-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Az2Tsfc3HnMekv5uc3ccCKNfsKVQFaHl1ejXDmoSfzou5u7fmesYSZ7XlgNvjDsI pXPaKNsHfO6fSu5KPhGoMQ== 0000314890-99-000003.txt : 19990325 0000314890-99-000003.hdr.sgml : 19990325 ACCESSION NUMBER: 0000314890-99-000003 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990323 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WICOR INC CENTRAL INDEX KEY: 0000314890 STANDARD INDUSTRIAL CLASSIFICATION: NATURAL GAS DISTRIBUTION [4924] IRS NUMBER: 391346701 STATE OF INCORPORATION: WI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-07951 FILM NUMBER: 99570568 BUSINESS ADDRESS: STREET 1: 626 E WISCONSIN AVE STREET 2: PO BOX 334 CITY: MILWAUKEE STATE: WI ZIP: 53202 BUSINESS PHONE: 4142917026 MAIL ADDRESS: STREET 1: 626 E WISCONSIN AVE CITY: MILWAUKEE STATE: WI ZIP: 53202 10-K405 1 1998 WICOR FORM 10-K FOR THE YEAR ENDED 12/31/98 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 1-7951 WICOR, Inc. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Wisconsin 39-1346701 ------------------------------- ------------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 626 East Wisconsin Avenue P. O. Box 334 Milwaukee, Wisconsin 53201 ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 414-291-7026 Securities registered pursuant to Section 12(b) of the Act: None Title of Each Class Name of Exchange on Which Registered - ------------------------------ ------------------------------------ Common Stock, $1 par value New York Stock Exchange Associated Common Stock Purchase Rights New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. /X/ Yes No. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] Aggregate market value of the voting stock held by non-affiliates of the registrant: $797,697,261 at March 1, 1999. Number of shares outstanding of each of the registrant's classes of common stock, as of March 1, 1999: Common Stock, $1 par value 37,435,794 shares ----- Documents Incorporated by Reference ----- WICOR, Inc. proxy statement dated March 15, 1999 (Part III) WICOR, Inc. 1998 Annual Report to Shareholders (Parts I and II 2 TABLE OF CONTENTS ----------------- PAGE ------ PART I. 1 Item 1. Business 1 (a) General Development of Business 1 (b) Financial Information about Industry Segments 1 (c) Forward-Looking Statements 1 (d) Narrative Description of Business 2 1. Energy 2 A. General 2 B. Gas Markets and Competition 2 C. Gas Supply, Pipeline Capacity and Storage 3 (1) Pipeline Capacity and Storage 3 (2) Term Gas Supply 4 (3) Secondary Market Transactions 4 (4) Spot Market Gas Supply 4 (5) Proposed New Pipeline 4 D. Wisconsin Regulatory Matters 5 (1) Rate Matters 5 (2) Gas Cost Recovery Mechanism 5 (3) Transition Cost Recovery Policy 5 (4) Changing Regulatory Environment 5 E. Employees 6 2. Manufacturing of Pumps, Fluid Processing and Filtration Equipment 6 A. General 6 B. U.S. Operations 6 C. International Operations 6 D. Raw Materials and Patents 7 E. Employees 7 Item 2. Properties 7 (a) Capital Expenditures 7 (b) Energy 7 (c) Manufacturing of Pumps, Fluid Processing and Filtration Equipment 7 Item 3. Legal Proceedings 7 (a) Energy Business 7 (b) Manufacturing Business 8 Item 4. Submission of Matters to a Vote of Security Holders 9 Executive Officers of the Registrant 9 PART II 10 Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 10 Item 6. Selected Financial Data 10 Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition 10 3 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 10 Item 8. Financial Statements and Supplementary Data 11 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 11 PART III. 11 Item 10. Directors and Executive Officers of the Registrant 11 Item 11. Executive Compensation 11 Item 12. Security Ownership of Certain Beneficial Owners and Management 11 Item 13. Certain Relationships and Related Transactions 11 PART IV 12 Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 12 (a) Documents Filed as Part of the Report 12 1. All Financial Statements and Financial Statement Schedules 12 2. Financial Statement Schedules 12 3. Exhibits 12 (b) Reports on Form 8-K 14 4 PART I ------ Item 1. BUSINESS - -------------------- (a) General Development of Business WICOR, Inc. (the "Company" or "WICOR") is a diversified holding company with two principal business groups: energy services and pump manufacturing. The Company has the following subsidiaries engaged in the indicated principal businesses. Wisconsin Gas Company ("Wisconsin Gas") engages in retail sales and distribution of natural gas and water. WICOR Energy Services Company ("WICOR Energy") engages in natural gas purchasing, and energy and price risk management. FieldTech, Inc. ("FieldTech") provides meter reading and technology services for gas, electric and water utilities. Sta-Rite Industries, Inc. ("Sta-Rite"), SHURflo Pump Manufacturing Co. ("SHURflo") and Hypro Corporation ("Hypro") are manufacturers of pumps and fluid processing and filtration equipment. WICOR Industries, Inc. ("WICOR Industries") is an intermediate holding company which holds the stock of the manufacturing subsidiaries. The Company is a Wisconsin corporation and maintains its principal executive offices in Milwaukee, Wisconsin. The Company was incorporated in 1980, when it acquired all the outstanding common stock of Wisconsin Gas through a merger. The Company acquired all of the outstanding common stock of Sta-Rite, SHURflo and Hypro through acquisitions in 1982, 1993, and 1995, respectively. In April, 1997, Nocchi Pompe S.p.A., an Italian subsidiary of Sta-Rite, purchased selected business assets and assumed certain liabilities of Majmar Pompe s.r.l., a pump manufacturer located in Milan, Italy. Majmar makes pumps for water circulation and pressure boosting applications. Majmar pumps are used primarily in residential and commercial heating systems, fire protection systems, high rise buildings and municipal water supply systems. In November, 1998, Sta-Rite increased its ownership interest in Nocchi Pompe, S.p.A. In June, 1997, FieldTech acquired selected business assets of Can-Am Utility Services Corporation, a privately held provider of contract meter reading, meter installation and other services for gas, electric and water utilities. In August, 1997, Sta-Rite purchased a line of swimming pool and spa lighting equipment made by Hydrel, a division of California-based GTY Industries. Sta-Rite also assumed certain liabilities of Hydrel. In September, 1997, the Company acquired the outstanding stock of Fibredyne, Inc. ("Fibredyne"). Fibredyne is a New Hampshire based manufacturer of specialty filter cartridges for purification of drinking water and industrial process fluids. Fibredyne operates as a subsidiary of Sta-Rite. In November, 1998, Sta-Rite entered into a joint venture arrangement with Hangzhou Pump General Factory, a Chinese pump manufacturer. Hangzhou manufactures pumps for agricultural, irrigation, sewage treatment, construction and mining operations. In November, 1998, Sta-rite increased its ownership interest in Nocchi Pompe S.p.A., an Italian subsidiary, to 97%. In November, 1998, Wisconsin Gas entered the water utility business by acquiring the water distribution system of a Milwaukee suburb serving about 500 customers. 5 On May 29, 1998, the Company effected a 2-for-1 split of its common stock. At December 31, 1998, the Company (including subsidiaries) had 3,524 employees. (b) Financial Information About Industry Segments Refer to the section entitled "Management's Discussion and Analysis" set forth in the Company's 1998 Annual Report to Shareholders. That section is included in Exhibit 13 hereto and is hereby incorporated herein by reference. (c) Forward-Looking Statements Certain matters discussed in this Annual Report are "forward-looking statements" intended to qualify for the safe harbors from liability established by the Private Securities Litigation Reform Act of 1995. These forward-looking statements can generally be identified as such because the context of the statements will include such words as the Company "believes," "anticipates" or "expects," or words of similar import. Similarly, statements that describe the Company's future plans, objectives or goals are also forward-looking statements. Such forward-looking statements are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated. These factors include but are not limited to the following risks and uncertainties: the impact of warmer- or colder-than-normal weather on the energy business; the impact of cool or wet weather on the pump manufacturing markets; general economic conditions, including the availability of individual discretionary income and changes in interest rates and foreign currency valuations; changes in natural gas prices and supply availability; increased competition in deregulated energy markets; the pace and extent of energy industry deregulation; regulatory, government and court decisions; increases in costs to clean up environmental contamination; the Company's ability to increase rates; market demand for the Company's products and services; and unanticipated expenses or outcomes associated with year 2000 date conversion. (d) Narrative Description of Business 1. ENERGY A. General Wisconsin Gas is the largest natural gas distribution public utility in Wisconsin. At December 31, 1998, Wisconsin Gas distributed gas to approximately 529,000 residential, commercial and industrial customers in 524 communities throughout Wisconsin. Wisconsin Gas' service area has a population of approximately 2,000,000 based on State of Wisconsin's estimates for 1998. Wisconsin Gas is subject to the jurisdiction of the Public Service Commission of Wisconsin ("PSCW") as to various phases of its operations, including rates, service and issuance of securities. WICOR Energy and FieldTech are in their third year of operations, and their results are not material to the Company's financial position or results of operations. 6 B. Gas Markets and Competition Wisconsin Gas' business is highly seasonal, particularly as to residential and commercial sales for space heating purposes, with a substantial portion of its gas deliveries occurring during the winter heating season. Competition in varying degrees exists between natural gas and other forms of energy available to consumers. Most of Wisconsin Gas' large commercial and industrial customers are dual-fuel customers that are equipped to switch between natural gas and alternate fuels. Wisconsin Gas offers lower-priced interruptible rates and transportation services for these customers to enable them to reduce their energy costs and use gas rather than other fuels. Under gas transportation agreements, customers purchase gas directly from gas marketers and arrange with pipelines and Wisconsin Gas to have the gas transported to the facilities where it is used. Wisconsin Gas also offers to sell gas at prices that are competitive with third-party sellers. Wisconsin Gas earns substantially the same margin (difference between revenue and cost of gas), whether it sells gas and transportation to customers or only transports third-party gas. The following table sets forth the volumes of natural gas delivered by Wisconsin Gas to its customers. The sales volumes represent quantities sold and delivered to customers by Wisconsin Gas. The volumes shown as transported represent third-party gas that was delivered by Wisconsin Gas to its customers.
Customer Class Year Ended ----------------------------------------------- December 31, 1998 December 31, 1997 --------------------- --------------------- Thousands Thousands Sales of Therms* Percent of Therms* Percent - --------------------- ---------- ------- ---------- ------- Residential 408,550 35.7 484,330 37.5 Commercial 193,000 16.8 219,220 17.0 Large Volume Commercial and Industrial Firm 47,620 4.2 87,240 6.8 Commercial and Industrial Interruptible 36,580 3.2 72,770 5.5 ---------- ------- ---------- ------ Total Sales 685,750 59.9 863,560 66.8 Transportation - -------------- Transported 460,170 40.1 428,830 33.2 ---------- ------- ---------- ------ Total Gas Throughput 1,145,920 100.0 1,292,390 100.0 ========== ======= ========== ======
*One therm equals 100,000 BTU's. Wisconsin Gas continues to secure approximately 98% of all new residential heating, 88% of existing residential and commercial retrofit and 70% of all new commercial construction customers in its service territory. In 1998, Wisconsin Gas added over 8,000 customers and has added more than 43,000 customers over the past five years. Approximately 25% of Wisconsin Gas' Milwaukee area annual market requirements can be supplied through the interstate pipelines of either ANR Pipeline Company ("ANR") or Northern Natural Gas Company ("NNG"). This capability enhances competition between ANR and NNG for services to Wisconsin Gas and its customers, and management believes that such competition provides overall lower gas costs to all customers than otherwise would exist. See "Gas Supply, Pipeline Capacity and Storage - Proposed New Pipeline" for further information on potential new pipeline competition. 7 Federal and state regulators continue to implement policies to bring more competition to the gas industry. The PSCW has instituted proceedings to consider how its regulation of gas distribution utilities should change to reflect the changing competitive environment in the gas industry. While the gas utility distribution function is expected to remain a heavily regulated, monopoly function, the sales of the natural gas commodity and related services, which were formerly utility monopoly functions, are expected to become increasingly subject to competition from third parties. However, it remains uncertain if and when Wisconsin Gas may face competition for selling gas to its smaller firm customers. Consequently, Wisconsin Gas is positioning itself to react quickly if and when regulation changes to permit customer choice. WICOR Energy sells gas on a for-profit basis and supplies gas to many large interruptible customers that formerly purchased gas from Wisconsin Gas. WICOR Energy is positioning to supply smaller firm customers if and when regulation changes to permit customer choice. FieldTech, among other things, provides meter reading and billing service to utilities. FieldTech is positioning to provide those services for customers if and when regulation changes to open those services to competition. With PSCW approval, Wisconsin Gas implemented a small-customer gas- supplier choice pilot program that is designed to test (1) market acceptance of third-party gas marketers, (2) third-party seller interest in selling gas in different market segments, and (3) Wisconsin Gas' capabilities to administer a distribution-only business. The pilot program, which began on November 1, 1996, has about 2,300 small commercial and residential participants. Wisconsin Gas expects to continue the pilot program, with certain modifications. Wisconsin Gas also has taken steps to enable its large firm commercial and industrial customers to transfer from sales and distribution to distribution- only service. As a consequence, the volume of gas sold by third parties and distributed by Wisconsin Gas has increased steadily since 1994 and now constitutes 40% of the gas distributed by Wisconsin Gas. See "Wisconsin Regulatory Matters". Wisconsin Gas' future ability to maintain its present share of the industrial dual-fuel market (the market that is equipped to use gas or other fuels) depends on the success of Wisconsin Gas and third-party gas marketers in obtaining long-term and short-term supplies of natural gas at marketable prices and their success in arranging or facilitating competitively-priced transportation service for those customers that desire to buy their own gas supplies. Although the dual-fuel market comprises more than 35% of Wisconsin Gas' annual deliveries, it contributes less than 10% of Wisconsin Gas' margin. C. Gas Supply, Pipeline Capacity and Storage Wisconsin Gas has been able to meet its contractual obligations with both its suppliers and its customers despite periods of severe cold and unseasonably warm weather. (1) Pipeline Capacity and Storage Interstate pipelines serving Wisconsin originate in three major gas producing areas of North America: the Oklahoma and Texas basins, the Gulf of Mexico and western Canada. Wisconsin Gas has contracted for long-term firm capacity on a relatively equal basis from each of these areas. This strategy reflects management's belief that overall supply security is enhanced by geographic diversification of Wisconsin Gas' supply portfolio and that Canada represents an important long-term source of reliable, competitively-priced gas. 8 Because of the daily and seasonal variations in gas usage in Wisconsin, Wisconsin Gas has also contracted with ANR and NNG for substantial underground storage capacity, primarily in Michigan. There are no known underground storage formations in Wisconsin capable of commercialization. Storage enables Wisconsin Gas to manage significant changes in daily demand and to optimize its overall gas supply and capacity costs. In summer, gas in excess of market demand is transported into the storage fields, and in winter, gas is withdrawn from storage and combined with gas purchased in or near the production areas ("flowing gas") to meet the increased winter market demand. As a result, Wisconsin Gas can contract for less long-line pipeline capacity than would otherwise be necessary, and it can purchase gas on a more uniform daily basis from suppliers year-round. Each of these capabilities enables Wisconsin Gas to reduce its overall costs. Wisconsin Gas also maintains high deliverability storage in the mid- continent and Southeast production areas, as well as in its market area. This storage capacity is designed to deliver gas when other supplies cannot be delivered during extremely cold weather in the producing areas, which can reduce long-line supply. Wisconsin Gas' firm winter daily transportation and storage capacity entitlements from pipelines under long-term contracts are set forth below. Maximum Daily (Thousands Pipeline of Therms*) ------------------------- -------------- ANR Mainline 2,848 Storage 4,826 NNG Mainline 1,040 Storage 236 Viking Mainline 105 Peaking Facilities 76 -------------- Total 9,131 ============== *One therm equals 100,000 BTU's. (2) Term Gas Supply Wisconsin Gas has contracts for firm supplies with terms in excess of 30 days with 18 gas suppliers for gas produced in each of the three producing areas discussed above. The term contracts have varying durations so that only a portion of Wisconsin Gas' gas supply expires in any year. Management believes the volume of gas under contract is sufficient to meet its forecasted firm peak day demand. The following table sets forth Wisconsin Gas' 1998-1999 winter maximum daily total firm gas deliverability. Maximum Daily (Thousands of Therms* ------------- Domestic flowing gas 1,949 Canadian flowing gas 1,628 Storage withdrawals 5,062 Peaker withdrawals 76 ------------- Total 8,715 ============= *One therm equals 100,000 BTU's. 9 (3) Secondary Market Transactions Capacity release is a mechanism by which pipeline long-line and storage capacity and gas supplies under contract can be resold in the secondary market. Local distribution companies, such as Wisconsin Gas, must contract for capacity and supply sufficient to meet the firm peak day demand of their customers. Peak or near peak demand days generally occur only a few times each year. Capacity release facilitates higher utilization of contracted capacity and supply during those times when the full contracted capacity and supply are not needed by the utility, helping to mitigate the fixed costs associated with maintaining peak levels of capacity and gas supply. Through pre-arranged agreements and day-to-day electronic bulletin board postings, interested parties can purchase this excess capacity and supply. The proceeds from these transactions are passed through to ratepayers, subject to the incentive gas cost mechanism pursuant to which Wisconsin Gas has an opportunity to share in the cost savings. See "Wisconsin Regulatory Matters - Gas Cost Recovery" for information on the incentive gas cost recovery mechanism. During 1998, Wisconsin Gas continued its active participation in the capacity release market. (4) Spot Market Gas Supply Wisconsin Gas expects to continue to make gas purchases in the 30-day spot market as price and other circumstances dictate. Wisconsin Gas has purchased spot market gas since 1985 and has supply relationships with a number of sellers from whom it purchases spot gas. (5) Proposed New Pipeline On March 10, 1999, the Company announced the formation of a joint venture to construct the Guardian interstate natural gas pipeline from the Chicago market hub near Joliet, Illinois to southeastern Wisconsin. Subsidiaries of CMS Energy, a Dearborn, Michigan based international energy company, and Northern States Power Company, a Minneapolis based diversified energy company, are the sponsors of the project with WICOR. The three partners will have equal ownership interests in the project. The Guardian Pipeline will consist of approximately 150 miles of 36-inch pipe and related compression equipment and will be designed to carry about 750,000 Dekatherms per day of gas. The total cost of the project, which requires FERC approval, is approximately $230 million. The pipeline is scheduled to be in service by November 1, 2002. Wisconsin Gas has committed to purchase 650,000 Dekatherms per day of capacity on the pipeline and will construct a 35-mile lateral at a cost of approximately $45 million to connect its distribution system to the Guardian Pipeline. The project, if approved by FERC and placed in service, is expected to increase the availability and reliability of gas transportation service in Northern Illinois and southeastern Wisconsin as well as introduce or increase competition among pipelines serving the area. D. Wisconsin Regulatory Matters (1) Rate Matters Wisconsin Gas is subject to the jurisdiction of the PSCW as to various phases of its operations, including rates, customer service and issuance of securities. 10 Wisconsin Gas' rates were made subject to a total margin rate cap (initially three years through October 1997) based on the rates in effect in November 1994. The PSCW approved two one-year extensions of the margin cap mechanism in 1996 and 1997. In 1998, the PSCW approved a two-year extension until November 1, 2001. The PSCW order also specifies margin rate floors for each rate class. Wisconsin Gas has the ability to raise or lower margin rates within the specified range on a quarterly basis. The rates at December 31, 1998, were $1.5 million below the cap because of annualized rate reductions beginning in 1995 of $9.0 million offset by an increase of $7.5 million in 1998. (2) Gas Cost Recovery Wisconsin Gas' rates traditionally contained clauses providing for periodic rate adjustments, with PSCW approval, to reflect changes in purchased gas costs, including the recovery of transition costs passed through by pipeline suppliers. See "Wisconsin Regulatory Matters - Transition Cost Recovery Policy". The PSCW approved a three-year incentive gas cost recovery mechanism for Wisconsin Gas effective November 1, 1997. Under the mechanism, monthly targeted gas supply costs, including pipeline capacity and storage costs, are set. At the end of each 12-months, Wisconsin Gas' actual gas supply costs are compared with the annual targeted costs. If Wisconsin Gas' actual costs are within 1.5% (either above or below) the target costs, Wisconsin Gas recovers its actual costs. If Wisconsin Gas' actual costs are between 1.5% and 4% below the target, Wisconsin Gas and its customers share the benefits equally. Similarly, if actual gas costs are between 1.5% and 4% above the target, Wisconsin Gas and its customers share the additional costs equally. If actual costs are outside the 4% band on either side of the target, the benefits and additional costs below or above 4%, as the case may be, accrue to or are borne by customers. For the year November 1, 1997 through October 31, 1998, Wisconsin Gas accrued $3.8 million of benefits under the mechanism. (3) Transition Cost Recovery Policy Interstate pipelines are permitted to recover certain costs incurred in the transition from the bundled sales service to the unbundled FERC Order No. 636 regime. ANR and NNG have made filings since at FERC 1992 to recover transition costs. Wisconsin Gas will bear a portion of any such additional costs approved by the FERC. The PSCW has permitted Wisconsin Gas to recover transition costs from customers through its rates. The Company expects that the impact of any future filings at FERC to recover additional transition costs will be immaterial to Wisconsin Gas' results of operations. (4) Changing Regulatory Environment The PSCW has instituted proceedings to consider how its regulation of gas distribution utilities should change to reflect the changing competitive environment in the gas industry. To date, the PSCW has made a policy decision that gas prices may be deregulated for customer segments with workably competitive market choices. The PSCW has identified numerous issues which must be resolved before its policy can be implemented. The PSCW has a number of work groups addressing these issues. Work group recommendations to the PSCW are due at various times in 1999. The Company is unable to determine what impact these proceedings may have on Wisconsin Gas' operations or financial position. See "Gas Markets and Competition". 11 E. Employees At December 31, 1998, the energy group had 1,143 full-time equivalent employees. 2. MANUFACTURING OF PUMPS AND FLUID PROCESSING AND FILTRATION EQUIPMENT A. General The Company's manufacturing subsidiaries manufacture pumps and fluid processing equipment, including filtration equipment for residential, agricultural and industrial markets world-wide. Manufacturing and assembly activities are conducted in plants in the United States, Australia, China, Germany, India, Italy, Mexico and New Zealand. B. U.S. Operations Water products include jet, centrifugal, sump, submersible and submersible turbine water pumps, water storage and pressure tanks, residential and in-line pool and spa filters, pool heaters and pump and tank systems. These products pump, filter and store water used for drinking, cooking, washing and livestock watering, and are used in private and public swimming pools, spas, "hot tubs", jetted bathtubs, and fountains. The manufacturing businesses also produce large higher pressure and capacity water pumps used in agricultural and turf irrigation systems and in a wide variety of commercial, industrial and municipal fluids-handling applications. High performance pumps, related fluids-handling products, accessories and pumping systems have applications in a variety of markets, including (1) the food service industry, where gas-operated pumps are used for pumping soft drinks made from syrups, and electric motor driven pumps are used for water boost and drink dispensing; (2) the recreational vehicle and marine markets, where electric motor driven pumps are used for multiple applications including pumping potable water in travel trailers, motor homes, camping trailers and boats, and for other purposes including marine engine cooling, marine washdown, bilge and livewell pumping; (3) agricultural markets, including spraying fertilizers and pesticides on crops; (4) industrial markets, where applications include carpet cleaning machines for soil extraction, firefighting and pressure cleaning applications and general industrial uses requiring fluid handling;, and (5) the water purification industry, where electric motor driven pumps are used to pressure reverse osmosis systems for water transfer. Sales of pumps and water processing equipment are somewhat related to the season of the year as well as the level of activity in the housing construction industry and are sensitive to weather, interest rates, discretionary income, and leisure and recreation spending. The markets for most water and industrial products are highly competitive, with price, service and product performance all being important competitive factors. The Company believes it is a leading producer of pumps for private water systems and swimming pools and spas, and for the food service, recreational vehicle, agricultural spraying, marine engine cooling, and foam proportioning systems for the firefighting markets. Management believes the Company also ranks among the larger producers of pool and spa filters and submersible turbine pumps. Major brand names under trademarks include "Sta-Rite", "Berkeley", "SHURflo", "Flotec", "AquaTools", "Hydro-Flow", "FoamPro", "Onga", "Hypro", "Sherwood", "SherTech", and "Nocchi". 12 Domestic pumps and water products are sold and serviced primarily through a network of independent distributors, dealers, retailers and manufacturers' representatives serving the well drilling, hardware, plumbing, filtration, pump installing, irrigation, pool and spa, food service, recreational vehicle, marine, industrial, commercial and do-it-yourself markets. Sales are also made on a private brand basis to large customers in various water products markets and to original equipment manufacturers. Backlog of orders for pumps and water products is not a significant indicator of future sales. C. International Operations International operations are conducted primarily by international subsidiaries and export operations from the United States. Products are sold to markets in approximately 100 countries on six continents. Foreign manufacturing is carried out by Australian, Chinese, German, Indian, Italian, Mexican and New Zealand operations. The products sold in the international markets in some cases are similar to those sold in the United States, but in many instances have distinct features required for those markets. Product distribution channels are similar to those for domestic markets. Non-domestic operating revenues, including exports, were 30% of 1998 manufacturing group sales. D. Raw Materials and Patents Raw materials essential to the manufacturing operations are available from various established sources in the United States and overseas. The principal raw materials needed for production of the Company's primary lines of products include cast iron, aluminum and bronze castings for pumps; copper wire, steel and aluminum for motors; stainless and carbon sheet steel, bar steel and tubing; plastic resins for injection molded components; and powdered metal components. The manufacturing units also purchase from third party suppliers completely assembled electric motors, plastic molded parts, elastomers for valves and diaphragms, components for electric motors, stamped and die-cast metal parts, and hardware and electrical components. Although the manufacturing subsidiaries own a number of patents and hold licenses for manufacturing rights under other patents, no one patent or group of patents is material to the success of the manufacturing businesses as a whole. E. Employees At December 31, 1998, the manufacturing group had 2,381 full time equivalent employees. Item 2. PROPERTIES - ------------------- (a) Capital Expenditures The Company's capital expenditures for the year ended December 31, 1998, totaled $49.3 million. Retirements during this period totaled $10.2 million. Except as discussed under "Legal Proceedings", the Company does not expect to make any material capital expenditures for environmental control facilities in 1999. 13 (b) Energy Wisconsin Gas owns a 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' distribution system consists almost entirely of plastic and coated steel pipe. Wisconsin Gas also owns its main office building in Milwaukee, office buildings in certain other communities in which it serves, gas regulating and metering stations, peaking facilities and its major service centers, including garage and warehouse facilities. Where distribution mains and services occupy private property, Wisconsin Gas in some, but not all, instances has obtained consents, permits or easements for such installations from the apparent owners or those in possession, generally without an examination of title. (c) Manufacturing of Pumps, Fluid Processing and Filtration Equipment The manufacturing group has 14 manufacturing/assembly facilities located in California (2), Minnesota, Nebraska, New Hampshire, Wisconsin, Australia, China, Germany, India, Italy (2), Mexico and New Zealand. These plants contain more than 1,200,000 square feet of floor space. The Company through its manufacturing business also owns or leases seven sales/distribution facilities in the United States, six in Australia, and one each in Canada, China, France, Italy, Kazakhstan, Mexico, New Zealand, Russia and the United Kingdom. Item 3. LEGAL PROCEEDINGS - -------------------------- There are no material legal proceedings pending, other than ordinary routine litigation incidental to the Company's businesses, to which the Company or any of its subsidiaries is a party, except as discussed below. There are no material legal proceedings to which any officer or director of the Company or any of its subsidiaries is a party or has a material interest adverse to the Company. There are no material administrative or judicial proceedings arising under environmental quality or civil rights statutes pending or known to be contemplated by governmental agencies to which the Company or any of its subsidiaries is or would be a party. (a) Energy Business Wisconsin Gas has identified two previously owned sites on which it operated manufactured gas plants. Such plants ceased operations prior to the mid-1950's. In 1997, Wisconsin Gas completed a comprehensive review of its potential environmental liabilities stemming from these two former manufactured gas plant sites. Significant technological developments, lower unit costs and the recognition of the "brown fields" concept by regulatory agencies have all resulted in a reduction in the estimate of the probable liability for cleanup to $7.9 million. Expenditures over the next three years are expected to total approximately $5 million. The cleanup estimate discussed above includes the costs of feasibility studies, data collection, soil and groundwater remediation activities and ongoing monitoring activities through 2017. Environmental remediation work for one of the sites was commenced in 1998 and will continue through 1999. Wisconsin Gas is evaluating potential remediation options at the second site. It is reasonably possible that, due to uncertainties associated with defining the nature and extent of environmental contamination, application of laws and regulations by regulatory authorities and changes in remediation technology, the ultimate cost of remediation could change in the future. The Company periodically reviews its accrued liabilities for such remediation costs as evidence becomes available indicating that its remediation liability has changed. 14 Due to anticipated regulatory treatment, changes in the Wisconsin Gas recorded cleanup liability for the manufactured gas plant sites do not immediately impact net income. Under the current ratemaking treatment approved by the PSCW, the costs expended in the environmental remediation of these sites, net of any insurance proceeds, are deferred and recovered from gas customers in rates (less carrying costs). On February 21, 1997, Wisconsin Gas was named by the defendant in an environmental cleanup lawsuit as a co-defendant. The suit involves contamination of a Milwaukee area industrial site by wood chips characteristic of those used in the manufactured gas process. Wisconsin Gas believes it is not the source of the contaminated wood chips and intends to vigorously defend the suit. Although the Company is unable to predict the outcome of the litigation, management currently believes that amounts recovered from its insurance carriers or through rate recovery will be sufficient to cover any liability imposed on Wisconsin Gas. Wisconsin Gas also owns a service center that is constructed on a site that was previously owned by the City of Milwaukee and was used by the City as a public dump site. Wisconsin Gas has conducted a site assessment at the request of the WDNR and has sent the report of its assessment to the WDNR. Management cannot predict whether or not the WDNR will require any remediation action, nor the extent or cost of any remediation actions that may be required. In the judgment of management, any remediation costs incurred by Wisconsin Gas will be recoverable from the City of Milwaukee or in Wisconsin Gas' rates pursuant to the PSCW's orders discussed above. (b) Manufacturing Business Sta-Rite has established an accrual for the continuing environmental remediation of its owned site in Delavan, Wisconsin and for the investigation and remediation of its formerly owned manufacturing site in Deerfield, Wisconsin. Based upon current information, the Company believes that any future costs in excess of the amounts accrued will not be material to the Company's financial position or results of operations. The State of Florida Department of Environmental Protection has accepted the remedial action plan proposed by Sta-Rite to address contaminated ground water associated with the operation of a previously leased manufacturing facility in Osprey Florida. The Company has established accruals for the remediation and for settlement of a property damage claim by a neighboring property owner, Based upon current information, the Company believes that the reserves are sufficient to cover future costs. The Michigan Department of Natural Resources informed Sta-Rite that it is a potentially responsibility party under the Comprehensive Environmental Response Compensation and Liability Act, "CERCLA", for damaged resources at Reliable Equipment, a company which purchased a plating product line from Sta- Rite in 1973. Sta-Rite denies it is responsible on the grounds that it did not generate waste like many of the other potentially responsible parties identified. Based upon current information, the Company believes its exposure, if any, will not be material to the Company's financial position or results of operations. 15 The manufacturing subsidiaries are involved in various other environmental matters, all of which are monitored by the Company. Based upon current information, the Company believes its exposure is not material to the Company's financial position or results of operations. See Note 8c to Notes to Consolidated Financial Statements contained in Exhibit 13, consisting of portions of the Company's 1998 Annual Report to Shareholders, which note is hereby incorporated herein by reference. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------------------------------------------------------------ No matters were submitted to a vote of security holders during the fourth quarter of 1998. EXECUTIVE OFFICERS OF THE REGISTRANT The following sets forth the names and ages of, and the offices held by, the executive officers of the Company. The officers serve one-year terms commencing with their election at the meeting of the Board of Directors following the annual meeting of shareholders in April. Name Age Offices Held - --------------------- ----- ----------------------------------------------- George E. Wardeberg 63 Chairman and Chief Executive Officer of the Company and its subsidiaries. Thomas F. Schrader 49 President and Chief Operating Officer of the Company and Vice Chairman of its subsidiaries. Joseph P. Wenzler 57 Senior Vice President and Chief Financial Officer of the Company, WICOR Industries, and Wisconsin Gas; Treasurer and Secretary of SHURflo and Hypro; and Vice President and Treasurer of WICOR Energy and FieldTech. James C. Donnelly 53 Vice-President of the Company and President and Chief Executive Officer of Sta-Rite. Bronson J. Haase 54 Vice President of the Company and President and Chief Executive Officer of Wisconsin Gas, WICOR Energy and FieldTech. James J. Monnat 43 Treasurer of the Company, Wisconsin Gas, WICOR Industries and Sta-Rite. Robert A. Nuernberg 59 Secretary of the Company, WICOR Energy Services and FieldTech; and Vice President- Corporate Relations and Secretary of Wisconsin Gas. Thomas M. Rettler 38 Vice President of the Company Each of the executive officers has held his position for more than five years, except as follows: Mr. Wardeberg was elected Chairman and Chief Executive Officer of the Company effective July 23, 1997. Prior thereto, he was President and Chief Executive Officer of the Company from 1994 to 1997, and held executive positions with the Company's subsidiaries from 1989 to 1994. He continues in his position as Chairman of the Company's subsidiaries. 16 Mr. Schrader was elected to his current positions in 1997. Prior thereto, he was Vice President of the Company from 1988 to 1997 and President and Chief Executive Officer of Wisconsin Gas from 1990 to 1997, WICOR Energy from 1995 to 1997 and FieldTech from 1996 to 1997. Mr. Wenzler was elected Senior Vice President and Chief Financial Officer of the Company and Wisconsin Gas Company on May 1, 1998. Prior thereto, he served as Vice President, Treasurer and Chief Financial Officer of the Company and Senior Vice President, Treasurer and Chief Financial Officer of Wisconsin Gas. He continues as Senior Vice President and Chief Financial Officer of WICOR Industries; Vice President and Treasurer of WICOR Energy and FieldTech; and Treasurer and Secretary of SHURflo and Hypro. Mr. Haase was elected Vice President of the Company and President and Chief Executive Officer of Wisconsin Gas, WICOR Energy and FieldTech on December 31, 1997. Prior thereto, he served as President and Chief Executive Officer of Ameritech Wisconsin for more than five years. Mr. Monnat was elected Treasurer of the Company on May 1, 1998. Previously, he was Assistant Treasurer of the Company. He continues as Treasurer of Wisconsin Gas, WICOR Industries and Sta-Rite. Mr. Rettler was elected Vice President of the Company on May 1, 1998. Previously he served as Director of Corporate Development from 1996 to 1998 and as Manager of Mergers and Acquisitions from 1993 to 1996. PART II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS - ------------------------------------------------------------------------------ The Company's common stock and the associated common stock purchase rights (which do not currently trade independently of the common stock) are traded on the New York Stock Exchange. For information regarding the high and low sales prices for the Company's common stock and dividends paid per share in each quarter of 1998 and 1997, see the section entitled "Investor Information" set forth in the Company's 1998 Annual Report to Shareholders. That section is included in Exhibit 13 hereto and is hereby incorporated herein by reference. At December 31, 1998, there were 21,373 holders of record of WICOR common stock. The Company's ability to pay dividends is dependent to a great extent on the ability of its subsidiaries to pay dividends. The Wisconsin Business Corporation Law and the indentures and agreements under which debt of the Company and its subsidiaries is outstanding each contain certain restrictions on the payment of dividends on common stock by the Company's subsidiaries. See Note 1j of Notes to Consolidated Financial Statements contained in Exhibit 13, consisting of portions of the Company's 1998 Annual Report to Shareholders, which note is hereby incorporated herein by reference. Item 6. SELECTED FINANCIAL DATA - -------------------------------- Refer to the section entitled "Selected Financial Data" set forth in the Company's 1998 Annual Report to Shareholders. Such section is included in Exhibit 13 hereto and is hereby incorporated herein by reference. 17 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION - ---------------------------------------------------------------- Refer to the section entitled "Management's Discussion and Analysis" set forth in the Company's 1998 Annual Report to Shareholders. Such section is included in Exhibit 13 hereto and is hereby incorporated herein by reference. Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - ------------------------------------------------------------------- The Company uses derivative financial instruments to manage commodity risk associated with the price of natural gas and to manage foreign exchange risks. The Company's policy prohibits the use of derivative financial instruments for trading purposes. Wisconsin Gas has a risk management program that has been approved by the PSCW. This program allows Wisconsin Gas to utilize call and put option contracts to reduce market risk associated with fluctuations in the price of natural gas purchases and gas in storage. Under this program, Wisconsin Gas has the ability to hedge up to 50% of its planned gas deliveries for the heating season. The PSCW has also allowed Wisconsin Gas to hedge gas purchased for storage during non-heating months. The cost of the call and put option contracts, as well as gains or losses realized under the contracts do not affect net income as they are recovered dollar for dollar under the purchased gas adjustment clause. As of December 31, 1998, Wisconsin Gas had options covering approximately 33% of the volumes of gas in storage, and call options covering 15% of the expected natural gas purchases for the remainder of the 1998-1999 heating season. WICOR Energy utilizes futures contracts to manage commodity price associated with firm customer sales commitments. Unrealized gains and losses on these instruments are deferred and recognized in earnings in the period the sales occur. As of December 31, 1998, WICOR Energy had natural gas futures contracts with a notational value of $6.6 million. Substantially all of the futures contracts expire in 1999. Certain manufacturing subsidiaries use foreign exchange futures and forward contracts to hedge foreign exchange exposure resulting from international purchases or sales of products. Gains and losses from open contracts are deferred until recognized as part of the transaction. These contracts are not material. During 1998 and 1997, WICOR entered into weather insurance agreements to hedge a portion of the impact weather has on Energy Group earnings. Under the agreements, a payment will be made or received if the heating degree days during the heating season fall outside a specific range. The payment is limited to a maximum of $2.0 million per year. At December 31, 1998, the fair value of the agreement entered into for the 1998-1999 heating season was not significant. During 1998, the Company recorded income of $1.2 million in connection with the agreement entered into for the 1997-1998 heating season. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ---------------------------------------------------- Refer to the Company's consolidated balance sheets and consolidated statements of capitalization as of December 31, 1998 and 1997, and the related consolidated statements of income, common equity and cash flows for each of the three years in the period ended December 31, 1998, together with the report of independent public accountants dated January 25, 1999, all appearing in Exhibit 13, consisting of portions of the Company's 1998 Annual Report to Shareholders, which is hereby incorporated herein by reference. Condensed parent company only financial statements together with the report of independent public accountants are included in Part IV of this report. 18 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE - ------------------------------------------------------------ There has been no change in or disagreement with the Company's independent public accountants on any matter of accounting principles or practices or financial statement disclosure required to be reported pursuant to this item. PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - ------------------------------------------------------------ Refer to "Item No. 1: Election of Directors" included in the WICOR proxy statement dated March 15, 1999, which is hereby incorporated herein by reference, for the names, ages, business experience and other information regarding directors and nominees for election as directors of the Company. See "Executive Officers of the Registrant" included in Part I hereof for information regarding executive officers of the Company. Item 11. EXECUTIVE COMPENSATION - ------------------------------------ Refer to "Executive Compensation" included in the WICOR proxy statement dated March 15, 1999, which is hereby incorporated herein by reference, for information on compensation of executive officers of the Company; provided, however, that the subsections entitled "Board Compensation Committee Report on Executive Compensation" and "Executive Compensation - Performance Information" shall not be deemed to be incorporated herein by reference. Refer to "The Board of Directors" included in the WICOR proxy statement dated March 15, 1999, which is hereby incorporated herein by reference, for information on compensation of directors of the Company. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - ---------------------------------------------------------------- Refer to "Security Ownership of Management" included in the WICOR proxy statement dated March 15, 1999, which is hereby incorporated herein by reference, for information regarding voting securities of the Company beneficially owned by its directors and officers. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - ------------------------------------------------------------ Refer to "Item No. 1: Election of Directors" included in the WICOR proxy statement dated March 15, 1999, which is hereby incorporated herein by reference, for the information required to be disclosed under this item. 19 PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K - ------------------------------------------------------------- (a) The following documents are filed as part of this Annual Report on Form 10-K: 1. All Financial Statements. The Company's consolidated balance sheets and statements of capitalization as of December 31, 1998 and 1997, and the related consolidated statements of income, common equity and cash flows for each of the three years in the period ended December 31, 1998, together with the report of independent public accountants dated January 25, 1999, included in Exhibit 13, consisting of portions of the Company's 1998 Annual Report to Shareholders, which is incorporated herein by reference. 2. Financial statement schedules. Schedule III -- Condensed Statements of Income, Retained Earnings and Cash Flows (Parent Company Only) for the Years Ended December 31, 1998, 1997 and 1996; Condensed Balance Sheets (Parent Company Only) as of December 31, 1998 and 1997; Notes to Parent Company Only Financial Statements. Financial statement schedules other than those referred to above have been omitted as not applicable or not required. 3. Exhibits 3.1 WICOR, Inc. Restated Articles of Incorporation, as amended (incorporated by reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q dated July 31, 1998. 3.2 WICOR, Inc. By-laws, as amended (incorporated by reference to Exhibit 3.3 to the Company's Form 10-K Annual Report for 1994). 4.1 Indenture, dated as of September 1, 1990, between Wisconsin Gas Company and Firstar Bank Milwaukee, N.A., Trustee (incorporated by reference to Exhibit 4.11 to Wisconsin Gas Company's Form S-3 Registration Statement No. 33- 36639). 4.2 Officers' Certificate, dated as of September 15, 1993, setting forth the terms of Wisconsin Gas Company's 6.60% Debentures due 2013 (incorporated by reference to Exhibit 4.1 to Wisconsin Gas Company's Form 8-K Current Report for September, 1993). 4.3 Officers' Certificate, dated as of November 7, 1995, setting forth the terms of Wisconsin Gas Company's 6-3/8% Notes due 2005(incorporated by reference to Exhibit 4 to Wisconsin Gas Company's Form 8-K Current Report dated November 7, 1995). 4.4 Officers certificate, dated as of January 21, 1999, setting forth the terms of Wisconsin Gas Company's 5.5% notes due 2009 (incorporated by reference to Exhibit 4 to Wisconsin Gas Company's Form 8-K Current Report dated January 15, 1999). 20 4.5 Revolving Credit Agreement, dated as of August 6, 1997, among WICOR, Inc. and Citibank, N.A., as Agent, Firstar Bank Milwaukee, N.A., Harris Trust and Savings Bank and M&I Marshall & Ilsley Bank (incorporated by reference to Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q dated October 31, 1997). 4.6 Revolving Credit Agreement, dated as of August 6, 1997, among Wisconsin Gas Company and Citibank, N.A., as Agent, Firstar Bank Milwaukee, N.A., Harris Trust and Savings Bank and M&I Marshall & Illsley Bank (incorporated by reference to Exhibit 4.2 the Company's Quarterly Report on Form 10-Q dated October 31, 1997). 4.7 Revolving Credit Agreement, dated as of August 6, 1997, among WICOR Industries, Inc. and Citibank, N.A., as Agent, Firstar Bank Milwaukee, N.A., Harris Trust and Savings Bank and M&I Marshall & Illsley Bank (incorporated by reference to Exhibit 4.3 to the Company's Quarterly Report on Form 10-Q dated October 31, 1997). 4.8 Rights Agreement, dated as of August 29, 1989, between WICOR, Inc. and Manufacturers Hanover Trust Company, Rights Agent (incorporated by reference to Exhibit 4 to the Company's Form 8-K Current Report for August, 1989). 4.9 Loan Agreement, dated as of March 29, 1996, by and among ABN AMRO Bank, N.V., Wisconsin Gas Company Employees' Savings Plans Trust and WICOR, Inc. (incorporated by reference to Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q dated April 26, 1996). 4.10 Guarantee, dated as of March 29, 1996, from WICOR, Inc. to and for the benefit of ABN AMRO Bank, N.V. (incorporated by reference to Exhibit 4.15 to the Company's Annual Report on Form 10-K for 1996). 4.11 First Amendment, dated as of November 27, 1996, to Loan Agreement, dated as of March 29, 1996, by and among WICOR, Inc. Master Savings Trust (formerly the Wisconsin Gas Company Employees' Savings Plans Trust), WICOR, Inc. and ABN AMRO Bank, N.V. (incorporated by reference to Exhibit 4.16 to the Company's Annual Report on Form 10-K for 1996). 4.12 Securities Loan Agreement, effective June 22, 1996, among Citibank, N.A. and Sta-Rite Industries, Inc. (incorporated by reference to Exhibit 4.2 to the Company's Quarterly Report on Form 10-Q dated July 30, 1996). 10.1 Service Agreement, dated as of June 1, 1994, among WICOR, Inc., Wisconsin Gas Company, Sta-Rite Industries, Inc., WEXCO of Delaware, Inc. and SHURflo Pump Manufacturing Co. (incorporated by reference Exhibit 10.1 to the Company's Annual Report on Form 10-K for 1995). 10.2 Endorsement of Hypro Corporation, dated as of July 19, 1995, to Service Agreement among WICOR, Inc., Wisconsin Gas Company, Sta-Rite Industries, Inc. and WEXCO of Delaware, Inc. (incorporated by reference to Exhibit 10.2 to the Company's Annual Report Form 10-K for 1995). 10.3#* WICOR, Inc. 1992 Director Stock Option Plan, as amended. 10.4# Form of nonstatutory stock option agreement used in connection with the WICOR, Inc. 1992 Director Stock Option Plan (incorporated by reference to Exhibit 4.2 to the Company's Form S-8 Registration Statement No. 33-67132). 21 10.5# WICOR, Inc. 1994 Long-Term Performance Plan (incorporated by reference to Exhibit 4.1 to the Company's Form S-8 Registration Statement No. 33-55755). 10.6# Form of nonstatutory stock option agreement used in connection with the WICOR, Inc. 1994 Long-Term Performance Plan (incorporated by reference to Exhibit 4.2 to the Company's Form S-8 Registration Statement No. 33-55755). 10.7# Form of restricted stock agreement used in connection with the WICOR, Inc. 1994 Long-Term Performance Plan (incorporated by reference to Exhibit 4.3 to the Company's Form S-8 Registration Statement No. 33-55755). 10.8# Form of Key Executive Employment and Severance Agreement between the Company and certain of its executive officers (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q dated July 31, 1997). 10.9#* WICOR, Inc. 1999 Officers' Incentive Compensation Plan. 10.10#* Wisconsin Gas Company Supplemental Retirement Income Program. 10.11#* Wisconsin Gas Company 1999 Officers' Incentive Compensation Plan. 10.12# Wisconsin Gas Company Group Travel Accident Plan (incorporated by reference to Exhibit 10.24 to the Company's Annual Report Form 10-K for 1992). 10.13# Form of Deferred Compensation Agreements between Wisconsin Gas Company and certain of its executive officers (incorporated by reference to Exhibit 10.30 to the Company's Form 10-K for 1990). 10.14#* Sta-Rite Industries, Inc. 1999 Officers' Incentive Compensation Plan. 10.15# Sta-Rite Industries, Inc. Group Travel Accident Plan (incorporated by reference to Exhibit 10.28 to the Company's Annual Report Form 10-K for 1992). 13* Portions of the WICOR, Inc. 1998 Annual Report to Shareholders. 21* Subsidiaries of WICOR, Inc. 23* Consent of independent public accountants. 27* Financial Data Schedule. (EDGAR version only) 99* WICOR, Inc. proxy statement dated March 15, 1999. (Except to the extent incorporated by reference, this proxy statement is not deemed "filed" with the Securities and Exchange Commission as part of this Form 10-K.) # Indicates a plan under which compensation is paid or payable to directors or executive officers of the Company. * Indicates a document filed herewith. (b) Reports on Form 8-K. No Current Report on Form 8-K was filed during the fourth quarter of 1998. 22 SIGNATURES ---------- Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. WICOR, Inc. Date: March 18, 1999 By /s/ JOSEPH P. WENZLER Joseph P. Wenzler Senior Vice President and Chief Financial Officer 23 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date - ----------------------- ------------------------------ --------------- GEORGE E. WARDEBERG George E. Wardeberg Chairman, Chief Executive March 18, 1999 Officer and Director (Principal Executive Officer) THOMAS F. SCHRADER Thomas F. Schrader President, Chief Operating March 18, 1999 Officer and Director JOSEPH P. WENZLER Joseph P. Wenzler Senior Vice President and March 18, 1999 Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) WENDELL F. BUECHE Wendell F. Bueche Director March 18, 1999 WILLIE D. DAVIS Willie D. Davis Director March 18, 1999 JERE D. MCGAFFEY Jere D. McGaffey Director March 18, 1999 DANIEL F. MCKEITHAN, JR. Daniel F. McKeithan, Jr. Director March 18, 1999 GUY A. OSBORN Guy A. Osborn Director March 18, 1999 STUART W. TISDALE Stuart W. Tisdale Director March 18, 1999 ESSIE M. WHITELAW Essie M. Whitelaw Director March 18, 1999 WILLIAM B. WINTER William B. Winter Director March 18, 1999 24 Schedule III - Condensed Parent Company Financial Statements WICOR REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors of WICOR, Inc. We have audited in accordance with generally accepted auditing standards, the consolidated financial statements of WICOR, Inc. included in Exhibit 13 to this Form 10-K, and have issued our report therein dated January 25, 1999. Our audit was made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. Supplemental Schedule III is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not a required part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic consolidated financial statements and, in our opinion, fairly states in all material respects, the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. ARTHUR ANDERSEN LLP Milwaukee, Wisconsin January 25, 1999. 25 Schedule III - Condensed Parent Company Financial Statements (continued) WICOR, INC. (Parent Company Only) Statement of Income
Year Ended December 31, ---------------------------------- 1998 1997 1996 (Thousands of Dollars) ---------- ---------- ---------- Income: Equity in income of subsidiaries after dividends $ 13,343 $ 19,048 $ 19,023 Cash dividends from subsidiaries 32,000 30,000 28,044 Interest income and other 1,862 747 722 ---------- ---------- ---------- 47,205 49,795 47,789 ---------- ---------- ---------- Expenses: Operating (Supplemental Note C) 1,769 96 868 Interest 26 36 62 ---------- ---------- ---------- 1,795 132 930 ---------- ---------- ---------- Income Before Income Taxes 45,410 49,663 46,859 Income Taxes (85) 140 88 ---------- ---------- ---------- Net Income $ 45,495 $ 49,523 $ 46,771 ========== ========== ==========
The accompanying notes are an integral part of these statements. 26 Schedule III - Condensed Parent Company Financial Statements (continued) WICOR, INC. (Parent Company Only) Balance Sheet
As of December 31, (Thousands of Dollars) ----------------------- Assets 1998 1997 - ------ ---------- ---------- Current Assets: Cash and cash equivalents $ 63 $ 207 Intercompany receivable, net (Supplemental Note B) 11,531 8,473 Other 22 123 ---------- ---------- 11,616 8,803 ---------- ---------- Investment in Subsidiaries, at equity 395,832 384,565 ---------- ---------- Deferred Income Taxes 142 151 Deferred Charges and Other 1,096 1,305 ---------- ---------- $ 408,686 $ 394,824 ========== ========== Liabilities and Capitalization - ------------------------------ Current Liabilities: Income taxes payable $ 877 32 Other 314 447 ---------- ---------- 1,191 479 ---------- ---------- Deferred Credits 1,248 1,118 ---------- ---------- Capitalization: ESOP loan guarantee (Supplemental Note D) 2,807 3,607 ---------- ---------- Common equity: Common stock, $1 par value, authorized 120,000,000 shares; outstanding 37,359,000 and 18,601,000 shares, respectively 37,359 18,601 Other paid-in-capital 216,821 232,702 Retained earnings 160,937 147,903 Accumulated other comprehensive income (7,905) (5,377) Unearned compensation (Supplemental Note D) (3,772) (4,209) ---------- ---------- Total common equity 403,440 389,620 ---------- ---------- $ 408,686 $ 394,824 ========== ==========
The accompanying notes are an integral part of these statements. 27 Schedule III - Condensed Parent Company Only Financial Statements (continued) WICOR, INC. Statement of Cash Flows Increase (Decrease) in Cash and Cash Equivalents
Year Ended December 31, (Thousands of Dollars) ---------------------------------- 1998 1997 1996 Operations - ---------- ---------- ---------- Net income $ 45,495 $ 49,523 $ 46,771 Adjustments to reconcile net income to net cash flows: Equity in (income) losses of subsidiaries (13,343) (19,048) (19,023) Change in deferred income taxes 9 35 6 Change in intercompany receivables (3,058) 3,539 1,742 Change in income taxes payable 845 (479) (4,509) Change in other current assets 101 (72) 25 Change in other current liabilities (133) (203) 489 Change in other non-current assets and Liabilities (477) (5,833) (719) ---------- ---------- ---------- 29,439 27,462 24,782 ---------- ---------- ---------- Investment Activities - Investments in subsidiaries - - (600) ---------- ---------- ---------- - - (600) ---------- ---------- ---------- Financing Activities - Issuance of common stock 2,878 2,684 3,345 Dividends paid on common stock (32,461) (31,397) (30,485) ---------- ---------- ---------- (29,583) (28,713) (27,140) ---------- ---------- ---------- Change in Cash and Cash Equivalents (144) (1,251) (2,958) Cash and Cash Equivalents at Beginning of Year 207 1,458 4,416 ---------- ---------- ---------- Cash and Cash Equivalents at End of Year $ 63 $ 207 $ 1,458 ========== ========== ========== Supplemental Disclosure of Cash Flow Information Cash paid (received) during the year for: Interest paid $ 68 $ 88 $ 52 Income taxes paid $ (1,025) $ (1,149) $ 202
The accompanying notes are an integral part of these statements. 28 Schedule III - Condensed Parent Company Financial Statements WICOR, INC. (Parent Company Only) Statement of Retained Earnings
Year Ended December 31, ---------------------------------- 1998 1997 1996 (Thousands of Dollars) ---------- ---------- ---------- Balance - Beginning of Year $ 147,903 $ 129,777 $ 113,491 Add: Net income 45,495 49,523 46,771 ---------- ---------- ---------- 193,398 179,300 160,262 Deduct: Cash dividends on common stock 32,461 31,397 30,485 ---------- ---------- ---------- Net Income $ 160,937 $ 147,903 $ 129,777 ========== ========== ==========
The accompanying notes are an integral part of these statements. 29 Schedule III - Condensed Parent Company Financial Statements (continued) WICOR, Inc. Notes to Parent Company Only Financial Statements - ------------------------------------------------- The following are supplemental notes to the WICOR, Inc. (Parent Company Only) financial statements and should be read in conjunction with the WICOR, Inc. Consolidated Financial Statements and Notes thereto included herein under Item 8: SUPPLEMENTAL NOTES ------------------ A. The parent company files a consolidated Federal income tax return with its subsidiaries. B. Net amounts due from subsidiaries result from intercompany transactions including advances less payments of expenses by subsidiaries on behalf of the parent company. C. During 1998, 1997 and 1996, the parent company allocated certain administrative and operating expenses to its subsidiaries using an allocation method approved by the Public Service Commission of Wisconsin: 1998 1997 1996 ------------ ------------ ------------ Administrative and operating ex- penses allocated to subsidiaries $ 3,073,597 $ 2,880,000 $ 2,579,000 ============ ============ ============ D. In November 1991, the parent established an Employee Stock Ownership Plan (ESOP) covering non-union employees of Wisconsin Gas Company. Because the parent company has guaranteed the loan, the unpaid balance is shown as a liability on the balance sheet with a like amount of unearned compensation recorded as a reduction of stockholders' equity. The ESOP trustee is repaying the $10 million loan with dividends paid on the shares of the parent company common stock in the ESOP and with Wisconsin Gas Company contributions to the ESOP 30 INDEX TO EXHIBITS ----------------- 3.1 WICOR, Inc. Restated Articles of Incorporation, as amended (incorporated by reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q dated July 31, 1998. 3.2 WICOR, Inc. By-laws, as amended (incorporated by reference to Exhibit 3.3 to the Company's Form 10-K Annual Report for 1994). 4.1 Indenture, dated as of September 1, 1990, between Wisconsin Gas Company and Firstar Bank Milwaukee, N.A., Trustee (incorporated by reference to Exhibit 4.11 to Wisconsin Gas Company's Form S-3 Registration Statement No. 33- 36639). 4.2 Officers' Certificate, dated as of September 15, 1993, setting forth the terms of Wisconsin Gas Company's 6.60% Debentures due 2013 (incorporated by reference to Exhibit 4.1 to Wisconsin Gas Company's Form 8-K Current Report for September, 1993). 4.3 Officers' Certificate, dated as of November 7, 1995, setting forth the terms of Wisconsin Gas Company's 6-3/8% Notes due 2005(incorporated by reference to Exhibit 4 to Wisconsin Gas Company's Form 8-K Current Report dated November 7, 1995). 4.4 Officers certificate, dated as of January 21, 1999, setting forth the terms of Wisconsin Gas Company's 5.5% notes due 2009 (incorporated by reference to Exhibit 4 to Wisconsin Gas Company's Form 8-K Current Report dated January 15, 1999). 4.5 Revolving Credit Agreement, dated as of August 6, 1997, among WICOR, Inc. and Citibank, N.A., as Agent, Firstar Bank Milwaukee, N.A., Harris Trust and Savings Bank and M&I Marshall & Ilsley Bank (incorporated by reference to Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q dated October 31, 1997). 4.6 Revolving Credit Agreement, dated as of August 6, 1997, among Wisconsin Gas Company and Citibank, N.A., as Agent, Firstar Bank Milwaukee, N.A., Harris Trust and Savings Bank and M&I Marshall & Illsley Bank (incorporated by reference to Exhibit 4.2 the Company's Quarterly Report on Form 10-Q dated October 31, 1997). 4.7 Revolving Credit Agreement, dated as of August 6, 1997, among WICOR Industries, Inc. and Citibank, N.A., as Agent, Firstar Bank Milwaukee, N.A., Harris Trust and Savings Bank and M&I Marshall & Illsley Bank (incorporated by reference to Exhibit 4.3 to the Company's Quarterly Report on Form 10-Q dated October 31, 1997). 4.8 Rights Agreement, dated as of August 29, 1989, between WICOR, Inc. and Manufacturers Hanover Trust Company, Rights Agent (incorporated by reference to Exhibit 4 to the Company's Form 8-K Current Report for August, 1989). 4.9 Loan Agreement, dated as of March 29, 1996, by and among ABN AMRO Bank, N.V., Wisconsin Gas Company Employees' Savings Plans Trust and WICOR, Inc. (incorporated by reference to Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q dated April 26, 1996). 31 4.10 Guarantee, dated as of March 29, 1996, from WICOR, Inc. to and for the benefit of ABN AMRO Bank, N.V. (incorporated by reference to Exhibit 4.15 to the Company's Annual Report on Form 10-K for 1996). 4.11 First Amendment, dated as of November 27, 1996, to Loan Agreement, dated as of March 29, 1996, by and among WICOR, Inc. Master Savings Trust (formerly the Wisconsin Gas Company Employees' Savings Plans Trust), WICOR, Inc. and ABN AMRO Bank, N.V. (incorporated by reference to Exhibit 4.16 to the Company's Annual Report on Form 10-K for 1996). 4.12 Securities Loan Agreement, effective June 22, 1996, among Citibank, N.A. and Sta-Rite Industries, Inc. (incorporated by reference to Exhibit 4.2 to the Company's Quarterly Report on Form 10-Q dated July 30, 1996). 10.1 Service Agreement, dated as of June 1, 1994, among WICOR, Inc., Wisconsin Gas Company, Sta-Rite Industries, Inc., WEXCO of Delaware, Inc. and SHURflo Pump Manufacturing Co. (incorporated by reference Exhibit 10.1 to the Company's Annual Report on Form 10-K for 1995). 10.2 Endorsement of Hypro Corporation, dated as of July 19, 1995, to Service Agreement among WICOR, Inc., Wisconsin Gas Company, Sta-Rite Industries, Inc. and WEXCO of Delaware, Inc. (incorporated by reference to Exhibit 10.2 to the Company's Annual Report Form 10-K for 1995). 10.3# WICOR, Inc. 1992 Director Stock Option Plan, as amended. 10.4# Form of nonstatutory stock option agreement used in connection with the WICOR, Inc. 1992 Director Stock Option Plan (incorporated by reference to Exhibit 4.2 to the Company's Form S-8 Registration Statement No. 33-67132). 10.5# WICOR, Inc. 1994 Long-Term Performance Plan (incorporated by reference to Exhibit 4.1 to the Company's Form S-8 Registration Statement No. 33-55755). 10.6# Form of nonstatutory stock option agreement used in connection with the WICOR, Inc. 1994 Long-Term Performance Plan (incorporated by reference to Exhibit 4.2 to the Company's Form S-8 Registration Statement No. 33-55755). 10.7# Form of restricted stock agreement used in connection with the WICOR, Inc. 1994 Long-Term Performance Plan (incorporated by reference to Exhibit 4.3 to the Company's Form S-8 Registration Statement No. 33-55755). 10.8# Form of Key Executive Employment and Severance Agreement between the Company and certain of its executive officers (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q dated July 31, 1997). 10.9# WICOR, Inc. 1999 Officers' Incentive Compensation Plan. 10.10# Wisconsin Gas Company Supplemental Retirement Income Program 10.11# Wisconsin Gas Company 1999 Officers' Incentive Compensation Plan. 32 10.12# Wisconsin Gas Company Group Travel Accident Plan (incorporated by reference to Exhibit 10.24 to the Company's Annual Report Form 10-K for 1992). 10.13# Form of Deferred Compensation Agreements between Wisconsin Gas Company and certain of its executive officers (incorporated by reference to Exhibit 10.30 to the Company's Form 10-K for 1990). 10.14# Sta-Rite Industries, Inc. 1999 Officers' Incentive Compensation Plan. 10.15# Sta-Rite Industries, Inc. Group Travel Accident Plan (incorporated by reference to Exhibit 10.28 to the Company's Annual Report Form 10-K for 1992). 13 Portions of the WICOR, Inc. 1998 Annual Report to Shareholders. 21 Subsidiaries of WICOR, Inc. 23 Consent of independent public accountants. 27 Financial Data Schedule. (EDGAR version only) 99 WICOR, Inc. proxy statement dated March 15, 1999. (Except to the extent incorporated by reference, this proxy statement is not deemed "filed" with the Securities and Exchange Commission as part of this Form 10-K.) EX-10 2 EXHIBIT 10.3 1 WICOR, Inc. 1992 DIRECTOR STOCK OPTION PLAN AS AMENDED DECEMBER 15, 1998 I. PURPOSE. The purpose of the WICOR, Inc. 1992 Director Stock Option Plan (the "Plan") is to promote the best interests of WICOR, Inc. (the "Company") and its shareholders by providing a means to attract and retain directors of exceptional competence who are not employees of the Company or any subsidiary or affiliate thereof ("Eligible Directors") and to provide opportunities for stock ownership by such Eligible Directors which will increase their proprietary interest in the Company and, consequently, their identification with the interests of the Company's shareholders. II. SECURITIES SUBJECT TO THE PLAN. Subject to adjustment as provided in Section XI hereof, an aggregate of 300,000 shares of the Company's common stock, $1 par value ("Common Stock"), may be issued to Eligible Directors upon the exercise of options granted under the Plan ("Options"). The shares of Common Stock deliverable upon the exercise of Options may be from authorized but unissued shares of the Company or shares reacquired by the Company and held as treasury shares; provided, however, that shares of Common Stock deliverable upon the exercise of Options bearing Grant Dates (as hereinafter defined) on or after December 31, 1998, shall be shares of Common Stock reacquired by the Company and held as treasury shares. In the event that an Option granted under the Plan expires, is cancelled or terminates unexercised as to any shares of Common Stock covered thereby, if shares of Common Stock are used to satisfy the Company's tax withholding obligations, or if shares of Common Stock are delivered to the Company as payment of the Purchase Price (as hereinafter defined) upon exercise, such shares shall thereafter be available for the granting of additional Options under the Plan. III. EFFECTIVE DATE: DURATION OF PLAN. The Plan shall become effective as of the date of its adoption by the Company's Board of DirectorsThe Plan shall terminate (a) when the total number of shares of Common Stock with respect to which Options may be granted have been issued, or (b) by action of the Board of Directors pursuant to Section XIV hereof, whichever shall first occur. IV. ADMINISTRATION. The Plan shall be administered by the Compensation Committee (the "Committee") of the Company's Board of Directors. Grants of Options under the Plan and the amount and nature of the awards to be granted shall be automatic as described in Section VI hereof. However, all questions regarding interpretation, administration and application of the Plan, any related agreements and instruments, and the value of shares of Common Stock subject to Options shall be subject to the good faith determination of the Committee, which determination shall be final and binding 2 VI. OPTIONS. (a) Grant of Options. Subject to adjustment as provided in Section XI, as long as this Plan is effective and has not been terminated, on the fourth Tuesday in February of each year, commencing February 23, 1993, each Eligible Director shall automatically receive an Option to purchase Four Thousand (4,000)shares of Common Stock. Any date on which an Eligible Director receives an Option shall be referred to as a "Grant Date". (b) Purchase Price. The purchase price at which shares of Common Stock may be purchased pursuant to Options granted under the Plan shall be equal to the mean of the high and low prices for shares of Common Stock as reported in consolidated trading for securities traded on the New York Stock Exchange (or in the principal market on which the Common Stock is traded, if other than on the New York Stock Exchange) on the Grant Date (or if no sales occurred on such date, the average of the high and low prices for shares of Common Stock as reported in consolidated trading for securities traded on the New York Stock Exchange or on such other principal market on the last preceding date on which sales of Common Stock occurred) (the "Purchase Price"). (c) Option Period. Subject to the following sentence, an Option granted under the Plan may be exercised at any time while the Eligible Director holding the Option remains a director of the Company and within two (2) years after an Eligible Director ceases to be a director of the Company. No Option granted under the Plan shall be exercisable after the expiration of ten (10) years from the Grant Date of such Option. (d) Exercise of Options. An Option shall be exercised in whole or in part only by delivery of written notice to the Company setting forth the number of shares with respect to which the Option is to be exercised and the address to which the certificates for such shares are to be mailed, together with cash or its equivalents (including checks, bank drafts or postal or express money orders payable to the order of the Company) and/or such other consideration (including previously acquired shares of Common Stock or shares of Common Stock issuable upon exercise of the Option) as may be approved by the Committee, in an amount equal to the aggregate Purchase Price of such shares. Any shares of Common Stock tendered by an Eligible Director in connection with the exercise of an Option shall be valued as of the date of exercise in accordance with Section VI(b) of the Plan. As soon as practicable after receipt of such written notification and payment, the Company shall deliver to the Eligible Director certificates for the number of the shares with respect to which such Option has been so exercised, issued in the Eligible Director's name. (e) Transferability of Options. Options shall not be transferable otherwise than by will or the laws of descent and distribution and shall be exercisable during the Eligible Director's lifetime only by such Eligible Director or by his or her guardian or legal representative. (f) Termination. Except as expressly provided herein, an Option shall terminate on the earlier of: (i) its expiration date as provided above; or (ii) two (2) years after the Eligible Director ceases to be a director of the Company. 3 VII. MANDATORY HOLDING PERIOD FOR COMMON STOCK. Shares of Common Stock delivered by the Company upon the exercise of an Option may not be sold by the Eligible Director or other holder thereof within the six- (6) month period following the Grant Date of such Option unless such a sale is consummated with the written consent of the Committee. The Company may place a legend which sets forth this six- (6) month transfer restriction on any certificate representing shares of Common Stock delivered upon the exercise of an Option within six (6) months of the Grant Date. VIII. REQUIREMENTS IMPOSED BY LAW. The Company is not required to sell or issue any shares of Common Stock under any Option if the issuance of such shares constitutes a violation by the Eligible Director or by the Company of any provisions of any law or regulation of any governmental authority or national securities exchange. Any such determination by the Committee shall be final, binding and conclusive. IX. NO RIGHTS AS SHAREHOLDERS WITH RESPECT TO OPTIONS. An Eligible Director shall not have rights as a shareholder with respect to shares of Common Stock covered by an Option except to the extent that an Option has been exercised, the Purchase Price paid and a stock certificate issued therefor. X. NO RIGHT TO CONTINUE AS A DIRECTOR. The granting of any Option shall not impose upon the Company or its shareholders any obligation to continue to retain an Eligible Director as a member of the Company's Board of Directors, and the right of the Company or its shareholders to remove an Eligible Director shall not be diminished or affected in any way by reason of the fact that an Option has been granted to such director. XI. ADJUSTMENT OF AND CHANGES IN COMMON STOCK. In the event of a reorganization, recapitalization, stock split, stock dividend, combination of shares, merger, consolidation, distribution of assets, or any other changes in the corporate structure or stock of the Company, the aggregate number and kinds of shares of Common Stock authorized by the Plan, the number and kind of shares covered by outstanding options granted under the Plan and the Purchase Price for each Option shall be automatically adjusted. XII. NON-STATUTORY OPTIONS. All Options granted under the Plan shall be non-statutory options not intended to qualify under Section 422A of the Internal Revenue Code of 1986, as amended. 4 XIII. WITHHOLDING. In the event the Company determines that it is required to withhold Federal or state income tax as a result of the exercise of any Option, it may require the Eligible Director to make arrangements satisfactory to the Company to enable it to satisfy such withholding requirements as a condition to the exercise of the Option. XIV. AMENDMENT, SUSPENSION OR TERMINATION OF THE PLAN. The Company's Board of Directors may, subject to applicable law and the shareholder approval requirements of the New York Stock Exchange, suspend, terminate, revise or amend the Plan in any respect whatsoever (including amending the Plan from time to time to cause it to continue to comply with the rules of the Securities and Exchange Commission under Section 16 of the Securities Exchange Act of 1934, as amended (the "Section 16 Rules")); provided, however, that no such suspension, termination, revision or amendment shall become effective if it would cause the Plan to cease to comply with the Section 16 Rules. Without limitation, the Board of Directors shall have the right from time to time to amend the first sentence of Section VI(a) of the Plan to provide that each of the Options to be automatically granted at the times specified in the Plan to the Eligible Directors shall cover such number of shares of Common Stock not less than Two Hundred (200) and not more than Four Thousand (4,000) shares as determined at the time of amendment of Section VI(a) by the Board of Directors. Notwithstanding the foregoing, the provisions of Sections V and VI of the Plan may not be amended more than once in any six (6)-month period other than to comply with changes in the Internal Revenue Code or the rules thereunder. XV. NOTICE. Any written notice to the Company required by any of the provisions of the Plan shall be addressed to the Secretary of the Company at the Company's principal executive office, and shall become effective upon receipt. XVI. FRACTIONAL SHARES. No fractional share of Common Stock shall be issued pursuant to the exercise of an Option, but in lieu thereof, the cash value of such fractional share shall be paid. XVII. SECTION 16 COMPLIANCE. Transactions under the Plan are intended to comply with all applicable conditions of Rule 16b-3 or its successors under the Securities Exchange Act of 1934, as amended. To the extent any provision of the Plan or action by the Committee or the Company's Board of Directors fail to so comply, it shall be deemed null and void, to the extent permitted by law and deemed advisable by the Committee or the Company's Board of Directors. EX-10 3 EXHIBIT 10.9 1 EXHIBIT 10-9 WICOR, Inc. 1999 Corporate Officer's Incentive Compensation Plan I. Objectives The principle objectives of the Plan are: A. To motivate and to provide incentive for officers of WICOR to create economic value. B. To ensure a focus on earning a return on capital in excess of the cost of capital while also making a positive contribution to earnings. C. To assist in the retention of quality senior management. D. To yield competitive total compensation levels when performance goals meet the cost of capital requirement. II. Eligibility Participation in the Plan is limited to designated WICOR corporate officers. The Chief Executive Officer will be responsible for recommending eligibility changes to the Compensation Committee of the Board of Directors of WICOR, Inc. III. Amount of Potential Award A. The minimum, target and maximum award opportunities for each executive, as a percentage of base salary (W-2 base salary calendar earnings), are as follows: Award as Percent of Salary ------------------------------------------ Position Minimum Target Maximum - ------------------ ------- ---------- ----------- Chairman & CEO 0% 60% 130.50% President & COO 0% 50% 108.75% Sr. V.P. & CFO 0% 45% 97.875% Treasurer 0% 30% 65.25% V.P Corporate Development and Planning 0% 30% 65.25% B. Each executive's award will be determined based on a combination of WICOR and individual performance, with WICOR performance accounting for 75% of the award and individual performance weighted at 25%. 2 IV. Performance Criteria and Objective Setting A. Financial Component (75% Weight) 1.) Overall WICOR performance will be measured by Return on Capital (ROC), which is defined as NOPAT (Net Operating Profit After Tax) divided by Total Capital Employed (NOPAT and Total Capital Employed are defined in Appendix I). Threshold, Target, and Maximum ROC performance levels, and their corresponding incentive awards are as follows: Performance Level 1999 Return on Capital Award as a % of Target ----------------- ---------------------- ---------------------- Below Threshold Less than 7.2% 0% Threshold 7.2% 1% Target 8.5% 100% Maximum or Above 11.1% 200% * WICOR Cost of Capital = 8.5% For performance at levels between Threshold and Target or between Target and Maximum, award calculations will be interpolated on a linear basis. 2.) ROC payout will be further modified by performance against EPS Growth (the modifier). As seen below, EPS growth performance can modify the award by +/- 20%. Award modification Performance Level 1999 EPS Growth as a % of Target - ------------------ ------------------ ------------------ Threshold < or = to 5% 80% Target 10% 100% Maximum > or = to 15% 120% For performance at levels between Threshold and Target or between Target and Maximum award calculations will be interpolated on a linear basis. B. Discretionary/Individual Component (25% Weight) The individual component of total incentive compensation will be determined by the WICOR Compensation Committee on recommendations from the CEO reflecting the individual's overall performance as measured against previously identified and agreed upon goals and objectives. The award may vary between 0% and 150% of the individual performance portion of the target award, and will be determined and paid independently of Corporate financial performance. 3 Combining the previously mentioned components yields the following formula for determining annual incentive payout: Step 1 [ Base Salary x Eligible Target % ] Multiplied by the sum of Step 2 and Step 3 Step 2 [(ROC Award % x EPS Growth Modifier %) x 75%] Plus Step 3 [Discretionary % x 25%] Equals Annual Incentive Award C. The company intends to hold the proposed financial/operational performance standards constant for at least three years, with annual reviews to ensure reasonableness vis-a-vis external market conditions. This is especially relevant with regard to the cost of capital, which is the key determinant of performance levels for the ROC measure. D. If the Compensation Committee of WICOR, Inc. determines that corporate performance was inadequate, it may exercise discretion to reduce or eliminate any or all bonus payments. V. Performance Company performance goals will be for the 1999 calendar year. VI. Treatment of Acquisitions and Investments A. Acquisitions The capitalized value (NOPAT/Target's Cost of Capital) of the acquired entity's last full year's NOPAT will be added to the capital base of the acquiring business unit in the month of acquisition. The acquisition premium (defined as the excess of the purchase price over the capitalized value ) will be incorporated into the capital base at a rate of 20% per year starting at the beginning of the first calendar year after the acquisition. B. Investments The entire value of investments of an operating nature (capital expenditures) will be added to the capital base. However, investments of a significant dollar amount, whose project life extends beyond ten years, will be reviewed by management for potential adjustments to the capital base (similar to the treatment for acquisitions). 4 VII. Form and Timing of Award Payments A. Awards will be determined and paid as soon as practicable after the close of the Plan year. B. At each participant's discretion and with the concurrence of the Compensation committee of WICOR, Inc., awards may be paid in one of three ways: 1. Lump sum. 2. Partly in lump sum and the remainder in deferred annual installments. 3. Completely in deferred annual installments. C. The Company will offer a deferred payment option to those officers who prefer not to receive their awards in current cash, following these guidelines: 1. Deferred incentive award payments will be carried as an accrued liability with an interest rate (three-year treasury bill rate) credited each year. 2. Deferred elections must be made prior to June 30, 1999, and a definite time period for deferral must be specified. D. Additionally, if performance significantly exceeds the maximum standard established, the Compensation Committee has the discretion to provide an incentive payout in excess of the maximum allowable payout. However, any exceptional performance which qualifies for this award, must be a direct result of management efforts and not due to external factors beyond management's control. Any awards in excess of the maximum payout opportunity would be paid in WICOR restricted stock which would vest ratably over five years. However, if a participant terminates employment due to death, retirement, or disability, any prior restricted stock awards made under this provision would become immediately vested. E. In the event the company's overall ROC is negatively impacted by the inclusion of a newly acquired company's results, the compensation committee has the discretion to make a supplemental incentive payment. The supplemental payment will be considered if the acquired company is meeting the financial projections established at the time of the acquisition and the officers of the acquiring entity would have otherwise received a higher incentive payment had it not been for the inclusion of the acquired entity's results. The purpose of this supplemental incentive provision is to motivate officers to invest in value building projects. The duration of the supplemental incentive period will be no more than three years. VIII. Implementation A. The effective date of the Plan is January 1, 1999. 5 IX. Plan Administration A. Compensation Committee 1. The Plan will be administered by the Compensation Committee of the Board of Directors of WICOR, Inc. 2. The Committee's administration is subject to approval of the Board of Directors of WICOR, Inc. 3. The decisions of the Board are final and binding on all Plan participants. 4. The Board retains the right to terminate or amend the Plan as it may deem advisable. B. Partial Year Participation 1. Participants must be employed by the Company on the last day of the Plan year in order to receive a bonus for that year. However, once earned, a bonus will be paid to a participant regardless of whether he/she is employed by the company on the date payment is made. 2. Awards for part year participants will be pro-rated based on the proportion of the year that the participant was in the Plan. This includes participants who terminate employment due to death, disability or retirement 3. Participants who terminate employment with the Company prior to the last day of the plan year shall forfeit all rights to an incentive award payment under the Plan except for terminations due to death, retirement or disability. 4. A participant is deemed to be disabled if he/she becomes eligible for benefits under the Company's Long Term Disability Plan. 6 Appendix I DEFINITIONS OF TERMS Corporate Consolidated NOPAT - Net operating profits after tax is calculated as follows: ! Sum of the individual Subsidiaries NOPAT, including Energy PCO, WICOR Industries PCO, WEXCO, Fieldtech, and WESCO. CAPITAL-Total capital employed is calculated as follows: ! Sum of the individual Subsidiaries Average Capital employed, including Energy PCO, WICOR Industries PCO, WEXCO, Fieldtech and WESCO. Measurement for all capital employed items is determined using 13 month rolling average. EX-10 4 EXHIBIT 10.10 1 EXHIBIT 10-10 WISCONSIN GAS COMPANY SUPPLEMENTAL RETIREMENT INCOME PROGRAM 1. Purpose of the Program The purpose of the Wisconsin Gas Company Supplemental Retirement Income Program (the "Program") is fivefold: (i) to reimburse each designated corporate officer of Wisconsin Gas Company (the "Company"), WICOR, Inc., and/or WICOR Energy Services Company (in the aggregate, the "Employer") for any reduction in his benefit payments under the Wisconsin Gas Company Pension Plan for Non-Union Employees (the "Pension Plan") which may be caused by the limitations imposed thereon by Internal Revenue Code Section 415 (the "415 Limit") or Internal Revenue Code Section 401(a)(17) (the "Compensation Limit") and/or by the exclusion from the definition of compensation under the Pension Plan of any earnings paid by Sta-Rite Industries, Inc. to its corporate officers, and any such earnings voluntarily deferred pursuant to a non- qualified deferred compensation arrangement (the "Sta-Rite Exclusion"), any amounts voluntarily deferred from Employer salary pursuant to a non-qualified deferred compensation arrangement (the "Deferred Compensation Exclusion") or any bonuses (provided that any bonus payments shall be pro-rated on a monthly basis over the calendar year for which the bonus payments are applicable) (the "Bonus Exclusion"); (ii) to reimburse a corporate officer of the Company for any reduction in his employer or employee contribution allocations under the Wisconsin Gas Company Employees' Savings Plan (the "Savings Plan") which may be caused by the 415 Limit, the Compensation Limit, and/or by the Deferred Compensation Exclusion; (iii) to provide retirement income for any designated corporate officer retiring on or after January 1, 1987 to replace the post- retirement life insurance benefit program which will not be available to anyone retiring after December 31, 1986; (iv) to provide incentive and reward to such officer through additional retirement income in recognition of his meritorious service and material contribution to the Employer's continued growth and development; and (v) to assist the Employer in retaining and attracting high caliber key executives upon whose efforts the future successful and profitable operation of its business is dependent. 2. Effective Date The Program was originally adopted effective as of January 1, 1983 as the replacement for the Wisconsin Gas Company Corporate Officer Post- Retirement Benefit Plan in effect prior to that date. This is an amendment and restatement of the Program and is effective January 1, 1997 for current and future participants. The terms of the Program in effect prior to January 1, 1997 shall apply to any former participants who retired or otherwise terminated employment prior to that date. Prior to January 1, 1997, the Program was known as the Wisconsin Gas Company Principal Officers' Supplemental Retirement Income Program. 3. Participants in the Program As of January 1, 1997, the Program covers Messrs. Wardeberg, Wenzler, Schrader, Donnelly, Nuernberg, Zeddun and Osborne. Any officer of the Employer may be added as a participant by action of the Compensation Committee of the Board of Directors of WICOR, Inc 2 4. Savings Plan Benefits The Company shall establish a Savings Plan Bookkeeping Reserve Account (the "Reserve Account") for each participant as follows: (a) As of each December 31 during the participant's employment with the Employer as an officer commencing December 31, 1983, an amount shall be credited to the Reserve Account equal to the difference between (i) four percent (4%) of the participant's aggregate compensation as defined in the Savings Plan and the amount by which such compensation is reduced by the Deferred Compensation Exclusion and Compensation Limit for such calendar year; and (ii) the actual employer contribution to the Savings Plan allocable to the account of the participant for such calendar year, excluding any participant deposits thereunder and excluding the one percent (1%) additional match commencing November 1, 1991 as a result of the ESOP provision. Notwithstanding the foregoing, in the event a participant fails to make deposits equal to four percent (4%) of his Compensation as defined in the Savings Plan during a calendar year and such failure was not caused by the 415 Limit or the discrimination test of Internal Revenue Code Section 401(k)(3) as estimated by the Company, the reference to four percent (4%) in (i) above shall be reduced to the percentage of the participant's compensation as defined in the Savings Plan contributed by the participant to the Savings Plan for such year. (b) Pursuant to a salary reduction agreement, if any, executed by the Company and a participant in the form attached hereto as Exhibit A (the "Salary Reduction Agreement"), an amount shall be credited by the Company to the Reserve Account for such participant equal to the amount, if any, by which the participant's salary is reduced by the Salary Reduction Agreement (the "Pre-Tax Employee Contribution"). The credit to the Reserve Account for the Pre-Tax Employee Contribution shall be made as of the time specified in the Salary Reduction Agreement. The Pre-Tax Employee Contribution under the Salary Reduction Agreement is a non-qualified deferred compensation agreement for purposes of computing the Deferred Compensation Exclusion under the Program. (c) The Salary Reduction Agreement may also provide that the participant will contribute an amount to the Company to be credited to the Reserve Account for such participant (the "Post- Tax Employee Contribution"). The credit to the Reserve Account for the Post-Tax Employee Contribution shall be made as of the time specified in the Salary Reduction Agreement and may be made by payroll deduction or other method provided therein. (d) As of the last day of each month, commencing January 31, 1984, and prior to any distribution pursuant to subparagraphs (e) and (f) below, an additional amount shall be credited to the Reserve Account as an interest equivalent on the balance credited to the Reserve Account as of the last day of the previous month. The interest rate earned will be that rate earned for such month by the "Stable Value Fund" under the Savings Plan 3 (e) Payment of the amounts credited to the Reserve Account for each participant shall commence during the month of January immediately following the calendar year in which occurs the participant's termination of employment with the Employer and shall be made in a lump sum. A transfer of employment to Sta-Rite Industries, Inc. or other affiliated entity shall not be treated as a termination of employment causing a required distribution hereunder. (f) In the event of a participant's death before benefits hereunder have been paid to him, any amount allocated to the Reserve Account shall be paid in a lump sum in the month following such death to such beneficiary or beneficiaries as the participant shall designate by written instrument delivered to the Secretary of the Company, or if no such written instrument is properly delivered or if such designated beneficiary predeceases the participant, to the executors, administrators, or personal representatives of the participant's estate. (g) The Reserve Account shall be utilized solely as a device for the measurement and determination of the amount to be paid to a participant at the times specified above for the payment of Savings Plan benefits. Neither the Reserve Account nor any other reserve established on the Company's books to reflect the liabilities under this Program shall constitute or be treated as a trust fund of any kind. On the contrary, it is expressly agreed and understood that the Company shall not be required to set aside any assets with respect hereto and that any assets actually held by the Company with reference to this Program shall be and remain the sole property of the Company, and that neither a participant nor a participant's beneficiaries, heirs, legal representatives or assigns shall have ownership rights of any nature with respect thereto, unless and until such time as such assets are paid over and transferred to the participant or the participant's beneficiaries, as herein provided. (h) The Program shall accept a transfer from the Sta-Rite Industries Officers' Supplemental Retirement Income Program ("Sta-Rite Supplemental Plan") for Joseph P. Wenzler of the obligations and liabilities under Section 4 thereof with respect to a deferred savings plan account, which amount shall be treated as the opening balance of said individual's Reserve Account. 5. Pension Plan Benefits (a) Eligibility. This paragraph applies to (i) Messrs. Wardeberg, Wenzler, Schrader and Donnelly and (ii) any other officer who was a named Program participant on January 1, 1997 in paragraph 3 who is a corporate officer immediately prior to his eligibility for normal or early retirement from the Employer under the terms of the Pension Plan 4 (b) Definitions. For purposes of this paragraph, "Unrestricted Pension Benefit" means the amount which would have been payable from the Pension Plan if the (i) 415 Limit, (ii) Compensation Limit, (iii) Sta-Rite Exclusion, (iv) Bonus Exclusion, and (v) Deferred Compensation Exclusion did not apply, calculated as of the participant's date of retirement or pre-retirement death, as applicable, based on the applicable optional payment method, but subject to adjustment from time to time for applicable cost of living increases. "Restricted Benefit Amount" means the amount actually payable from the Pension Plan calculated as of the participant's date of retirement or pre-retirement death based on the applicable optional payment method, but subject to adjustment from time to time for applicable cost of living increases and for reductions in the 415 Limit. (c) Married Participants - Joint and Survivor Annuity. A participant who is lawfully married at his retirement date and elects to receive his benefits from the Pension Plan in any joint and survivor annuity form available thereunder with his spouse designated as the survivor annuitant, shall receive a monthly supplement for his lifetime. The supplement shall be equal to the difference between (i) the Unrestricted Pension Benefit payable on a life only annuity basis under the terms of the Pension Plan and (ii) the Restricted Benefit Amount payable on a joint and fifty percent (50%) survivor annuity basis under the terms of the Pension Plan. If the participant predeceases his spouse, fifty percent (50%) of such difference shall then be paid monthly to his surviving spouse during her lifetime. If both the participant and his spouse die prior to the end of the ten (10) year period commencing on his retirement date, fifty percent (50%) of the aggregated monthly amount received by him under the Pension Plan and this subparagraph 5(a) shall be paid for the balance of such ten (10) year period to the beneficiary designated in writing by him for that purpose or, in the absence of such a designated beneficiary, to the estate of the last survivor of the participant and his spouse. (d) Unmarried Participants - Ten-Year Certain Annuity. A participant who is unmarried at his retirement date and elects to receive his benefits from the Pension Plan in the ten (10) year period certain annuity form available thereunder, shall receive a monthly supplement for his lifetime. The supplement shall be equal to the difference between (i) the Unrestricted Pension Benefit payable on a life only annuity basis under the terms of the Pension Plan and (ii) the Restricted Benefit Amount payable in a ten (10) year period certain annuity form under the terms of the Pension Plan. If the participant dies prior to the end of the ten (10) year period commencing on his retirement date, the supplement shall be paid for the balance of such ten (10) year period to the beneficiary designated in writing by him for the purpose or, in the absence of such a designated beneficiary, to the estate of the participant. 5 (e) Lump Sum Pension Plan Distribution. A participant who elects to receive his benefits from the Pension Plan in a lump sum distribution at his retirement date shall receive a supplement hereunder based on the difference between (i) the Unrestricted Pension Benefit, and (ii) the Restricted Benefit Amount, both calculated on a life only annuity basis. In the event the lump sum value of such difference payable on a monthly life only annuity basis calculated using the Pension Plan factors is less than $100,000, such amount shall be paid to the participant in a lump sum with no survivor benefits. In the event the lump sum value is $100,000 or more, the difference between (i) and (ii) above shall be paid monthly to the participant for his lifetime. If the participant predeceases the spouse to whom he was married at his retirement date, if any, fifty percent (50%) of such monthly supplement shall be paid monthly to his surviving spouse during her lifetime. If both the participant and his spouse, if applicable, die prior to the end of the ten (10) year period commencing on his retirement date, fifty percent (50%) of such supplement to the participant shall be paid for the balance of such ten (10) year period to the beneficiary designated in writing by him for that purpose or, in the absence of such a designated beneficiary, to the estate of the last survivor of the participant and his spouse as of his retirement date, if any. 6. Pension Plan Benefits-Other Participants (a) Eligibility. All Program participants who are not eligible for benefits under paragraph 5 shall be eligible under this paragraph if they are vested under the Pension Plan with five (5) years of vesting service. (b) Definitions. For purposes of this paragraph, "Unrestricted Pension Benefit" means the amount which would have been payable from the Pension Plan if the (i) Compensation Limit and (ii) Deferred Compensation Exclusion did not apply, calculated as of the participant's date of retirement or pre-retirement death, as applicable, based on the applicable optional payment method, but subject to adjustment from time to time for applicable cost of living increases. Notwithstanding the foregoing, for any Program participant who is a corporate officer immediately prior to his eligibility for normal or early retirement from the Employer under the terms of the Pension Plan, the applicable limits shall also include the (i) 415 Limit, (ii) Sta-Rite Exclusion and (iii) Bonus Exclusion. "Restricted Benefit Amount" has the meaning provided in subparagraph 5(b). 6 (c) Benefit. An eligible participant shall receive a monthly supplement equal to the difference between (i) the Unrestricted Pension Benefit and (ii) the Restricted Benefit Amount, both calculated according to the form of payment elected for his Pension Plan benefits. The supplement shall be paid for the participant's lifetime, and in the event the participant's death and payment election form cause a Pension Plan payment to a beneficiary, a portion of the supplement shall be paid to such beneficiary during the period of any related Pension Plan payment. The portion of the supplement to be paid shall equal the portion of the participant's Pension Plan benefit which is continued for such beneficiary. 7. Pension Plan Benefits-Pre-Retirement Death (a) Eligibility. In the event of the pre-retirement death of a Program participant, the beneficiary or beneficiaries of any death benefits under the Pension Plan shall be eligible for death benefits under this paragraph. (b) Definitions. For purposes of this paragraph, "Unrestricted Pension Benefit" means the amount which would have been payable to the beneficiary from the Pension Plan if the applicable limits did not apply, calculated as of the participant's date of pre- retirement death, based on the applicable optional payment method, but subject to adjustment from time to time for applicable cost of living increases. The applicable limits for the beneficiaries shall be those applicable to the participant pursuant to paragraph 5(b) or 6(b). Notwithstanding the foregoing, for purposes of the supplemental benefit related to the 20% and 5% benefits under Section 6.07 of the Pension Plan, the Bonus Exclusion shall not be an applicable limit. 8. Supplemental Retirement Benefits Supplemental retirement benefits shall be available to an eligible participant who is a corporate officer immediately prior to his normal or early retirement from the Employer under the terms of the Pension Plan. The eligible participants are Messrs. Schrader, Nuernberg, Osborne, and Zeddun. The monthly supplement is equal to $2,083.33 ($25,000 annually) and shall commence to the participant at the later of attainment of age sixty-five (65) or retirement. Payments shall be made as of the first day of the month commencing with the month following the qualifying event and shall continue for one hundred eighty (180) months. If the participant dies (i) after commencement of benefits but prior to the end of the fifteen (15) year period or (ii) after retirement but prior to attainment of age sixty-five (65), the supplement shall be paid for the balance of such period to the beneficiary designated in writing by him for that purpose or, in the absence of such a designated beneficiary, to the estate of the participant. Payments under (ii) above shall commence as of the month following the participant's death and shall continue for the fifteen (15) year period. 7 9. Administration of the Program The Program shall be administered by the Wisconsin Gas Company Employee Benefit Plan Committee (the "Committee"); provided that a participant in the Program who is a Committee member may not participate in any Committee action regarding his benefits hereunder. The Committee shall have all such powers that may be necessary to carry out the provisions of the Program in the absence of any action by the Board, including without limitation, the power to delegate administrative matters to other persons, to construe and interpret the Program, to adopt and revise rules, regulations and forms relating to and consistent with the Program's terms and to make any other determinations which it deems necessary or advisable for the implementation and administration of the Program; provided, however, that the right and power to amend and/or terminate the Program are reserved exclusively to the Board. Subject to the foregoing, all decisions and determinations by the Committee shall be final, binding and conclusive as to all parties, including without limitation the Company, any participant hereunder and all other employees and persons. 10. Source of Benefit Payments No funds or other assets of the Company shall be segregated and attributable to any benefit payments to be made at a later time as hereinabove provided, but rather benefit payments under the Program shall be made from the general assets of the Company at the time any such payment becomes due and payable. Benefit payments under the Program are to be taken as deductions for income tax purposes in the Company's fiscal year that they are actually made. At such time as any benefit payments are made, it shall be determined by the Company whether any portion thereof is allocable to WICOR, Inc., or other affiliates because of their recipient having also served as a corporate officer of any or all of those corporations; and, if such is the case, the Company shall obtain reimbursement from such entities, as appropriate, for such allocable portion. No participant or surviving spouse or beneficiary thereof shall have any proprietary rights of any nature whatsoever with respect to any benefit payments, unless and until such time a benefit payment, and then only as to the amount of such payment, is made to such participant or the surviving spouse or beneficiaries thereof, as the case may be. 11. Non-Alienation of Payments Any benefits payable under the Program shall not be subject in any manner to alienation, sale, transfer, assignment, pledge, attachment, garnishment or encumbrance of any kind, by will, or by inter vivos instrument. Any attempt to alienate, sell, transfer, assign, pledge or otherwise encumber any such benefit payment, whether currently or thereafter payable, shall not be recognized by the Committee or the Company. Any benefit payment due hereunder shall not in any manner be liable for or subject to the debts or liabilities of any participant or the surviving spouse or beneficiary thereof, as the case may be. If any such participant, surviving spouse or beneficiary shall attempt to alienate, sell, transfer, assign, pledge or otherwise encumber any benefit payments to be made to that person under the Program or any part thereof, or if by reason of such person's bankruptcy or other event happening at any time, such payments would devolve upon anyone else or would not be enjoyed by such person, then the Committee, in its discretion, may terminate such person's interest in any such benefit payment, and hold or apply it to or for the benefit of that person, the spouse, children, or other dependents thereof, or any of them, in such manner as the Committee may deem proper 8 12. Incompetency Every person receiving or claiming benefit payments under the Program shall be conclusively presumed to be mentally competent until the date on which the Committee receives a written notice, in a form and manner acceptable to the Committee, that such person is incompetent and that a guardian, conservator, or other person legally vested with the care of his estate has been appointed. In the event a guardian or conservator of the estate of any person receiving or claiming benefit payments under this Program shall be appointed by a court of competent jurisdiction, payments may be made to such guardian or conservator; provided that proper proof of appointment and continuing qualification is furnished in a form and manner acceptable to the Committee. Any such payment so made shall be a complete discharge of any liability therefor. 13. Limitation of Rights against the Employer Participation in this Program, or any modifications thereof, or the payments of any benefits hereunder, shall not be construed as giving to any participant any right to be retained in the service of the Employer, limiting in any way the right of the Employer to terminate such participant's employment at any time, evidencing any agreement or understanding express or implied, that the Employer will employ such participant in any particular position or at any particular rate of compensation and/or guaranteeing such participant any right to receive any other form or amount of remuneration from the Employer. 14. Construction The Program shall be construed, administrated and governed in all respects under and by the laws of the State of Wisconsin. Wherever any words are used herein in the masculine, they shall be construed as though they were used in the feminine for all cases where they would so apply; and wherever any words are used herein in the singular or the plural, they shall be construed as though they were used in the plural or the singular, as the case may be, in all cases where they would so apply. The words "hereof", "herein", "hereunder" and other similar compounds of the word "here" shall mean and refer to this entire document and not to any particular paragraph. 15. Liability Neither the Company nor any shareholder, director, officer or other employee of the Company or any member of the Committee or any other person shall be jointly or severally liable for any act or failure to act hereunder, except for gross negligence or fraud 9 16. Amendment or Termination of the Program The Company, by action of the Board, reserves the right to amend, modify, terminate or discontinue the Program at any time; and such action shall be final, binding and conclusive as to all parties, including any participant hereunder, any surviving spouse or beneficiary thereof and all other Employer employees and persons; provided, however, that any such Board action to terminate or discontinue the Program or to change the monthly payment amount or the time and manner of payment thereof as then provided in the Program shall not be effective and operative unless and until written consent thereto is obtained from each participant affected by such action or, if any such participant is not then living, from the surviving spouse or beneficiary thereof, as the case may be. 17. Successors or Assigns The terms and conditions of the Program, as amended and in effect from time to time, shall be binding upon the successors and assigns of the Company, including without limitation any entity into which the Company may be merged or with which the Company may be consolidated. 10 WISCONSIN GAS COMPANY SUPPLEMENTAL RETIREMENT INCOME PROGRAM Exhibit A Salary Reduction Agreement This Agreement is being made and entered into as of this ______ day of ______________, 19__, by and between Wisconsin Gas Company, a Wisconsin corporation (the "Company") and _____________________________ (the "Participant"). 1. Effective with respect to salary earned on and after _______________________ (a payroll period commencement date after the execution of this Agreement), the Company and the Participant agree to defer $_____________ per payroll period from the Participant's salary. Such deferred amount shall be credited to the Reserve Account as a Pre-Tax Employee Contribution as of the time the deferred amount would have been paid to the Employee but for this Agreement. 2. Effective on and after _______________________ (a payroll period commencement date after the execution of this Agreement), the Participant directs the Company to deduct from the Participant's salary $____________ per payroll period on an after-tax basis as a Post-Tax Employee Contribution. Such deducted amount shall be credited to the Reserve Account as of the time the deducted amount would have been paid to the participant but for this Agreement. 3. On _____________________, the Participant shall give to the Company in a lump sum $_______________ as a Post-Tax Employee Contribution. Such amount shall be credited to the Reserve Account as of the first day of the month following the date of receipt. Any election under paragraphs 1 or 2 above may be changed on a prospective basis by action of either the Company or the Participant. WISCONSIN GAS COMPANY By: Participant Instructions This form is an optional election by corporate officers participating under the Program. Company-paid benefits are provided under the Program whether or not Pre-Tax Employee Contributions or Post-Tax Employee Contributions are elected. An officer can elect any combination of 1, 2 or 3 (or none of them), but the maximum amount of such contribution will be determined from time to time by the Company. 11 * * * * CERTIFICATION The undersigned, as Administrator of the Wisconsin Gas Company Supplemental Retirement Income Program, hereby certifies that the foregoing document is a true and accurate copy of the restatement of said Plan as amended effective January 1, 1997, by authorization of the Board of Directors of Wisconsin Gas Company. Dated this ______ day of _____________________, 1998. WISCONSIN GAS COMPANY EMPLOYEE BENEFIT PLANS COMMITTEE EX-10 5 EXHIBIT 10-11 1 EXHIBIT 10-11 Wisconsin Gas Company 1999 Officer's Incentive Compensation Plan I. Objectives The principle objectives of the Plan are: A. To motivate and to provide incentive for officers and executive management (EMT) of Wisconsin Gas Company to create economic value. B. To ensure a focus on earning a return on capital in excess of the cost of capital while also achieving the performance plus goals. C. To assist in the retention of quality senior management. D. To yield competitive total compensation levels when performance goals meet the cost of capital requirement. II. Eligibility Participation in the Plan is limited to designated officers and EMT of Wisconsin Gas. The Chief Executive Officer of WICOR will be responsible for recommending eligibility changes to the Compensation Committee of the Board of Directors of WICOR, Inc. III. Amount of Potential Award A. The minimum, target and maximum award opportunities for each participant, as a percentage of base salary (W-2 base salary calendar earnings), are as follows: Award as Percent of Salary -------------------------------- Position Minimum Target Maximum - ---------------- ------- ------ ------- President & CEO 0% 40% 87% Senior VP 0% 35% 76.125% VP and Direct Reports 0% 20% 43.5% B. Each executive's award will be determined based on a combination of WGC and individual performance, with WGC performance accounting for 75% of the award and individual performance weighted at 25%. 2 IV. Performance Criteria and Objective Setting A. Financial Component (75% Weight) 1.) Overall WGC performance will be measured by Return on Capital (ROC), which is defined as NOPAT (Net Operating Profit After Tax) divided by Total Capital Employed (NOPAT and Total Capital Employed are defined in Appendix I). Threshold, Target, and Maximum ROC performance levels, and their corresponding incentive awards are as follows: Performance Level 1999 Return on Capital Award as a % of Target ----------------- ---------------------- ---------------------- Below Threshold Less than 6.0% 0% Threshold 6.0% 1% Target 7.0%* 100% Maximum or Above 9.1% 200% * WGC Cost of Capital = 7.0% For performance at levels between Threshold and Target or between Target and Maximum, award calculations will be interpolated on a linear basis. 2.) ROC payouts will be further modified by performance against budgeted criteria denoted as "Performance Plus" (the modifier). Performance Plus consists of Rate Comparison, Customer Service, Safety, and Cost Effectiveness. Each year management will recommend specific goals for the aforementioned criteria. Associated with various levels of performance for each goal will be a certain number of award points. The cumulative total of these points will determine the modification factor. As seen below, achievement of Performance Plus can modify the award by +/- 20%, or eliminate the award if the threshold number of points is not achieved. Performance Plus Performance Plus Award modification Achievement Points as a % of Target ---------------- ---------------- ------------------ Below Threshold < 12 points 0% Threshold 12 points 80% Target 24 points 100% Maximum 40 points 120% For performance at levels between Threshold and Target or between Target and Maximum award calculations will be interpolated on a linear basis. 3 B. Discretionary/Individual Component (25% Weight) The individual component of total incentive compensation will be based on the individual's overall performance as measured against previously identified and agreed upon goals and objectives. The award may vary between 0% and 150% of the individual performance portion of the target award, and will be determined and paid independently of Company financial performance. Combining the previously mentioned components yields the following formula for determining annual incentive payouts: Step 1 [ Base Salary x Eligible Target % ] Multiplied by sum of step 2 and step 3 Step 2 [(ROC Award % x Performance Plus Modifier %) x 75%] Plus Step 3 [Discretionary % x 25%] Equals Annual Incentive Award C. The company intends to hold the proposed financial/operational performance standards constant for at least three years, with annual reviews to ensure reasonableness vis-a-vis external market conditions. This is especially relevant with regard to the cost of capital, which is the key determinant of performance levels for the ROC measure. D. If the Compensation Committee of WICOR, Inc. determines that corporate performance was inadequate, it may exercise discretion to reduce or eliminate any or all bonus payments. V. Performance Company performance goals will be for the 1999 calendar year. VI. Treatment of Acquisitions and Investments A. Acquisitions The capitalized value (NOPAT/Target's Cost of Capital) of the acquired entity's last full year's NOPAT will be added to the capital base of the acquiring business unit in the month of acquisition. The acquisition premium (defined as the excess of the purchase price over the capitalized value ) will be incorporated into the capital base at a rate of 20% per year starting at the beginning of the first calendar year after the acquisition. 4 B. Investments The entire value of investments of an operating nature (capital expenditures) will be added to the capital base. However, investments of a significant dollar amount, whose project life extends beyond ten years, will be reviewed by management for potential adjustments to the capital base (similar to the treatment for acquisitions). VII. Form and Timing of Award Payments A. Awards will be determined and paid as soon as practicable after the close of the Plan year. B. At each participant's discretion and with the concurrence of the Compensation committee of WICOR, Inc., awards may be paid in one of three ways: 1. Lump sum. 2. Partly in lump sum and the remainder in deferred annual installments. 3. Completely in deferred annual installments. C. The Company will offer a deferred payment option to those officers who prefer not to receive their awards in current cash, following these guidelines: 1. Deferred incentive award payments will be carried as an accrued liability with an interest rate (three-year treasury bill rate) credited each year. 2. Deferred elections must be made prior to June 30, 1999, and a definite time period for deferral must be specified. D. Additionally, if performance significantly exceeds the maximum standard established, the Compensation Committee has the discretion to provide an incentive payout in excess of the maximum allowable payout. However, any exceptional performance which qualifies for this award, must be a direct result of management efforts and not due to external factors beyond management's control. Any awards in excess of the maximum payout opportunity would be paid in WICOR restricted stock which would vest ratably over five years. However, if a participant terminates employment due to death, retirement, or disability, any prior restricted stock awards made under this provision would become immediately vested. 5 E. In the event the company's overall ROC is negatively impacted by the inclusion of a newly acquired company's results, the compensation committee has the discretion to make a supplemental incentive payment. The supplemental payment will be considered if the acquired company is meeting the financial projections established at the time of the acquisition and the officers of the acquiring entity would have otherwise received a higher incentive payment had it not been for the inclusion of the acquired entity's results. The purpose of this supplemental incentive provision is to motivate officers to invest in value building projects. The duration of the supplemental incentive period will be no more than three years. VIII. Implementation A. The effective date of the Plan is January 1, 1999. IX. Plan Administration A. Compensation Committee 1. The Plan will be administered by the Compensation Committee of the Board of Directors of WICOR, Inc. 2. The Committee's administration is subject to approval of the Board of Directors of WICOR, Inc. 3. The decisions of the Board are final and binding on all Plan participants. 4. The Board retains the right to terminate or amend the Plan as it may deem advisable. B. Partial Year Participation 1. Participants must be employed by the Company on the last day of the Plan year in order to receive a bonus for that year. However, once earned, a bonus will be paid to a participant regardless of whether he/she is employed by the company on the date payment is made. 2. Awards for part year participants will be pro-rated based on the proportion of the year that the participant was in the Plan. This includes participants who terminate employment due to death, disability or retirement. 3. Participants who terminate employment with the Company prior to the last day of the plan year shall forfeit all rights to an incentive award payment under the Plan except for terminations due to death, retirement or disability. 4. A participant is deemed to be disabled if he/she becomes eligible for benefits under the Company's Long Term Disability Plan. 6 Appendix 1 DEFINITION OF TERMS Wisconsin Gas Company NOPAT-Net Operating Profit After Taxes-is calculated as follows: Net Income per financial statements Plus the change in specific equity equivalents (net of tax): Uncollectible Reserve Regulatory Assets and liabilities (except for Environmental liability related) Injuries and Damage Reserve Assets or Liabilities for Deferred Compensation Plans Other Post Employee Benefits (Medical and Life Insurance) Pension Expense (Qualified and non-Qualified) Plus interest expense (net of tax) Capital - An approximation of the economic book value of cash invested. Capital is the sum of: Shareholders equity Long and short term debt Capital Equivalents (net of tax) Measurement of capital employed is determined using a 13 month rolling average. EX-10 6 EXHIBIT 10-14 1 EXHIBIT 10-14 Sta-Rite Industries, Inc. 1999 Officer's Incentive Compensation Plan I. Objectives The principle objectives of the Plan are: A. To motivate and to provide incentive for officers of Sta-Rite to create economic value. B. To ensure a focus on earning a return on capital in excess of the cost of capital while also making a positive contribution to sales growth. C. To assist in the retention of quality senior management. D. To yield competitive total compensation levels when performance goals meet the cost of capital requirement. II. Eligibility Participation in the Plan is limited to designated officers of Sta-Rite Industries, Inc. The Chief Executive Officer, WICOR, will be responsible for recommending eligibility changes to the Compensation Committee of the Board of Directors of WICOR, Inc. III. Amount of Potential Award A. The minimum, target and maximum award opportunities for each executive, as a percentage of base salary (W-2 base salary calendar earnings), are as follows: Award as Percent of Salary ------------------------------ Position Minimum Target Maximum ------------------- ------- ------ ----------- President & CEO 0% 45% 97.875% VP 0% 30% 65.25% B. Each executive's award will be determined based on a combination of Sta-Rite and individual performance, with Sta- Rite performance accounting for 75% of the award and individual performance weighted at 25%. 2 IV. Performance Criteria and Objective Setting A. Financial Component (75% Weight) 1.) Overall Sta-Rite performance will be measured by Return on Capital (ROC), which is defined as NOPAT (Net Operating Profit After Tax) divided by Total Capital Employed (NOPAT and Total Capital Employed are defined in Appendix I). Threshold, Target, and Maximum ROC performance levels, and their corresponding incentive awards are as follows: Award as a Performance Level 1998 Return on Capital % of Target ------------------ ---------------------- ----------- Below Threshold less than 9.3% 0% Threshold 9.3% 1% Target 10.9% 100% Maximum or Above 14.2% 200% * Sta-Rite Cost of Capital = 10.9% For performance at levels between Threshold and Target or between Target and Maximum, award calculations will be interpolated on a linear basis. 2.) ROC payouts will be further modified by performance against Sales Growth (the modifier). As seen below, Sales growth performance can modify the award by +/- 20%. Award modification Performance Level 1999 Sales Growth as a % of Target - ------------------- ----------------- ------------------- Threshold < or = to 5% 80% Target 10% 100% Maximum > or = to 15% 120% For performance at levels between Threshold and Target or between Target and Maximum award calculations will be interpolated on a linear basis. 3 B. Discretionary/Individual Component (25% Weight) The individual component of total incentive compensation will be based on the individual's overall performance as measured against previously identified and agreed upon goals and objectives. The award may vary between 0% and 150% of the individual performance portion of the target award, and will be determined and paid independently of Company financial performance. Combining the previously mentioned components yields the following formula for determining annual incentive payouts: Step 1 [ Base Salary x Eligible Target % ] Multiplied by sum of step 2 and step 3 Step 2 [(ROC Award % x Sales Growth Modifier) x 75%] Plus Step 3 [Discretionary % x 25%] Equals Annual Incentive Award C. The company intends to hold the proposed financial/operational performance standards constant for at least three years, with annual reviews to ensure reasonableness vis-a-vis external market conditions. This is especially relevant with regard to the cost of capital, which is the key determinant of performance levels for the ROC measure. D. If the Compensation Committee of WICOR, Inc. determines that corporate performance was inadequate, it may exercise discretion to reduce or eliminate any or all bonus payments. V. Performance Company performance goals will be for the 1999 calendar year. VI. Treatment of Acquisitions and Investments A. Acquisitions The capitalized value (NOPAT/Target's Cost of Capital) of the acquired entity's last full year's NOPAT will be added to the capital base of the acquiring business unit in the month of acquisition. The acquisition premium (defined as the excess of the purchase price over the capitalized value ) will be incorporated into the capital base at a rate of 20% per year starting at the beginning of the first calendar year after the acquisition. 4 B. Investments The entire value of investments of an operating nature (capital expenditures) will be added to the capital base. However, investments of a significant dollar amount, whose project life extends beyond ten years, will be reviewed by management for potential adjustments to the capital base (similar to the treatment for acquisitions). VII. Form and Timing of Award Payments A. Awards will be determined and paid as soon as practicable after the close of the Plan year. B. At each participant's discretion and with the concurrence of the Compensation committee of WICOR, Inc., awards may be paid in one of three ways: 1. Lump sum. 2. Partly in lump sum and the remainder in deferred annual installments. 3. Completely in deferred annual installments. C. The Company will offer a deferred payment option to those officers who prefer not to receive their awards in current cash, following these guidelines: 1. Deferred incentive award payments will be carried as an accrued liability with an interest rate (three-year treasury bill rate) credited each year. 2. Deferred elections must be made prior to June 30, 1999, and a definite time period for deferral must be specified. D. Additionally, if performance significantly exceeds the maximum standard established, the Compensation Committee has the discretion to provide an incentive payout in excess of the maximum allowable payout. However, any exceptional performance which qualifies for this award, must be a direct result of management efforts and not due to external factors beyond management's control. Any awards in excess of the maximum payout opportunity would be paid in WICOR restricted stock which would vest ratably over five years. However, if a participant terminates employment due to death, retirement, or disability, any prior restricted stock awards made under this provision would become immediately vested. 5 E. In the event the company's overall ROC is negatively impacted by the inclusion of a newly acquired company's results, the compensation committee has the discretion to make a supplemental incentive payment. The supplemental payment will be considered if the acquired company is meeting the financial projections established at the time of the acquisition and the officers of the acquiring entity would have otherwise received a higher incentive payment had it not been for the inclusion of the acquired entity's results. The purpose of this supplemental incentive provision is to motivate officers to invest in value building projects. The duration of the supplemental incentive period will be no more than three years. VIII. Implementation A. The effective date of the Plan is January 1, 1999. IX. Plan Administration A. Compensation Committee 1. The Plan will be administered by the Compensation Committee of the Board of Directors of WICOR, Inc. 2. The Committee's administration is subject to approval of the Board of Directors of WICOR, Inc. 3. The decisions of the Board are final and binding on all Plan participants. 4. The Board retains the right to terminate or amend the Plan as it may deem advisable. B. Partial Year Participation 1. Participants must be employed by the Company on the last day of the Plan year in order to receive a bonus for that year. However, once earned, a bonus will be paid to a participant regardless of whether he/she is employed by the company on the date payment is made. 2. Awards for part year participants will be pro-rated based on the proportion of the year that the participant was in the Plan. This includes participants who terminate employment due to death, disability or retirement. 3. Participants who terminate employment with the Company prior to the last day of the plan year shall forfeit all rights to an incentive award payment under the Plan except for terminations due to death, retirement or disability. 4. A participant is deemed to be disabled if he/she becomes eligible for benefits under the Company's Long Term Disability Plan. 6 Appendix 1 DEFINITION OF TERMS Sta-Rite NOPAT - Net operating profits after tax is calculated as follows: Operating Income Per Financial Statements Plus (minus) the change in specific equity equivalent adjustments: Goodwill amortization increase/(decrease) in LIFO reserve increase/(decrease) in product liability reserve increase/(decrease) in "operating" environmental reserve increase/(decrease) in retiree health benefit liability increase/(decrease) in deferred compensation Book environmental provisions for abandoned facilities Minus cash income tax expense. Capital- An approximation of the economic book value of all cash invested in going-concern business activities, capital is essentially a company's net assets (total assets less non-interest-bearing current liabilities), but with three adjustments: 1. Marketable securities are subtracted 2. The present value of non-capitalized leases is added to net property, plant and equipment. (Adjustment determined immaterial for Sta-Rite at this time. Adjustment will be monitored in the future for potential inclusion should circumstances change) 3. Certain equity equivalent reserves are added to assets: -- Cumulative amortization of Goodwill -- LIFO reserve is added to inventories -- Bad debt reserve is added to receivables (adjustment not made for Sta-Rite due to immateriality. Adjustment will be monitored for potential inclusion should it become material) Sta-Rite's capital calculation for 1999 is: Current assets (excluding marketable securities, if any) Plus Net property, plant & equipment Plus Goodwill Plus Other assets Plus Equity equivalent reserves: Cumulative goodwill amortization LIFO reserve Minus Non-interest bearing current liabilities (incl. warranty reserve) Measurement for all capital employed items is determined using a 13 month rolling average. EX-13 7 EXHIBIT 13 1 MANAGEMENT'S DISCUSSION AND ANALYSIS Forward-Looking Statements - -------------------------- Certain matters discussed in this report are "forward-looking statements" intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. These forward-looking statements generally can be identified as such because they include words such as the Company "believes," "anticipates," "expects," or words of similar import. Similarly, statements that describe the Company's future plans, objectives or goals also are considered forward-looking. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from current expectations. These factors include but are not limited to the risks and uncertainties listed below. All of these factors are difficult to predict and generally beyond management's control. * the impact of warmer- or colder-than-normal weather on the energy business * the impact of cool or wet weather on the pump manufacturing markets * economic conditions, including the availability of individual discretionary income and changes in interest rates and foreign currency valuations * changes in natural gas prices and supply availability * increased competition in deregulated energy markets * the pace and extent of energy industry deregulation * regulatory, government and court decisions * increases in costs to clean up environmental contamination * the Company's ability to increase prices * market demand for the Company's products and services * unanticipated expenses or outcomes associated with year 2000 date conversion General Overview - ---------------- WICOR's 1998 financial results fell short of 1997's record performance as net earnings decreased by 8% to $45.5 million. Diluted earnings per share in 1998 decreased 9% to $1.21 compared to a record $1.33 per share in 1997. Continued strength in and contributions from the Manufacturing Group partially offset the impact of extremely unfavorable weather on Energy Group earnings. WICOR's 1997 financial results exceeded 1996's record performance as net income rose by 6% to $49.5 million. Diluted earnings per share in 1997 rose 5% to $1.33 compared with 1996, as the Company's manufacturing business posted significantly improved results. 2 Results of Operations - --------------------- Energy Group - 1998 Compared with 1997 - -------------------------------------- The Energy Group's primary business is the distribution of natural gas through Wisconsin Gas Company (Wisconsin Gas), the oldest and largest natural gas distribution utility in Wisconsin, which represented 89% of Energy Group revenues in 1998. The Energy Group also includes WICOR Energy Services (WESCO), an energy marketer, and FieldTech, a utility services company. Margin, defined as revenues less cost of gas sold, is a better comparative performance indicator than revenues because the mix of utility volumes between sales and transportation service affects revenues but not margin. In addition, changes in the cost of gas sold to utility customers are flowed through to revenue under a gas adjustment clause. Energy Group net earnings declined by $7.8 million, or 26%, in 1998 as compared with 1997. During 1998, heating degree days were 17% lower than 1997 and 16% lower than the 20-year average (as published by the United States Weather Bureau). This decline in heating degree days negatively impacted Wisconsin Gas margins from heating customers. The lower gas margins were driven by unseasonably warm weather in the first quarter, combined with extremely mild weather in November and early December. Net earnings were positively affected by a gain from a weather insurance agreement, revenues derived from the gas cost incentive mechanism (GCIM) and gains realized on the sale of non-utility land. 3 The following tables set forth financial data for the Energy Group and volume data for Wisconsin Gas for each of the years ended December 31.
Energy Group - ------------ MILLIONS OF DOLLARS 1998 1997 1996 -------- -------- -------- Revenues $ 459.0 $ 573.8 $ 588.3 Cost of gas sold 295.6 394.1 393.7 -------- -------- -------- Sales margin 163.4 179.7 194.6 Gas transportation margin 22.5 22.5 14.4 -------- -------- -------- Gross margin 185.9 202.2 209.0 Operation and maintenance 100.1 101.8 102.3 Depreciation and amortization 33.7 31.8 32.9 Taxes, other than income taxes 9.0 9.6 9.3 -------- -------- -------- Operating income 43.1 59.0 64.5 Interest expense 12.5 12.3 12.9 Other (income) expenses, net (3.6) (0.6) (0.7) -------- -------- -------- Income before income taxes 34.2 47.3 52.3 Income taxes 12.5 17.8 20.2 -------- -------- -------- Net earnings $ 21.7 $ 29.5 $ 32.1 ======== ======== ======== Wisconsin Gas Company MILLIONS OF THERMS 1998 1997 1996 -------- -------- -------- Sales volumes Firm 649.2 790.8 883.3 Interruptible 36.5 72.8 196.2 Transport volumes 460.2 428.8 275.8 -------- -------- -------- Total throughput 1,145.9 1,292.4 1,355.3 ======== ======== ======== Heating degree days 5,865 7,094 7,458 ======== ======== ========
4 The decrease in firm sales volumes in 1998 was caused principally by the extremely mild heating season, lower average use per customer and firm customers switching from sales to transportation service. Transportation volumes increased mainly because more customers purchased gas from sources other than Wisconsin Gas and transported volumes through the Wisconsin Gas distribution system. Historically, the movement to transportation from gas sales has had no impact on margin. Effective November 1, 1997, a slightly lower margin rate was put into effect for transportation-only customers. The future impact of this change on total Company margin is expected to be immaterial. During 1998, Wisconsin Gas realized $3.8 million of margin under a gas cost incentive mechanism (GCIM). In August 1998, Wisconsin Gas raised its rates $7.5 million on an annual basis. This rate increase is expected to offset increased operating expenses. Non-regulated energy operating revenues in 1998 decreased to $52.9 million from $59.5 million in 1997. This decrease in non-regulated energy revenues consisted largely of decreased gas sales volumes and lower prices. The WESCO gas supply strategy is to match purchase commitments with customer requirements so that the Company is not exposed to significant commodity price risk. Total operating and maintenance expenses of $100.1 million for 1998 were $1.7 million lower than the prior year. The decrease resulted primarily from lower labor and benefit expenses and weather related spending reductions at Wisconsin Gas. Depreciation and amortization expense for 1998 increased by $1.9 million, or 6%, compared with 1997, due to additions to depreciable plant balances. Depreciation expense in 1999 is expected to increase due to planned capital investments. Interest expense in 1998 increased $0.2 million compared to 1997. The increase reflects slightly higher average borrowing levels offset partially by lower interest rates. Other income, net of expenses, increased by $3.0 million in 1998 compared to 1997. Other income was positively impacted by a $1.2 million gain relating to a weather insurance agreement and $1.2 million in gains realized on the sale of non-utility property. Income tax expense decreased $5.3 million in 1998 compared to 1997, reflecting lower pre-tax income. The effective income tax rate remained relatively unchanged between 1998 and 1997. Energy Group - 1997 Compared with 1996 - -------------------------------------- Energy Group net earnings decreased by $2.6 million, or 8%, in 1997 as compared with 1996. This decrease was due primarily to reduced sales margins resulting from warmer weather and voluntary rate reductions. Lower operating expenses partially offset the decrease in sales margin. 5 Total Energy Group margin decreased by 3% in 1997 primarily as a result of a 10% decrease in firm sales volumes and a $3.0 million voluntary annual rate reduction effective November 1996, offset in part by a decrease in operating expenses. Utility margin rates had been reduced an aggregate of $9.0 million as a result of a November 1994 rate order of the Public Service Commission of Wisconsin (PSCW) and through voluntary annualized rate reductions of $1.5 million, $3.0 million and $4.5 million in 1997, 1996 and 1995, respectively. The weather in 1997 was 1% colder than the 20-year average and 5% warmer than 1996. Transportation volumes in 1997 increased mainly because more customers purchased gas from sources other than Wisconsin Gas and transported that volume through the Wisconsin Gas distribution system. Historically, the movement to transportation from gas sales has had no impact on margin. Non-regulated energy operating revenues in 1997 increased by $30.1 million, or 102%, to $59.5 million. This increase in non-regulated energy revenues consisted largely of increased gas sales at WESCO primarily as a result of customer growth. Total operating and maintenance expenses of $101.8 million for 1997 decreased $0.5 million compared with the prior year. The decrease resulted primarily from lower labor and benefit expenses, which included a reduction in post-retirement benefit expenses reflecting improved health care cost experience and the impact of a one-time $3.0 million amortization of the uncollectible accounts receivable regulatory asset approved by the PSCW in the fourth quarter of 1996. The decrease was partially offset by higher costs associated with the increased operating activities of FieldTech and increased levels of outside services. Depreciation expense for 1997 decreased by $1.1 million, or 3%, compared with 1996. This decrease was due to the second year impact of the depreciation rates approved by the PSCW, the effect of which was partially offset by additions to property, plant and equipment. Interest expense in 1997 decreased $0.6 million, or 5%, compared with 1996. This decrease resulted from lower average borrowing levels and slightly lower interest rates. Income tax expense decreased $2.4 million in 1997 compared to 1996, reflecting lower pre-tax income. The effective income tax rate remained relatively unchanged between 1997 and 1996. 6 Manufacturing Group - 1998 Compared with 1997 - --------------------------------------------- The Manufacturing Group net sales increased 9% to a record $462.7 million during 1998, outpacing sales of $424.8 million in 1997. In addition, net earnings increased 18% to a record $23.8 million during the year. Financial data regarding the Manufacturing Group is set forth in the table below. MILLIONS OF DOLLARS 1998 1997 1996 -------- -------- -------- Revenues $ 462.7 $ 424.8 $ 409.9 Cost of sales 329.2 307.2 297.1 -------- -------- -------- Gross profit 133.5 117.6 112.8 Operating expenses 92.0 82.6 86.6 Operating income 41.5 35.0 26.2 Interest expense 4.4 5.1 5.8 Other (income) expenses, net (0.3) (0.7) (0.7) -------- -------- -------- Income before income taxes 37.4 30.6 21.1 Income taxes 13.6 10.5 6.5 -------- -------- -------- Net earnings $ 23.8 $ 20.1 $ 14.6 ======== ======== ======== Domestic manufacturing sales in 1998 increased by 15% to $323.2 million as compared with 1997. Overall shipments within the water systems, pool/spa, filtration, industrial and the food and beverage markets in North America were up from last year due mainly to customer growth and new product introductions. International sales of $139.5 million decreased by 3% compared to 1997. International sales were negatively impacted by currency translation related to the strengthening U.S. dollar and continued weakness in the Asian economy. International sales accounted for 30% of total manufacturing net sales in 1998. Gross profit margins improved to 29% in 1998, as compared to 28% in the previous year, due primarily to improved manufacturing productivity. Operating expenses, as a percentage of sales, increased slightly compared to 1997. Operating expenses in total increased by $9.4 million, or 11%, due in part to the impact of higher support spending for acquisitions, introductions of new products and customer development. Interest expense in 1998 decreased $0.7 million, or 14%, compared to 1997. The decrease reflects lower borrowing levels to fund working capital requirements and lower interest rates. Income tax expense increased $3.1 million in 1998 compared to 1997, reflecting higher pre-tax income. The effective income tax rate remained relatively unchanged between 1998 and 1997. 7 Manufacturing Group - 1997 Compared with 1996 - --------------------------------------------- Net sales for 1997 rose 4% to a record $424.8 million as compared with sales of $409.9 million in 1996. Net income for 1997 increased 38% to a record $20.1 million compared to the prior year. Net income in 1996 includes one-time charges totaling $1.2 million relating to the settlement of a product liability lawsuit and the consolidation of two Wisconsin manufacturing plants. Domestic manufacturing sales in 1997 increased by 4% to $281.0 million as compared with 1996. Domestic shipments for beverage, agricultural spraying and pool/spa markets were up from the prior year. International sales of $143.8 million increased 2% compared to 1996. The increase in international sales was negatively impacted by currency translation related to the strengthening U.S. dollar and the weakening of the Korean economy. International sales accounted for 34% of total manufacturing net sales in 1997 and 1996. In 1997, manufacturing operating income was $35.0 million compared with $26.2 million in 1996. The increase in 1997 operating income is attributable to increased sales, plant consolidations and cost-saving programs, as well as continuing productivity improvements. Operating expenses decreased by 5% in 1997 compared to the prior year due to cost reduction programs and improved performance of the Australian operations. As a percentage of sales, 1997 operating expenses were 19% of sales compared to 21% in 1996. The Company initiated efforts to reduce costs and improve productivity and asset utilization by consolidating certain of its manufacturing operations. These activities resulted in the 1997 closing of a plant located in Waterford, Wisconsin, and the 1996 closing of a plant located in Detroit, Michigan. As a result of these plant closings, the Company recorded an after-tax charge of $0.7 million in 1996. Interest expense in 1997 decreased $0.7 million, or 12%, compared to last year. This decrease resulted from lower average borrowing levels and slightly lower interest rates. Income tax expense increased by $4.0 million in 1997, or 62%, compared to 1996 reflecting increased pre-tax income and a higher effective income tax rate. 8 New Accounting Standards - ------------------------ In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 133 (SFAS 133), "Accounting for Derivative Instruments and Hedging Activities," effective in the first quarter of 2000. SFAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. The Company is currently evaluating the impact of the provisions of SFAS 133 on its financial statements and does not believe that SFAS 133 will materially increase volatility in earnings and other comprehensive income. The Company adopted the American Institute of Certified Public Accountants Statement of Position No. 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," in 1998 which provides guidance on accounting for the costs of computer software developed or obtained for internal use. The after-tax impact of adopting this statement on the Company's consolidated financial statements was less than $0.01 per share. Effects of Changing Prices - -------------------------- In management's opinion, changes in the rate of inflation have not had a significant effect on WICOR's income over the past three years. Inflationary increases in recent years have been recovered through productivity improvements and/or product price increases. The Company continues to monitor the impact of inflation in order to minimize its effects in future years through pricing strategies, productivity improvements and cost reductions. Wisconsin Gas rates are set under an alternative method of rate making (see page 23 under "Regulatory Matters"). After reviewing the impact of the margin rate cap and other factors, management believes that Wisconsin Gas's productivity improvements have offset the impact of inflationary cost increases. Liquidity and Capital Resources - ------------------------------- The Company has access to outside capital markets and has been able to generate funds internally to meet its investment needs. WICOR's ability to attract the necessary financial capital at reasonable terms is critical to the Company's overall strategic plan. Acquisitions and investments have been initially financed with short-term debt and later permanently funded with various long-term debt securities or common equity, depending on market conditions. Working capital was $109.5 million at the end of 1998 compared to $77.0 million and $83.4 million at the end of 1997 and 1996, respectively. The Company's current ratio at December 31 was 1.4, 1.2 and 1.3 in 1998, 1997 and 1996, respectively. 9 Because of timing differences in the receipt and disbursement of cash and the level of construction requirements, the Energy Group borrows on a short-term basis. As customers move to purchase their own gas supplies directly from producers or brokers, the impact of gas purchases on the cash flow of the energy business may diminish. The Company believes that cash provided from operating activities over the next three years will satisfy normal ongoing cash requirements. The Company may need external capital for financing acquisitions and scheduled debt retirement. Investment Activities - --------------------- Consolidated capital expenditures in 1998 decreased slightly to $49.3 million. Consolidated capital expenditures are expected to increase modestly in 1999 due to water utility expenditures, and are expected to be funded from operations. Capital expenditures of $51.6 million in 1997 remained relatively flat compared to the prior year. In May 1998, the PSCW approved an increase in the amount the Company may invest in nonutility businesses. The new investment limitation permits nonutility investments to constitute up to 60% of the Company's total capitalization. Under these new restrictions, the amount available to WICOR for future nonutility investment at December 31, 1998 is $351.7 million. (See Note 7 of Notes to Consolidated Financial Statements.) Financing Activities - -------------------- In November 1998, Wisconsin Gas used its existing lines of credit to issue commercial paper, the proceeds of which were used to redeem, at par, $40 million of 7.5% Notes due in 1998. In January 1999, Wisconsin Gas issued $50 million of 5.5% Notes due in 2009, to replace the commercial paper. The Company's ratio of long-term debt to capitalization was 32% in 1998 as compared to 28% in 1997 and 32% in 1996. The utility's embedded cost of long-term debt was 6.9%, 7.1% and 7.0% for the years ended December 31, 1998, 1997 and 1996, respectively. WICOR raised its common stock dividend by 2.3% in 1998 and by 2.4% in both 1997 and 1996. The current annual dividend rate is $0.88 per share. At December 31, 1998, the Company had $136.8 million of unrestricted retained earnings available for dividend payments to shareholders. The Board of Directors approved a two-for-one stock split of the Company's common stock to make the stock more accessible to the individual investor (See Note 9 of Notes to the Consolidated Financial Statements). The stock split was effective in May 1998. 10 The WICOR Plan, established in 1992, allows investors to purchase WICOR common stock directly and through dividend reinvestment without paying fees or service charges. Since February 1, 1995, share requirements for the WICOR Plan have been met through open market purchases of WICOR common stock. As described in Note 7 of Notes to Consolidated Financial Statements, a 1993 PSCW rate order retained certain limitations with respect to equity levels of and dividend payments by Wisconsin Gas. Restrictions imposed by the PSCW are not expected to have any material effect on WICOR's ability to meet its cash obligations. Wisconsin Gas's ratio of pre-tax earnings to fixed charges decreased to 3.8 in 1998 from 4.5 in 1997, as a result of lower earnings, the effects of which were offset in part by fixed charges that were 2% lower in 1998 than in 1997. Access to capital markets at a reasonable cost is determined in large part by credit quality. Wisconsin Gas's strong financial position, as evidenced by Moody's Investors Service 1997 upgrading of its long-term debt from Aa3 to Aa2, provides a high degree of flexibility in obtaining funds on competitive terms. Standard and Poor's Corporation's current rating is AA-. These ratings reflect the views of such organizations, and an explanation of the significance of these ratings may be obtained from each agency. Such ratings are not a recommendation to buy, sell or hold securities, but rather an indication of creditworthiness. The Company and its subsidiaries maintain lines of credit worldwide. The Company's primary domestic line of credit is a $115 million unsecured revolving credit facility with several banks which expires August 6, 2002. Financial covenants under these facilities include leverage and interest coverage ratios. In addition, the Company arranges domestic seasonal lines of credit to support its commercial paper borrowing program. The Company also has arranged lines of credit from foreign lenders which allow it to borrow in the applicable local currency. These lines of credit total $36.6 million and are concentrated in Australia, Canada and Italy. The Company's lines of credit generally provide borrowing at the bank reference rate or better, which varies depending on the country where the funds are borrowed. The Company was in compliance with all financial covenants at December 31, 1998. Wisconsin Gas and WICOR Industries finance working capital needs by issuing commercial paper in the open market. Commercial paper outstanding, on a consolidated basis, at December 31, 1998 and 1997 was $158.7 million and $125.2 million, respectively. The Company believes that it has adequate capacity to fund its operations for the foreseeable future through its borrowing arrangements and internally generated cash. 11 Regulatory Matters - ------------------ Wisconsin Gas is subject to the jurisdiction of the PSCW as to various phases of its operations, including rates, service and issuance of securities. The PSCW has instituted generic proceedings to consider how its regulation of gas distribution utilities should change to reflect the changing competitive environment in the natural gas industry. To date, the PSCW has made a policy decision to deregulate the sale of natural gas in customer segments with workably competitive market choices. It has also adopted standards for transactions between a utility and its gas marketing affiliates. The PSCW has established working groups to study and make recommendations on major deregulation issues. These working groups are scheduled to complete their work at various times through the year 2000. Presumably, the PSCW will use the work group reports as the basis for recommendations to the state legislature. The impact of these proceedings on Wisconsin Gas's future operations is uncertain at this time. On November 1, 1996, with PSCW approval, Wisconsin Gas began a one-year pilot supplier choice program for firm gas customers located in a small geographic area of the Company's service territory. The program was modified and extended for the 1997-98 and 1998-99 program years. The Company has filed with the PSCW to further modify and extend the program for the 1999-2000 program year, and expects to continue the program from year to year until it is superseded by a generic PSCW order or state legislative mandate. The pilot program was designed to test market acceptance of supplier choice, the interest of third-party marketers in serving firm markets, including residential, and Wisconsin Gas's capabilities to administer transportation-only services. WICOR Energy Services is one of the gas suppliers participating in the pilot program. It is unclear how long it will take for customer choice to become available in Wisconsin, and it is unknown what the impacts of customer choice may be on the Company. Wisconsin Gas rates are set within the framework of the Productivity-based Alternative Ratemaking Mechanism (PARM), which was established in 1994 and has been extended through October 31, 2001. Under PARM, Wisconsin Gas has the ability to raise or lower margin rates within a specified range on a quarterly basis. The PARM order also specifies margin rate floors for each rate class. In 1997, 1996 and 1995, Wisconsin Gas reduced its base rates by $1.5 million, $3.0 million and $4.5 million on an annualized basis, respectively. Effective August 1, 1998, Wisconsin Gas increased its base rates by $7.5 million on an annualized basis. With this increase, Wisconsin Gas's rates recover $1.5 million per year less than the maximum amount allowed by the PSCW's rate order. The rate increase is expected to offset increased operating costs. The PARM has certain criteria that allow it to be reopened at any time for significant deterioration in safety, failures to meet conservation goals, significant changes in interest rates and "extraordinary items." To date, none of the criteria have been triggered. 12 The PSCW approved a gas cost incentive mechanism (GCIM) which became effective on November 1, 1997, for each of the three years ending October 31, 1998, 1999 and 2000. Under the GCIM, Wisconsin Gas's gas commodity and capacity costs are compared to monthly benchmarks. If, at the end of each GCIM year, such costs deviate by more than 1.5% from the benchmark cost of gas, the utility shares such excess or reduced costs on a 50-50 basis with customers. The sharing mechanism applies only to costs between 1.5% and 4% above or below the benchmark. The new GCIM provides an opportunity for Wisconsin Gas's earnings to increase or decrease as a result of gas and capacity acquisition activities. Wisconsin Gas complies with the provisions of Statement of Financial Accounting Standards (SFAS No. 71) "Accounting for the Effects of Certain Types of Regulation," which provides that rate-regulated public utilities such as Wisconsin Gas record certain costs and credits allowed in the ratemaking process in different periods than would be required for unregulated businesses. In the event Wisconsin Gas determines that it no longer meets the criteria for following SFAS 71, the accounting impact would be an extraordinary, non-cash charge to operations of an amount that could be material. Criteria that give rise to the discontinuance of SFAS 71 include (1) increasing competition that restricts Wisconsin Gas's ability to establish prices to recover specific costs and (2) a significant change in the manner in which rates are set by regulators from cost-based regulation to another form of regulation. SFAS 71 continues to be applicable to Wisconsin Gas in that its rates are approved by a third party regulator and are designed to recover its cost of service. Wisconsin Gas believes its current cost-based rates are competitive in the open market. Pipeline companies have been allowed to pass through to local gas distributors various costs incurred in the transition to FERC Order No. 636. The PSCW has authorized the recovery through rates of costs that have been passed through to Wisconsin Gas. Although complete assurance cannot be given, it is believed that any additional future transition costs will also be recoverable from customers. Environmental Matters - --------------------- Wisconsin Gas has identified two previously owned manufactured gas plant sites where it is responsible for environmental remediation. Wisconsin Gas started remediation at one site in the first quarter of 1998 and the work should be completed during 1999. Wisconsin Gas is currently evaluating potential remedial options at the second site. Wisconsin Gas currently anticipates that the costs incurred in the remediation effort will be recoverable from insurers or through rates and will not have a material adverse effect on the Company's liquidity or results of operations. The manufacturing segment has provided reserves believed sufficient to cover its estimated costs related to contamination associated with its manufacturing facilities. For additional disclosure regarding environmental matters, see Note 8 of Notes to Consolidated Financial Statements. 13 Year 2000 Date Conversion - ------------------------- Issues relating to Year 2000 conversion are the result of computer software programs being written using two digits rather than four to define the applicable year. Any of the Company's software programs, computer hardware or equipment that have date sensitive software or embedded chips may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, distribute natural gas, manufacture products or engage in other normal business activities. The Company has developed a formal plan to ensure that its significant date-sensitive computer software and hardware systems (Information Technology) and other equipment utilized in its various activities (Operating Equipment) will be Year 2000 compliant and operational on a timely basis. The plan addresses all of the Company's locations throughout the world, and includes a review of computer applications that connect elements of the Company's business directly to its customers and suppliers. The plan also includes an assessment process to determine if the Company's significant customers and suppliers will be Year 2000 compliant. The Company's plan to resolve issues relating to Year 2000 conversion includes four major phases - assessment, remediation, testing, and implementation. To assist the Company in reaching Year 2000 compliance, the Company has retained third party consultants. The Company has substantially completed the assessment phase of its plan for all of its significant Information Technology and Operating Equipment that it believes could be affected by the Year 2000 conversion. Based upon its assessment, the Company concluded that it would be necessary to reprogram and/or replace certain of its Information Technology. The Company also determined that certain of its Operating Equipment would also require modification to ensure it remains operational. For its Information Technology applications as of December 31, 1998, the Company believes it is approximately 72% compliant on all of its significant systems, and estimates that it will complete software reprogramming and/or replacement in the second quarter of 1999. The Company believes that the Operating Equipment at December 31, 1998 is approximately 64% compliant, and the Company is targeting completion during the second quarter of 1999. With respect to operations that involve third parties, the Company has made inquiries of its significant customers and suppliers and, at the present time and based on such inquiries, is not aware of Year 2000 issues facing these third parties that would materially impact the Company's operations. However, the Company has no means of ensuring that these customers and suppliers (and, in turn, their customers and suppliers) will be Year 2000 compliant in a timely manner. The inability of these parties to successfully resolve their Year 2000 issues could have a material adverse effect on the Company. 14 Despite the efforts that the Company has undertaken, there can be no assurances that every Year 2000 related issue will be identified and addressed before January 1, 2000. An unexpected failure as a result of a Year 2000 compliance issue could result in an interruption in certain normal business activities or operations. For that reason, the Company is currently developing contingency plans to address alternatives in the event certain Year 2000 compliance failures occur. Through December 31, 1998, the Company had spent approximately $3.9 million for Year 2000 remediation. The amount of additional development and remediation costs necessary for the Company to prepare for Year 2000 is estimated to be approximately $0.9 million and is expected to be funded through operating cash flow. The estimated costs of, and timetable for, becoming Year 2000 compliant constitute "forward looking statements" as defined in the Private Securities Litigation Reform Act of 1995. Annual Degree Days Bar Chart % COLDER (WARMER) THAN 20-YEAR AVERAGE 1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- (16.4) 1.0 6.8 (2.8) (9.0) International Revenues Bar Chart $ IN MILLIONS 1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- $ 139.5 $ 143.8 $ 140.9 $ 130.2 $ 114.2 WICOR Operating Income Bar Chart $ IN MILLIONS 1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- Energy $ 43.1 $ 59.0 $ 64.5 $ 58.8 $ 44.4 Manufacturing 41.5 35.0 26.2 20.3 22.2 -------- -------- -------- -------- -------- Total $ 84.6 $ 94.0 $ 90.7 $ 79.1 $ 66.6 ======== ======== ======== ======== ======== WICOR Return on Average Common Equity Bar Chart AS A PERCENTAGE 1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- 11.3 13.0 12.9 13.1 11.6 15 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders and Board of Directors of WICOR, Inc.: We have audited the accompanying consolidated balance sheets and statements of capitalization of WICOR, Inc. (a Wisconsin corporation) and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of earnings, common equity and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of WICOR, Inc.'s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of WICOR, Inc. and subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. Arthur Andersen LLP Milwaukee, Wisconsin, January 25, 1999. 16 WICOR, INC. CONSOLIDATED STATEMENT OF EARNINGS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
YEARS ENDED DECEMBER 31, 1998 1997 1996 ------------ ------------ ------------ Operating Revenues Energy $ 481,489 $ 596,262 $ 602,685 Manufacturing 462,694 424,779 409,916 ------------ ------------ ------------ 944,183 1,021,041 1,012,601 ------------ ------------ ------------ Operating Costs and Expenses Cost of gas sold 295,601 394,101 393,681 Manufacturing cost of sales 329,248 307,160 297,053 Operations and maintenance 190,674 182,976 187,557 Depreciation and amortization 35,038 33,173 34,355 Taxes, other than income taxes 9,039 9,602 9,244 ------------ ------------ ------------ 859,600 927,012 921,890 ------------ ------------ ------------ Operating Income 84,583 94,029 90,711 Interest expense (16,746) (17,404) (18,349) Other income, net 3,706 1,222 1,114 ------------ ------------ ------------ Income before income taxes 71,543 77,847 73,476 Income tax provision 26,048 28,324 26,705 ------------ ------------ ------------ Net earnings $ 45,495 $ 49,523 $ 46,771 ============ ============ ============ Per Share of Common Stock* Basic earnings $ 1.22 $ 1.34 $ 1.27 Diluted earnings $ 1.21 $ 1.33 $ 1.27 Cash dividends paid $ 0.87 $ 0.85 $ 0.83 Average common shares outstanding 37,311 36,950 36,730 Average diluted shares outstanding 37,608 37,239 36,955
The accompanying notes are an integral part of these statements. 17 WICOR, INC. CONSOLIDATED STATEMENT OF EARNINGS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS QUARTERLY FINANCIAL DATA (UNAUDITED) Because seasonal factors significantly affect the Company's operations (particularly at Wisconsin Gas), the following data may not be comparable between quarters:
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS QUARTERS: ------------------------------------------------ First Second Third Fourth ----------- ----------- ---------- ---------- 1998 - ---- Operating revenues $ 303,327 $ 219,879 $ 172,746 $ 248,231 Operating income $ 42,985 $ 13,904 $ 797 $ 26,897 Earnings available for common stock $ 24,963 $ 6,024 $ (1,211) $ 15,719 Basic earnings (loss) per common share* $ 0.67 $ 0.16 $ (0.03) $ 0.42 Diluted earnings (loss) per common share* $ 0.66 $ 0.16 $ (0.03) $ 0.42 1997 - ---- Operating revenues $ 349,065 $ 221,605 $ 173,342 $ 277,029 Operating income $ 48,879 $ 14,427 $ 612 $ 30,111 Earnings available for common stock $ 27,908 $ 6,315 $ (2,071) $ 17,371 Basic earnings (loss) per common share* $ 0.76 $ 0.17 $ (0.06) $ 0.47 Diluted earnings (loss) per common share* $ 0.75 $ 0.17 $ (0.06) $ 0.46 Quarterly earnings per share may not total to the amounts reported for the year since the computation is based on weighted average common shares outstanding during each quarter. *Adjusted for a two-for-one stock split in May 1998
18 WICOR, INC. CONSOLIDATED BALANCE SHEETS
DECEMBER 31, -------------------------- THOUSANDS OF DOLLARS 1998 1997 ------------ ------------ ASSETS Current Assets: Cash and cash equivalents $ 13,383 $ 11,810 Accounts receivable, less allowance for doubtful accounts of $12,511 and $15,364, respectively 137,321 164,243 Accrued revenues 47,483 44,842 Manufacturing inventories 86,312 83,431 Gas in storage 36,919 41,887 Deferred income taxes 17,195 21,531 Prepayments and other 15,542 16,924 ------------ ------------ 354,155 384,668 ------------ ------------ Property, Plant and Equipment, at cost: Energy 829,286 801,523 Manufacturing 153,381 141,610 ------------ ------------ 982,667 943,133 Less accumulated depreciation and amortization 535,002 497,239 ------------ ------------ 447,665 445,894 ------------ ------------ Deferred Charges and Other: Regulatory assets 59,319 53,910 Goodwill 67,552 65,953 Prepaid pension costs 50,011 42,753 Other 36,494 38,154 ------------ ------------ 213,376 200,770 ------------ ------------ $ 1,015,196 $ 1,031,332 ============ ============
19 WICOR, INC. CONSOLIDATED BALANCE SHEETS
DECEMBER 31, -------------------------- THOUSANDS OF DOLLARS 1998 1997 ------------ ------------ LIABILITIES AND CAPITALIZATION Current Liabilities: Short-term borrowings $ 107,653 $ 118,900 Current portion of long-term debt 3,528 43,926 Accounts payable 70,000 75,034 Refundable gas costs 18,570 24,776 Accrued payroll and benefits 20,490 18,599 Accrued taxes 7,885 9,684 Other 16,526 16,757 ------------ ------------ 244,652 307,676 ------------ ------------ Deferred Credits and Other Liabilities: Postretirement benefit obligation 60,627 64,323 Regulatory liabilities 32,153 36,533 Deferred income taxes 49,065 43,975 Accrued environmental remediation costs 11,215 14,300 Unamortized investment tax credit 6,357 6,808 Other 19,217 18,987 ------------ ------------ 178,634 184,926 ------------ ------------ Commitments and Contingencies (Note 8) Capitalization (See accompanying statement): Long-term debt 188,470 149,110 Redeemable preferred stock - - Common equity 403,440 389,620 ------------ ------------ 591,910 538,730 ------------ ------------ $ 1,015,196 $ 1,031,332 ============ ============
The accompanying notes are an integral part of these statements. 20 WICOR, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, THOUSANDS OF DOLLARS ---------------------------------- 1998 1997 1996 Operations: ---------- ---------- ---------- Net earnings $ 45,495 $ 49,523 $ 46,771 Adjustments to reconcile net earnings to net cash flow from operating activities: Depreciation and amortization 54,531 53,740 54,871 Deferred income taxes 9,425 4,530 (1,103) Net pension/postretirement benefit/(income) (6,955) (1,725) 3,133 Changes in: Accounts receivable 14,292 2,046 (28,641) Manufacturing inventories (2,881) (7,463) (3,590) Gas in storage 4,968 (8,424) (9,512) Other current assets 623 (464) (1,167) Accounts payable (5,033) (25,975) 32,520 Refundable gas costs (6,206) (6,769) (2,802) Accrued taxes (1,039) 8,561 (6,028) Other current liabilities 2,745 (1,502) 4,225 Other noncurrent assets/liabilities (12,965) (16,754) (13,261) ---------- ---------- ---------- Cash provided by operating activities 97,000 49,324 75,416 Investment Activities: ---------- ---------- ---------- Capital expenditures (49,279) (51,572) (51,744) Proceeds from sale of assets 1,762 3,362 1,249 Acquisitions (7,288) (2,065) 22 Other, net 301 293 285 ---------- ---------- ---------- Cash used in investing activities (54,504) (49,982) (50,188) Financing Activities: ---------- ---------- ---------- Change in short-term borrowings (14,284) 6,115 (969) Issuance of long-term debt 52,828 27,000 10,045 Reduction of long-term debt (50,368) (11,157) (9,194) Issuance of common stock 2,878 2,684 3,345 Dividends paid on common stock (32,461) (31,397) (30,485) Other 484 439 434 ---------- ---------- ---------- Cash used in financing activities (40,923) (6,316) (26,824) ---------- ---------- ---------- Change in Cash and Cash Equivalents 1,573 (6,974) (1,596) Cash and cash equivalents at beginning of year 11,810 18,784 20,380 ---------- ---------- ---------- Cash and Cash Equivalents at End of Year $ 13,383 $ 11,810 $ 18,784 ========== ========== ========== Supplemental Disclosure of Cash Flow Information: Cash paid during the year for: Income taxes, net of refunds $ 17,847 $ 17,315 $ 34,669 Interest $ 16,590 $ 16,352 $ 16,824
The accompanying notes are an integral part of these statements. 21 WICOR, INC. CONSOLIDATED STATEMENTS OF CAPITALIZATION
THOUSANDS OF DOLLARS DECEMBER 31, ---------------------- 1998 1997 ---------- ---------- Long-Term Debt Wisconsin Gas: Commercial paper (See Note 6 of Notes to the Consolidated Financial Statements) $ 50,000 $ - 6.6% Notes due 2013 45,000 45,000 6.375% Notes due 2005 65,000 65,000 First mortgage bonds Adjustable rate series, 7.2% and 8.1%, respectively, due 1999 - 2,000 WICOR Industries, Inc.: Commercial paper under multi- year credit agreements 17,000 27,000 Securities loan agreement, 11.75% due semi- annually through 2000 (includes unamortized bond premium of $550 and $814, respectively) 6,486 6,750 First mortgage notes, adjustable rate, 4.6% to 6.5%, due semi-annually through 2000 3,043 266 Industrial revenue bonds, 7.84%, payable through 2000 295 830 Unamortized (discount), net (1,161) (1,343) ESOP loan guarantee 2,807 3,607 ---------- ---------- 188,470 149,110 ---------- ---------- Redeemable Preferred Stock WICOR: $1.00 par value; authorized 1,500,000 shares - - Wisconsin Gas: Without par value, cumulative; authorized 1,500,000 shares - - ---------- ---------- - - Common Equity: ---------- ---------- Common stock, $1.00 par value, authorized 120,000,000 shares; outstanding 37,359,000 and 18,601,000 shares, respectively 37,359 18,601 Other paid-in capital 216,821 232,702 Retained earnings 160,937 147,903 Accumulated other comprehensive income (7,905) (5,377) Unearned comp. - ESOP and restricted stock (3,772) (4,209) ---------- ---------- 403,440 389,620 ---------- ---------- Total Capitalization $ 591,910 $ 538,730 ========== ==========
The accompanying notes are an integral part of these statements. 22 WICOR, INC. CONSOLIDATED STATEMENTS OF COMMON EQUITY
Unearned Accumulated Compensation Other Other ESOP and Common Paid-in Retained Comprehensive Restricted THOUSANDS OF DOLLARS Stock Capital Earnings Income Stock --------- --------- ---------- ------------- ------------ Balance December 31, 1995 $ 18,237 $219,133 $ 113,491 $ (1,593) $ (5,595) Net earnings - - 46,771 - - Other comprehensive income: Foreign currency translation - - - 1,474 - Minimum pension liability - - - (485) - --------- --------- ---------- ------------- ------------ Comprehensive income - - 46,771 989 - --------- --------- ---------- ------------- ------------ Issued in connection with employee benefit plans/other 170 4,908 - - - Dividends on common stock - - (30,485) - - ESOP loan payments - - - - 908 Issuance of restricted stock - - - - (1,208) Amortization and forfeiture of restricted stock - - - - 773 --------- --------- ---------- ------------- ------------ Balance December 31, 1996 18,407 224,041 129,777 (604) (5,122) Net earnings - - 49,523 - - Other comprehensive income: Foreign currency translation - - - (4,375) - Minimum pension liability - - - (398) - --------- --------- ---------- ------------- ------------ Comprehensive income - - 49,523 (4,773) - --------- --------- ---------- ------------- ------------ Issued in connection with employee benefit plans/other 194 8,661 - - - Dividends on common stock - - (31,397) - - ESOP loan payments - - - - 800 Issuance of restricted stock - - - - (145) Amortization and forfeiture of restricted stock - - - - 258 --------- --------- ---------- ------------- ------------ Balance December 31, 1997 $ 18,601 $232,702 $ 147,903 $ (5,377) $ (4,209) ========= ========= ========== ============= ============
23 WICOR, INC. CONSOLIDATED STATEMENTS OF COMMON EQUITY
Unearned Accumulated Compensation Other Other ESOP and Common Paid-in Retained Comprehensive Restricted THOUSANDS OF DOLLARS Stock Capital Earnings Income Stock --------- --------- ---------- ------------- ------------ Balance December 31, 1997 $ 18,601 $232,702 $ 147,903 $ (5,377) $ (4,209) Net earnings - - 45,495 - - Other comprehensive income: Foreign currency translation - - - (1,405) - Minimum pension liability - - - (1,123) - --------- --------- ---------- ------------- ------------ Comprehensive income - - 45,495 (2,528) - --------- --------- ---------- ------------- ------------ Issued in connection with employee benefit plans/other 96 2,781 - - - Two-for-one common stock split 18,662 (18,662) - - - Dividends on common stock - - (32,461) - - ESOP loan payments - - - - 800 Issuance of restricted stock - - - - (884) Amortization and forfeiture of restricted stock - - - - 521 --------- --------- ---------- ------------- ------------ Balance December 31, 1998 $ 37,359 $216,821 $ 160,937 $ (7,905) $ (3,772) ========= ========= ========== ============= ============
The accompanying notes are an integral part of these statements. 24 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 Accounting Policies - ----------------------------- A Principles of consolidation The consolidated financial statements include the accounts of WICOR, Inc., and its wholly-owned subsidiaries: Wisconsin Gas, WICOR Energy Services Company (WESCO), FieldTech and WICOR Industries, Inc. (WICOR Industries), an intermediate holding company for various manufacturing subsidiaries. Intercompany transactions and accounts are eliminated in consolidation. B Business The Company is a diversified holding company with two principal business groups: energy services and pump manufacturing. Energy services consists primarily of natural gas distribution through Wisconsin Gas, the oldest and largest natural gas distribution utility in Wisconsin. Wisconsin Gas is subject to regulation by the Public Service Commission of Wisconsin (PSCW) and gives recognition to ratemaking policies substantially in accordance with the FERC System of Accounts. At December 31, 1998, Wisconsin Gas served approximately 529,000 customers in 524 communities. The Energy Group accounted for 51% of the Company's 1998 operating revenues and operating income. Through its subsidiary, WICOR Industries, the Company engages in the manufacture and sale of pumps and processing equipment used to pump, control, transfer, hold and filter water and other fluids. The Company's products are used primarily in water system, pool and spa, agriculture, RV/marine and beverage/food service applications. The Company markets its manufactured products in over 100 countries. C Gas distribution revenues and purchased gas costs Utility billings are rendered on a cycle basis. Revenues include estimated amounts accrued for service provided but not yet billed. Wisconsin Gas's rate schedules contain provisions which permit the recovery of actual purchased gas costs incurred. The difference between actual gas costs incurred and costs recovered through rates is deferred as a current asset or liability. Subject to the sharing mechanism discussed below, the deferred balance is returned to or recovered from customers at intervals throughout the year and any residual balance at the annual October 31 reconciliation date is subsequently refunded to or recovered from customers. A GCIM approved by the PSCW in October 1997 became effective on November 1, 1997, for each of the three years ending October 31, 1998, 1999 and 2000. Under the GCIM, Wisconsin Gas's gas commodity and capacity costs are compared to monthly benchmarks. If, at the end of each GCIM year, such costs deviate by more than 1.5% from the benchmark cost of gas, the utility shares such excess or reduced costs on a 50-50 basis with customers. The sharing mechanism applies only to costs between 1.5% and 4% above or below the benchmark. The GCIM provides an opportunity for Wisconsin Gas's earnings to increase or decrease as a result of gas and capacity acquisition activities. Reduced gas costs during the first year under the GCIM have been shared between the Company and its customers. 25 D Income taxes The Company files a consolidated Federal income tax return and allocates Federal current tax expense or credits to each domestic subsidiary based on its respective separate tax computation. For Wisconsin Gas, investment tax credits are amortized to income over the applicable service lives of the related properties consistent with regulatory treatment. E Earnings per common share Effective December 31, 1997, SFAS 128 "Earnings per Share" requires a dual presentation of earnings per share - basic and diluted. Basic earnings per common share has been computed by dividing net earnings by the weighted average number of common shares outstanding. Diluted earnings per share has been computed by dividing net earnings by the weighted average number of common shares outstanding, including the dilutive effects of stock options. F Inventories ENERGY - Substantially all gas in storage inventory is priced using the weighted average method of accounting. MANUFACTURING - Approximately 61% and 57% of manufacturing inventories, in 1998 and 1997, respectively, are priced using the last-in, first-out (LIFO) method (not in excess of market), with the remaining inventories priced using the first-in, first-out (FIFO) method. If the FIFO method had been used exclusively, manufacturing inventories would have been $7.7 million and $7.9 million higher at December 31, 1998 and 1997, respectively. G Plant and depreciation Gas distribution property, plant and equipment is stated at original cost, including overhead allocations. Upon ordinary retirement of utility plant assets, original cost plus cost of removal, net of salvage, is charged to accumulated depreciation, and no gain or loss is recognized. The depreciation of Wisconsin Gas's assets is computed using straight-line rates over estimated useful lives and considers estimated removal costs and salvage value. These rates have been consistently used for ratemaking purposes. The composite rates were 4.4%, 4.3% and 4.5% for 1998, 1997 and 1996, respectively. Depreciation of manufacturing property is calculated under the straight-line method over the estimated useful lives of the assets (3 to 10 years for equipment and 30 years for buildings) and is primarily included in cost of sales. 26 H Regulatory accounting Wisconsin Gas accounts for its regulated operations in accordance with SFAS 71, "Accounting for the Effects of Certain Types of Regulation." This statement sets forth the application of generally accepted accounting principles to those companies whose rates are determined by an independent third-party regulator. The economic effects of regulation can result in regulated companies recording costs that have been or are expected to be allowed in the ratemaking process in a period different from the period in which the costs would be charged to expense by an unregulated enterprise. When this occurs, costs are deferred as assets in the balance sheet (regulatory assets) and recorded as expenses in the periods when those same amounts are reflected in rates. Additionally, regulators can impose liabilities upon a regulated company for amounts previously collected from customers and for amounts that are expected to be refunded to customers (regulatory liabilities). The amounts recorded as regulatory assets and regulatory liabilities in the Consolidated Balance Sheet at December 31 are as follows: THOUSANDS OF DOLLARS 1998 1997 ---------- ---------- Regulatory assets: Postretirement benefit costs (Note 10) $ 36,720 $ 39,498 Deferred uncollectible expenses 19,960 11,056 Income tax-related amounts due from customers 2,295 2,648 Other 344 708 ---------- ---------- $ 59,319 $ 53,910 ========== ========== Regulatory liabilities: Income tax-related amounts due to customers $ 18,058 $ 19,725 Unrecognized pension income (Note 10) 10,929 13,780 Other 3,166 3,028 ---------- ---------- $ 32,153 $ 36,533 ========== ========== Wisconsin Gas is precluded from discontinuing service to residential customers within its service area during the heating season. Any differences between doubtful account provisions based on actual experience and provisions allowed for ratemaking purposes by the PSCW are deferred and recovered in future rates. I Cash flows Cash equivalents consist of highly liquid investments which are readily convertible into cash and have maturities of three months or less. Due to the short maturity of these instruments, market value approximates cost. Beginning in 1995, the Company, through an agent, purchased common stock in the open market for shareholders who elected to reinvest their dividends in common stock. 27 J Derivative financial instruments The Company uses derivative financial instruments to manage commodity risks associated with the price of natural gas and to manage foreign exchange risks. The Company's policy prohibits the use of derivative financial instruments for trading purposes. Wisconsin Gas has a commodity risk management program that has been approved by the PSCW. This program allows Wisconsin Gas to utilize call and put option contracts to reduce market risk associated with fluctuations in the price of natural gas purchases and gas in storage. Under this program, Wisconsin Gas has the ability to hedge up to 50% of its planned gas deliveries for the heating season. The PSCW has also allowed Wisconsin Gas to hedge gas purchased for storage during non-heating months. The cost of the call and put option contracts, as well as gains or losses realized under the contracts do not affect net income as they are recovered dollar for dollar under the purchased gas adjustment clause. As of December 31, 1998, Wisconsin Gas had put options covering approximately 33% of the volumes of gas in storage, and call options covering 15% of the expected natural gas purchases for the remainder of the 1998-1999 heating season. WESCO utilizes gas futures contracts to manage commodity price risk associated with firm customer sales commitments. Unrealized gains or losses on these instruments are deferred and recognized in earnings in the period the sales occurs. As of December 31, 1998, WESCO had natural gas futures contracts with a notional value of $6.6 million. Substantially all of the futures contracts expire in 1999. Certain manufacturing subsidiaries use foreign exchange futures and forward contracts to hedge foreign exchange exposure resulting from international purchases or sales of products. Gains and losses from open contracts are deferred until recognized as part of the transaction. These contracts were not material. During 1998 and 1997, WICOR entered into weather insurance agreements to hedge a portion of the impact weather has on Energy Group earnings. Under the agreements, a payment will be made or received if the heating degree days during the heating season fall outside a specific range. The payment is limited to a maximum of $2.0 million per year. At December 31, 1998, the fair value of the agreement entered into for the 1998-1999 heating season was not significant. During 1998, the Company recorded income of $1.2 million in connection with the agreement entered into for the 1997-1998 heating season. K Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. L Reclassifications Certain prior year financial statement amounts have been reclassified to conform to their current year presentation. 28 Note 2 New Accounting Standards - ---------------------------------- In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 133 (SFAS 133), "Accounting for Derivative Instruments and Hedging Activities," effective in the first quarter of 2000. SFAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. The Company is currently evaluating the impact of the provisions of SFAS 133 on its financial statements. The Company does not believe that SFAS 133 will materially increase volatility in earnings and other comprehensive income. During 1998, the Company adopted Statement of Position No. 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," which provides guidance on accounting for the costs of computer software developed or obtained for internal use. The impact of adopting this statement on the Company's consolidated financial statements was immaterial. Note 3 Mergers and Acquisitions - ---------------------------------- During 1998, WICOR and its subsidiaries acquired a small municipal water utility, made an additional equity investment in an Italian subsidiary and entered into a joint venture arrangement with an existing Chinese pump manufacturer. Total funds invested as a result of these activities amounted to $7.3 million during 1998. During 1997, WICOR and its subsidiaries completed four acquisitions. The aggregate purchase price was approximately $10 million and was financed using cash and by issuing 255,676 shares of the Company's common stock. Three of the acquisitions were pump, fluid processing and filtration equipment companies. The fourth acquisition was a utility meter reading and meter installation company. Each of the acquisitions was accounted for as a purchase and the results of operations of the acquired companies were included in the consolidated financial statements from their respective acquisition dates. The excess of the purchase price over the estimated fair value of net assets acquired has been recorded as goodwill and is being amortized over 40 years. 29 Note 4 Income Taxes - ---------------------- The provision for income taxes differs from the amount of income tax determined by applying the applicable U.S. statutory federal income tax rate to pretax income as a result of the following differences:
YEARS ENDED DECEMBER 31, ---------------------------------------------------- THOUSANDS OF DOLLARS 1998 1997 1996 ---------------- ---------------- ---------------- Statutory U.S. tax rates $ 25,064 35.0% $ 27,327 35.0% $ 25,717 35.0% State income taxes, net 3,151 4.4 3,383 4.3 3,818 5.2 Other, net (2,167) (3.0) (2,386) (3.0) (2,830) (3.9) ---------------- ---------------- ---------------- Effective Tax Rates $ 26,048 36.4% $ 28,324 36.3% $ 26,705 36.3% ================ ================ ================
The current and deferred components of income tax expense (benefit) for each of the years ended December 31 are as follows:
THOUSANDS OF DOLLARS 1998 1997 1996 ---------- ---------- ---------- Current: Federal $ 15,960 $ 19,229 $ 23,479 State 3,640 4,146 6,022 Foreign 1,432 808 752 ---------- ---------- ---------- Total Current 21,032 24,183 30,253 ---------- ---------- ---------- Deferred: Federal 3,698 1,836 (2,610) State 1,262 926 (264) Foreign 56 1,379 (674) ---------- ---------- ---------- Total Deferred 5,016 4,141 (3,548) ---------- ---------- ---------- Total Provision $ 26,048 $ 28,324 $ 26,705 ========== ========== ==========
30 The components of deferred income tax classified as current assets and long-term liabilities at December 31 are as follows:
THOUSANDS OF DOLLARS 1998 1997 ---------- ---------- Current deferred income tax assets: Recoverable gas costs $ 7,176 $ 9,712 Deferred compensation 3,246 3,407 Inventory 2,398 2,421 Product related/warranty 1,123 1,254 Other 3,252 4,737 ---------- ---------- $ 17,195 $ 21,531 ========== ========== Long-term deferred income tax liabilities: Property related $ 49,427 $ 48,905 Systems development costs 5,178 6,993 Investment tax credit (4,205) (4,503) Postretirement benefits (8,064) (9,217) Deferred compensation (4,019) (4,042) Pension benefits 14,798 11,033 Environmental (3,180) (4,819) Other (870) (375) ---------- ---------- $ 49,065 $ 43,975 ========== ==========
Note 5 Short-term Borrowings and Lines of Credit - --------------------------------------------------- As of December 31, 1998 and 1997, the Company had total unsecured lines of credit available from banks of $266.6 million and $240.0 million, respectively. These borrowing arrangements may require the maintenance of average compensating balances, which are generally satisfied by balances maintained for normal business operations, and may be withdrawn at any time. During 1997, the Company, and certain subsidiaries, renegotiated their existing revolving credit facilities. Financial covenants under the Company's five-year $115 million credit facilities, which expire in August, 2002, include leverage and interest coverage ratios. 31 The components of short-term borrowings at December 31 are as follows: THOUSANDS OF DOLLARS 1998 1997 ---------- ---------- Notes payable to banks Non-U.S. subsidiaries $ 15,976 $ 20,668 Commercial paper - U.S. 91,677 98,232 ---------- ---------- $ 107,653 $ 118,900 ========== ========== Weighted average interest rates on debt outstanding at end of year: THOUSANDS OF DOLLARS 1998 1997 ---------- ---------- Notes payable to banks Non-U.S. subsidiaries 4.6% 5.8% Commercial paper - U.S. 5.7% 5.8% Highest month-end balance $ 107,653 $ 118,900 Average month-end balance $ 63,480 $ 79,701 Note 6 Long-term Debt - ------------------------ In January 1999, Wisconsin Gas issued $50 million of 5.5% Unsecured Notes due 2009. The proceeds of this offering were used in part to reduce commercial paper issued in November 1998, in connection with the maturity of $40 million of 7.5% Notes. Maturities and sinking fund requirements during the succeeding five years on all long-term debt total $3.5 million, $7.6 million, $1.2 million, $18.6 million and $0.4 million in 1999, 2000, 2001, 2002 and 2003. Note 7 Restrictions - ---------------------- On May 7, 1998, the PSCW approved an increase in the amount the Company may invest in nonutility businesses. The new investment limitation permits nonutility investments to constitute up to 60% of the Company's total capitalization. The PSCW also found that the utility does not have to be WICOR's predominant business. The PSCW conditioned the change on the utility maintaining at least a single A bond rating and its continued compliance with the customer service and safety standards included in the PARM order. Failure to comply with these conditions could trigger a reopening of the investment limitation. Under the new investment limitation, the amount available for future nonutility investments at December 31, 1998, was $351.7 million. 32 The PSCW has established a 13-month average equity ratio range of 43% to 50% for Wisconsin Gas and also requires Wisconsin Gas to request PSCW approval prior to the payment of dividends on its common stock to the Company if the payment would reduce its common equity (net assets) below 43% of total capitalization (including short-term debt). Under this requirement, $41.4 million of Wisconsin Gas's net assets at December 31, 1998, plus future earnings, were available for such dividends without PSCW approval. In addition, the PSCW must also approve any dividends in excess of $16 million for any 12-month period beginning November 1 if such dividends would reduce Wisconsin Gas's 13-month average equity below 48.43% of its total capitalization. Wisconsin Gas paid $6.0 million in dividends in November 1998 and expects to pay $25.5 million in dividends for the 12 months ending October 1999. At December 31, 1998, Wisconsin Gas's equity ratio was 53.2%. Combined restricted common equity of the Company's subsidiaries totaled $266.7 million under the most restrictive provisions as of December 31, 1998; accordingly, $136.8 million of consolidated retained earnings is available for payment of dividends. Note 8 Commitments and Contingencies - --------------------------------------- A Gas supply Wisconsin Gas has agreements for firm pipeline and storage capacity that expire at various dates through 2008. The aggregate amount of required payments under such agreements totals approximately $505.9 million, with annual required payments of $105.5 million in 1999, $97.5 million in 2000, $95.6 million in 2001, $93.5 million in 2002 and $74.9 million in 2003. Wisconsin Gas's total payments for firm pipeline and storage capacity prior to recovery from sales of excess capacity were $113.9 million in 1998, $126.6 million in 1997 and $129.6 million in 1996. The purchased gas adjustment provisions of Wisconsin Gas's rate schedules permit the recovery of gas costs from its customers subject to the GCIM sharing mechanism. The FERC has allowed ANR Pipeline Company (ANR) to recover capacity and "above market" supply costs associated with quantities purchased from Dakota Gasification Company (Dakota) under a long-term contract expiring in year 2009. Consistent with guidelines set forth in Order No. 636, ANR has allocated 90% of Dakota costs to firm transportation service. Based on its contracted quantities with ANR, Wisconsin Gas is currently paying approximately $100,000 per month of Dakota costs. Transmission costs billed to Wisconsin Gas are being recovered from customers under the purchased gas provisions within its rate schedules. B Capital expenditures Certain commitments have been made in connection with 1999 capital expenditures. The Energy Group's capital expenditures for 1999 are estimated at $45.3 million. The Manufacturing Group's capital expenditures for 1999 are estimated at $18.7 million. 33 C Environmental matters Wisconsin Gas has identified two previously owned sites on which it operated manufactured gas plants. Such plants ceased operations prior to the mid-1950's. During 1997, Wisconsin Gas completed a comprehensive review of its potential environmental accrual stemming from these two former manufactured gas plant sites. Significant technological developments, lower unit costs and the recognition of the "brown fields" concept by regulatory agencies all resulted in a reduction of the estimated probable liability for cleanup to $7.9 million. Expenditures over the next three years are expected to total approximately $5 million. The cleanup estimate discussed above includes the costs of feasibility studies, data collection, soil and groundwater remediation activities and ongoing monitoring activities through 2017. Environmental remediation work for one of the sites was commenced in 1998 and will continue through 1999. Wisconsin Gas is evaluating potential remedial options at the second site. It is reasonably possible that, due to uncertainties associated with defining the nature and extent of environmental contamination, application of laws and regulations by regulatory authorities and changes in remediation technology, the ultimate cost of remediation could change in the future. Due to anticipated regulatory treatment, changes in the recorded liability do not immediately impact net income. Under the current ratemaking treatment approved by the PSCW, the costs expended in the environmental remediation of these sites, net of any insurance proceeds, would be deferred and recovered from gas customers. The Company's manufacturing subsidiaries are involved in various environmental matters, including matters in which the subsidiaries or alleged predecessors have been named as potentially responsible parties under the Comprehensive Environmental Response Compensation and Liability Act (CERCLA). The Company has established accruals for all environmental contingencies of which management is currently aware in accordance with generally accepted accounting principles. In establishing these accruals, management considered (a) reports of environmental consultants retained by the Company, (b) the costs incurred to date by the Company at sites where clean-up is presently ongoing and the estimated costs to complete the necessary remediation work remaining at such sites, (c) the financial solvency, where appropriate, of other parties that are responsible for effecting remediation at specified sites, and (d) the experience of other parties that have been involved in the remediation of comparable sites. The accruals recorded by the Company with respect to environmental matters have not been reduced by potential insurance or other recoveries and are not discounted. Although the Company has and will continue to pursue such claims against insurance carriers and other responsible parties, future potential recoveries remain uncertain and, therefore, have not been recorded as a reduction to the estimated gross environmental liabilities. 34 The Company periodically reviews its accrued liabilities for such remediation costs as evidence becomes available indicating that its remediation liability has changed. Based on the foregoing and given current information, management believes that future costs in excess of the amounts accrued on all presently known and quantifiable environmental contingencies will not be material to the Company's financial position or results of operations. D Other The Company is party to various legal proceedings arising in the ordinary course of business which are not expected to have a material effect on the Company's financial position or results of operations. Note 9 Common Stock and Other Paid-in Capital - ------------------------------------------------ In April 1998, the Company's Board of Directors approved a two-for-one split of the Company's common stock to be effected by the distribution of one share for each share outstanding. Such distribution was made on May 29, 1998, to shareholders of record as of the close of business on May 14, 1998. The par value of the additional shares of common stock issued ($1 per share) in connection with the stock split has been credited to common stock and a like amount charged to other paid-in capital. Per share amounts throughout the financial statements and footnotes have been restated. In connection with stock split, the Company increased its authorized shares of common stock from 60,000,000 to 120,000,000 of which 37,359,413 shares and 37,201,264 shares were outstanding at December 31, 1998 and 1997, respectively. Common stock totaling 8,273,295 shares is reserved for issuance under the Company's dividend reinvestment, stock option and incentive savings plans. In addition 45,661,308 shares are reserved pursuant to the Company's shareholder rights plan. Under certain circumstances, each right entitles the shareholder to purchase one common share at an exercise price of $37.50, subject to adjustment. The rights are not exercisable until 10 business days after a person or group announces a tender offer or exchange offer which would result in their acquiring ownership of 20% or more of the Company's outstanding common stock, or after a person or group acquires at least 20% of the Company's outstanding common shares. Under certain circumstances, including the existence of a 20% acquiring party, each holder of a right, other than the acquiring party, will have the right to purchase at the exercise price WICOR common stock having a value of two times the exercise price. If, after 20% or more of the outstanding shares of WICOR common stock is acquired by a person or group and the Company is then acquired by that person or group, rights holders would be entitled to purchase shares of common stock of the acquiring person or group having a market value of two times the exercise price of the rights. The rights do not have any voting rights and may be redeemed at a price of $.01 per right. The rights expire on August 29, 1999. 35 Note 10 Benefit Plans - ------------------------ A Pension and other postretirement benefit plans The Company provides defined benefit pension and postretirement benefit plans to employees. Effective January 1, 1998, the Company adopted SFAS 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits." The following provides a reconciliation of benefit obligations, plan assets and funded status of the plans, at December 31, 1998 and 1997.
OTHER POSTRETIREMENT PENSION BENEFITS BENEFITS --------------------- --------------------- THOUSANDS OF DOLLARS 1998 1997 1998 1997 ---------- ---------- ---------- ---------- Change in benefit obligation Benefit obligation at January 1 $ 181,018 $ 164,701 $ 105,863 $ 99,535 Service cost 4,014 4,042 1,176 2,102 Interest cost 12,782 12,742 5,822 6,731 Amendments and settlements (943) (879) (14,382) - Actuarial loss (gain) 15,733 11,929 (15,913) 1,730 Benefits paid (13,975) (11,517) (4,266) (4,235) ---------- ---------- ---------- ---------- Benefit obligation at December 31 198,629 181,018 78,300 105,863 ---------- ---------- ---------- ---------- Change in plan assets Fair value of plan assets at January 1 273,871 232,284 54,958 40,846 Actual return on plan assets 14,804 52,446 2,732 11,320 Employer contributions - - 3,948 5,717 Benefits paid from plan assets (13,270) (10,868) (3,187) (2,925) ---------- ---------- ---------- ---------- Fair value of plan assets at December 31 275,405 273,862 58,451 54,958 ---------- ---------- ---------- ---------- Funded status of the plans 76,776 92,844 (19,849) (50,905) Unrecognized net actuarial (gain) (26,734) (49,161) (16,223) (3,890) Unrecognized prior service cost 2,762 3,900 (26,474) (13,476) Unrecognized net transition (asset) (9,253) (10,950) 1,919 3,948 ---------- ---------- ---------- ---------- Net amount recognized $ 43,551 $ 36,633 $ (60,627) $ (64,323) ========== ========== ========== ========== Amounts recognized in the Consolidated Balance Sheets Prepaid benefit cost $ 50,011 $ 42,753 $ - $ - Accrued benefit liability (6,460) (6,120) (60,627) (64,323) Additional minimum liability (3,474) (2,351) - - Accumulated other comprehensive income 3,474 2,351 - - ---------- ---------- ---------- ---------- Net amount recognized $ 43,551 $ 36,633 $ (60,627) $ (64,323) ========== ========== ========== ========== Assumptions as of December 31 Discount rate (weighted average) 6.50% 7.25% 6.50% 7.25% Expected return on plan assets 9.00% 9.00% 9.00% 9.00% Rate of compensation increase 4.50% 4.50% 4.50% 4.50%
36 Net pension (income) costs and other postretirement benefit costs for each of the years ended December 31, include the following components:
OTHER POSTRETIREMENT PENSION BENEFITS BENEFITS -------------------------- -------------------------- THOUSANDS OF DOLLARS 1998 1997 1996 1998 1997 1996 -------- -------- -------- -------- -------- -------- Service costs $ 4,014 $ 4,042 $ 4,713 $ 1,176 $ 2,102 $ 2,712 Interest costs on projec- ted benefit obligations 12,782 12,742 12,833 5,822 6,731 7,330 Expected (gain) on assets (21,443) (19,884) (19,028) (5,168) (4,053) (3,412) Amortization of: Transition obli- gation (asset) (1,693) (1,693) (1,723) - - - Prior service cost 195 389 389 (1,384) (957) (957) Actuarial (gain) loss (40) (352) 141 (1,143) (719) 208 -------- -------- -------- -------- -------- -------- (6,185) (4,756) (2,675) (697) 3,104 5,881 Amortization of regula- tory (liability) asset (2,851) (2,851) (2,851) 2,778 2,778 2,778 -------- -------- -------- -------- -------- -------- Net benefit (income)/exp. $(9,036) $(7,607) $(5,526) $ 2,081 $ 5,882 $ 8,659 ======== ======== ======== ======== ======== ========
Pension plans Employer contributions and funding policies are consistent with funding requirements of Federal law and regulations. Commencing November 1, 1992, Wisconsin Gas pension costs or credits have been calculated in accordance with SFAS 87 and are recoverable from customers. Prior to this date, pension costs were recoverable in rates as funded. The cumulative difference between the amounts funded and the amounts based on SFAS 87 through November 1, 1992, is recorded as a regulatory liability and is being amortized as a reduction of pension expense over an eight-year period effective November 1, 1994. In 1998, the Company's Board of Directors approved certain amendments to the plan for non-represented employees of Wisconsin Gas, effective January 1, 1998. Such amendments change the manner in which benefits accrue and the time at which benefits become payable under the non-represented plan. 37 Postretirement health care and life insurance In addition to providing pension benefits, the Company provides certain health care and life insurance benefits for retired employees when they reach normal retirement age while working for the Company. Wisconsin Gas funds the accrual annually based on the maximum tax deductible amount. Commencing January 1, 1992, Wisconsin Gas postretirement benefit costs have been calculated in accordance with SFAS 106 and are recoverable from customers. The cumulative difference between the amounts funded and the amounts based on SFAS 106 through January 1, 1992, is recorded as a regulatory asset and is being amortized over a twenty-year period effective January 1, 1992. In 1998, the Company's Board of Directors approved certain amendments to the plan for non-represented employees of Wisconsin Gas, effective January 1, 1998. Such amendments change the manner in which benefits accrue and the time at which benefits become payable under the non-represented plan and impose a limitation on the dollar amount of the employer's share of the cost of covered benefits incurred by a plan participant. The postretirement benefit cost components for 1998 were calculated assuming health care cost trend rates ranging up to 10% for 1999 and decreasing to 5% in 2004. An increase of one percentage point in the assumed health care cost trend rate in each year would increase the accumulated postretirement benefit obligation as of December 31, 1998, by $3.6 million and the aggregate of the service and interest cost components of postretirement expense by $0.3 million. A corresponding decrease of one percentage point would decrease the accumulated postretirement benefit obligation by $3.1 million and the aggregate of the service and interest cost components of postretirement expense by $0.2 million. Plan assets are primarily invested in equities and fixed income securities. B Retirement savings plans Certain of the Company's operating subsidiaries maintain various employee savings plans, which provide employees a mechanism to contribute amounts up to 16% of their compensation for the year. Company matching contributions may be made for up to 5% of eligible compensation including 1% for the Employee Stock Ownership Plan (ESOP). Total contributions were valued at $1.9 million in 1998 and $1.8 million in 1997 and 1996. C Employee stock ownership plan In November 1991, WICOR established an ESOP covering non-union employees of Wisconsin Gas. The ESOP funds employee benefits of up to 1% of compensation with Company common stock distributed through the ESOP. The ESOP used the proceeds from a $10 million, adjustable rate loan (5.6% interest rate at December 31, 1998), guaranteed by the Company, to purchase 862,532 shares of WICOR common stock. The Company has extended the adjustable rate loan, with similar terms, until May 31, 2002. The unpaid balance ($2.8 million) is shown as long-term debt with a like amount of unearned compensation reported as a reduction of common equity on the Company's balance sheet. The ESOP trustee is repaying the loan with dividends on shares of the Company's common stock held in the ESOP and with Wisconsin Gas contributions to the ESOP. 38 D Stock option plans and restricted stock The Company has a total of 131 employees participating in one or more of its common stock option plans. All options were granted at prices not less than the fair market value on the date of grant and expire no later than eleven years from the date of grant.
1998 1997 1996 ------------------ ------------------ ------------------ WTD AVG WTD AVG WTD AVG THOUSANDS OF DOLLARS SHARES PRICE SHARES PRICE SHARES PRICE ---------- ------- ---------- ------- ---------- ------- Outstanding at January 1 1,959,716 $ 15.22 1,560,298 $ 13.38 1,490,100 $ 12.51 Granted 744,200 $ 23.61 538,400 $ 19.75 325,400 $ 16.50 Exercised (120,749) $ 13.23 (137,382) $ 12.11 (196,540) $ 11.55 Canceled (21,604) $ 21.13 (1,600) $ 15.66 (58,662) $ 14.69 ---------- ---------- ---------- Outstanding at December 31 2,561,563 $ 17.70 1,959,716 $ 15.22 1,560,298 $ 13.38 ========== ========== ========== Exercisable at December 31 1,423,174 $ 14.30 1,246,550 $ 13.54 1,077,344 $ 12.36 ========== ========== ========== Available for future grant at year-end 1,437,984 347,980 893,814 ========== ========== ==========
SFAS 123, "Accounting for Stock-Based Compensation," became effective for the Company on January 1, 1996. The Company will continue to apply APB Opinion No. 25 and related interpretations in accounting for its stock option plans. As required by SFAS 123, the Company has determined the pro forma information as if the Company had accounted for stock options granted since January 1, 1995, under the fair value method of SFAS 123. The Black-Scholes option-pricing model was used with the following assumptions for 1998, 1997 and 1996, respectively: dividend yields of 3.6%, 4.8% and 5.0%, risk-free interest rates of 5.3%, 5.1% and 5.0%, expected volatility of 15.1%, 15.9% and 16.4%, and an expected option life of 5.64 years for all periods. The weighted average fair value of options granted in 1998, 1997 and 1996 was $3.59, $4.22 and $3.83 per share, respectively. Had compensation cost for the Company's 1998, 1997 and 1996 grants for stock-based compensation plans been determined consistent with SFAS 123, the Company's net income and diluted earnings per common share would have been reduced to the pro forma amounts indicated below: 1998 1997 1996 -------- -------- -------- Net earnings: As reported $45,495 $49,523 $46,771 Pro forma $44,594 $49,167 $46,557 Diluted earnings per common share As reported $ 1.21 $ 1.33 $ 1.27 Pro forma $ 1.19 $ 1.32 $ 1.26 39 Under the Company's 1994 Long-Term Performance Plan (1994 Plan), awards covering up to 3,490,000 shares of common stock may be granted to certain key employees as compensation. The types of awards that may be granted under the 1994 Plan include incentive stock options, nonqualified stock options, stock appreciation rights and restricted stock. Awards of restricted stock subject to performance vesting criteria have been granted under the 1994 Plan. These awards will vest only if the Company achieves certain financial goals over a three-year performance period beginning in the year of grant. Recipients of restricted stock awards are not required to provide consideration to the Company other than rendering service and have the right to vote the shares and the right to receive dividends thereon. Restricted shares that are forfeited revert to theCompany at no cost. A total of 142,700 restricted shares (net of cancellations) were issued through 1998. Initially, the total market value of the shares is treated as unearned compensation and is charged to expense over the vesting periods. For both restricted stock and performance option shares, adjustments are made to expense for changes in market value and progress towards achievement of financial goals. E Director compensation plan Effective January 1, 1997, the Company converted its director compensation plan into a new Deferred Director Compensation Plan (Director Plan) which provides for the payment of the annual retainer and meeting fees using a combination of hypothetical shares of Company common stock (stock units) and cash. A portion of the annual retainer is now paid using stock units. In addition, a director may elect to defer the cash portion of the retainer or meeting fees, or both. The value of each stock unit is equal to the current market price of the Company's common stock. Retirement benefits for active directors were also converted into stock units as of December 31, 1996. Benefits will be paid in cash and Company common stock, at the option of the holder, over varying periods following termination of service. The Company recognized no compensation expense in 1998 and $0.6 million of compensation expense under the Director Plan in 1997. Note 11 Fair Value of Financial Instruments - ---------------------------------------------- The carrying value of cash and cash equivalents, accounts receivable and short-term borrowings approximates fair value due to the short-term maturities of these instruments. The fair value of the Company's long-term debt is based on the market prices of U.S. Treasury issues having a similar term to maturity, adjusted for the Company's bond rating and present value of future cash flows. 40 Because Wisconsin Gas operates in a regulated environment, shareholders probably would not be affected by realization of gains or losses on extinguishment of its outstanding fixed-rate debt. Realized gains would be refunded to and losses would be recovered from customers through gas rates. Likewise, any gains or losses on gas commodity instruments used by Wisconsin Gas are refunded to or recovered from customers under the PGAC. The estimated fair value of WICOR's financial instruments at December 31, is as follows: 1998 1997 CARRYING FAIR CARRYING FAIR THOUSANDS OF DOLLARS AMOUNT VALUE AMOUNT VALUE ---------- ----------- ----------- ----------- Cash and cash equivalents $ 13,383 $ 13,383 $ 11,810 $ 11,810 Accounts receivable $ 137,321 $ 137,321 $ 164,243 $ 164,243 Short-term debt $ 107,653 $ 107,633 $ 118,900 $ 118,900 Long-term debt $ 188,470 $ 192,412 $ 149,110 $ 150,159 Note 12 Business Segment Information - --------------------------------------- Effective December 31, 1998, the Company adopted SFAS 131, "Disclosures About Segments of an Enterprise and Related Information" which changes the way the Company reports information about its operating segments. The Company is a diversified holding company with two principal business segments: an Energy Group responsible for natural gas distribution and related services, and a Manufacturing Group responsible for the manufacture of pumps and processing equipment used to pump, control, transfer, hold and filter water and other fluids. The Company's reportable segments are managed separately because each business requires different technology and marketing strategies. Most of the businesses were acquired as a unit, and the management at the time of the acquisition was retained. The accounting policies of the reportable segments are the same as those described in Note 1 of Notes to the Consolidated Financial Statements. The Company evaluates the performance of its operating segments based on income from continuing operations. Intersegment sales and transfers are not significant. Information regarding products and services and geographic areas are not presented as they are not included in measures that are reviewed by the Company. 41 Summarized financial information concerning the Company's reportable segments is shown in the following table. The other category includes the results of the parent company only and non-regulated energy operations involved in energy and risk management services, automated meter reading and other related services.
ENERGY ------------------------------- THOUSANDS OF DOLLARS REGULATED OTHER TOTAL MANUFACTURING CONSOLIDATED --------- --------- ----------- ------------- ------------ 1998 - ---- Revenues $428,562 $ 52,927 $ 481,489 $ 462,694 $ 944,183 Depreciation and amortization $ 40,336 $ 134 $ 40,470 $ 14,061 $ 54,531 Net earnings $ 22,668 $ (1,012) $ 21,656 $ 23,839 $ 45,495 Total assets $651,492 $ 14,284 $ 665,776 $ 349,420 $ 1,015,196 Capital expenditures $ 34,995 $ 170 $ 35,165 $ 14,114 $ 49,279 1997 - ---- Revenues $536,720 $ 59,542 $ 596,262 $ 424,779 $ 1,021,041 Depreciation and amortization $ 39,820 $ 139 $ 39,959 $ 13,781 $ 53,740 Net earnings $ 29,335 $ 108 $ 29,443 $ 20,080 $ 49,523 Total assets $683,888 $ 13,780 $ 697,668 $ 333,664 $ 1,031,332 Capital expenditures $ 35,017 $ 131 $ 35,148 $ 16,424 $ 51,572 1996 - ---- Revenues $573,255 $ 29,430 $ 602,685 $ 409,916 $ 1,012,601 Depreciation and amortization $ 41,111 $ 43 $ 41,154 $ 13,717 $ 54,871 Net earnings $ 32,724 $ (879) $ 31,845 $ 14,926 $ 46,771 Total assets $718,990 $ 13,418 $ 732,408 $ 304,948 $ 1,037,356 Capital expenditures $ 36,586 $ 31 $ 36,617 $ 15,127 $ 51,744
42 SELECTED FINANCIAL DATA THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS
THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS 1998 1997 1996 1995 1994 1993 ---------- ---------- ---------- ---------- ---------- ---------- CONSOLIDATED Operating Data: Operating revenues(4) $ 944,183 $1,021,041 $1,012,601 $ 860,594 $ 867,755 $ 849,528 Net earnings $ 45,495 $ 49,523 $ 46,771 $ 39,527 $ 33,174 $ 29,313 Common Stock Data: Basic earnings per common share(1) $ 1.22 $ 1.34 $ 1.27 $ 1.16 $ 0.99 $ 0.91 Diluted earnings per share(1) $ 1.21 $ 1.33 $ 1.27 $ 1.16 $ 0.99 $ 0.90 Cash dividends per common share(1) $ 0.870 $ 0.850 $ 0.830 $ 0.810 $ 0.790 $ 0.770 Book value per common share(1) $ 10.80 $ 10.47 $ 9.96 $ 9.42 $ 8.57 $ 8.24 Balance Sheet Data: Long-term debt $ 188,470 $ 149,110 $ 169,169 $ 174,713 $ 161,669 $ 165,230 Common equity 403,440 389,620 366,499 343,673 289,918 270,276 ---------- ---------- ---------- ---------- ---------- ---------- Capitalization at Y/E $ 591,910 $ 538,730 $ 535,668 $ 518,386 $ 451,587 $ 435,506 ========== ========== ========== ========== ========== ========== Total assets Y/E(2) $1,015,196 $1,031,332 $1,057,652 $1,008,514 $ 930,708 $ 933,726 Other General Data: Market-to-book ratio at year-end (%) 202 222 179 170 165 191 Dividend payout ratio (%)(2)(3) 71.4 63.4 65.2 69.5 79.6 82.2 Yield at year-end (%) 4.0 3.7 4.7 5.1 5.6 5.0 Return on average com- mon equity (%)(2)(3) 11.3 13.0 12.9 13.1 11.6 11.2 Price/earnings ratio at year-end(2)(3) 17.8 17.3 14.1 13.9 14.3 17.3 Price range(1) $ 19-5/8- $16-11/16- $ 15-1/16- $ 13-5/16- $ 12-3/4- $12-13/16- $ 25-1/2 $ 23-15/16 $ 18-7/8 $ 16-7/16 $ 16-5/16 $ 16-7/16 Registered share- holders at Y/E(5) 21,373 22,312 23,339 27,379 25,017 23,694 Cash flow-operations $ 97,000 $ 49,324 $ 75,416 $ 69,918 $ 103,551 $ 3,401 Capital expenditures $ 49,279 $ 51,572 $ 51,744 $ 56,241 $ 55,051 $ 51,906 Employees at year-end 3,524 3,625 3,475 3,368 3,214 3,222 Debt/equity ratio Y/E 32/68 28/72 32/68 34/66 36/64 38/62 Energy Operations Operating revenues $ 481,489 $ 596,262 $ 602,685 $ 522,840 $ 556,587 $ 574,835 Net earnings $ 21,656 $ 29,443 $ 32,141 $ 27,701 $ 18,896 $ 19,870 Capital expenditures $ 35,165 $ 35,148 $ 36,617 $ 42,852 $ 44,626 $ 42,253
43 SELECTED FINANCIAL DATA THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS
THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS 1998 1997 1996 1995 1994 1993 ---------- ---------- ---------- ---------- ---------- ---------- Utility throughput (000'S of dekatherms) Residential 40,856 48,433 52,991 49,425 46,369 47,964 Commercial 17,967 21,922 24,257 21,157 18,598 19,060 Industrial firm 6,095 8,724 11,078 13,496 14,544 15,246 Ind. interruptible 3,657 7,277 19,624 31,353 28,217 20,849 Transported 46,017 42,883 27,578 14,549 11,908 17,408 ---------- ---------- ---------- ---------- ---------- ---------- 114,592 129,239 135,528 129,980 119,636 120,527 ========== ========== ========== ========== ========== ========== Utility customers Y/E 528,963 520,975 512,868 504,746 495,129 485,103 Utility customers served per employee 549 534 516 471 419 352 Ave. cost of gas/util- ity Dth purchased $ 3.62 $ 3.99 $ 3.47 $ 2.79 $ 3.34 $ 3.76 Ave. annual residen- tial utility bill $ 561 $ 701 $ 725 $ 686 $ 719 $ 779 Ave. use/utility resi- dential customer(Dth) 90 108 120 114 110 116 Degree days 5,865 7,094 7,458 6,836 6,431 6,775 % colder (warmer) than 20-year average (16.4) 1.0 6.8 (2.8) (9.0) (4.1) Manufacturing Oper.(2) Operating revenues $ 462,694 $ 424,779 $ 409,916 $ 337,754 $ 311,168 $ 274,693 International/export % of total sales 30 34 34 39 37 34 Net earnings(3) $ 23,834 $ 20,080 $ 14,630 $ 11,826 $ 14,278 $ 9,443 Capital expenditures $ 14,115 $ 16,424 $ 15,127 $ 13,389 $ 10,425 $ 9,653
44 SELECTED FINANCIAL DATA THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS
THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS 1992 1991 1990 1989 1988 ---------- ---------- ---------- ---------- ---------- CONSOLIDATED Operating Data: Operating revenues (4) $ 747,409 $ 716,767 $ 696,023 $ 741,218 $ 780,633 Net earnings $ 14,799 $ 22,966 $ 16,651 $ 33,881 $ 34,163 Common Stock Data: Basic earnings per common share(1) $ 0.48 $ 0.77 $ 0.57 $ 1.17 $ 1.19 Diluted earnings per share(1) $ 0.47 $ 0.77 $ 0.57 $ 1.16 $ 1.19 Cash dividends per common share(1) $ 0.750 $ 0.730 $ 0.710 $ 0.685 $ 0.660 Book value per common share(1) $ 7.80 $ 7.92 $ 8.06 $ 8.42 $ 7.91 Balance Sheet Data: Long-term debt $ 164,171 $ 168,366 $ 130,215 $ 122,639 $ 133,034 Common equity 245,287 243,453 237,407 244,351 227,080 ---------- ---------- ---------- ---------- ---------- Capitalization at year-end $ 409,458 $ 411,819 $ 367,622 $ 366,990 $ 360,114 ========== ========== ========== ========== ========== Total assets at Y/E(2) $ 825,774 $ 670,250 $ 651,559 $ 620,548 $ 565,967 Other General Data: Market-to-book ratio Y/E(%) 175 153 122 148 123 Dividend payout ratio (%)(2)(3) 96.1 89.0 117.2 55.0 52.0 Yield at year-end (%) 5.6 6.1 7.3 5.6 6.9 Return on average common equity (%)(2)(3) 9.2 9.5 6.8 14.3 15.3 Price/earnings ratio at year-end(2)(3) 18.5 15.7 17.2 10.7 8.2 Price range(1) $11-7/16- $ 9-5/16- $ 9-1/8- $9-11/16- $7-13/16- $13-11/16 $ 12-3/16 $ 12-5/8 $12-11/16 $ 10-7/16 Registered shareholders at year-end(5) 22,864 18,503 19,463 20,509 21,611 Cash flow from operations $ 37,012 $ 50,413 $ 10,022 $ 94,623 $ 73,526 Capital expenditures $ 71,873 $ 45,113 $ 37,529 $ 40,944 $ 48,295 Employees at year-end 3,178 3,196 3,152 3,696 3,927 Debt/equity ratio Y/E 40/60 41/59 35/65 33/67 37/63 Energy Operations Operating revenues $ 495,415 $ 474,702 $ 455,559 $ 441,477 $ 476,904 Net earnings $ 18,060 $ 17,086 $ 13,195 $ 25,169 $ 23,223 Capital expenditures $ 62,125 $ 34,473 $ 27,978 $ 25,813 $ 37,148
45 SELECTED FINANCIAL DATA THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS
THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS 1992 1991 1990 1989 1988 ---------- ---------- ---------- ---------- ---------- Utility throughput (000's of dekatherms-MDth) Residential 45,905 45,614 43,020 48,154 46,769 Commercial 17,840 17,861 16,319 18,089 17,012 Industrial firm 14,488 15,690 15,106 16,915 16,808 Indus. interruptible 17,388 17,440 16,620 5,475 3,752 Transported 21,379 19,658 16,565 29,158 29,639 ---------- ---------- ---------- ---------- ---------- 117,000 116,263 107,630 117,791 113,980 ========== ========== ========== ========== ========== Utility customers at Y/E 470,956 460,549 452,906 445,771 439,063 Utility customers served per employee 331 323 321 319 311 Average cost of gas per utility Dth purchased $ 3.34 $ 3.18 $ 3.30 $ 3.15 $ 3.68 Average annual resi- dential utility bill $ 712 $ 677 $ 670 $ 758 $ 770 Average use per utility residential customer(Dth) 115 117 113 129 127 Degree days 6,683 6,416 6,103 7,382 7,124 % colder (warmer) than 20-year average (6.4) (10.8) (16.0) 1.5 (2.0) Manufacturing Operations(2) Operating revenues $ 251,994 $ 242,065 $ 240,464 $ 300,156 $ 303,729 International/export sales as a % of total sales 34 31 27 24 22 Net earnings(3) $ 4,704 $ 5,880 $ 3,456 $ 8,712 $ 10,940 Capital expenditures $ 9,748 $ 10,640 $ 9,551 $ 15,131 $ 11,147
(1) Adjusted for a two-for-one stock split effected in May 1998. (2) Includes continuing operations and discontinued operations up to the year disposition was authorized. (3) Before effects of 1992 accounting changes. (4) Includes revenues (in thousands) from discontinued operations from 1988 and 1989 of $63,552 and $56,318, respectively. (5) Reflects WICOR Plan participants beginning with 1992. EX-21 8 EXHIBIT 21 1 EXHIBIT 21 WICOR, Inc. Subsidiaries of the Registrant State or Country Percent Voting Subsidiaries of WICOR, Inc. in Which Incorporated Stock Owned - --------------------------- --------------------- -------------- Wisconsin Gas Company Wisconsin 100% WICOR Energy Service Company Wisconsin 100% FieldTech, Inc. Wisconsin 100% WICOR Industries, Inc. Wisconsin 100% Subsidiaries of State or Country Percent Voting WICOR Industries, Inc. in Which Incorporated Stock Owned - ------------------------------- --------------------- -------------- Sta-Rite Industries, Inc. Wisconsin 100% SHURflo Pump Manufacturing Company California 100% Hypro Corporation Minnesota 100% WEXCO of Delaware, Inc. Delaware 100% WICOR FSC, Inc. Barbados 100% Subsidiaries of Sta-Rite State or Country Percent Voting Industries, Inc. in Which Incorporated Stock Owned - ------------------------ --------------------- -------------- WICOR Canada Inc. Canada 79% Sta-Rite de Mexico Mexico 80% Sta-Rite Industries GmbH Germany .5% Europa WICOR Industries (Australia) Pty. Ltd. Australia 100% Fibredyne, Inc. New Hampshire 100% Sta-Rite Holdings, B.V. Netherlands 100% Webster Electric Company Delaware 100% Hydro-Flow Filtration Systems, Inc. California 80% Subsidiary of WICOR Country in Which Percent Voting (Australia) Pty. Ltd. Incorporated Stock Owned - ----------------------------- ---------------------- -------------- Onga Pty. Ltd. Australia 100% WICOR, Canada Inc. Australia 21% Dega Research Pty. Ltd. Australia 100% Subsidiaries of Sta-Rite Country in Which Percent Voting Holdings, B.V. Incorporated Stock Owned - ----------------------------- ---------------------- -------------- Sta-Rite Industries Germany 99.5% GmbH Europa Onga (New Zealand) Pty. Ltd. New Zealand 100% Nocchi Pompe S.p.A. Italy 97% Subsidiary of Nocchi Pompe, Country in Which Percent Voting S.p.A. Incorporated Stock Owned - ----------------------------- ---------------------- -------------- Nocchi Pompes S.a.r.l. France 100% Nocchi Pompe Moscow Russia 100% Subsidiary of SHURflo Pump Country in Which Percent Voting Manufacturing Company Incorporated Stock Owned - ----------------------------- ---------------------- -------------- SHURflo Ltd. England 100% EX-23 9 EXHIBIT 23 EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS ----------------------------------------- As independent public accountants, we hereby consent to the incorporation of our reports included in and incorporated by reference in this Form 10-K, into the Company's previously filed Registration Statements on Form S-8 (Nos. 2-93964, 2-93963, 2- 87076, 2-72454, 33-16489, 33-36457, 33-43645, 33-67132, 33- 67134, 33-55755, 333-13029, 333-43257 and 333-51735) and Form S- 3 (Nos. 33-50682 and 333-27415). Milwaukee, Wisconsin, ARTHUR ANDERSEN LLP March 18, 1999. EX-27 10 EXHIBIT 27
UT This schedule contains summary financial information extracted from the WICOR, Inc. FORM 10-K for the year ended December 31, 1998 and is qualified in its entirety by reference to such financial statements and the related footnotes. 1,000 YEAR DEC-31-1998 DEC-31-1998 PER-BOOK 380,478 67,187 354,155 213,376 0 1,015,196 37,359 216,821 160,937 403,440 0 0 188,470 0 110,000 91,677 3,528 0 0 0 328,081 1,015,196 944,183 26,048 859,600 885,648 58,535 3,706 62,241 16,746 45,495 0 45,495 32,461 846 97,000 1.22 1.21
EX-99 11 EXHIBIT 99 1 EXHIBIT 99 WICOR 626 East Wisconsin Avenue P.O. Box 334 Milwaukee, WI 53201 NOTICE OF ANNUAL MEETING OF SHAREHOLDERS To Be Held April 22, 1999 To the Shareholders of WICOR, Inc.: NOTICE IS HEREBY GIVEN THAT the Annual Meeting of Shareholders of WICOR, Inc. will be held Thursday, April 22, 1999, at 2:00 P.M. (local time), at the Italian Community Center, 631 East Chicago Street, Milwaukee, Wisconsin, for the following purposes: 1. To elect two directors to hold office until the 2002 Annual Meeting of Shareholders and until their successors are duly elected and qualified. 2. To consider and act upon any other business which may be properly brought before the Annual Meeting or any adjournment or postponement thereof. The close of business Monday, February 22, 1999, has been fixed as the record date for the determination of shareholders entitled to receive notice of, and to vote at, the Annual Meeting and any adjournment or postponement thereof. A proxy and Proxy Statement are enclosed herewith. By Order of the Board of Directors Robert A. Nuernberg Secretary March 15, 1999 YOUR VOTE IS IMPORTANT. TO ASSURE YOUR REPRESENTATION AT THE MEETING, PLEASE DATE THE ENCLOSED PROXY, WHICH IS SOLICITED BY THE BOARD OF DIRECTORS, SIGN EXACTLY AS YOUR NAME APPEARS, AND RETURN IMMEDIATELY. 2 WICOR 626 East Wisconsin Avenue P.O. Box 334 Milwaukee, Wisconsin 53201 PROXY STATEMENT FOR ANNUAL MEETING OF SHAREHOLDERS To Be Held April 22, 1999 This Proxy Statement is being furnished to shareholders by the Board of Directors of WICOR, Inc. (the "Company") beginning on or about March 15, 1999, in connection with a solicitation of proxies by the Board of Directors of the Company (the "Board") for use at the Annual Meeting of Shareholders (the "Annual Meeting") to be held on Thursday, April 22, 1999, at 2:00 P.M.(local time), at the Italian Community Center, 631 East Chicago Street, Milwaukee, Wisconsin, and at all adjournments or postponements thereof, for the purposes set forth in the attached Notice of Annual Meeting of Shareholders. Execution of a proxy given in response to this solicitation will not affect a shareholder's right to attend the Annual Meeting and to vote in person. Presence at the Annual Meeting of a shareholder who has signed a proxy does not in itself revoke a proxy. Any shareholder giving a proxy may revoke it at any time before it is exercised by giving notice thereof to the Company in writing or in open meeting. Unless so revoked, the shares represented by proxies received by the Board will be voted at the Annual Meeting and at any adjournment or postponement thereof. A properly executed proxy will be voted as directed therein by the shareholder. Only holders of record of the Company's Common Stock, $1 par value ("Common Stock"), at the close of business on February 22, 1999, are entitled to vote at the Annual Meeting and at any adjournment thereof. On that date, the Company had outstanding and entitled to vote 37,398,094 shares of Common Stock. The record holder of each outstanding share of Common Stock is entitled to one vote per share. Share and per share amounts set forth in this Proxy Statement, have been adjusted to reflect the 2-for-1 stock split that was effective May 29, 1998. The Company is a holding company. Its principal subsidiaries include Wisconsin Gas Company ("Wisconsin Gas"), WICOR Industries, Inc. ("WICOR Industries"), Sta-Rite Industries, Inc. ("Sta-Rite"), SHURflo Pump Manufacturing Co.("SHURflo"), Hypro Corporation ("Hypro"), WICOR Energy Services Company ("WICOR Energy") and FieldTech, Inc. ("FieldTech"). ITEM NO. 1: ELECTION OF DIRECTORS Stuart W. Tisdale, retired chief executive officer of the Company and a director for 19 years, and William B. Winter, a director for 20 years, have reached mandatory retirement age and will be retiring coincident with the Annual Meeting. The Board extends its thanks to Messrs. Tisdale and Winter for the valuable contributions they have made to the Company throughout their tenures. The Board has determined not to replace the retiring directors at this time. Accordingly, the number of directors on the Board will be reduced to eight effective with the Annual Meeting. The Company's By-laws provide that the directors shall be divided into three classes, with staggered terms of three years each. At the Annual Meeting, shareholders will elect two directors to hold office until the 2002 Annual Meeting of Shareholders and until their successors are duly elected and qualified. Directors are elected by a plurality of the votes cast (assuming a quorum is present at the Annual Meeting). Consequently, shares not voted, whether due to abstentions or otherwise, have no impact on the election of directors. However, abstentions are counted in determining whether a quorum is present at the meeting. 3 Unless shareholders otherwise specify, the shares represented by the proxies received will be voted "FOR" the indicated nominees for election as directors. The Board has no reason to believe that either of the listed nominees will be unable or unwilling to continue to serve as a director if elected. However, in the event that a nominee should be unable or for good cause unwilling to serve, the shares represented by proxies received will be voted for another nominee selected by the Board. The following sets forth information regarding the two nominees for election as directors and the six continuing directors. Except as otherwise noted, each such person has engaged in the principal occupation or employment and held the offices shown for at least the past five years. ============================================================================= NOMINEES FOR ELECTION TO THE BOARD OF DIRECTORS For Three-Year Terms Expiring April, 2002 ============================================================================= JERE D. McGaffey Mr. McGaffey, 63, is a partner in the Nominating (Chairman) and law firm of Foley & Lardner.(1) He has Retirement Plans Investment been in practice with that firm since Committees 1961 and has been a partner since 1968. Director since 1980. Mr. McGaffey is a director of Smith Investment Company. (1) Foley & Lardner was retained in 1998 by the Company and its subsidiaries to provide legal services and has been similarly retained in 1999. THOMAS F. SCHRADER Mr. Schrader, 49, is President and Director since 1988. Chief Operating Officer of the Company and Vice Chairman of its subsidiaries. He was elected to those positions in 1997 and 1998, respectively. Previously, he served as Vice President of the Company and President and Chief Executive Officer of Wisconsin Gas, WICOR Energy and FieldTech from 1988 to 1997 Mr. Schrader is a director of Firstar Bank Milwaukee, N.A. ============================================================================== MEMBERS OF THE BOARD OF DIRECTORS CONTINUING IN OFFICE Terms Expiring April, 2000 ============================================================================== WILLIE D. DAVIS Mr. Davis, 64, is President, Chief Audit (Chairman) and Executive Officer and a director of All Compensation Committees Pro Broadcasting, Inc., which owns and Director since 1988. Operates radio stations in Los Angeles and Milwaukee. Mr. Davis is a director of Alliance Bank, Bassett Furniture Industries Inc., The Dow Chemical Co., Johnson Controls, Inc., Kmart Corp., MGM Grand Inc., Metro-Goldwyn-Mayer, Inc., Rally's Hamburgers, Inc., Sara Lee Corporation and Strong Capital Management, Inc. 4 GUY A. OSBORNE Mr Osborne, 63, retire as Chairman of Compensation (Chairman) Foods Corporation, an international and Retirement Plans manufacturer and marketer of value- Investment Committees added food products, in 1997. He is a Director since 19878 director of Fleming Companies, Inc., and is a Trustee of The Northwestern Mutual Life Insurance Company. ============================================================================== MEMBERS OF THE BOARD OF DIRECTORS CONTINUING IN OFFICE Terms Expiring April, 2001 ============================================================================== WENDELL F. BUECHE Mr. Bueche, 68, retired as Chairman of Audit and Compensation IMC Global, Inc., a producer and Committees marketer of crop nutrients in 1998. He Director since 1984 served as Chairman of IMC from 1997 to 1998, as Chairman and Chief Executive Officer from 1994 to 1997, and as President and Chief Executive Officer from 1993 to 1994. Mr. Bueche is a director of IMC Global, Marshall & Ilsley Corporation and M&I Marshall DANIEL F McKEITHAN, JR. Mr. McKeithan, 63, is President, Chief Compensation and Retirement Executive Officer and a director of Plans Investment (Chairman) Tamarack Petroleum Company, Inc., an Committees operator of producing oil and gas Director since 1989 wells. Since 1995, he has also been President and Chief Executive Officer of SeisTech Development, Inc., an oil and gas exploration and development company. He is a director of Firstar Corporation and The Marcus Corporation, and is a trustee of The Northwestern Mutual Life Insurance Company. GEORGE E. WARDEBERG Mr. Wardeberg, 63, is Chairman and Nominating Committee Chief Executive Officer of the Company Director since 1992 and Chairman of its subsidiaries. He was elected Chairman and Chief Executive Officer of the Company in 1997. Previously, he was President and Chief Executive Officer of the Company from 1994 to 1997. He has held his positions with Wisconsin Gas, Sta-Rite and SHURflo since 1994; with Hypro and WICOR Energy since 1995; and with FieldTech since 1996. He is a director of M&I Marshall & Ilsley Bank, M&I Data Services, and Twin Disc, Inc. ESSIE M. WHITELAW Ms. Whitelaw, 50, is Vice President - Nominating and Retirement National Business Development and Plans Investment Committees Government Employee Services of Blue Director since 1992 Cross & Blue Shield United of Wisconsin, a comprehensive health care insurer. She has held that position since 1997. Previously, she served as President and Chief Operating Officer of Blue Cross & Blue Shield United from 1992 to 1997. She is a director of Universal Foods Corporation. 5 THE BOARD RECOMMENDS A VOTE "FOR" ALL NOMINEES FOR ELECTION AS DIRECTORS, ITEM NO. 1. PROXIES SOLICITED BY THE BOARD OF DIRECTORS WILL BE SO VOTED UNLESS SHAREHOLDERS SPECIFY A DIFFERENT CHOICE. THE BOARD OF DIRECTORS General - ------- The Board held ten meetings in 1998. Each director attended at least 75% of the total of such meetings and meetings of any committees on which such director served. The Board maintains standing Audit, Nominating, Compensation, and Retirement Plans Investment Committees. The Audit Committee held two meetings in 1998. The committee's functions include recommending the selection of the independent auditors each year; consulting with the independent auditors regarding the scope and plan of audit, internal controls, fees, non-audit services (including the possible effect of such services on the independence of the auditors), the audit report and related matters; reviewing other accounting, internal audit and financial matters; investigating accounting, auditing or financial exceptions which may occur; and overseeing the corporate compliance programs of the Company and its subsidiaries. The Nominating Committee held two meetings in 1998. The committee's functions include recommending those persons to be nominated by the Board for election as directors of the Company at the next Annual Meeting of Share- holders and recommending the person to fill any unexpired term on the Board which may occur. The committee will consider nominees recommended by share- holders, but has no established procedures which must be followed to make recommendations. The Compensation Committee held three meetings in 1998. The committee's functions include reviewing and recommending adjustments to the salaries of the officers of the Company and the presidents of its subsidiaries; administering the 1992 Director Stock Option Plan, the Director Deferred Stock Plan, the 1994 Long-Term Performance Plan and the other incentive compensation plans of the Company and its subsidiaries; and reviewing and recommending director compensation. The Retirement Plans Investment Committee held two meetings in 1998. The committee's functions include generally overseeing the management of Company and subsidiary retirement and other employee benefit and welfare plans. The committee determines investment policy, selects the trustees and investment managers, and monitors and evaluates the performance of the trustees and investment managers. The committee also recommends to the Board changes in plan design. Compensation of Directors - ------------------------- The Company's director compensation program is designed to provide compensation at a competitive level and tie a substantial portion of the directors' compensation to the performance of the Company's stock. Only non- employee directors receive compensation for service as directors. 6 Cash Compensation. The Company pays its directors the following cash compensation: an annual retainer fee of $6,000, $600 for each Board meeting they attend and, effective February 1, 1999, $1,000 for each Board committee meeting they attend. Committee chairmen are paid an additional annual retainer fee of $1,000 and receive meeting fees for meetings with the Chief Executive Officer of the Company relating to committee business. Wisconsin Gas pays its non-employee directors an annual cash retainer fee of $4,000, and $600 for each Board meeting they attend. Presently, all directors of Wisconsin Gas are also directors of the Company. Any fees payable to directors in cash may, at the option of each individual director, be deferred for future payment as discussed below. Deferred Compensation. The Company and Wisconsin Gas have identical deferred stock plans for directors. Under the deferred stock plans, each director receives on January 1 of each year, 1,114 deferred stock units (668 from the Company and 446 from Wisconsin Gas). Each stock unit has an economic value equivalent to a share of Common Stock. As of December 31, 1998, these deferred stock units had a value of $24,299 based on the price of a share of Common Stock on that date ($21.825). Each deferred stock unit is credited with an amount equal to the dividend paid on a share of Common Stock if and when such dividends are declared and paid. Such dividend-equivalent amounts will be converted into deferred stock units based on the per-share price on the dividend payment date. When a director retires, leaves the Board or dies, the director's account balance will be paid out in shares of Common Stock. The Company (for itself and on behalf of Wisconsin Gas) intends to purchase Common Stock on the open market from time to time in its discretion to accumulate shares of Common Stock to be used for settlement of deferred stock balances. However, neither the Company nor Wisconsin Gas intends to fund its future payment obligations under its deferred stock plan. The Company and Wisconsin Gas each maintain a deferred compensation plan for directors which entitles a director to defer directors' fees otherwise payable in cash for payment when the director ceases to be a director. Fees may be deferred for settlement in cash or shares of Common Stock, at the election of the director. Amounts deferred for settlement in cash accrue interest at the prevailing announced prime interest rate of a major commercial bank. Amounts deferred for settlement in Common Stock are converted into deferred stock units based on the per-share price on the date of deferral. Each deferred stock unit will be credited with an amount equal to the dividend paid on a share of Common Stock if and when such dividends are declared and paid. Each director may elect to receive payment of the director's deferred account balance in a lump sum or in equal installments over ten years. All amounts deferred are unsecured. The Company has entered into an executive trust agreement with Marshall & Ilsley Trust Company to provide a means of segregating assets for the payment of director deferred compensation, subject to the claims of the Company's creditors. Such trust is only nominally funded until the occurrence of a potential change of control. Stock Options. Directors participate in the 1992 Director Stock Option Plan, pursuant to which options to purchase 4,000 shares of Common Stock are automatically granted annually on the fourth Tuesday in February to each non- employee director. The exercise price per share for options granted under the 1992 Director Stock Option Plan is equal to the fair market value of a share of Common Stock on the date of grant. On February 25, 1998, Messrs. Bueche, Davis, McGaffey, McKeithan, Osborn, Tisdale and Winter and Ms. Whitelaw each received an option to purchase 4,000 shares of Common Stock at a per-share exercise price of $23.55. Options granted under the 1992 Director Stock Option Plan are immediately exercisable and have a ten-year term; provided, however, that no option may be exercised after 24 months have elapsed from the date the optionee ceased being a director. On February 23, 1999, an option to purchase an additional 4,000 shares of Common Stock was granted to each director at a per-share exercise price of $19.94. 7 SECURITY OWNERSHIP OF MANAGEMENT The following tabulation sets forth the number of shares of Common Stock beneficially owned, as of February 28, 1999, by each director and nominee, each executive officer named in the Summary Compensation Table, and all directors and executive officers as a group. The tabulation also reflects the number of deferred stock units held by each such person. Amount and Nature Name of of Beneficial Percent of Deferred Stock Beneficial Owner Ownership (1) (2) (3) Class (4) Units (5) - ---------------------- --------------------- --------- --------------- Wendell F. Bueche 32,140 - 13,550 Willie D. Davis 29,097 - 9,301 James C. Donnelly 199,636 - - Bronson J. Haase 63,333 - - Jere D. McGaffey 34,597 - 10,255 Daniel F. McKeithan, Jr. 30,000 - 9,241 Guy A. Osborn 32,000 - 10,777 Thomas F. Schrader 319,385 - - Stuart W. Tisdale 184,162 (6) (7) - 9,867 George E. Wardeberg 287,800 (8) - - Joseph P. Wenzler 309,770 (9) - - Essie M. Whitelaw 28,000 - 4,052 William B. Winter 33,176 (10) (11) - 14,130 All directors and executive officers as a group (16 persons) 1,751,152 4.7% 81,173 (1) Except as otherwise noted in the footnotes to the table, each beneficial owner exercises sole voting and investment power with respect to the shares shown as owned beneficially. (2) Includes the following numbers of shares covered under options exercisable as of or within 60 days of February 28, 1999: Mr. Donnelly, 168,967; Mr. Haase, 63,333; Mr. Schrader, 210,983; Mr. Wardeberg, 193,333; Mr. Wenzler, 184,633; Messrs. Bueche, Davis, McGaffey, McKeithan, Osborn and Winter and Ms. Whitelaw, 28,000 each; Mr. Tisdale, 24,000; and all directors and executive officers as a group, 1,118,699. (3) Includes the following numbers of shares of restricted stock over which the holders have sole voting but no investment power: Mr. Donnelly, 6,000; Mr. Schrader, 8,000; Mr. Wardeberg, 14,400; and Mr. Wenzler, 6,000; and all directors and executive officers as a group, 37,800. The restricted stock vests three years after grant if the Company's total return to shareholders for the three-year period exceeds a pre-established goal. However, reflecting the fact that Mr. Wardeberg is approaching retirement, he will receive a percentage of the shares granted in 1998 and 1999 that otherwise would vest at the end of the three-year period equal to 1/36 for each month he remains employed beginning January 1, 1998 and 1999, respectively. Any restricted shares from the 1998 and 1999 grants that are not vested at the time of his retirement will be forfeited. (4) Where no percentage figure is set out in this column, the person owns less than 1% of the outstanding shares. (5) Deferred stock units are issued under the deferred stock plans and the deferred compensation plan discussed under "Compensation of Directors - Deferred Compensation". (6) Includes 9,704 shares owned by Mr. Tisdale's spouse. (7) Mr. Tisdale will retire from the Board effective with the Annual Meeting. (8) Includes 8,600 shares owned jointly by Mr. Wardeberg and his spouse. 8 (9) Includes 1,052 shares owned by Mr. Wenzler's spouse. (10) Includes 5,176 shares owned by Mr. Winter's spouse. (11) Mr. Winter will retire from the Board effective with the Annual Meeting. EXECUTIVE COMPENSATION The following tabulation is a three-year summary of the compensation awarded or paid to, or earned by, the persons who served as Company's chief executive officer during 1998 and each of the Company's four other most highly compensated executive officers whose total cash compensation exceeded $100,000 in 1998. 9 SUMMARY COMPENSATION TABLE
Long Term Annual Compensation Compensation Awards ---------------------------- -------------------------- Securities Restricted Underlying All Other Name and Principal Stock Options/ Compensation Position Year Salary ($) Bonus ($) Awards ($)(1) SARs (#) ($) (2) - ------------------------------ ---- ---------- --------- ------------- ---------- ------------ George E. Wardeberg, Chairman 1998 $ 500,000 $136,232 $ 169,089 200,000 $ 21,600 and Chief Executive Officer 1997 $ 440,833 $185,200 40,000 $ 19,233 of the Company and its sub- 1996 $ 393,750 $217,638 $ 264,500 40,000 $ 17,250 sidiaries (3)(7) Thomas F. Schrader, President 1998 $ 360,500 $ 81,852 $ 93,939 60,000 $ 16,020 and Chief Operating Officer 1997 $ 321,616 $144,700 20,000 $ 14,465 of the Company and Vice 1996 $ 290,650 $177,903 $ 132,250 20,000 $ 13,126 Chairman of certain of its subsidiaries(4) James C. Donnelly, Vice-Pres- 1998 $ 301,175 $155,852 $ 70,454 40,000 $ 16,537 ident of the Company and 1997 $ 287,250 $ 78,000 20,000 $ 14,775 President and Chief Execu- 1996 $ 277,525 $ 59,218 $ 132,000 20,000 $ 12,735 tive Officer of Sta-Rite Joseph P. Wenzler, Senior 1998 $ 303,850 $ 62,092 $ 70,454 40,000 $ 13,754 Vice President and 1997 $ 286,825 $ 96,400 15,000 $ 13,073 Chief Financial Officer 1996 $ 272,050 $120,296 $ 99,188 15,000 $ 12,382 of the Company and Wisconsin Gas; Secretary and Treasurer of SHURflo and Hypro; and Vice-President and Treasurer of WICOR Energy and FieldTech (5)(7) Bronson J. Haase, Vice 1998 $ 278,750 $ 41,813 40,000 $ 7,797 President of the Company and 1997 - - 200,000 - President and Chief Executive 1996 - - - - of Wisconsin Gas, WICOR Energy and FieldTech (6)
10 (1) The amounts in the table reflect the market value on the date of grant of restricted stock awarded under the 1994 Long-Term Performance Plan. The number of shares of restricted stock held by the executive officers named in the table and the market value of such shares as of December 31, 1998, were as follows: Mr. Wardeberg, 23,200 shares, $506,050; Mr. Schrader, 12,000, $261,750; Mr. Donnelly, 11,000 shares, $239,938; and Mr. Wenzler, 9,000 shares, $196,313. The restricted stock vests three years after issuance provided the Company's three-year total return to shareholders exceeds a pre-established goal. However, reflecting the fact that Mr. Wardeberg is approaching retirement, he will receive a percentage of the shares that otherwise would vest at the end of the three-year period equal to 1/36 for each month he remains employed beginning January 1, 1998. Any restricted shares from the 1998 grant that are not vested at the time of his retirement will be forfeited. Holders of shares of restricted stock are entitled to receive dividends on such shares. The numbers of shares of restricted stock held by the named officers on February 28, 1999, are set out in footnote 3 to the Security Ownership of Management and Certain Beneficial Owners table. (2) The amounts shown in this column for 1998 are comprised of the following items: Company contributions to 401(k) and supplemental savings plans: Mr. Wardeberg, $21,600; Mr. Schrader, $16,020; Mr. Donnelly, $15,100; Mr. Wenzler, $13,754; and Mr. Haase, $7,797. Above-market earnings on deferred compensation: Mr. Donnelly, $1,437. (3) On July 22, 1997, Mr. Wardeberg was elected Chairman and Chief Executive Officer of the Company. He previously served as President and Chief Executive Officer. He continues as Chairman of the Company's subsidiaries. (4) On July 22, 1997, Mr. Schrader was elected President and Chief Operating Officer of the Company. He previously served as Vice President. On December 16, 1997, Mr. Schrader was elected Vice Chairman of Wisconsin Gas, WICOR Energy and FieldTech. He previously served as President and Chief Executive Officer of those subsidiaries. On April 23, 1998, Mr. Schrader was elected Vice Chairman of Sta-Rite, SHURflo and Hypro. (5) On May 1, 1998, Mr. Wenzler was elected Senior Vice President and Chief Financial Officer of the Company and Wisconsin Gas. He previously served as Senior Vice President, Treasurer and Chief Financial Officer of the Company and Vice President, Treasurer and Chief Financial Officer of Wisconsin Gas. He continues in his positions with the Company's other subsidiaries. (6) On December 31, 1997, Mr. Haase was elected Vice President of the Company and President and Chief Executive Officer of Wisconsin Gas, WICOR Energy and FieldTech. He previously served as President and Chief Executive Officer of Ameritech Wisconsin (formerly Wisconsin Bell) from June 1993 to December 1997. (7) These executive officers were elected to their positions with SHURflo in 1993, Hypro and WICOR Energy in 1995, and FieldTech in 1996. 11 Stock Option Information ------------------------ The Company has in effect benefit plans pursuant to which options to purchase Common Stock may be granted to key employees (including executive officers) of the Company and its subsidiaries. The following tabulation sets forth information regarding grants of options made by the Company in 1998 to the executive officers named in the Summary Compensation Table. No SARs were awarded in 1998. OPTION/SAR GRANTS IN 1998 FISCAL YEAR
Individual Grants - --------------------------------------------------------------------------------- Number of Sec. Percent of Total Grant Underlying Options Granted Exercise or Date Options/SARs to Employees Base Expiration Present Name Granted (#) (1) in Fiscal Year Price ($/sh.) Date Value (2) - ------------------- --------------- ---------------- ------------- ---------- --------- George E. Wardeberg 200,000 27.5 $ 23.625 2/17/08 $718,000 Thomas F. Schrader 60,000 8.3 $ 23.625 2/17/08 $215,400 James C. Donnelly 40,000 5.5 $ 23.625 2/17/08 $143,600 Joseph P. Wenzler 40,000 5.5 $ 23.625 2/17/08 $143,600 Bronson J. Haase 40,000 5.5 $ 23.625 2/17/08 $143,600
(1) The options reflected in the table (which are nonstatutory stock options for purposes of the Internal Revenue Code) were granted on February 17, 1998 and vest one-third each year beginning February 17, 1999. However, reflecting the fact that Mr. Wardeberg is approaching retirement, his award vests one-third on February 17, 1999, one-third on February 17, 2000, and one-third on the earlier of February 17, 2001 or his retirement. (2) Amounts in this column were calculated using the Black-Scholes option pricing model. The model assumes: (a) an option term of 10 years and an average life of 5.64 years; (b) a risk-free interest rate of 5.29%; (c) volatility (variance of rate of return) of 15.10%; and (d) a dividend yield of 3.6%. The actual value, if any, that an optionee may realize upon exercise will depend upon the excess of the price of the Common Stock over the option exercise price on the date that the option is exercised. There is no assurance that the value received by the optionee will be at or near the value estimated by the Black-Scholes model. 12 The following tabulation sets forth information regarding the exercise of stock options during 1998 and the unexercised options held at December 31, 1998, by each of the executive officers named in the Summary Compensation Table. AGGREGATED OPTION/SAR EXERCISES IN 1998 FISCAL YEAR, AND FY-END OPTION/SAR VALUES
Numbers of Securities Underlying Value of Unexercised Unexercised Options/ In-the-Money Options/ Shares SARs at FY-End (#) SARs at FY-End ($) Acquired on Value ------------------------- ------------------------- Name Exercise(#) Realized($) Exercisable Unexercisable Exercisable Unexercisable - ------------------- ----------- ----------- ----------- ------------- ----------- ------------- George E. Wardeberg 9,000 $ 96,268 100,000 240,000 $ 623,541 $ 183,322 Thomas F. Schrader 9,200 $ 107,525 197,649 80,001 $1,868,919 $ 91,669 James C. Donnelly 0 $ 0 160,299 60,001 $1,473,935 $ 91,669 Joseph P. Wenzler 9,200 $ 102,063 181,300 55,000 $1,762,234 $ 68,750 Bronson J. Haase 0 $ 0 50,000 190,000 $ 0 $ 0
13 Pension and Retirement Plans - ---------------------------- The Company and its subsidiaries maintain pension and retirement plans in which the executive officers and other employees participate. The Company and its subsidiaries also maintain supplemental retirement plans for officers and certain other employees to reflect certain compensation that is excluded under the retirement plans and to provide benefits that otherwise would have been accrued or payable except for the limitations imposed by the Internal Revenue Code. Effective January 1, 1998, the basic pension plan was amended to restate the benefit accrual using a "cash balance" formula. Under a cash balance pension plan, a participant's benefit is based on an annual accrual of a percentage of current year's compensation, with such annual accruals being combined and adjusted by an earnings factor. The actual pension benefit is then determined by converting such lump sum balance into an equivalent annuity value. The Company's cash balance formula provides an annual accrual of 6% of salary and bonus, with a guaranteed earnings rate of 4%. In its discretion, the Company may amend the plan from year to year to grant a higher earnings rate for the applicable year. In order to recognize the pre-1998 service and compensation of participants as of January 1, 1998, the plan grants each such participant a special transition credit. In addition, in order to protect such existing participants, the revised pension plan guarantees that for employment through December 31, 2007, the benefit accrual will not be less under the new cash balance formula than under the pre-1998 final average earnings formula. The plan's actuaries project that for most long-service employees the revised cash balance formula will provide substantially equivalent benefits commencing at age 65 as under the pre-1998 "final average earnings" formula. The plan's actuaries have projected the ultimate benefits for the named executive officers. Such projection is subject to the applicable earnings rate that is applied from time to time to the cash balance account and to future interest rates. Because of the ten-year guarantee until the end of 2007, the actuaries project that the pre-1998 final average earnings formula will provide the better benefit for Messrs. Wardeberg, Wenzler and Donnelly and the revised cash balance formula will provide the better benefit for Messrs. Schrader and Haase. 14 The following tabulation sets forth estimated annual retirement benefits payable under the pension plans, as supplemented, for Messrs. Wardeberg, Wenzler and Donnelly. It is based on the final average earnings formula for the indicated levels of final average earnings with various periods of credited service. Benefits reflected in the table are based on a straight life annuity and an assumed age of 65. The election of other available payment options would change the retirement benefits shown in the table. The plan does not provide for reduction of retirement benefits to offset Social Security or any other retirement benefits. PENSION PLAN TABLE
Years of Service -------------------------------------------------------------- Remuneration 10 15 20 25 30 - ------------ ---------- ---------- ---------- ---------- ---------- $ 400,000 $ 78,484 $ 117,726 $ 156,968 $ 179,684 $ 185,684 $ 500,000 $ 98,384 $ 147,426 $ 196,568 $ 224,984 $ 232,484 $ 600,000 $ 118,084 $ 177,126 $ 236,168 $ 270,284 $ 279,284 For Messrs. Schrader and Haase, using a 4% earnings assumption for the cash balance formula and assuming continuation of compensation as defined in the plan at the level paid in 1998, the actuaries project estimated annual benefits under the pension plan, as supplemented, payable upon retirement at normal retirement age of 65 of $240,534 and $21,896, respectively. The compensation covered by the pension plan, as supplemented, for the named executive officers includes all compensation reported for each individual as salary and bonus in the Summary Compensation Table. Messrs. Wardeberg, Schrader, Donnelly, Wenzler and Haase have 9, 20, 11, 24 and 1 years, respectively, of credited service under the pension plan. Pursuant to a supplemental retirement plan, Mr. Schrader will receive a supplemental retirement benefit of $25,000 per year for 15 years beginning at age 65, payable in monthly installments. A retired executive officer (other than Mr. Haase)who is married at the time of retirement and selects one of the available joint and surviving spouse annuity payment options will also receive the difference between the monthly benefits payable under the single life annuity payment option and the 50% joint and surviving spouse annuity payment option for the lives of the retired officer and spouse. Upon the death of the retired officer, the surviving spouse will receive 50% of the supplemental benefit for life. The Company has entered into an executive trust agreement with Marshall & Ilsley Trust Company to provide a means of segregating assets for the payment of these benefits (as well as benefits under the Company's supplemental retirement plans), subject to the claims of the Company's creditors. Such trust is only nominally funded until the occurrence of a potential change of control. 15 Agreements With Certain Executive Officers - ------------------------------------------ The Company has agreements with Messrs. Wardeberg, Schrader, Donnelly, Wenzler and Haase that provide that each such executive officer is entitled to benefits if, following a change of control (as such term is defined in the agreements), the officer's employment is ended through (i) termination by the Company, other than by reason of death or disability or for cause (as defined in the agreements), or (ii) termination by the officer following the first anniversary of the change in control or due to a breach of the agreement by the Company or a significant change in the officer's responsibilities. In general, the benefits provided are: (i) a cash termination payment of up to three times the sum of the executive officer's annual salary and his highest annual bonus during the three years before the termination, (ii) supplemental pension benefits,(iii) continuation of equivalent hospital, medical, dental, accident, disability and life insurance coverage as in effect at the time of termination, and (iv) outplacement services. The agreements also provide the foregoing benefits in connection with certain terminations that are effected in anticipation of a change of control. Each agreement provides that if any portion of the benefits under the agreement or under any other agreement for the officer would constitute an "excess parachute payment" for purposes of the Internal Revenue Code, benefits will be reduced so that the officer will be entitled to receive $1 less than the maximum amount which he could receive without becoming subject to the 20% excise tax imposed by the Code, or which the Company may pay without loss of deduction under the Code. BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION ------------------------------------------------------------- The Company's executive compensation program is administered by the Compensation Committee of the Board. The Compensation Committee is comprised of four independent, non-employee directors. Following Compensation Committee review and approval, matters relating to executive compensation (other than the grant of stock options and restricted stock) are submitted to the full Board for approval. The Compensation Committee utilizes an independent compensation consultant. The consultant provides advice to the Committee on compensation-related issues, including incentive plan design and competitive compensation data for officer positions. Compensation Policies - --------------------- Policies are used to set a general direction and as a backdrop against which specific compensation decisions are made. >> Design of executive pay programs is intended to attract and retain top talent, motivate and reward performance. >> Differences in pay practices and performance measures between the Company's primary lines of business are recognized. >> Compensation opportunities, by component and in the aggregate, are targeted at the median (50th percentile) of competitive practice. Actual compensation earned by an executive may exceed the market median for above average performance and be less than median for performance that is below expectation. >> Achievement of incentive compensation levels is dependent on attainment of performance goals as agreed to by the Board annually. These goals relate to the achievement of the Company's operating and financial plan, individual objectives and milestones in the Company's longer-term strategic plan. 16 >> In business units where an all-employee bonus or profit-sharing program exists, a portion of each executive's incentive compensation is determined on the same criteria. >> The focus on enhancement of shareholder value is accomplished by tying a significant portion of total pay to performance of the Company's stock. In assessing executive performance and pay, the members of the Compensation Committee consider and weigh in their judgment factors outside the formal incentive plans. These factors include operational and financial measures not specifically incorporated in the incentive plans, and actual performance in dealing with unanticipated business conditions during the year. The Compensation Committee believes such factors should be considered in addition to the more formalized factors to assess and reward executive performance properly. Base salary midpoints, annual incentive targets and long-term incentive grants are set based on a competitive analysis conducted by the independent compensation consultant. As indicated above, compensation opportunities, by component and in the aggregate, are set at or near the 50th percentile of competitive practice for comparably sized organizations. Rates for the gas utility positions are set using survey sources from the utility industry. There is substantial overlap between the companies in these surveys and the companies used in the peer company index in the Performance Graph. Rates for the nonutility positions are set using survey sources from general industry; there is no overlap with the Performance Graph peer companies here. Components of Compensation -------------------------- Base salary. The Compensation Committee targets salary range midpoints as indicated above. Individual salaries range above and below the midpoint based upon an individual's past and current performance, and expectations for future performance. The factors considered in this review are job specific and vary depending on the individual's position. There is no specific weighting given to these factors. Annual incentive plan. The Company's annual incentive compensation plan tailors each officer's incentive potential to that officer's Company and subsidiary responsibilities. The plan sets incentive targets ranging from 20% to 60% of base salary. The plan is designed to compensate the officers primarily on a formula basis. For the Chief Executive Officer, Chief Operating Officer and the Chief Financial Officer, the formula bases 75% of the targeted award on the Company's return on capital and 25% on individual performance objectives. The return on capital calculation is further modified by performance against earnings per share growth. For Company Vice Presidents, who are also the subsidiary presidents, the formula bases 75% of the targeted award on the subsidiary's return on capital and 25% on individual performance objectives. The return on capital calculation is further modified by performance against sales growth for Sta-Rite and by performance against rate comparison, customer service, safety and cost effectiveness criteria for Wisconsin Gas. Individual performance objectives vary among the officers, but may include such things as cost management, product development, sales growth, personnel management and development, and management of specific projects. The Compensation Committee exercises its judgment on a case-by-case basis in determining the weight to be accorded any individual performance objective. 17 Long-term incentive plan. The Company's long-term incentive compensation plan provides for annual awards of stock options and performance- based restricted stock. The plan splits an officer's long-term incentive opportunity approximately 75% and 25% (based on value) between stock options and performance-based restricted stock, respectively. The independent compensation consultant provides the Compensation Committee with a long-term incentive grant schedule that approximates a market median grant opportunity. The Compensation Committee reserves the right to adjust this schedule upward or downward based on Company performance and individual circumstances; however, it is the Compensation Committee's intention that in most cases grants will be provided at targeted levels. Stock options may be incentive stock options or nonstatutory options which have a term of not more than ten years and have a per share exercise price equal to the fair market value of a share of Common Stock on the date of grant. The Compensation Committee determines the manner and conditions under which the options become exercisable. The number of options granted is based on the participant's office or position, with an equal number of shares generally being granted to individuals holding the same or similar positions, such as vice president of an operating subsidiary. Performance-based restricted stock will vest three years from the year of grant provided the Company's three-year total return to shareholders equals or exceeds pre- established goals relative to the Performance Graph peer group. Compensation of Officers ------------------------ The Compensation Committee sets base salaries of officers within the established ranges. The Compensation Committee considers specified financial measures tailored to the Company and each subsidiary, each officer's contribution to achieving corporate goals, and such officer's achievement of personal performance objectives. Examples of financial measures are net income earned relative to budget, return on capital, return on total assets, return on sales, and rate of return earned versus allowed. The Compensation Committee weighs the financial measures differently for each officer, in recognition that the Company's principal subsidiaries operate in different industries with different compensation practices and that the officers' responsibilities differ. For example, the rate of return earned versus that nominally allowed by state regulatory authorities having jurisdiction over the gas utility subsidiary is applicable only to officers of the utility company, whereas return on total assets and return on sales are applicable primarily to officers of the manufacturing subsidiaries. Examples of personal performance objectives considered by the Compensation Committee are set out above in the discussion of the Annual Incentive Plan. The Compensation Committee exercises its judgment in determining the relative weight to be accorded each personal objective. As stated above, each officer's annual incentive award, if any, is based on a formula, although the Compensation Committee exercises its judgment in determining the weight to be accorded the achievement of personal objectives. Long-term incentive awards (stock options and restricted stock) are also formula-based, with individual awards being set relative to the officer's position. The specific number of stock options awarded is based on the number of options to be awarded to all key employees of the Company and its subsidiaries and the number of options previously granted and outstanding, as determined by the Compensation Committee. Options granted in 1998 were nonstatutory, have a term of ten years, and first become exercisable one-third each year on the first, second and third anniversary of the grant. Restricted stock grants were made in the targeted amounts. 18 Compensation of the Chief Executive Officer ------------------------------------------- The Compensation Committee increased the base salary of George E. Wardeberg, the Company's Chairman and Chief Executive Officer, by $40,000 or 8.5% effective April 1, 1998. The increase reflects his overall performance, as demonstrated by record earnings for the Company in 1997, an increase in earnings per share of 5% and a total return of 35%, along with his position in the salary range. The increase set Mr. Wardeberg's salary in the third quartile of the range targeted by the Compensation Committee. The Compensation Committee awarded Mr. Wardeberg 200,000 nonstatutory stock options in 1998. This award has special vesting terms as follows: one- third on February 17, 1999; one-third on February 17, 2000; and one-third on the earlier of February 17, 2001 or his retirement. The number of options awarded was two times the targeted number established in the long-term incentive compensation plan. This increase reflects Mr. Wardeberg's anticipated retirement in the next several years. As a result, Mr. Wardeberg will not receive an award of nonstatutory stock options in 1999. The Compensation Committee also awarded Mr. Wardeberg 7,200 shares of performance-based restricted stock. The number of shares awarded was at the targeted number established in the long-term incentive compensation plan, and the shares will vest pro rata (1/36 for each month of employment beginning January 1, 1998)should Mr. Wardeberg retire prior to December 31, 2000. The annual incentive award to Mr. Wardeberg for 1998 was $136,232 or 27.2% of his salary as compared to a target of 60% of salary. This award reflects Mr. Wardeberg's contributions to the Company during 1998. The less than targeted incentive award was caused by certain financial objectives which were not met. These included the Company's return on capital at 7.4%, less than targeted at 8.5% and earnings per share decreasing by 9%, less than the targeted growth of 10%. This was caused primarily by Wisconsin Gas' earnings declining by 23% due to weather that was 16% warmer than normal for the year. Despite the adverse impacts of the weather on utility earnings, manufacturing net earnings were up 19%, setting another record and partially offsetting the decline at the utility. The Company also outperformed its industry peers over the last five years as shown in the accompanying Total Return Comparison performance graph. In addition, Mr. Wardeberg accomplished many of his personal objectives in the areas of growth, preserving the Company's financial strength, and human resources which included a management succession plan. The Compensation Committee exercised its judgment in determining the weight accorded to his accomplishment of these personal objectives. Compliance with Tax Regulations ------------------------------- Under Section 162(m) of the Internal Revenue Code, the tax deduction by corporate taxpayers, such as the Company, is limited with respect to the compensation of certain executive officers unless such compensation is based upon performance objectives meeting certain regulatory criteria or is otherwise excluded from the limitation. The Compensation Committee currently intends to qualify compensation paid to the Company's executive officers for deductibility by the Company under Section 162(m) of the Code. Guy A. Osborn, Chairman Wendell F. Bueche Willie D. Davis Daniel F. McKeithan, Jr. Members of the Compensation Committee 19 Performance Presentation ------------------------ The following graph compares the yearly percentage change in the Company's cumulative total shareholder return (dividends declared plus share appreciation) to the S&P 500 Stock Index and a peer group comprised of 30 U.S. natural gas distribution utilities. The peer group formerly was published as the PaineWebber Gas Distribution Utility Index. However, PaineWebber ceased publication of the index in 1998. The Company has obtained the performance information for the same peer group companies from an independent, but unpublished source. The peer group companies are: AGL Resources Inc., Atmos Energy Corp., Bay State Gas Co., Cascade Natural Gas Corp., Connecticut Energy Corp., Consolidated Natural Gas Co., CTG Resources, Inc., Energen Corp., Equitable Resources, Inc., Indiana Energy, Inc., KN Energy, Inc., KeySpan Energy Corp., Laclede Gas Co., MCN Energy Group Inc., National Fuel Gas Co., New Jersey Resources Corp., Nicor, Inc., Northwest Natural Gas Co., NUI Corp., ONEOK, Inc., Peoples Energy Corp., Piedmont Natural Gas Co., Inc., Providence Energy Corp., Public Service Company of North Carolina, Inc., Questar Corp., South Jersey Industries, Inc., UGI Corp., Washington Gas Light Co., WICOR, Inc., and Yankee Energy Systems, Inc. The information presented assumes that all dividends were reinvested. The returns of each company have been weighted based on such company's relative market capitalization. [Performance graph will appear here.] Total Return Comparison * Value of $100 Invested Year-End 1993 1993 1994 1995 1996 1997 1998 -------- -------- -------- -------- -------- -------- WICOR $ 100 $ 95 $ 114 $ 133 $ 180 $ 176 S&P $ 100 $ 101 $ 139 $ 171 $ 228 $ 293 Industry $ 100 $ 86 $ 109 $ 130 $ 159 $ 144 * Includes Reinvested Dividends 20 SHAREHOLDER PROPOSALS --------------------- Proposals which shareholders of the Company intend to present at the 2000 Annual Meeting of Shareholders and have included in the Company's proxy statement relating to such meeting pursuant to Rule 14a-8 must be received by the Company by the close of business on November 12, 1999. If the Company receives notice of a shareholder proposal that is submitted other than pursuant to Rule 14a-8 after January 29, 2000, the notice will be deemed untimely and the persons named in proxies solicited by the Board of Directors for the 2000 Annual Meeting may exercise discretionary voting power with respect to such shareholder proposal. OTHER MATTERS ------------- Arthur Andersen LLP was retained as the Company's independent auditors for the year ended December 31, 1998 and, upon the recommendation of the Audit Committee, the Board has reappointed Arthur Andersen as independent public accountants for the Company for the year ending December 31, 1999. A representative of Arthur Andersen is expected to be present at the Annual Meeting with the opportunity to make a statement if such representative desires to do so, and it is expected that such representative will be available to respond to appropriate questions. The Company will file with the Securities and Exchange Commission on or before March 31, 1999, an annual report on Form 10-K for the fiscal year ended December 31, 1998. The Company will provide without charge a copy of this Form 10-K (including financial statements and financial statement schedules, but not including exhibits thereto) to each person who is a record or beneficial holder of shares of Common Stock as of the record date for the Annual Meeting and who submits a written request for it. A request for a Form 10-K should be addressed to Robert A. Nuernberg, Secretary, WICOR, Inc., P.O. Box 334, Milwaukee, Wisconsin 53201. Management does not intend to present to the Annual Meeting any matters other than the matters described in this Proxy Statement. Management knows of no other matters to be brought before the Annual Meeting. However, if any other matters are properly brought before the Annual Meeting, it is the inten- tion of the persons named in the enclosed form of proxy to vote thereon in accordance with their best judgment. The cost of soliciting proxies will be borne by the Company. The Company expects to solicit proxies primarily by mail. Proxies may also be solicited personally and by telephone by certain officers and regular employees of the Company and its subsidiaries. The Company may reimburse brokers and other nominees for their expenses in communicating with the persons for whom they hold Common Stock. By Order of the Board of Directors /s/ Robert A. Nuernberg ------------------------- Secretary March 15, 1999 21 APPENDIX B WICOR VOTING AUTHORIZATION [X] Please mark your votes as this - ---------------------------------------------------------------------------- The Board of Directors recommends a vote FOR all nominees in Item 1 - ---------------------------------------------------------------------------- 1. Election of the following nominees as directors for three-year terms: Jere D. McGaffey and Thomas F. Schrader. FOR all nominees WITHHOLD (except as marked AUTHORITY to the contrary) to vote for all nominees / / / / (Instruction: To withhold authority to vote for any nominee write the name below) ------------------------------------------- . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . This Voting Authoriza- . . tion is Solicited by the . . Board of Directors . . . . . . . . . . . . . . . . . . . . . . Signature(s) _________________________________ Date ________________ NOTE: Please sign as name appears hereon. Joint owners should each sign. When signing as attorney, executor, administrator, trustee or guardian, please give full title as such. - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 22 FOLD AND DETACH HERE March 15, 1999 Dear WICOR Employee Shareholder: Enclosed is a notice of WICOR's annual shareholders meeting, coming up April 22, 1999, in Milwaukee. Also enclosed is a proxy statement, voting authorization card and WICOR 1998 annual report. It's important that you fill out and return the authorization card as soon as possible. It entitles you, as an owner of WICOR common stock through our company's savings plans, to vote your interest at the annual meeting. Filing out the card directs the Trustee of your shares held in the savings plan as of February 22, 1999, to vote them on your behalf. You must return your marked and signed card in order to have the Trustee vote your shares. The WICOR Board of Directors urges you to exercise this right to vote. To make sure your vote counts, and to prevent the expense of WICOR sending further reminder notices, please mark and sign your voting authorization card now and return it to the Trustee in the enclosed envelope. Thank you, Sincerely, George E. Wardeberg Chairman and Chief Executive Officer YOUR VOTE IS IMPORTANT. TO ASSURE YOUR REPRESENTATION AT THE WICOR SHAREHOLDERS ANNUAL MEETING, MARK YOUR VOTES ON THE ENCLOSED VOTING AUTHORIZATION CARD, DATE IT, SIGN IT EXACTLY AS YOUR NAME APPEARS AND RETURN IT TODAY IN THE ENCLOSED ENVELOPE. 23 --- (BACKSIDE OF VOTER AUTHORIZATION FORM) --- WICOR VOTING AUTHORIZATION The undersigned acknowledges receipt of the WICOR, Inc. Annual Report for 1998 and the proxy solicitation material relative to the Annual Meeting of Shareholders of WICOR, Inc. to be held April 22, 1999. As to my interest in the Common Stock of WICOR, Inc. held by Marshall and Ilsley Trust Company, the Trustee under the WICOR, Inc. Master Savings Trust, I hereby instruct the Trustee to vote as indicated on the reverse side. The shares represented by this authorization will be voted as directed by the undersigned. If no direction is given when the duly executed authorization is returned, the Trustee cannot vote such shares. THIS VOTING AUTHORIZATION IS SOLICITED BY THE BOARD OF DIRECTORS FOR USE AT THE ANNUAL MEETING OF SHAREHOLDERS OF WICOR, INC., APRIL 22, 1999. (continued on the reverse side) 24 APPENDIX II /X/ Please mark your votes as indicated WICOR in this example PROXY - ------------------------------------------------------------------------ The Board of Directors recommends a vote FOR all nominees in Item 1 - ------------------------------------------------------------------------ 1. Election of the following nominees as directors for three-year terms: Jere D. McGaffey and Thomas F. Schrader FOR all nominees WITHHOLD (except as marked AUTHORITY to the contrary) to vote for all nominees / / / / (Instruction: To withhold authority to vote for any nominee write the name below) ----------------------------------------------- Please check this box if you plan to attend the annual meeting [ ] This Proxy is Solicited by the Board of Directors Signature(s) __________________________ Date __________________ NOTE: Please sign as name appears hereon. Joint owners should each sign. When signing as attorney, executor, administrator, trustee or guardian, please give full title as such. - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 25 FOLD AND DETACH HERE March 15, 1999 Dear WICOR Shareholder: We're pleased to send you the enclosed 1998 annual report and proxy materials. I hope you'll find the annual report interesting and informative, and that you'll exercise your right to vote at the annual meeting by returning your proxy card promptly. I'd also like to invite you to attend WICOR's Annual Meeting of Shareholders on Thursday, April 22, 1999. This year's meeting will be held at the Italian Community Center, 631 East Chicago Street, Milwaukee, Wisconsin, beginning at 2:00 p.m. (Central Time). A map with directions to the center is on the reverse side of this letter. Free parking is available in a lot on the south side of the building. At the meeting, we will elect directors, discuss 1998 performance and talk about the future. As an investor in WICOR, you have a right and a responsibility to vote on issues affecting your company. Regardless of whether you plan to attend the annual meeting, please mark the appropriate boxes on the proxy form, and then date, sign and promptly return the form in the enclosed, postage-paid envelope. If you sign and return the proxy form without specifying your choices, your shares will be voted according to the recommendations of your board of directors. If you plan to attend the annual meeting, please check the appropriate box on the proxy card. We welcome your comments and suggestions, and we will provide time during the meeting for questions from shareholders. I hope to see you on April 22. Sincerely, George E. Wardeberg Chairman and Chief Executive Office 26 WICOR COMMON SHAREHOLDER PROXY The undersigned hereby appoints George E. Wardeberg and Joseph P. Wenzler, and each of them, as proxy with the power of substitution (to act by a majority present or if only one acts then by that one) to vote for the undersigned as indicated on the reverse side and in their discretion on such other matters as may properly be considered at the Annual Meeting of Shareholders of WICOR, Inc. to be held Thursday, April 22, 1999, at 2:00 P.M., at the Italian Community Center, 631 E. Chicago Street, Milwaukee, Wisconsin, and at any adjournments thereof. The shares represented by this proxy will be voted as directed by the shareholder. If no direction is given when the duly executed proxy is returned, such shares will be voted "FOR" all nominees in Item 1, and in the discretion of the proxies on any other items of business as may properly arise at the meeting. Please mark, date and sign on the reverse side exactly as name appears and return in the enclosed postage-paid envelope. If shares are held jointly, each shareholder named should sign. If signing as attorney, administrator, executor, trustee or guardian, please give full title as such. If a corporation, please sign in full corporate name by duly authorized officer. THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS FOR USE AT THE ANNUAL MEETING OF SHAREHOLDERS OF WICOR, INC., APRIL 22, 1999. - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - FOLD AND DETACH HERE Map of eastern downtown Milwaukee, Wisconsin, showing location of annual meeting and the routes to take within Milwaukee and from Chicago, Green Bay and Madison.
-----END PRIVACY-ENHANCED MESSAGE-----