As filed with the Securities and Exchange Commission on November 1, 1999
File No. 70-________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM U-1
APPLICATION / DECLARATION
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
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Wisconsin Energy Corporation
231 West Michigan Street
P.O. Box 2949
Milwaukee, WI 53201
(Names of company filing this statement and
addresses of principal executives offices)
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None
(Name of top registered holding company parent)
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Paul Donovan
Senior Vice President and Chief Financial Officer
Wisconsin Energy Corporation
231 West Michigan Street
Milwaukee, WI 53203
(Name and address of agent for service)
The Commission is requested to send copies of all notices,
orders and communications in connection with this matter to:
Clifford M. Naeve, Esq. Walter T. Woelfle
Judith A. Center, Esq. Law Director - Regulatory
William C. Weeden Wisconsin Electric Power Company
Skadden, Arps, Slate, Meagher & Flom LLP 231 West Michigan Street
1440 New York Avenue, N.W. Milwaukee, WI 53203
Washington, D.C. 20005
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TABLE OF CONTENTS
Page
ITEM I: DESCRIPTION OF PROPOSED TRANSACTION................................ 1
A. Introduction and Request for Commission Action................... 1
B. Description of the Parties to the Transaction.................... 2
1. General Description......................................... 2
a. WEC.................................................... 2
b. WICOR.................................................. 4
c. CEW Acquisition........................................ 4
2. Description of Facilities................................... 5
a. WEC.................................................... 5
i. General........................................... 5
ii. Electric Generating Facilities and Resources...... 5
iii. Electric Transmission and Distribution
Facilities........................................ 7
iv. Gas Facilities.................................... 7
v. Other WEC Businesses.............................. 7
b. WICOR.................................................. 9
i. General........................................... 9
ii. Gas Facilities.................................... 9
iii. Other WICOR Businesses............................ 10
C. Description of Transaction....................................... 11
1. Background.................................................. 11
2. Merger Agreement............................................ 13
3. Management and Operations Following
the Transaction............................................. 14
ITEM II: FEES, COMMISSIONS AND EXPENSES.................................... 14
ITEM III: APPLICABLE STATUTORY PROVISIONS.................................. 15
A. Section 10 Standards............................................. 16
1. Section 10(b)............................................... 16
a. Section 10(b)(1)....................................... 16
i. Interlocking Relationships........................ 17
ii. Concentration of Control.......................... 17
b. Section 10(b)(2)....................................... 19
i. Fairness of Consideration......................... 19
ii. Reasonableness of Fees............................ 21
c. Section 10(b)(3)....................................... 21
i. Capital Structure................................. 21
ii. Public Interest, Interest of Investors and Consumers
and Proper Functioning of Holding Company
System............................................ 23
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2. Section 10(c)............................................... 24
a. Section 10(c)(1)....................................... 24
b. Section 10(c)(2)....................................... 24
i. Integrated Electric Utility System................ 25
ii. Integrated Gas Utility System..................... 25
(A) Single Area or Region........................ 26
(B) Coordinated Operations....................... 28
(C) Economies and Efficiencies................... 29
(D) Absence of Impairment........................ 29
iii. De Facto Integration.............................. 29
3. Section 10(f)............................................... 30
B. Section 3(a)(1).................................................. 30
ITEM IV: REGULATORY APPROVALS.............................................. 31
ITEM V: PROCEDURE.......................................................... 31
ITEM VI: EXHIBITS AND FINANCIAL STATEMENTS................................. 31
A. Exhibits......................................................... 31
B. Financial Statements............................................. 33
ITEM VII: INFORMATION AS TO ENVIRONMENTAL EFFECTS......................... 34
<PAGE>
ITEM I: DESCRIPTION OF PROPOSED TRANSACTION
A. Introduction and Request for Commission Action
Pursuant to Sections 9(a)(2) and 10 of the Public Utility Holding
Company Act of 1935, as amended (the "Act"), Wisconsin Energy Corporation
("WEC"), a Wisconsin corporation and an exempt holding company pursuant to
Section 3(a)(1) of the Act, hereby requests that the Securities and Exchange
Commission (the "Commission") authorize WEC's acquisition of all of the issued
and outstanding stock of WICOR, Inc. ("WICOR"), also a Wisconsin corporation and
an exempt holding company pursuant to Section 3(a)(1) of the Act (the
"Transaction"). WEC also requests an order from the Commission that following
the consummation of the Transaction, WEC, and each of its subsidiary companies,
will be exempt from all provisions of the Act, other than Section 9(a)(2),
pursuant to Section 3(a)(1) of the Act.
The Transaction will result in a combined company that serves
approximately 921,000 gas customers and more than one million electric customers
in Wisconsin and in Michigan's Upper Peninsula, and operates more than 16,500
miles of gas main and 30,000 miles of electrical transmission and distribution
wires. The combined company will have approximately 9,000 employees.
Shareholders, customers and the public will benefit from the
Transaction. The Transaction will create a financially strong company that will
be well- positioned in the energy marketplace. Enhanced purchasing power and
coordinated gas portfolio management are projected to reduce the cost of
purchased gas. Most of the purchase gas savings will be passed through to
customers under the purchased gas adjustment mechanisms of WEC's subsidiary,
Wisconsin Electric Power Company ("WEPCO") and WICOR's subsidiary, Wisconsin Gas
Company ("Wisconsin Gas"). Additionally, gas utility operations will be improved
by the coordinated use of the resources and skill sets of the two companies and
adoption of best practices.
The Transaction will be consummated in accordance with the terms of an
Agreement and Plan of Merger (the "Merger Agreement"), dated at June 27, 1999,
as amended at September 9, 1999, by and between WEC, WICOR and CEW Acquisition,
Inc. ("CEW Acquisition"), a Wisconsin corporation and wholly-owned subsidiary of
WEC formed for the purpose of facilitating the Transaction. A copy of the Merger
Agreement is attached as Exhibit B-1. The Transaction was approved by both the
Board of Directors of WEC and the Board of Directors of WICOR on June 27, 1999.
Consummation of the Transaction is subject to approval by the
shareholders of WEC and WICOR. Such approval was received at shareholder
meetings held on October 27, 1999. The Transaction also is conditioned upon
<PAGE>
approval by the Commission under the Act, approval by the Public Service
Commission of Wisconsin ("Wisconsin Commission"), and expiration or termination
of the waiting period applicable to the Merger under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the "HSR Act").
B. Description of the Parties to the Transaction
1. General Description
a. WEC
WEC is a public utility holding company incorporated under the laws of
the State of Wisconsin exempt from regulation by the Commission under the Act
(except for Section 9(a)(2) thereof) pursuant to Section 3(a)(1) of the Act by
order of the Commission. Wisconsin Energy Corporation, Holding Company Act
Release No. 26877 (May 21, 1998) ("WEC"). WEC's principal executive office is
located at 231 West Michigan Street, Milwaukee, Wisconsin 53203. Copies of WEC's
Restated Articles of Incorporation and By-Laws are incorporated by reference as
Exhibits A-1 and A-2.
WEC owns all of the common stock of two public utility companies:
WEPCO, a combination electric and gas utility company, and Edison Sault Electric
Company ("Edison Sault"), an electric utility company. A copy of WEC's corporate
organization chart is attached as Exhibit E-8. At December 31, 1998, WEC had
5,404 employees, of which 5,333 were utility employees. WEPCO and Edison Sault
are subject to regulation by (i) the Federal Energy Regulatory Commission (the
"FERC") under the Federal Power Act (the "FPA") with respect to wholesale sales
and transmission of electric power and gas, construction and operation of
hydroelectric projects, gas marketing, and accounting and other matters, (ii)
the Wisconsin Commission and the Michigan Public Service Commission (the
"Michigan Commission"), and (iii) the Nuclear Regulatory Commission (the "NRC"),
with respect to the activities of the nuclear facility in which WEC, indirectly
through its subsidiary WEPCO, has an ownership interest.
On a consolidated basis at the end of 1998, WEC had total assets of
$5.4 billion. During 1998, WEC had, on a consolidated basis, total operating
revenues of $2.0 billion and net income of $188 million. At the end of 1998,
WEPCO had total assets of $4.8 billion. During 1998, WEPCO had electric
operating revenues of $1.64 billion, gas operating revenues of $296 million,
steam operating revenues of $21 million and net income of $183 million after
dividends on preferred stock. The WEC Common Stock is listed on the New York
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Stock Exchange. At September 30, 1999, there were 117,681,613 shares of WEC
Common Stock outstanding.
WEPCO was incorporated in Wisconsin in 1896. Copies of WEPCO's
Restated Articles of Incorporation and By-Laws are incorporated by reference as
Exhibits A-3 and A-4. WEPCO is authorized to provide retail electric service in
designated territories in Wisconsin, and in certain territories in Michigan.
WEPCO also sells wholesale electric power. WEPCO is subject to the regulation of
the FERC, the NRC, the Wisconsin Commission, and the Michigan Commission. At
year-end 1998, WEPCO had 5,262 employees. At December 31, 1998, WEPCO had total
assets of $4.8 billion. During 1998, WEPCO had total operating revenues of $1.96
billion, and net income of $183 million after dividends on preferred stock.
WEPCO generates, transmits, distributes, and sells electric energy in
a territory of approximately 12,000 square miles, with a population estimated at
2,300,000 in southeastern (including the metropolitan Milwaukee area), east
central and northern Wisconsin and in the Upper Peninsula of Michigan. A map of
WEPCO's electric service area is attached as Exhibit E-1. At December 31, 1998,
WEPCO had approximately 989,000 electric customers. WEPCO's existing FERC
tariffs also provide for transmission service to its wholesale customers. A map
of WEPCO's transmission system is attached as Exhibit E-2. During 1998, WEPCO
had 19 customers taking transmission service. During 1998, WEPCO had electric
operating revenues of $1.64 billion.
WEPCO purchases, distributes, and sells natural gas to retail
customers and transports customer-owned gas in four distinct service areas of
about 3,800 square miles in Wisconsin: west and south of the City of Milwaukee,
the Appleton area, the Prairie du Chien area, and areas within Iron and Vilas
Counties. A map of WEPCO's gas service area is attached as Exhibit E-3. The gas
service territory has an estimated population of approximately 1,200,000. During
1998, WEPCO had gas operating revenues of $296 million.
Effective May 31, 1998, WEC acquired ESELCO, Inc. ("ESELCO"), a
holding company whose principal subsidiary was Edison Sault. ESELCO was merged
with and into WEC, with WEC the surviving company. See WEC, supra. Thus, Edison
Sault is a wholly-owned direct subsidiary of WEC. Edison Sault is authorized to
provide retail electric service in certain territories in Michigan. Edison Sault
generates, transmits, distributes, and sells electric energy in a territory of
approximately 2,000 square miles with a population of approximately 55,000 in
the eastern Upper Peninsula of Michigan. A map of Edison Sault's electric
service area is attached as Exhibit E-4. A map of Edison Sault's transmission
system is attached as Exhibit E-5. At December 31, 1998, Edison Sault had
approximately 21,000 electric customers and 71 employees. Edison Sault also
provides wholesale electric service under contract with one rural cooperative.
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Edison Sault is subject to the regulation of the FERC and the Michigan
Commission. At December 31, 1998, Edison Sault had total assets of $70.1
million. During 1998, Edison Sault had electric operating revenues of $22
million, and net income of $2 million.
b. WICOR
WICOR is a public utility holding company incorporated under the laws
of the State of Wisconsin, which is exempt from regulation under the Act (except
for Section 9(a)(2) thereof) pursuant to Section 3(a)(1) of the Act under Rule
2. On a consolidated basis at the end of 1998, WICOR had total assets of $1
billion. During 1998, WICOR had total operating revenues of $944 million and net
income of $45 million. The WICOR Common Stock is listed on the New York Stock
Exchange. At September 30, 1999, there were 37,619,133 shares of WICOR Common
Stock outstanding. A copy of WICOR's Restated Articles of Incorporation is
incorporated by reference as Exhibit A-5 and a copy of WICOR's By-Laws is
attached as Exhibit A-6. WICOR's principal executive office is located at 626
East Wisconsin Avenue, Milwaukee, Wisconsin 53202.
WICOR has one wholly-owned public utility subsidiary: Wisconsin Gas, a
gas utility company which is organized under the laws of the State of Wisconsin.
A copy of WICOR's corporate organization chart is attached as Exhibit E-9. At
December 31, 1998, WICOR had 3,524 employees.
At December 31, 1998, Wisconsin Gas distributed gas to approximately
529,000 residential, commercial, and industrial customers in 524 communities
throughout Wisconsin. Wisconsin Gas' service area has a population of
approximately 2,000,000. A map of Wisconsin Gas' gas service area is attached as
Exhibit E-6. At the end of 1998, Wisconsin Gas had total assets of $651 million.
During 1998, Wisconsin Gas had total operating revenues of $429 million, and net
income of $23 million. A copy of Wisconsin Gas' Restated Articles of
Incorporation is incorporated by reference as Exhibit A-7 and a copy of
Wisconsin Gas' By-Laws is attached as Exhibit A-8.
c. CEW Acquisition
CEW Acquisition is a direct, wholly-owned subsidiary of WEC,
incorporated under the laws of the State of Wisconsin solely for the purpose of
facilitating the Transaction by merging with WICOR. CEW Acquisition does not
have, and prior to the closing of the Transaction will not have, any operations
other than the activities contemplated by the Merger Agreement necessary to
accomplish the merger of CEW Acquisition and WICOR as described herein. The
principal executive office of CEW Acquisition is located at 231 West Michigan
Street, Milwaukee, Wisconsin 53203. Copies of CEW Acquisition's Articles of
<PAGE>
Incorporation and By-Laws are incorporated by reference as Exhibits A-9 and
A-10.
2. Description of Facilities
a. WEC
i. General
During 1998, WEPCO and Edison Sault sold approximately 29.9 billion
kilowatt-hours ("kWh") of electric energy (at retail and wholesale). WEPCO sold
approximately 29.5 billion kWh of electric energy (at retail and wholesale).
WEPCO's net generation totaled 26 billion kWh during 1998, with the remaining
sales supplemented by power purchases. For the year ended December 31, 1998,
approximately 74.8 percent of kWh production of WEPCO was obtained from
coal-fired generation, approximately 21.7 percent from nuclear generation, and
approximately 3.5 percent from other generation. During the seven months ending
December 31, 1998, Edison Sault sold approximately 465 million kWh of electric
energy (at retail and wholesale). In 1998, Edison Sault generated twenty percent
of its total electric energy requirements and purchased the remaining eighty
percent of such requirements.
Total gas therms delivered by WEPCO, including customer-owned
transported gas, were approximately 923 million therms in 1998. At December 31,
1998, WEPCO transported gas for approximately 310 customers who purchased
natural gas directly from other suppliers. Transported gas accounted for
approximately 46 percent of the total therms delivered by WEPCO during 1998.
There were approximately 388,000 natural gas customers at December 31, 1998.
WEPCO's maximum daily send-out during 1998 was 619,578 dekatherms on January 13,
1998. WEPCO's gas operations deliver natural gas to WEPCO's Concord, Paris, and
Oak Creek power plants. Deliveries to these facilities are at rates approved by
the Wisconsin Commission.
ii. Electric Generating Facilities and Resources
At December 31, 1998, WEPCO had a total dependable net generating
capability of 5,785 MW from the following units:
o Point Beach: two nuclear electric generating units with a combined net
capability of 1,010 MW.
o Oak Creek: four coal-fired electric generating units with a combined
net capability of 1,139 MW.
<PAGE>
o Presque Isle: nine coal-fired electric generating units with a
combined net capability of 617 MW.
o Pleasant Prairie: two coal-fired electric generating units with a
combined net capability of 1,210 MW.
o Port Washington: four coal-fired electric generating units with a
combined net capability of 327 MW.
o Valley: two coal-fired electric generating units with a combined net
capability of 227 MW.
o Edgewater: a 25 percent undivided interest (equivalent to a net
capability of 98 MW) in one coal-fired unit, operated by a
nonaffiliated utility.
o Concord: four gas/oil fired combustion turbine generating units with a
combined net capability of 376 MW.
o Paris: four gas/oil fired combustion turbine generating units with a
combined net capability of 376 MW.
o Milwaukee County: three coal-fired electric generating units with a
combined net capability of 11 MW.
o Germantown: four oil-fired combustion turbine generating units with a
combined net capability of 252 MW.
o WEPCO also owns 15 hydro-plants with an aggregate net capability of 67
MW. (WEPCO is in the process of selling to an independent party one
plant with an installed generating capacity of approximately 1 MW.) In
addition, WEPCO owns six smaller combustion turbines and diesel units
with a combined net capability of 75 MW.
Edison Sault's major source of electric energy is its 29.8 MW
hydroelectric generating power plant on the St. Mary's River in Sault Ste.
Marie, Michigan. In addition, Edison Sault owns and operates a 4.8 MW
diesel-fired peaking power plant.
<PAGE>
iii. Electric Transmission and Distribution Facilities
At December 31, 1998, WEPCO's electric transmission and distribution
system had 2,855 miles of transmission circuits, of which 639 miles were
operating at 345 kilovolts, 123 miles at 230 kilovolts, 1,704 miles at 138
kilovolts, and 394 miles at voltage levels less than 138 kilovolts. At December
31, 1998, WEPCO was operating 21,927 pole miles of overhead distribution lines
and 16,295 miles of underground distribution cable, as well as 350 distribution
substations and 233,726 line transformers.
Edison Sault owns two 138 kilovolt submarine transmission cable
circuits, which interconnect with Consumers Power Company in the Lower Peninsula
of Michigan, as well as two 138 kilovolt substations, which interconnect with a
46 mile, 138 kilovolt transmission line owned and operated by Cloverland
Electric Cooperative. In total, Edison Sault had 282 miles of transmission line
in service at December 31, 1998, and maintained 792 miles of primary
distribution lines. Edison Sault renders service to its customers through
approximately 8,600 line transformers.
Copies of maps showing interconnections of WEPCO and Edison Sault
systems with other systems are attached as Exhibit E-7.
iv. Gas Facilities
At December 31, 1998, WEPCO's gas distribution system included
approximately 7,895 miles of mains connected at 21 gate stations to the pipeline
transmission systems of ANR Pipeline Company ("ANR"), Natural Gas Pipeline
Company of America ("NGPL") and Northern Natural Gas Company ("Northern
Natural"). WEPCO has a liquefied natural gas storage plant, which converts and
stores in liquefied form natural gas received during periods of low consumption.
The liquefied natural gas storage plant has a send-out capability of 70,000
dekatherms per day. WEPCO also has propane tanks for peaking purposes. These
tanks can provide approximately 7,000 dekatherms of supply to the system.
v. Other WEC Businesses
WEPCO also operates two district steam systems for space heating and
processing. These systems are located in Milwaukee and in the City of Wauwatosa,
Wisconsin, and are subject to regulation by the Wisconsin Commission. The
combined systems consist of approximately 43 miles of high and low pressure
mains and related regulating equipment. Steam for the Milwaukee system is
supplied by WEPCO's Valley power plant. Steam for the Wauwatosa system is
supplied by WEPCO's Milwaukee County power plant.
<PAGE>
In addition, each of following companies are non-utility subsidiaries
of WEC:
Wispark Corporation ("Wispark") develops and invests in real estate,
primarily business parks and industrial buildings.
Wisvest Corporation ("Wisvest") is a non-regulated energy services
subsidiary that builds, owns, operates and maintains energy production
facilities and invests in other energy-related projects. Wisvest's subsidiary,
Griffin Energy Marketing, L.L.C., markets energy related services and trades
electricity. In April 1999, Wisvest Connecticut, L.L.C., a wholly owned
subsidiary of Wisvest, acquired two fossil-fueled power plants in the state of
Connecticut; the Bridgeport Harbor Station (active generating capacity of 590
MW) and the New Haven Harbor Station (active generating capacity of 466 MW).
Wisconsin Energy Capital Corporation ("WECC"), formerly Wisconsin
Michigan Investment Corporation, engages in investing and financing activities.
Activities include advances to affiliated companies and investments in financial
instruments and in partnerships developing low-and moderate-income housing
projects. Other investments also may be made from time to time. WECC's
subsidiary, WMF Corp., engages in financing activities. Any funds obtained by
WMF Corp. through financing arrangements are advanced to WECC.
Minergy Corp. ("Minergy") is engaged in the business of developing and
marketing proprietary technologies designed to convert high volume industrial
and municipal wastes into value-added products. In 1998, Minergy completed
construction of and placed into commercial operation in Neenah, Wisconsin a
facility that recycles paper sludge from area paper mills into two usable and
salable products: glass aggregate and steam.
WEC International Inc. ("WECII") serves as WEC's international
investment vehicle. WECII has investments in two joint ventures in the
Netherlands. One joint venture owns and operates a by-product utilization plant.
The other joint venture is in the process of renovating a waste treatment
facility.
Witech Corporation ("Witech") is a venture capital company operating
in the State of Wisconsin. At December 31, 1998, Witech had investments in
eleven companies and three funds totaling more than $34 million. The companies
include an operator of a nationwide data communications network for the
agriculture industry, a manufacturer of electronic components, and a
manufacturer of motor drives.
<PAGE>
WEC Nuclear Corporation, formerly WEC Sub Corp., has an ownership
interest in Nuclear Management Company, L.L.C. Formed during the first quarter
of 1999, it is intended that Nuclear Management Company, L.L.C. will provide
services to WEPCO in connection with the Point Beach nuclear plant and to other
companies that own nuclear generating facilities.
Northern Tree Service, Inc., a former subsidiary of ESELCO, is engaged
in tree trimming in the State of Michigan's eastern Upper Peninsula.
Badger Service Company ("Badger") holds coal rights in Indiana.
Estimates indicate that 40 million tons of coal could be recovered from this
property with conventional mining techniques. However, there are no current
plans to develop the property. Badger may sell or develop these rights in the
future as conditions warrant.
b. WICOR
i. General
During 1998, Wisconsin Gas sold 685,750 thousand therms of natural gas
and served approximately 529,000 natural gas customers. In addition, Wisconsin
Gas transported 460,170 thousand therms of natural gas for 929 customers who
purchased natural gas directly from other suppliers. Transported gas accounted
for approximately 40 percent of the total therms delivered by Wisconsin Gas
during 1998. Wisconsin Gas' maximum daily send-out during 1998 was 799,000
dekatherms on December 22, 1998.
ii. Gas Facilities
Wisconsin Gas owns a gas distribution system, which, on December 31,
1998, included approximately 9,100 miles of distribution and transmission mains,
447,700 service laterals and 561,400 active meters. Wisconsin Gas receives gas
at 147 gate stations throughout Wisconsin connected to the pipeline transmission
systems of ANR, Northern Natural and Viking Gas Transmission Company ("Viking").
Wisconsin Gas has two small propane-air facilities and an LNG storage facility
used for peaking purposes. These facilities can provide an aggregate of
approximately 6,825 dekatherms of supply to the system.
Wisconsin Gas and WEPCO jointly own a 10.5-mile gas distribution line
that is operated by Wisconsin Gas. The line runs from a gate station connection
to Northern Natural in the Town of Eagle to a WEPCO gate station in Mukwonago in
Waukesha County. The line continues from Mukwonago for another 18.7 miles to the
City of New Berlin in Waukesha County under the sole ownership of Wisconsin Gas.
<PAGE>
This line, as presently operated, enables the utilities to deliver up to 220,000
dekatherms of gas per day to their southeastern Wisconsin service areas
otherwise supplied by ANR.
iii. Other WICOR Businesses
The following companies are direct, non-utility subsidiaries of WICOR:
WICOR Energy Services Company ("WICOR Energy") was formed in 1995, and
maintains its principal office and place of business in Milwaukee, Wisconsin.
WICOR Energy engages in natural gas purchasing and selling, and energy and price
risk management.
FieldTech, Inc. ("FieldTech") was formed in 1995 and operated as a
division of Wisconsin Gas until October 1, 1996, when it incorporated as a
subsidiary of WICOR. FieldTech maintains its principal office and place of
business in Milwaukee, Wisconsin and provides meter reading and technology
services for gas, electric and water utilities.
WICOR Industries, Inc. ("WICOR Industries") is an intermediate holding
company, which holds the stock of WICOR's manufacturing subsidiaries. WICOR
Industries owns 100 percent of the voting securities of five direct
subsidiaries: Sta-Rite Industries, Inc. ("Sta-Rite"), SHURflo Pump Manufacturing
Company ("SHURflo"), Hypro Corporation, WEXCO of Delaware, Inc., and WICOR FSC,
Inc. WICOR Industries and its subsidiaries manufacture pumps and fluid
processing equipment, including filtration equipment for residential,
agricultural, and industrial markets worldwide. Manufacturing activities are
conducted by plants in the United States, Australia, China, Germany, India,
Italy, Mexico, and New Zealand. At December 31, 1998, WICOR Industries had total
assets of $349 million. During 1998, WICOR Industries had operating revenues of
$463 million, and net income of $24 million.
WICOR has made four acquisitions in 1999 to expand its pump and
filtration manufacturing businesses. On May 26, 1999, WICOR acquired Omni
Corporation ("Omni"), a privately-held manufacturer of water filtration products
primarily for residential use which has its manufacturing operations in Hammond,
Indiana, in a cash-for-stock transaction. The Omni operations will be integrated
into Sta-Rite. On June 10, 1999, WICOR acquired CUMA, S.A. ("CUMA"), a
privately-held manufacturer of pumps for irrigation, industrial and residential
applications with its manufacturing operations in Monterrey, Mexico, in a
cash-for-stock transaction. CUMA will be integrated into Sta-Rite's Mexican
subsidiary. On October 7, 1999, WICOR acquired Western Dispensing Technologies,
Inc. ("Western Dispensing"), a privately-held company with its manufacturing
<PAGE>
operations in Santa Barbara, California, in a cash-for-stock transaction, and on
October 8, 1999, WICOR acquired Simer Pump, a division of the Rival Company of
Kansas City, in a cash-for-assets transaction. Western Dispensing designs and
manufactures chemical dispensing systems used in commercial laundry, janitorial
and institutional applications. The Western Dispensing operations will be
integrated into SHURflo. Simer Pump manufactures sump, utility, water well and
emergency back-up pumps and accessories. The Simer Pump operations will be
integrated into Sta-Rite.
WICOR is an owner of Guardian Pipeline, L.L.C. ("Guardian"). Guardian
is a limited liability company formed to construct, own and operate an
interstate natural gas pipeline extending approximately 147 miles from the
Chicago Market Hub near Chicago, Illinois to near the Town of Ixonia, Jefferson
County, in southeastern Wisconsin. A subsidiary of CMS Energy Corporation,
Viking, a subsidiary of Northern States Power Company, and WICOR are equal
one-third members of the limited liability company. The pipeline will have
capacity of 750,000 dekatherms per day, will cost approximately $230 million,
and is planned to be in service by November 1, 2002. Wisconsin Gas has signed a
binding precedent agreement to contract with Guardian for 650,000 dekatherms per
day of capacity. Wisconsin Gas plans to construct a lateral from the terminus of
the Guardian pipeline at Ixonia to its Milwaukee area distribution system, a
distance of approximately 35 miles. Guardian expects to file an application with
the Federal Energy Regulatory Commission before the end of 1999 for approval to
construct and operate the pipeline. The Wisconsin Commission has approved the
capacity contract between Guardian and Wisconsin Gas and must authorize
Wisconsin Gas to construct the lateral.
C. Description of Transaction
1. Background
On July 30, 1998, Mr. Richard Abdoo, the Chairman of the Board,
President and Chief Executive Officer of WEC, met informally with Mr. George
Wardeberg, the Chairman and Chief Executive Officer of WICOR, and suggested the
possibility of combining WEC and WICOR. Mr. Wardeberg indicated that WICOR was
not interested in such a combination.
In November, 1998, Mr. Abdoo again approached Mr. Wardeberg about a
possible business combination. Mr. Abdoo and Mr. Wardeberg talked several times,
and Mr. Wardeberg agreed to discuss the matter with the WICOR Board of
Directors.
<PAGE>
At a meeting on December 15, 1998, the WICOR Board of Directors
directed its management to consider the feasibility of a business combination
with WEC and to pursue exploratory discussions if an appropriate confidentiality
agreement could be negotiated. On January 14, 1999, WEC and WICOR executed a
confidentiality agreement. Throughout the remainder of January and February, Mr.
Abdoo and Mr. Wardeberg continued their discussions.
At a meeting on January 26, 1999, the WICOR Board of Directors
discussed a possible business combination with WEC and encouraged management to
pursue discussions with WEC management. WICOR management updated the WICOR Board
on the status of the discussions at its meeting on February 25, 1999. At a
meeting on January 28, 1999, the WEC Board of Directors discussed a possible
business combination with WICOR and encouraged management to pursue discussions
with WICOR management. WEC management updated the WEC Board on the status of the
discussions at its meeting on February 16, 1999.
On March 8, 1999, WICOR engaged Merrill Lynch, Pierce, Fenner & Smith
Incorporated and on March 14, 1999, WEC engaged Chase Securities Inc. to assist
in analyzing a possible transaction. Discussions between WEC and WICOR
representatives continued throughout March and April. At the end of March and in
April, senior management of WEC and WICOR met to review operations and financial
data.
The WEC Board of Directors received another update concerning the
status of the Transaction at its meeting on April 27, 1999, and again authorized
WEC management to continue discussions with WICOR. The WEC Board discussed a
proposal in which WICOR shareholders would receive a fixed price of $30 per
share.
On May 16, 1999, the WEC and WICOR senior management met for detailed
discussions of structure, management and employee issues.
On May 20, 1999, the WICOR Board of Directors met to discuss the
proposed transaction. The WICOR Board indicated that it was willing to consider
a combination with WEC, but only in a transaction valued at not less than $31.50
per share of WICOR Common Stock. Following the meeting, the parties continued to
exchange information and proposals. WICOR management updated the WICOR Board at
its meeting on June 1, 1999. The WICOR Board again determined that a price of
less than $31.50 per share of WICOR Common Stock was not advisable.
At WEC's Board of Directors meeting on June 2, 1999, Mr. Abdoo
reported on the status of discussions. The WEC Board concluded that a fixed
price of $31.50 per share of WICOR common stock might be acceptable, provided
<PAGE>
other issues could be resolved. The Board directed WEC management to continue
the discussions.
On June 3, 1999, WEC provided a proposed merger agreement to WICOR.
The senior financial staff of both companies met on June 15 and 17. Legal
counsel and management also met on several occasions during June.
A special meeting of the WEC Board of Directors to consider the
proposed transaction was held on June 25, 1999. A special meeting of the WICOR
Board of Directors to consider the proposed transaction was held on June 25,
1999. On June 27, 1999, both the WEC and WICOR Boards approved the Merger
Agreement and the transaction contemplated thereby. The Merger Agreement then
was executed on June 27, 1999.
2. Merger Agreement
Subject to the terms of the Merger Agreement, at the time of the
Merger, the consideration to be received for each outstanding share of WICOR
common stock, par value $1.00 per share ("WICOR Common Stock") will be $31.50
per share of WICOR Common Stock, provided the Transaction occurs on or before
July 1, 2000. In the event the Transaction occurs after July 1, 2000, the
consideration will be increased by an amount equivalent to daily simple interest
on $31.50 at the rate of six percent per annum for each day after July 1, 2000,
through the closing date (the "Exchange Value"). The consideration will be paid
in the form of cash, common stock of WEC, par value $0.01 per share ("WEC Common
Stock"), or a combination of cash and WEC Common Stock. Prior to the closing
date, WEC will select the percentage of the consideration to be paid in WEC
Common Stock, which may be not less than 40 percent nor more than 60 percent;
the balance of the consideration will be paid in cash. The exchange ratio for
each share of WICOR Common Stock converted into WEC Common Stock will be
determined by dividing the Exchange Value by the average of the closing prices
of the WEC Common Stock on the New York Stock Exchange for the 10 trading days
ending with the fifth trading day prior to the closing date (the "Average WEC
Price"). Each WICOR shareholder may elect to receive cash, WEC Common Stock or a
combination thereof, subject to proration if the cash or stock elections exceed
the maximum amounts permitted. Cash will be paid in lieu of any fractional
shares of WEC Common Stock, which holders of WICOR Common Stock otherwise would
receive. If the Average WEC Price is less than $22.00 per share, WEC may elect
to pay the entire Merger Consideration in cash.
As a result of the Transaction, WICOR will become a wholly-owned
subsidiary of WEC, and WICOR's subsidiaries will be indirect subsidiaries of
WEC. The means of accomplishing such a result will depend on whether the entire
<PAGE>
merger consideration is paid in cash or in a combination of cash and WEC stock.
If the former, CEW Acquisition will be merged with and into WICOR, with WICOR
surviving as a wholly-owned subsidiary of WEC. If the latter, WICOR will be
merged with and into CEW Acquisition, with CEW Acquisition remaining a
wholly-owned subsidiary of WEC. The name of CEW Acquisition then would be
changed to WICOR.
3. Management and Operations Following the Transaction
After consummation of the Transaction, WICOR will be a direct
subsidiary of WEC and WICOR's subsidiaries, including Wisconsin Gas, will be
indirect subsidiaries of WEC. A copy of the post-Transaction corporate
organization chart is attached as Exhibit E-10. In addition, the directors and
officers of WICOR will continue in office at WICOR after the Transaction except
that (i) WEC shall appoint new directors to the WICOR Board of Directors which
will represent a majority of the WICOR directors and (ii) Mr. Abdoo will become
Chairman of the Board of Directors of WICOR. The principal corporate and
executive offices of WICOR will remain in Wisconsin.
The Merger Agreement provides that upon the consummation of the
Merger, Mr. Richard A. Abdoo will continue as the Chairman of the Board,
President and Chief Executive Officer of WEC and that George E. Wardeberg, the
Chairman of the Board and Chief Executive Officer of WICOR, will become the Vice
Chairman of the Board of WEC. The Merger Agreement also provides that, in
addition to Mr. Wardeberg, one other member of the current WICOR Board of
Directors will be elected a director of the WEC Board of Directors.
ITEM II: FEES, COMMISSIONS AND EXPENSES
The fees, commissions, and expenses that shall be paid or incurred,
directly or indirectly, in connection with the Transaction are estimated as
follows:
<PAGE>
<TABLE>
<CAPTION>
(dollars in
thousands)
<S> <C>
Commission filing fee for the Registration Statement on Form S-4..................................258
Hart Scott Rodino Act filing fee...................................................................45
Accountants' fees.................................................................................373
Legal fees and expenses.........................................................................2,380
Shareholder communication, proxy solicitation, and exchanging,
printing, and engraving of stock certificates.................................................1,155
NYSE listing fee...................................................................................45
Investment bankers' fees and expenses..........................................................10,353
Miscellaneous (including consultants and internal costs)..........................................891
Total.................................................................................15,500
</TABLE>
ITEM III: APPLICABLE STATUTORY PROVISIONS
The following Sections of the Act and the Commission's rules
thereunder are or may be directly or indirectly applicable to the proposed
transaction: 9(a)(2), 10 and 3(a)(1). Section 9(a)(2) provides that "[u]nless
the acquisition has been approved by the Commission under Section 10, it shall
be unlawful ... for any person ... to acquire, directly or indirectly, any
security of any public-utility company, if such person is an affiliate ... of
such company and of any other public utility or holding company, or will by
virtue of such acquisition become such an affiliate." Section 2(a)(11) of the
Act defines an "affiliate" as, inter alia, "any person that directly or
indirectly owns, controls, or holds with power to vote, 5 per centum or more of
the outstanding voting securities of such specified company."
Pursuant to the Transaction, WEC, indirectly through its acquisition
of WICOR, will acquire the securities of Wisconsin Gas, a public utility
company. Therefore, following the Transaction, WEC, already an affiliate of
WEPCO and Edison Sault, will be an affiliate of Wisconsin Gas. Accordingly, the
Transaction requires the Commission's approval and is subject to the standards
of Section 10 of the Act. WEC believes that the Transaction satisfies the
standards of Section 10, and therefore requests a Commission order approving the
Transaction.
As noted above, WEC currently is a public utility holding company
exempt from regulation under the Act (other than Section 9(a)(2) thereof)
pursuant to Section 3(a)(1) of the Act. Following the Transaction, WEC and each
of its subsidiary companies from which it derives a material part of its income
will be organized under the laws of the state of Wisconsin and carry on its
utility business substantially within Wisconsin. Accordingly, WEC also requests
an order from the Commission granting WEC an exemption pursuant to Section
3(a)(1) of the Act.
<PAGE>
A. Section 10 Standards
The statutory standards to be considered by the Commission in
evaluating the Transaction are set forth in Sections 10(b), 10(c) and 10(f) of
the Act. For the reasons set forth in detail below, the Transaction fully
complies with such sections.
1. Section 10(B)
Section 10(b) provides that the Commission shall approve an
acquisition unless the Commission finds that:
(1) such acquisition will tend towards interlocking relations or the
concentration of control of public-utility companies, of a kind or to
an extent detrimental to the public interest or the interest of
investors or consumers;
(2) in case of the acquisition of securities or utility assets, the
consideration, including all fees, commissions, and other
remuneration, to whomsoever paid, to be given, directly or indirectly,
in connection with such acquisition is not reasonable or does not bear
a fair relation to the sums invested in or the earning capacity of the
utility assets to be acquired or the utility assets underlying the
securities to be acquired; or
(3) such acquisition will unduly complicate the capital structure of the
holding-company system of the applicant or will be detrimental to the
public interest or the interest of investors or consumers or the
proper functioning of such holding-company system.
a. Section 10(b)(1)
Under Section 10(b)(1), the Commission may not approve a proposed
acquisition if it finds that the proposed acquisition will "tend towards
interlocking relations or the concentration of control of public utility
companies of a kind or to an extent detrimental to the public interest or the
interest of investors or consumers." Thus, Section 10(b)(1) does not prohibit an
acquisition merely because the acquisition causes interlocking relations or
increases concentration of control to some degree. Instead, the Commission will
determine whether any detrimental effects from any interlocking relations or
concentration of control caused by the merger outweigh the merger benefits.
<PAGE>
i. Interlocking Relationships
Any acquisition subject to Section 9(a)(2) will create interlocking
relations between previously unrelated companies. As the Commission has noted,
"with any addition of a new subsidiary to a holding company system, the
Acquisition will result in certain interlocking relationships between [the two
merging companies]." Northeast Utilities, Holding Company Act Release No. 25221
(December 21, 1990), modified on other grounds, Holding Company Act Release No.
25273 (March 15, 1991), aff'd sub nom. City of Holyoke Gas & Elec. Dep't v. SEC,
972 F.2d 358 (D.C. Cir. 1992) ("Northeast I"). The Commission also has
recognized that such "interlocking relationships are necessary to integrate [the
two merging companies.]" Id.
After completion of the Transaction, WEC will appoint a majority of
the WICOR Board of Directors. In addition, two members of the WICOR Board of
Directors will become members of the WEC Board of Directors. These interlocking
relationships will serve to integrate WEC and WICOR. Thus, the interlocking
relationships that will occur will not be detrimental to the interests protected
by the Act and are not prohibited by Section 10(b)(1).
ii. Concentration of Control
The Transaction will not result in a concentration of control
detrimental to the public interest in violation of Section 10(b)(1). The
Transaction will not create an excessively large merged company. Following the
Transaction, WEC will have total utility assets of $5.5 billion, total utility
revenues of $2.4 billion, and will serve over one million electric utility
customers and 921,000 gas utility customers. The Commission has recently
approved a number of transactions which resulted in holding companies of a much
larger size.1
Nor will the Transaction have an adverse effect on competition in the
natural gas or electric industries. As discussed below, as a result of the
Transaction, there will neither be a loss of natural gas vs. electricity
competition nor a loss of gas-to-gas competition. Nor will the Transaction
result in an increased concentration of market power in the natural gas or
electric industries. In addition, parties who believe the Transaction raises
meaningful competitive issues can bring those issues to the attention of the
- --------------
1 See PP&L Resources, Inc., Rel. No. 35-26905 (August 12, 1998) ("PP&L")
(utility assets of approximately $10 billion; utility revenues of
approximately $3.1 billion and approximately 1.2 million utility
customers); TUC Holding Co., Rel. No. 35-26749 (August 1, 1997) ("TUC")
(utility assets of approxi mately $19.6 billion; utility revenues of
approximately $6.9 billion and approximately 2.7 million utility
customers).
<PAGE>
Wisconsin Commission as part of the Wisconsin Commission's approval process. The
Wisconsin Commission is expected to address any competitive issues it deems
material. See Exhibit I-1 (responses submitted by WEC and WICOR to certain data
requests in the approval proceeding pending before the Wisconsin Commission).
With respect to competition between electricity and natural gas, the
competitive overlap between WEPCO and Wisconsin Gas in terms of service areas is
substantial, but the competitive overlap in end uses of energy is meager.
Regulation, not interfuel competition, determines customer prices; interfuel
competition is such a weak constraint that deregulation of gas and electric
distribution has not been considered seriously in Wisconsin. The role of the
energy utility companies in such interfuel competition as does exist is
virtually non-existent. In addition, the weak role of competition between
electricity and gas as a constraint on delivered prices is shown by the
continued existence of combination utilities. Most gas customers in Wisconsin
are served by combination companies. In those states where open retail access
for electricity and gas is occurring, utilities have not been required to divest
their gas or electric operations. To the contrary, there have been a number of
recent convergence mergers, where electricity companies have bought gas
operations, including gas LDC operations with overlapping territories.
With respect to gas-to-gas competition, Wisconsin Electric and
Wisconsin Gas are not currently competing for gas customers. Moreover, Wisconsin
Electric and Wisconsin Gas do not expect any future head-to-head competition for
new service territories, due to the companies' economic criteria for expansion.
Moreover, the Transaction will not result in an increase of market
power. First, WICOR does not participate in the markets for retail or wholesale
electricity. As a result, the combination of WEC with WICOR will have no impact
whatsoever on concentration in those product markets. Similarly, while Wisconsin
Gas and the gas operations of WEPCO do participate in the retail natural gas
product market, the geographic markets they serve are distinct. Absent any
overlap of geographic markets, a combination of the two companies will have no
impact whatsoever on concentration in any geographic market for retail gas.
If the retail product market were defined more broadly to include both
retail gas and retail electricity, then the combination of WICOR and WEC would
lead to an increase in concentration in the geographic market in which Wisconsin
Gas' retail gas service overlaps with WEPCO's retail electric service. However,
because of the weakness of gas-electric competition discussed above, such an
expansive definition of the product market would be erroneous. Accordingly, the
Transaction will not create an increased concentration of market power.
<PAGE>
The Transaction will provide important competitive benefits. The
merged company will be stronger and better equipped to compete effectively in
rapidly changing energy markets. In addition, as discussed herein, the
Transaction is expected to result in efficiencies and economies for customers,
investors, and the public. The Commission will weigh such benefits against any
concerns about concentration of control. See American Electric Power Co., 46
S.E.C. 1299 (1978).
Moreover, under the HSR Act and regulations thereunder, the
Transaction cannot be consummated until WEC and WICOR have filed Notification
and Report Forms with the Department of Justice ("DOJ") and the Federal Trade
Commission ("FTC") describing the effects of the Transaction on competition in
relevant markets, and expiration or termination of the required waiting period.
On September 22, 1999, WEC and WICOR filed the required Notification and Report
Forms.
b. Section 10(b)(2)
Pursuant to Section 10(b)(2) of the Act, the Commission must determine
whether the consideration to be paid in connection with the Transaction,
"including all fees, commissions and other renumeration . . . is not reasonable
or does not bear a fair relation to the sums invested in or the earning capacity
of . . . the utility assets underlying the securities to be acquired . . . ."
i. Fairness of Consideration
When determining whether consideration for an acquisition satisfies
the fair and reasonable test of Section 10(b)(2), the Commission has considered:
(i) the market price at which securities have traded; (ii) whether the purchase
price was decided as the result of arm's-length negotiations; (iii) whether each
party's board of directors has approved the purchase price; (iv) the opinions of
investment bankers, and (v) the earnings, dividends and book and market value of
the shares of the company to be acquired. See American Natural Gas Co., Holding
Company Act Release No. 15620 (December 12, 1966), Consolidated Natural Gas Co.,
Holding Company Act Release No. 25040 (February 14, 1990). In accordance with
the standards the Commission previously has established, the consideration to be
paid by WEC in the Transaction is reasonable and bears a fair relation to the
earnings capacity of the utility assets underlying the WICOR Common Stock.
Each share of WICOR Common Stock will be converted into the right to
receive $31.50 per share in cash, WEC Common Stock, or a combination of the two.
As shown in the table below, the quarterly data, high and low, for WICOR Common
Stock provide support for the consideration for each share of WICOR Common
Stock.
<PAGE>
<TABLE>
<CAPTION>
DIVIDENDS
PAID PER
WICOR HIGH* LOW* COMMON SHARE
1996
<S> <C> <C> <C>
First Quarter $17 7/32 $15 1/16 $0.205
Second Quarter 18 7/8 16 3/8 0.205
Third Quarter 18 7/8 16 13/16 0.21
Fourth Quarter 18 7/16 17 0.21
1997
First Quarter $18 15/16 $17 $0.21
Second Quarter 19 7/8 16 11/16 0.21
Third Quarter 21 29/32 19 13/32 0.215
Fourth Quarter 23 15/16 20 1/2 0.215
1998
First Quarter $24 11/32 $21 7/16 $0.215
Second Quarter 24 3/4 21 1/4 0.215
Third Quarter 24 5/16 20 1/8 0.22
Fourth Quarter 25 1/2 19 5/8 0.22
* Adjusted for a 2-for-1 stock split effective in May 1998.
</TABLE>
The $31.50 purchase price represents an 18.6 percent premium above
WICOR's closing stock price on June 25, 1999, the last trading day before the
Transaction was announced.
Moreover, as explained herein and in a copy of the Proxy Statement
attached as Exhibit C-1, the consideration to be paid by WEC was the result of
extensive, lengthy, arms-length negotiations between the management and advisors
of WEC and WICOR. In addition, the Transaction has been approved by both the WEC
and WICOR Boards of Directors, and is subject to the approval of the WEC and
WICOR shareholders. At separate meetings held October 27, 1999, the WEC and
WICOR shareholders each approved the Transaction. Finally, financial advisors
for both WEC and WICOR reviewed extensive information concerning the companies
and analyzed a variety of valuation methodologies. An opinion from WEC's
financial adviser, Chase Securities Inc. (see Exhibit F-3), states that the
consideration to be paid by WEC with respect to the Merger is fair, from a
financial point of view, to WEC. An opinion from WICOR's financial adviser,
Merrill Lynch, Pierce, Fenner & Smith Incorporated (see Exhibit F-4), states
that the consideration to be received by WICOR's shareholders with respect to
the Transaction is fair, from a financial point of view, to WICOR and WICOR's
shareholders. Accordingly, the consideration to be paid in accordance with the
<PAGE>
Transaction is fair and reasonable in accordance with the standards of Section
10(b)(2).
ii. Reasonableness of Fees
The overall fees, commissions and expenses WEC and WICOR expect to
incur in connection with the Transaction are set forth in Item II to this
Application/Declaration. WEC and WICOR together expect to incur total costs of
approximately $16 million.
WEC believes that the estimated fees and expenses bear fair relation
to WICOR's value and the Transaction savings, and are fair and reasonable.
Northeast Utilities, Holding Company Act Release No. 25548 (June 3, 1992),
modified on other grounds, Holding Company Act Release No. 25550 (June 4, 1992)
("Northeast II") (Commission considers whether fees and expenses bear a fair
relation to the value of the company to be acquired and the savings to be
achieved by the acquisition). As discussed below, the expected savings that will
be achieved by the Transaction substantially will outweigh the estimated fees.
Furthermore, the estimated overall fees are reasonable as compared to the fees
approved by the Commission in other merger transactions.2 Thus, the fees to be
incurred in connection with this Transaction are consistent with the standards
of Section 10(b)(3).
c. Section 10(b)(3)
Section 10(b)(3) of the Act provides that the Commission may not
approve an acquisition if "such acquisition will unduly complicate the capital
structure of the holding-company system ... or will be detrimental to the public
interest or the interest of investors or consumers or the proper functioning of
such holding-company system."
i. Capital Structure
The proposed combination of WEC and WICOR will not unduly complicate
the capital structure of the merged company. As a result of the Transaction, WEC
will acquire 100 percent of the common stock of WICOR, and will continue to own
100 percent of the common stock of WEPCO and Edison Sault. The Transaction will
not affect the outstanding securities of WEPCO, Edison Sault or WICOR (including
- --------------
2 See TUC (fees and expenses of $37 million); Sierra Pacific Resources and
Nevada Power Co., Rel. No. 27054 (July 26, 1999) (fees and expenses of $26
million).
<PAGE>
Wisconsin Gas), including their long-term debt obligations. The only issued and
outstanding voting securities of WEC are and will be WEC Common Stock.
The Commission has determined that acquisitions do not unduly
complicate the capital structure of a holding company system if the purchaser's
capital structure is negligibly affected by the acquisition and the
debt-to-equity ratio of the merged holding company following the acquisition
falls within the seventy-to-thirty percent of debt-to-common equity generally
prescribed by the Commission. Northeast I; Entergy Corporation, Holding Company
Act Release No. 25952 (December 17, 1993).
Set forth below are summaries of the historical capital structures of
WEC and WICOR at June 30, 1999:
<TABLE>
<CAPTION>
WEC and WICOR Historical Capital Structures
(In Millions)
WEC WICOR
--- -----
$ % $ %
<S> <C> <C> <C> <C>
Long-Term Debt* 2,109.3 49.15 205.9 32.70
Trust Preferred Securities of 200.0 4.66 0.0 0.0
Sub
Preferred Equity 30.5 0.71 0.0 0.00
Common Equity 1,951.9 45.48 423.8 67.30
------- ----- ----- -----
Total Capitalization 4,291.7 100.00 629.7 100.00
======= ====== ===== ======
Short-Term Debt 273.9 17.8
===== ====
</TABLE>
The pro forma consolidated capital structure of a combined WEC and
WICOR at June 30, 1999, would have been as follows:
<PAGE>
Post-Transaction WEC's Pro Forma Consolidated Capital Structure**
(in Millions)
$ %
Long-Term Debt* 3,037.3 53.07
Trust Preferred Securities 200.0 3.49
of Sub
Preferred Equity 30.5 0.53
Common Equity 2,455.9 42.91
------- -----
Total Capitalization 5,723.7 100.00
======= ======
Short-Term Debt 291.7
=====
* Includes current portion of long-term debt.
** Purchase price is assumed to be financed with 40 percent stock and 60
percent debt. WEC may use bridge debt to finance transaction,
depending on market conditions and other factors.
As the above tables reveal, WEC's debt-to-equity ratio will not be
affected by any material degree by the Transaction. Following the Transaction,
WEC will have a pro forma common equity to total capitalization ratio of
approximately 42.91 percent, which significantly exceeds the Commission's
traditionally acceptable ratio.
ii. Public Interest, Interest of Investors and Consumers
and Proper Functioning of Holding Company System
Section 10(b)(3) also requires the Commission to determine whether the
Transaction will be detrimental to the public interest, the interests of
investors or consumers or the proper functioning of the post-Transaction WEC
system. As set forth more fully herein, the Transaction is expected to result in
substantial cost savings and synergies, and will improve the efficiencies of the
utility systems. Thus, the Transaction will be in the public interest and the
interest of investors and consumers, and will not be detrimental to the proper
functioning of the resulting holding company system.
<PAGE>
2. Section 10(C)
a. Section 10(c)(1)
Pursuant to Section 10(c)(1), the Commission may not approve an
acquisition of securities or utility assets, or of any other interest, which is
unlawful under the provisions of Section 8 or is detrimental to the carrying out
of the provisions of Section 11. Section 8, which provides that a registered
holding company may not acquire an interest in an electric utility and a gas
utility serving substantially the same territory without the express approval of
the state commission when state law prohibits or requires approval of such an
acquisition, applies only to registered holding companies and, therefore, is not
applicable to this transaction. Although Section 8 is not applicable to the
Transaction, WEC and WICOR will secure the approval of the Wisconsin Commission
prior to consummating the Transaction.
Section 11(b)(1) provides that unless it satisfies the requirements of
Section 11(b)(1)(A)-(C), a registered holding company must limit its operations
to those of "a single integrated public utility system, and to such other
businesses as are reasonably incidental, or economically necessary or
appropriate to the operations of such integrated public-utility system." The
Commission previously has determined that "a holding company may acquire utility
assets that will not, when combined with the acquiring company's existing
utility assets, make up an integrated system or comply fully with the
[requirements of Section 11(b)(1)(A)-(C)], provided that there is de facto
integration of the utility properties and the holding company will be exempt
from registration under Section 3 of the Act following the acquisition." CMP
Group, Inc., Holding Company Act Release No. 26977 (February 12, 1999); see also
Sierra Pacific Resources, Holding Company Act Release No. 27054 (July 26, 1999).
As discussed below in connection with the standards of Section 10(c)(2), the
Transaction satisfies these standards for approval. The Transaction will tend
toward the development of an integrated system that will benefit consumers,
investors and the public.
b. Section 10(c)(2)
Section 10(c)(2) provides that the Commission may not approve an
acquisition "unless the Commission finds that such acquisition will serve the
public interest by tending towards the economical and the efficient development
of an integrated public-utility system ..." As noted above, the Commission has
determined that an exempt holding company may consist of more than one
integrated public utility system, provided that there is de facto integration of
the combined utility properties and that the transaction serves the public
interest. The combined WEC/WICOR system will consist of one integrated electric
utility system and one integrated gas utility system, which in turn will be
integrated in a number of important ways.
<PAGE>
i. Integrated Electric Utility System
With respect to electric utility facilities, Section 2(a)(29)(A)
defines an integrated electric utility system as:
A system consisting of one or more units of generating plants and/or
transmission lines and/or distributing facilities, whose utility
assets, whether owned by one or more electric utility companies, are
physically interconnected or capable of physical interconnection and
which under normal conditions may be economically operated as a single
interconnected and coordinated system confined in its operations to a
single area or region, in one or more States, not so large as to
impair (considering the state of the art and the area or region
affected) the advantages of localized management, efficient operation,
and the effectiveness of regulation.
WEC conducts electric utility operations through its two present
subsidiaries, WEPCO and Edison Sault. The Commission previously has determined
that the electric utility operations of WEPCO and Edison Sault constitute a
single integrated electric utility system. WEC, supra. Following the
Transaction, the electric utility operations of WEC will continue to constitute
an integrated electric utility system.
ii. Integrated Gas Utility System
With respect to gas utility facilities, Section 2(a)(29)(B) defines an
integrated gas utility system as:
a system consisting of one or more gas utility companies which are so
located and related that substantial economies may be effectuated by
being operated as a single coordinated system confined in its
operations to a single area or region, in one or more States, not so
large as to impair (considering the state of the art and the area or
region affected) the advantages of localized management, efficient
operation, and the effectiveness of regulation; Provided, that gas
utility companies deriving natural gas from a common source of supply
may be deemed to be included in a single area or region.
<PAGE>
WEC currently conducts its gas utility operations through its
subsidiary, WEPCO. WICOR currently conducts its gas utility operations through
its subsidiary, Wisconsin Gas. As discussed below, following the Transaction,
the gas utility operations of WEPCO and Wisconsin Gas will constitute an
integrated gas utility system within the meaning of Section 2(a)(29)(B).
(A) Single Area or Region
The WEPCO and Wisconsin Gas retail gas service areas are located
wholly within the state of Wisconsin. The two companies share approximately 100
miles of common gas service territory boundary in southeast Wisconsin (through
Milwaukee, Waukesha, Dodge, and Jefferson counties) and approximately 80 miles
of common gas service territory boundary in the Fox Valley area of central
Wisconsin (through Calumet, Outagamie, Winnebago, Waushara, and Waupaca
counties). Thus, the retail gas service areas of WEPCO and Wisconsin Gas are
adjacent and located in close proximity. The Commission has approved mergers
between gas utilities far more separated. See MCN Corporation, 62 SEC Docket
2379 (September 17, 1996) (approving acquisition of an interest in a gas utility
company by an exempt gas utility holding company whose service area is located
more than 500 miles distant in a non-adjoining State) ("MCN"). The two companies
also jointly own the high-pressure Eagle distribution line from the Northern
Natural Gas Pipeline Eagle Gate to Mukwonago.
Not only are the gas operations of WEPCO and Wisconsin Gas adjacent
and located in close proximity, they also share common sources of gas supply.
Section 2(a)(29)(B) specifically provides that "gas utility companies deriving
natural gas from a common source of supply may be deemed to be included in a
single area or region." Historically, in determining whether two gas companies
share a "common source of supply," the Commission has placed primary importance
on whether the gas supply of the two companies is derived from the same gas
producing areas (or basins), recognizing that the most significant economies and
efficiencies that two entities can achieve is through the coordination and
management of gas supply. Both WEPCO and Wisconsin Gas obtain all of their gas
supply from the same basins, namely 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. WEPCO contracts
for firm capacity from the Oklahoma and Texas basins and the Gulf of Mexico on a
relatively equal basis, with a somewhat smaller amount from Canada. Wisconsin
Gas has contracts for firm supplies with terms in excess of 30 days with 18 gas
suppliers for gas produced in each of the three producing areas discussed above.
WEPCO has contracts for firm supplies with terms in excess of 30 days with 16
gas suppliers for gas produced in each of the three producing areas discussed
above.
In addition, WEPCO and Wisconsin Gas obtain transportation services
from several of the same interstate gas pipelines, namely ANR, Northern Natural
<PAGE>
and Viking. Although ANR can supply all of Wisconsin Gas' Milwaukee area annual
market requirements, Northern Natural can supply approximately 25 percent of
those requirements. Wisconsin Gas also has contracted with ANR for substantial
underground storage capacity in Michigan. Wisconsin Gas' distribution system
includes mains connected at 146 gate stations to the pipeline transmission
systems of ANR, Northern Natural and Viking. WEPCO's gas distribution system
include mains connected at 21 gate stations to the pipeline transmission systems
of ANR, Northern Natural and NGPL. Accordingly, there is substantial evidence
that WEPCO and Wisconsin Gas share a common source of supply, in terms of supply
basins, suppliers and pipelines.
Any determination of the appropriate size of the area or region calls
for consideration of the "state of the art" in the gas industry. In this regard,
the "state of the art" in the gas industry continues to evolve and change,
primarily as a result of decontrol of wellhead prices, the continuing
development of an integrated national gas transportation network, the emergence
of marketers and brokers, and the "unbundling" of the commodity and
transportation functions of pipelines in response to various FERC initiatives.3
Of particular importance has been the formation of a national network of trading
hubs at locations where interstate pipelines intersect.
Several interstate gas pipelines, including ANR and NGPL, converge in
an area near Chicago, Illinois. The Alliance pipeline currently is under
construction. Alliance originates in western Canada and terminates at Joliet.
Alliance will have capacity of 2.0 billion dekatherms per day. Two large gas
distribution companies, Peoples Energy and Nicor Gas, have facilities in the hub
and are able to provide services for gas purchasers. This aggregation of
pipelines and large gas utilities forms what has been denominated the "Chicago
Market Hub". Several proposed pipelines could become part of the hub, and in the
future, it is likely that the hub could be expanded to include several other
existing pipelines that operate in northern Illinois. Currently, and increasing
in the future as long-line capacity contracts expire, the Chicago Market Hub
will be a place where gas is priced, sold and delivered in a competitive market.
Utilities and other shippers will be able to purchase gas originating in most of
the major gas producing areas of North America at the hub, and they will not
have to hold pipeline capacity contracts from the point of production to their
markets to do so as has been necessary historically. The pipelines or utilities
- --------------
3 The Commission has taken notice of the regulatory and technological changes
that have reshaped the natural gas industry over the past two decades. See
1995 Report, pp. 29 - 31. In the Report, the Division recommended that the
Commission "interpret the single area or region' requirement [of Section
2(a)(29)] flexibly, recognizing technological advances, consistent with the
purposes and provisions of the Act." Id. at 73.
<PAGE>
with facilities in or near the Chicago Market Hub offer ancillary services, such
as storage, parking, lending, and back-haul services, thereby providing the
flexibility gas utilities need to manage their changing seasonal, and even
daily, demands for gas. The proposed Guardian pipeline is designed to access gas
delivered at the Chicago Market Hub from any of the pipelines comprising the hub
and to transport the gas to Wisconsin. Substantially all of the capacity that
Wisconsin Gas and WEPCO use to serve southeastern Wisconsin is under long-term,
long-haul or storage contracts that expire between now and October 31, 2003.
Therefore, in the near future Wisconsin Gas and WEPCO will have the opportunity
to restructure their capacity portfolios to take advantage of the gas purchasing
opportunities at the Chicago Market Hub.
With the construction of new pipeline capacity and development of
trading "hubs" and market centers, which now provide buyers with access to gas
supplies in many producing areas, the gas industry is rapidly evolving into a
fully integrated, competitive, marketplace. These developments will allow WEPCO
and Wisconsin Gas even greater flexibility in coordinating and managing common
supply.
The Chicago hub is of special importance as a result of the increased
importation of low-cost western Canadian gas. With the expansion of import
capacity for western Canadian gas into the Chicago area, it is projected that
Illinois will experience an excess supply situation. Given the proximity of
Chicago to Wisconsin, it is likely that the Chicago hub itself will become an
important supply region for the majority of gas moving to Wisconsin. Both WEC
and WICOR have continued interest in expanding market access to the Chicago hub.
Because WEPCO and Wisconsin Gas share access through their respective
pipeline transporters to several industry-recognized market and supply-area
hubs, including the Chicago hub, WEPCO and Wisconsin Gas will have the physical
ability to coordinate and manage their portfolios of supply, transportation, and
storage.
(B) Coordinated Operations
After the Transaction, WEC and WICOR plan to coordinate the operation
of their gas utility operations in a number of ways. For example, WEPCO and
Wisconsin Gas plan to evaluate ways to consolidate their gas purchasing
functions, and expect that significant savings will result as a result of the
combined company's increased options and flexibility. WEPCO and Wisconsin Gas
also will evaluate ways to combine their service center operations where
feasible. The merged company will explore the possibility of high-pressure
pipeline interconnects between the systems. These and other coordinated
operations are discussed in detail in the Testimony of James F. Schott, filed
with the Wisconsin Commission in support of WEC's Application for the Wisconsin
<PAGE>
Commission's approval of the Transaction (the "Wisconsin Application") (Exhibit
D-1).
(C) Economies and Efficiencies
It is estimated that the Transaction will produce annual savings of
approximately $35 million, as the result of lower costs for purchased gas;
materials and services through enhanced purchasing power; elimination of
duplicative resources and services; and consolidation of operations and
functions over time, as described above. The expected benefits and cost savings
flowing from the Transaction are discussed in the Wisconsin Application (Exhibit
D-1).
(D) Absence of Impairment
The integrated gas utility system consisting of the gas operations of
WEPCO and Wisconsin Gas will not be so large as to impair the advantages of
localized management, efficient operation and the effectiveness of regulation.
As discussed, the Transaction will result in substantial economies and
efficiencies. The Transaction will not impair the effectiveness of state
regulation. Each of WEPCO, Edison Sault, and Wisconsin Gas will continue its
separate existence as before and their utility operations will remain subject to
the same regulatory authorities by which they are presently regulated, namely
the Wisconsin Commission, the Michigan Commission, the FERC, and the NRC.
iii. De Facto Integration
Following the Transaction, there will be clear de facto integration of
WEC's integrated electric utility system and integrated gas utility system.
First, the respective service territories of the gas and electric systems will
be "overlapping, adjacent or in close proximity to each other." See CMP, PP&L.
Second, the electric and gas systems will be coordinated with respect to a
number of administrative, operational and support functions. Such functions
being considered include: human resources, payroll, customer service, meter
reading, billing, supply chain, fleet, accounting and treasury. Third, the
Transaction will result in a company that will be able more efficiently and
effectively to provide energy services to customers. Fourth, the Transaction
will not result in any of the abuses, such as "ownership of scattered utility
properties, inefficient operations, lack of local management or evasion of state
regulation, that Section 11(b)(1) and the Act generally were intended to
address." See Id. Accordingly, the Transaction will satisfy the requirements of
Section 10(c)(2).
<PAGE>
3. Section 10(F)
Section 10(f) provides that the Commission may not approve an
acquisition "unless it appears to the satisfaction of the Commission that such
State laws as may apply in respect of such acquisition have been complied with
...."
As described below, the Transaction requires the approval of the
Wisconsin Commission. On July 20, 1999, WEC filed the Wisconsin Application, a
copy of which is attached as Exhibit D-1. The Michigan Commission does not have
the statutory authority to review holding company-to-holding company mergers or
acquisitions. Thus, no approval or authorization of the Michigan Commission is
required for the Transaction.
B. Section 3(A)(1)
Section 3(a)(1) provides that unless the Commission would find an
exemption "detrimental to the public interest or the interest of investors or
consumers," the Commission shall exempt any holding company from registration if
such holding company and every subsidiary company thereof, which is a
public utility company from which such holding company derives,
directly or indirectly, any material part of its income, are
predominantly intrastate in character and carry on their business
substantially in a single State in which such holding company and
every such subsidiary company thereof are organized.
As previously noted, WEC currently is a Section 3(a)(1) exempt holding
company pursuant to Commission order. After consummation of the Transaction, WEC
will continue to satisfy the requirements of Section 3(a)(1). As a result of the
Transaction, WEC will acquire one additional utility subsidiary, Wisconsin Gas.
Wisconsin Gas is incorporated under the laws of the state of Wisconsin and
conducts all of its gas business within Wisconsin. The merged company will
obtain approximately 93 percent of its utility gross revenues from within
Wisconsin. Moreover, the Transaction will result in significant economies and
efficiencies which will benefit the interests of consumers, investors and the
public. Accordingly, after WEC's acquisition of WICOR, and therefore Wisconsin
Gas, WEC will continue to satisfy the standards of Section 3(a)(1).4
- ---------------
4 WICOR also will continue to satisfy the standards of Section 3(a)(1).
<PAGE>
ITEM IV: REGULATORY APPROVALS
As noted above, the Transaction must be approved by the Wisconsin
Commission. The Wisconsin Application is attached as Exhibit D-1.
The HSR Act, and rules and regulations thereunder, provide that
certain merger transactions (including the Transaction) may not be consummated
until required information and materials have been furnished to the DOJ and the
FTC and certain waiting periods have expired or been terminated. WEC and WICOR
submitted their HSR filings on September 22, 1999.
ITEM V: PROCEDURE
The Commission is respectfully requested to issue and publish not
later than December 1, 1999, the requisite notice under Rule 23 with respect to
the filing of this Application/Declaration, such notice to specify a date not
later than December 21, 1999 by which comments may be entered and a date not
later than January 14, 2000 as the date after which an order of the Commission
granting and permitting this Application/Declaration to become effective may be
entered by the Commission.
It is submitted that a recommended decision by a hearing or other
responsible officer of the Commission is not needed for approval of the proposed
Transaction. The Division of Investment Management may assist in the preparation
of the Commission's decision. There should be no waiting period between the
issuance of the Commission's order and the date on which it is to become
effective.
ITEM VI: EXHIBITS AND FINANCIAL STATEMENTS
A. EXHIBITS
A-1 Restated Articles of Incorporation of WEC, as amended and
restated effective June 12, 1995 (Exhibit (3)-1 to WEC's Form
10-Q for the quarter ended June 30, 1995, File No. 1-9057, and
incorporated herein by reference)
A-2 By-Laws of WEC, as amended to December 17, 1997 (Exhibit 3.2
to WEC's Annual Report on Form 10-K for the year ended
December 31, 1997, File No. 1-9057, and incorporated herein by
reference)
A-3 Restated Articles of Incorporation of WEPCO, as amended and
restated effective January 10, 1995 (Exhibit (3)-1 to WEPCO's
Annual Report of Form10-K for the year ended December 31,
1994, File No. 1-1245, and incorporated herein by reference)
A-4 By-Laws of WEPCO, as amended to December 17, 1997 (Exhibit 3.2
to WEPCO's Annual Report on Form 10-K for the year ended
<PAGE>
December 31, 1997, File No. 1-1245, and incorporated herein by
reference)
A-5 Restated Articles of Incorporation of WICOR, as amended
(Exhibit 3.1 to WICOR's Form 10-Q for the quarter ended July
31, 1998, File No. 1-7951, and incorporated herein by
reference)
A-6 By-Laws of WICOR, as amended
A-7 Restated Articles of Incorporation of Wisconsin Gas (Exhibit
3.1 to Wisconsin Gas' Form 10-K for the year ended December
31, 1998, File No. 1-7951, and incorporated herein by
reference)
A-8 By-Laws of Wisconsin Gas
A-9 Articles of Incorporation of CEW Acquisition (to be filed by
Amendment)
A-10 By-Laws of CEW Acquisition (to be filed by Amendment)
B-1 Merger Agreement (Appendix A to WEC and WICOR Joint Proxy
Statement/Prospectus included in WEC Registration Statement on
Form S-4, File No. 333-86827, and incorporated herein by
reference)
C-1 WEC and WICOR Joint Proxy Statement/Prospectus included in
WEC Registration Statement on Form S-4 (File No. 333-86827,
and incorporated herein by reference)
D-1 Application filed with the Wisconsin Commission requesting
approval of the Transaction
D-2 Wisconsin Commission order approving the Transaction (to be
filed by Amendment)
E-1 Map of WEPCO electric service area
E-2 Map of WEPCO transmission system (Exhibit E-6 to WEC's Form
U-1, dated January 16, 1998, File No. 70-9161, and
incorporated herein by reference)
E-3 Map of WEPCO gas service area
E-4 Map of Edison Sault electric service area
E-5 Map of Edison Sault transmission system (Exhibit E-5 to WEC's
Form U-1, dated January 16, 1998, File No. 70-9161, and
incorporated herein by reference)
E-6 Map of Wisconsin Gas service area
E-7 Maps showing interconnections of WEPCO and Edison Sault, with
each other and with other systems (Exhibit E-2 to WEC's Form
U-1, dated January 16, 1998, File No. 70-9161, and
incorporated herein by reference)
E-8 WEC corporate organization chart
E-9 WICOR corporate organization chart
E-10 Post-Transaction corporate organization chart
<PAGE>
F-1 Preliminary opinion of counsel (to be filed by Amendment)
F-2 Past-tense opinion of counsel (to be filed by Amendment)
F-3 Opinion of Chase Securities Inc. (Appendix B to WEC and WICOR
Joint Proxy Statement/Prospectus included in WEC Registration
Statement on Form S-4, File No. 333-86827, and incorporated
herein by reference)
F-4 Opinion of Merrill Lynch, Pierce, Fenner & Smith Incorporated
(Appendix C to WEC and WICOR Joint Proxy Statement/Prospectus
included in WEC Registration Statement on Form S-4, File No.
333- 86827, and incorporated herein by reference)
G-1 Combined Annual Report of WEC and WEPCO on Form 10-K for the
year ended December 31, 1998, dated March 25, 1999 (File Nos.
1- 9057 and 1-1245 and incorporated herein by reference)
G-2 Combined Quarterly Report of WEC and WEPCO on Form 10-Q for
the quarter ended June 30, 1999, dated August 13, 1999 (File
Nos. 1- 9057 and 1-1245 and incorporated herein by reference)
G-3 Annual Report of WICOR and Wisconsin Gas on Form 10-K for the
year ended December 31, 1998, dated March 23, 1999 (File Nos.
1- 7951and 1-7530 and incorporated herein by reference)
G-4 Quarterly Report of WICOR and Wisconsin Gas on Form 10-Q for
the quarter ended June 30, 1999, dated August 12, 1999, as
amended (File Nos. 1-7951 and 1-7530 and incorporated herein
by reference)
H-1 Proposed Form of Notice
I-1 Wisconsin Commission Proceeding Responses to Certain Data
Requests
B. Financial Statements
FS-1 WEC Consolidated Balance Sheet at December 31, 1998 (see
Annual Report of WEC on Form 10-K for the year ended December
31, 1998 (Exhibit G-1 hereto))
FS-2 WEC Consolidated Statements of Income for the year 1998 (see
Annual Report of WEC on Form 10-K for the year ended December
31, 1998 (Exhibit G-1 hereto))
FS-3 WICOR Consolidated Balance Sheet at December 31, 1998 (see
Annual Report of WICOR on Form 10-K for the year ended
December 31, 1998 (Exhibit G-3 hereto))
FS-4 WICOR Consolidated Statements of Income for the year 1998 (see
Annual Report of WICOR on Form 10-K for the year ended
December 31, 1998 (Exhibit G-3 hereto))
<PAGE>
ITEM VII: INFORMATION AS TO ENVIRONMENTAL EFFECTS
The Transaction neither involves "major federal actions" nor
"significantly [affects] the quality of the human environment" as those terms
are used in Section 102(2)(C) of the National Environmental Policy Act, 42
U.S.C. Sec. 4332. The only federal actions related to the Transaction pertain to
the required approvals and actions summarized in Item IV, and Commission
approval of this Application/Declaration. Consummation of the Transaction will
not result in changes in the operations of the public utilities involved in the
Transaction that would have any impact on the environment. No federal agency is
preparing an environmental impact statement with respect to this matter.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Public Utility Holding Company Act
of 1935, the undersigned company has duly caused this Application/Declaration to
be signed on its behalf by the undersigned thereunto duly authorized.
WISCONSIN ENERGY CORPORATION
BY: /s/ Paul Donovan
-----------------------------
Name: Paul Donovan
Title: Senior Vice President and
Chief Financial Officer
Dated: November 1, 1999
BY-LAWS
OF
WICOR, INC.
(A WISCONSIN CORPORATION)
EFFECTIVE APRIL 22, 1999
<PAGE>
BY-LAWS
OF
WICOR, INC.
(A WISCONSIN CORPORATION)
EFFECTIVE APRIL 22, 1999
ARTICLE I. OFFICES
1.1. PRINCIPAL AND BUSINESS OFFICES. The corporation may have such
principal and other business offices, either within or without the State of
Wisconsin, as the Board of Directors may designate or as the business of the
corporation may require from time to time.
1.2. REGISTERED OFFICE. The registered office of the corporation
required by the Wisconsin Business Corporation Law to be maintained in the State
of Wisconsin may be, but need not be, identical with the principal office in the
State of Wisconsin, and the address of the registered office may be changed from
time to time by the Board of Directors or by the registered agent. The business
office of the registered agent of the corporation shall be identical to such
registered office.
ARTICLE II. SHAREHOLDERS
2.1. ANNUAL MEETING. The annual meeting of the shareholders shall be
held on the fourth Thursday in April of each year at 11:00 a.m. local time, or
at such other time and date within thirty days before or after such date as may
be fixed by or under the authority of the Board of Directors, for the purpose of
electing directors and for the transaction of such other business as may come
before the meeting. If the day fixed for the annual meeting shall be a legal
holiday in the State of Wisconsin, such meeting shall be held on the next
succeeding business day.
2.2. SPECIAL MEETINGS. Special meetings of the shareholders, for any
purpose or purposes, unless otherwise prescribed by the Wisconsin Business
Corporation Law, may be called by the Board of Directors, the Chairman, the Vice
Chairman or the President. The corporation shall call a special meeting of
shareholders in the event that the holders of at least 10% of all of the votes
entitled to be cast on any issue proposed to be considered at the proposed
special meeting sign, date and deliver to the corporation one or more written
demands for the meeting describing one or more purposes for which it is to be
held. The corporation shall give notice of such a special meeting within thirty
(30) days after the date that the demand is delivered to the corporation.
2.3. PLACE OF MEETING. The Board of Directors may designate any place,
either within or without the State of Wisconsin, as the place of meeting for any
annual or special meeting of shareholders. If no designation is made, the place
of meeting shall be the principal office of the corporation. Any meeting may be
adjourned to reconvene at any place designated by vote of the shares represented
thereat.
2.4. NOTICE OF MEETING. Written notice stating the date, time and
place of any meeting of shareholders and, in case of a special meeting, the
purpose or purposes for which the meeting is called, shall be delivered not less
<PAGE>
than ten (10) days nor more than sixty (60) days before the date of the meeting
(unless a different time is provided by the Wisconsin Business Corporation Law
or the articles of incorporation), either personally or by mail, by or at the
direction of the Chairman, the Vice Chairman, the President or the Secretary, to
each shareholder of record entitled to vote at such meeting and to such other
persons as required by the Wisconsin Business Corporation Law. If mailed, such
notice shall be deemed to be effective when deposited in the United States mail,
addressed to the shareholder at his or her address as it appears on the stock
record books of the corporation, with postage thereon prepaid. If an annual or
special meeting of shareholders is adjourned to a different date, time or place,
the corporation shall not be required to give notice of the new date, time or
place if the new date, time or place is announced at the meeting before
adjournment; provided, however, that if a new record date for an adjourned
meeting is or must be fixed, the corporation shall give notice of the adjourned
meeting to persons who are shareholders as of the new record date.
2.5. WAIVER OF NOTICE. A shareholder may waive any notice required by
the Wisconsin Business Corporation Law, the articles of incorporation or these
by-laws before or after the date and time stated in the notice. The waiver shall
be in writing and signed by the shareholder entitled to the notice, contain the
same information that would have been required in the notice under applicable
provisions of the Wisconsin Business Corporation Law (except that the time and
place of meeting need not be stated) and be delivered to the corporation for
inclusion in the corporate records. A shareholder's attendance at a meeting, in
person or by proxy, waives objection to all of the following: (a) lack of notice
or defective notice of the meeting, unless the shareholder at the beginning of
the meeting or promptly upon arrival objects to holding the meeting or
transacting business at the meeting; and (b) consideration of a particular
matter at the meeting that is not within the purpose described in the meeting
notice, unless the shareholder objects to considering the matter when it is
presented.
2.6. FIXING OF RECORD DATE. The Board of Directors may fix in advance a
date as the record date for the purpose of determining shareholders entitled to
notice of and to vote at any meeting of shareholders, shareholders entitled to
demand a special meeting as contemplated by Section 2.2 hereof, shareholders
entitled to take any other action, or shareholders for any other purpose. Such
record date shall not be more than seventy (70) days prior to the date on which
the particular action, requiring such determination of shareholders, is to be
taken. If no record date is fixed by the Board of Directors or by the Wisconsin
Business Corporation Law for the determination of shareholders entitled to
notice of and to vote at a meeting of shareholders, the record date shall be the
close of business on the day before the first notice is given to shareholders.
If no record date is fixed by the Board of Directors or by the Wisconsin
Business Corporation Law for the determination of shareholders entitled to
demand a special meeting as contemplated in Section 2.2 hereof, the record date
shall be the date that the first shareholder signs the demand. Except as
provided by the Wisconsin Business Corporation Law for a court-ordered
adjournment, a determination of shareholders entitled to notice of and to vote
at a meeting of shareholders is effective for any adjournment of such meeting
unless the Board of Directors fixes a new record date, which it shall do if the
meeting is adjourned to a date more than one hundred twenty (120) days after the
date fixed for the original meeting. The record date for determining
shareholders entitled to a distribution (other than a distribution involving a
purchase, redemption or other acquisition of the corporation's shares) or a
share dividend is the date on which the Board of Directors authorized the
distribution or share dividend, as the case may be, unless the Board of
Directors fixes a different record date.
2.7. SHAREHOLDERS' LIST FOR MEETINGS. After a record date for a
special or annual meeting of shareholders has been fixed, the corporation shall
prepare a list of the names of all of the shareholders entitled to notice of the
meeting. The list shall be arranged by class or series of shares, if any, and
show the address of and number of shares held by each shareholder. Such list
shall be available for inspection by any shareholder, beginning two (2) business
<PAGE>
days after notice of the meeting is given for which the list was prepared and
continuing to the date of the meeting, at the corporation's principal office or
at a place identified in the meeting notice in the city where the meeting will
be held. A shareholder or his or her agent may, on written demand, inspect and,
subject to the limitations imposed by the Wisconsin Business Corporation Law,
copy the list, during regular business hours and at his or her expense, during
the period that it is available for inspection pursuant to this Section 2.7. The
corporation shall make the shareholders' list available at the meeting and any
shareholder or his or her agent or attorney may inspect the list at any time
during the meeting or any adjournment thereof. Refusal or failure to prepare or
make available the shareholders' list shall not affect the validity of any
action taken at a meeting of shareholders.
2.8. QUORUM AND VOTING REQUIREMENTS. Shares entitled to vote as a
separate voting group may take action on a matter at a meeting only if a quorum
of those shares exists with respect to that matter. If the corporation has only
one class of common stock outstanding, such class shall constitute a separate
voting group for purposes of this Section 2.8. Except as otherwise provided in
the articles of incorporation, any by-law adopted under authority granted in the
articles of incorporation, or the Wisconsin Business Corporation Law, a majority
of the votes entitled to be cast on the matter shall constitute a quorum of the
voting group for action on that matter. Once a share is represented for any
purpose at a meeting, other than for the purpose of objecting to holding the
meeting or transacting business at the meeting, it is considered present for
purposes of determining whether a quorum exists for the remainder of the meeting
and for any adjournment of that meeting unless a new record date is or must be
set for the adjourned meeting. If a quorum exists, except in the case of the
election of directors, action on a matter shall be approved if the votes cast
within the voting group favoring the action exceed the votes cast opposing the
action, unless the articles of incorporation, any by-law adopted under authority
granted in the articles of incorporation, or the Wisconsin Business Corporation
Law requires a greater number of affirmative votes. Unless otherwise provided in
the articles of incorporation, directors shall be elected by a plurality of the
votes cast by the shares entitled to vote in the election of directors at a
meeting at which a quorum is present. For purposes of this Section 2.8,
"plurality" means that the individuals with the largest number of votes are
elected as directors up to the maximum number of directors to be chosen at the
meeting. Though less than a quorum of the outstanding votes of a voting group
are represented at a meeting, a majority of the votes so represented may adjourn
the meeting from time to time without further notice. At such adjourned meeting
at which a quorum shall be present or represented, any business may be
transacted which might have been transacted at the meeting as originally
noticed.
2.9. CONDUCT OF MEETING. The Chairman, and in his or her absence, the
Vice Chairman, and in his or her absence, the President, and in his or her
absence, a Vice President in the order provided under Section 4.10 hereof, and
in their absence, any person chosen by the shareholders present shall call the
meeting of the shareholders to order and shall act as chairman of the meeting,
and the Secretary of the corporation shall act as secretary of all meetings of
the shareholders, but, in the absence of the Secretary, the presiding officer
may appoint any other person to act as secretary of the meeting.
2.10. PROXIES. At all meetings of shareholders, a shareholder may vote
his or her shares in person or by proxy. A shareholder may appoint a proxy to
vote or otherwise act for the shareholder by signing an appointment form, either
personally or by his or her attorney-in-fact. An appointment of a proxy is
effective when received by the Secretary or other officer or agent of the
corporation authorized to tabulate votes. An appointment is valid for eleven
(11) months from the date of its signing unless a different period is expressly
provided in the appointment form. The presence of a shareholder who has
<PAGE>
filed a proxy shall not of itself constitute revocation. The Board of Directors
shall have the power and authority to make rules establishing presumptions as to
the validity and sufficiency of proxies.
2.11. VOTING OF SHARES. Except as provided in the articles of
incorporation or in the Wisconsin Business Corporation Law, each outstanding
share, regardless of class, is entitled to one vote on each matter voted on at a
meeting of shareholders.
2.12. ACTION WITHOUT MEETING. Any action required or permitted by the
articles of incorporation or these by-laws or any provision of the Wisconsin
Business Corporation Law to be taken at a meeting of the shareholders may be
taken without a meeting and without action by the Board of Directors if a
written consent or consents, describing the action so taken, is signed by all of
the shareholders entitled to vote with respect to the subject matter thereof and
delivered to the corporation for inclusion in the corporate records.
2.13. ACCEPTANCE OF INSTRUMENTS. Showing Shareholder Action. If the
name signed on a vote, consent, waiver or proxy appointment corresponds to the
name of a shareholder, the corporation, if acting in good faith, may accept the
vote, consent, waiver or proxy appointment and give it effect as the act of a
shareholder. If the name signed on a vote, consent, waiver or proxy appointment
does not correspond to the name of a shareholder, the corporation, if acting in
good faith, may accept the vote, consent, waiver or proxy appointment and give
it effect as the act of the shareholder if any of the following apply:
(a) The shareholder is an entity and the name signed purports
to be that of an officer or agent of the entity.
(b) The name purports to be that of a personal representative,
administrator, executor, guardian or conservator representing
the shareholder and, if the corporation requests, evidence of
fiduciary status acceptable to the corporation is presented
with respect to the vote, consent, waiver or proxy
appointment.
(c) The name signed purports to be that of a receiver or
trustee in bankruptcy of the shareholder and, if the
corporation requests, evidence of this status acceptable to
the corporation is presented with respect to the vote,
consent, waiver or proxy appointment.
(d) The name signed purports to be that of a pledge,
beneficial owner, or attorney-in-fact of the shareholder and,
if the corporation requests, evidence acceptable to the
corporation of the signatory's authority to sign for the
shareholder is presented with respect to the vote, consent,
waiver or proxy appointment.
(e) Two or more persons are the shareholders as co-tenants or
fiduciaries and the name signed purports to be the name of at
least one of the co-owners and the person signing appears to
be acting on behalf of all co-owners.
The corporation may reject a vote, consent, waiver or proxy appointment
if the Secretary or other officer or agent of the corporation who is authorized
to tabulate votes, acting in good faith, has reasonable basis for doubt about
the validity of the signature on it or about the signatoryOs authority to sign
for the shareholder.
<PAGE>
ARTICLE III. BOARD OF DIRECTORS
3.1. GENERAL POWERS. Classification and Number. All corporate powers
shall be exercised by or under the authority of, and the business affairs of the
corporation managed under the direction of, the Board of Directors. The number
of directors of the corporation shall be eight (8), divided into three classes
of four (4), two (2), and two (2) directors, respectively, and designated as
Class I, Class II and Class III, respectively. At each annual meeting of
shareholders the successors to the class of directors whose terms shall expire
at the time of such annual meeting shall be elected to hold office until the
third succeeding annual meeting of shareholders and until their successors are
elected and qualified.
3.2. TENURE AND QUALIFICATIONS. Each director shall hold office until
the next annual meeting of shareholders in the year in which such director's
term expires and until his or her successor shall have been elected and, if
necessary, qualified, or until there is a decrease in the number of directors
which takes effect after the expiration of his or her term, or until his or her
prior retirement, death, resignation or removal. The retirement or resignation
of a director who is an officer of this corporation or an affiliated
corporation, but not also the chief executive officer of this corporation, shall
take effect at the time he or she ceases to hold his or her position as an
officer of this corporation or an affiliated corporation. Any other director
shall resign from the Board of Directors effective as of the annual meeting of
shareholders next following the date on which he or she attains the age of
seventy (70) years. No person shall be eligible for election as a director after
he or she shall have attained the age of seventy (70) years. Effective April 22,
1999, any non-employee director of the corporation who (i) has a material change
in his or her position or employment, or (ii) is the subject of media attention
that might reflect unfavorably on his or her continued service on the Board of
Directors, or (iii) finds himself or herself to be in a situation that may
present, or appear to present, a conflict of interest with the corporation,
shall submit his or her resignation as a director, which resignation shall be
considered by the Board of Directors and either accepted or rejected based upon
the corporation's best interests. A director may be removed from office only as
provided in the articles of incorporation at a meeting of the shareholders
called for the purpose of removing the director, and the meeting notice shall
state that the purpose, or one of the purposes, of the meeting is removal of the
director. A director may resign at any time by delivering written notice which
complies with the Wisconsin Business Corporation Law to the Board of Directors,
to the Chairman or the President (in his or her capacity as chairperson of the
Board of Directors) or to the corporation. A director's resignation is effective
when the notice is delivered unless the notice specifies a later effective date.
Directors need not be residents of the State of Wisconsin or shareholders of the
corporation. No other restrictions, limitations or qualifications may be imposed
on individuals for service as a director.
3.3. REGULAR MEETINGS. A regular meeting of the Board of Directors
shall be held without other notice than this by-law immediately after the annual
meeting of shareholders and each adjourned session thereof. The place of such
regular meeting shall be the principal business office of the corporation in the
State of Wisconsin, or such other suitable place as may be announced at such
meeting of shareholders. The Board of Directors may provide, by resolution, the
date, time and place, either within or without the State of Wisconsin, for the
holding of additional regular meetings of the Board of Directors without other
notice than such resolution.
3.4. SPECIAL MEETINGS. Special meetings of the Board of Directors may
be called by or at the request of the Chairman, the Vice Chairman, the
President, Secretary or any two (2) directors. The Chairman, the Vice Chairman,
the President or Secretary may fix any place, either within or without the
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State of Wisconsin, as the place for holding any special meeting of the Board of
Directors, and if no other place is fixed the place of the meeting shall be the
principal business office of the corporation in the State of Wisconsin.
3.5. NOTICE; WAIVER. Notice of each meeting of the Board of Directors
(unless otherwise provided in or pursuant to Section 3.3) shall be given by
written notice delivered or communicated in person, by telegraph, teletype,
facsimile or other form of wire or wireless communication, or by mail or private
carrier, to each director at his business address or at such other address as
such director shall have designated in writing filed with the Secretary, in each
case not less than forty-eight (48) hours prior to the meeting. The notice need
not describe the purpose of the meeting of the Board of Directors or the
business to be transacted at such meeting. If mailed, such notice shall be
deemed to be effective when deposited in the United States mail so addressed,
with postage thereon prepaid. If notice is given by telegram, such notice shall
be deemed to be effective when the telegram is delivered to the telegraph
company. If notice is given by private carrier, such notice shall be deemed to
be effective when delivered to the private carrier. Whenever any notice whatever
is required to be given to any director of the corporation under the articles of
incorporation or these by-laws or any provision of the Wisconsin Business
Corporation Law, a waiver thereof in writing, signed at any time, whether before
or after the date and time of meeting, by the director entitled to such notice
shall be deemed equivalent to the giving of such notice. The corporation shall
retain any such waiver as part of the permanent corporate records. A director's
attendance at or participation in a meeting waives any required notice to him or
her of the meeting unless the director at the beginning of the meeting or
promptly upon his or her arrival objects to holding the meeting or transacting
business at the meeting and does not thereafter vote for or assent to action
taken at the meeting.
3.6. QUORUM. Except as otherwise provided by the Wisconsin Business
Corporation Law or by the articles of incorporation or these by-laws, a majority
of the number of directors specified in Section 3.1 of these by-laws shall
constitute a quorum for the transaction of business at any meeting of the Board
of Directors. Except as otherwise provided by the Wisconsin Business Corporation
Law or by the articles of incorporation or by these by-laws, a quorum of any
committee of the Board of Directors created pursuant to Section 3.12 hereof
shall consist of a majority of the number of directors appointed to serve on the
committee. A majority of the directors present (though less than such quorum)
may adjourn any meeting of the Board of Directors or any committee thereof, as
the case may be, from time to time without further notice.
3.7. MANNER OF ACTING. The affirmative vote of a majority of the
directors present at a meeting of the Board of Directors or a committee thereof
at which a quorum is present shall be the act of the Board of Directors or such
committee, as the case may be, unless the Wisconsin Business Corporation Law,
the articles of incorporation or these by-laws require the vote of a greater
number of directors.
3.8. CONDUCT OF MEETINGS. The Chairman, and in his or her absence, the
Vice Chairman, and in his or her absence, the President, and in his or her
absence, a Vice President in the order provided under Section 4.10, and in their
absence, any director chosen by the directors present, shall call meetings of
the Board of Directors to order and shall act as chairman of the meeting. The
Secretary of the corporation shall act as secretary of all meetings of the Board
of Directors but in the absence of the Secretary, the presiding officer may
appoint any other person present to act as secretary of the meeting. Minutes of
any regular or special meeting of the Board of Directors shall be prepared and
distributed to each director.
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3.9. VACANCIES. Any vacancies occurring in the Board of Directors,
including a vacancy created by an increase in the number of directors, shall be
filled only as provided in the articles of incorporation. A vacancy that will
occur at a specific later date, because of a resignation effective at a later
date or otherwise, may be filled before the vacancy occurs, but the new director
may not take office until the vacancy occurs.
3.10. COMPENSATION. The Board of Directors, irrespective of any
personal interest of any of its members, may establish reasonable compensation
of all directors for services to the corporation as directors, officers or
otherwise, or may delegate such authority to an appropriate committee. The Board
of Directors also shall have authority to provide for or delegate authority to
an appropriate committee to provide for reasonable pensions, disability or death
benefits, and other benefits or payments, to directors, officers and employees
and to their estates, families, dependents or beneficiaries on account of prior
services rendered by such directors, officers and employees to the corporation.
3.11. PRESUMPTION OF ASSENT. A director who is present and is announced
as present at a meeting of the Board of Directors or any committee thereof
created in accordance with Section 3.12 hereof, when corporate action is taken,
assents to the action taken unless any of the following occurs: (a) the director
objects at the beginning of the meeting or promptly upon his or her arrival to
holding the meeting or transacting business at the meeting; (b) the director
dissents or abstains from an action taken and minutes of the meeting are
prepared that show the director's dissent or abstention from the action taken;
(c) the director delivers written notice that complies with the Wisconsin
Business Corporation Law of his or her dissent or abstention to the presiding
officer of the meeting before its adjournment or to the corporation immediately
after adjournment of the meeting; or (d) the director dissents or abstains from
an action taken, minutes of the meeting are prepared that fail to show the
director's dissent or abstention from the action taken, and the director
delivers to the corporation a written notice of that failure that complies with
the Wisconsin Business Corporation Law promptly after receiving the minutes.
Such right of dissent or abstention shall not apply to a director who votes in
favor of the action taken.
3.12. COMMITTEES. The Board of Directors by resolution adopted by the
affirmative vote of a majority of all of the directors then in office may create
one or more committees, appoint members of the Board of Directors to serve on
the committees and designate other members of the Board of Directors to serve as
alternates. Each committee shall have two (2) or more members who shall, unless
otherwise provided by the Board of Directors, serve at the pleasure of the Board
of Directors. A committee may be authorized to exercise the authority of the
Board of Directors, except that a committee may not do any of the following: (a)
authorize distributions; (b) approve or propose to shareholders action that the
Wisconsin Business Corporation Law requires to be approved by shareholders; (c)
fill vacancies on the Board of Directors or, unless the Board of Directors
provides by resolution that vacancies on a committee shall be filled by the
affirmative vote of the remaining committee members, on any Board committee; (d)
amend the corporation's articles of incorporation; (e) adopt, amend or repeal
by-laws; (f) approve a plan of merger not requiring shareholder approval; (g)
authorize or approve reacquisition of shares, except according to a formula or
method prescribed by the Board of Directors; and (h) authorize or approve the
issuance or sale or contract for sale of shares, or determine the designation
and relative rights, preferences and limitations of a class or series of shares,
except that the Board of Directors may authorize a committee to do so within
limits prescribed by the Board of Directors. Unless otherwise provided by the
Board of Directors in creating the committee, a committee may employ counsel,
accountants and other consultants to assist it in the exercise of its authority.
3.13. ALTERNATE MEMBERS OF COMMITTEES. The Board of Directors may
appoint annually and from time to time, as alternate members of any committee of
the Board of Directors, directors to serve whenever designated by the committee
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or by the Chairman, the Vice Chairman or the President to take the place of
absent members, or to fill vacancies on such committee until the next meeting of
the Board of Directors. An alternate member of any committee so designated to
serve shall receive compensation for such service as fixed by the Board of
Directors.
3.14. TELEPHONIC MEETINGS. Except as herein provided and
notwithstanding any place set forth in the notice of the meeting or these
by-laws, members of the Board of Directors (and any committees thereof created
pursuant to Section 3.12 hereof) may participate in regular or special meetings
by, or through the use of, any means of communication by which all participants
may simultaneously hear each other, such as by conference telephone. If a
meeting is conducted by such means, then at the commencement of such meeting the
presiding officer shall inform the participating directors that a meeting is
taking place at which official business may be transacted. Any participant in a
meeting by such means shall be deemed present in person at such meeting.
Notwithstanding the foregoing, no action may be taken at any meeting held by
such means on any particular matter which the presiding officer determines, in
his or her sole discretion, to be inappropriate under the circumstances for
action at a meeting held by such means. Such determination shall be made and
announced in advance of such meeting.
3.15. ACTION WITHOUT MEETING. Any action required or permitted by the
Wisconsin Business Corporation Law to be taken at a meeting of the Board of
Directors or a committee thereof created pursuant to Section 3.12 hereof may be
taken without a meeting if the action is taken by all members of the Board or of
the committee. The action shall be evidenced by one or more written consents
describing the action taken, signed by each director or committee member and
retained by the corporation. Such action shall be effective when the last
director or committee member signs the consent, unless the consent specifies a
different effective date.
ARTICLE IV. OFFICERS
4.1. NUMBER. The principal officers of the corporation shall be a
President, the number of Vice Presidents as authorized from time to time by the
Board of Directors, a Secretary, and a Treasurer, each of whom shall be elected
by the Board of Directors. A Chairman, a Vice Chairman and such other officers
and assistant officers as may be deemed necessary may be elected or appointed by
the Board of Directors. The Board of Directors may also authorize any duly
appointed officer to appoint one or more officers or assistant officers. Any two
(2) or more offices may be held by the same person.
4.2. ELECTION AND TERM OF OFFICE. The officers of the corporation to
be elected by the Board of Directors shall be elected annually by the Board of
Directors at the first meeting of the Board of Directors held after each annual
meeting of the shareholders. If the election of officers shall not be held at
such meeting, such election shall be held as soon thereafter as is practicable.
Each officer shall hold office until his or her successor shall have been duly
elected or until his or her prior death, resignation or removal.
4.3. REMOVAL. The Board of Directors may remove any officer and,
unless restricted by the Board of Directors or these by-laws, an officer may
remove any officer or assistant officer appointed by that officer, at any time,
with or without cause and notwithstanding the contract rights, if any, of the
officer removed. The appointment of an officer does not of itself create
contract rights.
4.4. RESIGNATION. An officer may resign at any time by delivering
notice to the corporation that complies with the Wisconsin Business Corporation
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Law. The resignation shall be effective when the notice is delivered, unless the
notice specifies a later effective date and the corporation accepts the later
effective date.
4.5. VACANCIES. A vacancy in any principal office because of death,
resignation, removal, disqualification or otherwise, shall be filled by the
Board of Directors for the unexpired portion of the term. If a resignation of an
officer is effective at a later date as contemplated by Section 4.4 hereof, the
Board of Directors may fill the pending vacancy before the effective date if the
Board provides that the successor may not take office until the effective date.
4.6. CHIEF EXECUTIVE OFFICER. The Board of Directors shall from time
to time designate the Chairman, if any, the Vice Chairman, if any, or the
President as the Chief Executive Officer of the corporation. The President shall
be the Chief Executive Officer when the offices of Chairman and Vice Chairman
are vacant, or when the Board of Directors has not designated the Chairman, if
any, or the Vice Chairman, if any, as Chief Executive Officer. Subject to the
control of the Board of Directors, the Chief Executive Officer shall in general
supervise and control all of the business and affairs of the corporation and
shall perform all duties incident to the office of Chief Executive Officer and
such other duties as may be prescribed by the Board of Directors from time to
time.
4.7. CHAIRMAN. The Chairman, if any, shall, when present, preside at
all meetings of the shareholders and the Board of Directors. He or she shall
have authority, subject to such rules as may be prescribed by the Board of
Directors, to appoint such agents and employees of the corporation as he or she
shall deem necessary, to prescribe their powers, duties and compensation, and to
delegate authority to them. Such agents and employees shall hold office at the
discretion of the Chairman. He or she shall have authority to sign, execute and
acknowledge, on behalf of the corporation, all deeds, mortgages, bonds, stock
certificates, contracts, leases, reports and all other documents or instruments
necessary or proper to be executed in the course of the corporation's regular
business, or which shall be authorized by resolution of the Board of Directors;
and, except as otherwise provided by law or the Board of Directors, he or she
may authorize any other officer or agent of the corporation to sign, execute and
acknowledge such documents or instruments in his or her place and stead. In
general, he or she shall perform all duties incident to the office of Chairman
and such other duties as may be prescribed by the Board of Directors from time
to time.
4.8. VICE CHAIRMAN. The Vice Chairman, if any, shall have such
authority and responsibilities as may be prescribed by the Board of Directors
from time to time. In the absence of the Chairman, or in the event of the
chairman's death or inability to act, or in the event for any reason it shall be
impracticable for the Chairman to act personally, the Vice Chairman shall
perform the duties of the Chairman, and when so acting, shall have all the
powers of and be subject to all of the restrictions upon the Chairman. He or she
shall have authority, subject to such rules as may be prescribed by the Board of
Directors, to appoint such agents and employees of the corporation as he or she
shall deem necessary, to prescribe their powers, duties and compensation, and to
delegate authority to them. Such agents shall hold office at the discretion of
the Vice Chairman. He or she shall have authority to sign, execute and
acknowledge, on behalf of the corporation, all deeds, mortgages, bonds, stock
certificates, contracts, leases, reports and all other documents or instruments
necessary or proper to be executed in the course of the corporation's regular
business, or which shall be authorized by resolution of the Board of Directors;
and, except as otherwise provided by law or the Board of Directors, he or she
may authorize the President or other officer or agent of the corporation to
sign, execute and acknowledge such documents or instruments in his or her place
and stead. In general, he or she shall perform all duties incident to the office
of Vice Chairman and such other duties as may be prescribed by the Chairman or
the Board of Directors from time to time.
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4.9. PRESIDENT. The President shall have such authority and
responsibility as may be prescribed by the Board of Directors from time to time.
In the absence of the Vice Chairman, if any, or in the event of the Vice
Chairman's death or inability to act, or in the event for any reason it shall be
impracticable for the Vice Chairman to act personally, the President shall
perform the duties of the Vice Chairman, and when so acting, shall have all the
powers of and be subject to all the restrictions upon the Vice Chairman. He or
she shall have authority, subject to such rules as may be prescribed by the
Board of Directors, to appoint such agents and employees of the corporation as
he or she shall deem necessary, to prescribe their powers, duties and
compensation, and to delegate authority to them. Such agents shall hold office
at the discretion of the President. He or she shall have authority to sign,
execute and acknowledge, on behalf of the corporation, all deeds, mortgages,
bonds, stock certificates, contracts, leases, reports and all other documents or
instruments necessary or proper to be executed in the course of the
corporation's regular business, or which shall be authorized by resolution of
the Board of Directors; and, except as otherwise provided by law or the Board of
Directors, he or she may authorize any other officer or agent of the corporation
to sign, execute and acknowledge such documents or instruments in his or her
place and stead. In general, he or she shall perform all duties incident to the
office of President and such other duties as may be prescribed by the Chairman,
or Vice Chairman, if any, or the Board of Directors from time to time.
4.10. THE VICE PRESIDENTS. In the absence of the President, or in the
event of the President's death, inability or refusal to act, or in the event for
any reason it shall be impracticable for the President to act personally, the
Vice President (or in the event there be more than one Vice President, the Vice
Presidents in the order designated by the Board of Directors, or in the absence
of any designation, then in the order of their election) shall perform the
duties of the President, and when so acting, shall have all the powers of and be
subject to all the restrictions upon the President. Any Vice President may sign,
with the Secretary or Assistant Secretary, certificates for shares of the
corporation; and shall perform such other duties and have such authority as from
time to time may be delegated or assigned to him or her by the Chairman or Vice
Chairman, if any, by the President or the Board of Directors. The execution of
any instrument of the corporation by any Vice President shall be conclusive
evidence, as to third parties, of his or her authority to act in the stead of
the Chairman, the Vice Chairman or the President.
4.11. THE SECRETARY. The Secretary shall: (a) keep minutes of the
meetings of the shareholders and of the Board of Directors (and of committees
thereof) in one or more books provided for that purpose (including records of
actions taken by the shareholders or the Board of Directors (or committees
thereof) without a meeting); (b) see that all notices are duly given in
accordance with the provisions of these by-laws or as required by the Wisconsin
Business Corporation Law; (c) be custodian of the corporate records and of the
seal of the corporation and see that the seal of the corporation is affixed to
all documents the execution of which on behalf of the corporation under its seal
is duly authorized; (d) maintain a record of the shareholders of the
corporation, in a form that permits preparation of a list of the names and
addresses of all shareholders, by class or series of shares and showing the
number and class or series of shares held by each shareholder; (e) sign with the
Chairman, the Vice Chairman, the President or a Vice President, certificates for
shares of the corporation, the issuance of which shall have been authorized by
resolution of the Board of Directors; (f) have general charge of the stock
transfer books of the corporation; and (g) in general perform all duties
incident to the office of Secretary and have such other duties and exercise such
authority as from time to time may be delegated or assigned by the Chairman, the
Vice Chairman, the President or the Board of Directors.
4.12. THE TREASURER. The Treasurer shall: (a) have charge and custody
of and be responsible for all funds and securities of the corporation; (b)
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maintain appropriate accounting records; (c) receive and give receipts for
moneys due and payable to the corporation from any source whatsoever, and
deposit all such moneys in the name of the corporation in such banks, trust
companies or other depositaries as shall be selected in accordance with the
provisions of Section 5.4; and (d) in general perform all of the duties incident
to the office of Treasurer and have such other duties and exercise such other
authority as from time to time may be delegated or assigned by the Chairman, the
Vice Chairman, the President or the Board of Directors. If required by the Board
of Directors, the Treasurer shall give a bond for the faithful discharge of his
or her duties in such sum and with such surety or sureties as the Board of
Directors shall determine.
4.13. ASSISTANT SECRETARIES AND ASSISTANT TREASURERS. There shall be
such number of Assistant Secretaries and Assistant Treasurers as the Board of
Directors may from time to time authorize. The Assistant Secretaries may sign
with the Chairman, the Vice Chairman, the President or a Vice President
certificates for shares of the corporation the issuance of which shall have been
authorized by a resolution of the Board of Directors. The Assistant Treasurers
shall respectively, if required by the Board of Directors, give bonds for the
faithful discharge of their duties in such sums and with such sureties as the
Board of Directors shall determine. The Assistant Secretaries and Assistant
Treasurers, in general, shall perform such duties and have such authority as
shall from time to time be delegated or assigned to them by the Secretary or the
Treasurer, respectively, or by the Chairman, the Vice Chairman, the President or
the Board of Directors.
4.14. OTHER ASSISTANTS AND ACTING OFFICERS. The Board of Directors
shall have the power to appoint, or to authorize any duly appointed officer of
the corporation to appoint, any person to act as assistant to any officer, or as
agent for the corporation in his or her stead, or to perform the duties of such
officer whenever for any reason it is impracticable for such officer to act
personally, and such assistant or acting officer or other agent so appointed by
the Board of Directors or an authorized officer shall have the power to perform
all the duties of the office to which he or she is so appointed to be an
assistant, or as to which he or she is so appointed to act, except as such power
may be otherwise defined or restricted by the Board of Directors or the
appointing officer.
ARTICLE V. CONTRACTS, LOANS, CHECKS
AND DEPOSITS; SPECIAL CORPORATE ACTS
5.1. CONTRACTS. The Board of Directors may authorize any officer or
officers, agent or agents, to enter into any contract or execute or deliver any
instrument in the name of and on behalf of the corporation, and such
authorization may be general or confined to specific instances. In the absence
of other designation, all deeds, mortgages and instruments of assignment or
pledge made by the corporation shall be executed in the name of the corporation
by the Chairman, the Vice Chairman, the President or one of the Vice Presidents
and by the Secretary, an Assistant Secretary, the Treasurer or an Assistant
Treasurer; the Secretary or an Assistant Secretary, when necessary or required,
shall affix the corporate seal, if any, thereto; and when so executed no other
party to such instrument or any third party shall be required to make any
inquiry into the authority of the signing officer or officers.
5.2. LOANS. No indebtedness for borrowed money shall be contracted on
behalf of the corporation and no evidences of such indebtedness shall be issued
in its name unless authorized by or under the authority of a resolution of the
Board of Directors. Such authorization may be general or confined to specific
instances.
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5.3. CHECKS, DRAFTS, ETC. All checks, drafts or other orders for the
payment of money, notes or other evidences of indebtedness issued in the name of
the corporation, shall be signed by such officer or officers, agent or agents of
the corporation and in such manner as shall from time to time be determined by
or under the authority of a resolution of the Board of Directors.
5.4. DEPOSITS. All funds of the corporation not otherwise employed
shall be deposited from time to time to the credit of the corporation in such
banks, trust companies or other depositaries as may be selected by or under the
authority of a resolution of the Board of Directors.
5.5. VOTING OF SECURITIES OWNED BY THIS CORPORATION. Subject always to
the specific directions of the Board of Directors, (a) any shares or other
securities issued by any other corporation and owned or controlled by this
corporation may be voted at any meeting of security holders of such other
corporation by the Chairman of this corporation if he or she be present, or in
his or her absence, by the Vice Chairman of this corporation if he or she be
present, or in his or her absence, by the President of this corporation if he or
she be present, or in his or her absence by any Vice President of this
corporation who may be present, and (b) whenever, in the judgment of the
Chairman, or in his or her absence, the Vice Chairman, or in his or her absence,
the President, or in his or her absence, any Vice President, it is desirable for
this corporation to execute a proxy or written consent in respect to any shares
or other securities issued by any other corporation and owned by this
corporation, such proxy or consent shall be executed in the name of this
corporation by the Chairman, the Vice Chairman, the President or one of the Vice
Presidents of this corporation, without necessity of any authorization by the
Board of Directors, affixation of corporate seal, if any, or countersignature or
attestation by another officer. Any person or persons designated in the manner
above stated as the proxy or proxies of this corporation shall have full right,
power and authority to vote the shares or other securities issued by such other
corporation and owned by this corporation the same as such shares or other
securities might be voted by this corporation.
ARTICLE VI. CERTIFICATES FOR SHARES; TRANSFER OF SHARES
6.1. CERTIFICATES FOR SHARES. Certificates representing shares of the
corporation shall be in such form, consistent with the Wisconsin Business
Corporation Law, as shall be determined by the Board of Directors. Such
certificates shall be signed by the Chairman, the Vice Chairman, the President
or a Vice President and by the Secretary or an Assistant Secretary. All
certificates for shares shall be consecutively numbered or otherwise identified.
The name and address of the person to whom the shares represented thereby are
issued, with the number of shares and date of issue, shall be entered on the
stock transfer books of the corporation. All certificates surrendered to the
corporation for transfer shall be cancelled and no new certificate shall be
issued until the former certificate for a like number of shares shall have been
surrendered and cancelled, except as provided in Section 6.6.
6.2. FACSIMILE SIGNATURES AND SEAL. The seal of the corporation on any
certificates for shares may be a facsimile. The signature of the Chairman, the
Vice Chairman, the President or Vice President and the Secretary or Assistant
Secretary upon a certificate may be facsimiles if the certificate is manually
signed on behalf of a transfer agent, or a registrar, other than the corporation
itself or an employee of the corporation.
6.3. SIGNATURE BY FORMER OFFICERS. The validity of a share certificate
is not affected if a person who signed the certificate (either manually or in
facsimile) no longer holds office when the certificate is issued.
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6.4. TRANSFER OF SHARES. Prior to due presentment of a certificate for
shares for registration of transfer the corporation may treat the registered
owner of such shares as the person exclusively entitled to vote, to receive
notifications and otherwise to have and exercise all the rights and power of an
owner. Where a certificate for shares is presented to the corporation with a
request to register for transfer, the corporation shall not be liable to the
owner or any other person suffering loss as a result of such registration of
transfer if (a) there were on or with the certificate the necessary
endorsements, and (b) the corporation had no duty to inquire into adverse claims
or has discharged any such duty. The corporation may require reasonable
assurance that such endorsements are genuine and effective and compliance with
such other regulations as may be prescribed by or under the authority of the
Board of Directors.
6.5. RESTRICTIONS ON TRANSFER. The face or reverse side of each
certificate representing shares shall bear a conspicuous notation of any
restriction imposed by the corporation upon the transfer of such shares.
6.6. LOST, DESTROYED OR STOLEN CERTIFICATES. Where the owner claims
that certificates for shares have been lost, destroyed or wrongfully taken, a
new certificate shall be issued in place thereof if the owner (a) so requests
before the corporation has notice that such shares have been acquired by a bona
fide purchaser, (b) files with the corporation a sufficient indemnity bond if
required by the Board of Directors or any principal officer, and (c) satisfies
such other reasonable requirements as may be prescribed by or under the
authority of the Board of Directors.
6.7. CONSIDERATION FOR SHARES. The Board of Directors may authorize
shares to be issued for consideration consisting of any tangible or intangible
property or benefit to the corporation, including cash, promissory notes,
services performed, contracts for services to be performed or other securities
of the corporation. Before the corporation issues shares, the Board of Directors
shall determine that the consideration received or to be received for the shares
to be issued is adequate. The determination of the Board of Directors is
conclusive insofar as the adequacy of consideration for the issuance of shares
relates to whether the shares are validly issued, fully paid and nonassessable.
The corporation may place in escrow shares issued in whole or in part for a
contract for future services or benefits, a promissory note, or otherwise for
property to be issued in the future, or make other arrangements to restrict the
transfer of the shares, and may credit distributions in respect of the shares
against their purchase price, until the services are performed, the benefits or
property are received or the promissory note is paid. If the services are not
performed, the benefits or property are not received or the promissory note is
not paid, the corporation may cancel, in whole or in part, the shares escrowed
or restricted and the distributions credited.
6.8. STOCK REGULATIONS. The Board of Directors shall have the power and
authority to make all such further rules and regulations not inconsistent with
law as it may deem expedient concerning the issue, transfer and registration of
shares of the corporation.
ARTICLE VII. SEAL
7.1. The Board of Directors shall provide for a corporate seal for the
corporation which shall be circular in form and shall have inscribed thereon the
name of the corporation, the state of incorporation and the words "Corporate
Seal".
<PAGE>
ARTICLE VIII. INDEMNIFICATION
8.1. PROVISION OF INDEMNIFICATION. The corporation shall, to the
fullest extent permitted or required by Sections 180.0850 to 180.0859,
inclusive, of the Wisconsin Business Corporation Law, including any amendments
thereto (but in the case of any such amendment, only to the extent such
amendment permits or requires the corporation to provide broader indemnification
rights than prior to such amendment), indemnify its Directors and Officers
against any and all Liabilities, and advance any and all reasonable Expenses,
incurred thereby in any Proceeding to which any such Director of Officer is a
Party because he or she is or was a Director or Officer of the corporation. The
corporation shall also indemnify an employee who is not a Director or Officer,
to the extent that the employee has been successful on the merits or otherwise
in defense of a Proceeding, for all reasonable Expenses incurred in the
Proceeding if the employee was a Party because he or she is or was an employee
of the corporation. The rights to indemnification granted hereunder shall not be
deemed exclusive of any other rights to indemnification against Liabilities or
the advancement of Expenses which a Director, Officer or employee may be
entitled under any written agreement, Board resolution, vote of shareholders,
the Wisconsin Business Corporation Law or otherwise. The corporation may, but
shall not be required to, supplement the foregoing rights to indemnification
against Liabilities and advancement of Expenses under this Section 8.1 by the
purchase of insurance on behalf of any one or more of such Directors, Officers
or employees, whether or not the corporation would be obligated to indemnify or
advance Expenses to such Director, Officer or employee under this Section 8.1.
All capitalized terms used in this Article VIII and not otherwise defined herein
shall have the meaning set forth in Section 180.0850 of the Wisconsin Business
Corporation Law.
ARTICLE IX. AMENDMENTS
9.1. BY SHAREHOLDERS. Except as otherwise provided in the articles of
incorporation and these by-laws, the shareholders shall have the power to adopt,
amend, alter, change or repeal any of the by-laws of the corporation by the
affirmative vote of shareholders holding not less than a majority of the voting
power of the then outstanding shares of all classes of capital stock of the
corporation generally possession, voting rights present or represented at any
annual or special meeting of the shareholders at which a quorum is in
attendance.
9.2. BY DIRECTORS. Except as otherwise provided by the Wisconsin
Business Corporation Law, the articles of incorporation and these by-laws, the
Board of Directors shall have the power to adopt, amend, alter, change or repeal
any of the by-laws of the corporation by the affirmative vote of a majority of
the directors present at any meeting of the Board of Directors at which a quorum
is in attendance; but no by-law adopted by the shareholders shall be amended or
repealed by the Board of Directors if the by-law so adopted so provides. The
manner of adoption of these by-laws or any section or provision thereof shall
not be deemed to impair or negate the power of the Board of Directors to adopt,
amend, alter, change or repeal these by-laws as provided herein.
9.3. IMPLIED AMENDMENTS. Any action taken or authorized by the
shareholders or by the Board of Directors which would be inconsistent with the
by-laws then in effect but which is taken or authorized by affirmative vote of
not less than the number of shares or the number of directors required to amend
the by-laws so that the by-laws would be consistent with such action shall be
given the same effect as though the by-laws had been temporarily amended or
suspended so far, but only so far, as is necessary to permit the specific action
so taken or authorized.
BY-LAWS
OF
WISCONSIN GAS COMPANY
(A WISCONSIN CORPORATION)
EFFECTIVE APRIL 22, 1999
<PAGE>
BY-LAWS
OF
WISCONSIN GAS COMPANY
(A WISCONSIN CORPORATION)
EFFECTIVE APRIL 22, 1999
ARTICLE I. OFFICES
1.01. PRINCIPAL AND BUSINESS OFFICES. The corporation may have such
principal and other business offices, either within or without the State of
Wisconsin, as the Board of Directors may designate or as the business of the
corporation may require from time to time.
1.02. REGISTERED OFFICE. The registered office of the corporation
required by the Wisconsin Business Corporation Law to be maintained in the State
of Wisconsin may be, but need not be, identical with the principal office in the
State of Wisconsin, and the address of the registered office may be changed from
time to time by the Board of Directors or by the registered agent. The business
office of the registered agent of the corporation shall be identical to such
registered office.
ARTICLE II. SHAREHOLDERS
2.01. ANNUAL MEETING. The annual meeting of the shareholders shall be
held on the fourth Thursday in April of each year at 9:00 a.m. local time, or at
such other time and date within thirty days before or after such date as may be
fixed by or under the authority of the Board of Directors, for the purpose of
electing directors and for the transaction of such other business as may come
before the meeting. If the day fixed for the annual meeting shall be a legal
holiday in the State of Wisconsin, such meeting shall be held on the next
succeeding business day.
2.02. SPECIAL MEETINGS. Special meetings of the shareholders, for any
purpose or purposes, unless otherwise prescribed by the Wisconsin Business
Corporation Law, may be called by the Board of Directors, the Chairman, the Vice
Chairman or the President. The corporation shall call a special meeting of
shareholders in the event that the holders of at least 10% of all of the votes
entitled to be cast on any issue proposed to be considered at the proposed
special meeting sign, date and deliver to the corporation one or more written
demands for the meeting describing one or more purposes for which it is to be
held. The corporation shall give notice of such a special meeting within thirty
(30) days after the date that the demand is delivered to the corporation.
2.03. PLACE OF MEETING. The Board of Directors may designate any
place, either within or without the State of Wisconsin, as the place of meeting
for any annual or special meeting of shareholders. If no designation is made,
the place of meeting shall be the principal office of the corporation. Any
meeting may be adjourned to reconvene at any place designated by vote of the
shares represented thereat.
2.04. NOTICE OF MEETING. Written notice stating the date, time and
place of any meeting of shareholders and, in case of a special meeting, the
purpose or purposes for which the meeting is called, shall be delivered not less
<PAGE>
than ten (10) days nor more than sixty (60) days before the date of the meeting
(unless a different time is provided by the Wisconsin Business Corporation Law
or the articles of incorporation), either personally or by mail, by or at the
direction of the Chairman, the Vice Chairman, the President or the Secretary, to
each shareholder of record entitled to vote at such meeting and to such other
persons as required by the Wisconsin Business Corporation Law. If mailed, such
notice shall be deemed to be effective when deposited in the United States mail,
addressed to the shareholder at his or her address as it appears on the stock
record books of the corporation, with postage thereon prepaid. If an annual or
special meeting of shareholders is adjourned to a different date, time or place,
the corporation shall not be required to give notice of the new date, time or
place if the new date, time or place is announced at the meeting before
adjournment; provided, however, that if a new record date for an adjourned
meeting is or must be fixed, the corporation shall give notice of the adjourned
meeting to persons who are shareholders as of the new record date.
2.05. WAIVER OF NOTICE. A shareholder may waive any notice required by
the Wisconsin Business Corporation Law, the articles of incorporation or these
by-laws before or after the date and time stated in the notice. The waiver shall
be in writing and signed by the shareholder entitled to the notice, contain the
same information that would have been required in the notice under applicable
provisions of the Wisconsin Business Corporation Law (except that the time and
place of meeting need not be stated) and be delivered to the corporation for
inclusion in the corporate records. A shareholder's attendance at a meeting, in
person or by proxy, waives objection to all of the following: (a) lack of notice
or defective notice of the meeting, unless the shareholder at the beginning of
the meeting or promptly upon arrival objects to holding the meeting or
transacting business at the meeting; and (b) consideration of a particular
matter at the meeting that is not within the purpose described in the meeting
notice, unless the shareholder objects to considering the matter when it is
presented.
2.06. FIXING OF RECORD DATE. The Board of Directors may fix in advance
a date as the record date for the purpose of determining shareholders entitled
to notice of and to vote at any meeting of shareholders, shareholders entitled
to demand a special meeting as contemplated by Section 2.02 hereof, shareholders
entitled to take any other action, or shareholders for any other purpose. Such
record date shall not be more than seventy (70) days prior to the date on which
the particular action, requiring such determination of shareholders, is to be
taken. If no record date is fixed by the Board of Directors or by the Wisconsin
Business Corporation Law for the determination of shareholders entitled to
notice of and to vote at a meeting of shareholders, the record date shall be the
close of business on the day before the first notice is given to shareholders.
If no record date is fixed by the Board of Directors or by the Wisconsin
Business Corporation Law for the determination of shareholders entitled to
demand a special meeting as contemplated in Section 2.02 hereof, the record date
shall be the date that the first shareholder signs the demand. Except as
provided by the Wisconsin Business Corporation Law for a court-ordered
adjournment, a determination of shareholders entitled to notice of and to vote
at a meeting of shareholders is effective for any adjournment of such meeting
unless the Board of Directors fixes a new record date, which it shall do if the
meeting is adjourned to a date more than one hundred twenty (120) days after the
date fixed for the original meeting. The record date for determining
shareholders entitled to a distribution (other than a distribution involving a
purchase, redemption or other acquisition of the corporation's shares) or a
share dividend is the date on which the Board of Directors authorized the
distribution or share dividend, as the case may be, unless the Board of
Directors fixes a different record date.
2.07. SHAREHOLDERS' LIST FOR MEETINGS. After a record date for a
special or annual meeting of shareholders has been fixed, the corporation shall
prepare a list of the names of all of the shareholders entitled to notice of the
meeting. The list shall be arranged by class or series of shares, if any, and
show the address of and number of shares held by each shareholder. Such list
shall be available for inspection by any shareholder, beginning two (2) business
<PAGE>
days after notice of the meeting is given for which the list was prepared and
continuing to the date of the meeting, at the corporation's principal office or
at a place identified in the meeting notice in the city where the meeting will
be held. A shareholder or his or her agent may, on written demand, inspect and,
subject to the limitations imposed by the Wisconsin Business Corporation Law,
copy the list, during regular business hours and at his or her expense, during
the period that it is available for inspection pursuant to this Section 2.07.
The corporation shall make the shareholders' list available at the meeting and
any shareholder or his or her agent or attorney may inspect the list at any time
during the meeting or any adjournment thereof. Refusal or failure to prepare or
make available the shareholders' list shall not affect the validity of any
action taken at a meeting of shareholders.
2.08. QUORUM AND VOTING REQUIREMENTS. Shares entitled to vote as a
separate voting group may take action on a matter at a meeting only if a quorum
of those shares exists with respect to that matter. If the corporation has only
one class of common stock outstanding, such class shall constitute a separate
voting group for purposes of this Section 2.08. Except as otherwise provided in
the articles of incorporation, any by-law adopted under authority granted in the
articles of incorporation, or the Wisconsin Business Corporation Law, a majority
of the votes entitled to be cast on the matter shall constitute a quorum of the
voting group for action on that matter. Once a share is represented for any
purpose at a meeting, other than for the purpose of objecting to holding the
meeting or transacting business at the meeting, it is considered present for
purposes of determining whether a quorum exists for the remainder of the meeting
and for any adjournment of that meeting unless a new record date is or must be
set for the adjourned meeting. If a quorum exists, except in the case of the
election of directors, action on a matter shall be approved if the votes cast
within the voting group favoring the action exceed the votes cast opposing the
action, unless the articles of incorporation, any by-law adopted under authority
granted in the articles of incorporation, or the Wisconsin Business Corporation
Law requires a greater number of affirmative votes. Unless otherwise provided in
the articles of incorporation, directors shall be elected by a plurality of the
votes cast by the shares entitled to vote in the election of directors at a
meeting at which a quorum is present. For purposes of this Section 2.08,
"plurality" means that the individuals with the largest number of votes are
elected as directors up to the maximum number of directors to be chosen at the
meeting. Though less than a quorum of the outstanding votes of a voting group
are represented at a meeting, a majority of the votes so represented may adjourn
the meeting from time to time without further notice. At such adjourned meeting
at which a quorum shall be present or represented, any business may be
transacted which might have been transacted at the meeting as originally
noticed.
2.09. CONDUCT OF MEETING. The Chairman, and in his or her absence, the
Vice Chairman, and in his or her absence, the President, and in his or her
absence, a Vice President in the order provided under Section 4.10 hereof, and
in their absence, any person chosen by the shareholders present shall call the
meeting of the shareholders to order and shall act as chairman of the meeting,
and the Secretary of the corporation shall act as secretary of all meetings of
the shareholders, but, in the absence of the Secretary, the presiding officer
may appoint any other person to act as secretary of the meeting.
2.10. PROXIES. At all meetings of shareholders, a shareholder may vote
his or her shares in person or by proxy. A shareholder may appoint a proxy to
vote or otherwise act for the shareholder by signing an appointment form, either
personally or by his or her attorney-in-fact. An appointment of a proxy is
effective when received by the Secretary or other officer or agent of the
corporation authorized to tabulate votes. An appointment is valid for eleven
(11) months from the date of its signing unless a different period is expressly
provided in the appointment form. The presence of a shareholder who has
<PAGE>
filed a proxy shall not of itself constitute revocation. The Board of Directors
shall have the power and authority to make rules establishing presumptions as to
the validity and sufficiency of proxies.
2.11. VOTING OF SHARES. Except as provided in the articles of
incorporation or in the Wisconsin Business Corporation Law, each outstanding
share, regardless of class, is entitled to one vote on each matter voted on at a
meeting of shareholders.
2.12. Action without Meeting. Any action required or permitted by the
articles of incorporation or these by-laws or any provision of the Wisconsin
Business Corporation Law to be taken at a meeting of the shareholders may be
taken without a meeting and without action by the Board of Directors if a
written consent or consents, describing the action so taken, is signed by all of
the shareholders entitled to vote with respect to the subject matter thereof and
delivered to the corporation for inclusion in the corporate records.
2.13. ACCEPTANCE OF INSTRUMENTS SHOWING SHAREHOLDER ACTION. If the name
signed on a vote, consent, waiver or proxy appointment corresponds to the name
of a shareholder, the corporation, if acting in good faith, may accept the vote,
consent, waiver or proxy appointment and give it effect as the act of a
shareholder. If the name signed on a vote, consent, waiver or proxy appointment
does not correspond to the name of a shareholder, the corporation, if acting in
good faith, may accept the vote, consent, waiver or proxy appointment and give
it effect as the act of the shareholder if any of the following apply:
(a) The shareholder is an entity and the name signed purports
to be that of an officer or agent of the entity.
(b) The name purports to be that of a personal representative,
administrator, executor, guardian or conservator representing
the shareholder and, if the corporation requests, evidence of
fiduciary status acceptable to the corporation is presented
with respect to the vote, consent, waiver or proxy
appointment.
(c) The name signed purports to be that of a receiver or
trustee in bankruptcy of the shareholder and, if the
corporation requests, evidence of this status acceptable to
the corporation is presented with respect to the vote,
consent, waiver or proxy appointment.
(d) The name signed purports to be that of a pledgee,
beneficial owner, or attorney-in-fact of the shareholder and,
if the corporation requests, evidence acceptable to the
corporation of the signatory's authority to sign for the
shareholder is presented with respect to the vote, consent,
waiver or proxy appointment.
(e) Two or more persons are the shareholders as co-tenants or
fiduciaries and the name signed purports to be the name of at
least one of the co-owners and the person signing appears to
be acting on behalf of all co-owners.
The corporation may reject a vote, consent, waiver or proxy appointment
if the Secretary or other officer or agent of the corporation who is authorized
to tabulate votes, acting in good faith, has reasonable basis for doubt about
the validity of the signature on it or about the signatory's authority to sign
for the shareholder.
<PAGE>
ARTICLE III. BOARD OF DIRECTORS
3.01. GENERAL POWERS, Classification and Number. All corporate powers
shall be exercised by or under the authority of, and the business affairs of the
corporation managed under the direction of, the Board of Directors. The number
of directors of the corporation shall be eight (8).
3.02. TENURE AND QUALIFICATIONS. Each director shall hold office until
the next annual meeting of shareholders and until his or her successor shall
have been elected and, if necessary, qualified, or until his or her prior
retirement, death, resignation or removal. The retirement or resignation of a
director who is an officer of this corporation or an affiliated corporation, but
not also the chief executive officer of this corporation's parent corporation,
shall take effect at the time he or she ceases to hold his or her position as an
officer of this corporation or an affiliated corporation. Any other director
shall resign from the Board of Directors effective as of the annual meeting of
shareholders next following the date on which he or she attains the age of
seventy (70) years. A director may be removed from office at a meeting of the
shareholders called for the purpose of removing the director, and the meeting
notice shall state that the purpose, or one of the purposes, of the meeting is
removal of the director. A director may be removed from office with or without
cause if the number of votes cast to remove the director exceeds the number of
votes cast not to remove such director. A director may resign at any time by
delivering written notice which complies with the Wisconsin Business Corporation
Law to the Board of Directors, to the Chairman or to the corporation. A
director's resignation is effective when the notice is delivered unless the
notice specifies a later effective date. Directors need not be residents of the
State of Wisconsin or shareholders of the corporation. No other restrictions,
limitations or qualifications may be imposed on individuals for service as a
director.
3.03. REGULAR MEETINGS. A regular meeting of the Board of Directors
shall be held without other notice than this by-law immediately after the annual
meeting of shareholders and each adjourned session thereof. The place of such
regular meeting shall be the principal business office of the corporation in the
State of Wisconsin, or such other suitable place as may be announced at such
meeting of shareholders. The Board of Directors may provide, by resolution, the
date, time and place, either within or without the State of Wisconsin, for the
holding of additional regular meetings of the Board of Directors without other
notice than such resolution.
3.04. SPECIAL MEETINGS. Special meetings of the Board of Directors may
be called by or at the request of the Chairman, the Vice Chairman, the
President, Secretary or any two (2) directors. The Chairman, the Vice Chairman,
the President or Secretary may fix any place, either within or without the State
of Wisconsin, as the place for holding any special meeting of the Board of
Directors, and if no other place is fixed the place of the meeting shall be the
principal business office of the corporation in the State of Wisconsin.
3.05. NOTICE; WAIVER. Notice of each meeting of the Board of Directors
(unless otherwise provided in or pursuant to Section 3.03) shall be given by
written notice delivered or communicated in person, by telegraph, teletype,
facsimile or other form of wire or wireless communication, or by mail or private
carrier, to each director at his business address or at such other address as
such director shall have designated in writing filed with the Secretary, in each
case not less than forty-eight (48) hours prior to the meeting. The notice need
not describe the purpose of the meeting of the Board of Directors or the
business to be transacted at such meeting. If mailed, such notice shall be
deemed to be effective when deposited in the United States mail so addressed,
with postage thereon prepaid. If notice is given by telegram, such notice shall
be deemed to be effective when the telegram is delivered to the telegraph
<PAGE>
company. If notice is given by private carrier, such notice shall be deemed to
be effective when delivered to the private carrier. Whenever any notice whatever
is required to be given to any director of the corporation under the articles of
incorporation or these by-laws or any provision of the Wisconsin Business
Corporation Law, a waiver thereof in writing, signed at any time, whether before
or after the date and time of meeting, by the director entitled to such notice
shall be deemed equivalent to the giving of such notice. The corporation shall
retain any such waiver as part of the permanent corporate records. A director's
attendance at or participation in a meeting waives any required notice to him or
her of the meeting unless the director at the beginning of the meeting or
promptly upon his or her arrival objects to holding the meeting or transacting
business at the meeting and does not thereafter vote for or assent to action
taken at the meeting.
3.06. QUORUM. Except as otherwise provided by the Wisconsin Business
Corporation Law or by the articles of incorporation or these by-laws, a majority
of the number of directors specified in Section 3.01 of these by-laws shall
constitute a quorum for the transaction of business at any meeting of the Board
of Directors. Except as otherwise provided by the Wisconsin Business Corporation
Law or by the articles of incorporation or by these by-laws, a quorum of any
committee of the Board of Directors created pursuant to Section 3.12 hereof
shall consist of a majority of the number of directors appointed to serve on the
committee. A majority of the directors present (though less than such quorum)
may adjourn any meeting of the Board of Directors or any committee thereof, as
the case may be, from time to time without further notice.
3.07. MANNER OF ACTING. The affirmative vote of a majority of the
directors present at a meeting of the Board of Directors or a committee thereof
at which a quorum is present shall be the act of the Board of Directors or such
committee, as the case may be, unless the Wisconsin Business Corporation Law,
the articles of incorporation or these by-laws require the vote of a greater
number of directors.
3.08. CONDUCT OF MEETINGS. The Chairman, and in his or her absence, the
Vice Chairman, and in his or her absence, the President, and in his or her
absence, a Vice President in the order provided under Section 4.10, and in their
absence, any director chosen by the directors present, shall call meetings of
the Board of Directors to order and shall act as chairman of the meeting. The
Secretary of the corporation shall act as secretary of all meetings of the Board
of Directors but in the absence of the Secretary, the presiding officer may
appoint any other person present to act as secretary of the meeting. Minutes of
any regular or special meeting of the Board of Directors shall be prepared and
distributed to each director.
3.09. VACANCIES. Any vacancies occurring in the Board of Directors,
including a vacancy created by an increase in the number of directors, shall be
filled only as provided in the articles of incorporation. A vacancy that will
occur at a specific later date, because of a resignation effective at a later
date or otherwise, may be filled before the vacancy occurs, but the new director
may not take office until the vacancy occurs.
3.10. COMPENSATION. The Board of Directors, irrespective of any
personal interest of any of its members, may establish reasonable compensation
of all directors for services to the corporation as directors, officers or
otherwise, or may delegate such authority to an appropriate committee. The Board
of Directors also shall have authority to provide for or delegate authority to
an appropriate committee to provide for reasonable pensions, disability or death
benefits, and other benefits or payments, to directors, officers and employees
and to their estates, families, dependents or beneficiaries on account of prior
services rendered by such directors, officers and employees to the corporation.
<PAGE>
3.11. PRESUMPTION OF ASSENT. A director who is present and is
announced as present at a meeting of the Board of Directors or any committee
thereof created in accordance with Section 3.12 hereof, when corporate action is
taken, assents to the action taken unless any of the following occurs: (a) the
director objects at the beginning of the meeting or promptly upon his or her
arrival to holding the meeting or transacting business at the meeting; (b) the
director dissents or abstains from an action taken and minutes of the meeting
are prepared that show the director's dissent or abstention from the action
taken; (c) the director delivers written notice that complies with the Wisconsin
Business Corporation Law of his or her dissent or abstention to the presiding
officer of the meeting before its adjournment or to the corporation immediately
after adjournment of the meeting; or (d) the director dissents or abstains from
an action taken, minutes of the meeting are prepared that fail to show the
director's dissent or abstention from the action taken, and the director
delivers to the corporation a written notice of that failure that complies with
the Wisconsin Business Corporation Law promptly after receiving the minutes.
Such right of dissent or abstention shall not apply to a director who votes in
favor of the action taken.
3.12. COMMITTEES. The Board of Directors by resolution adopted by the
affirmative vote of a majority of all of the directors then in office may create
one or more committees, appoint members of the Board of Directors to serve on
the committees and designate other members of the Board of Directors to serve as
alternates. Each committee shall have two (2) or more members who shall, unless
otherwise provided by the Board of Directors, serve at the pleasure of the Board
of Directors. A committee may be authorized to exercise the authority of the
Board of Directors, except that a committee may not do any of the following: (a)
authorize distributions; (b) approve or propose to shareholders action that the
Wisconsin Business Corporation Law requires to be approved by shareholders; (c)
fill vacancies on the Board of Directors or, unless the Board of Directors
provides by resolution that vacancies on a committee shall be filled by the
affirmative vote of the remaining committee members, on any Board committee; (d)
amend the corporation's articles of incorporation; (e) adopt, amend or repeal
by-laws; (f) approve a plan of merger not requiring shareholder approval; (g)
authorize or approve reacquisition of shares, except according to a formula or
method prescribed by the Board of Directors; and (h) authorize or approve the
issuance or sale or contract for sale of shares, or determine the designation
and relative rights, preferences and limitations of a class or series of shares,
except that the Board of Directors may authorize a committee to do so within
limits prescribed by the Board of Directors. Unless otherwise provided by the
Board of Directors in creating the committee, a committee may employ counsel,
accountants and other consultants to assist it in the exercise of its authority.
3.13. ALTERNATE MEMBERS OF COMMITTEES. The Board of Directors may
appoint annually and from time to time, as alternate members of any committee of
the Board of Directors, directors to serve whenever designated by the committee
or by the Chairman, the Vice Chairman or the President to take the place of
absent members, or to fill vacancies on such committee until the next meeting of
the Board of Directors. An alternate member of any committee so designated to
serve shall receive compensation for such service as fixed by the Board of
Directors.
3.14. TELEPHONIC MEETINGS. Except as herein provided and
notwithstanding any place set forth in the notice of the meeting or these
by-laws, members of the Board of Directors (and any committees thereof created
pursuant to Section 3.12 hereof) may participate in regular or special meetings
by, or through the use of, any means of communication by which all participants
may simultaneously hear each other, such as by conference telephone. If a
meeting is conducted by such means, then at the commencement of such meeting the
<PAGE>
presiding officer shall inform the participating directors that a meeting is
taking place at which official business may be transacted. Any participant in a
meeting by such means shall be deemed present in person at such meeting.
Notwithstanding the foregoing, no action may be taken at any meeting held by
such means on any particular matter which the presiding officer determines, in
his or her sole discretion, to be inappropriate under the circumstances for
action at a meeting held by such means. Such determination shall be made and
announced in advance of such meeting.
3.15. ACTION WITHOUT MEETING. Any action required or permitted by the
Wisconsin Business Corporation Law to be taken at a meeting of the Board of
Directors or a committee thereof created pursuant to Section 3.12 hereof may be
taken without a meeting if the action is taken by all members of the Board or of
the committee. The action shall be evidenced by one or more written consents
describing the action taken, signed by each director or committee member and
retained by the corporation. Such action shall be effective when the last
director or committee member signs the consent, unless the consent specifies a
different effective date.
ARTICLE IV. OFFICERS
4.01. NUMBER. The principal officers of the corporation shall be a
Chairman, a President, the number of Vice Presidents as authorized from time to
time by the Board of Directors, a Secretary, and a Treasurer, each of whom shall
be elected by the Board of Directors. A Vice Chairman and such other officers
and assistant officers as may be deemed necessary may be elected or appointed by
the Board of Directors. The Board of Directors may also authorize any duly
appointed officer to appoint one or more officers or assistant officers. Any two
(2) or more offices may be held by the same person.
4.02. ELECTION AND TERM OF OFFICE. The officers of the corporation to
be elected by the Board of Directors shall be elected annually by the Board of
Directors at the first meeting of the Board of Directors held after each annual
meeting of the shareholders. If the election of officers shall not be held at
such meeting, such election shall be held as soon thereafter as is practicable.
Each officer shall hold office until his or her successor shall have been duly
elected or until his or her prior death, resignation or removal.
4.03. REMOVAL. The Board of Directors may remove any officer and,
unless restricted by the Board of Directors or these by-laws, an officer may
remove any officer or assistant officer appointed by that officer, at any time,
with or without cause and notwithstanding the contract rights, if any, of the
officer removed. The appointment of an officer does not of itself create
contract rights.
4.04. RESIGNATION. An officer may resign at any time by delivering
notice to the corporation that complies with the Wisconsin Business Corporation
Law. The resignation shall be effective when the notice is delivered, unless the
notice specifies a later effective date and the corporation accepts the later
effective date.
4.05. VACANCIES. A vacancy in any principal office because of death,
resignation, removal, disqualification or otherwise, shall be filled by the
Board of Directors for the unexpired portion of the term. If a resignation of an
officer is effective at a later date as contemplated by Section 4.04 hereof, the
Board of Directors may fill the pending vacancy before the effective date if the
Board provides that the successor may not take office until the effective date.
<PAGE>
4.06. CHIEF EXECUTIVE OFFICER. The Board of Directors shall from time
to time designate the Chairman, the Vice Chairman, if any, or the President as
the Chief Executive Officer of the corporation. The President shall be the Chief
Executive Officer when the offices of Chairman and Vice Chairman are vacant, or
when the Board of Directors has not designated the Chairman or the Vice
Chairman, if any, as Chief Executive Officer. Subject to the control of the
Board of Directors, the Chief Executive Officer shall in general supervise and
control all of the business and affairs of the corporation and shall perform all
duties incident to the office of Chief Executive Officer and such other duties
as may be prescribed by the Board of Directors from time to time.
4.07. CHAIRMAN. The Chairman shall, when present, preside at all
meetings of the shareholders and the Board of Directors. He or she shall have
authority, subject to such rules as may be prescribed by the Board of Directors,
to appoint such agents and employees of the corporation as he or she shall deem
necessary, to prescribe their powers, duties and compensation, and to delegate
authority to them. Such agents and employees shall hold office at the discretion
of the Chairman. He or she shall have authority to sign, execute and
acknowledge, on behalf of the corporation, all deeds, mortgages, bonds, stock
certificates, contracts, leases, reports and all other documents or instruments
necessary or proper to be executed in the course of the corporation's regular
business, or which shall be authorized by resolution of the Board of Directors;
and, except as otherwise provided by law or the Board of Directors, he or she
may authorize any other officer or agent of the corporation to sign, execute and
acknowledge such documents or instruments in his or her place and stead. In
general, he or she shall perform all duties incident to the office of Chairman
and such other duties as may be prescribed by the Board of Directors from time
to time.
4.08. VICE CHAIRMAN. The Vice Chairman, if any, shall have such
authority and responsibilities as may be prescribed by the Board of Directors
from time to time. In the absence of the Chairman, or in the event of the
Chairman's death or inability to act, or in the event for any reason it shall be
impracticable for the Chairman to act personally, the Vice Chairman shall
perform the duties of the Chairman, and when so acting, shall have all the
powers of and be subject to all of the restrictions upon the Chairman. He or she
shall have authority, subject to such rules as may be prescribed by the Board of
Directors, to appoint such agents and employees of the corporation as he or she
shall deem necessary, to prescribe their powers, duties and compensation, and to
delegate authority to them. Such agents shall hold office at the discretion of
the Vice Chairman. He or she shall have authority to sign, execute and
acknowledge, on behalf of the corporation, all deeds, mortgages, bonds, stock
certificates, contracts, leases, reports and all other documents or instruments
necessary or proper to be executed in the course of the corporation's regular
business, or which shall be authorized by resolution of the Board of Directors;
and, except as otherwise provided by law or the Board of Directors, he or she
may authorize the President or other officer or agent of the corporation to
sign, execute and acknowledge such documents or instruments in his or per place
and stead. In general, he or she shall perform all duties incident to the office
of Vice Chairman and such other duties as may be prescribed by the Chairman or
the Board of Directors from time to time.
4.09. PRESIDENT. Subject to Section 4.06 hereof, the President shall
be the Chief Executive Officer of the corporation and, subject to the control of
the Board of Directors, shall supervise and control all the affairs of the
corporation. In the absence of the Vice Chairman, or in the event of the Vice
Chairman's death or inability to act, or in the event for any reason it shall be
impracticable for the Vice Chairman to act personally, the President shall
perform the duties of the Vice Chairman, and when so acting, shall have all the
powers of and be subject to all the restrictions upon the Vice Chairman. He or
she shall have authority, subject to such rules as may be prescribed by the
Board of Directors, to appoint such agents and employees of the corporation as
he or she shall deem necessary, to prescribe their powers, duties and
<PAGE>
compensation, and to delegate authority to them. Such agents shall hold office
at the discretion of the President. He or she shall have authority to sign,
execute and acknowledge, on behalf of the corporation, all deeds, mortgages,
bonds, stock certificates, contracts, leases, reports and all other documents or
instruments necessary or proper to be executed in the course of the
corporation's regular business, or which shall be authorized by resolution of
the Board of Directors; and, except as otherwise provided by law or the Board of
Directors, he or she may authorize any other officer or agent of the corporation
to sign, execute and acknowledge such documents or instruments in his or her
place and stead. In general, he or she shall perform all duties incident to the
office of President and such other duties as may be prescribed by the Chairman,
or the Vice Chairman, if any, or the Board of Directors from time to time.
4.10. THE VICE PRESIDENTS. In the absence of the President, or in the
event of the President's death, inability or refusal to act, or in the event for
any reason it shall be impracticable for the President to act personally, the
Vice President (or in the event there be more than one Vice President, the Vice
Presidents in the order designated by the Board of Directors, or in the absence
of any designation, then in the order of their election) shall perform the
duties of the President and, when so acting, shall have all the powers of and be
subject to all the restrictions upon the President. Any Vice President may sign,
with the Secretary or Assistant Secretary, certificates for shares of the
corporation; and shall perform such other duties and have such authority as from
time to time may be delegated or assigned to him or her by the Chairman, the
Vice Chairman, the President or the Board of Directors. The execution of any
instrument of the corporation by any Vice President shall be conclusive
evidence, as to third parties, of his or her authority to act in the stead of
the Chairman, the Vice Chairman or the President.
4.11. THE SECRETARY. The Secretary shall: (a) keep minutes of the
meetings of the shareholders and of the Board of Directors (and of committees
thereof) in one or more books provided for that purpose (including records of
actions taken by the shareholders or the Board of Directors (or committees
thereof) without a meeting); (b) see that all notices are duly given in
accordance with the provisions of these by-laws or as required by the Wisconsin
Business Corporation Law; (c) be custodian of the corporate records and of the
seal of the corporation and see that the seal of the corporation is affixed to
all documents the execution of which on behalf of the corporation under its seal
is duly authorized; (d) maintain a record of the shareholders of the
corporation, in a form that permits preparation of a list of the names and
addresses of all shareholders, by class or series of shares and showing the
number and class or series of shares held by each shareholder; (e) sign with the
Chairman, the Vice Chairman, the President or a Vice President, certificates for
shares of the corporation, the issuance of which shall have been authorized by
resolution of the Board of Directors; (f) have general charge of the stock
transfer books of the corporation; and (g) in general perform all duties
incident to the office of Secretary and have such other duties and exercise such
authority as from time to time may be delegated or assigned by the Chairman, the
Vice Chairman, the President or the Board of Directors.
4.12. THE TREASURER. The Treasurer shall: (a) have charge and custody
of and be responsible for all funds and securities of the corporation; (b)
maintain appropriate accounting records; (c) receive and give receipts for
moneys due and payable to the corporation from any source whatsoever, and
deposit all such moneys in the name of the corporation in such banks, trust
companies or other depositaries as shall be selected in accordance with the
provisions of Section 5.04; and (d) in general perform all of the duties
incident to the office of Treasurer and have such other duties and exercise such
other authority as from time to time may be delegated or assigned by the
Chairman, the Vice Chairman, the President or the Board of Directors. If
required by the Board of Directors, the Treasurer shall give a bond for the
faithful discharge of his or her duties in such sum and with such surety or
sureties as the Board of Directors shall determine.
<PAGE>
4.13. ASSISTANT SECRETARIES AND ASSISTANT TREASURERS. There shall be
such number of Assistant Secretaries and Assistant Treasurers as the Board of
Directors may from time to time authorize. The Assistant Secretaries may sign
with the Chairman, the Vice Chairman, the President or a Vice President
certificates for shares of the corporation the issuance of which shall have been
authorized by a resolution of the Board of Directors. The Assistant Treasurers
shall respectively, if required by the Board of Directors, give bonds for the
faithful discharge of their duties in such sums and with such sureties as the
Board of Directors shall determine. The Assistant Secretaries and Assistant
Treasurers, in general, shall perform such duties and have such authority as
shall from time to time be delegated or assigned to them by the Secretary or the
Treasurer, respectively, or by the Chairman, the Vice Chairman, the President or
the Board of Directors.
4.14. OTHER ASSISTANTS AND ACTING OFFICERS. The Board of Directors
shall have the power to appoint, or to authorize any duly appointed officer of
the corporation to appoint, any person to act as assistant to any officer, or as
agent for the corporation in his or her stead, or to perform the duties of such
officer whenever for any reason it is impracticable for such officer to act
personally, and such assistant or acting officer or other agent so appointed by
the Board of Directors or an authorized officer shall have the power to perform
all the duties of the office to which he or she is so appointed to be an
assistant, or as to which he or she is so appointed to act, except as such power
may be otherwise defined or restricted by the Board of Directors or the
appointing officer.
<PAGE>
ARTICLE V. CONTRACTS, LOANS, CHECKS
AND DEPOSITS; SPECIAL CORPORATE ACTS
5.01. CONTRACTS. The Board of Directors may authorize any officer or
officers, agent or agents, to enter into any contract or execute or deliver any
instrument in the name of and on behalf of the corporation, and such
authorization may be general or confined to specific instances. In the absence
of other designation, all deeds, mortgages and instruments of assignment or
pledge made by the corporation shall be executed in the name of the corporation
by the Chairman, the Vice Chairman, the President or one of the Vice Presidents
and by the Secretary, an Assistant Secretary, the Treasurer or an Assistant
Treasurer; the Secretary or an Assistant Secretary, when necessary or required,
shall affix the corporate seal, if any, thereto; and when so executed no other
party to such instrument or any third party shall be required to make any
inquiry into the authority of the signing officer or officers.
5.02. LOANS. No indebtedness for borrowed money shall be contracted on
behalf of the corporation and no evidences of such indebtedness shall be issued
in its name unless authorized by or under the authority of a resolution of the
Board of Directors. Such authorization may be general or confined to specific
instances.
5.03. CHECKS, DRAFTS, ETC. All checks, drafts or other orders for the
payment of money, notes or other evidences of indebtedness issued in the name of
the corporation, shall be signed by such officer or officers, agent or agents of
the corporation and in such manner as shall from time to time be determined by
or under the authority of a resolution of the Board of Directors.
5.04. DEPOSITS. All funds of the corporation not otherwise employed
shall be deposited from time to time to the credit of the corporation in such
banks, trust companies or other depositaries as may be selected by or under the
authority of a resolution of the Board of Directors.
5.05. VOTING OF SECURITIES OWNED BY THIS CORPORATION. Subject always to
the specific directions of the Board of Directors, (a) any shares or other
securities issued by any other corporation and owned or controlled by this
corporation may be voted at any meeting of security holders of such other
corporation by the Chairman of this corporation if he or she be present, or in
his or her absence, by the Vice Chairman of this corporation if he or she be
present, or in his or her absence, by the President of this corporation if he or
she be present, or in his or her absence by any Vice President of this
corporation who may be present, and (b) whenever, in the judgment of the
Chairman, or in his or her absence, of the Vice Chairman, or in his or her
absence, of the President, or in his or her absence, any Vice President, it is
desirable for this corporation to execute a proxy or written consent in respect
to any shares or other securities issued by any other corporation and owned by
this corporation, such proxy or consent shall be executed in the name of this
corporation by the Chairman, the Vice Chairman, the President or one of the Vice
Presidents of this corporation, without necessity of any authorization by the
Board of Directors, affixation of corporate seal, if any, or countersignature or
attestation by another officer. Any person or persons designated in the manner
above stated as the proxy or proxies of this corporation shall have full right,
power and authority to vote the shares or other securities issued by such other
corporation and owned by this corporation the same as such shares or other
securities might be voted by this corporation.
ARTICLE VI. CERTIFICATES FOR SHARES; TRANSFER OF SHARES
6.01. CERTIFICATES FOR SHARES. Certificates representing shares of the
corporation shall be in such form, consistent with the Wisconsin Business
Corporation Law, as shall be determined by the Board of Directors. Such
<PAGE>
certificates shall be signed by the Chairman, the Vice Chairman, the President
or a Vice President and by the Secretary or an Assistant Secretary. All
certificates for shares shall be consecutively numbered or otherwise identified.
The name and address of the person to whom the shares represented thereby are
issued, with the number of shares and date of issue, shall be entered on the
stock transfer books of the corporation. All certificates surrendered to the
corporation for transfer shall be cancelled and no new certificate shall be
issued until the former certificate for a like number of shares shall have been
surrendered and cancelled, except as provided in Section 6.06.
6.02. FACSIMILE SIGNATURES AND SEAL. The seal of the corporation on any
certificates for shares may be a facsimile. The signature of the Chairman, the
Vice Chairman, the President or Vice President and the Secretary or Assistant
Secretary upon a certificate may be facsimiles if the certificate is manually
signed on behalf of a transfer agent, or a registrar, other than the corporation
itself or an employee of the corporation.
6.03. SIGNATURE BY FORMER OFFICERS. The validity of a share certificate
is not affected if a person who signed the certificate (either manually or in
facsimile) no longer holds office when the certificate is issued.
6.04. TRANSFER OF SHARES. Prior to due presentment of a certificate for
shares for registration of transfer the corporation may treat the registered
owner of such shares as the person exclusively entitled to vote, to receive
notifications and otherwise to have and exercise all the rights and power of an
owner. Where a certificate for shares is presented to the corporation with a
request to register for transfer, the corporation shall not be liable to the
owner or any other person suffering loss as a result of such registration of
transfer if (a) there were on or with the certificate the necessary
endorsements, and (b) the corporation had no duty to inquire into adverse claims
or has discharged any such duty. The corporation may require reasonable
assurance that such endorsements are genuine and effective and compliance with
such other regulations as may be prescribed by or under the authority of the
Board of Directors.
6.05. RESTRICTIONS ON TRANSFER. The face or reverse side of each
certificate representing shares shall bear a conspicuous notation of any
restriction imposed by the corporation upon the transfer of such shares.
6.06. LOST, DESTROYED OR STOLEN CERTIFICATES. Where the owner claims
that certificates for shares have been lost, destroyed or wrongfully taken, a
new certificate shall be issued in place thereof if the owner (a) so requests
before the corporation has notice that such shares have been acquired by a bona
fide purchaser, (b) files with the corporation a sufficient indemnity bond if
required by the Board of Directors or any principal officer, and (c) satisfies
such other reasonable requirements as may be prescribed by or under the
authority of the Board of Directors.
6.07. CONSIDERATION FOR SHARES. The Board of Directors may authorize
shares to be issued for consideration consisting of any tangible or intangible
property or benefit to the corporation, including cash, promissory notes,
services performed, contracts for services to be performed or other securities
of the corporation. Before the corporation issues shares, the Board of Directors
shall determine that the consideration received or to be received for the shares
to be issued is adequate. The determination of the Board of Directors is
conclusive insofar as the adequacy of consideration for the issuance of shares
relates to whether the shares are validly issued, fully paid and nonassessable.
The corporation may place in escrow shares issued in whole or in part for a
contract for future services or benefits, a promissory note, or otherwise for
property to be issued in the future, or make other arrangements to restrict the
transfer of the shares, and may credit distributions in respect of the shares
against their purchase price, until the services are performed, the benefits or
<PAGE>
property are received or the promissory note is paid. If the services are not
performed, the benefits or property are not received or the promissory note is
not paid, the corporation may cancel, in whole or in part, the shares escrowed
or restricted and the distributions credited.
6.08. STOCK REGULATIONS. The Board of Directors shall have the power
and authority to make all such further rules and regulations not inconsistent
with law as it may deem expedient concerning the issue, transfer and
registration of shares of the corporation.
ARTICLE VII. SEAL
7.01. The Board of Directors shall provide for a corporate seal for the
corporation which shall be circular in form and shall have inscribed thereon the
name of the corporation, the state of incorporation and the words "Corporate
Seal".
ARTICLE VIII. INDEMNIFICATION
8.01. PROVISION OF INDEMNIFICATION. The corporation shall, to the
fullest extent permitted or required by Sections 180.0850 to 180.0859,
inclusive, of the Wisconsin Business Corporation Law, including any amendments
thereto (but in the case of any such amendment, only to the extent such
amendment permits or requires the corporation to provide broader indemnification
rights than prior to such amendment), indemnify its Directors and Officers
against any and all Liabilities, and advance any and all reasonable Expenses,
incurred thereby in any Proceeding to which any such Director of Officer is a
Party because he or she is or was a Director or Officer of the corporation. The
corporation shall also indemnify an employee who is not a Director or Officer,
to the extent that the employee has been successful on the merits or otherwise
in defense of a Proceeding, for all reasonable Expenses incurred in the
Proceeding if the employee was a Party because he or she is or was an employee
of the corporation. The rights to indemnification granted hereunder shall not be
deemed exclusive of any other rights to indemnification against Liabilities or
the advancement of Expenses which a Director, Officer or employee may be
entitled under any written agreement, Board resolution, vote of shareholders,
the Wisconsin Business Corporation Law or otherwise. The corporation may, but
shall not be required to, supplement the foregoing rights to indemnification
against Liabilities and advancement of Expenses under this Section 8.01 by the
purchase of insurance on behalf of any one or more of such Directors, Officers
or employees, whether or not the corporation would be obligated to indemnify or
advance Expenses to such Director, Officer or employee under this Section 8.01.
All capitalized terms used in this Article VIII and not otherwise defined herein
shall have the meaning set forth in Section 180.0850 of the Wisconsin Business
Corporation Law.
ARTICLE IX. AMENDMENTS
9.01. BY SHAREHOLDERS. Except as otherwise provided in the articles of
incorporation, the shareholders shall have the power to adopt, amend, alter,
change or repeal any of the by-laws of the corporation at any annual or special
meeting of the shareholders at which a quorum is in attendance.
9.02. BY DIRECTORS. Except as otherwise provided by the Wisconsin
Business Corporation Law or in the articles of incorporation, the Board of
Directors shall have the power to adopt, amend, alter, change or repeal any of
<PAGE>
the by-laws of the corporation by the affirmative vote of a majority of the
directors present at any meeting of the Board of Directors at which a quorum is
in attendance; but no by-law adopted by the shareholders shall be amended or
repealed by the Board of Directors if the by-law so adopted so provides. The
manner of adoption of these by-laws or any section or provision thereof shall
not be deemed to impair or negate the power of the Board of Directors to adopt,
amend, alter, change or repeal these by-laws as provided herein.
9.03. IMPLIED AMENDMENTS. Any action taken or authorized by the
shareholders or by the Board of Directors which would be inconsistent with the
by-laws then in effect but which is taken or authorized by affirmative vote of
not less than the number of shares or the number of directors required to amend
the by-laws so that the by-laws would be consistent with such action shall be
given the same effect as though the by-laws had been temporarily amended or
suspended so far, but only so far, as is necessary to permit the specific action
so taken or authorized.
[Quarles & Brady Letterhead]
July l9, 1999
Ms. Lynda L. Dorr
Secretary to the Commission
Public Service Commission of Wisconsin
610 N. Whitney Way
P.O. Box 7854
Madison, WI 53707-7854
Re: Application of Wisconsin Energy Corporation
for Approval to Acquire the Stock of WICOR, Inc.
Dear Ms. Dorr:
Enclosed are 20 copies of Wisconsin Energy Corporation's ("WEC")
application to the Public Service Commission of Wisconsin ("Commission") to
acquire the stock of WICOR, Inc. ("WICOR").
We are providing courtesy copies of the enclosed application to all of
the parties whose names appear on the Service Lists for the last rate
proceedings involving the gas operations of both WEC and WICOR. Those to whom
courtesy copies have been sent are identified on the attached Mailing List.
The application describes the many benefits of this transaction to the
customers of the gas operations of both WEC and WICOR, the respective
shareholders and the general public. Expeditious treatment of the application
will allow these benefits to be realized earlier.
We would also like to encourage the expeditious processing of this
application because it is particularly difficult on the employees of both
companies to live with the uncertainty of not knowing whether the acquisition
will occur pending a decision by this Commission. We also believe it is
important to close this merger as quickly as possible since the greater the
period of time between signing of the Merger Agreement and the closing, the
greater the risk that something will happen, such as a hostile tender from an
unfriendly (and perhaps, out-of-state) potential acquiror.
<PAGE>
Ms. Lynda Dorr
July 19, 1999
Page 2
For these reasons, we ask that the Commission expedite treatment of
this application. At the same time, we are supportive of allowing interested
panties to present their positions through a contested case proceeding. We
believe that the interest of all parties can be protected while proceeding on an
expedited course. We thank the Commission in advance for whatever efforts it can
undertake in this regard.
Please direct any questions about this application to either me (phone
number 414/277- 5135) or Roman Draba (414/221-2285).
Very truly yours,
QUARLES & BRADY LLP
/s/ Larry J. Martin
----------------------------------------
Larry J. Martin
encl.
cc: Mailing List
Ave M. Bie, Chairperson
John H. Farrow, Commissioner
Joseph P. Mettner, Commissioner
John Cappellari, Executive Assistant to Commissioner Farrow
William C. Esbeck, Executive Assistant to Commissioner Mettner
Robert M. Garvin, Executive Assistant to Chairperson
<PAGE>
MAILING LIST
SUPERIOR WATER, LIGHT AND POWER COMPANY
Mr. Robert E. Evered
1230 Tower Avenue
P.O. Box 519
Superior, WI 54880
WISCONSIN INDUSTRIAL ENERGY GROUP
Richard L. Olson, Esq.
LaFollette & Sinykin
One East Main Street
P.O. Box 2719
Madison, WI 53701-2719
WISCONSIN COALITION FOR FAIR COMPETITION
Ron Kuehn, Esq.
DeWitt, Ross & Stevens
Two East Mifflin Street, Suite 600
Madison, WI 53703-2685
WISCONSIN PAPER COUNCIL
Mr. Earl Gustafson
Energy/Projects Mgr.
250 North Green Bay Road
P.O. Box 718
Neenah, WI 54957-0718
<PAGE>
CITIZENS UTILITY BOARD
Mr. Steve Hiniker
16 North Carroll Street
Suite 300
Madison, WI 53703
WISCONSIN POWER AND LIGHT CO.
Mr. Terry Nicolai
Manager of Regulatory Relations
222 West Washington Avenue
P.O. Box 192
Madison, WI 53701-0192
KOHLER COMPANY
Mr. Michael Potts
Kohler Company
444 Highland Drive
Kohler, WI 53044
LSP-WHITEWATER LIMITED PARTNERSHIP
William H. Wilson, Jr. Esq.
Brown, Olson & Wilson, P.C.
501 South Street
Concord, NH 03304
WISCONSIN END-USER GAS ASSOCIATION
Ms. Darcy Fabrizius
Manger of Regulatory Affairs
N16 W23217 Stone Ridge Drive
Waukesha, WI 53188
WPS ENERGY SERVICES, INC.
Mr. Chris Matthiesen
Director - Consulting
677 Baeten Road
Green Bay, WI 54304
<PAGE>
NORTHERN STATES POWER COMPANY
John D. Wilson, Esq.
100 North Barstow Street
P.O. Box 8
Eau Claire, WI 54702-0008
MADISON GAS AND ELECTRIC COMPANY
Mr. Jeffrey C. Newman
133 South Blair Street
P.O. Box 1231
Madison, WI 53701-1231
COALITION FOR EQUITABLE RATES
Mr. John H. Bucy II
701 Brazos, Suite 1500
Austin, TX 78701
WISCONSIN FEDERATION OF COOPERATIVES
Warren J. Day, Esq.
30 West Mifflin Street, Suite 401
Madison, WI 53703
RENEW WISCONSIN AND
WISCONSIN ENVIRONMENTAL DECADE
Frank Jablonski, Esq.
Porter, Jablonski & Associates, S.C.
7 North Pinckney Street
Madison, WI 53703
ENERGY SOLUTIONS, INC.
Ms. Valerie G. Kelm
2386 Dahlk Circle
Verona, WI 53593
<PAGE>
WISCONSIN PUBLIC SERVICE CORPORATION
Bradley D. Jackson, Esq.
Foley & Lardner
150 East Gilman Street
P.O. Box 1497
Madison, WI 53701-1497
RELIANT ENERGY RETAIL, INC.
Gordon Smith, Esq.
John & Hengerer
1200 17th Street, N.W.
Suite 600
Washington, DC 20036-3013
WISCONSIN DEPT. OF AGRICULTURE,
TRADE AND CONSUMER PROTECTION
Mr. Kevin LeRoy
P.O. Box 8911
Madison, WI 53708
WISCONSIN AGRI-SERVICE ASSOCIATION, INC.
Mr. Raymond J. Schmitt
6000 Gisholt Drive
Madison, WI 53713
SELECT ENERGY CONSULTING, LLC
Mr. George E. Wennerlyn
1549 Grosse Point Drive
Middleton, WI 53562
NR PIPELINE COMPANY
Mr. Michael J. Armiak
Vice President, State Regulatory Relations
ANR Pipeline Company
500 Renaissance Center
Detroit, MI 48243-1902
<PAGE>
INDEPENDENT BUSINESS ASSOCIATION OF WISCONSIN
Mr. John Kasdorf
N16 W23217 Stone Ridge Drive
Waukesha, WI 53188
WISCONSIN COALITION FOR FAIR COMPETITION
Mr. Ron Kuehn
[Need Address]
PHILIP MORRIS MANAGEMENT CORP.
Michael A. Stosser, Esq.
Eric R. Todderud, Esq.
Heller, Ehrman, White & McAuliffe
200 S.W. Market Street, Suite 1750
Portland, OR 97201-5718
WISCONSIN FUEL AND LIGHT COMPANY
Hugh H. Bell, Esq.
Bell, Metzner, Gierhart & Moore, S.C.
44 E. Mifflin Street
P.O. Box 1807
Madison, WI 53701-1807
CITY GAS COMPANY
Thomas A. Lockyear, Esq.
131 W. Wilson Street, Suite 501
Madison, WI 53703
QUAD GRAPHICS, INC.
Eric von Estorff, Esq.
Quad Graphics, Inc.
N63 W23075 Highway 74
Sussex, WI 53089-2876
<PAGE>
Mr. Alan Chalfant
Brubaker & Associates, Inc.
1215 Fert Ridge Parkway, Ste. 208
P.O. Box 412000
St. Louis, MO 63141-2000
Mr. Clarence J. Heller
LS Power LLC
655 Craig Road, Suite 336
St. Louis, MO 63141
Ms. Vicki L. Bradford
National Energy Management
2810 Crossroads Drive #2400
Madison, WI 53718
Mr. John J. Walker
JL Walker & Associates
7434 Cedar Creek Trail
Madison, WI 53717
Wisconsin Manufacturers & Commerce
501 E. Washington Avenue
Madison, WI 53703
Glenn Stugelmayer
Midwest Natural Gas, Inc.
P.O. Box 429
LaCrosse, WI 54602-0425
Mr. Don Matthews
Stoughton Trailer, Inc.
416 S. Academy Street
Stoughton, WI 53589
George Edgar
Wisconsin Energy Conservation Corp.
3120 International Lane
Madison, WI 53704
Richard Dahnke
R.J. Dahnke Associates
P.O. Box 1254
Sheboygan, WI 53082-1254
<PAGE>
Bill G. Smith
NFIB-Wisconsin
119 Martin Luther King Drive Blvd.
Suite 516
Madison, WI 53703
Ms. Alice Linnabary
Radio Oil Co.
435 S. 16th
Milwaukee, WI 53214
Mr. Edward Wolf
EH Wolfe & Sons
P.O. Box 348
Slinger, WI 53086
Mr. Miles Cline
Cline Gas Co.
130 W. Lincoln Street
Fall Creek, WI 54742
Mr. Edward Blume
Wisconsin Propane Association
P.O. Box 2116
Madison, WI 53701
Mr. Gary France
France Propane Services, Inc.
1151 Foundry Street
Schofield, WI 54476
Mr. Robert Bartlett
Petroleum Marketers Association
P.O. Box 8518
Madison, WI 53709
Mr. Mike Haydock
Redi Gas, Inc.
765 N. Church Street
Watertown, WI 53094
<PAGE>
BEFORE THE
PUBLIC SERVICE COMMISSION OF WISCONSIN
Application of Wisconsin Energy Corporation )
for Approval of a Transaction by which )
Wisconsin Energy Corporation Would ) Docket No.:
Acquire All of the Outstanding Common )
Stock of WICOR, Inc. )
- --------------------------------------------------------------------------------
APPLICATION OF WISCONSIN ENERGY CORPORATION
FOR APPROVAL TO ACQUIRE THE STOCK OF WICOR, INC.
- --------------------------------------------------------------------------------
Wisconsin Energy Corporation ("WEC") hereby requests approval by the
Public Service Commission of its plan to acquire 100% of the outstanding common
stock of WICOR, Inc. ("WICOR"). (This acquisition, which is described in Section
II, is referred to throughout this Application as the "Transaction".) Because
WICOR is a holding company, as defined by section 196.795(1)(h)1.a., Wis.
Stats., the proposed Transaction is governed by section 196.795(3), Wis. Stats.,
which provides in relevant part:
No person may take, hold or acquire, directly or indirectly,
more than 10% of the outstanding voting securities of a
holding company, with the unconditional power to vote those
securities, unless the commission has determined, after
investigation and an opportunity for hearing, that the
taking, holding or acquiring is in the best interests of
utility consumers, investors and the public . . .
The Transaction will result in a financially stronger Wisconsin-based company,
gas system benefits, reduced gas costs, improved gas system reliability, and
<PAGE>
increased value added. Consequently, the Transaction is clearly in the best
interests of utility consumers, investors and the public and should receive the
Commission's approval.
This application is limited. All that is sought is: (a) approval of
the Transaction under section 196.795(3), Wis. Stats., which requires only three
findings; and (b) authorization of recovery of the acquisition premium
consistent with the Commission's announced policy. No rate changes or approvals
associated with the future expected combination of the two companies' gas
operations are sought or at issue in this proceeding
I. THE PARTIES TO THE TRANSACTION
A. WISCONSIN ENERGY CORPORATION
WEC is a holding company with a number of wholly owned subsidiaries.
In fiscal 1998, WEC had operating revenues of approximately $2 billion, net
income of approximately $188 million, and employed approximately 5,400 people,
including 690 in its gas operations. WEC is owned by approximately 95,000
registered shareholders, of whom more than 40,000 reside in Wisconsin.
WEC's Wisconsin Electric Power Company ("WE") subsidiary is a public
utility. In addition to its steam and electric energy businesses, WE also
purchases and transports natural gas to Wisconsin through pipeline companies and
distributes and sells natural gas in a territory of approximately 3,800 square
miles in the area west and south of Milwaukee, an area along the Michigan
border, the Appleton area, and the Prairie du Chien area. The gas service
territory has an estimated population of approximately 1.2 million. WE's gas
assets include approximately 7,900 miles of gas mains.
<PAGE>
B. WICOR, INC.
WICOR is a holding company that was formed in 1980. It owns and
operates subsidiaries in two industries: energy services and pump manufacturing.
WICOR had 1998 operating revenues of $944 million, of which $481 million was
attributable to its energy subsidiaries and $463 million to manufacturing.
WICOR's net income in 1998 was $45.5 million, with 48% of that from energy and
52% from manufacturing. WICOR has approximately 21,500 shareholders, of whom
11,300 reside in Wisconsin.
WICOR's principal energy subsidiary is Wisconsin Gas Company, a
regulated natural gas utility which purchases and transports natural gas to
Wisconsin through pipeline companies and distributes and sells that gas to
approximately 529,000 customers in 524 Wisconsin communities.1 Wisconsin Gas
owns approximately 9,100 miles of gas mains.
WICOR's manufacturing subsidiaries make and market pumps, fluid
processing equipment and water filtration equipment for a variety of
applications.
II. DESCRIPTION OF THE TRANSACTION
The Transaction will be structured as a merger of WICOR and a special
purpose acquisition subsidiary of WEC. The Transaction may involve cash and
stock or just cash, as discussed below. If the Transaction involves both cash
and stock, WICOR will be merged into the acquisition subsidiary and the name of
the subsidiary will be changed to WICOR. If the Transaction involves only cash,
the acquisition subsidiary will be merged into WICOR. In either event, WICOR (or
- ---------------
1 A map of WICOR's gas service territory and WE's gas and electric
service territories is attached to this Application.
<PAGE>
its successor) will become a wholly-owned subsidiary of WEC and will in turn own
Wisconsin Gas and the other WICOR subsidiaries. A diagram depicting the
organizational structure of the resulting entity is attached to this
Application.
Each outstanding share of WICOR Common Stock will receive $31.50 (plus
a daily escalator equal to an annualized rate of 6% if the transaction closes
after July 1, 2000) (the "Exchange Value"). Chase Securities Inc., an investment
banking firm, has given its opinion that the consideration to be paid in the
Transaction is fair, from a financial point of view, to WEC. Merrill Lynch,
Pierce, Fenner & Smith Incorporated has opined that the consideration is fair,
from a financial point of view, to WICOR's shareholders. If the average closing
price of Wisconsin Energy Common Stock on the New York Stock Exchange for the 10
trading days ending 5 trading days prior to the Closing Date (the "Wisconsin
Energy Average") is less than $22 per share, WEC may elect to pay the entire
acquisition price in cash. Otherwise payment will consist of a combination of
cash and WEC Common Stock. Prior to the Closing, WEC will select what percentage
of the acquisition price will be paid in cash and what percentage will be paid
in WEC Common Stock, with the limitation that WEC Common Stock will not
constitute less than 40% or more than 60% of the acquisition price. The exchange
ratio, which will determine the number of shares of WEC Common Stock to be
issued for the stock portion of the merger consideration, will be calculated by
dividing the Exchange Value by the Wisconsin Energy Average as described above.
WICOR shareholders will receive an Election Form by which they can
choose to take cash, stock, or a combination of both, or indicate that they have
no preference. The cash and stock elections will then be prorated, if necessary,
<PAGE>
so that the total of cash and WEC Common Stock to all WICOR shareholders equals
the percentages selected by WEC.
The total equity value of the Transaction is approximately $1.275
billion. In addition, on a consolidated basis WEC will assume approximately $230
million of WICOR debt. WEC intends to finance the cash portion of the merger
consideration through a combination of bank and capital market financings. The
Transaction will create a company with assets of approximately $7.3 billion.
WEC anticipates no special charges in connection with this Transaction
other than those normally associated with completing a transaction of this kind.
The post-closing structure of WEC is depicted in an attachment to this
Application. As the attachment makes clear, the principal structural effect of
the Transaction will be to expand the base of shareholders who have an interest
in WICOR. WICOR will become a first tier subsidiary of WEC, while WICOR's own
subsidiaries will continue as such. Accordingly, the practical effect of the
merger will be to change the ownership of WICOR. Initially, the utility
operations of WEC and WICOR will remain unchanged. Between now and the
consummation of the Transaction, WEC and WICOR will devote their energies to
completing the Transaction, ensuring that all critical systems are Y2K
compliant, and ensuring that the provision of utility service and the quality of
customer service remain at the highest possible level. As discussed in Section
IV, after the Transaction is approved and completed and any lingering Y2K
problems are resolved, WEC will begin a detailed evaluation of how the gas
operations of Wisconsin Gas and Wisconsin Electric might be combined to increase
efficiency and reduce costs.
<PAGE>
Decisions have not yet been made on the extent to which WEC's and
WICOR's gas operations should be combined. However, it is probable that in the
future Wisconsin Electric's gas operations will combine with WICOR's Wisconsin
Gas subsidiary to form a single utility. However, a decision on such combination
will not occur until sometime after all requisite approvals have been obtained
for this Transaction and the Transaction has closed.
III. THE TRANSACTION SATISFIES THE STANDARD IN SECTION 196.795(3).
The Transaction should be approved if the Commission determines that
it is "in the best interests of utility consumers, investors and the public."
The Transaction easily satisfies this standard.
A. THE TRANSACTION IS IN THE BEST INTERESTS OF THE UTILITY CONSUMERS.
WEC and WICOR will be studying the extent to which their gas
operations should be combined and operated as a single system. Whatever the
extent and pace of that combination, gas utility customers are benefitted by
this Transaction in both the short term and the long term.
Gas utility customers will realize immediate and ongoing benefits from
the Transaction. Savings are projected to come from lower costs for purchased
gas resulting from enhanced purchasing power and gas portfolio management. Much
of this cost savings will be passed through to the customers under the purchased
gas adjustment mechanisms of Wisconsin Electric and Wisconsin Gas. Additionally,
gas utility operations will be improved by coordinated use of the resources and
skill sets of the two companies and adoption of best practices, which will
enhance gas system reliability and result in a variety of system benefits (see
section IV below). Gas utility customers will enjoy high quality, reliable
service, delivered by a seasoned, capable work force. Finally, but importantly,
<PAGE>
this transaction will make more likely an expansion of gas supplies into the
state of Wisconsin, including extension of gas service to as yet unserved retail
customers sooner than would otherwise be the case. Such an expansion of gas
supply has positive implications for economic growth in the State.
In the long run, the Transaction will result in base gas rates lower
than they would have been on a stand alone basis. It is proposed here that the
synergy savings that are expected to result from the Transaction and any
subsequent combination of gas operations be initially retained by the gas
operations to allow, in this fashion, recovery of the acquisition premium. As
described in Section IV, WEC is not seeking any recovery of the acquisition
premium, except to the extent that it is offset by cost savings. Thus, the
proposed methodology for recovery of the acquisition premium ensures that the
customers are held harmless in the short run and will, in the long run, benefit
from synergy savings.
B. THE TRANSACTION IS IN THE BEST INTERESTS OF THE PUBLIC.
The Transaction combines two premier Wisconsin-based companies, both
of which have deep roots in the state and in the communities they serve. Both
companies have long traditions of making significant contributions to regional
economic development and of generously supporting educational, cultural and
charitable activities. The Transaction will ensure that this tradition
continues. The headquarters of the post-merger entity and all associated jobs
will remain in Wisconsin and critical decisions affecting energy policy in
Wisconsin will continue to be made in Wisconsin.
The companies' employees will benefit by becoming part of an
organization that is better equipped to compete and maintain its independence in
the rapidly changing energy business. No layoffs will result from the merger.
<PAGE>
Any workforce reductions resulting from the Transaction will occur through
attrition and all union contracts will be honored.
C. THE TRANSACTION IS IN THE BEST INTERESTS OF THE SHAREHOLDERS.
As a result of the Transaction, shareholders will own a financially
stronger company that will be well-positioned in the market place and will be
able to participate in the enhanced earnings and growth potential of the
post-merger company. The Transaction is expected to result in earnings accretion
which is expected to have a positive impact on the price of WEC stock. WICOR's
shareholders will receive a premium for their stock. In any case, the
shareholders themselves will indicate where their best interests lie because the
Transaction is conditioned on approval by the shareholders of both WEC and WICOR
and such approval is expected.
IV. BECAUSE OF THE BENEFITS PRODUCED BY THIS TRANSACTION THE
COMMISSION SHOULD AUTHORIZE RECOVERY OF THE ACQUISITION
PREMIUM CONSISTENT WITH THE COMMISSION'S ANNOUNCED
POLICY.
Transactions such as the one proposed are one of several means by
which utilities may be able to reduce their cost of service, improve service
reliability, and enhance their financial strength. Prudent policy requires that
the managements of utilities be vigilant to seize all reasonable opportunities
for cost reductions, including those that involve consolidation. Customers are
benefited by, and regulators should encourage, all measures -- including
consolidation -- that will promote efficiency by discouraging duplication,
increasing productivity, and improving service reliability in order to reduce
costs and increase value added for all customers.
<PAGE>
However, consolidations that reduce costs and improve service will not
occur without the proper incentives. The market's perception that consolidation
can yield significant real economies has stimulated competition for the purchase
of utility assets with the result that a target company's shareholders will
demand a price higher than the depreciated book value of the target's assets.
In addition, because the management of an acquiring company owes a
fiduciary duty to that company's shareholders, there will be no incentive to
pursue efficiency-enhancing consolidation if regulators require the acquiror's
shareholders to bear all the costs of a merger but deprive them of any
opportunity to benefit.
Regulators -- including the Commission -- should resolve to treat
investments in efficiency-enhancing consolidation the same way they treat
investments in efficiency-enhancing physical assets. If a regulated utility
proposed to invest in a machine that would reduce costs by $35 million per year,
there is no doubt the Commission would endorse the proposal to the extent that
the savings are commensurate with the costs required to achieve them. Moreover,
the Commission would certainly permit the utility to recover the cost of such an
investment.
To acquire WICOR, and achieve the benefits described in this
Application, WEC must pay a premium over book value for WICOR's stock. That
premium is consistent with prices paid by other buyers in comparable
transactions. Because this transaction is accorded purchase accounting
treatment, the premium will be reflected on the books of the company. WEC asks
the Commission to permit it to recover the portion of the premium attributable
to WICOR's utility assets just as it would permit recovery of an investment in a
physical asset that lowers costs or improves service quality or reliability.
<PAGE>
Recovery of the acquisition premium will not require any increase in
rates as a result of the Transaction. What WEC proposes is merely that the
Commission endorse the principle that WEC be allowed to retain the synergy
savings that result from the Transaction for a period of time adequate to
recover the acquisition premium it is paying to make those savings possible.
The Commission Staff enunciated such a principle in 1993. In a letter
to all gas and electric utilities, the Administrator of the Gas Division and the
Administrator of the Electric Division stated:
Depending on the level of likely benefits [from a
consolidation], all or part of an acquisition adjustment may
be recovered from ratepayers.
The principle developed by the Staff supports recovery of the premium where
there are gas system benefits or, if such benefits are difficult to quantify,
where there are cost savings resulting from the synergies produced by the
acquisition. As will be discussed below, there are both gas system benefits and
synergies which will be achieved here.
The Commission itself has addressed the issue of when recovery of an
acquisition premium is appropriate. In Dockets 4220-EA-110/5050-EB-100 (1993),
the City of Rice Lake purchased electric distribution facilities from Northern
States Power. The Commission authorized amortization of the acquisition premium
for the assets and also permitted a return on the unamortized balance. The
Commission found that recovery of the premium was justified because the
transaction resulted in system benefits to the acquiring utility and its present
and future customers. Those benefits consisted of improved reliability and
avoidance of duplication.
<PAGE>
Similarly, in Docket 4220-UR-407 (1993), the Commission found that
Northern States Power-Wisconsin (NSPW) would receive substantial system benefits
from its parent Northern States Power-Minnesota's acquisition of Viking Gas
Transmission Company. Those benefits included greater flexibility in accessing
natural gas suppliers, an enhanced ability to balance the gas load between
pipelines, greater flexibility in peak shaving options, and an overall increase
in the reliability of the gas delivery system. The Commission also found that
there would be economic benefits resulting from the purchase. On that basis, the
Commission found it reasonable to permit NSPW to recover a revenue requirement
adjustment from ratepayers "to the extent that those costs are less than or
equal to the savings that customers will recognize as a result of the ...
acquisition."
Although the companies have not yet conducted comprehensive studies,
WEC believes that the proposed Transaction will lead to the sort of system
benefits that justify recovery of the acquisition premium under the Commission's
established policy. For example, WEC expects that there are improvements which
each gas system had planned to undertake on its own which, when looked at from a
joint perspective, can be accomplished more efficiently. An example of this
would be achieving increased pressure support through the interconnection of
facilities, rather than having to construct new pipelines. In addition, the
Wisconsin Electric LNG facilities may be used to supply system support for both
Wisconsin Electric's gas operations and Wisconsin Gas.
It will also be possible to improve service center operations through
joint scheduling and reduction in travel time. Combining operations is likely to
reduce the required level of inventory of pipe, fittings, meters, risers, meter
sets and regulators. Joint purchasing of inventoried material is likely to
<PAGE>
result in additional efficiencies. Also at the service center level, system
benefits will be realized by joint or rerouted meter reading.
System benefits will also be achievable on the gas supply side. Since
the full implementation of FERC Order 636 which took interstate pipelines out of
the merchant gas business, local distribution companies have obtained their gas
supplies on the competitive market. One consequence of this is that larger LDC's
have increased buying power and the potential to secure more favorable prices
and other terms and conditions. Larger, more diversified systems also afford
greater opportunity for contractual flexibility in meeting system demands. For
example, it will be possible to modify or eliminate short-term gas portfolio
contracts when the supply portfolios of the two systems are managed jointly.
While connecting systems is one way to take advantage of a joint portfolio, even
non-interconnected systems will benefit from the joint portfolio approach. In
addition, joint portfolio planning may result in strategies to reduce the cost
of supplying peak day demands.
While no definitive synergies study has been done, an initial estimate
is that gas operations resulting from the Transaction will result in annual
savings of about $35 million. These savings are projected to come from lower
costs for purchased gas, materials and services through enhanced purchasing
power, elimination of duplication through attrition and sharing of resources and
consolidation of common functions over time. This estimate of the synergy
savings is fairly supported by the preliminary analysis done by WEC. A refined
projection of the synergy savings will not be developed until after the
Transaction is closed and the analysis of how to best bring together the gas
operations is completed. In the interim, it is essential for both companies to
<PAGE>
focus on continuing to provide reliable, safe, and economical gas service to
their respective customers.
WEC does not propose that the precise mechanism for acquisition cost
recovery be established as part of this proceeding. WEC does request a finding
from the Commission that the proposed Transaction will result in system benefits
and that WEC's shareholders should be allowed to recover the acquisition premium
to the extent the premium is less than or equal to the savings that will result
from the transaction
V. FEDERAL REVIEW OF THE PROPOSED TRANSACTION
A. THE SECURITIES AND EXCHANGE COMMISSION
The proposed Transaction is subject to review and approval by the
Securities and Exchange Commission ("SEC") under the Public Utility Holding
Company Act of 1935. In reviewing a proposed transaction, the SEC considers
whether (1) the acquisition tends toward the creation of interlocking
directorates; (2) whether the acquisition tends towards concentration of control
of public utility companies of a kind or to an extent detrimental to the public
interest or the interest of investors or consumer; (3) whether the consideration
to be paid bears a fair relation to the earning capacity of the assets to be
acquired; (4) whether the acquisition unduly complicates the capital structure
of the applicant's holding company system; and (5) whether the acquisition
serves the public interest by tending towards the economical and efficient
development of an integrated public utility system.
<PAGE>
B. THE FEDERAL ENERGY REGULATORY COMMISSION
The Transaction does not appear to require review or approval by the
Federal Energy Regulatory Commission ("FERC").
C. ANTITRUST REVIEW
Section 7 of the Clayton Act (15 U.S.C. section 18) prohibits business
combinations the effect of which may be substantially to lessen competition or
to tend to create a monopoly. To facilitate enforcement of Section 7, parties to
a proposed business combination are required by the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, 15 U.S.C. section 18a (the "Act"), to submit to the
Federal Trade Commission ("FTC") and the Antitrust Division of the Department of
Justice ("Antitrust Division") certain information regarding their operations
and the proposed transaction. The information must be provided to the agencies
on a detailed Notification and Report Form for Certain Mergers and Acquisitions.
The Act also prohibits consummation of the merger until all applicable waiting
periods under the Act have expired or been terminated.
The Act is intended to identify and postpone consummation of
significant merger transactions in order to allow the FTC and Antitrust Division
to meaningfully analyze the competitive effects of the transaction and to give
them the time and discovery authority necessary to challenge the transaction
prior to its consummation if the reviewing antitrust agency believes that the
transaction will result in competitive harm.
The parties' submission of their HSR filings will initiate a waiting
period which the parties must observe prior to consummating the merger.
<PAGE>
Additional information may be requested prior to the expiration of the initial
waiting period. Such a request has the effect of extending the review process.
The federal antitrust enforcement agencies have been active in
reviewing similar transactions in the energy industry, and it is expected that
they will be vigilant with respect to this Transaction as well. In this case,
WEC believes the proposed Transaction raises no significant issues regarding
either horizontal or vertical market power in any appropriately defined market.
VI. RELIEF REQUESTED
For the reasons stated, WEC asks the Public Service Commission of
Wisconsin:
1. To find that the proposed Transaction whereby Wisconsin Energy
Corporation will acquire 100% of the outstanding common stock of
WICOR, Inc. satisfies the standard in Wis. Stat. section
196.795(3) in that the Transaction is in the best interests of
utility consumers, investors and the public, and to approve the
Transaction without any conditions; and
2. To find that Wisconsin Energy Corporation is entitled to retain
the synergy savings resulting from the Transaction in such amount
and for such a period of time as to permit recovery of that
portion of the acquisition premium attributable to WICOR's
utility assets.
<PAGE>
Dated this 2OTH day of July, 1999, in Milwaukee, Wisconsin.
Respectfully submitted,
QUARLES & BRADY
/s/ Larry J. Martin
----------------------------------------
Larry J. Martin
Brian D. Winters
Attorneys for Wisconsin Energy Corporation
QUARLES & BRADY
411 E. Wisconsin Avenue
Suite 2550
Milwaukee, WI 53202-4497
(414) 277-5000
<PAGE>
[Chart: Transaction Overview, Post Closing Structure]
<PAGE>
[Map: Combined Utilities Service Territories]
<PAGE>
[Quarles & Brady Letterhead]
September 10, 1999
VIA HAND DELIVERY
Ms. Lynda L. Dorr,
Secretary to the Commission
Public Service Commission of Wisconsin
610 North Whitney Way
PO Box 7854
Madison, WI 53707-7854
Re: Application of Wisconsin Energy Corporation
for Approval to Acquire the Stock of WICOR, Inc.
Docket Nos. 9401-YO-100 and Docket 9402-YO-101
Dear Ms. Dorr:
We are pleased to file with the Commission, a week prior to the
required pre-filing date of September 17, 20 copies each of the direct testimony
and exhibits of Calvin Baker and Bronson Haase and 20 copies of the testimony of
James Schott. The two maps referred to in Mr. Schott's testimony have not been
prepared and will be filed with the balance of the applicants' testimony and
exhibits. We plan to file the direct testimony and exhibits of our remaining
witnesses by the September 17 deadline established at the pre-hearing
conference.
Copies of the enclosed testimony and exhibits are being sent today,
via overnight delivery service, to the parties currently shown on the official
service list and also to those persons who we believe have recently applied for,
or are in the process of applying for, full party status.
Very truly yours,
QUARLES & BRADY LLP
/s/ Larry J. Martin
----------------------------------------
Larry J. Martin
Enclosures
cc: Forrest Ceel
Ms. Linda M. Clifford
Ms. Darcy Fabrizius
<PAGE>
Lynda L. Dorr, Secretary
September 10, 1999
Page 2
Phil Gozy
Earl J. Gustafson
Theresa Hottenroth
Mr. Bradley Jackson
Ms. Joan L. Romett
Michael Stuart
Ms. Mary Wright
<PAGE>
BEFORE THE
PUBLIC SERVICE COMMISSION OF WISCONSIN
Application of the Wisconsin Energy Corporation for 9401-YO-100
Approval to Acquire the Stock of WICOR Inc. 9402-YO-101
- --------------------------------------------------------------------------------
DIRECT TESTIMONY OF CALVIN H. BAKER
IN SUPPORT OF APPLICATION BY WISCONSIN ENERGY CORPORATION
- --------------------------------------------------------------------------------
Q. Please state your name and business address.
A. My name is Calvin H. Baker. My business address is 231 West Michigan
Avenue, Milwaukee, Wisconsin, 53201.
Q. By whom are you employed and in what capacity?
A. I am employed by Wisconsin Energy Corporation as treasurer and by Wisconsin
Electric Power Company as vice president of finance and chief financial
officer.
Q. Please describe your educational and professional background?
A. Prior to joining Wisconsin Electric in 1991, I was senior vice president
with the Financial Services Corp. of New York City. Previously, I owned and
operated the Tri-State Transit Corporation in Milwaukee. I have also worked
with Smith Barney, Harris Upham, Inc. as second vice president and
Citibank, N.A. as assistant vice president.
I was graduated from Franklin & Marshall College in 1965. I earned a
Master of Business Administration degree in finance from the University of
Chicago in 1969.
Q. On whose behalf are you testifying in this proceeding?
<PAGE>
A. I am testifying on behalf of Wisconsin Energy Corporation (WEC), referred
to as the Applicant.
Q. What is the Applicant seeking in this proceeding?
A. The applicant is seeking Public Service Commission of Wisconsin (PSCW)
approval for its plan to acquire 100% of the outstanding common stock of
WICOR, Inc. (WICOR) (the "Transaction").
Q. What is the purpose of this testimony?
A. The purpose of this testimony is to provide background and an overview of
the Transaction, describe the reasons for the Transaction from WEC's
perspective, and the benefits to our customers and the public.
Q. Before proceeding further, please generally describe WEC.
A. WEC is a holding company with a number of wholly owned subsidiaries. In
fiscal 1998, WEC had operating revenues of approximately $2 billion, net
income of approximately $188 million, and employed approximately 5,400
people, including 690 in its gas operations. WEC is owned by approximately
95,000 registered shareholders, of whom more than 40,000 reside in
Wisconsin.
WEC's Wisconsin Electric Power Company (WE) subsidiary is a public
utility. In addition to its steam and electric energy businesses, WE also
purchases and transports natural gas to Wisconsin through pipeline
companies and distributes and sells natural gas in a territory of
approximately 3,800 square miles in the area west and south of Milwaukee,
an area along the Michigan border, the Appleton area, and Prairie du Chien
<PAGE>
area. The gas service territory has an estimated population of
approximately 1.2 million. WE's gas assets include approximately 7,900
miles of gas mains.
Q. How did the proposed Transaction come about?
A. Discussions between Richard Abdoo, chairman, president and chief executive
officer of WEC, and George Wardeberg, chairman and chief executive officer
of WICOR, in July and November 1998 ultimately led to a series of meetings
and discussions between the two companies. In December, 1998, the WICOR
board instructed WICOR management to consider the combination with WEC.
Between December 1998 and June 1999, the WEC and WICOR boards of directors
(boards) met separately on combination-related topics on a number of
occasions. On June 27, 1999, each of the boards met for a final review and
approval of the Transaction.
Q. Please describe why WEC is proposing this Transaction.
A. WEC believes that a combination of market forces, regulatory and
legislative initiatives and technological changes has caused the utility
industry to experience rapid change in recent years, and that these changes
will continue for the foreseeable future. Competition is increasing,
particularly in wholesale markets, but also in gas and electric retail
markets. We believe that utilities that achieve significant size and scope
of operations, efficient, reliable and low cost sources of energy supply
and a diverse customer base, will be best positioned to compete in an
increasingly deregulated and competitive energy market. Changes in the
energy utility industry are bringing increased competition to various
sectors of the business and are putting pressure on utilities to lower
their costs. WEC believes that a combination with another financially
strong utility, such as Wisconsin Gas, already operating within its service
<PAGE>
territory will enable the combined entity to, longer term, deliver energy
more cheaply and efficiently and thereby remain a premier supplier of
energy within its markets in an increasingly deregulated industry.
Given this environment, we believe that the Transaction offers both
WEC and WICOR the best chance to remain financially strong, viable,
Wisconsin-based corporations. At the same time the Transaction offers
customers the best chance to enjoy continued competitive rates and service.
Q. What benefits can the customers expect from the Transaction?
A. From the utility consumer standpoint the Transaction offers multiple
benefits. Gas utility customers will realize ongoing benefits from the
Transaction. As witness James Schott explains in more detail, savings are
projected to come from lower costs for purchased gas resulting from
enhanced purchasing power and gas portfolio management. Much of this cost
savings will be passed through to customers under the purchased gas
adjustment mechanisms of Wisconsin Electric and Wisconsin Gas.
Additionally, gas utility operations will be improved by coordinated use of
the resources and skill sets of the two companies and adoption of best
practices, which will enhance gas system reliability and result in a
variety of system benefits. Gas utility customers will enjoy high quality,
reliable service, delivered by a seasoned, capable work force. In the long
run the synergies which the Transaction will produce will result in gas
rates which are lower than they would have been on a stand-alone basis.
Finally, but importantly, the Transaction will make more likely an
expansion of gas supplies into the state of Wisconsin, including extension
of gas service to as yet unserved retail customers sooner than would
<PAGE>
otherwise be the case. Such an expansion of gas supply has positive
implications for economic growth in the State.
Q. Please describe how this Transaction is in the best interests of the
public.
A. This Transaction combines two premier Wisconsin-based companies, both of
which have deep roots in the state and in the communities that they serve.
Both companies have long traditions of making significant contributions to
regional economic development and of generously supporting educational,
cultural and charitable activities. This Transaction will ensure that this
tradition continues. The headquarters of the post-merger entity and the
jobs will remain in Wisconsin and critical decisions affecting energy
policy in Wisconsin will continue to be made in Wisconsin.
Q. How will the employees benefit?
A. The employees will benefit by becoming part of an organization that is
better equipped to compete and maintain its independence in the rapidly
changing energy business. No layoffs will result from the merger. Any
workforce reductions resulting from the Transaction will occur through
attrition and all union contracts will be honored.
Q. What will be the structure of the combined organization?
A. After the completion of the acquisition, WICOR will be a wholly-owned
subsidiary of WEC, with Wisconsin Gas remaining a subsidiary of WICOR.
Exhibit ___ (CHB-1) shows the organizational structure of the
post-Transaction entity.
Q. What regulatory approvals are required in order to complete the
Transaction?
A. In addition to PSCW approval, Securities and Exchange Commission (SEC) and
federal antitrust approval are also required.
<PAGE>
Q. Assuming all necessary approvals are granted, when would WEC like to
complete the Transaction?
A. Given the benefits that can be achieved through the Transaction, the
company would like to complete the Transaction as soon as possible. By year
end 1999 would be the company's preference. With that in mind the company
requests that the Commission act upon this as expeditiously as possible.
Q: Why is it important, in your view, for the Commission to act as
expeditiously as possible?
A: From the customer's standpoint, the sooner that the Transaction is
complete, the sooner they can begin to receive benefits derived from the
Transaction, such as reduced purchased gas costs. It is particularly
difficult on the employees of both companies to live with the uncertainty
of not knowing whether the acquisition will occur pending a decision by
this Commission. I also believe it is important to close this merger as
quickly as possible since the greater the period of time between the
signing of the Merger Agreement and the closing, the greater the risk that
something adverse will happen, such as a hostile tender from an unfriendly
and perhaps, out-of-state, potential acquiror. Finally, we are unable to
obtain approval from the Securities and Exchange Commission under the 1935
Act until after this Commission has acted. -----
Q. Does this conclude your testimony?
A. Yes, it does.
<PAGE>
BEFORE THE
PUBLIC SERVICE COMMISSION OF WISCONSIN
Application of the Wisconsin Energy Corporation 9401-YO-100
for Approval to Acquire the Stock of WICOR Inc. 9402-YO-101
- --------------------------------------------------------------------------------
DIRECT TESTIMONY OF BRONSON J. HAASE
IN SUPPORT OF APPLICATION BY WISCONSIN ENERGY CORPORATION
- --------------------------------------------------------------------------------
Q. State your name, business address and position with WICOR, Inc.
A. My name is Bronson J. Haase. My business address is 626 East Wisconsin
Avenue, Milwaukee, Wisconsin 53202. I am a Vice President of WICOR, Inc.
and President and Chief Executive Officer of its three energy subsidiaries,
Wisconsin Gas Company, FieldTech, Inc. and WICOR Energy Services Company.
Q. Describe your responsibilities with WICOR.
A. As president and chief executive officer of WICOR's energy companies, I am
responsible for the overall operations and performance of these companies
and for the strategy and vision to enable them to succeed in the future. As
a vice president of WICOR, I am responsible for coordinating the energy
companies' planning, budgeting, capital requirements, and the like with
WICOR's overall activities in these areas.
Q. Describe your educational background and business experience.
A. I have a bachelor of science degree in Marketing and Finance from Marquette
University. Prior to assuming my current responsibilities in December,
1998, I was employed for approximately thirty-one years by Wisconsin
<PAGE>
Bell/Ameritech in a variety of positions, including President and Chief
Executive Officer from 1993 through 1997.
Q. What is the purpose of your testimony?
A. My purpose is to provide information in support of the Application in this
proceeding and to demonstrate the benefits to the several interested WICOR
constituencies of the proposed merger of WICOR, Inc. with and into
Wisconsin Energy Corporation. My testimony covers two basic topics. First,
I will describe WICOR's corporate structure. Second, I will explain why
WICOR's management believes the proposed merger will be beneficial for
WICOR customers, employees, shareholders, and the citizens of Wisconsin.
Q. Are you sponsoring any exhibits in this proceeding?
A. Yes, I have one exhibit, marked Exhibit ___ (BJH-1) for identification,
that was prepared at my direction and under my supervision for this
proceeding.
Q. Describe Exhibit ___ (BJH-1).
A. The exhibit is a chart showing the WICOR corporate structure. It identifies
the direct subsidiaries of WICOR.
Q. Describe WICOR's corporate structure.
A. WICOR is a Wisconsin corporation and a public utility holding company as
defined in Section 196.795 of the Wisconsin statutes which maintains its
principal executive offices in Milwaukee, Wisconsin. WICOR is a diversified
holding company with two principal business groups: energy services and
pump manufacturing. WICOR is not engaged directly in any business. It is
<PAGE>
the sole shareholder of subsidiaries which engage in the energy services
and pump manufacturing businesses.
Q. Describe WICOR's energy subsidiaries.
A. WICOR has three energy services companies. Wisconsin Gas Company is
incorporated under the laws of the State of Wisconsin and maintains its
principal office and place of business in Milwaukee, Wisconsin. At June 30,
1999, Wisconsin Gas distributed gas to about 525,000 customers in 524
communities in Wisconsin. Wisconsin Gas also distributes water to a growing
number of subdivisions and communities in southeast Wisconsin. Wisconsin
Gas is a public utility and a public service corporation subject to the
jurisdiction of this Commission as to various phases of its operations,
including rates, service and issuance of securities under chapters 196 and
200 of the Wisconsin statutes. None of the other subsidiaries of WICOR is a
public utility or subject to this Commission's jurisdiction.
FieldTech, Inc. is incorporated under the laws of the State of
Wisconsin and maintains its principal office and place of business in
Milwaukee, Wisconsin. FieldTech was formed in 1995 and operated as a
division of Wisconsin Gas until October 1, 1996, when it was incorporated
as a subsidiary of WICOR. It provides metering instrumentation, services
and solutions including: meter route design and optimization, meter reader
training, contract meter reading, meter and automation technology
selection, procurement and financing, and installation, maintenance and
asset management. Presently, FieldTech has projects in Wisconsin,
Pennsylvania, New Hampshire, Virginia, Massachusetts, Rhode Island,
Kentucky, Minnesota and New York and currently employs approximately 200
<PAGE>
people and manages over 1 million meters nationwide. To date FieldTech has
performed over 30,000,000 contract meter reads and 500,000 AMR unit
installs.
WICOR Energy Services Company is incorporated under the laws of the
State of Wisconsin and maintains its principal office and place of business
in Milwaukee, Wisconsin. WICOR Energy was formed in 1995 and is in the
business of selling natural gas and related services in Wisconsin, Michigan
and Illinois. Currently it has over 1800 customers, including over 1100
residential customers, over 450 small commercial customers and over 300
large commercial and industrial customers. 1998 revenues were $44 million.
Q. Does the management of WICOR believe the proposed merger with Wisconsin
Energy will be beneficial for WICOR?
A. Yes. WICOR's management believes the merger will be beneficial to all of
the Company's constituencies: customers, employees, shareholders, and the
general public. It is a win-win transaction. Witnesses John Reed and James
Schott will also discuss benefits arising from the transaction.
Q. What are the benefits to Wisconsin Gas' utility customers?
A. The benefits for customers are lower gas rates and better service. We have
stated that we estimate on the order of $35 million per year of
merger-related savings beginning in the first full year after the closing.
As witnesses John Reed and Jeff West describe in their testimony, it is
reasonable to believe we can achieve cost savings and avoidances
aggregating $35 million per year throughout the gas utility operations.
Customers will see immediate and ongoing savings from coordinating gas
<PAGE>
supply and capacity management through Wisconsin Electric's and Wisconsin
Gas' gas cost recovery mechanisms. Other savings will occur and be ongoing
as we integrate the gas utility operations. The acquisition premium will be
recovered by retention of the cost savings and avoidances achieved, so
customers will not pay more for regulated gas distribution services as a
result of the merger and will, in both the short term and long term, pay
less. Rates will not be increased to recover the acquisition premium. Also,
the Wisconsin Gas business growth initiatives will continue and expand to
the benefit a broader base of customers.
We expect customers to experience better customer service. As we
integrate the two gas utilities, we will review all our key processes and
improve them by adopting the better of Wisconsin Electric's or Wisconsin
Gas' practice, or adopting a best practice from elsewhere. Customers will
also benefit from the continuation of local management which is more
sensitive to customer concerns than absentee management.
Q. What are the benefits to WICOR employees?
A. The merger will be beneficial to WICOR employees in several ways. There
will be no layoffs. All WICOR union collective bargaining agreements will
be assumed and honored by Wisconsin Energy. Wisconsin Electric Power
Company has more than 400 positions either vacant or currently filled by
temporary employees and also experiences attrition of several hundred
employees a year. Additionally, Wisconsin Gas experiences attrition of
about sixty employees on an annual basis. These circumstances make it
possible for Wisconsin Energy to achieve the estimated synergy savings
without layoffs.
<PAGE>
Wisconsin Energy's pay and benefits are generally similar to those at
WICOR, so WICOR employees will not suffer a reduction in pay or benefits
for performing the same work after the merger.
WICOR and Wisconsin Energy share a similar perspective on the energy
utility business and a vision for its future. Although Wisconsin Gas is a
sizable company by many standards, it is relatively small in the energy
utility business in which it operates. With the mergers and acquisitions
and the convergence of gas and electricity that John Reed describes in his
testimony, it is unlikely that a small gas-only utility could remain
independent very long, even in a diversified holding company such as WICOR.
The likely suitors would be large out-of-state combination gas and electric
holding companies. If WICOR were to be acquired by an out-of-state company,
almost certainly there would be layoffs, and it is likely that jobs would
move out of Wisconsin. It is usually cost-effective to consolidate call
center operations, billing, cash processing and support services for
several operating companies in a single operating unit, and that unit does
not have to be located in Wisconsin and employ Wisconsin residents. The
merger provides WICOR employees better job security than would be provided
if WICOR were acquired by a corporation other than Wisconsin Energy.
There will also be opportunities for Wisconsin Gas employees at
Wisconsin Energy after the merger. Wisconsin Gas is the largest gas utility
in the state of Wisconsin and is significantly larger than Wisconsin
Electric - Gas Operations. Wisconsin Gas has excellent employees who have
created a number of best-practice processes, have achieved high customer
satisfaction ratings, and generally have made Wisconsin Gas successful. I
<PAGE>
believe Wisconsin Gas employees will have more opportunities for
advancement in the larger gas utility operation than may have existed at
Wisconsin Gas. In addition, the new business initiatives which Wisconsin
Gas is currently undertaking, such as its water services and Power Now!,
will continue and expand for a larger customer base as a result of the
merger. The result will be more and new jobs for Wisconsin Gas employees.
There will also be opportunities for employees on the electric side of
Wisconsin Energy that would not exist at Wisconsin Gas.
Finally, I think the substantially greater financial strength of the
merged companies will be beneficial to employees. Measured by revenues,
earnings or assets, the merged companies will be about four times larger
than WICOR. At a smaller company, such as WICOR, it is not always possible
to obtain the funding to undertake and complete projects, particularly for
developing and marketing new products and services that may entail
significant start-up money and market risk. While I am sure Wisconsin
Energy will be prudent and responsible in its spending, nevertheless, the
merger provides WICOR with access to substantially more funding than we
have today.
In summary, I believe this merger is unique in the protections and
opportunities it provides for WICOR employees. It also gives WICOR access
to greater funding for new projects than we would have as an independent
company, and that will create new job opportunities for employees.
Q. What are the benefits to WICOR shareholders?
A. The primary benefit of the merger to WICOR shareholders is the financial
benefit. The merger generally provides that each outstanding share of WICOR
common stock will be acquired by Wisconsin Energy for $31.50. That price is
<PAGE>
fixed and not subject to change. Often in mergers, the purchase price is
not fixed until at or near the date the merger closes, based on the
relative trading prices of the two companies' common stock, so there is
some risk that the shareholders' realized value may be less than their
expected value. Each WICOR shareholder will have the right to receive the
purchase price in cash or shares of Wisconsin Energy common stock, subject
to proration in the event the aggregate payment elections exceed either the
amount of cash or the number of shares of common stock Wisconsin Energy has
allocated for payment. Often in mergers, the payment medium (stock or cash)
is fixed, and that may not be suitable to many shareholder's tax or stock
portfolio objectives. Further, the $31.50 price includes a substantial
premium relative to WICOR's historical trading price in the mid-$20 range.
Therefore, WICOR shareholders will receive a fair price for their WICOR
stock, which is fixed and cannot be reduced, and they will have flexibility
to receive the purchase price in Wisconsin Energy common stock or cash, or
a combination of stock and cash.
Q. What are the benefits for the general public?
A. I believe the public benefits are substantial. The merger will create a
large, diversified Wisconsin-based company with its headquarters in
Milwaukee. The merged company will be positioned to be a major player in
the evolving electric and gas business in the Midwest.
The no-layoff policy ensures that WICOR's Wisconsin-based employees
will continue to be employed and pay taxes in the state and not be a drain
on the state's financial resources, such as unemployment compensation and
job training services. If, instead of the proposed transaction, an
<PAGE>
out-of-state utility acquired WICOR, many utility jobs could move out of
Wisconsin. In addition to call center, billing and cash processing, which I
mentioned earlier, legal, tax, accounting, purchasing, information systems,
and other support services could be moved out of Wisconsin. That is a
common practice in business today. Look at the remittance address on bills
you receive from local merchants. Chances are the address is not Wisconsin.
Ask a call center representative where he or she is located when you call a
local merchant's local customer service telephone number. Chances are he or
she is not located in Wisconsin.
It is also important to consider the impacts on Wisconsin civic and
charitable organizations. The top executives of Wisconsin Energy and WICOR
are important civic leaders in Milwaukee. Not only do they head fundraising
efforts such as United Way, but they make large contributions of time and
money to a broad range of charitable and civic causes. We encourage all of
our employees to volunteer time to worthy causes and to contribute
financially to them. For example, I currently serve as a board member for
the Boys and Girls Club, Junior Achievement and the United Performing Arts
Fund. For the year 2000 I will be co-chair of the Greater Milwaukee United
Way campaign.
Wisconsin Energy and WICOR make generous corporate contributions to
charitable, civic and educational organizations throughout Wisconsin. The
WICOR Foundation contributed over $600,000 to such organizations in 1998.
These contributions include substantial amounts to United Way and other
charitable organizations in the Milwaukee area, but also smaller, but
important, amounts in the communities in which we do business. A
contribution of $500 to a fund for an infrared camera for the volunteer
<PAGE>
fire department in a small village or town is vital to that cause. When
companies are taken over by out-of-state interests, those civic and
charitable endeavors inevitably suffer, both in the magnitude of the
financial support from the company and its employees and in the reduction
in personal volunteerism at the top and throughout the company.
Q. Are there any other benefits from the merger?
A. Yes. There are benefits to WICOR as an organization. These benefits may not
directly inure to customers, employees or shareholders, so I am discussing
them separately. Wisconsin Gas Company is a gas-only public utility. There
have always been more combination gas and electric utilities than gas-only
or electric-only utilities in the country, but the convergence of gas and
electric power that is occurring today is making the gas-only utility a
vanishing breed.
From my view as President and Chief Executive Officer, the merged
companies will better position Wisconsin Energy to remain independent and
play a leading role in the Midwest energy markets. Larger scope and scale
creates other benefits, such as increased bargaining power with suppliers,
particularly the interstate pipelines and gas merchants. As compared to
Wisconsin Gas' utility operations, the larger scope and scale of the merged
companies should enable us to negotiate more favorable capacity and storage
prices and terms and conditions of those services than we would be able to
do as separate smaller companies. The lack of natural gas storage in
Wisconsin and the dominance of a single interstate gas pipeline serving
eastern Wisconsin will continue to hamper our ability to be the absolute
lowest cost provider in the region, but the increased size of the merged
<PAGE>
companies will enable us to bargain on a more equal footing with the large
pipelines for capacity. We should also have more bargaining power for the
purchase of other goods and services, including deregulated natural gas
supplies. In summary, the larger scope and scale of the merged companies
should enable us to provide outstanding customer service at rates that are
among the lowest in the region.
Q. What conclusions do you draw from your testimony?
A. The proposed merger offers WICOR customers, employees, shareholders, and
the general public substantial benefits that are unique to this transaction
and which would not be available if WICOR were to remain independent or
merge with another utility holding company.
<PAGE>
BEFORE THE
PUBLIC SERVICE COMMISSION OF WISCONSIN
Application of Wisconsin Energy Corporation for 9401-YO-100
Approval to Acquire the Stock of WICOR, Inc. 9402-YO-101
- --------------------------------------------------------------------------------
DIRECT TESTIMONY OF JAMES F. SCHOTT
IN SUPPORT OF APPLICATION BY WISCONSIN ENERGY CORPORATION
- --------------------------------------------------------------------------------
Q: Please state your name and business address.
A: My name is James F. Schott and my business address is 626 East Wisconsin
Avenue, Milwaukee, Wisconsin 53202.
Q: Please state your employer and your title.
A: I am currently employed by Wisconsin Gas Company as Senior Vice President.
Q: What are your responsibilities in that position?
A: I am responsible for the regulated operations of Wisconsin Gas Company
(WGC), including the profitability of those operations. The regulated
operations include customer service, gas supply, sales, construction,
repair, meter shop, and similar functions.
Q: What is your educational and professional background?
A: I have a Bachelor of Science degree in Business Administration from
Georgetown University and a Masters in Business Administration from
University of Wisconsin- Milwaukee. Prior to my employment with WGC, I was
employed with Arthur Andersen & Co. in the Chicago and Milwaukee offices
where I specialized in utility taxation and mergers and acquisitions. I
<PAGE>
have been employed with WGC since 1990 in various positions in the Finance
area until I assumed my current duties April 1, 1998.
Q: Please discuss the purpose of your testimony.
A: The purpose of my testimony is to identify those areas of operations that
potentially will be improved, either through improved customer service,
lower costs or both as a result of the merger between Wisconsin Energy
Corporation (WEC) and WICOR, Inc. (WICOR). However, since the details of
the integration of the operations of the companies has yet been worked out,
the specific costs savings which will result from the operational benefits
I will discuss have not been identified at this time.
Q: Please briefly describe the high pressure underground systems of Wisconsin
Electric Gas Operations (WEGO) and WGC.
A: WEGO's high pressure underground system consists primarily of a 500 psi
system that runs from near the Village of Rochester in Racine County to
Watertown in Jefferson County and a 300 psi system that runs through the
western suburbs of Milwaukee down to the Illinois-Wisconsin state line in
Kenosha County. WGC's 175 psi system generally extends east from three gate
stations on the ANR pipeline system, which runs North/South near 178th
Street. The 175 psi system then feeds a 100 psi system serving the east
half of Milwaukee County. WGC also owns the Eagle lateral from Mukwanago to
178th Street and Cleveland Avenue in New Berlin. WGC and WEGO jointly own
the Eagle lateral from the Northern Natural Gas Pipeline (Northern) Town of
Eagle gate to Mukwanago. This pipeline currently operates at 375 psi.
Exhibit _____ , (JFS-1) is a map of the high pressure systems for both
companies in Southeast Wisconsin.
<PAGE>
WEGO and WGC also operate high pressure systems in the Appleton/Little
Chute area and in the Prairie du Chien and Mount Hope areas. Exhibit _____,
(JFS-2) contains maps of these two systems.
Q: What are some of the ways these systems could be integrated if they were
under joint ownership and what are some of the benefits of such
integration?
A: One potential interconnect we have identified is between WGC's Eagle
pipeline and WEGO's 300 psi high pressure system in New Berlin. These two
pipes lie in virtually the same right of way and the cost of
interconnecting would be minimal. This interconnect would serve to provide
gas from Eagle, which currently comes from Northern Natural Gas' system, to
WEGO's service territory south of Milwaukee, enhancing reliability and
creating competition to ANR for this load. Gas from the proposed Guardian
Pipeline could also flow into WEGO's system at this location.
A second interconnect could link WGC's 100 psi system on the south
side of Milwaukee to WEGO's 300 psi system which runs along Howard Avenue.
By supplying additional gas at higher pressure in this area, WGC's
reliability in the City of Milwaukee would increase, resulting in fewer
interruptions for customers. This interconnect would also provide WGC with
a direct access to Natural Gas Pipeline Company of America (NGPL) gas in
the summer and to WEGO's Oak Creek LNG peaking facility in the winter.
Finally, an interconnect would improve the possibility of delivering higher
pressure gas to facilities in the City of Milwaukee, such as the Milwaukee
Metropolitan Sewerage District. In short, such interconnects would provide
expanded, more reliable and improved service for customers of both
companies.
<PAGE>
These interconnects would also provide WEGO, WGC, gas transporters and
marketers with more choices for upstream capacity and supply, especially
during off peak times. Such choices would create competition that could
lower the upstream transportation, gas supply, and related storage and
balancing costs for transporters and marketers.
Additional interconnects throughout the two systems would likewise
increase the reliability and flexibility of the systems in other areas of
the State. Possibilities include an interconnect between WGC's high
pressure system in Little Chute and WEGO's Appleton system, an interconnect
from WGC's system in the Town of Lisbon to WEGO's system in the Town of
Merton and an interconnect from WGC's Capitol Drive gate to WEGO's
distribution system in Brookfield. As the integration of the two companies
proceeds following the merger, other distribution system benefits will be
identified and implemented.
Q: Please discuss how the merger will result in increased customer service
response.
A: In relatively densely populated service territories, such as in Southeast
Wisconsin, the opportunities for improving service response times are
limited. One or two calls over and above the normal workload in Southeast
Wisconsin, either in WEGO's or WGC's territory, will not pose a problem
simply because of the large number of employees required for normal work
who are available to respond. Thus, the work associated with extra calls is
easily absorbed with little or no problems. However, in those parts of the
companies' service territories which are less densely populated and the
number of local employees required for routine operations is therefore
less, one or two calls over and above the normal workload may tax the
<PAGE>
available local workforce. If the work force of the two companies is
combined in neighboring, but thinly populated, service territories, then
one or two additional calls will not tax the larger combined work group as
much as the smaller stand-alone work groups. Therefore, response times in
the Appleton/Little Chute and Prairie du Chien/Mt. Hope areas should
improve. WEGO recently began providing gas service to Vilas County. The
next nearest service territory WEGO has is in the Appleton area. While
still somewhat distant, WGC has a significant presence in Wisconsin Rapids,
Marshfield and Clintonville, all of which have a shorter travel time. A
combined company would be able to provide service to that area. Finally,
WGC provides gas service in the Niagara area, while Wisconsin Electric
provides electric service. The Niagara area is fairly distant from the
nearest WGC office in Clintonville. The use of Wisconsin Electric
facilities and personnel in the Niagara area has the potential for
improving service in this area as well.
Although rare, widespread gas outages are very labor intensive, given
the requirement to individually shut off and then relight all gas services
in the affected area. WGC experienced an outage in the Monroe area earlier
this year. WGC was able to handle this incident quickly and with its own
crews. A more widespread outage would have required more crews than WGC
could have put into the field. A combined company would be able to respond
more quickly to a significantly larger outage. The merger would, therefore,
improve response and shorten recovery times in the event of a widespread
outage. It is true that, as with electric operations, gas operations have
mutual help arrangements in which utilities assist each other in such
circumstances. However, due to different work rules between companies,
<PAGE>
different communication networks, etc., it is more difficult to coordinate
outside support. A combined WGC and WEGO operation would be more effective
in a large scale outage.
In Southeast Wisconsin, the proximity of service territories and the
historical similarity in the names of the gas operations of the two
companies has generated confusion on the part of the customer as to which
company to call. A combination of the two operations would avoid this
confusion in the future.
The lengthy territorial border in southeast Wisconsin also provides
the opportunity to improve response times. For example, if WEGO has a crew
operating on the border between WEGO's and WGC's systems and a leak occurs
nearby in the WGC system, the WEGO crew may be the closest crew of either
company to respond to that leak, thereby potentially reducing the response
time.
Some form of integration of the dispatching operations would be
required before these savings are obtainable, however.
Q: What impact might the merger have on providing new utility products or
services to customers of the individual utilities?
A: Development of new products and services is costly. A successful launch of
new products and services requires a significant investment in marketing,
including market research, product development, focus groups, marketing
materials, advertisements, etc. In addition, development costs such as
employee training and systems development can also be expensive. If these
costs are associated with the utility operations and can be recovered over
<PAGE>
a larger potential base of customers, additional utility related products
or services are possible. A few examples are existing conservation and
weatherization programs, deregulation pilots such as the WGC's West Bend
pilot, and future programs, such as e-commerce and various hedging programs
for customers. By amortizing development costs of these items over a larger
customer base, these programs would be less expensive on a per customer
basis. In addition, these new products or services would also be available
to a larger customer base than if they had been developed by either WGC or
WEGO alone.
Q: Will the combination of the two companies result in greater potential for
expanding gas service into those areas of the state not already served by
natural gas?
A: Yes. Gas service is generally extended to those areas in which the marginal
revenue exceeds the marginal cost of providing service, evaluated over the
life of the assets required to serve the new area. To the extent the
marginal costs can be reduced by leveraging the combined purchases of both
companies, certain territories that are marginally uneconomic might become
economic. In addition, while projects may be economic over the life of the
assets, they do not contribute sufficient revenues in the early years to
cover the increased costs. This shortfall under current ratemaking is
spread over all customers. To the extent these costs can be spread over a
wider base, the impact of expansion projects is reduced.
Q: In what other ways will the merger benefit the operations of the two
companies?
A: Historically, the two individual companies have chosen to outsource certain
functions for various reasons. A prime reason may have been that that
function was not one that the company could develop an expertise in simply
because the amount of work for the given number of customers could not
<PAGE>
justify the investment in that expertise. The combined company will review
those functions to determine if it is feasible to bring that work back
in-house. This would provide the benefit to the public of the local utility
having the expertise in-house to perform these functions. This will also
create opportunities, often of a highly technical nature, for our
employees, giving them additional skills and personal growth opportunities.
Some examples of these opportunities follow.
In the construction area, WEGO has outsourced most tapping work, while
WGC has kept that work in-house. On the other hand, WGC has outsourced most
service installations, while WEGO continues to do that internally.
Directional boring, field welding and radiography have all been outsourced
to a greater or lesser extent at both companies. We will review all of
these areas to determine whether it is more cost effective, results in
higher levels of customer service, and better quality assurance to do more
of this work with our own employees.
Another technical skill that neither company has developed fully
in-house is risk management. This area of expertise is becoming ever more
critical in the gas industry and both companies have had to rely to a
certain extent on outside expertise. For 900,000-plus gas customers, and
the growing importance of risk management in the electric industry,
developing this expertise in-house may be the most effective way to reduce
costs and avoid price spikes for our customers.
Just as the employee skills may become more technical in a larger
organization, the company will be able to make capital investments in
specialized equipment if the increased volume of work justifies the
<PAGE>
expenditure. Such specialized equipment includes vacuum excavators,
specialized back hoe and trenching equipment, and boring equipment. By
having this specialized equipment and the employee skill sets to operate
this equipment in-house, we can perform the work internally, resulting in
better and more responsive customer service at lower costs.
For those areas which will still be outsourced, the higher volume
resulting from the combination of the two companies will give us better
leverage in negotiating outsourcing agreements.
Q: Please discuss the impact the merger would have on Guardian Pipeline.
A: Guardian Pipeline would bring significant competition to ANR Pipeline in
Southeastern Wisconsin. In addition, Guardian Pipeline would bring
additional capacity into the state at this critical time when more electric
generation will be fired by natural gas than at any time in the past. WGC
signed a ten year contract for 650,000 dth/day of transportation on
Guardian. This represented virtually all of WGC's peak day firm gas supply
demand for southeast Wisconsin. This was a major commitment on the part of
WGC, but a commitment WGC management believed was necessary in order to
ensure that Guardian would be built. A contract this large, however,
precludes WGC from contracting with ANR over the life of the Guardian
contract for any significant gas transportation needs in Southeast
Wisconsin. A combined company, however, would have its Southeast Wisconsin
gas supply transportation needs met primarily by a balance between ANR and
Guardian.
<PAGE>
WICOR's investment in Guardian Pipeline was motivated by a desire to
have a say in the operations of Guardian. This control is most important
during the pre-construction and construction phases to ensure that the
concerns of Wisconsin landowners and government officials are addressed
appropriately. As an equal one-third member of the Guardian Partnership,
WICOR will also have a significant influence on the operation and growth of
Guardian Pipeline. This will provide a level of local control over the
energy delivery infrastructure into the state. The acquisition of WICOR by
Wisconsin Energy, rather than by an out of state energy company, serves to
retain that local control over Wisconsin's energy delivery infrastructure.
Q: Please describe the savings expected from gas supply and transportation
services.
A: Given the great volume of such services required by a combined company,
several areas of potential savings can be initially identified. As
discussed above, with a larger customer base, the combined companies can
afford to invest in employee skills that could not have been justified for
a smaller volumetric base. Developing skills in the acquisition of natural
gas supplies becomes more economical, i.e., identifying and monitoring
market drivers for natural gas such as weather, drilling activity, etc.,
where the cost of such monitoring could not be justified for less than the
900,000 customers the combined company will have. Monitoring specific
basins such as offshore Louisiana, Mid-Continent, western Canada, etc., to
determine the proper sourcing of gas will become more economical as well.
<PAGE>
The major interconnects discussed above will create more competition
among the pipelines serving southeast Wisconsin. This greater competition
will obviously have a positive impact on the cost and the quality of the
gas transportation services into the combined companies' systems.
Q: What is the total budget for cost of gas for the two companies for 1999?
A: The budgeted cost of gas for WGC is $266.7 million and $208.9 million for
WEGO for a total 1999 Budget cost of gas of $475.6 million.
Q: What are the components of cost of gas that might generate savings from the
merged companies?
A: The cost of gas is made up of three basic components, commodity,
transportation and deliverability. With the increasing use of hubs and hub
services in the natural gas industry, the traditional distinction between
these three components is blurring. However, for purposes of discussing
where savings potential exists, these three components provide a reasonable
structure.
The commodity portion of the cost of gas is the cost of gas when it
leaves the well, whether the well is in the Gulf of Mexico, Alberta or
elsewhere. Both companies are of a size that they have already captured any
volume discount that would be available on the commodity. Few, if any,
additional volume discounts would be available for simply having more
volume. However as discussed above, the combined companies would be able to
invest resources to identify buying opportunities in the commodity business
which should lead to savings.
<PAGE>
Cost of gas also includes transporting the gas from various sources to
the respective company's city gates. This service is for the most part
regulated by the Federal Energy Regulatory Commission (FERC). The FERC is,
however, moving toward lighter handed regulation. Those transportation
users who do not have access to competitive transportation services may
suffer as a result. If access to such competition can only be obtained by a
significant financial commitment, a larger, combined company would
obviously be able to make that commitment easier than two stand-alone
entities. Having access to competition has benefits today, but will become
even more critical as the FERC moves more toward market based rates.
Costs incurred to met deliverability requirements are also included in
cost of gas. Such costs of deliverability include various storage
reservation costs, carrying costs, no-notice services, and the costs of
operating and maintaining peak shaving equipment, such as LNG and LPG
facilities. These costs are minimized by managing this portfolio of
services and sculpting the services to meet the specific needs of the
combined companies. Economies of scale definitely exist for these specific
services such that a combined company should certainly be able to reduce
these costs over time. Unfortunately, contracts for these services or the
life of the assets used to provide these services have long lives. Savings
from these can only be achieved as contracts are renewed and/or terminated
or assets can be expanded and/or abandoned.
Q: Can the potential savings from cost of gas be identified at this time?
<PAGE>
A: Neither company, for obvious reasons, has reviewed in detail the various
costs and contracts the other company has in place for each of these
components. Therefore, an estimate of the potential savings cannot be made
with specificity.
Q: Describe the kind of savings that can be attributed to purchasing of items
other than natural gas.
A: The company can expect to obtain larger discounts from suppliers for
certain products. This will be especially true for products which are
currently used by the operations of each company, but are shipped
separately. Savings from suppliers will result from shipping to fewer
locations, fewer invoices, and purchasing in larger volumes. The larger
volume of construction projects would also tend to reduce contractor costs
given the increase in scheduling flexibility that comes from greater
volume.
Q: What will be the companies' primary objectives in integrating the
operations of the two companies?
A: The primary objective will be to focus on those areas that maintain or
enhance customer service. If we do not achieve high levels of customer
service during this transition, the merger will have failed, no matter what
the cost savings. Customer satisfaction will be paramount. A second
objective will be to identify those areas in which we can achieve maximum
efficiency improvements through the combination of operations.
Q: How will areas for efficiency improvements in the operations area and in
the support processes be identified?
<PAGE>
A: A key focus will be on those areas where the costs are driven not by the
volume of work, but are basically fixed, regardless of the volume. A good
example of this is in the payroll area. The programming cost of the payroll
system is, to a certain extent, fixed. These costs are primarily external
and relate to the payroll processing company. Cost savings can be obtained
by the combined companies to the extent the payroll can be processed by one
system vs. two systems. On the other hand, clerical employees in the
payroll area deal with employees. The amount of work for the payroll clerks
is dependent on the number of employees. As a consequence, savings from the
clerical staff in payroll will only occur to the extent attrition leads to
reduction in the overall payroll itself.
Q: You have discussed a number of benefits that will accrue to the customers
of the two companies as a result of the proposed merger between WICOR and
Wisconsin Energy. Will a legal merger of the operations of Wisconsin Gas
with the gas operations of Wisconsin Electric be required to obtain these
benefits?
A: Not necessarily. Virtually all of these benefits can be obtained without
the legal merger of WEGO with WGC. What is required is a common goal of
obtaining these benefits as quickly and efficiently as possible. By means
of cost allocations, these benefits can be realized by the individual
stand-alone operations and the costs or the savings associated with these
benefits allocated accordingly. Allocations of this type are very common in
the utility industry, such as with combination companies or companies with
multiple subsidiaries and shared costs.
Q: Then are there any incremental benefits from legally merging the gas
operations?
<PAGE>
A: Yes. While allocations are possible, there are transaction costs associated
with allocations. One simple and very real example would be when an
interconnect is constructed between the two companies. If the two companies
have not merged their operations for regulatory purposes, in order to
determine proper cost allocations, a metering station would need to be
constructed at the interconnect to determine the amount of gas going
between the two companies. In a second example, one company may be
transporting gas for the other through its system. A rate would have to be
established for that type of transportation service. Where employees are
being shared across the companies, the time reporting requirements are more
extensive when the operations have not been merged. Legally merging WEGO
and WGC, along with a merged rate structure, would avoid most, if not all,
of these transaction costs.
Q. Would you summarize your testimony?
A. For the reasons I have given, and for the reasons given in the testimony of
other witnesses in support of the Application, the merger of Wisconsin
Energy Corporation and WICOR will yield important system benefits for gas
customers as well as significant synergy savings. I believe that virtually
all of the system benefits and much of the synergy savings can be achieved
without legal merger of Wisconsin Gas and Wisconsin Electric's gas
operations.
Q. Does this conclude your testimony?
A. Yes, it does.
<PAGE>
[Quarles & Brady Letterhead]
October 21, 1999
Ms. Lynda Dorr
Secretary to the Commission
Public Service Commission of Wisconsin
610 N. Whitney Way
P.O. Box 7854
Madison WI 53707-7854
Re: Application of Wisconsin Energy Corporation
for Approval to Acquire the Stock of WICOR, Inc.
Docket Nos. 9401-YO-100 and 9402-YO-101
Dear Ms. Dorr:
Enclosed are 20 copies of the testimony and exhibits of Jeffrey West
(five exhibits) and John Reed (three exhibits). In addition, we are filing 20
copies of the written statements of Julie Penman and Timothy Sheehy supporting
the Application. Ms. Penman and Mr. Sheehy will make themselves available, if
necessary, at the hearing commencing November 17, 1999, to respond to any
questions.
Also enclosed are 20 copies each of the two maps which are exhibits to
Mr. Schott's previously filed testimony but which were not filed with the
testimony because they were still in the process of being prepared.
We are transmitting today by overnight mail copies of all of the
enclosures to the parties whose names appear on the September 10, 1999 Service
List and to the following additional parties who appeared at the prehearing
conference but whose names do not appear on the Service List: (a) Michael May
representing the Municipal Electric Utilities of Wisconsin; (b) Mary Wright
representing the Citizens Utility Board; (c) Linda M. Clifford representing
Wisconsin Industrial Energy Group; and (d) Bradley D. Jackson representing
Wisconsin Public Service Corporation.
The Commission Staff, at the September 8, 1999 prehearing conference,
identified, as issues, mechanisms for the measurement of synergy savings and the
mechanics of reflecting such savings in future rate cases. It was applicants'
view that, because such issues relate to implementation rather than directly to
merger approval or the acquisition premium, they should be dealt with outside
this proceeding. However, these issues were identified as issues for this
proceeding. Because of this and because of the Staff's concern, applicant
requests the opportunity to present its suggestions on these issues in a
subsequent filing made on or before September 24.
Very truly yours,
QUARLES & BRADY LLP
/s/ Larry J. Martin
----------------------------------------
Larry J. Martin
encl.
cc: Service List
<PAGE>
BEFORE THE
PUBLIC SERVICE COMMISSION OF WISCONSIN
Application of the Wisconsin Energy Corporation 9401-YO-100
for Approval to Acquire the Stock of WICOR Inc. 9402-YO-101
- --------------------------------------------------------------------------------
DIRECT TESTIMONY OF JOHN J. REED
IN SUPPORT OF APPLICATION BY WISCONSIN ENERGY CORPORATION
- --------------------------------------------------------------------------------
Q. Please state your name, affiliation, and business address.
A. My name is John J. Reed. I am the Executive Managing Director in charge of
the Management Consulting practice of Navigant Consulting Inc. ("NCI"), 200
Wheeler Road, Burlington, Massachusetts 01803.
Q. On whose behalf are you submitting this direct testimony?
A. I am submitting this testimony on behalf of Wisconsin Energy Corporation
("WEC") and WICOR, Inc. ("WICOR") (collectively the "Companies").
Q. Please describe the nature of the services provided by NCI and the
Management Consulting practice.
A. The Management Consulting practice of NCI provides services to utilities,
energy producers, major energy consumers, project developers, and
governmental authorities throughout the United States, Canada, Australia,
and New Zealand. Our staff of approximately 550 people provides a wide
array of consulting services, including financial services (which includes
merger, acquisition and divestiture engagements), technical services (which
<PAGE>
includes engineering, design, and IT engagements), and management and
operation services (which includes energy delivery, customer care,
organizational and market analysis engagements).
Q. Please describe your professional experience.
A. I have served as an executive and manager with other consulting firms and
as Corporate Economist for Southern California Gas Company. I have provided
expert testimony on rate and regulatory matters in more than 100 cases
before the Federal Energy Regulatory Commission, the National Energy Board
of Canada, more than 15 state utility regulatory agencies, and various
state courts in civil proceedings. I have advised numerous clients, both
domestically and internationally, on all facets of asset acquisition and
divestiture transactions. A summary of my professional experience and
educational background is attached as Exhibit ___ (JJR-1).
Q. What is the purpose of your testimony?
A. The purpose of my testimony is to address the reasonableness of WEC's
proposed acquisition of WICOR. Specifically, I will address four major
issues: (1) the recent industry trends which have fostered consolidation
among energy companies; (2) an overview of the general strategic and
operational motivations of why companies are increasingly consolidating;
(3) the expected benefits to the Companies' customers as a result of the
proposed transaction; and (4) the reasonableness of the proposed recovery
of the acquisition adjustment.
<PAGE>
Overview of the Transaction
Q. Please briefly describe the transaction.
A. On June 27, 1999, WEC and WICOR signed a merger agreement ("Merger
Agreement") pursuant to which WEC would acquire 100% of the outstanding
common stock of WICOR. After the transaction is consummated, WEC will be
the surviving entity and WICOR will become a wholly-owned subsidiary of
WEC, with WICOR's existing subsidiaries, including Wisconsin Gas ("WGC"),
remaining as subsidiaries of WICOR. The total equity value of the
transaction is approximately $1.275 billion. In addition, WEC will assume
approximately $230 million of WICOR debt. When completed, the proposed
transaction will create a Wisconsin-based company with a combined asset
base of approximately $7.3 billion. WEC has stated that it intends to
maintain its headquarters in Milwaukee and that no workforce reductions
will result from the merger.
Industry Trends Fostering Consolidation
Q. What is the status of utility deregulation in the United States?
A. Deregulation of both the electric and natural gas industries has continued
to accelerate over the past few years. The electric power industry is
moving from a highly regulated business to one in which the generation and
wholesale power markets are strongly competitive. In the last several
years, the number of states that have moved towards retail competition has
also increased dramatically. At this time, all fifty states and the
<PAGE>
District of Columbia have addressed reforms to retail electric service.1
Currently, twenty-two states have adopted retail electric competition:
Arizona, Arkansas, California, Connecticut, Delaware, Illinois, Maine,
Maryland, Massachusetts, Montana, Nevada, New Hampshire, New Jersey, New
Mexico, New York, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island,
Texas, and Virginia. Vermont has also endorsed retail electric competition,
but requires that legislation be passed in order to implement electric
restructuring. Wisconsin, however, has shifted away from electric
restructuring in the past few years, focusing instead on issues of
reliability.
Natural gas restructuring is also progressing in a large number of
states. Statewide unbundling initiatives exist in eleven states:
California, Colorado, Georgia, Maryland, Massachusetts, New Jersey New
Mexico, New York, Ohio, Pennsylvania and West Virginia.2 Finally, pilot
programs and partial unbundling have taken place in the District of
Columbia and ten states: Delaware, Illinois, Indiana, Michigan, Montana,
Nebraska, South Dakota, Virginia, Wisconsin and West Virginia.
Q. What is the impact of deregulation on the regulated utility?
A. Initially, as regulatory protections are lifted and additional providers
enter the market, the regulated utilities experience downward pressure on
prices and earnings. This shift occurred in the wholesale natural gas
markets following the Federal Energy Regulatory Commission's ("FERC") Order
- ---------------
1 Edison Electric Institute, August 1999, Competition/Regulation "States
Activity on Electric Utility Restructuring/Retail Competition", page 1.
2 U.S. Energy Information Administration, Status of Natural Gas Residential
Choice Programs by State, July 1999.
<PAGE>
No. 636 and truly began in the electric industry with the issuance of Order
Nos. 888 and 889.
Q. How have regulated utilities responded to changes in the industry?
A. One obvious response has been for utility companies to focus on increasing
the scale of their operations. We are in agreement with industry executives
and other experts that the scale of operations required to survive and
prosper in the deregulated environment is greater than the scale at which
utilities have operated prior to deregulation. Consolidation has been the
means by which many utilities have reached a reasonable scale to compete in
the deregulated environment. There is evidence of many forms of
consolidation including the consolidation of two or more electric
companies, consolidation of gas companies, and the consolidation of
electric and gas companies.
Q. In other words, bigger is better?
A. Yes, to the extent that increased size makes it possible to reap
significant economies of scale and scope, as well as achieve other
synergies that increase a company's ability to compete. While it is
possible for smaller stand-alone companies to achieve economies internally,
the technical and economic characteristics of the industry are such that
the benefits which result from size are especially important.
Q. How do your observations about recent industry trends apply to WEC and
WICOR?
A. One obvious implication is that gas operations which are WICOR's size or
smaller are potential targets for other energy companies seeking to
increase their size. Most recently, this trend has been seen in New
England, where several smaller companies have been consolidated over the
<PAGE>
past two years. For example, in Massachusetts, NiSource recently acquired
Bay State Gas Company ("Bay State"), Eastern Enterprises recently acquired
three smaller gas utilities - Colonial Gas Company, Essex Gas Company and
Energy North, and BEC Energy, parent company of Boston Edison, recently
acquired COM/Energy, parent company of Commonwealth Gas Company
("COM/Gas"). In the NiSource/Bay State transaction, NiSource benefitted by
increasing the size of its gas distribution business, as well as by
establishing itself in the New England market. Eastern Enterprises
indicated that the motivation for its recent acquisitions was to achieve
economies of scale which will better position the company to offer reliable
supplies at a lower price. Eastern Enterprises indicated that absent the
mergers, such benefits could not be realized for customers. BEC Energy
indicated that the acquisition of COM/Energy (and COM/Gas) improved its
competitive and strategic positioning by providing a broader and more
diversified customer base to compete in the deregulated environment since
BEC Energy did not previously provide any natural gas distribution
services. In addition, the merger will allow the companies to realize cost
savings through the integration of corporate functions and programs, as
well as through the realization of other operating synergies.
In Connecticut, all three natural gas LDCs were recently acquired.
Energy East recently acquired Southern Connecticut Gas Company ("CNE") and
Connecticut Natural Gas Company ("CTG"), while Northeast Utilities acquired
Yankee Gas Company. Energy East stated that the consolidation of CNE and
CTG has increased the company's competitive position by expanding the scale
<PAGE>
of the company's operations and the size of its customer base. This will
allow CNE and CTG to become lower-cost suppliers of energy and related
services. Similarly, NU stated that the purchase of Yankee Gas will help
the combined company maintain competitive natural gas and electric rates
for its customers. In addition, the proposed merger was cited as providing
Yankee's customers with reduced transaction costs, the ease of receiving
service from one electricity and gas supplier, and thus realizing cost
savings over the longer term.
The trend in the northeast clearly indicates that economies of scale
are critical to competing in the deregulated environment. It is likely that
this trend will continue throughout the country, as larger companies
continue to seek opportunities to reduce overall operating costs through
increased economies of scale in order to compete on a regional or national
scale.
Strategic Motivations for Industry Consolidation
Q. What are the strategic motivations for industry consolidation?
A. While the strategic motivations of any given transaction depend on the
nature and specific circumstances of the companies involved, a fundamental
strategic motivation for utility consolidation is to provide increased
benefits to customers and shareholders by achieving operating savings.
Consolidations provide opportunities to extract certain operating synergies
through the combination of corporate programs, redundant administrative
functions, deferred or avoided capital expenses, and enhanced purchasing
<PAGE>
economies. In essence, the unit cost of production may be lowered by
reducing some operating expenses and spreading the remaining costs over a
broader base of assets and customers.
Q. What types of operating savings can be achieved as a result of a
consolidation?
A. Consolidations among investor-owned utilities produce two general types of
savings which would not occur absent the merger: direct savings and
indirect savings. Direct savings refer to the cost savings experienced as a
result of the elimination of duplicative corporate, administrative, and
operating programs as well as from the economies of scale generated by
spreading fixed costs over a greater activity base as the business grows.
Absent the merger, these cost savings could not be realized by either of
the companies, operating independently. Direct savings are generally
estimated by quantifying the cost reductions associated with the
consolidation of redundant corporate and operational expenses. In general,
the costs to achieve these savings are low relative to the total potential
savings. Examples of direct savings include cost reductions associated with
the procurement of outside services (e.g. corporate auditing, and legal),
as well as cost reductions associated with the consolidation of corporate
and administrative functions such as legal and human resources.
Indirect savings result from the ability to avoid previously planned
investments by sharing resources across the merged entity. These savings
are typically associated with the integration of information and
telecommunications systems and other technological resources. In addition,
indirect savings can result from the restructuring of business processes
<PAGE>
across the merged company to capitalize on operational synergies and to
increase productivity. The extent to which such integration will take
place, however, often is not known until after the transaction is complete
and the companies begin to work together on a daily basis. In addition,
unlike the direct savings, there are typically significant costs associated
with the consolidation of information and telecommunications systems as
well as costs associated with reengineering the business processes of a
company to achieve long term savings. For example, integrating information
systems should streamline certain business processes between companies, but
there can be substantial up-front costs to combine two separate systems
into one system, or to convert one of the independent companies' data into
the other company's, more efficient, system. With respect to the proposed
transaction, it is not yet clear whether there will be significant indirect
savings. The extent to which such savings may be realized will be a
function of long-term integration initiatives that, by their nature, tend
to be less certain than direct cost savings. Given the uncertain nature of
integration initiatives and the extent of data available at this time, my
assessment of the Companies' indirect savings estimates will be largely
qualitative in nature.
BENEFITS OF WEC/WICOR CONSOLIDATION
Q. What are the expected benefits from the proposed consolidation?
A. The consolidation of WEC and WICOR will result in numerous strategic and
financial benefits for the new company's customers, employees,
shareholders, and the communities in which the combined company will
<PAGE>
operate. With respect to operating synergies, the proposed transaction
likely will result in direct and indirect operating cost savings that would
not otherwise be achievable absent the merger. In fact, the Companies
believe that after the first full year of operations the transaction will
create $35 million of annual merger-related operating savings that would
not be available absent the transaction. The Companies have stated that
this $35 million estimate is based on amounts estimated by management
without the benefit of a definitive synergies study.
In addition to operating savings, the Companies also expect the
consolidation to produce system benefits through gas cost savings,
improvements in service quality and reliability, an expanded and more
diverse employee base and enhanced financial strength. Along with the
operating savings, each of these benefits is described in detail below as
well.
Q. Has NCI performed an independent assessment of the potential operating
synergies?
A. No. However, NCI has generally evaluated the potential sources of savings
within each of the Companies, and believes that, at a minimum, there are
two general categories from which savings may be derived: eliminating
duplication of corporate and administrative programs and achieving
purchasing economies. Within the corporate and administrative programs,
there are several areas where consolidation of operations or contracted
services can produce savings. These include the following areas:
o Insurance - Utilities require insurance for property, excess
liability and directors and officers' liability. A combined
company will have a reduced risk profile because of its broader
<PAGE>
and more diverse asset base which should translate into lower
rates.
o Shareholder services - The combination of the companies will
reduce the total cost of processing transactions, eliminate the
need for two annual shareholder meetings, and eliminate
duplicative communications that are sent to investors of both WEC
and WICOR.
o Professional services - Savings in this category typically result
from the combination of audit fees, legal fees and general
consulting services.
o Credit facilities - The merged entity should be able to
consolidate credit facilities at a lower cost due to its
increased size.
o Advertising - The merger will allow the companies to shed the
costs of duplicative fixed production, studio and distribution
expenses associated with advertising for two independent
companies.
o Public relations - Similar to advertising, the fixed production
and distribution expenses can be consolidated.
o Association dues - The merged entity will be able to eliminate
duplicative association memberships.
Q. How can cost savings be achieved through purchasing economies?
A. In addition to corporate and administrative programs, cost savings can also
be achieved through purchasing economies. These savings are typically
associated with procurement, inventories, and contract services, as
described below.
<PAGE>
o Procurement - Centralized purchasing and inventory functions
related to the construction and operation and maintenance of
equipment, utility plant and facilities can result in significant
savings. In addition, the larger combined company will likely be
able to exercise purchasing leverage with vendors which can
further decrease costs.
o Inventory - Existing inventories of the combined Companies can be
reduced to maximize the efficient scale of the inventory level
for the combined entity.
o Contract services - Similar to consolidating materials and
supplies purchasing volumes, the combined company will be able to
gain economies of scale from the consolidation of work activities
across the two companies. In addition, procurement costs
associated with contracting outside services, such as
construction, can potentially be reduced by the companies'
increased leverage in negotiating contracts.
Q. Do the Companies anticipate any labor-related cost savings associated with
the consolidation?
A. Yes. As stated in the testimony of Witness Haase, the Companies have
indicated that there will be no layoffs as a result of the merger. However,
Witness Haase has stated in his testimony that WEC currently has more than
400 positions which are either vacant or filled by temporary employees. In
addition, WEC experiences attrition of several hundred employees per year,
<PAGE>
while WGC experiences attrition of approximately 60 employees per year. Due
to operating synergies achieved from eliminating redundant corporate and
administrative programs, it is likely that it will be unnecessary for the
combined company to replace employees lost due to attrition and, as such,
presents an opportunity for meaningful labor cost savings without layoffs.
Q. Are the areas in which the Companies can potentially achieve operating
savings consistent with the areas identified in recent consolidations?
A. Yes. Exhibit ___ (JJR-2) provides a list of recent consolidations in which
operating savings have been identified and the areas from which the
proposed savings are intended to be derived. As shown on Exhibit ___
(JJR-2), operating savings generally are estimated to be derived from
labor-related reductions, corporate and administrative programs, purchasing
and inventory economies, facilities reductions, and fuel procurement
savings. As noted earlier in my testimony, the areas from which WEC and
WICOR are likely to derive savings are the same areas anticipated in
similar transactions.
Exhibit ___ (JJR-2) also presents the non-fuel and fuel related
operation and maintenance expense ("O&M") savings as a percentage of the
total consolidated non-fuel and fuel related O&M expenses. As illustrated
in Exhibit ___ (JJR-2), the non-fuel related savings as a percentage of
consolidated non-fuel related O&M expense have ranged from between 2.8% and
16.3%. Additionally, the fuel-related savings as a percentage of
consolidated fuel-related O&M expense have ranged from between 0.56% and
1.36%.
<PAGE>
Q. Although the Companies have not performed any specific synergies studies,
what level of operating savings is it reasonable to assume that the
Companies can achieve?
A. The Companies' total combined 1998 non-fuel related O&M expenses is
approximately $840 million. Applying the average annual non-fuel related
merger savings percentage illustrated in Exhibit ___ (JJR-2) of
approximately 9.7% to the Companies' consolidated non-fuel O&M expenses
yields an estimated annual savings level of approximately $81.1 million. In
addition, as noted in the testimony of Witness Schott, the Companies expect
to achieve savings derived from lower cost gas supplies from enhanced
purchasing power and gas supply portfolio management. The Companies' total
consolidated 1998 gas supply expenses were $471 million. Applying the
percentage of annual average fuel- related savings of 0.96%, shown in
Exhibit ___ (JJR-2), yields an estimated annual savings level of
approximately $4.5 million for the Companies.
Therefore, although the Companies have not performed definitive
savings estimates, the Companies' estimate of $35 million in annual
operating savings appears to be reasonably attainable based on the level of
savings announced in similar recent consolidations. The actual level of
savings attained as a result of the Companies' consolidation hinges on
management's ability to effectively develop and execute the necessary
integration plans.
Q. Please explain in more detail the benefits that gas utility customers will
receive.
A. As described in Witness Baker's testimony, gas utility customers should
benefit from the transaction through reductions in gas costs and through
increased service quality and reliability. In general, the combined
<PAGE>
purchasing power of the consolidated entity and the combined gas supply
portfolio management is expected to result in lower cost gas supplies. As
Witness Baker indicates in his testimony, "much of this cost savings will
be passed through to customers under the purchased gas adjustment
mechanisms of Wisconsin Electric and Wisconsin Gas."3
In addition to the purchasing economies generated from buying gas for
both companies, the consolidated entity would be able to streamline
short-term gas supply requirements by joint management of the gas supply
portfolios. For example, the companies may be able to eliminate the short
term contracts that Wisconsin Gas Company would need to serve its weather
sensitive and peaking needs through increased utilization of WEC's LNG
resources.
Joint management of the combined gas portfolio should also result in
more efficient investment decisions in plant and facilities. As discussed
in Witness Schott's testimony, the Companies have identified areas where
the systems can be integrated if they are under joint ownership and
management. One potential interconnect is between WGC's Eagle pipeline and
WEC's high pressure system in New Berlin. This interconnect would provide
gas from Eagle to WEC's system, offering a competitive alternative to ANR
to serve this load. In addition, a second interconnect between WEC and
WGC's systems would increase WGC's reliability in Milwaukee, resulting in
fewer interruptions. This interconnection would also provide WGC with
- ---------------
3 Application of Wisconsin Energy Corporation for approval to acquire the
stock of WICOR, Inc., Direct Testimony of Calvin H. Baker. Pg. 4, lines
12-14.
<PAGE>
direct access to Natural Gas Pipeline Company gas in the summer and peaking
facilities in the winter. Interconnections such as those described above
could provide lower cost alternatives to having to construct new pipelines.
Q. What are the expected service quality and reliability benefits resulting
from the transaction?
A. Gas utility operations will be improved by coordinating the use of the
resources and skill sets from each of the companies once the transaction is
completed. One of the motivations for consolidation is the transfer of best
practices, and the gas operations of WEC and WICOR anticipate significant
benefits as a result of the transfer of skills and knowledge upon
completion of the transaction. This change in operations, combined with a
broader base of resources and skill sets, should enhance the gas utility
operations and service quality, as well as the safety and reliability of
the gas systems. For example, as was described above, interconnection
points identified by the merging companies could result in increased
reliability in the Milwaukee area on the WGC system. As stated in Witness
Schott's testimony, interconnections in other areas of the WGC and WEC
systems will increase the reliability and flexibility of the systems in
other areas of Wisconsin.
Q. Can you identify the system benefits which will be realized as a result of
the transaction?
A. In general, the interconnections described above will be beneficial to gas
customers because these improvements will increase the safety and enhance
the reliability of the combined system. In the absence of this transaction,
<PAGE>
in order to provide comparable improvements to safety and system
reliability, WEC and WGC would each have had to make additional
improvements on their individual systems. For example, due to current
system limitations, WGC is not able to provide firm service to some
customers on the south side of its system. WGC conducted a study to
determine the level of investment in system upgrades and additional
pipeline that would need to be installed to provide firm service to all
customers on the south side of its system. In order to expand service from
interruptible to firm service on the south side of its system, WGC would
need to install an additional 11 miles of pipeline at an estimated cost of
$14 million. The interconnections proposed between WEC and WGC on the south
side of WGC's system would increase the number of customers who could
receive firm service in that area of the system for significantly less
investment. WGC estimates that once the transaction is complete, if the
interconnection was to be made, the construction costs for the project
would be reduced by a total of $3 million. This cost savings includes the
costs of interconnecting the WGC and WEC systems, as well as the savings
generated through a reduction in pipeline construction costs associated
with interconnection.
In addition, the interconnection of the two distribution systems will
also potentially reduce the likelihood of gas outages on either system. As
noted by Witness Schott, Wisconsin Gas experienced a brief gas outage in
Monroe earlier this year. Forced outages on gas distribution systems are
costly and time consuming due to the nature of having to simultaneously
restore service to customers. In addition to the LDC's costs, lost service
<PAGE>
creates economic losses and social disruptions for customers. Therefore,
although difficult to quantify, increased reliability as a result of the
merger will provide a meaningful benefit to the Companies' customers.
Q. What is the expected benefit of an expanded and more diverse employee base
and who receives this benefit?
A. An expanded and more diverse employee base provides benefits to
shareholders, customers, employees and the community. The post-transaction
entity will have a broader pool of management resources, with different
skill sets, on which it can rely to successfully direct the company in the
competitive market through increased growth, profitability and financial
strength. The successful operation of the combined company is expected to
benefit customers by providing higher quality service at lower cost and to
benefit shareholders through increased returns. The employees will benefit
by being part of a larger organization that is more likely to retain its
independence in the competitive market. In addition, retaining a large
regional employer will benefit the community and the local economy as well.
Finally, the larger organization will be better able to attract highly
qualified employees, which will result in more efficient, higher quality
service for customers.
Q. What benefits will result from the increased financial strength of the
post-transaction entity?
A. Similar to the strategic benefits resulting from increased financial
strength described earlier in my testimony, the increased size of the
post-transaction entity will provide a substantially larger capital base
<PAGE>
which is expected to result in increased financial flexibility and a
potentially stronger financial profile. The direct benefit of lower
borrowing rates for the regulated entities would be passed on to customers
through lower rates. In addition, the increased financial flexibility
should allow the combined company to expand in both its utility and
non-regulated subsidiaries at a more rapid pace than either of the
independent companies would have previously been able, thus providing
increased job opportunities and further economic development in the State
of Wisconsin.
Q. How will the transaction benefit the communities in which WEC and WICOR
currently operate?
A. The WEC/WICOR transaction combines two Wisconsin-based companies with a
deep commitment to the communities that they serve. The companies have
stated that there will be no layoffs resulting from the merger, they intend
to honor all union contracts, and that any workforce reductions will occur
through attrition. The headquarters of the new entity and all corporate
jobs will remain in Wisconsin. In addition, both companies have made
significant contributions to regional economic development by sponsoring
educational, charitable and cultural events, and each is committed to
continuing its involvement in these community related activities after the
transaction is consummated.
In other circumstances, especially those involving geographically
disparate parties, consolidations have had an adverse impact on the
communities in which the target company operates. Acquiring companies
sometimes integrate the target company into the acquirer's existing
business operations and practices. Integration of the companies generally
<PAGE>
results in the elimination of duplicative labor resources and functions and
the consolidation of corporate commitments. In many instances, corporate
headquarters are relocated out of the target company's community and labor
reductions occur which have an impact on the local economy.
Q. You have described how the transaction will provide benefits to customers,
employees and the community. Please explain what the benefits are of the
transaction for shareholders.
A. As described in detail above, shareholders will own a financially stronger
company post-merger that will be better positioned to compete in the
marketplace. WICOR's shareholders are receiving a premium for their stock.
Moreover, the transaction is expected to result in annual earnings
accretion beginning in the first full year after the merger, provided the
Commission authorizes recovery of the acquisition adjustment, which will
have a positive impact on WEC's stock price, and thus provide a direct
benefit to stockholders.
Recovery of the Acquisition Premium
Q. Please describe the "acquisition adjustment" that results from the
transaction.
A. The concept of an acquisition adjustment is discussed in some detail in the
testimony of Witness West. The basic concept is that the price WEC is
paying to acquire WICOR exceeds the depreciated book value of WICOR's
assets. As Witness West explains, FERC accounting rules require that the
difference between the price paid for the utility assets and their
<PAGE>
depreciated book value be recorded on the acquiring entity's books as an
"acquisition adjustment".
Q. Does the Public Service Commission of Wisconsin ("Commission") have a
formal policy on the recovery of acquisition adjustments?
A. No, the Commission does not have a formal or generic policy on the recovery
of acquisition premiums. In an 1989 order on remand in Docket Nos.
2040-EA-100 and 6680-EB-103 ("1989 Order")4, the Commission issued very
general guidelines stating that "the standard it has applied in this case
and will apply to determine whether an acquisition adjustment is a proper
element of the purchasing utility's rates is the standard of clear and
substantial system benefit to the purchasing utility."5 In a position paper
issued on March 19, 1993 ("1993 Position Paper") to all natural gas and
electric utilities in the State of Wisconsin regarding guidelines on the
treatment of acquisition adjustments, a copy of which is attached as
Exhibit ___ (JJR-3), the Commission Staff referred to the 1989 Order noting
the general guidelines specified therein, but stated that "more specific
guidelines would be difficult to articulate as each case has individual
circumstances which cannot be readily addressed by generic guidelines. In
lieu of formal Commission guidelines, staff is setting forth its basic
position on the allowance of acquisition adjustments (premiums) for energy
- ---------------
4 Village of Footville, Public Service Commission of Wisconsin Docket Nos.
2040-EA-100 and 6680-EB-103, February 22, 1989.
5 Id., p. 2.
<PAGE>
utilities." In the 1993 Position Paper, the Commission Staff articulated
its position stating that:
...there may be ways in which a gas utility could show
system benefit vis-a-vis lower cost gas supply and/or more
reliable supply. Depending on the level of benefits, all or
part of an acquisition adjustment may be recovered from
ratepayers. The burden of proof of such benefits is on the
utility and requires substantive quantification and
documentation. There must be a showing that there is an
increased value of service for those ratepayers that will
bear the cost. Those ratepayers that will bear the cost must
derive benefits that equal or exceed the cost of the
acquisition adjustment.
Similar to the 1989 Order, the 1993 Position Paper noted that an
acquisition premium may be recoverable as long as system benefits could be
demonstrated, and that the customers from which the premium is to be
recovered will be at least as well off after the premium is recovered as
compared to their position prior to the merger. Furthermore, the 1993
Position Paper notes that system benefits include "lower cost gas supply
and/or more reliable supply".
Q. What has WEC proposed with regard to recovery of the acquisition
adjustments?
A. WEC has committed to not seek recovery of the acquisition premium which is
attributable to WICOR's utility assets through higher rates to WICOR's
utility customers. Rather, WEC has requested that the Commission permit it
to retain savings resulting from the merger in such amount and for such
period of time necessary for WEC to fully recover the acquisition premium
attributable to WICOR's utility assets.
Q. Do you believe that WEC's approach for recovery of the acquisition premium
complies with the guidelines previously set forth by the Commission and is
in the public interest?
<PAGE>
A. Yes, I believe that the recovery methodology which WEC has requested
complies with the Commission's guidelines and is reasonable and in the
public interest. As noted above, both the 1989 Order and 1993 Position
Paper state that an acquisition adjustment may be recovered if the merging
companies can demonstrate increased system benefits for those ratepayers
that will bear the cost of the merger. WEC's proposed recovery mechanism
complies with these guidelines in two distinct ways.
First, WEC has committed that ratepayers will bear no costs associated
with the merger. WEC has committed that the Companies' utility customers
will not be subject to rate increases as a result of the merger. Thus,
WEC's shareholders have assumed 100% of the risk that future savings
resulting from the merger may not fully mitigate the cost of the
acquisition premium. As such, this guarantees that utility customers will,
at a minimum, be at least as well off as they were prior to the merger. In
fact, as stated by Witness Baker, customers will be better off as a result
of retaining most of the purchased gas cost savings through the Companies'
respective gas cost adjustment mechanisms. Therefore, although the 1993
Position Paper indicates that "benefits that equal or exceed the cost of
the acquisition premium" must be demonstrated for customers which bear
merger costs, no merger costs will be borne by any utility customers in the
Companies' transaction. This clearly fully complies with the guidelines
previously espoused in the 1993 Position Paper.
Second, not only have the Companies committed that no merger costs
will be collected from utility customers, the Companies have also
demonstrated that customers will experience system benefits as a result of
<PAGE>
the transaction. The 1989 Order and 1993 Position Paper indicate that
system benefits need to be demonstrated if an acquisition adjustment is
going to be recovered from ratepayers. This implies that if an acquisition
adjustment is not going to be recovered from ratepayers, then no system
benefits need to be demonstrated. However, in the Companies' proposed
transaction, even though WEC is not proposing to recover the acquisition
adjustment from ratepayers, the transaction will still provide system
benefits to the Companies' customers. As described earlier in my testimony
and in the testimony of Witness Baker, most of the gas cost savings will be
passed through to customers under the purchased gas adjustment mechanisms
of Wisconsin Electric and Wisconsin Gas. The Companies have estimated that
the transaction will likely result in annual savings of $35 million. In
addition, the consolidation will result in increased reliability that,
although difficult to quantify, is an important benefit to all of the
Companies' customers nonetheless. Since the Companies' customers will
likely receive direct and ongoing benefits, without any additional cost or
exposure, the recovery mechanism proposed by WEC fully complies with the
Commission's guidelines.
In the 1993 Position Paper, the Commission Staff stated:
We would recommend that the Commission consider any proposal which is
in the public interest. In Wisconsin, the Public Service Commission
applies the concept of original cost when setting utility rates.
Ratepayers will not pay more than original cost in their rates unless
it can be reasonably shown that there is a system benefit and that
customers are getting additional value commensurate or greater than
the additional cost.
<PAGE>
WEC's request for recovery of the acquisition adjustment through the
retention of merger savings clearly fully complies with the standard
outlined above since customers are guaranteed no rate increases due to
transaction costs. Thus, it is clearly in the public interest to approve a
transaction which will likely result in significant and ongoing benefits to
utility customers at no cost to those customers.
Q. As a policy matter, is WEC's proposed recovery mechanism in the public
interest?
A. Yes, WEC's proposed recovery mechanism is in the public interest and, thus,
should be approved by the Commission. As a policy matter, the proposed
recovery methodology aligns the interests of customers and shareholders
resulting in a 'win-win' situation. The proposed recovery methodology
allows the utilities the opportunity to recover the acquisition adjustment
costs through transaction-related savings, while guaranteeing that
customers are at least as well off as they were prior to the merger (and
likely to be significantly better off long-term). This mechanism provides
not only the correct incentive structure for the utility when it is making
decisions on behalf of its customers, but at the same time, protects the
interests of the utility's shareholders by providing an opportunity for
recovery of the acquisition adjustment associated with the transaction. If
the opportunity to recover the acquisition adjustment is permitted, the
utility has an incentive to pursue business investment opportunities which
will provide net benefits to customers that, absent recovery, would not be
available. Therefore, allowing the opportunity for recovery of the
acquisition adjustment creates opportunities for the company to increase
the quality of service and/or reduce the cost of providing service to the
<PAGE>
utility's customers as compared with the costs and service quality provided
to customers absent such an investment. Conversely, if the estimated
savings are not achieved by the utilities, the utilities' shareholders are
at risk for the cost of the investment and ratepayers remain unaffected.
Since the proposed recovery methodology fully complies with the
guidelines previously specified by the Commission and its Staff and
represents sound regulatory policy, the Commission should permit WEC to
recover the premium paid for WICOR's gas utility assets. Utility
consolidations can provide substantial net benefits to utility customers.
It is important for the Commission to encourage utilities to take actions
which will produce benefits for their customers, while at the same time
producing a potential benefit for shareholders. In this transaction,
utility customers are guaranteed to be at least as well off after the
transaction as they are prior to the transaction. In fact, customers are
likely to reap direct and ongoing benefits from the transaction. Absent the
transaction, the Companies' customers would receive none of the benefits
which are likely to result from the proposed transaction. In addition to
customer benefits, WEC has a fiduciary duty to its stockholders to pursue
actions which will result in stockholder benefits. If the Commission were
not to permit recovery of the acquisition adjustment, such a policy would
eliminate the incentive for WEC's shareholders to bear the costs associated
with the consolidation with no opportunity to benefit. Permitting recovery
of the acquisition adjustment in this instance is sound regulatory policy
<PAGE>
and in the public interest since customers are provided with upside benefit
potential and none of the downside risk of investments which do not produce
net ratepayer benefits.
Q. Has the Commission previously permitted utilities to recover an acquisition
adjustment?
A. Yes. In Docket 4220-UR-407, the Commission permitted Northern States Power-
Wisconsin ("NSPW") to recover an acquisition adjustment associated with its
purchase of Viking Gas Transmission Company ("Viking"). In that proceeding,
the Commission found that NSPW's purchase of Viking had resulted in annual
discounts from competing pipelines which were in excess of the proposed
annual amortization of the acquisition premium and thus permitted NSPW to
recover the acquisition adjustment through rates.
Also, in Dockets 4220-EA-110 and 5050-EB-100, the Commission permitted
the City of Rice Lake to recover through rates the amortization of the
acquisition adjustment associated with its purchase of facilities from
NSPW, as well as a return on the unamortized balance. The Commission found
that the increase in system benefits from Rice Lake acquiring and operating
the facilities, namely improved reliability and avoiding the duplication of
facilities, was sufficient to allow the recovery of the acquisition
adjustment.
Q. Have other regulatory commissions allowed recovery of acquisition
adjustments in a similar manner in which WEC is proposing?
A. Yes. There are numerous cases in which regulated natural gas and electric
utilities have proposed acquisition adjustment recovery mechanisms similar
to the one proposed by WEC in this proceeding that have been accepted and
been found to be in the public interest by their respective state
<PAGE>
regulatory commissions. For example, (i) Eastern Enterprises' ("Eastern")
acquisition of Essex Gas; (ii) Eastern's subsequent acquisition of Colonial
Gas; and (iii) Carolina Power and Light's ("CP&L") acquisition of North
Carolina Natural Gas ("NCNG").
Q. Please explain how the treatment of the acquisition adjustment recovery in
these cases is similar to the recovery methodologies proposed by WEC.
A. In the recent merger between Eastern Enterprises and Essex Gas, the
Massachusetts Department of Telecommunications and Energy ("MA DTE")
approved Eastern's proposal to recover all costs associated with the
merger, which included not only the acquisition adjustment, but transaction
and integration costs as well, through the retention of merger savings for
a ten-year period during which distribution rates would be frozen. After
the ten-year rate freeze, Eastern would be permitted to recover the
merger-related costs from ratepayers as long as it could demonstrate
savings which equal or exceed the merger costs. In Eastern/Essex case,
shareholders, not ratepayers, were entirely responsible for merger-related
costs which exceed merger savings; however, shareholders also were given
the opportunity to recover the merger-related costs by retaining merger
savings. As explained above, this treatment of merger costs and savings is
similar to the methodology proposed by WEC.
A similar merger-related cost recovery mechanism was also approved for
the merger of Eastern and Colonial Gas Company. In this merger, the MA DTE
also approved Eastern's proposed ten-year rate freeze during which time
Eastern could recover the acquisition adjustment and a return on the cash
<PAGE>
investment for Colonial through the retention of merger savings. Similar to
its previous ruling in the Eastern/Essex merger, the MA DTE also stated
that the merger-related costs amortized after the rate freeze period could
be recovered through rates if Eastern could demonstrate savings equal to or
greater than the level of merger-related costs.
In the CP&L and NCNG merger, the North Carolina Public Service
Commission ("NC PSC") approved the Regulatory Conditions proposed by the
merging entities, which included a distribution rate freeze for both
companies through December 31, 2004 and the specification that no
merger-related costs would be collected from ratepayers through the
retention of savings. In addition, CP&L was permitted to recover the
acquisition adjustment and any other merger-related costs during the rate
freeze period. As in the other cases addressed above, the state utility
regulatory agency approved a recovery mechanism in which shareholders would
be responsible for the merger-related costs, but would also have the
opportunity to recover the acquisition premium and other merger-related
costs through the retention of merger savings. Again, this is similar to
the treatment which is being proposed by WEC.
Conclusion
Q. Please summarize your testimony.
A. The consolidation between WEC and WICOR is expected to result in
significant benefits to all stakeholders, including the companies'
customers, employees, shareholders, the State of Wisconsin and the
<PAGE>
communities which the companies serve. The benefits resulting from the
transaction will likely be both near-term as well as longer-term as the
merging companies integrate their operations. The majority of the benefits
of the transaction will not be one-time savings, but rather lasting
benefits which could not be achieved absent the transaction. Although the
transaction includes an acquisition premium, WEC has not proposed to
recover the acquisition adjustment from its regulated customers. Rather WEC
has proposed that its shareholders have the opportunity to recover the
acquisition premium through the retention of transaction-related savings,
thereby assuming all of the risk of under-recovery of the acquisition
adjustment. WEC's proposal fully complies with the guidelines previously
specified in Wisconsin and has been found to be in the public interest in
other jurisdictions. As such, the transaction and recovery of the
acquisition adjustment should be found to be in the public interest.
Q. Does this conclude your testimony?
A. Yes, it does.
<PAGE>
Resume of John J. Reed, Page 1
JOHN J. REED
EXECUTIVE MANAGING DIRECTOR
- --------------------------------------------------------------------------------
As founder of Reed Consulting Group (REED) and Executive Managing Director of
Navigant's Management consulting (NCI) practice, Mr. Reed managed the firm's
growth into an internationally recognized leader in the field of energy industry
restructuring and utility management consulting. The Management Consulting
practice of NCI provides services to utilities, energy producers, major energy
consumers, project developers, and governmental authorities throughout the
United States, Canada, Australia, and New Zealand. The staff of approximately
550 people provides a wide array of consulting services, including financial
services (which includes merger, acquisition and divestiture engagements),
technical services (which includes engineering, design, and IT engagements), and
management and operation services (which includes energy delivery, customer
care, organizational and market analysis engagements). John Reed has served as
an executive and manager with other consulting firms and as Corporate Economist
for southern California Gas Company. He has provided expert testimony on rate
and regulatory matters in more than 100 cases before the Federal Energy
Regulatory commission, the National Energy Board of Canada, more than 15 state
utility regulatory agencies, and various state courts in civil proceedings. he
has advised numerous clients, both domestically and internationally, on all
facets of asset acquisition and divestiture transactions.
PROFESSIONAL EMPLOYMENT
1988-Present NAVIGANT/REED CONSULTING GROUP
President
1983-1988 R.J. RUDDEN ASSOCIATES, INC.
Vice President
1981-1983 STONE & WEBSTER MANAGEMENT CONSULTANTS, INC.
Senior Consultant
Consultant
1976-1981 SOUTHERN CALIFORNIA GAS COMPANY
Corporate Economist
Financial analyst
Treasury Analyst
PROFESSIONAL EXPERIENCE
STRATEGIC PLANNING AND UTILITY RESTRUCTURING
- --------------------------------------------
Been a leading participant in the restructuring of the natural gas and electric
utility industries over the past ten years, acting as an adviser to local
distribution companies (LDCs), pipelines, electric utilities, and independent
energy project developers. In the recent past, provided services to Pacific Gas
and electric, Brooklyn Union Gas, Wisconsin Gas, Duke Power, Bay State Gas,
Commonwealth Energy, Boston Edison, Connecticut Energy, and many other leading
utilities and energy marketers across North America. Manages projects that
frequently include the redevelopment of strategic plans, corporate
reorganizations, the development of multi-year regulatory and legislative
agendas, merger, acquisition and divestiture strategies, and the development of
market entry strategies. Developed and supported merchant function exit
strategies, marketing affiliate strategies, and detailed plans fora the
functional business units of many of North America's leading utilities.
<PAGE>
Resume of John J. Reed, Page 2
MERGERS, ACQUISITIONS, DIVESTITURES, AND PROJECT DEVELOPMENT
- ------------------------------------------------------------
Retained by many of the nation's leading energy companies and financial
institutions for services relating to the purchase, sale or development of new
enterprises. These projects include major new gas pipeline projects, gas storage
projects, several non-utility generation projects, the purchase and sale of
project development and gas marketing firms, and utility acquisitions. Specific
services provided include the development of corporate expansion plans, review
of acquisition candidates, establishment of divestiture standards, due diligence
on acquisitions or financing, market entry or expansion studies, competitive
assessments, project financing studies, and negotiations relating to these
transactions.
LITIGATION SUPPORT
- ------------------
Provided expert testimony on more than 100 occasions in administrative and civil
proceedings on a wide range of energy and economic issues. Clients in these
matters have included gas distribution utilities, gas pipelines, gas producers,
oil producers, electric utilities, large energy consumers, governmental and
regulatory agencies, trade associations, independent energy project developers,
engineering firms, and gas and power marketers. testimony has focused on issues
ranging from broad regulatory policy to virtually all elements of the utility
ratemaking process. Also frequently testified regarding energy contract
interpretation, accepted energy industry practices, horizontal and vertical
market power, quantification of damages, and management prudence. For the past
several years, has led the efforts of the Northern Distributor Group, an
association of 15 Midwestern utilities that actively participate in natural gas
proceedings before the Federal Energy Regulatory Commission (FERC). Also worked
for many other customer groups, including the Wisconsin Distributor Group, the
Tennessee, Transco, Texas Eastern, CNG, Algonquin, and El Paso Customer groups,
the Association of Gas Distributors (AGD), and the United Distribution companies
(UDC). REED has provided litigation support services to over 200 gas
distribution, electric utility and pipeline clients in the past few years.
Also served on FERC Commissioner Terzic's Task Force on Competition, which
conducted an industry-wide investigation into the levels of and means of
encouraging competition in U.S. natural gas markets. Represented the interests
of the gas distributors (the AGD and UDC) and participated actively in
developing and presenting position papers on behalf of the LDC community.
CONTRACT NEGOTIATIONS
- ---------------------
On behalf of gas distributors, gas pipelines, gas producers, electric utilities,
and independent energy project developers, personally managed or participated in
the negotiation, drafting, and regulatory support of hundreds of energy
contracts, including the largest gas contracts in North America, electric
contracts representing billions of dollars, pipeline and storage contracts, and
facilities leases.
These efforts have resulted in bringing large new energy projects to market
across North America, the creation of hundreds of millions of dollars in savings
through contract renegotiation, and the regulatory approval of a number of
highly contested energy contracts.
EDUCATION
Wharton School, University of Pennsylvania, BS, Economics and Finance, 1976
BOARDS OF DIRECTORS
Nukem, Inc.
New England Gas Association
R. J. Rudden Associates
<PAGE>
Resume of John J. Reed, Page 3
AFFILIATIONS
National Association of Business Economists
International Association of Energy Economics
American Gas Association
New England Gas Association
Society of Gas Lighters
Guild of Gas Managers
<PAGE>
<TABLE>
<CAPTION>
Areas and Amounts of Savings
for Recent Consolidations
CONSOLIDATED CONSOLIDATED
AMOUNT OF NON-FUEL NAT. GAS SAVINGS
COMBINED ENTITY/ SAVINGS O&M EXPENSE O&M EXPENSE AS PERCENT
(TRANSACTION PARTIES) AREAS OF OPERATING SAVINGS ($MILLIONS) ($MILLIONS) ($MILLIONS) OF O&M
-------------------- -------------------------- ----------- ----------- ----------- ----------
(a) (b) (c) (d) (e) (f)
COMPLETED/IN PROGRESS TRANSACTIONS
<S> <C> <C> <C> <C> <C>
ALIANT ENERGY CORP. Corp./Opers. Labor $ 380.5
(IES Utilities and Corp./Admin. Programs $ 149.1
Interstate Power and Purchasing Economies (non-fuel) $ 60.2
Wisconsin Power and Light) Procurement - Electric $ 48.9
Gas Supply $ 23.6
Purchased Power Demand Charges $ 80.2
Generating Capacity Deferral $ 44.6
Joint Dispatch $ 47.2
--------
Gross Total Over 10 years $ 834.3
Avg. Annual Corp./Admin. Savings $ 59.0 $ 619.3 9.52%
Avg. Annual Natural Gas-Related Fuel Savings $ 2.4 $ 282.7 0.83%
Avg. Annual Electric-Related Fuel and Other Savings $ 22.1
AMEREN Labor $ 188.1
(Union Electric and Corp./Admin. Programs $ 199.5
CIPSCO) Elec. Prod./Gas Supply (1) $ 114.0
Purchasing Economies $ 68.4
Net Total Over 10 years $ 570.0
Avg. Annual Corp./Admin. Savings $ 45.6 $ 844.1 5.40%
Avg. Annual Natural Gas-Related Fuel Savings $ 1.6 $ 120.7 1.36%
Avg. Annual Electric-Related Fuel and Other Savings $ 9.8
CONNECTIV INC. Corp./Opers./Gen. Support Labor $ 346.0
(Delmarva and Corp./Admin. Programs $ 125.0
Atlantic City Electric) Purchasing Economies $ 56.0
Fuel Supply/Purchased Power $ 28.0
Facilities $ 26.0
--------
Gross Total over 10 years $ 581.0
Avg. Annual Corp./Admin. Savings $ 55.3 $ 432.5 12.79%
Avg. Annual Natural Gas-Related Fuel Savings $ 0.0
Avg. Annual Electric-Related Fuel and Other Savings $ 2.8
EASTERN ENTERPRISES Corp.Admin. Programs $ 14.4
(Eastern Enterprises and Labor $ 36.6
Essex County Gas) Gas Supply $ 23.5
--------
Gross Total Over 10 years 74.5
Avg. Annual Corp./Admin. Savings $ 5.1 $ 182.3 2.80%
Avg. Annual Natural Gas-Related Fuel Savings $ 2.4 $ 422.7 0.56%
Avg. Annual Electric-Related Fuel and Other Savings $ 0.0
EASTERN ENTERPRISES Gas Supply (1) $ 37.0
(Eastern Enterprises and --------
Colonian Gas) Gross Total Over 10 years $ 37.0
Avg. Annual Corp./Admin. Savings $ 5.1 $ 182.3 2.80%
Avg. Annual Natural Gas-Related Fuel Savings $ 2.4 $ 422.7 0.56%
Avg. Annual Electric-Related Fuel and Other Savings $ 0.0
FIRST ENERGY Corp./Opers. Labor $ 643.3
(Ohio Edison and Corp./Admin. Programs $ 299.4
Centerior) Procurement/Inventory (non-fuel) $ 77.8
Electric production $ 115.9
Fuel Procurement $ 44.6
--------
Gross Total Over 10 years $1,181.0
Avg. Annual Corp./Admin. Savings $ 102.1 $1,502.0 6.79%
Avg. Annual Natural Gas-Related Fuel Savings $ 0.0
Avg. Annual Electric-Related Fuel and Other Savings $ 16.1
<PAGE>
Areas and Amounts of Savings
for Recent Consolidations
CONSOLIDATED CONSOLIDATED
AMOUNT OF NON-FUEL NAT. GAS SAVINGS
COMBINED ENTITY/ SAVINGS O&M EXPENSE O&M EXPENSE AS PERCENT
(TRANSACTION PARTIES) AREAS OF OPERATING SAVINGS ($MILLIONS) ($MILLIONS) ($MILLIONS) OF O&M
-------------------- -------------------------- ----------- ----------- ----------- ----------
(a) (b) (c) (d) (e) (f)
NEW CENTURY ENERGIES Corp./Opers Labor $ 389.5
(Public Service of Colorado and Corp./Admin. Programs $ 82.7
Southwestern Pub Svc.) Purchasing Economies (non-fuel) $ 19.1
Fuel Procurement - Electric $ 144.3
Fuel Procurement - Gas $ 52.8
Generating Capacity Deferral $ 160.1
Joint Dispatch $ (33.7)
--------
Gross Total Over 10 years $ 814.8
Avg. Annual Corp./Admin. Savings $ 49.1 $ 573.5 8.57%
Avg. Annual Natural Gas-Related Fuel Savings $ 5.3 $ 397.9 1.33%
Avg. Annual Electric-Related Fuel and Other Savings $ 27.1
WESTAR Labor $ 402.4
(BEC Energy and Corp./Admin. Programs $ 211.1
COM/Energy Purchasing Economies $ 46.3
Energy $ 7.1
--------
Gross Total Over 10 years $ 666.9
Avg. Annual Corp./Admin. Savings $ 66.0 $ 481.2 13.71%
Avg. Annual Natural Gas-Related Fuel Savings $ 0.0
Avg. Annual Electric-Related Fuel and Other Savings $ 0.7
PUGET SOUND ENERGY Corp./Opers. Labor $ 198.0
(Puget Sound Energy and Distribution facilities $ 36.0
Washington Energy) Corp./Admin. Programs $ 124.0
Purchasing Economies (non-fuel) $ 4.0
Capital Deferrals $ 20.0
Revenue-related tax savings $ 18.0
--------
Gross Total Over 10 years $ 400.0
Avg. Annual Corp./Admin. Savings $ 40.0 $ 354.0 11.30%
Avg. Annual Natural Gas-Related Fuel Savings $ 0.0
Avg. Annual Electric-Related Fuel and Other Savings $ 0.0
SEMPRA ENERGY Corporate Functions - Labor $ 538.8
(Enova and Corporate Programs $ 462.0
Pacific Enterprises) Field Support Functions - Labor $ 332.0
Inventories/Purch. Economies $ 23.0
Facilities $ 39.0
--------
Gross Total Over 10 years $1,394.0
Avg. Annual Corp./Admin. Savings $ 139.4 $1,393.0 10.01%
Avg. Annual Natural Gas-Related Fuel Savings $ 0.0
Avg. Annual Electric-Related Fuel and Other Savings $ 0.0
WESTAR Electric Generation Dispatch $ 64.0
(Western Resources and Capacity Deferrals $ 57.3
Kansas City Power & Light) Generation Labor $ 117.1
Field Operations $ 106.0
Procurement $ 183.4
Inventory $ 7.4
Contract Services $ 48.3
Information Services $ 132.6
Facilities $ 17.1
Professional Services $ 15.6
Insurance $ 12.8
Corp./Opers. Labor $ 248.7
Overhead and Benefits $ 43.9
Other Corporate and Admin. Benefits$ 18.5
--------
Gross Total Over 10 years $1,073.0
Avg. Annual Corp./Admin. Savings $ 83.4 $ 636.7 13.10%
Avg. Annual Natural Gas-Related Fuel Savings $ 0.0
Avg. Annual Electric-Related Fuel and Other Savings $ 23.9
<PAGE>
Areas and Amounts of Savings
for Recent Consolidations
CONSOLIDATED CONSOLIDATED
AMOUNT OF NON-FUEL NAT. GAS SAVINGS
COMBINED ENTITY/ SAVINGS O&M EXPENSE O&M EXPENSE AS PERCENT
(TRANSACTION PARTIES) AREAS OF OPERATING SAVINGS ($MILLIONS) ($MILLIONS) ($MILLIONS) OF O&M
-------------------- -------------------------- ----------- ----------- ----------- ----------
(a) (b) (c) (d) (e) (f)
LG&E ENERGY Labor/Corp. & Admin. Progs./
(LG&E Energy and Purchasing Econs. $ 680.0
KU Energy) --------
Gross Total Over 10 years $ 680.0
Avg. Annual Corp./Admin. Savings $ 68.0 $ 417.31 16.29%
Avg. Annual Natural Gas-Related Fuel Savings $ 0.0
Avg. Annual Electric-Related Fuel and Other Savings $ 0.0
SIERRA PACIFIC RESOURCES Corporate Functions - Labor
(Sierra Pacific and Corporate Programs
Nevada Power) Customer Support Functions - Labor
Inventories/Purch. Economies --------
Gross Total Over 10 years $ 322.0
Avg. Annual Corp./Admin. Savings $ 32.2 $ 954 3.38%
Avg. Annual Natural Gas-Related Fuel Savings $ 0.0
Avg. Annual Electric-Related Fuel and Other Savings $ 0.0
Transactions Not Completed
CONSTELLATION Labor $1,030.3
(Baltimore Gas & Electric and Facilities $ 19.9
Potomac Electric Power) Corp/Admin. Programs $ 224.5
Purchasing Economies $ 304.9
--------
Gross Total Over 10 years $1,579.7
Avg. Annual Corp./Admin. Savings $ 158.0 $1,017.8 15.52%
Avg. Annual Natural Gas-Related Fuel Savings $ 0.0
Avg. Annual Electric-Related Fuel and Other Savings $ 0.0
RESOURCES WEST ENERGY Corp./Opers. Labor $ 210.2
(Sierra Pacific and Corp./Admin. Programs $ 109.6
Washington Water Power) Procurement/Inventory (non-fuel) $ 44.5
Facilities $ 19.0
Gas Supply $ 67.5
Electric Production $ 60.2
--------
Gross Total Over 10 years $ 511.0
Avg. Annual Corp./Admin. Savings $ 38.3 $ 726.9 5.27%
Avg. Annual Natural Gas-Related Fuel Savings $ 6.8 (3)
Avg. Annual Electric-Related Fuel and Other Savings $ 6.0
Total Average Annual Corp./Admin. Savings Percentage 9.68%
Total Average Annual Natural Gas-Related Fuel Savings Percentage 0.96%
(1) Savings for electric production versus gas supply broken out on basis of annual natural gas fuel expenses to total fuel expense
of combined entity.
(2) Synergies savings in addition to gas supply savings are anticipated; however, specific areas and amounts not available.
(3) Fuel expense data unavailable for Sierra Pacific Resources.
Source: Regulatory Filings and Securities and Exchange Commission Form S-4 for respective transactions.
</TABLE>
<PAGE>
[SEAL] Public Service
4802 Sheboygan Avenue
P.0. Box 7854
Madison, Wisconsin 53707-7854
March 19, 1993
To All Gas and Electric Utilities:
The Commission has recently received a request for guidelines on the treatment
of acquisition adjustments, the amount paid by a utility for acquiring property
previously dedicated to utility service, which is in excess of book value. This
request stems from the recent sale of a gas utility and the anticipation that
there may be more gas utilities for sale In Wisconsin. The Commission has
articulated general guidelines for a) lowing acquisition adjustments in races in
the WPL/Footville case, docket numbers 6680-CB-103 and 2040-EA-100. More
specific guidelines would be difficult to articulate as each case has individual
circumstances which cannot be readily addressed by generic guidelines. In lieu
of formal Commission guidelines, staff is setting forth its basic position on
the allowance of acquisition adjustments (premiums) for energy utilities.
In the Footvi1le order, an electric purchase/sale agreement, thp Commission
determined that there must be a showing of clear and substantial system benefit
to the purchasing utility for an acquisition adjustment to be included in rates
of the purchasing utility. System benefit was further described as providing
substantial physical or electrical benefit. The Footville case established that
the redistribution of costs or the spreading of costs over more customers is not
considered a system benefit in itself.
With the recent changes in the natural gas industry that have resulted from FERC
policy and orders (especially Order 636), there may be ways in which a gas
utility could show system benefit vis-a-vis lower cost gas supply and/or more
reliable supply. Depending on the level of likely benefits, all or part Of an
acquisition adjustment may be recovered from ratepayers. The burden of proof of
such benefits is on the utility and requires substantive quantification and
documentation. There must be a showing that there is an increased value of
service for those ratepayers that will bear the cost. Those ratepayers that will
bear the cost must derive benefits that equal or exceed the cost of the
acquisition adjustment. If there are proposals in which only a segregated group
<PAGE>
All Gas and Electric Utilities
Page 2
of ratepayers still bear the cost (a separation of the buying and selling
utilities), then the utility must adequately show that those ratepayers not
bearing the cost are kept whole (rates for service not increased and value of
service not diminished). The utility must also be able to document that the
proposal does not involve subsidies in either direction.
At times it may be difficult to monetize potential gas system benefits that
result from a purchase/sale agreement. It is then that we suggest that the
Commission consider resulting cost savings as additional support for allowing
the recovery of acquisition adjustments. Cost savings may be the result of
efficiencies gained or better access to a lower cost of capital for the selling
utility. Many other value-of-service items, such as conservation programs and
customer service, which support the purchase/sale agreement, may also provide
additional support for above-the-line treatment. Again, there must be a showing
of increasing the value of service for the ratepayers that will pay the
additional cost.
When utilities are combined, it is possible that cost savings will result. When
these cost savings occur, the staff would not recommend that the Commission
require immediate rate reduction to reflect the efficiency gains; however they
would likely be reflected in the next scheduled rate case. There may be
exceptions based on the circumstances in individual proposals. For example, if a
utility were to freeze gas rates (margin) for an extended period of time, the
Commission may agree to waive a decrease that reflects the efficiency savings.
One concern seems to be the number of years over which an allowable adjustment
can be recovered. This will likely be dependent on the specific circumstances of
the case. There has to be flexibility so that the perceived benefits, the
materiality and the structure of the proposal can all be considered. In cases
where the system benefits are difficult to monetize and cost savings are used as
partial monetary justification, staff would likely be more supportive of shorter
periods and some shared risk (i.e. recovery of the acquisition adjustment is
dependent on the utility achieving the cost savings it projected.) The use of
<PAGE>
All Gas and Electric Utilities
Page 3
shorter periods of time is also consistent with the SEC's allowed amortization
for regulatory assets.
We would recommend that the Commission consider any proposal which is in the
public interest. In Wisconsin, the Public Service Commission applies the concept
of original cost when setting utility rates. Ratepayers will not pay more than
original cost in their rates unless it can be reasonably shown that there in a
system benefit and that customers are getting additional value commensurate or
greater than the additional cost.
Sincerely, Sincerely,
/s/ Anita Sprenger /s/ Susan E. Stratton
- ---------------------------------- ----------------------------------------
Anita Sprenger Susan E. Stratton
Administrator Administrator
Division of Gas, Water Electric Division
and Federal Intervention
DJS:AS:SES:03199302.JRB/LETTER.GWF
<PAGE>
STATEMENT
JULIE PENMAN
Commissioner
Milwaukee Department of City Development
September 3, 1999
The City of Milwaukee has long reaped the benefits of having two major
utility holding companies headquartered in our city's downtown.
Both Wisconsin Energy Corporation and WICOR have been major employers
and outstanding corporate citizens. Both have invested in our community and been
strong partners with the city on civic projects. The combination of these two
companies offers reasons for much optimism for the future.
Wisconsin Energy Corporation had pledged to keep its corporate
headquarters in its historic downtown office building, which was completely
restored as one of the finest examples of our city's architectural heritage.
WICOR made a similar commitment, investing the resources to ensure the
art deco corporate headquarters with the famous "weather flame" remains a part
of our downtown landscape.
The corporate leadership of both companies is a reflection of
Wisconsin Energy Chairman Richard Abdoo and WICOR Chairman George Wardeberg.
Both are among the business leaders at the top of the list when it comes to
civic commitment. A few examples -- the Milwaukee Redevelopment Corporation,
Greater Milwaukee Committee, Competitive Wisconsin, and United Way.
Wisconsin Energy has also been a strong partner in building hundreds
of new housing units in downtown Milwaukee, supporting an ongoing boom in
downtown living.
From the Library Hill housing development at the west end of downtown
to East Pointe Commons at the eastern end, Wisconsin Energy has helped
rejuvenate our downtown.
Wisconsin Energy also played an important role in securing the future
of Emmpak Foods as a major employer in the nearby Menomonee Valley. Today,
Emmpak Foods provides jobs at family supporting wages for 1,800 people. A
significant fact that should not be overlooked is that close to 70 percent of
Emmpak's workforce is from the minority community.
Wisconsin Energy has helped the city achieve substantial savings in
its utility bills and launch a new street lighting system.
WICOR has also invested in the city and its economic growth. It has
been a leader in promoting energy conservation and is helping the city with a
cost-saving, automated meter reading system.
<PAGE>
BEFORE THE
PUBLIC SERVICE COMMISSION OF WISCONSIN
Application of the Wisconsin Energy Corporation 9401-YO-100
for Approval to Acquire the Stock of WICOR Inc. 9402-YO-101
- --------------------------------------------------------------------------------
DIRECT TESTIMONY OF JEFFREY P. WEST
IN SUPPORT OF APPLICATION BY WISCONSIN ENERGY CORPORATION
- --------------------------------------------------------------------------------
I. INTRODUCTION
Q. Please state your name, business address, and title.
A. My name is Jeffrey P. West. My business address is 231 West Michigan
Street, Milwaukee, Wisconsin 53201. I am Treasurer of Wisconsin Electric
Power Company.
Q. Please describe your educational background and business experience.
A. I received a Bachelor of Business Administration Degree with a major in
finance from the University of Wisconsin-Milwaukee in December, 1975. In
May, 1981, I received a Master of Business Administration Degree from
Marquette University. In September of 1976, I accepted a position with
Wisconsin Electric Power Company as an analyst in Financial Management. I
held various positions in Financial Management and Corporate Planning
before becoming Manager of Financial Services in October of 1989. In July
of 1999 I was appointed Treasurer of Wisconsin Electric Power Company.
Q. What are your responsibilities as Treasurer?
A. My responsibilities include cash management, insurance and risk management,
and pension and other dedicated funds management. They also include
<PAGE>
corporate financings, long-term financial forecasts, investor relations,
and the development of special studies in the aforementioned areas.
Q. What is the purpose of this testimony?
A. The purpose of this testimony is to discuss the financial implications of
and the required accounting treatment and expected tax treatment of the
proposed merger of WICOR, Inc. ("WICOR") and Wisconsin Energy Corporation
("WEC"). Specifically, I will discuss the impact of the proposed merger on
(1) the common stockholders of WEC; (2) the debt security holders of WICOR
and WEC and their affiliates; (3) the estimated synergy levels that are
expected to result from the merger; and (4) the purchase premium to be paid
by WEC for WICOR. In addition, I will discuss certain pro forma financial
statements reflecting the merger.
Q. Have you supervised the preparation of exhibits to support your testimony?
A. Yes, I have supervised the preparation of 6 exhibits. Exhibit ____ (JPW-1)
shows recently published S&P rating benchmarks; Exhibit ____ (JPW-2) shows
journal entries for WEC to record the merger; Exhibit _____ (JPW-3)
provides pro forma condensed financial statements; Exhibit _____ (JPW-4)
shows estimated synergies, and Exhibit _____ (JPW-5) calculates WEC's
goodwill relating to the transaction and annual amortization thereof.
In addition, I will sponsor Exhibit _____ (JPW-6) to report the
results of the WEC and WICOR shareholder meetings to be held on October 27,
1999. Obviously, this exhibit can not be filed with this testimony, but it
will be filed and provided to the parties in advance of the hearing.
<PAGE>
II. SUMMARY
Q. Please summarize the significant points of your testimony.
A. It is my opinion that this merger over time will result in a financially
stronger company with lower investment risk than WEC or WICOR on a stand
alone basis. This will provide WEC with better access to the capital
markets than either WEC or WICOR on a stand alone basis. The merger should
also enhance the ability of the utility affiliates, as wholly owned
subsidiaries of WEC, to issue long- and short-term debt and other
securities, if needed, on more favorable terms when compared to the
predecessor companies on a stand alone basis. Based on the past records of
WEC and WICOR, I believe that the secured debt of Wisconsin Electric Power
Company ("WEPCO") and WICOR's utility subsidiary, Wisconsin Gas Company
("WGCO"), initially will be rated in the AA/A category.
Under General Accepted Accounting Principles ("GAAP"), the proposed
merger will be accounted for as a purchase. Purchase accounting is required
since the merger does not meet all the criteria prescribed for a pooling
transaction.
III. FINANCIAL IMPACTS OF THE MERGER
Q. Is it likely that the merger will have a positive affect on the common
stockholders of WEC and WICOR, who will, following the merger, become
shareholders of WEC?
A. Yes, I believe that from an equity investor perspective, WEC following the
merger represents a more attractive investment than WEC or WICOR on a stand
alone basis.
Q. Please explain.
A. The value of a common stock investment today is based on the future cash
flows and the relative certainty of the cash flows to be derived from the
<PAGE>
investment discounted at the opportunity cost of capital. To the extent
that a proposed merger can either enhance the ability of a combined entity
to generate future cash flows or to reduce the underlying risk of the
company - which then reduces the opportunity cost of capital - the value of
the investment should be improved.
Q. How do investors or financial analysts determine a utility's ability to
generate cash flow for its common stockholders?
A. Financial analysts and investors typically analyze a company on both a
quantitative and qualitative basis and look at a company on a historic,
current and prospective basis. Historic and current data is important as an
indicator of management's ability to produce returns for investors.
However, as indicated above, it is the ability or perceived ability to
produce future returns that determines a common stock's value.
Q. Please describe what the quantitative analysis would include.
A. Analysts and investors evaluate a number of financial statistics and ratios
such as revenue by customer class, internal cash generation and its
relationship to capital requirements, the cost of providing service, the
level of non-cash earnings, and interest coverage ratios among others. An
analysis of the balance sheet also is performed. The assets are reviewed to
determine whether impaired assets exist, the level of regulatory assets and
the existence or potential for stranded investment. The capital structure
is evaluated to determine the financial risk of the company and its
implications on the company's ability to raise capital. The construction
program and other financing requirements relative to the size of the
company are examined to ascertain whether the required capital growth will
<PAGE>
be a financial strain going forward. A review of the rate structure also is
performed and compared to other utilities in the region. In addition, a
review of historic returns on equity and investment is performed, not only
on an absolute basis but also in relationship with the allowed returns from
regulators.
Q. What qualitative factors are analyzed?
A. Qualitative factors analyzed for electric and gas utilities include a
review of service territory issues - the area economy, employment, the
composition and diversity of the industrial base, sales outlook, state and
local government policies, among others. In addition, energy supply issues
are evaluated, including the electric generation and gas supply mix,
vintage of the major generation units, availability and reliability of the
units, terms and conditions of any purchase power or gas supply contracts,
and environmental compliance issues. Regulatory policies and practices are
also evaluated.
Q. Please continue.
A. Based on the analyst's evaluation of the prospective factors and recent
historical results, a forecast is developed to determine the ability of the
company to pay dividends currently, and to grow dividends in the future.
These projected dividend payments, along with capital appreciation of the
stock, are the cash flows that accrue to the common stockholders.
Lastly, with consideration given to both the qualitative factors and
quantitative factors, an assessment is made of the relative business risk
of the company. Due to the growing competitive nature of the industry, the
cost of delivered energy and its implications are carefully scrutinized.
The relative certainty of the cash flows is largely a function of the
<PAGE>
business risk and, therefore, is critical in determining the opportunity
cost of capital at which the stockholder cash flows are discounted.
Q. Please explain how the proposed merger would affect investor's analysis.
A. In the short-term, purchased gas savings and in the long-term, synergy
savings expected to be realized from the transaction will allow the merged
companies' rates to remain competitive. Competitive rates have a positive
impact on the economic vitality of the utilities' service territories. In
addition, the estimated synergies will improve financial ratios and
internal cash generation, strengthening the companies' financial condition
over time.
Additionally, the overall business risk of the new company will be
reduced relative to each company on a stand alone basis. After the merger,
WEC will serve a larger number of utility customers gaining critical size
and greater earnings diversification due to WICOR's gas operations and
growing nonutility manufacturing operations. Due to the relatively larger
size, funds invested in any one large construction project will represent a
smaller percentage of the combined companies' assets and capitalization.
These factors tend to reduce the variability of the cash flows, and
therefore, reduce investment risk. Finally, the merger enhances the ability
of WEC after the merger to attract and maintain a high quality management
team.
Q. How do these factors affect the ability of WEC after the merger to attract
capital at reasonable rates?
A. I believe these factors should enhance the ability of WEC to attract
capital at reasonable cost. As indicated above, the ability of the combined
company to generate cash flow should be enhanced while at the same time the
<PAGE>
underlying risk is reduced from what would otherwise exist without the
proposed merger.
Q. How has the financial community reacted to the proposed merger?
A. Reaction from Wall Street analysts following the merger announcement was
positive overall with analysts from A. G. Edwards and Robert W. Baird
Incorporated viewing the WICOR/WEC merger as positive for both company
shareholders. Based upon the outlook for the combined entity, Baird raised
WEC's short-term outlook from market-perform to market-outperform.
Q. How will the merger affect external financing requirements?
A. WEC plans to fund the portion of the WICOR acquisition price not paid with
WEC common stock from bank borrowing arrangements or from securities to be
issued in the capital markets. The amount, type and timing of the bank
borrowing arrangements and securities to be issued in the capital markets
have not yet been determined. Over the long-term, internal cash generation
should improve and further reductions in external financing requirements
are expected. This will provide WEC and its utility subsidiaries after the
merger the flexibility to improve their capital structures by taking
advantage of capital market conditions to reduce the total cost of capital
when market conditions allow.
Q. What are the senior secured debt credit ratings of WEPCO and WGCO?
A. Both WEPCO and WGCO have among the highest security ratings in the electric
and gas utility industries. Currently, Standard and Poors Corporation
("S&P") has assigned a AA+ credit rating to the senior debt of WEPCO and
AA+ to the senior debt of WGCO. Moody's Investors Service ("Moody's'") has
assigned a Aa2 credit rating to both the senior debt of WEPCO and WGCO.
<PAGE>
Duff and Phelps Inc ("D&P") and Fitch Investors Service, Inc. ("Fitch")
have assigned a AA+ and AA credit rating to WEPCO's senior debt,
respectively. Neither D&P or Fitch have assigned credit ratings to WGCO
senior debt.
Q. What was the response of the credit rating agencies to the merger
announcement?
A. D&P and Fitch affirmed the previous security ratings of WEPCO. Moody's
affirmed the security ratings of WEC, WEPCO and WGCO. S&P affirmed the
security ratings of WGCO and certain securities of WEC and WEPCO and placed
other securities of WEC and WEPCO on credit watch with negative
implications. S&P indicated that the consolidated credit quality of the
merged entity would likely be AA-. S&P also indicated that if the merger
does not occur, that the ratings on Wisconsin Electric and affiliates could
still be lowered due to the company's weaker financial statistics relative
to other similarly rated companies.
Q. Have any of the rating agencies taken any other action recently that could
influence the security ratings of WEC or its utility subsidiaries after the
merger?
A. Yes. S&P recently announced new utility security ranking benchmarks that
are more stringent than the previously published benchmarks as shown in
Exhibit ____ (JPW-1). As a result of these changes, there is much less
certainty with respect to current and future bond ratings of the companies
either on a combined or separate basis.
Q. How will the debt holders of the utility subsidiaries be affected by the
merger?
A. Over the long-term I believe there are positive implications for the
companies' debt holders.
<PAGE>
Q. Please explain.
A. Earlier in my testimony, I noted that the merger will provide improvements
in the business fundamentals of the companies while diversifying, and thus
reducing, the overall risk. These same fundamental improvements will also
benefit the debt holders of the utility companies.
Q. Will the customers of the utility subsidiaries benefit from this?
A. Yes. To the extent that the business and financial fundamentals of the
utility subsidiaries improve, the companies will gain greater access to the
debt markets with better terms than on a stand alone basis.
Q. Please summarize the benefits to the utility customers of the proposed
merger flowing from these financial impacts.
A. I believe there are substantial benefits for the utility customers of the
companies. Customers will benefit from lower purchased gas costs and in the
longer term, the projected net merger synergies will minimize the need for
future rate increases. The merger will also result in a company with less
business risk than either WEC or WICOR on a stand alone basis. These
improvements will allow increased access to the capital markets and
improved financial flexibility. This will serve to enhance the long-term
ability of the utility subsidiaries to provide safe, reliable energy at a
reasonable cost to customers.
IV. IMPACTS ON SECURITY HOLDERS
Q. Are there any impacts on the preferred stockholders of WEPCO or the Trust
Preferred Stockholders of WEC as a result of the merger?
<PAGE>
A. WEPCO currently has two issues of preferred stock outstanding and WEC has
one issue of Trust Preferred outstanding. The existing preferred stock of
WEC and WEPCO will remain outstanding. Currently, D&P, Fitch, Moody's and
S&P rate WEPCO's preferred stock as AA, AA-, aa3 and AA-, respectively. The
Trust Preferred of WEC is currently rated A by D&P, a1 by Moody's and A+ by
S&P. Long-term the same benefits that accrue to the debt holders discussed
above will accrue to the WEC and WEPCO preferred stockholders.
Q. What happens to the debt and other obligations of the companies which are
currently outstanding?
A. It is anticipated that all debt currently outstanding will remain
outstanding.
Q. What happens to the company's various First Mortgage Bond ("FMB")
indentures?
A. WEPCO has issued a portion of its long-term debt under a FMB indenture.
This indenture gives the holders of FMB's a first lien on virtually all
property owned by the company. The Mortgage has a clause that subjects
subsequently acquired property to the lien, including property acquired by
merger into that company. Under the merger agreement, WEPCO will remain as
separate operating subsidiary of WEC after the merger. Consequently, the
WEPCO mortgage will not be directly impacted by the merger. The first lien
on the properties subject to the WEPCO mortgage immediately prior to the
merger will remain in place. All of WGCO's debt is unsecured.
Q. What impact will the merger have on holders of unsecured debt securities of
WEPCO and WGSCO?
A. The unsecured debt of WEPCO and WGSCO will be retained by each company.
<PAGE>
Q. Will there be any changes in short-term credit facilities as a result of
the merger?
A. There may be some consolidation or replacement of existing lines of credit
and other short term credit facilities as a result of the merger.
Q. Will the additional debt securities issued by WEC to fund the acquisition
of WICOR adversely impact WEC's financial position after the merger?
A. While the amount of additional debt to be issued by WEC to fund the portion
of acquisition price not funded through the issuance of new WEC common
stock is significant, ranging from $0.5 billion to $0.8 billion to $1.3
billion depending on whether WEC issues 60%, 40% or 0% of the purchase
price consideration in the form of WEC common stock, respectively, as
discussed earlier in my testimony, the security ratings are not expected to
be significantly impacted as a result of the merger.
V. ACCOUNTING AND TAX TREATMENT OF THE MERGER
Q. What are the relevant accounting pronouncements for a merger or business
combination?
A. Under GAAP, the accounting rules for a business combination are prescribed
in Accounting Principles Board Opinion No. 16, Business Combinations. The
accounting treatment required in a business accounting is either the
pooling-of-interests ("pooling") method or the purchase method, depending
on the facts or circumstances of the transaction. The methodology used is a
function of the terms of the transaction and is not elective. In
determining how to account for a business transaction, the transaction must
be analyzed to see if it meets the criteria for pooling. If all the
criteria for a pooling are not met, then the required accounting is the
purchase method. This transaction will be required to be accounted for
<PAGE>
using the purchase method since it does not qualify for the pooling of
interest method.
Q. Please describe the purchase method of accounting for a merger in greater
detail.
A. GAAP defines a purchase as the acquisition of one company by another. In a
purchase combination, ownership of at least one of the combining entities
does not change. Under purchase accounting, the acquired corporation ceases
to control its own assets and operations because control passes to the
acquirer. In a purchase, the recorded amounts of the assets and liabilities
of the acquiring entity generally remain the same, but the assets and
liabilities of the acquired entity are revalued to fair market value based
on the purchase price (including any acquisition premium) at the time of
the combination. In a utility purchase combination, however, Federal Energy
Regulatory Commission ("FERC") accounting requirements, as adopted by the
Commission, do not allow utilities to adjust the value of assets to fair
market; rather, the utility plant assets are recorded at their depreciated
original value and the difference between the purchase price and the
depreciated original cost is recorded on the acquiring entity's books as an
"acquisition adjustment" (see Gas Plant Instruction NO. 5 of the Uniform
System of Accounts for FERC accounting requirements for acquisitions).
Q. Specifically, how will the purchase method be applied in the WICOR and WEC
merger?
A. WEC will determine the purchase price for the WICOR assets by multiplying
the $31.50 offer price, subject to escalation if the transaction does not
close by July 1, 2000, times the shares of WICOR common stock and
equivalents outstanding on the closing date. As part of WEC's offer, WICOR
stockholders in the aggregate will receive 40% of the purchase price
consideration in WEC common stock (which at WEC's option can be increased
<PAGE>
to 60%). Shortly before the merger, WEC will select a percentage between
40% and 60% of the merger consideration that it will pay in WEC common
stock, with the remainder being paid in cash. WEC will determine the
exchange ratio for WEC common stock to be issued in the merger based on the
average closing price of WEC common stock as reported in the New York Stock
Exchange Composite Tape for the 10 trading days ending with the fifth
trading day prior to the closing date of the merger. The exchange ratio
will equal the exchange value of $31.50 per WICOR share, or a higher amount
if the merger occurs after July 1, 2000, divided by the average closing
price per share of WEC common stock during the valuation period. If the
average closing price of WEC common stock during the valuation period is
less than $22.00, WEC may elect to pay the entire consideration in cash.
WEC will record the new shares of its $0.01 par value common stock issued
for WICOR assets in the merger on its books. It is anticipated that WEC
will initially borrow the balance of the WICOR consideration under a
"bridge-banking" loan yet to be negotiated or from proceeds of securities
to be sold in the capital markets. Such borrowings/or securities will also
be recorded on WEC's books. Under the purchase method, the assets and
liabilities of WICOR will be recorded at their estimated fair values on the
date of closing. The excess of the WICOR purchase price over the fair value
of the net assets at the effective time of the merger will be recorded as
goodwill. It is expected that WEC will retain independent appraisers to
assist it in determining the fair value of the WICOR assets being
purchased. Under purchase accounting, WEC will have 12 months following the
completion of the merger to finalize the valuation of the assets purchased.
Results of operations of both WICOR and WEC will be combined from the date
<PAGE>
of the merger's closing going forward. No prior period financial statements
will be restated following the merger. This accounting treatment will
commence as of the date the merger is consummated (i.e., the legal closing
date). The proposed WEC journal entry to record the purchase of the WICOR
assets on WEC's books is shown on page 1 of Exhibit _____ (JPW-2).
VI. HISTORICAL AND PRO FORMA FINANCIAL INFORMATION
Q. Please describe the historical and pro forma financial statements shown in
the filed exhibits.
A. Exhibit _____ (JPW-3) page 2 shows the Unaudited Pro Forma Combined
Condensed Income Statement for the Twelve Months Ended June 30, 1999 for
WEC, as if the merger had been accomplished for the period presented.
Estimated synergies from the merger are not reflected in the Pro Forma
Income Statement. Page 3 of Exhibit _____ (JPW-3) shows the Unaudited Pro
Forma Condensed Balance Sheet as of June 30, 1999, as if the merger had
been accomplished as of the period presented. Pages 4 and 5 of Exhibit
_____ (JPW-3) contains the Notes to the Unaudited Pro Forma Combined
Condensed Financial Statements.
Q. How was the pro forma information derived?
A. Pro forma adjustments were computed assuming the transaction was
consummated at the beginning of the period presented and include
adjustments that give effect to events that are (a) directly attributable
to the merger; (b) expected to have a continuing impact on the combined
enterprise; and (c) factually supportable. Pro forma adjustments to the
balance sheet were computed assuming the merger was consummated at the end
of period presented and include adjustments that give effect to events that
<PAGE>
are directly attributable to the merger whether they have a continuing
impact or are non-recurring. The pro forma accounting adjustments include
the estimated preliminary accounting adjustments required for purchase
accounting to reflect fair market valuation of assets and liabilities.
Q. What pro forma adjustments were made to historical amounts to reflect the
impact of the proposed merger in the pro forma financial statements?
A. The pro forma adjustments made are discussed in the notes to the pro forma
financial statements in Exhibit_____ (JPW-3 pages 4 and 5).
Q. Have the estimated synergy savings resulting from the merger been reflected
in the pro forma financial statements?
A. No, the pro forma adjustments do not reflect the estimated synergy savings.
The pro forma statement of income reflects only historical information,
showing how the companies would have been combined in prior periods,
adjusted to reflect the estimated impact of the merger on principal items,
including interest expense and depreciation due to additional borrowings
and goodwill amortization resulting from the merger.
VII. ESTIMATED SYNERGIES EXPECTED TO RESULT FROM THE MERGER
Q. Please describe the synergies expected to result from the merger.
A. The companies have not performed a definitive synergies study. WEC's
preliminary estimate of annual savings in this transaction was based on the
projected savings to be achieved in WEC's acquisition of the Wisconsin
Southern Gas Company, Inc. adjusted for the increased size of the WICOR gas
utility operations as shown in Exhibit _____ (JPW-4). A detailed synergy
study will be prepared after the transaction closes. The preliminary
<PAGE>
estimate indicates the merger could result in annual savings of about $35
million. These savings projections, as more fully described in the
testimonies of James Schott and John Reed, are projected to come from lower
costs for purchased gas, materials and services, through enhanced
purchasing power, elimination of duplication through attrition and sharing
of resources and consolidation of common facilities over time.
Q. Is it necessary to have an actual merger of WEPCO's gas operations with
WGCO to achieve these synergies?
A. No, it is not. Synergies can be achieved through integration of operations
as we did with WEPCO and Wisconsin Natural Gas Company ("Wisconsin
Natural").
Q. Please describe what type of integration of operations were achieved by
WEPCO and Wisconsin Natural prior to the merging of Wisconsin Natural with
and into WEPCO.
A. WEPCO and Wisconsin Natural were able to obtain savings through integration
of certain support services including supply chain, information systems,
meter reading, customer billing, treasury and accounting, human resources,
legal, and other administrative functions. Additional cost savings were
achieved by providing backup support between WEPCO and Wisconsin Natural in
the areas of fleet management, storeroom, and field operations, on an as
needed basis, in order to serve peak needs or to respond to emergency
situations. WEC would expect similar opportunities would exist following
WICOR acquisition.
<PAGE>
VIII. DESCRIPTION PURCHASE PRICE, ESTIMATED GOODWILL TO RESULT FROM THE MERGER
AND RELATED TRANSACTION COSTS
Q. Please describe how the purchase price for WICOR was determined by WEC and
whether the acquisition premium is commensurate with the premiums being
paid by other acquiring companies.
A. The purchase price of $31.50 offered by WEC for each share of WICOR common
stock was the result of arms-length negotiations between WEC and WICOR.
Each company retained independent financial advisors, who provided fairness
opinions to the respective Boards of Directors that the consideration being
paid was fair. WEC retained Chase Securities Inc. and WICOR retained
Merrill Lynch. The analysis performed by both Merrill Lynch and Chase
Securities Inc. are described in detail in the joint WICOR/WEC proxy
statement, dated September 10, 1999. Based upon the analysis done by Chase
Securities Inc. for WEC, the acquisition premium paid by WEC for WICOR is
commensurate with the premiums being paid under comparable circumstances.
Q. Please describe the goodwill to result from the merger.
A. The estimated goodwill from the merger is expected to approximate $797
million as calculated in Exhibit _____ (JPW-5). This amount is prior to any
accounting adjustments necessary in purchase accounting to reflect the fair
value of the assets being purchased and liabilities assumed in the merger.
Q. Is any portion of the goodwill allocable to the WGCO assets?
A. Yes. Preliminary estimates indicate that approximately 60% of the goodwill
is allocable to the WGCO assets.
<PAGE>
A final determination of the goodwill allocable to WGCO will be made
after independent appraisals of the assets being purchased in the merger
are completed.
Q. How does the Company anticipate recovering goodwill allocable to WGCO?
A. WEC is proposing the Commission allow retention of the synergy savings
resulting from the merger as a means to permit recovery of that portion of
the goodwill attributable to WICOR's utility assets. Our proposal is based
on the guidelines contained in the Commission staff's white paper on the
treatment of acquisition adjustments issued in March 1993 and on precedent
created in prior dockets which allowed recovery including the City of Rice
Lake's purchase of electric distribution facilities from Northern States
Power Company (Dockets 4420-EA-110/5050-EB-100) and Northern States Power
Company's acquisition of The Viking Gas Transmission Company (Docket
4220-UR-407). The testimony of witness John Reed submitted in this
proceeding describes more fully the companies justification for requesting
such regulatory treatment.
Q. Will WEC be adversely impacted financially if the Commission does not
authorize retention of the synergy savings as requested?
A. Yes. If the company is not able to retain the estimated synergy savings,
WEC's net income for the foreseeable future will be significantly reduced,
which will have a correspondingly adverse impact on the financial strength
of the Company thereby limiting its ability to raise capital in the capital
markets at a reasonable cost.
Q. Will WEC's utility customers be negatively impacted by the proposal to
retain the estimated synergy savings as an offset to the goodwill incurred
as a result of the transaction?
<PAGE>
A. No. WEC's utility customers will not be negatively impacted. The merger
will result in no change in base rates and WEC's stockholders will bear
100% of the risk if the estimated synergy levels are not obtained. In fact,
the customers will be positively impacted for the reasons described earlier
in my testimony and that of Calvin Baker, Bronson Haase and John Reed.
Q. Please describe the estimated transaction costs for the merger of WICOR and
WEC and related accounting treatment.
A. Both WEC and WICOR will incur third party out-of-pocket costs related to
the merger, which are estimated to approximate $8 million each. These costs
are primarily fees for financial advisors, legal counsel, and independent
public accountants; filing fees with the Securities and Exchange Commission
and Department of Justice for the Hart-Scott-Rodino antitrust filing; and
proxy printing and special meeting costs (including mailing list) for the
WEC and WICOR stockholder meetings to approve the transaction. WEC's
transaction costs will be included as part of the WICOR acquisition price.
WICOR's transaction costs will be expensed prior to the closing of the
merger.
In addition to the third party out-of-pocket costs related to the
merger, WEC estimates it will incur approximately $5 million of costs to
obtain the debt financing to fund the non-WEC common stock portion of the
consideration being paid to the WICOR stockholders in the merger. WEC's
debt financing costs will be deferred and amortized over the life of the
related debt.
Q. Does this conclude your testimony?
A. Yes, it does.
<PAGE>
WISCONSIN ENERGY CORPORATION
DOCKET NOS. 9401-YO0100 AND 9402-YO-101
EXHIBITS OF J. P. WEST
(JPW-1) THROUGH (JPW-5)
<PAGE>
COMPARISON S&P UTILITY RATING BENCHMARKS PUBLISHED IN JUNE 1999
WITH PRIOR BENCHMARKS
Wisconsin Electric Power Company - Standard & Poor Business Position 4
Prior S&P Revised S&P
Benchmark Benchmark
For AA Rated For AA Utility
Electric With Business
Utility* Position 4
------------ --------------
FFO / Total Debt 26% 36.5% to 30.5%
FFO Interest Coverage 4.00x 5.1x to 4.5x
Pretax Interest Coverage 3.50x 4.6x to 4.0x
Total Debt / Total Capital 47% 37.5% to 43.0%
- ---------------
* For Above Average Business Position.
FFO - Funds from Operations.
<PAGE>
Global
Utilities Standard & Poor's
Rating Utilities &
Service Perspectives
UTILITY FINANCIAL TARGETS ARE REVISED
Standard & Poors has revised the four principal financial targets that it
uses to analyze the credit quality of all investor-owned electric, natural gas,
and water utilities in the U.S. (See table on page 3).
Standard & Poor's has created a single set of financial targets that can be
applied across the different utility segments. These financial measures reflect
the convergence that is occurring throughout the utility industry and the
changing risk profile of the industry in general.
No rating changes will result from establishing these new financial targets
since they were developed in integrating prior utility financial benchmarks and
historical industrial medians. The new financial targets, like the previous
benchmarks, pertain to risk-adjusted ratios that distinguish between lower-risk
and higher-risk activities. The targets have been broadened to correspond with
Standard & Poors 10-point business profit assessments. The business profile
scores assess the qualitative attributes of a firm, with "1" being considered
lowest risk and "10" highest risk. Thus, the new targets allow for comparability
on a single scale between typically lower-risk activities, such as water
operations, gas distribution, and electric transmission, and higher-risk
activities, such as merchant power generation, oil and gas exploration and
production, and energy trading and marketing. For example, a water utility,
which can expect to have a lower business risk profile than a typical integrated
electric utility, will be required to meet less stringent financial targets for
any given rating category.
<PAGE>
Funds from operations to total debt, funds from operations interest
coverage, pretax interest coverage, and total debt to total capital re the four
credit-protection ratios that are an integral part of Standard & Poor's
quantitative review on the overall credit analysis of the utility sector.
Standard & Poor's recognizes that the nature of utilities' business strategies
is changing significantly and is shifting toward higher-risk endeavors. These
undertakings bear risk characteristics that are more representative of an
industrial company than a regulated utility. Therefore, Standard & Poor's also
incorporates a greater reliance on several additional ratios in its credit
analysis. These include, but are not limited to, pretax return on permanent
capital, funds from operations to current obligations, earnings before interest
and taxes to total assets, net cash flow to capital expenditures, and capital
expenditures to average total capital. Additionally, further analysis of the
cash flow coverage of all obligations (including preferred stock) is performed.
Although these measures do not have published targets, broader use of these
financial ratios combined with the four principal targets, provides greater
depth to the fundamental analysis used in the rating evaluation process.
Consistent with Standard & Poor's ratings methodology the four published
financial targets will be used with other quantitative measures, business risk
analysis, and comparative analysis of peer groupings to determine credit
ratings. The new targets are designed to assist utilities, utility affiliates,
and the investment community in assessing the relative financial strength of
issuers.
RONALD M. BARON
New York (1) 212-438-766_
JOHN W. WHITLOCK
New York (1) 212-438-766_
SCOTT A. BEICK
New York (1) 212-438-766_
<PAGE>
COVER STORY
REVISED UTILITY GROUP FINANCIAL TARGETS*
<TABLE>
<CAPTION>
FFO TO TOTAL DEBT
BUSINESS POSITION "AA" "A" "BBB" "BB" "B"
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 20.0 16.5 16.5 12.5 12.5 7.0 <7.0 - -
2 25.0 21.0 21.0 16.0 16.0 10.5 <10.5 - -
3 31.5 26.0 26.0 20.0 20.0 14.0 14.0 9.5 9.5 4.0
4 36.5 30.5 30.5 24.5 24.5 17.5 17.5 12.0 12.0 6.0
5 40.0 33.0 33.0 27.0 27.0 20.5 20.5 15.0 15.0 7.5
6 47.0 39.0 39.0 31.0 31.0 22.0 22.0 16.0 16.0 8.5
7 56.0 47.0 47.0 36.5 36.5 24.5 24.5 17.0 17.0 9.5
8 66.0 55.0 55.0 42.5 42.5 27.5 27.5 18.5 18.5 11.0
9 - - 64.5 49.5 49.5 32.0 32.0 22.0 22.0 12.5
10 - - 78.0 60.5 60.5 39.0 39.0 28.0 28.0 17.5
FFO INTEREST COVERAGE
BUSINESS POSITION "AA" "A" "BBB" "BB" "B"
1 3.1 2.5 2.5 1.9 1.9 0.9 <0.9 - -
2 3.9 3.3 3.3 2.5 2.5 1.5 <1.5 - -
3 4.5 3.9 3.9 3.1 3.1 2.1 2.1 1.3 1.3 3.5
4 5.1 4.5 4.5 3.8 3.8 2.7 2.7 1.8 1.8 0.9
5 5.4 4.8 4.8 4.0 4.0 3.0 3.0 2.1 2.1 1.1
6 6.6 5.7 5.7 4.5 4.5 3.1 3.1 2.2 2.2 1.2
7 8.4 7.0 7.0 5.1 5.1 3.3 3.3 2.3 2.3 1.3
8 10.2 8.3 8.3 5.9 5.9 3.5 3.5 2.4 2.4 1.5
9 - - 9.5 7.1 7.1 4.3 4.3 2.9 2.9 1.8
10 - - 11.3 8.6 8.6 5.3 5.3 3.6 3.6 2.3
PRETAX INTEREST COVERAGE
BUSINESS POSITION "AA" "A" "BBB" "BB" "B"
1 2.8 2.4 2.4
2 3.4 2.9 2.8
3 4.0 3.4 3.4
4 4.5 4.0 4.0
5 5.0 4.8 4.8 [Illegible Text in Original]
6 6.2 5.2 5.2
7 8.0 6.5 5.5
8 9.9 8.0 8.2
9 - 9.0
10 - 11.1
TOTAL DEBT TO TOTAL CAPITAL
BUSINESS POSITION "AA" "A" "BBB" "BB" "B"
1 50.5 55.0 55.0 60.5 60.5 67.5 >67.5 - -
2 46.5 51.0 51.0 56.5 56.5 63.5 >63.5 - -
3 42.0 47.5 47.5 53.0 51.0 61.0 61.0 67.0 67.0 74.0
4 37.5 43.0 43.0 49.5 49.5 57.0 57.0 54.0 54.0 72.5
5 36.0 41.5 41.5 47.0 47.0 55.0 55.0 52.5 52.5 71.0
6 32.5 39.5 39.5 46.0 46.0 53.5 53.5 50.5 50.5 59.0
7 30.5 37.5 37.5 45.0 45.0 52.5 52.5 59.5 59.5 58.0
8 28.0 35.0 35.0 43.0 41.0 51.5 51.5 58.0 58.0 56.0
9 - - 30.0 39.0 39.0 47.5 47.5 54.0 54.0 51.5
10 - - 24.0 33.0 33.0 40.5 40.5 46.0 46.0 53.0
</TABLE>
* As of June 1999 FFO - Funds from operations
<PAGE>
KEY CONTACTS
UTILITIES/PROJECT FINANCE/INFRASTRUCTURE
GENERAL CONTACTS
Curtis Moulton NEW YORK (1) 212-438-____
John Bilardello NEW YORK (1) 212-438-____
Cheryl Ric NEW YORK (1) 212-438-____
William Chew NEW YORK (1) 212-438-____
UNITED STATES
John Bilardello NEW YORK (1) 212-438-____
U.S. Investor-Owners Utilities
CANADA
Thomas Connell TORONTO (1) 416-202-5000
LATIN AMERICA
Jane Eddy NEW YORK (1) 212-438-799
EUROPE/MIDDLE EAST/AFRICA
Aidan O'Mahony LONDON (44) 171-825-____
ASIA/PACIFIC
Paul Coughin HONG KONG (852) 2533-350
Rick Shepherd MELBOURNE (611 3 963_____)
Dan Fukatomi TOKYO (8) 3-3593-8714
TELECOMMUNICATIONS
GENERAL CONTACT
Richard Siderman NEW YORK (1) 212-438-____
UNITED STATES
Richard Siderman NEW YORK (1) 212-438-____
CANADA
Thomas Connell TORONTO (1) 416-202-5000
LATIN AMERICA
Laura Feirland Katz NEW YORK (1) 212-438-____
EUROPE/MIDDLE EAST/AFRICA
Juan Jose Garcia LONDON (44) 171-825-____
ASIA/PACIFIC
Duncan Warwick-Champion MELBOURNE (611 3 963_____)
Dan Fukatomi TOKYO (8) 3-3593-8714
VISIT US AT
WWW.STANDARDANDPOORS.COM/RATINGS
FOR MORE U.S. UTILITY CREDIT INFORMATION,
OR AT WWW.RATINGSDIRECT.COM TO SUBSCRIBE
TO STANDARD & POOR'S ON-LINE RATING SERVICE
For fast answers to utility questions.
Please e-mail us at
[email protected]
<PAGE>
WISCONSIN ENERGY CORPORATION
JOURNAL ENTRIES TO RECORD THE WICOR MERGER*
(MILLIONS OF DOLLARS)
WEC CORPORATE DEBIT CREDIT
Investments
Investment in Subsidiary Companies
WICOR, Inc.
Common Stock & Equity in Undistributed Earnings $1,221 $ -
Miscellaneous Deferred Debits
Debt Issuance Expenses $ 5 $ -
Long-Term/Other Debt
Bridge Notes Payable and Capital Markets Financing $ - $ 722
Stockholders' Equity
Common Stock ($0.01 Par Value) & Other Paid-In
Capital $ - $ 504
JOURNAL ENTRIES EXPLANATION
To record the acquisition of WICOR and affiliates by WEC and related financing
for the transaction.
- ---------------
* Before accounting adjustments to reflect fair market value of assets and
liabilities acquired required under purchase accounting.
<PAGE>
WISCONSIN ENERGY CORPORATION AND WICOR, INC. MERGER
PRO FORMA FINANCIAL STATEMENTS AND NOTES THERETO
WEC CONSOLIDATED
Unaudited Pro Forma Combined Condensed Income Statement
For the Twelve Months ended June 30, 1999 Page 2
Unaudited Pro Forma Combined Condensed Balance Sheet
At 06/30/99 Page 3
Notes To Unaudited Pro Forma Condensed Financial Statements Page 4-5
<PAGE>
<TABLE>
<CAPTION>
WISCONSIN ENERGY CORPORATION
UNAUDITED PRO FORMA COMBINED CONDENSED INCOME STATEMENT
REFLECTING COMPLETION OF THE MERGER OF
WICOR, INC. WITH WISCONSIN ENERGY CORPORATION
Twelve Months Ended June 30, 1999
Wisconsin Pro Forma Pro Forma
Energy (a) WICOR Adjustments Combined
---------- ----- ----------- ---------
(Thousands of Dollars, Except per Share Amounts
<S> <C> <C> <C> <C>
Operating Revenue $ 2,143,905 $ 950,550 $ - $ 3,094,455
Operating Expenses
Fuel 319,221 - - 319,221
Purchased power 201,270 - - 201,270
Cost of gas sold 168,675 283,483 - 452,158
Cost of goods sold - 333,218 - 333,218
Other operation and maintenance 711,598 196,503 1,000 (c)
3,164 (b) 912,265
Depreciation and amortization 257,715 35,947 17,232 (d)
8,700 (e) 319,594
Property and revenue tax 68,692 8,435 (3,164)(b) 73,963
----------- ----------- ----------- -----------
Total Operating Expenses 1,727,171 857,586 26,932 2,611,689
----------- ----------- ----------- -----------
Pretax Operating Income 416,734 92,964 (26,932) 482,766
Other Income and Deductions 34,375 1,921 - 36,296
Interest Charges and Other 131,771 16,334 45,669 (f) 193,774
----------- ----------- ----------- -----------
Income Before Income Taxes 319,338 78,551 (72,601) 325,288
Provisions for Income Taxes 106,694 29,185 (21,040)(g) 114,839
----------- ----------- ----------- -----------
Net Income $ 212,644 $ 49,366 $ (51,561) $ 210,449
=========== =========== =========== ===========
Weighted Average Common Shares 115,799 20,348 (h) 136,147
Earnings Per Share (Basic and Diluted) $ 1.84 $ 1.55 (i)
See accompanying Notes to Unaudited Pro Forma Combined Condensed Financial Information.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
WISCONSIN ENERGY CORPORATION
UNAUDITED PRO FORMA COMBINED CONDENSED INCOME STATEMENT
REFLECTING COMPLETION OF THE MERGER OF
WICOR, INC. WITH WISCONSIN ENERGY CORPORATION
June 30, 1999
Wisconsin Pro Forma Pro Forma
Energy (a) WICOR Adjustments Combined
---------- ----- ----------- ---------
(Thousands of Dollars)
Assets
<S> <C> <C> <C> <C>
Property, Plant & Equipment $ 3,798,985 $ 445,976 $ 87,000 (j) $ 4,331,961
Other Property and Investments 864,800 - 7,737 (b) 872,537
Current Assets
Cash & cash equivalents 35,369 8,752 - 44,121
Accounts receivable-net, including accrued
utility revenues 305,882 162,480 - 468,362
Materials, supplies and inventory 209,852 102,915 12,700 (j)
6,798 (b) 332,265
Prepayments and other current assets 79,988 32,939 (6,798)(b) 106,129
----------- ----------- ----------- -----------
Total Current Assets 631,091 307,086 12,700 950,877
Deferred Charges and Other Assets
Goodwill - 83,024 689,297 (k) 772,321
Regulatory assets 208,384 56,082 - 264,466
Accumulated deferred income taxes 206,010 - 20,056 (b) 226,066
Other assets, including prepaid pension
costs 107,307 90,687 54,900 (l)
(7,737)(b) 245,157
Total Deferred Charges and Other ----------- ----------- ----------- -----------
Asssets 521,701 229,793 756,516 1,508,010
----------- ----------- -----------
Total Assets $ 5,816,577 $ 982,855 $ 863,953 $ 7,663,385
=========== =========== =========== ===========
Capitalization and Liabilities
Capitalization $ 1,951,907 $ 423,826 $ 80,135 (m) $ 2,455,868
Common stock equity 30,450 - - 30,450
Preferred stock
Long-term debt 1,979,368 204,524 722,062 (m) 2,905,954
Wisconsin Energy obligated redeemable
preferred securities of subsidiary
trust 200,000 - - 200,000
----------- ----------- -----------
Total Capitalization 4,161,725 628,350 802,197 5,592,272
Current Liabilities
Short-term debt, including long-term
debt due currently 403,842 19,209 - 423,051
Accounts payable 162,182 73,999 - 236,181
Accrued liabilities and other 152,522 92,451 20,500 (j) 265,473
----------- ----------- -----------
Total Current Liabilities 718,546 185,659 20,500 924,705
Deferred Credits and Other Liabilities
Accumulated deferred income taxes 582,080 49,347 68,900 (j)
20,056 (b) 720,383
Regulatory liabilities 142,478 29,553 - 172,031
Other, including postretirement
benefit obligation 211,748 89,946 (47,700)(j) 253,994
----------- ----------- ------------
Total Deferred Credits and Other
Liabilities 936,306 168,846 41,256 1,146,408
----------- ----------- -----------
Total Capitalization and Liabilities $ 5,816,577 $ 982,855 $ 863,953 $ 7,663,385
=========== =========== =========== ===========
See accompanying Notes to Unaudited Pro Forma Combined Condensed Financial Information.
</TABLE>
<PAGE>
WISCONSIN ENERGY CORPORATION
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
REFLECTING COMPLETION OF THE MERGER OF
WICOR, INC. WITH WISCONSIN ENERGY CORPORATION
(Thousands of Dollars)
The unaudited pro forma financial information gives effect to the acquisition by
Wisconsin Energy Corporation of WICOR, Inc. in a transaction to be accounted for
as a purchase.
Wisconsin Energy's Unaudited Pro Forma Combined Condensed Financial Information
assumes the WICOR acquisition occurred (1) as of July 1, 1998, for purposes of
the Unaudited Pro Forma Combined Condensed Income Statement and (2) on June 30,
1999 for purposes of the Unaudited Pro Forma Combined Condensed Balance Sheet.
The allocation of estimated cost savings from the merger, net of costs incurred
to achieve such estimated cost savings, will be subject to regulatory review and
approval. None of the estimated cost savings, the costs to achieve such savings,
nor transaction costs (other than estimated debt issue costs) are reflected in
the Unaudited Pro Forma Combined Condensed Income Statement information.
a. Due to recent acquisitions by Wisconsin Energy that have increased the size
of Wisconsin Energy's non-utility operations, Wisconsin Energy has modified
its income statement and balance sheet presentations. The primary
modification includes reclassifying the results of the non-utility
operations from Other Income and Deductions to the various lines within
operating income (i.e. Operating Revenues and Operating Expenses). This
modification does not change net income. The primary balance sheet
modification includes reclassifying the non-utility property, plant and
equipment and related accumulated provision for depreciation from
investments to inclusion with utility property, plant and equipment. This
modification does not change total assets.
b. Reclassification of amounts to conform WICOR's annual pension income will
increase by $1.5 million and will be offset by an additional $2.5 million
of annual postretirement benefit expense.
c. Based upon revised actuarial information, WICOR's annual pension income
will increase by $1.5 million and will be offset by an additional $2.5
million of annual postretirement benefit expense.
d. Amortization of good will over 40 years ($689.3 million/40 years = $17.2
million per year or $4.3 million per quarter).
e. Additional depreciation resulting from the increased fair value of
machinery, equipment and buildings acquired based on estimated useful lives
of 10 years ($87 million/10 years = $8.7 million per year or $2.2 million
per quarter).
f. Incremental interest expense based upon an assumed rate of 6.25% ($722.1
million x 6.25% = $45.1 million per year or $11.3 million per quarter). A
1/8 percent increase (or decrease) in the interest rate would increase (or
decrease) annual interest expense by approximately $0.9 million. Estimated
debt issue cost of $5.4 million will be amortized over ten years.
g. Reduction of income taxes relating to the foregoing adjustments.
h. Shares to be issued assuming the purchase price is paid with 40% stock,
including outstanding stock options. The closing price of Wisconsin
Energy's Common Stock on June 30, 1999 was $25-1/16.
i. Assuming the purchase price is paid with 100% cash or 60% stock and 40%
cash, pro forma earnings per share for the year ended December 31, 1998
would approximate $1.42 and $1.33 per share, respectively. Assuming the
purchase price is paid with 100% cash or 60% stock and 40% cash, pro forma
earnings per share would approximate $0.87 and $0.79 for the six months
ended June 30, 1999, respectively, and $0.64 and $0.61 per share,
respectively, for the six months ended June 30, 1998.
j. Adjustments to net assets of WICOR to reflect fair value, purchase
accounting adjustments and related tax effects.
<PAGE>
k. The excess of cost over fair value of net assets acquired resulting from
the preliminary purchase price allocation is assumed to be as follows:
Pro forma purchase price $1,220,623
Pro forma historical net book value of assets acquired 423,826
----------
Excess of purchase price over net book value of assets
acquired 796,797
Allocated to:
Inventories (12,700)
Property, plant and equipment (87,000)
Prepaid pension asset (49,500)
Deferred tax liabilities 68,900
Other current liabilities 20,500
Postretirement obligation (47,700)
----------
Remaining excess of cost over fair value of net
assets acquired (goodwill) $ 689,297
===========
The foregoing preliminary purchase price allocation is based on available
information and certain assumptions Wisconsin Energy considers reasonable.
The final purchase price allocation will be based upon a determination of
the fair value of the net assets acquired at the date or the acquisition.
The final purchase price allocation may differ from the preliminary
allocation.
l. Amount consists of an adjustment of $49.5 million to fair value WICOR's
prepaid pension asset and $5.4 million in estimated debt issue costs.
m. Purchase price is assumed to be financed with 40% stock and 60% debt.
<PAGE>
WISCONSIN ENERGY CORPORATION AND WICOR, INC.
ESTIMATED SYNERGIES
Details of WEC's preliminary synergy calculation provided below:
Thousands of Dollars WSG 1993 A WGCO 1998 A
- --------------------------------------------------------------------------------
Certain Expense Items
Cost of Purchased Gas For Resale $30,373 $252,181
Operation and Maintenance Expense 12,681 87,571
Straight Line Depreciation Expense 1,724 33,568
Other Taxes 901 9,038
Interest Expense 1,195 12,448
Total $46,874 $394,806
Projected Savings 2nd Year $ 4,130
% Projected Savings 8.8% 8.8%
WG Pro Forma Savings $34,743
Rounded Use $35 million
WSG - former Wisconsin Southern Gas Company, Incorporated - acquired by WEC in
pooling transaction effective January 1, 1994.
WGCO - Wisconsin Gas Company.
<PAGE>
WISCONSIN ENERGY CORPORATION AND WICOR, INC.
ESTIMATED WICOR GOOD WILL AND ANNUAL GOOD WILL AMORTIZATION
Details of WEC's preliminary WICOR purchase price, acquisition
premium/goodwill and annual acquisition premium/goodwill
amortization amount are provided below:
June 30, 1999
- -------------
WICOR Common Shares Outstanding 37,503,735
WICOR Options Outstanding 2,969,409
----------
40,473,144
WEC Offer Price $31.50
WEC Purchase Price $ 1,275 Million
Less: Proceeds from WICOR Options
(@$18,28 weighted average option price) $ (54) Million
----------------
$ 1,221 Million
WICOR Common Equity $ 424 Million
----------------
Estimated Acquisition Premium/Goodwill $ 797 Million*
Estimated Annual Acquisition Premium/Goodwill
Amortization based on 40 Year Amortization Period $ 20 Million*
- ---------------
* Before accounting adjustments required for purchase accounting to reflect
fair market valuation of assets and liabilities.
[MAP OF WEPCO ELECTRIC SERVICE AREA]
[MAP OF WEPCO GAS SERVICE AREA]
[MAP OF EDISON SAULT ELECTRIC SERVICE AREA]
[MAP OF WISCONSIN GAS SERVICE AREA]
WEC Corporate Organization Chart
Wisconsin Energy Corporation
|
|
|----------Wisconsin Electric Power Company
|
|
|----------ESELCO
| |
| |----------Edison Sault Electric Company
|
|----------Badger Service Company
|
|
|----------Minergy Corporation
|
|
|----------Northern Tree Service, Inc.
|
|
|----------WEC International Inc.
|
|
|----------Wisconsin Energy Capital Corporation
|
|
|----------WISPARK Corporation
|
|
|----------WISVEST Corporation
| |
| |----------Griffin Energy, LLC
| |
| |----------Wisvest Connecticut, LLC
|
|----------WITECH Corporation
|
|
|----------WEC Nuclear Corporation
|
|----------(interest)-----Nuclear Management Company, LLC
WICOR Corporate Organization Chart
WICOR, Inc.
|
|
|----------Wisconsin Gas Company
|
|
|----------WICOR Energy Services Company
|
|
|----------FieldTech, Inc.
|
|
|----------WICOR Industries, Inc.
| |
| |
| |----------Sta-Rite Industries, Inc.
| |
| |
| |----------SHURflo Pump Manufacturing Company
| |
| |
| |----------Hypro Corporation
| |
| |
| |----------WEXCO of Delaware, Inc.
| |
| |
| |----------WICOR FSC, Inc.
|
|----------(1/3 interest)-----Guardian Pipeline, LLC
Post-Transaction Corporate Organization Chart
Wisconsin Energy Corporation
|
|----------Wisconsin Electric Power Company
|
|----------Wisconsin Energy Capital Corporation
|
|----------Badger Service Company
|
|----------Minergy Corporation
|
|----------Northern Tree Service, Inc.
|
|----------WEC International Inc.
|
|----------ESELCO
| |
| |----------Edison Sault Electric Company
|
|----------WISPARK Corporation
|
|----------WISVEST Corporation
| |
| |----------Griffin Energy, LLC
| |
| |----------WISVEST Connecticut, LLC
|
|----------WITECH Corporation
|
|----------WEC Nuclear Corporation
| |
| |----------(interest)-----Nuclear Management Company, LLC
|
|----------WICOR, Inc.
|
|----------Wisconsin Gas Company
|
|----------WICOR Energy Services Company
|
|----------WICOR Industries, Inc.
| |
| |----------WEXCO of Delaware, Inc.
| |
| |----------WICOR FSC, Inc.
| |
| |----------Sta-Rite Industries, Inc.
| |
| |----------SHURflo Pump Manufacturing Company
| |
| |----------Hypro Corporation
|
|----------(1/3 interest)-----Guardian Pipeline, LLC
|
|----------FieldTech, Inc.
UNITED STATES OF AMERICA
before the
SECURITIES AND EXCHANGE COMMISSION
PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
Release No. / , 1999
- ------------------------------
)
In the Matter of )
)
Wisconsin Energy Corporation )
231 West Michigan Street )
PO Box 2949 )
Milwaukee, WI 53201 )
)
(70- ) )
)
- ------------------------------)
Wisconsin Energy Corporation ("WEC"), a Wisconsin corporation and an
exempt holding company pursuant to Section 3(a)(1) of the Public Utility Holding
Company Act (the "Act"), has filed an Application on Form U-1 for authorization
to acquire of all of the issued and outstanding stock of WICOR, Inc. ("WICOR"),
also a Wisconsin corporation and an exempt holding company pursuant to Section
3(a)(1) of the Act (the "Transaction"). WEC also requests an order from the
Commission that following the consummation of the Transaction, WEC, and each of
its subsidiary companies, will be exempt from all provisions of the Act, other
than Section 9(a)(2), pursuant to Section 3(a)(1) of the Act.
As a result of the Transaction, WICOR will become a wholly-owned
subsidiary of WEC, and WICOR's subsidiaries will be indirect subsidiaries of
WEC. The means of accomplishing such a result will depend on whether the entire
merger consideration is paid in cash or in a combination of cash and WEC stock.
If the former, CEW Acquisition, Inc. ("CEW Acquisition"), a wholly-owned
subsidiary of WEC, will be merged with and into WICOR, with WICOR surviving as a
wholly-owned subsidiary of WEC. If the latter, WICOR will be merged with and
into CEW Acquisition, with CEW Acquisition remaining a wholly-owned subsidiary
of WEC. The name of CEW Acquisition then would be changed to WICOR.
<PAGE>
WEC owns all of the common stock of two public utility companies:
Wisconsin Electric Power Company ("WEPCO"), a combination electric and gas
utility company, and Edison Sault Electric Company ("Edison Sault"), an electric
utility company. WEPCO generates, transmits, distributes, and sells electric
energy in southeastern, east central, and northern Wisconsin, and in the Upper
Peninsula of Michigan. WEPCO also purchases, distributes and sells natural gas
to retail customers and transports customer-owned gas in four distinct service
areas in Wisconsin. Edison Sault provides retail electric service in certain
territories in the Upper Peninsula of Michigan. WICOR owns all of the common
stock of one public utility company: Wisconsin Gas Company ("Wisconsin Gas"), a
gas utility company. Wisconsin Gas provides retail service in certain areas
throughout southern, central and western Wisconsin.
The merger of WICOR with and into WEC will be governed by the terms of
an Agreement and Plan of Merger dated as of June 27, 1999, and amended as of
September 9, 1999 (the "Merger Agreement"), by and among WEC, WICOR, and CEW
Acquisition. As a result of the Transaction, each outstanding share of common
stock of WICOR will be converted into the right to receive $31.50 (subject to
adjustment as described in the Merger Agreement), which amount shall be paid by
WEC in the form of cash, WEC common stock, or a combination of cash and WEC
common stock.
WEC seeks an order from the Commission that WEC's acquisition of WICOR
satisfies the requirements of Sections 9(a)(2) and 10 of the Act. Pursuant to
the Transaction, WEC, indirectly through its acquisition of WICOR, will acquire
the securities of Wisconsin Gas, a public utility company. Therefore, following
the Transaction, WEC, already an affiliate of WEPCO and Edison Sault, will be an
affiliate of Wisconsin Gas. Accordingly, the Transaction requires the
Commission's approval under Section 9(a)(2) of the Act, subject to the standards
of Section 10 of the Act. WEC believes that the Transaction satisfies the
standards of Section 10 and, therefore, requests a Commission order approving
the Transaction.
Following the Transaction, WEC and each of its subsidiary companies
from which it derives a material part of its income will be organized under the
laws of Wisconsin and will carry on their utility business substantially within
Wisconsin. Accordingly, WEC also requests an order from the Commission granting
WEC an exemption pursuant to Section 3(a)(1) of the Act.
The Application and any amendments thereto are available for public
inspection through the Commission's Office of Public Reference. Interested
persons wishing to comment or request a hearing should submit their views in
writing by _______, 1999, to the Secretary, Securities and Exchange Commission,
<PAGE>
Washington, D.C. 20549, and serve a copy on WEC at the address specified above.
Proof of service (by affidavit or, in case of an attorney at law, by
certificate) should be filed with the request. Any request for hearing shall
identify specifically the issues of fact or law that are disputed. A person who
so requests will be notified of any hearing, if ordered, and will receive a copy
of any notice or order issued in the matter. After said date, the Application,
as filed or as amended, may be granted and/or permitted to become effective.
For the Commission, by the Division of Investment Management, pursuant
to delegated authority.
Jonathan G. Katz
Secretary
[Wisconsin Electric Power Company Letterhead]
August 18, 1999
Mr. Randy Pilo
Public Service Commission of Wisconsin
610 North Whitney Way
Madison, WI 53707-7854
Dear Mr. Pilo:
RE: WEC/WICOR MERGER
DOCKETS 9401-YO-100/9402-YO-101
Enclosed are Wisconsin Electric's responses to your data request Items A5, A6
and A7. Filed under separate Confidentiality Request is the list of steam
customers requested in Item A5.
Please call me at 414-221-2285 if you have any questions.
Sincerely,
/s/ Roman A. Draba
- -----------------------------------
Roman A. Draba
Manager, State Regulatory Affairs
Enclosure
<PAGE>
CUB Data Request
WEC/WICOR Merger
September 29, 1999
Item 1-CUB-28: At page 15 of the Application, WEC states: "In this case, WEC
believes the proposed Transaction raises no significant issues regarding either
horizontal or vertical market power in any appropriately defined market."
(a) What is the basis for WEC's belief that the proposed transaction
raises no significant issues regarding either horizontal or vertical
market power in any appropriately defined market?
(b) What are the appropriately defined markets for electricity and
natural gas?
(c) How has the market concentration study been performed in order to
assess the effect of this acquisition or competition?
(d) If the answer to 1-CUB-28 (a) is yes, please provide the market
concentration study.
(e) If the answer to 1-CUB-28 (a) is no, please explain how the PSCW
could find that this acquisition would not have an adverse effect on
competition?
Response:
Submitted by:
<PAGE>
CUB Data Request
WEC/WICOR Merger
September 29, 1999
Item 1-CUB-28: At page 15 of the Application, WEC states: "In this case, WEC
believes the proposed Transaction raises no significant issues regarding either
horizontal or vertical market power in any appropriately defined market."
(a) What is the basis for WEC's belief that the proposed transaction
raises no significant issues regarding either horizontal or vertical
market power in any appropriately defined market?
(b) What are the appropriately defined markets for electricity and
natural gas?
(c) How has the market concentration study been performed in order to
assess the effect of this acquisition or co mpetition?
(d) If the answer to 1-CUB-28 (a) is yes, please provide the market
concentration study.
(e) If the answer to 1-CUB-28 (a) is no, please explain how the PSCW
could find that this acquisition would not have an adverse effect on
competition?
Response:
(a) and (b). The appropriately defined markets for electricity and gas in this
transaction are: (1) retail electricity; (2) retail gas; (3) for certain
customers, retail gas and steam; and (4) wholesale electricity. The proposed
transaction raises no significant market power issues for the following reasons.
WICOR does not participate in the market for retail electricity. As a
result, the combination of WEC with WICOR will have no impact whatsoever on
concentration in that product market. Similarly, while WICOR's subsidiary
Wisconsin Gas and the gas operations of WEC's Wisconsin Electric subsidiary do
participate in the retail natural gas product market, the geographic markets
they serve are distinct. Absent any overlap of geographic markets, a combination
of the two companies will have no impact whatsoever on concentration in any
geographic market for retail gas.
<PAGE>
If the retail product market were defined more broadly to include both
retail gas and retail electricity, then the combination of WICOR and WEC would
lead to an increase in concentration in the geographic market in which WICOR's
retail gas service overlaps with WEC's retail electric service. However, WEC
believes that such an expansive definition of the product market would be
erroneous.
Products, such as retail gas and retail electricity, should be
included within the same product market only if customers view them as close
enough substitutes that the availability of one product constrains the price of
the other. The weakness of gas-electric competition as a constraint on prices is
shown by the cross-elasticities of demand. Cross elasticities are used to
quantify the extent to which two products are substitutable by measuring the
extent to which demand for one product rises in responses to an increase in the
price of the other product. Econometric studies of the demand for gas and
electricity, most of which date from the 1970s and early 1980s, show cross-price
elasticities that typically are in the range of 0.1 to 0.2. Short run
elasticities tend to be even lower, reflecting the fact that switching fuels
requires replacement of long-lived energy using appliances and devices. Such
extremely low cross elasticities indicate that gas and electricity are very poor
substitutes for one another and thus should not be included in the same product
market for purposes of evaluating the effect of the transaction on
concentration.
<PAGE>
Underlying these extremely low cross-elasticities is the fact that one
or the other fuel dominates most major end uses. The bulk of electricity demand
is for end uses for which gas is not directly substitutable. Some end uses for
which gas once competed, such as refrigeration and cooling are no longer
economic. Gas, conversely, dominates space heating and certain process uses.
Survey data compiled by WE shows that in areas that have gas service, 85 percent
of homes are heated with gas and only 6 percent with electricity. Gas is even
more dominant in commercial and industrial buildings. A substantial part of the
electricity share of this market is due to special circumstances, such as the
need for separate metering of apartments and condominiums. The relative shares
of gas and electricity in home heating are relatively stable, showing no
material difference between new homes and older homes.
There is slightly more interfuel substitutability for some end uses,
such as water heating, cooking, and clothes drying. On balance, however, as the
cross-elasticities demonstrate, retail gas and retail electricity are not
sufficiently substitutable in end uses to be included in the same product market
for purposes of market power analysis.
The weak role of interfuel competition as a constraint on pricing is
demonstrated by two additional facts. First, the deregulation of gas and
electric distribution has not been considered seriously in Wisconsin or, to our
knowledge, anywhere else. If retail gas and retail electricity were sufficiently
substitutable that the price of one constrained the price of the other,
deregulated distribution would be a plausible policy option.
<PAGE>
Second, the continued existence of combination utilities belies any
claim that retail gas and retail electricity are substitutable to any
competitively meaningful extent. In those states where open retail access for
gas and electricity is occurring, combination utilities have not been required
to divest one or the other operation for the sake of stimulating competition. To
the contrary, regulators have recently approved a number of convergence mergers,
where electricity companies have bought gas operations, including LDC operations
whose territories have overlapped the acquirer's electric service territory.
For certain customers in certain uses, there may be sufficient
substitutability between retail gas and steam to define a distinct product
market that includes both gas and steam. However, WEC believes the proposed
transaction will have no significant competitive impact on that market for the
following reasons.
WE operates a steam system covering parts of the City of Milwaukee.
The system has slightly over 300 customers, and steam revenues are about $13
million annually, or less then 1% of WEC's total revenues. The dozen largest
steam customers account for half of revenues. WE added four relatively major
steam customers (i.e., among the 50 largest steam customers) in the past 3
years, WE Steam estimates that it makes about six offers of service per year.
Steam is sold at cost-of-service-based regulated tariff rates set by the PSCW,
and there are no discounts offered against these tariffs. Consequently,
competition from gas does not affect the prices offered or paid for steam
service.
<PAGE>
Wisconsin gas sometimes offers discounts to gas customers who have
been offered steam service. Currently, there are 8 customers and 23 customer
sites on the SD-1 steam displacement rate schedule. The total volume of gas sold
on this tariff is 18.3 million therms per year. This represents 2.5% of the
total WICOR sendout to commercial and industrial customers. One company accounts
for more than two-thirds of the service on this schedule and three companies
account for 95 percent. Steam displacement discounts offered by Wisconsin gas
are negotiated on a customer-by-customer basis and are confidential. Each
customer's rate must be approved by the PSCW. Seven customers who were offered
SD-1 rates in recent years opted to take steam service.
A merger between WEC and WICOR might reduce the level of gas discounts
offered under the steam displacement tariff. However, regulation by the PSCW
determines the overall level of revenues for WICOR. Even setting aside, for the
moment, rate regulation, the fact that steam displacement discounts are offered
on a customer-by-customer basis and are overtly discriminatory in terms of the
steam opportunities available to the customer means that steam versus gas
competition does not constrain the overall level of gas distribution prices. In
fact, to the extent that certain customers receive a steam displacement
discount, the mechanics of tariff determination reassign the costs not recovered
from those customers to the customers who don't receive discounts.
Both commercial motives and regulation constrain the level of gas
discounts under the steam displacement tariff. Discounts offered will be the
<PAGE>
lower of 1) the amount necessary to retain the customer and 2) the amount that
still causes the customer to make a net contribution to system fixed costs. The
rationale for discounting is that if a gas customer is lost to steam
competition, the infrastructure that could have supported serving the customer
remains in place but may be underutilized. However, even when steam is highly
economically attractive to the customer, WICOR would not usually offer a
discount resulting in a price that is less than its avoidable cost of serving
the customer. This discount policy, the operation of which is subject to review
by the PSCW, can serve the interests of WICOR and its other customers even
though those other customers' rates are higher than would be the case if the
steam displacement customers were retained at full rates.
However, this discount policy may not be fully in the public interest
because it determines the optimal level of discounts taking into account only
the effects on the gas system while ignoring the effects on the steam system.
The steam system is subject to the same kinds of economies of scale and density
as in the gas distribution system, though not necessarily to an identical
degree. As with gas, a customer who is on or near a steam line can be served at
an incremental cost that is well below the fully allocated cost that is used to
set regulated tariffs. While WE does not discount steam tariffs, there is
probably an economic argument for doing so on the same rationale that justifies
gas discounts.
For the reasons to be explained below, combined ownership of gas and
steam would probably result in less discounting than occurs under separate
<PAGE>
ownership. However, in these circumstances that result is not offensive to the
goals of antitrust policy. Antitrust policy seeks to protect competition in
order to ensure that consumers pay competitive prices. Just as the purpose of
antitrust policy is to protect the competitive process as a whole and not
individual competitors, its purpose is also to maximize the welfare of consumers
as a whole and not to protect a small sub-class of consumers who benefit at the
expense of all other consumers. Competitive prices are deemed to be both
equitable and economically efficient. Where, as in the case of gas and steam
distribution, both competitors are natural monopolies, the economically
efficient level of discounts from full cost pricing should take into account the
economies of both systems. Placing the pricing decision, subject to regulatory
constraint and oversight, in the hands of one company that takes the economics
of both the gas and steam systems into account permits a discount policy that is
a more efficient (and in that sense a more competitive) outcome than the owner
of the gas system alone would pursue.
The level of steam displacement discounts resulting from the merger is
likely to be economically efficient and thus in the best interest of all
customers, not just the narrow subset of customers who benefit from the existing
discount policy. Under combined ownership of the gas and steam systems, if a
customer switching to steam would cost the gas business a net contribution to
fixed costs and profits of X, but would make net contribution of Y to the steam
system, then the maximum discount that WEC would contemplate offering to prevent
the switch would be X - Y. If Y is a positive amount, the maximum discount that
would be contemplated would, indeed, be less than Wisconsin Gas would consider
<PAGE>
as an independent company. If Y is greater than X, WEC would offer no steam
displacement discount. The important point is that this discount policy would
minimize rates for the rest of the customers (inclusive of gas and steam).
Thus, even in the retail gas-steam market, where the two companies
currently compete, bringing gas and steam under one roof would lead to more
economically efficient pricing and therefore would be consistent with the goals
of antitrust policy.
The last relevant product market is the market for wholesale
electricity. Because WICOR does not participate in that market, the merger will
have no effect whatsoever on concentration. In addition, because WICOR does not
supply gas to any producer of wholesale electricity that competes with Wisconsin
Electric, the combined company could not acquire market power by restricting the
supply of gas and raising its rivals' costs.
(c) WEC does not believe that any formal market concentration study is needed to
assess the market power effects of the proposed transaction. As explained in
FERC's Merger Guidelines, it "will not be necessary for the merger applicants to
perform the [market] screen analysis in cases where the merging firms do not
have facilities or sell relevant products in common geographic markets. As
explained above, WEC and WICOR do not have facilities or sell relevant products
in common geographic markets.
(d) and (e). Not applicable .
Submitted by: Roman Draba
<PAGE>
PSCW Staff Data Request
WEC/WICOR Merger
July 12, 1999
Item A5: Please describe the full extent of any loss of natural gas vs. steam
competition. Moreover, please provide an appropriate anti-trust analysis of this
issue. Furthermore, please address the nature and mechanics of potential
remedies to those identified anti-trust concerns.
Finally, please provide a list of contracts for steam customers.
Response:
WE operates a steam system covering parts of the City of Milwaukee. The system
has slightly over 300 customers. The downtown Milwaukee steam system revenues
are about $13 million, or less than 1% of Wisconsin Energy's total revenues. The
dozen largest customers account for half of revenues. While most urban steam
systems in the US are stagnant or shrinking, the WE system actually is
expanding, albeit at a slow rate. The healthiness of the system is primarily due
to low rates; WE's system is principally coal based and its rates are among the
lowest in the country.
Steam is sold at cost of service-based regulated tariff rates set by the PSCW.
There are no discounts offered against these tariffs. Hence, competition from
gas does not affect the prices offered or paid for steam service.
WE added four relatively major steam customers (i.e. among the 50 largest steam
customers) in the past 3 years. WE Steam estimates that it makes about 6 offers
of service per year.
Wisconsin Gas sometimes offers discounts to customers who have been offered
steam service. Currently, there are 8 customers and 23 customer sites on the
SD-1 steam displacement rate schedule. Total volume of gas sold on this tariff
is 18.3 million therms per year. This represents 2.5 percent of total WICOR
sendout to commercial and industrial customers. One company accounts for more
than two-thirds of the service on this schedule and three companies account for
95 percent.
Steam displacement discounts offered by Wisconsin Gas are negotiated on a
customer-by-customer basis and are confidential. Each customer's rate must be
approved by the PSC. Seven customers who were offered SD-1 rates in recent years
opted to take steam service.
<PAGE>
Both companies sometimes provide energy efficiency advice and engineering
analyses to customers at little or no cost. Since this advice can improve the
customers' economics of using the energy source that the company is offering,
this service has some competitive impact.
To summarize, there is some competition between gas and steam. This is limited
to a portion of the Wisconsin Gas service area. Only 23 customer sites and 8
customer firms benefit from steam displacement gas tariffs. nearly all of the
benefit goes to three customers.
In considering the market power implications of the merger between Wisconsin Gas
and WEC, the threshold question is whether the competition that potentially is
eliminated is competitively significant. Clearly, competition from gas is
competitively significant to the WE steam system. However, this has no effect on
the price charged for steam, which is old solely at regulated tariff rates.
Regulation, not competition, is the constraint on steam system pricing. Steam
competition plays a minor competitive role on the pricing by Wisconsin Gas. As a
consequence of open access gas competition, which applies to all of the major
steam-competitive customers, the only service for which steam competition is a
potentially relevant constraint on pricing is gas distribution. For commodity
gas, gas-on-gas competition is a more direct and meaningful pricing constraint.
Regulation by the PSC determines tariff prices for gas distribution and
constrains the overall level of revenues of WICOR. Even setting aside, for the
moment, the fact of rate regulation, the fact that steam displacement discounts
are offered on a customer-by-customer basis and are overtly discriminatory in
terms of the steam opportunities available to the customer means that steam
versus gas competition does not constrain the overall level of gas distribution
tariffs. Indeed, to the extent that a customer receives a steam displacement
discount, the mechanics of tariff formation reassign the costs not recovered
from that customer to the undiscounted customers.
Both commercial motives and regulation constrain the level of gas discounts
under the steam displacement tariff. Discounts offered will be the lower of 1)
the amount necessary to retain the customer and 2) the level that still causes
the customer to make a net contribution to system fixed costs. The rationale for
discounting is that if a customer is lost to steam competition, the
infrastructure that could have supported serving the customer remains in place
but may be underutilized. However, even when steam is highly economically
attractive to the customer, WICOR would not usually offer a discount that is
- ---------------
1 This point is illustrated by considering what would happen if only tariff
service could be offered to customers who have steam opportunities. If steam
competition were sufficiently common and commercially important, then (in the
absence of overall rate of return regulation), WICOR might reduce its level of
tariffs generally in order to retain the competitively accessible customers.
However, since price discrimination is permitted, there is no constraining
effect on overall tariff levels.
<PAGE>
less than its avoidable cost of serving the customer. The discount policy, the
operation of which is subject to review by the PSC, can serve the interests of
WICOR and its customers even though other customers' rates are higher than would
be the case if the steam-competitive customers were retained at full rates.
However, this discount policy may not be fully in the public interest. It
determines the optimum level of discounts having considered only the effects on
the gas system. It ignores the effects on the steam system. The steam system is
subject to the same kinds of economies of scale and density as is gas
distribution, albeit not necessarily to an identical degree. As with gas, a
customer who is on or near a steam line can be served at an incremental cost
that is well below the average or full cost basis for setting regulated tariffs.
While WE does not discount steam tariffs, there likely is an economic case for
doing so on the same rationale that justifies gas discounts.
For the reasons explained below, there would be a tendency for somewhat lower
discounts under combined than under separate ownership. However, in these
circumstances, this result is not offensive to the goals of antitrust
regulation. Antitrust policy seeks to protect competition in order to ensure
that customers see competitive prices. Just as the purpose of antitrust
regulation is to protect the competitive process as a whole and not individual
competitors, its purpose also is to maximize the welfare of consumers as a whole
and not to protect a small sub-class of consumers who benefit at the expense of
all other consumers. Competitive prices are deemed to be both equitable and
economically efficient. Where, as in the case of gas and steam distribution,
both competitors are natural monopolies, the economically efficient level of
discounts from full cost pricing should take into account the economics of both
systems. Placing the pricing decision, subject to regulatory constraint and
oversight, in the hands of one company that takes the economics of both the gas
and steam systems into account permits a discount policy that is a more
efficient outcome than the owner of the gas system alone would pursue.
This brings us to the ultimate question; what level of discounts is in the
public interest and is the merger likely to reduce discounts below that level?
- ---------------
2 Hypothetically, a gas distribution company in competition with a steam
system might offer discounts to a large customer that result in that customer
not covering even the avoidable cost of service. This could arise if losing that
customer would result in a new steam system loop being built that also would
pass by, and be available to serve, additional customers. Such a super-discount
would be in the interest of the LDC and its customers, considered narrowly.
However, it likely would not be in the public interest, since the intended
effect is to deny a steam alternative to other customers.
3 A natural monopoly occurs when the incremental cost of additional service
is less than average cost even at volume levels that are the total volume in the
market. Gas and steam distribution are natural monopolies primarily because 1)
the cost of system extension is less than average cost, and 2) costs are reduced
if customers are not passed by (i.e. if there are not two sets of pipes running
down the street, each of which serves part of the market.) There is an entire
literature that is concerned with the question of how the difference between
full costs and incremental costs should be recovered for natural monopolies.
Here, we focus solely on the question of how the "externalities" of pricing of
one system impacts on the costs of the other and how taking those externalities
into account affects pricing.
<PAGE>
WEC's economic interests, and those of its gas and steam customers collectively
would be served best by a discounting policy that is economically efficient. If
a customer switching to steam would cost the gas business a net contribution to
fixed costs and profits of X, and the benefit of switching to steam is worth a
net contribution of Y to the steam system, then the maximum discount that WEC
would contemplate would be X-Y. If Y is a positive amount, the maximum discount
that would be contemplated would, indeed, be less than Wisconsin Gas would
consider as an independent company. If Y is greater than X, no discount would be
offered by WEC. This discount policy is the policy that minimizes rates for the
rest of its customers (inclusive of gas and steam).
Of course, a few customers who have been uniquely positioned to extract
discounts may see higher prices as a result of this rationalization of discount
policy. Off-setting this loss is the gain made by all other customers of both
the gas and steam system from a more economically efficient discount policy.
<PAGE>
PSCW Staff Data Request
WEC/WICOR MERGER
July 12, 1999
Item A6: Please describe the full extent of any loss of natural gas vs.
electricity competition. (One example could include air conditioning; there are
likely others.) Moreover, please provide an appropriate anti-trust analysis of
this issue. Furthermore, please address the nature and mechanics of potential
remedies to those identified anti-trust concerns.
Response:
There is a substantial overlap between the gas service area of WICOR and the
electric service area of WE. Approximately 370,000 customers who take gas
service from WICOR take electric service from WE.
Both gas and electric service are regulated by PSC. Regulation, not competition,
is the main constraint that assures that prices are just and reasonable. While
gas versus electric service might provide some theoretical limit to the prices
charged for either form of energy, that limit is likely to be well above the
levels allowed by tariffs.
The weakness of interfuel competition as a constraint on prices is shown by the
cross-electicities of demand. Econometric studies of the demand for gas and
electricity, most of which date from the 1970s and early 1980s, show cross-price
elasticities that typically are in the range of 0.1 and 0.2. Short run
elasticities tend to be even lower, reflecting the fact that switching fuels
requires replacement of long-lived energy using appliances and devices.
Underlying these low cross-elasticities is the fact that one or the other fuel
dominates most major end uses. The bulk of electricity demand is for end uses
for which gas is not directly substitutable. Some end uses for which gas once
competed, such as refrigeration and cooling are no longer economic. Gas
conversely dominates space heating and certain process uses. Survey data
compiled by WE shows that in areas that have gas service, 85 percent of homes
are heated with gas and only 6 percent with electricity. Gas is still more
dominant in commercial and industrial buildings. A substantial part of the
electricity share of this market is due to special circumstances, such as the
need for separate metering of apartments and condominiums. The relative shares
of gas and electricity in home heating are relatively stable, showing no
material difference between new and older homes.
<PAGE>
Other end uses show some greater degree of competition between fuels. Gas
dominates in water heating where the customer has a choice but the electric
share is not trivial; other competitive end uses include ranges and clothes
drying in the residential sector and a few industrial process uses. The staff
question asks specifically about air conditioning. There is no competing gas
technology in the residential sector. In the commercial sector, Wisconsin Gas
has not found it profitable to pursue this market since the low level of
electric tariffs makes gas units unattractive to customers.
While there is competition between gas and electricity for a few uses, this in
not the same as saying that there is competition between gas and electric
companies. The days when energy companies sold appliances in their own stores at
attractive prices are long gone. Aggressive marketing to use gas or to go "all
electric" died with the energy "crisis" of the 1970s. Today, the role of the gas
LDC and electricity company, including WE and Wisconsin Gas, is passive. No
tariff discounts are available to induce customers to use gas versus
electricity. The customer chooses what energy form it wishes to use and buys its
equipment accordingly. The past practice of discounting connection costs to the
developers of new subdivisions also has ended. Both Wisconsin Gas and WE extend
service according to regulated schedules on a basis that does not discriminate
according to the systems and appliances that the developer installs.
To summarize, the competitive overlap between WE and Wisconsin Gas in terms of
service areas is substantial, but the competitive overlap in end uses of energy
is meager. Regulation, not interfuel competition, determines customer prices;
interfuel competition is such a weak constraint that deregulation of gas and
electric distribution has not been considered seriously in Wisconsin or
elsewhere. The role of the energy utility companies in such interfuel
competition as does exist is virtually non-existent.
The weak role of competition between electricity and gas as a constraint on
delivered prices is also shown by the continued existence of combination
utilities. Most gas customers in Wisconsin are served by combination companies.
In those states where open retail access for electricity and gas is occurring,
utilities have not been required to divest their gas or electric operations. To
the contrary, there have been a number of recent convergence mergers, where
electricity companies have bought gas operations. To the contrary, there have
been a number of recent convergence mergers, where electricity companies have
bought gas operations, including gas LDC operations with overlapping
territories.
<PAGE>
PSCW Staff Data Request
WEC/WICOR Merger
July 12, 1999
Item A7: Please describe the full extent of any other loss of competition.
Moreover, please provide an appropriate anti-trust analysis of this issue.
Furthermore, please address the nature and mechanics of potential remedies to
those identified anti-trust concerns.
Response:
One additional area of potential loss of competition is head-to-head
(gas-to-gas) competition for new franchise areas.
Wisconsin Electric and Wisconsin Gas are not currently competing for gas
customers. The companies currently have before the PSCW two boundary agreements,
one for the Town of Freedom, and the other for the Town of Ellington, both in
Outagamie County. Both of the companies presently serve customers in these
towns, and the agreements have been entered into to avoid conflict and provide
service to customers who want gas service.
Wisconsin Electric and Wisconsin Gas do not expect any future head-to-head
competition for new service territories for several reasons. Both companies have
recently grown significantly into the economic open territories. This expansion
period is now complete. Several remaining open areas do not meet the companies'
economic criteria for expansion. For example, two open areas in the Fox Valley
were targeted for new service territories by WE Gas Ops, but the economics
turned out to be unfavorable and were cancelled. Despite being adjacent to
Wisconsin Gas territory, Wisconsin Gas did not file a competing application due
to similar unfavorable economics from their point of view.
There will not be an overlap in the two companies expansion sin the future for
several additional reasons. First, WE Gas Ops is landlocked (surrounded by other
companies) with two exceptions, the North Border region and the Prairie du Chien
region. In the North Border region, Wisconsin Gas is not nearby. In the Prairie
du Chien region, WE Gas Ops has considered but rejected expanding into the open
areas due to unfavorable economics.
<PAGE>
Although highly speculative, there is some possibility that the merged company
could expand into areas that neither company alone would find economic. For
example, where the service territories of the combined companies are separated
by an open area, a project linking the two systems and providing service to the
open area might become economic.
