisconsin Gas Company Restated Articles of Incorporation, as
amended (incorporated by reference).
3.2 Wisconsin Gas Company By-laws, as amended (incorporated by
reference).
4.1 Indenture, dated as of September 1, 1990, between Wisconsin Gas
Company and Firstar Bank Milwaukee, N.A., Trustee (incorporated by
reference).
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).
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).
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).
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).
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).
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).
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).
10.2# WICOR, Inc. 1992 Director Stock Option Plan, as amended
(incorporated by reference).
10.3# Form of nonstatutory stock option agreement used in conjunction
with the WICOR, Inc. 1992 Director Stock Option Plan (incorporated by
reference).
10.4# WICOR, Inc. 1994 Long-Term Performance Plan (incorporated by
reference).
<PAGE>
<PAGE> 47
10.5# Form of nonstatutory stock option agreement used in connection
with the WICOR, Inc. 1994 Long-Term Performance Plan (incorporated by
reference).
10.6# Form of restricted stock agreement used in connection with the
WICOR, Inc. 1994 Long-Term Performance Plan (incorporated by reference).
10.7# Form of Key Executive Employment and Severance Agreement between
the Company and certain of its executive officers (incorporated by
reference).
10.8# Wisconsin Gas Company Supplemental Retirement Income Program
(incorporated by reference).
10.9#* Wisconsin Gas Company 2000 Officers' Incentive Compensation
Plan.
10.10# Wisconsin Gas Company Group Travel Accident Plan (incorporated
by reference).
10.11# Form of Deferred Compensation Agreement between Wisconsin Gas
Company and certain of its officers (incorporated by reference).
10.12# Form of amendment to the Deferred Compensation Agreement between
Wisconsin Gas Company and Thomas F. Schrader (incorporated by reference).
27* Financial Data Schedule. (EDGAR version only)
# Indicates a plan under which compensation is paid or payable to
directors or executive officers of the Company.
* Indicates a document filed herewith.
<PAGE>
<PAGE> 1
EXHIBIT 10-9
Wisconsin Gas Company
2000 Officer's Incentive Compensation Plan
I. Objectives
----------
The principle objectives of the Plan are:
A. To motivate and to provide incentive for officers and the General
Manager - Water 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 the General
Manager - Water 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 (calendar year 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 WEG
and individual performance, with WEG performance accounting for 75% of the
award and individual performance weighted at 25%.
<PAGE>
<PAGE> 2
IV. Performance Criteria and Objective Setting
------------------------------------------
A. Financial Component (75% Weight)
1.) Overall WEG 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 2000 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.
1. ROC payouts will be further modified by performance against budgeted
criteria denoted as "Performance Plus" (the modifier). Performance Plus
consists of Rate Comparison, Customer Service, Safety, and Cost Effectiveness.
Each year management will recommend specific goals for the aforementioned
criteria. Associated with various levels of performance for each goal will be
a certain number of award points. The cumulative total of these points will
determine the modification factor. As seen below, achievement of Performance
Plus can modify the award by +/- 20%, or eliminate the award if the threshold
number of points is not achieved.
Performance Plus Performance Plus Award modification
Achievement Points as a % of Target
---------------- ---------------- ------------------
Below Threshold < 12 points 0%
Threshold 12 points 80%
Target 24 points 100%
Maximum 40 points 120%
For performance at levels between Threshold and Target or between Target and
Maximum award calculations will be interpolated on a linear basis.
<PAGE>
<PAGE> 3
B. Discretionary/Individual Component (25% Weight)
The individual component of total incentive compensation will be based on the
individual's overall performance as measured against previously identified and
agreed upon goals and objectives. The award may vary between 0% and 150% of
the individual performance portion of the target award, and will be determined
and paid independently of Company financial performance.
Combining the previously mentioned components yields the following formula for
determining annual incentive payouts:
Step 1 [ Base Salary x Eligible Target % ]
Multiplied by sum of step 2 and step 3
Step 2 [(ROC Award % x Performance Plus Modifier %) x 75%]
Plus
Step 3 [Discretionary % x 25%]
Equals
Annual Incentive Award
C. 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.
D. The performance criteria in this Section IV have been established on the
basis of WICOR remaining an independent, publicly-traded corporation. Pursuant
to the Agreement and Plan of Merger, dated as of June 27, 1999 and amended as
of September 9, 1999, WICOR will become a wholly-owned subsidiary of Wisconsin
Energy Corporation and no longer will be an independent, publicly-traded
corporation. It is contemplated that the merger will close in the Spring of
2000. If the merger closes in 2000, the ways in which various WICOR business
functions are integrated into Wisconsin Energy in 2000 may make it necessary or
appropriate to change one or more of the performance criteria on which awards
under the Plan will be based. The Board of Directors reserves the right to
make such changes at any time before December 31, 2000.
V. Performance
-----------
Company performance goals will be for the 2000 calendar year.
VI. Treatment of Acquisitions and Investments
-----------------------------------------
A. Acquisitions
The capitalized value (NOPAT/Target's Cost of Capital) of the acquired entity's
last full year's NOPAT will be added to the capital base of the acquiring
business unit in the month of acquisition. The acquisition premium (defined as
the excess of the purchase price over the capitalized value ) will be
incorporated into the capital base at a rate of 20% per year starting at the
beginning of the first calendar year after the acquisition.
<PAGE>
<PAGE> 4
B. Investments
The entire value of investments of an operating nature (capital expenditures)
will be added to the capital base. However, investments of a significant
dollar amount, whose project life extends beyond ten years, will be reviewed by
management for potential adjustments to the capital base (similar to the
treatment for acquisitions).
VII. Form and Timing of Award Payments
---------------------------------
A. Awards will be determined and paid as soon as practicable after the
close of the Plan year.
B. At each participant's discretion and with the concurrence of the
Compensation committee of WICOR, Inc., awards may be paid in one of two ways:
1. Lump sum.
2. Partly in lump sum and the remainder in deferred payments.
C. The Company offers a deferred payment option as part of the WICOR, Inc.
Non-Qualified Deferred Compensation Plan to those officers who prefer not to
receive their awards in current cash. Deferral elections must be made in
accordance with the provisions of the Non-Qualified Deferred Compensation Plan.
D. Additionally, if performance significantly exceeds the maximum standard
established, the Compensation Committee has the discretion to provide an
incentive payout in excess of the maximum allowable payout. However, any
exceptional performance which qualifies for this award, must be a direct result
of management efforts and not due to external factors beyond management's
control. Any awards in excess of the maximum payout opportunity would be paid
in WICOR restricted stock which would vest ratably over five years. However, if
a participant terminates employment due to death, retirement, or disability,
any prior restricted stock awards made under this provision would become
immediately vested.
E. In the event the company's overall ROC is negatively impacted by the
inclusion of a newly acquired company's results, the compensation committee has
the discretion to make a supplemental incentive payment. The supplemental
payment will be considered if the acquired company is meeting the financial
projections established at the time of the acquisition and the officers of the
acquiring entity would have otherwise received a higher incentive payment had
it not been for the inclusion of the acquired entity's results. The purpose of
this supplemental incentive provision is to motivate officers to invest in
value building projects. The duration of the supplemental incentive period
will be no more than three years.
VIII. Implementation
--------------
A. The effective date of the Plan is January 1, 2000.
<PAGE>
<PAGE> 5
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: bad debt expense (net of tax)
Less: bad debt write-offs (net of tax)
>> Plus the change in specific equity equivalents (net of tax):
Less: pension and OPEB income (net of tax)
Plus: funding of pension and OPEB plans (net of tax)
>> Regulatory Tax Assets and Liabilities
>> Injuries and Damage Reserve
>> Assets or Liabilities for Deferred Compensation Plans
>> Plus interest expense (net of tax)
Definition: 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
<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, 1999 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-31-1999
<PERIOD-END> DEC-31-1999
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 387,616
<OTHER-PROPERTY-AND-INVEST> 0
<TOTAL-CURRENT-ASSETS> 166,858
<TOTAL-DEFERRED-CHARGES> 119,305
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 673,779
<COMMON> 9
<CAPITAL-SURPLUS-PAID-IN> 121,978
<RETAINED-EARNINGS> 95,107
<TOTAL-COMMON-STOCKHOLDERS-EQ> 215,558
0
0
<LONG-TERM-DEBT-NET> 158,244
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 160,000
<COMMERCIAL-PAPER-OBLIGATIONS> 89,759
<LONG-TERM-DEBT-CURRENT-PORT> 0
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 210,218
<TOT-CAPITALIZATION-AND-LIAB> 673,779
<GROSS-OPERATING-REVENUE> 439,477
<INCOME-TAX-EXPENSE> 15,609
<OTHER-OPERATING-EXPENSES> 385,911
<TOTAL-OPERATING-EXPENSES> 401,520
<OPERATING-INCOME-LOSS> 37,957
<OTHER-INCOME-NET> 1,078
<INCOME-BEFORE-INTEREST-EXPEN> 39,035
<TOTAL-INTEREST-EXPENSE> 12,601
<NET-INCOME> 26,434
0
<EARNINGS-AVAILABLE-FOR-COMM> 26,434
<COMMON-STOCK-DIVIDENDS> 26,000
<TOTAL-INTEREST-ON-BONDS> 72
<CASH-FLOW-OPERATIONS> 51,520
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
