-----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, PoZZvt5/rC1GCn4krlYNXqsFLB8pyrL6JnajdJ7W+1bMOK1/fbxvZ+lzP2/5W9gt /CC0G8c+D4+fraEmN9onJw== 0000314890-98-000003.txt : 19980323 0000314890-98-000003.hdr.sgml : 19980323 ACCESSION NUMBER: 0000314890-98-000003 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980320 SROS: NYSE 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: 98569571 BUSINESS ADDRESS: STREET 1: 626 E WISCONSIN AVE 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 1997 WIC FORM 10-K FOR THE YEAR ENDED 12/31/97 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 1-7951 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: 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: $878,833,100 at February 28, 1998. Number of shares outstanding of each of the registrant's classes of common stock, as of February 28, 1997: Common Stock, $1 par value 18,631,681 shares Documents Incorporated by Reference WICOR, Inc. proxy statement dated March 13, 1998 (Part III) WICOR, Inc. 1997 Annual Report to Shareholders (Parts I and II) 1 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) General 3 2) Pipeline Capacity and Storage 3 3) Term Gas Supply 4 4) Spot Market Gas Supply 4 5) Potential New Pipeline Capacity 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 5 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 6 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 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 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 10 2 TABLE OF CONTENTS (continued) PAGE Item 8. Financial Statements and Supplementary Data 10 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 10 PART III. 10 Item 10. Directors and Executive Officers of the Registrant 10 Item 11. Executive Compensation 10 Item 12. Security Ownership of Certain Beneficial Owners and Management 11 Item 13. Certain Relationships and Related Transactions 11 PART IV 11 Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 11 a) Documents Filed as Part of the Report 11 1. All Financial Statements and Financial Statement Schedules 11 2. Financial Statement Schedules 11 3. Exhibits 11 b) Reports on Form 8-K 11 3 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, with the following subsidiaries engaged in the indicated businesses. Wisconsin Gas Company ("Wisconsin Gas") engages in retail sales and distribution of natural gas. WICOR Energy Services Company ("WICOR Energy") sells energy and energy-related services. FieldTech, Inc. ("FieldTech") performs contract meter reading, manages field operations and provides billing 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 was formed during 1996 to hold 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. Per news release 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 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 water, gas and electric utilities. In August, 1997 Sta-Rite purchased a line of swimming pool and spa lighting equipment made by Hydrel, a division of California-based QTY industries. Sta-Rite also assumed certain liabilities of Hydrel. In September, 1997 the Company acquired a 100% ownership interest in 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. At December 31, 1997, the Company (including subsidiaries) had 3,625 employees. b) Financial Information About Industry Segments Refer to the section entitled "Management's Discussion and Analysis-General Overview" set forth in the Company's 1997 Annual Report to Shareholders. That section is included in Exhibit 13 hereto and is hereby incorporated herein by reference. 4 c) Forward-Looking Statements Certain matters discussed in this Annual Report are "forward- looking statements" intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. These forward-looking statements can generally be identified as such because the context of the statements will include such words as the Company "believes," "anticipates" or "expects," or words of similar import. Similarly, statements that describe the Company's future plans, objectives or goals are also forward-looking statements. Such forward- looking statements are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated. Such risks and uncertainties include general economic conditions; weather conditions; business conditions in the energy industry; the impact of and changes in government regulations; changes in environmental remediation costs; unanticipated increases in manufacturing costs; market acceptance of or preference for the Company's products; technological factors; and other risk factors identified from time to time by the Company in reports filed with the Securities and Exchange Commission. Shareholders, potential investors and other readers are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. d) Narrative Description of Business 1. ENERGY A. General Wisconsin Gas is the largest natural gas distribution public utility in Wisconsin. At December 31, 1997, Wisconsin Gas distributed gas to approximately 521,000 residential, commercial and industrial customers in 521 communities throughout Wisconsin. Wisconsin Gas' service area has an estimated population of approximately 2,000,000 based on State of Wisconsin's estimates for 1997. 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. See "Wisconsin Regulatory Matters". 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. 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. Effective November 1, 1997, Wisconsin Gas' margin may be impacted by its gas purchasing practices. See "Wisconsin Regulatory Matters - Gas Cost Recovery". 5 The following table sets forth the volumes of natural gas delivered by Wisconsin Gas to its customers. The volumes shown as transported represent third-party gas that was delivered by Wisconsin Gas to its customers. The sales volumes represent quantities sold and delivered to customers by Wisconsin Gas.
Customer Class Year Ended ------------------------------------------------ December 31, 1997 December 31, 1997 -------------------- ---------------------- Thousands Thousands Sales of Therms* Percent of Therms* Percent - --------------------- --------- ------- ---------- ------- Residential 484,330 37.5 529,910 39.1 Commercial 219,220 17.0 242,570 17.9 Large Volume Commercial and Industrial Firm 87,240 6.8 110,780 8.2 Commercial and Industrial Interruptible 72,770 5.5 196,240 14.5 --------- ------- ---------- ------ Total Sales 863,560 66.8 1,079,500 79.7 Transportation - -------------- Transported 428,830 33.2 275,780 20.3 --------- ------- ---------- ------ Total Gas Throughput 1,292,390 100.0 1,355,280 100.0 ========= ======= =========== ======
*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. Up to 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. Federal and state regulators continue to implement policies to bring more competition to the gas industry. The PSCW has instituted a proceeding to consider how its regulation of gas distribution utilities should change to reflect the changing competitive environment in the gas industry. While the gas utility distribution function is expected to remain a heavily regulated, monopoly function, the sales of the natural gas commodity and related services, which were formerly utility monopoly functions, are expected to become increasingly subject to competition from third parties. Given this regulatory direction and the fact that Wisconsin Gas' earnings are substantially the same whether it sells and distributes gas or only distributes it, Wisconsin Gas is pursuing a long-term strategy to no longer sell gas. WICOR Energy sells gas on a for-profit basis and will seek to replace Wisconsin Gas for a significant number of Wisconsin Gas' customers as well as those of other utilities. Wisconsin Gas must obtain PSCW approval to implement its strategy. To date, the PSCW has stated that it will permit utilities to discontinue the sale of gas on a market segment by market segment basis, when it determines that there is adequate and persistent competition in the particular segment. So far, the PSCW has not permitted any Wisconsin utility to discontinue completely the sale of gas to any market segment. 6 With PSCW approval, Wisconsin Gas has implemented a small- customer gas-supplier choice pilot program that is designed to test (1) market acceptance of third-party gas 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 2,114 small commercial and residential participants. Wisconsin Gas expects to continue the pilot program, with certain modifications. Wisconsin Gas also has taken steps to enable its large firm commercial and industrial customers to transfer from sales and distribution to distribution-only service. As a consequence of state regulatory policies and Wisconsin Gas' actions, the volume of gas sold by third parties and distributed by Wisconsin Gas has increased steadily since 1995 and now constitutes approximately one- third of the gas distributed by Wisconsin Gas. See "Wisconsin Regulatory Matters". In 1997, Wisconsin Gas added over 8,000 customers and has added more than 50,000 customers over the past five years. 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 only about 10% of Wisconsin Gas' margin. C. Gas Supply, Pipeline Capacity and Storage 1) General Prior to the Federal Energy Regulatory Commission's ("FERC") Order No. 636, which was implemented on November 1, 1993, the interstate pipelines serving Wisconsin Gas were the primary sellers of natural gas to Wisconsin Gas. Order No. 636 required the pipelines to discontinue the sale of gas on a delivered basis. During the transition period prior to the implementation of Order No. 636, Wisconsin Gas gradually assumed responsibility for the acquisition of supply from other sellers in the production areas of North America, as well as the management of transportation and storage capacities to deliver that supply to its market area. On November 1, 1993, Wisconsin Gas commenced full operation and responsibility for its supply and capacity under the requirements of Order No. 636. One of the provisions of Order No. 636 is capacity release. Capacity release creates a secondary market for pipeline long-line and storage capacity and for gas supplies. Local distribution companies, such as Wisconsin Gas, must contract for capacity and supply sufficient to meet the firm peak day demand of their customers. Peak or near peak days generally occur only a few times each year, so capacity release facilitates higher utilization of capacity and supply during those times when the capacity and supply are not needed by the utility. Through pre-arranged agreements and day-to-day electronic bulletin board postings, interested parties can purchase this excess capacity and supply. The proceeds from these transactions are passed through to ratepayers, thereby helping to mitigate the fixed costs associated with maintaining peak levels of capacity and gas supply. During 1997, Wisconsin Gas continued its active participation in the capacity release market. 7 Operating under Order No. 636, Wisconsin Gas has been able to meet its contractual obligations with both its suppliers and its customers despite periods of severe cold and unseasonably warm weather. 2) Pipeline Capacity and Storage Interstate pipelines serving Wisconsin originate in three major gas producing areas of North America: the Oklahoma and Texas basins, the Gulf of Mexico and western Canada. Wisconsin Gas has contracted for long-term firm capacity on a relatively equal basis from each of these areas. This strategy reflects management's belief that overall supply security is enhanced by geographic diversification of Wisconsin Gas' supply portfolio and that Canada represents an important long-term source of reliable, competitively-priced gas. See "Potential New Pipeline Capacity". 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 the market area. This storage capacity is designed to deliver gas when other supplies cannot be delivered during extremely cold weather in the producing areas, which can reduce long-line supply. Wisconsin Gas' firm winter daily transportation and storage capacity entitlements from pipelines under long-term contracts are set forth below. Maximum Daily Pipeline (Thousands of Therms*) ------------------- ---------------------- ANR Mainline 2,821 Storage 4,826 NNG Mainline 1,048 Peaking Facilities 228 Viking Mainline 77 Peaking Facilities 76 --------------------- Total 9,076 ===================== *One therm equals 100,000 BTU's. 8 3) Term Gas Supply Wisconsin Gas has contracts for firm supplies with terms in excess of 30 days with approximately 20 gas suppliers for gas produced in each of the three producing areas discussed above. The term contracts have varying durations so that only a portion of 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' winter season maximum daily firm total gas supply. Maximum Daily (Thousands of Therms*) -------------- Domestic flowing gas 1,937 Canadian flowing gas 1,628 Storage withdrawals 5,054 Peaker withdrawals 76 -------------- Total 8,695 ============== *One therm equals 100,000 BTU's. 4) Spot Market Gas Supply Wisconsin Gas expects to continue to make gas purchases in the 30-day spot market as price and other circumstances dictate. 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) Potential New Pipeline Capacity Viking Voyageur Gas Transmission LLC has filed an application with the FERC to construct a 775-mile, 42-inch, high- pressure natural gas pipeline from the United States - Canada border at Emerson, Manitoba, Canada, to the Chicago area near Joliet, Illinois ("Viking Voyageur"). The pipeline would run generally east from the Minneapolis area to Marshfield, Wisconsin and then generally south to Chicago. The pipeline would have a capacity of 1.4 billion cubic feet of gas per day. The pipeline is proposed to be in service by November 1, 1999. Wisconsin Gas is in the process of negotiating contracts for the purchase of Canadian gas which the sellers would deliver to various points in Wisconsin along the Viking Voyageur route. Wisconsin Gas would file applications with the PSCW to construct one or more lateral lines to connect the utility's distribution system to Viking Voyageur. The Viking Voyageur pipeline would provide benefits to Wisconsin Gas and its customers in two major ways. First, it would provide ongoing competition with ANR and NNG, which is likely to cause customers' overall gas bills to decline. Second, it would provide additional capacity which will be necessary to meet future demand for gas and to ensure gas service remains reliable. Management cannot predict if or when Viking Voyageur will be approved and constructed, nor if and when Wisconsin Gas will receive approval for or construct laterals to connect to Viking Voyageur. 9 D. Wisconsin Regulatory Matters 1) Rate Matters Wisconsin Gas is subject to the jurisdiction of the PSCW as to various phases of its operations, including rates, customer service and issuance of securities. Wisconsin Gas' rates were made subject to a total margin rate cap (initially three years through October 1997) based on the rates in effect in November 1994. On October 10, 1997, the PSCW approved a second one-year extension of the margin cap mechanism to November 1, 1999. The PSCW order also specified margin rate floors for each rate class. Wisconsin Gas has the ability to raise or lower margin rates within the specified range on a quarterly basis. The rates at December 31, 1997, were $9.0 million below the cap because of annualized rate reductions beginning in 1995. 2) Gas Cost Recovery Wisconsin Gas' rates traditionally contained clauses providing for periodic adjustment, with PSCW approval, to reflect changes in purchased gas costs including the recovery of transition costs passed through by pipeline suppliers. See "Wisconsin Regulatory Matters - Transition Cost Recovery Policy". The PSCW approved an incentive gas cost recovery mechanism for Wisconsin Gas effective November 1, 1997. Under the mechanism, monthly targeted gas supply costs, including upstream capacity costs, are set. At the end of each 12-months, Wisconsin Gas' actual gas supply costs are compared with the aggregate annual targeted costs. If Wisconsin Gas' actual costs are within 1-1/2% (either above or below) the target costs, Wisconsin Gas recovers its actual costs. If Wisconsin Gas' actual costs are between 1-1/2% and 4% below the target, Wisconsin Gas and its customers share the benefits equally. Similarly, if actual gas costs are between 1-1/2% and 4% above the target, Wisconsin Gas and its customers share the additional costs equally. If actual costs are outside the 4% band either side of the target, the benefits and additional costs below or above 4%, as the case may be, accrue to or are borne by customers. 3) Transition Cost Recovery Policy Under Order No. 636, interstate pipelines are permitted to recover certain costs incurred in the transition from the bundled sales service to the unbundled Order No. 636 regime. ANR and NNG have filed to recover transition costs and may file in the future to recover additional transition costs. Wisconsin Gas will bear a portion of such additional costs approved by the FERC. The PSCW has permitted Wisconsin Gas to recover transition costs from customers through its rates. In the judgment of management, the incurrence of these transition costs will have no material effect on Wisconsin Gas' operations or financial condition under current PSCW policy. See Note 8a to Notes to Consolidated Financial Statements contained in Exhibit 13, consisting of portions of the Company's 1997 Annual Report to Shareholders, which note is hereby incorporated herein by reference. 10 4) Changing Regulatory Environment The PSCW has instituted a proceeding to consider how its regulation of gas distribution utilities should change to reflect the changing competitive environment in the gas industry. To date, the PSCW has made a policy decision to deregulate gas prices for customer segments with workably competitive market choices. The PSCW has identified numerous issues which must be resolved before its policy can be implemented. The PSCW has a number of work groups addressing these issues. Work group recommendations to the PSCW are due over the next two years. The Company is unable to determine what impact this proceeding may have on Wisconsin Gas' operations or financial position. See "Gas Markets and Competition". E. Employees At December 31, 1997, the energy group had 1,174 full-time active employees. 2. MANUFACTURING OF PUMPS AND FLUID PROCESSING AND FILTRATION EQUIPMENT A. General The Company's manufacturing subsidiaries manufacture pumps and fluid processing and filtration equipment for residential, agricultural and industrial markets world-wide. Manufacturing and assembly activities are conducted in plants in the United States, Australia, 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, 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. Small, high performance pumps, and related fluids-handling products, are used in four primary markets: (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 a variety of applications including pumping potable water in travel trailers, motor homes, camping trailers and boats, and for other applications including marine engine cooling, marine wash down, bilge and live well pumping; (3) industrial markets, where applications are used in carpet cleaning machines for soil extraction, agricultural equipment for spraying pesticides and fertilizers, firefighting applications and general industrial applications requiring fluid handling; and (4) the water purification industry, where electric motor driven pumps are used to pressurize reverse osmosis systems and for water transfer. 11 Sales of pumps and water processing equipment are somewhat related to the seasons 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, and marine engine cooling markets. Management believes the Company also ranks among the larger producers of pool and spa filters, submersible turbine pumps and pumps for firefighting. Major brand names under trademarks include "Sta-Rite", "Berkeley", "SHURflo", "Flotec", "AquaTools", "Hydro-Flow", "FoamPro", "Onga", "Hypro", "Sherwood", "SherTech", and "Nocchi". 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, 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 all 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, German, Indian, Italian, Mexican and New Zealand subsidiaries. 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 34% of 1997 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, 1997, the manufacturing group had 2,442 full time active employees. 12 Item 2. PROPERTIES a) Capital Expenditures The Company's capital expenditures for the year ended December 31, 1997, totaled $51.6 million. Retirements during this period totaled $24.6 million. Except as discussed under "Legal Proceedings", the Company does not expect to make any material capital expenditures for environmental control facilities in 1998. (b) Energy Wisconsin Gas owns a distribution system which, on December 31, 1997, included approximately 8,700 miles of distribution and transmission mains, 435,700 services and 523,700 active meters. 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. The Milwaukee and other office buildings, the principal service facilities and the gas distribution systems of Wisconsin Gas are owned by it in fee subject to the lien of its Indenture of Mortgage and Deed of Trust, dated as of November 1, 1950, under which its first mortgage bonds are issued, and to permissible encumbrances as therein defined. 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 15 manufacturing facilities located in California (3), Minnesota, Nebraska, New Hampshire, Wisconsin, Australia, Germany, India, Italy (3), Mexico and New Zealand. These plants contain a total of approximately 1,240,000 square feet of floor space. The Company through its manufacturing business also owns or leases six sales/distribution facilities in the United States, five in Australia, and one each in Canada, 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. 13 a) Manufacturing Business The 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 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 cleanup 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 have been responsible for remediation at specified sites, and (d) the experience of other parties who 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, were not recorded as a reduction to the estimated gross environmental liabilities. Based on the foregoing and given current information, management believes that future costs in excess of the amounts accrued on all presently known and quantifiable environmental contingencies described above will not be material to the Company's financial position or results of operations. In July 1994, Sta-Rite was notified by the Wisconsin Department of Natural Resources ("WDNR") that the WDNR believes solvents used at a manufacturing site previously operated by Sta-Rite have migrated and contributed to the contamination of a Deerfield, Wisconsin municipal well, serving Deerfield residents, and surrounding property. In August, 1995 the WDNR issued an order to investigate, restore and repair the natural resources located in Deerfield. The order was dismissed on November 6, 1996. Although the Village of Deerfield has brought suit against Sta-Rite, alleging damages of more than $500,000 for new wells, management believes that the resolution of this matter will not have a material adverse effect upon its financial condition or results of operations. However, there is a possibility that costs in excess of the amount accrued may be incurred in the future. B 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. Wisconsin Gas completed a comprehensive review of its potential environmental liabilities stemming from these two former manufactured gas plant sites. Significant technological developments, lower unit costs and the recognition of the "brown fields" concept by regulatory agencies have all resulted in a reduction in 1997 in the estimate of the probable liability for cleanup to $12 million. This cleanup estimate considered a number of factors, including the estimated extent and volume of contaminated soil and/or groundwater and is based on current undiscounted costs. In addition, management believes it is possible, but not likely, that approximately $5 million in additional remediation costs may be incurred. Expenditures over the next three years are expected to total approximately $8 million. 14 The cleanup estimate discussed above includes the costs of feasibility studies, data collection, soil and groundwater remediation activities and ongoing monitoring activities through 2017. Environmental remediation work for one of the sites was commenced in the first quarter of 1998 and will continue through 1999. It is reasonably possible that, due to uncertainties associated with defining the nature and extent of environmental contamination, application of laws and regulations by regulatory authorities and changes in remediation technology, the ultimate cost of remediation could change in the future. The Company periodically reviews its accrued liabilities for such remediation costs as evidence becomes available indicating that its remediation liability has changed. Due to anticipated regulatory treatment, changes in the 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. 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. See Note 8c to Notes to Consolidated Financial Statements contained in Exhibit 13, consisting of portions of the Company's 1997 Annual Report to Shareholders, which note is hereby incorporated herein by reference. 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 1997. 15 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 62 Chairman and Chief Executive Officer of the Company and its subsidiaries Thomas F. Schrader 48 President and Chief Operating Officer of the Company and Vice Chairman of Wisconsin Gas, WICOR Energy and FieldTech Bronson J. Haase 53 Vice President of the Company and President and Chief Executive Officer of Wisconsin Gas, WICOR Energy and FieldTech James C. Donnelly 52 Vice President of the Company and President and Chief Executive Officer of Sta-Rite Joseph P. Wenzler 56 Senior Vice President, Treasurer and Chief Financial Officer of the Company and WICOR Industries; Vice President and Chief Financial Officer of Wisconsin Gas; Treasurer and Secretary of SHURflo and Hypro; and VP and Treasurer of WICOR Energy and FieldTech Robert A. Nuernberg 58 Secretary of the Company, WICOR Energy Services and FieldTech; and Vice President- Corporate Relations and Secretary of Wisconsin Gas Each of the executive officers has held his position for more than five years, except as follows: Mr. Wardeberg was elected Chairman 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. 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. 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. Donnelly was elected President and Chief Executive Officer of Sta- Rite in 1994. He has been a Vice President of the Company since 1987. Previously, he served as President and Chief Operating Officer of Sta- Rite for more than five years. Mr. Wenzler was elected Senior Vice President, Treasurer and Chief Executive Officer of the Company on July 23, 1997. Prior thereto, he served as Vice President, Treasurer and Chief Financial Officer of the Company from 1992 to 1997. He continues as Vice President and Chief Financial Officer of Wisconsin Gas and as Treasurer and Secretary of SHURflo and Hypro. 16 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 1997 and 1996, see the section entitled "Investor Information" set forth in the Company's 1997 Annual Report to Shareholders. That section is included in Exhibit 13 hereto and is hereby incorporated herein by reference. At December 31, 1997, there were 22,312 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 7 of Notes to Consolidated Financial Statements contained in Exhibit 13, consisting of portions of the Company's 1997 Annual Report to Shareholders, which note is hereby incorporated herein by reference. Item 6. SELECTED FINANCIAL DATA Refer to the section entitled "Selected Financial Data" set forth in the Company's 1997 Annual Report to Shareholders. Such section is included in Exhibit 13 hereto and is hereby incorporated herein by reference. 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 1997 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 Not applicable. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Refer to the Company's consolidated balance sheets and consolidated statements of capitalization as of December 31, 1997 and 1996, and the related consolidated statements of income, common equity and cash flows for each of the three years in the period ended December 31, 1997, together with the report of independent public accountants dated January 26, 1998, all appearing in Exhibit 13, consisting of portions of the Company's 1997 Annual Report to Shareholders, which is hereby incorporated herein by reference. 17 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 13, 1998, which is hereby incor- porated 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 13, 1998, 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 "Board of Directors" included in the WICOR proxy statement dated March 13, 1998, 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 13, 1998, 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 13, 1998, which is hereby incorpo- rated herein by reference, for the information required to be disclosed under this item. PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K 18 (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, 1997 and 1996, and the related consolidated statements of income, common equity and cash flow for each of the three years in the period ended December 31, 1997, together with the report of independent public accountants dated January 26, 1998, included in Exhibit 13, consisting of portions of the Company's 1997 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, 1997, 1996 and 1995; Condensed Balance Sheets (Parent Company Only) as of December 31, 1997 and 1996; 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 Form 10-K Annual Report for 1992). 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 of Mortgage and Deed of Trust, dated as of November 1, 1950, between Milwaukee Gas Light Company and Mellon National Bank and Trust Company and D. A. Hazlett, Trustees (incorporated by reference to Exhibit 7-E to Milwaukee Gas Light Company's Registration Statement No. 2-8631). 4.2 Bond Purchase Agreement, dated December 31, 1981, between Wisconsin Gas Company and Teachers Insurance and Annuity Association of America relating to the issuance and sale of $30,000,000 principal amount of First Mortgage Bonds, Adjustable Rate Series due 2002 (incorporated by reference to Exhibit 4.6 to Wisconsin Gas Company's Form S-3 Registration Statement No. 33-43729). 4.3 Indenture, dated as of September 1, 1990, between Wisconsin Gas Company and First Wisconsin Trust Company, Trustee (incorporated by reference to Exhibit 4.11 to Wisconsin Gas Company's Form S-3 Registration Statement No. 33-36639). 4.4 Officers' Certificate, dated as of November 19, 1991, setting forth the terms of Wisconsin Gas Company's 7-1/2% Notes due 1998 (incorporated by reference to Exhibit 4.1 to Wisconsin Gas Company's Form 8-K Current Report dated November 19, 1991). 19 4.5 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). 4.6 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). 4.7 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). 4.8 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). 4.9 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). 4.10 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). 4.11 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). 4.12 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). 4.13 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). 4.14 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). 20 10.3# WICOR, Inc. 1992 Director Stock Option Plan (incorporated by reference to Exhibit 4.1 to the Company's Form S-8 Registration Statement No. 33-67132). 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. 1998 Officers' Incentive Compensation Plan. 10.10# Wisconsin Gas Company Principal Officers' Supplemental Retirement Income Program (incorporated by reference to Exhibit 10.8 to the Company's Annual Report Form 10-K for 1993). 10.11# Wisconsin Gas Company 1998 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. 1998 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). 10.16# WICOR, Inc. 1987 Stock Option Plan, as amended (incorporated by reference to Exhibit 4.1 to the Company's Form S-8 Registration Statement No. 33-67134). 10.17# Form of nonstatutory stock option agreement used in connection with the WICOR, Inc. 1987 Stock Option Plan (incorporated by reference to Exhibit 10.20 to the Company's Annual Report on Form 10-K for 1991). 21 13 Portions of the WICOR, Inc. 1997 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 13, 1998. (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. (b) Reports on Form 8-K. No Current Report on Form 8-K was filed during the fourth quarter of 1997. 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. BY /S/ JOSEPH P. WENZLER --------------------------- Date: March 18, 1998 JOSEPH P. WENZLER Senior Vice President, Treasurer, 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, 1998 Officer and Director (Principal Executive Officer) THOMAS F. SCHRADER Thomas F. Schrader President, Chief Operating March 18, 1998 Officer and Director JOSEPH P. WENZLER Joseph P. Wenzler Senior Vice President, Treasurer March 18, 1998 and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) WENDELL F. BUECHE Wendell F. Bueche Director March 18, 1998 WILLIE D. DAVIS Willie D. Davis Director March 18, 1998 JERE D. MCGAFFEY Jere D. McGaffey Director March 18, 1998 DANIEL F. MCKEITHAN, JR. Daniel F. McKeithan, Jr. Director March 18, 1998 GUY A. OSBORN Guy A. Osborn Director March 18, 1998 STUART W. TISDALE Stuart W. Tisdale Director March 18, 1998 ESSIE M. WHITELAW Essie M. Whitelaw Director March 18, 1998 WILLIAM B. WINTER William B. Winter Director March 18, 1998 24 Schedule III - Condensed Parent Company Financial Statements WICOR, INC. (Parent Company Only) Statement of Income
Year Ended December 31, ---------------------------------- 1997 1996 1995 ---------- ---------- ---------- (Thousands of Dollars) Income: Undistributed equity in income of subsidiaries after dividends $ 19,048 $ 19,023 $ 16,052 Cash dividends from subsidiaries 30,000 28,044 23,000 Interest income and other 747 722 2,237 ---------- ---------- ---------- 49,795 47,789 41,289 ---------- ---------- ---------- Expenses: Operating (Supplemental Note C) 96 868 1,120 Interest 36 62 275 ---------- ---------- ---------- 132 930 1,395 ---------- ---------- ---------- Income Before Parent Company Income Taxes 49,663 46,859 39,894 Income Taxes 140 88 367 ---------- ---------- ---------- Net Income $ 49,523 $ 46,771 $ 39,527 ========== ========== ==========
The accompanying notes are an integral part of these statements. 25 Schedule III - Condensed Parent Company Financial Statements (continued)
WICOR, INC. (Parent Company Only) Balance Sheet As of December 31, ---------------------- (Thousands of Dollars) 1997 1996 Assets ---------- ---------- Current Assets: Cash and cash equivalents $ 207 $ 1,458 Intercompany receivable, net (Supplemental Note B) 8,473 12,012 Other 123 51 ---------- ---------- 8,803 13,521 ---------- ---------- Investment in Subsidiaries, at equity 384,565 358,094 ---------- ---------- Deferred Income Taxes 151 186 Deferred Charges and Other 1,305 1,426 ---------- ---------- $ 394,824 $ 373,227 ========== ========== Liabilities and Capitalization - ------------------------------ Current Liabilities: Income taxes payable $ 32 $ 511 Other 447 650 ---------- ---------- 479 1,161 ---------- ---------- Deferred Credits 1,118 1,160 ---------- ---------- Capitalization: ESOP loan guarantee (Supplemental Note D) 3,607 4,407 ---------- ---------- Common equity: Common stock, $1 par value, authorized 60,000,000 shares; outstanding 18,237,000 and 16,918,000 shares, respectively 18,601 18,407 Other paid-in-capital 232,702 224,041 Retained earnings 147,903 129,777 Accumulated other comprehensive income (5,377) (604) Unearned compensation (Supplemental Note D) (4,209) (5,122) ---------- ---------- Total common equity 389,620 366,499 ---------- ---------- $ 394,824 $ 373,227 ========== ==========
The accompanying notes are an integral part of these statements. 26 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) ---------------------------------- 1997 1996 1995 Operations- ---------- ---------- ---------- Net income $ 49,523 $ 46,771 $ 39,527 Adjustments to reconcile net income to net cash flows: Undistributed equity in (income) losses of subsidiaries (19,048) (19,023) (16,052) Change in deferred income taxes 35 6 12 Change in interco. receivables 3,539 1,742 (11,715) Change in income taxes payable (479) (4,509) 597 Change in other current assets (72) 25 3 Change in other current liab. (203) 489 62 Change in other non-current assets and liabilities (5,833) (719) (1,149) ---------- ---------- ---------- 27,462 24,782 11,285 ---------- ---------- ---------- Investment Activities- Investments in subsidiaries - (600) (37,875) Proceeds from sale of assets - - 5,099 ---------- ---------- ---------- - (600) (32,776) ---------- ---------- ---------- Financing Activities- Issuance of common stock 2,684 3,345 40,285 Dividends paid on common stock, less amounts reinvested (31,397) (30,485) (27,454) ---------- ---------- ---------- (28,713) (27,140) 12,831 ---------- ---------- ---------- Change in Cash and Cash Equivalents (1,251) (2,958) (8,660) Cash and Cash Equivalents at Beginning of Year 1,458 4,416 13,076 ---------- ---------- ---------- Cash and Cash Equivalents at End of Year $ 207 $ 1,458 $ 4,416 ========== ========== ==========
Supplemental Disclosure of Cash Flow Information Cash paid (received) during the year for: Interest paid $ 88 $ 52 $ - Income taxes paid $ (1,149) $ 202 $ 1,525
The accompanying notes are an integral part of these statements. 27 Schedule III - Condensed Parent Company Financial Statements (continued)
WICOR, INC. (Parent Company Only) Statement of Retained Earnings Year Ended December 31, ---------------------------------- 1997 1996 1995 ---------- ---------- ---------- (Thousands of Dollars) Balance - Beginning of Year $ 129,777 $ 113,491 $ 101,418 Add: Net income 49,523 46,771 39,527 ---------- ---------- ---------- 179,300 160,262 140,945 Deduct: Cash dividends on common stock 31,397 30,485 27,454 ---------- ---------- ---------- Balance - End of Year $ 147,903 $ 129,777 $ 113,491 ========== ========== ==========
The accompanying notes are an integral part of these statements 28 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 1997, 1996 and 1995, the parent company allocated certain administrative and operating expenses to its subsidiaries using an allocation method approved by the Public Service Commission of Wisconsin: 1997 1996 1995 ---------- ---------- ---------- Administrative and operating expenses allocated to subsidiaries $2,880,000 $2,579,000 $2,409,000 ========== ========== ========== 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. 29 INDEX TO EXHIBITS 3.1 WICOR, Inc. Restated Articles of Incorporation, as amended (incorporated by reference to Exhibit 3.1 to the Company's Form 10-K Annual Report for 1992). 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 of Mortgage and Deed of Trust, dated as of November 1, 1950, between Milwaukee Gas Light Company and Mellon National Bank and Trust Company and D. A. Hazlett, Trustees (incorporated by reference to Exhibit 7-E to Milwaukee Gas Light Company's Registration Statement No. 2-8631). 4.2 Bond Purchase Agreement, dated December 31, 1981, between Wisconsin Gas Company and Teachers Insurance and Annuity Association of America relating to the issuance and sale of $30,000,000 principal amount of First Mortgage Bonds, Adjustable Rate Series due 2002 (incorporated by reference to Exhibit 4.6 to Wisconsin Gas Company's Form S-3 Registration Statement No. 33-43729). 4.3 Indenture, dated as of September 1, 1990, between Wisconsin Gas Company and First Wisconsin Trust Company, Trustee (incorporated by reference to Exhibit 4.11 to Wisconsin Gas Company's Form S-3 Registration Statement No. 33-36639). 4.4 Officers' Certificate, dated as of November 19, 1991, setting forth the terms of Wisconsin Gas Company's 7-1/2% Notes due 1998 (incorporated by reference to Exhibit 4.1 to Wisconsin Gas Company's Form 8-K Current Report dated November 19, 1991). 30 4.5 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). 4.6 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). 4.7 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). 4.8 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). 4.9 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). 4.10 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). 4.11 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). 4.12 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). 4.13 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). 4.14 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). 31 10.3# WICOR, Inc. 1992 Director Stock Option Plan (incorporated by reference to Exhibit 4.1 to the Company's Form S-8 Registration Statement No. 33-67132). 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. 1998 Officers' Incentive Compensation Plan. 10.10# Wisconsin Gas Company Principal Officers' Supplemental Retirement Income Program (incorporated by reference to Exhibit 10.8 to the Company's Annual Report Form 10-K for 1993). 10.11# Wisconsin Gas Company 1998 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. 1998 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). 10.16# WICOR, Inc. 1987 Stock Option Plan, as amended (incorporated by reference to Exhibit 4.1 to the Company's Form S-8 Registration Statement No. 33-67134). 10.17# Form of nonstatutory stock option agreement used in connection with the WICOR, Inc. 1987 Stock Option Plan (incorporated by reference to Exhibit 10.20 to the Company's Annual Report on Form 10-K for 1991). 32 13 Portions of the WICOR, Inc. 1997 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 13, 1998. (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. EX-10 2 EXHIBIT 10-9 1 EXHIBIT 10-9 WICOR, Inc. 1998 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., Treasurer & CFO 0% 45% 97.875% Asst.Treasurer 0% 20% 43.5% 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 1998 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 1998 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. The cost of capital should be re-examined if there is a 100 basis point increase/decrease in the 30-year Treasury bond rate. (For example, based on the current rate of 7.0%, an increase in rates to 8.0% or more or a decrease in rates to 6.0% or less, would trigger a review of the cost of capital.) D. If the Compensation Committee of WICOR, Inc. determines that corporate performance was inadequate, it may exercise discretion to reduce or eliminate any or all bonus payments. V. Performance Company performance goals will be for the 1998 calendar year. VI. Treatment of Acquisitions and Investments A. Acquisitions The capitalized value (NOPAT/Target's Cost of Capital) of the acquired entity's last full year's NOPAT will be added to the capital base of the acquiring business unit in the month of acquisition. The acquisition premium (defined as the excess of the purchase price over the capitalized value ) will be incorporated into the capital base at a rate of 20% per year starting at the beginning of the first calendar year after the acquisition. 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, 1998, and a definite time period for deferral must be specified. D. Additionally, if performance significantly exceeds the maximum standard established, the Compensation Committee has the discretion to provide an incentive payout in excess of the maximum allowable payout. However, any exceptional performance which qualifies for this award, must be a direct result of management efforts and not due to external factors beyond management's control. Any awards in excess of the maximum payout opportunity would be paid in WICOR restricted stock which would vest ratably over five years. However, if a participant terminates employment due to death, retirement, or disability, any prior restricted stock awards made under this provision would become immediately vested. E. In the event the company's overall ROC is negatively impacted by the inclusion of a newly acquired company's results, the compensation committee has the discretion to make a supplemental incentive payment. The supplemental payment will be considered if the acquired company is meeting the financial projections established at the time of the acquisition and the officers of the acquiring entity would have otherwise received a higher incentive payment had it not been for the inclusion of the acquired entity's results. The purpose of this supplemental incentive provision is to motivate officers to invest in value building projects. The duration of the supplemental incentive period will be no more than three years. VIII. Implementation A. The effective date of the Plan is January 1, 1998. 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 3 EXHIBIT 10-11 1 EXHIBIT 10-11 Wisconsin Gas Company 1998 Officer's Incentive Compensation Plan I. Objectives The principle objectives of the Plan are: A. To motivate and to provide incentive for officers and executive management (EMT) of Wisconsin Gas Company to create economic value. B. To ensure a focus on earning a return on capital in excess of the cost of capital while also achieving the performance plus goals. C. To assist in the retention of quality senior management. D. To yield competitive total compensation levels when performance goals meet the cost of capital requirement. II. Eligibility Participation in the Plan is limited to designated officers and EMT of Wisconsin Gas. The Chief Executive Officer of WICOR will be responsible for recommending eligibility changes to the Compensation Committee of the Board of Directors of WICOR, Inc. III. Amount of Potential Award A. The minimum, target and maximum award opportunities for each participant, as a percentage of base salary (W-2 base salary calendar earnings), are as follows: Award as Percent of Salary -------------------------------- Position Minimum Target Maximum - ---------------- ------- ------ ------- President & CEO 0% 40% 87% VP and EMT 0% 20% 43.5% B. Each executive's award will be determined based on a combination of WGC and individual performance, with WGC performance accounting for 75% of the award and individual performance weighted at 25%. 2 IV. Performance Criteria and Objective Setting A. Financial Component (75% Weight) 1.) Overall WGC performance will be measured by Return on Capital (ROC), which is defined as NOPAT (Net Operating Profit After Tax) divided by Total Capital Employed (NOPAT and Total Capital Employed are defined in Appendix I). Threshold, Target, and Maximum ROC performance levels, and their corresponding incentive awards are as follows: Performance Level 1998 Return on Capital Award as a % of Target ----------------- ---------------------- ---------------------- Below Threshold Less than 6.0% 0% Threshold 6.0% 1% Target 7.0%* 100% Maximum or Above 9.1% 200% * WGC Cost of Capital = 7.0% For performance at levels between Threshold and Target or between Target and Maximum, award calculations will be interpolated on a linear basis. 2.) ROC payouts will be further modified by performance against budgeted criteria denoted as "Performance Plus" (the modifier). Performance Plus consists of Rate Comparison, Customer Service, Safety, and Cost Effectiveness. Each year management will recommend specific goals for the aforementioned criteria. Associated with various levels of performance for each goal will be a certain number of award points. The cumulative total of these points will determine the modification factor. As seen below, achievement of Performance Plus can modify the award by +/- 20%, or eliminate the award if the threshold number of points is not achieved. Performance Plus Performance Plus Award modification Achievement Points as a % of Target ---------------- ---------------- ------------------ Below Threshold < 12 points 0% Threshold 12 points 80% Target 24 points 100% Maximum 40 points 120% For performance at levels between Threshold and Target or between Target and Maximum award calculations will be interpolated on a linear basis. 3 B. Discretionary/Individual Component (25% Weight) The individual component of total incentive compensation will be based on the individual's overall performance as measured against previously identified and agreed upon goals and objectives. The award may vary between 0% and 150% of the individual performance portion of the target award, and will be determined and paid independently of Company financial performance. Combining the previously mentioned components yields the following formula for determining annual incentive payouts: Step 1 [ Base Salary x Eligible Target % ] Multiplied by sum of step 2 and step 3 Step 2 [(ROC Award % x Performance Plus Modifier %) x 75%] Plus Step 3 [Discretionary % x 25%] Equals Annual Incentive Award C. The company intends to hold the proposed financial/operational performance standards constant for at least three years, with annual reviews to ensure reasonableness vis-a-vis external market conditions. This is especially relevant with regard to the cost of capital, which is the key determinant of performance levels for the ROC measure. The cost of capital should be re-examined if there is a 100 basis point increase/decrease in the 30-year Treasury bond rate. (For example, based on the current rate of 7.0%, an increase in rates to 8.0% or more or a decrease in rates to 6.0% or less would trigger a review of the cost of capital.) D. If the Compensation Committee of WICOR, Inc. determines that corporate performance was inadequate, it may exercise discretion to reduce or eliminate any or all bonus payments. V. Performance Company performance goals will be for the 1998 calendar year. VI. Treatment of Acquisitions and Investments A. Acquisitions The capitalized value (NOPAT/Target's Cost of Capital) of the acquired entity's last full year's NOPAT will be added to the capital base of the acquiring business unit in the month of acquisition. The acquisition premium (defined as the excess of the purchase price over the capitalized value ) will be incorporated into the capital base at a rate of 20% per year starting at the beginning of the first calendar year after the acquisition. 4 B. Investments The entire value of investments of an operating nature (capital expenditures) will be added to the capital base. However, investments of a significant dollar amount, whose project life extends beyond ten years, will be reviewed by management for potential adjustments to the capital base (similar to the treatment for acquisitions). VII. Form and Timing of Award Payments A. Awards will be determined and paid as soon as practicable after the close of the Plan year. B. At each participant's discretion and with the concurrence of the Compensation committee of WICOR, Inc., awards may be paid in one of three ways: 1. Lump sum. 2. Partly in lump sum and the remainder in deferred annual installments. 3. Completely in deferred annual installments. C. The Company will offer a deferred payment option to those officers who prefer not to receive their awards in current cash, following these guidelines: 1. Deferred incentive award payments will be carried as an accrued liability with an interest rate (three-year treasury bill rate) credited each year. 2. Deferred elections must be made prior to June 30, 1998, and a definite time period for deferral must be specified. D. Additionally, if performance significantly exceeds the maximum standard established, the Compensation Committee has the discretion to provide an incentive payout in excess of the maximum allowable payout. However, any exceptional performance which qualifies for this award, must be a direct result of management efforts and not due to external factors beyond management's control. Any awards in excess of the maximum payout opportunity would be paid in WICOR restricted stock which would vest ratably over five years. However, if a participant terminates employment due to death, retirement, or disability, any prior restricted stock awards made under this provision would become immediately vested. 5 E. In the event the company's overall ROC is negatively impacted by the inclusion of a newly acquired company's results, the compensation committee has the discretion to make a supplemental incentive payment. The supplemental payment will be considered if the acquired company is meeting the financial projections established at the time of the acquisition and the officers of the acquiring entity would have otherwise received a higher incentive payment had it not been for the inclusion of the acquired entity's results. The purpose of this supplemental incentive provision is to motivate officers to invest in value building projects. The duration of the supplemental incentive period will be no more than three years. VIII. Implementation A. The effective date of the Plan is January 1, 1998. IX. Plan Administration A. Compensation Committee 1. The Plan will be administered by the Compensation Committee of the Board of Directors of WICOR, Inc. 2. The Committee's administration is subject to approval of the Board of Directors of WICOR, Inc. 3. The decisions of the Board are final and binding on all Plan participants. 4. The Board retains the right to terminate or amend the Plan as it may deem advisable. B. Partial Year Participation 1. Participants must be employed by the Company on the last day of the Plan year in order to receive a bonus for that year. However, once earned, a bonus will be paid to a participant regardless of whether he/she is employed by the company on the date payment is made. 2. Awards for part year participants will be pro-rated based on the proportion of the year that the participant was in the Plan. This includes participants who terminate employment due to death, disability or retirement. 3. Participants who terminate employment with the Company prior to the last day of the plan year shall forfeit all rights to an incentive award payment under the Plan except for terminations due to death, retirement or disability. 4. A participant is deemed to be disabled if he/she becomes eligible for benefits under the Company's Long Term Disability Plan. 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 4 EXHIBIT 10-14 1 EXHIBIT 10-14 Sta-Rite Industries, Inc. 1998 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 8.7% 0% Threshold 8.7% 1% Target 10.2% 100% Maximum or Above 13.3% 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 1998 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. The cost of capital should be re-examined if there is a 100 basis point increase/decrease in the 30-year Treasury bond rate. (For example, based on the current rate of 7.0%, an increase in rates to 8.0% or more or a decrease in rates to 6.0% or less would trigger a review of the cost of capital.) D. If the Compensation Committee of WICOR, Inc. determines that corporate performance was inadequate, it may exercise discretion to reduce or eliminate any or all bonus payments. V. Performance Company performance goals will be for the 1998 calendar year. VI. Treatment of Acquisitions and Investments A. Acquisitions The capitalized value (NOPAT/Target's Cost of Capital) of the acquired entity's last full year's NOPAT will be added to the capital base of the acquiring business unit in the month of acquisition. The acquisition premium (defined as the excess of the purchase price over the capitalized value ) will be incorporated into the capital base at a rate of 20% per year starting at the beginning of the first calendar year after the acquisition. 4 B. Investments The entire value of investments of an operating nature (capital expenditures) will be added to the capital base. However, investments of a significant dollar amount, whose project life extends beyond ten years, will be reviewed by management for potential adjustments to the capital base (similar to the treatment for acquisitions). VII. Form and Timing of Award Payments A. Awards will be determined and paid as soon as practicable after the close of the Plan year. B. At each participant's discretion and with the concurrence of the Compensation committee of WICOR, Inc., awards may be paid in one of three ways: 1. Lump sum. 2. Partly in lump sum and the remainder in deferred annual installments. 3. Completely in deferred annual installments. C. The Company will offer a deferred payment option to those officers who prefer not to receive their awards in current cash, following these guidelines: 1. Deferred incentive award payments will be carried as an accrued liability with an interest rate (three-year treasury bill rate) credited each year. 2. Deferred elections must be made prior to June 30, 1998, and a definite time period for deferral must be specified. D. Additionally, if performance significantly exceeds the maximum standard established, the Compensation Committee has the discretion to provide an incentive payout in excess of the maximum allowable payout. However, any exceptional performance which qualifies for this award, must be a direct result of management efforts and not due to external factors beyond management's control. Any awards in excess of the maximum payout opportunity would be paid in WICOR restricted stock which would vest ratably over five years. However, if a participant terminates employment due to death, retirement, or disability, any prior restricted stock awards made under this provision would become immediately vested. 5 E. In the event the company's overall ROC is negatively impacted by the inclusion of a newly acquired company's results, the compensation committee has the discretion to make a supplemental incentive payment. The supplemental payment will be considered if the acquired company is meeting the financial projections established at the time of the acquisition and the officers of the acquiring entity would have otherwise received a higher incentive payment had it not been for the inclusion of the acquired entity's results. The purpose of this supplemental incentive provision is to motivate officers to invest in value building projects. The duration of the supplemental incentive period will be no more than three years. VIII. Implementation A. The effective date of the Plan is January 1, 1998. IX. Plan Administration A. Compensation Committee 1. The Plan will be administered by the Compensation Committee of the Board of Directors of WICOR, Inc. 2. The Committee's administration is subject to approval of the Board of Directors of WICOR, Inc. 3. The decisions of the Board are final and binding on all Plan participants. 4. The Board retains the right to terminate or amend the Plan as it may deem advisable. B. Partial Year Participation 1. Participants must be employed by the Company on the last day of the Plan year in order to receive a bonus for that year. However, once earned, a bonus will be paid to a participant regardless of whether he/she is employed by the company on the date payment is made. 2. Awards for part year participants will be pro-rated based on the proportion of the year that the participant was in the Plan. This includes participants who terminate employment due to death, disability or retirement. 3. Participants who terminate employment with the Company prior to the last day of the plan year shall forfeit all rights to an incentive award payment under the Plan except for terminations due to death, retirement or disability. 4. A participant is deemed to be disabled if he/she becomes eligible for benefits under the Company's Long Term Disability Plan. 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 1998 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. 8 EX-13 5 FINANCIAL REVIEW 1 EXHIBIT 13 Management's Discussion and Analysis ------------------------------------ General Overview - ---------------- WICOR, Inc. (WICOR or the Company) is a diversified holding company with Energy and Manufacturing business groups. The Energy Group provides natural gas distribution and related services and the Manufacturing Group manufactures and distributes, both domestically and abroad, pumps and equipment used to control, transfer, hold and filter water and other fluids. The Energy Group includes Wisconsin Gas Company (Wisconsin Gas), the oldest and largest natural gas distribution utility in Wisconsin. WICOR's 1997 financial results exceeded 1996's record performance as net income rose by 6% to $49.5 million. Basic earnings per share in 1997 rose 5% to $2.68 compared with 1996, as the Company's manufacturing business posted significantly improved results. Basic earnings per share in 1997 reached a record high for the second year in a row. The 1997 improvement in the Manufacturing Group is attributable to higher domestic shipments within the beverage, agricultural spraying and pool/spa markets compared to 1996. Internal cost reductions and a strengthening in the Company's Australian operations also contributed to the improvement in earnings. Segment data for WICOR's operations for the last three years are summarized below in millions of dollars. 1997 1996 1995 Operating Revenues ---------- ---------- ---------- - ------------------------ Energy $ 596.3 $ 602.7 $ 522.8 Manufacturing-Domestic 280.9 269.0 207.6 Manufacturing-Foreign 143.8 140.9 130.2 ---------- ---------- ---------- $ 1,021.0 $ 1,012.6 $ 860.6 ========== ========== ========== 1997 1996 1995 Depreciation and Amortization ---------- ---------- ---------- - ----------------------------- Energy $ 40.0 $ 40.9 $ 36.7 Manufacturing-Domestic 10.4 10.7 8.8 Manufacturing-Foreign 3.3 3.3 3.0 ---------- ---------- ---------- $ 53.7 $ 54.9 $ 48.5 ========== ========== ========== 1997 1996 1995 Operating Income ---------- ---------- ---------- - ---------------------- Energy $ 59.0 $ 64.5 $ 58.8 Manufacturing-Domestic 23.3 18.2 13.7 Manufacturing-Foreign 11.7 8.0 6.6 ---------- ---------- ---------- $ 94.0 $ 90.7 $ 79.1 ========== ========== ========== 2 Estimated Capital Expenditures 1998 1997 1996 1995 - ---------------------- ---------- ---------- ---------- ---------- Energy $ 45.0 $ 35.1 $ 36.6 $ 42.9 Manufacturing-Domestic 13.1 13.3 11.3 8.2 Manufacturing-Foreign 2.9 3.2 3.8 5.1 ---------- ---------- ---------- ---------- $ 61.0 $ 51.6 $ 51.7 $ 56.2 ========== ========== ========== ========== Identifiable Assets 1997 1996 1995 - ------------------- ---------- ---------- ---------- Energy $ 697.3 $ 730.8 $ 718.3 Manufacturing-Domestic 249.6 215.8 206.5 Manufacturing-Foreign 84.4 90.8 83.7 ---------- ---------- ---------- $ 1,031.3 $ 1,037.4 $ 1,008.5 ========== ========== ========== Results of Operations --------------------- Energy Group - ------------ The Energy Group's primary business is the distribution of natural gas through Wisconsin Gas. Energy Group operating income decreased by $5.5 million, or 9%, in 1997 as compared with 1996. This decrease was due primarily to reduced sales margins resulting from warmer weather and voluntary rate reductions. Lower operating expenses partially offset the decrease in sales margin. The increase in Energy Group operating income of $5.7 million, or 10%, in 1996 compared to 1995 was due primarily to decreased operating and maintenance expenses and increased sales margins resulting from colder weather. The improvements were partially offset by higher depreciation expense and voluntary annualized rate reductions totaling $7.5 million 3 Revenues, margins and volumes are summarized below. Margin, defined as revenues less cost of gas, is a better comparative performance indicator than revenues. Historically, transportation service revenues were recorded at a slightly higher margin than sales with no corresponding cost of gas amount. Therefore, for a given rate class within the regulated business, the volume mix between sales and transportation service affects revenues but has a minimal impact on margin. In addition, prior to November 1997, changes in cost of gas flowed through to revenue under a purchased gas adjustment clause, with no effect on margin. The following tables set forth financial data for the Energy Group as a whole and volume data for Wisconsin Gas on an individualized basis for each of the years ended December 31. Millions of Dollars 1997 1996 1995 ---------- ---------- ---------- Revenues $ 573.8 $ 588.3 $ 515.0 Cost of gas sold 394.1 393.7 322.2 ---------- ---------- ---------- Sales margin 179.7 194.6 192.8 Gas transportation margin 22.5 14.4 7.8 ---------- ---------- ---------- Gross margin 202.2 209.0 200.6 ---------- ---------- ---------- Operation and maintenance 101.8 102.3 103.5 Depreciation 31.8 32.9 29.0 Interest and other 11.7 12.2 14.2 Taxes, other than income taxes 9.6 9.3 9.3 ---------- ---------- ---------- Income before income taxes 47.3 52.3 44.6 Income taxes 17.8 20.2 16.9 ---------- ---------- ---------- Net earnings $ 29.5 $ 32.1 $ 27.7 ========== ========== ========== Millions of therms 1997 1996 1995 ---------- ---------- ---------- Sales volumes Firm 791 883 841 Interruptible 73 196 314 Transport volumes 428 276 145 ---------- ---------- ----------- Total throughput 1,292 1,355 1,300 ========== ========== ========== Total Energy Group margin decreased by 3% in 1997 primarily as a result of a 10% decrease in firm sales volumes and a $3.0 million voluntary annual rate reduction effective November 1996, offset in part by a decrease in operating expenses. Utility margin rates have been reduced an aggregate of $9.0 million as a result of a November 1994 rate order of the Public Service Commission of Wisconsin (PSCW) through voluntary annualized rate reductions of $1.5 million, $3.0 million and $4.5 million in 1997, 1996 and 1995, respectively. The weather in 1997 was 1% colder than the 20-year average and 5% warmer than 1996. 4 Annual Degree Days Line/Area Chart % colder (warmer) than 20-year normal 1993 1994 1995 1996 1997 ---------- ---------- ---------- ---------- ---------- (4.1) (9.0) (2.8) 6.8 1.0 Energy Group margin increased by 4% in 1996. The increase in 1996 margin compared to 1995 was largely the result of a 5% increase in firm sales volumes which was partially offset by voluntary rate reductions. The weather in 1996 was 7% colder than the 20-year average and 9% colder than 1995. Transportation volumes in both 1997 and 1996 increased mainly because more customers purchased gas from sources other than Wisconsin Gas and transported this volume over the Wisconsin Gas distribution system. Historically, the movement to transportation from gas sales has had no impact on margin. Effective November 1, 1997, a slightly lower margin rate was put into effect for transportation-only customers. The future impact of this change on total Company margin is expected to be immaterial. Non-regulated energy operating revenues in 1997 increased by $30.1 million, or 102% to $59.5 million. This increase in non-regulated energy revenues consisted largely of increased gas sales at WICOR Energy Services (WESCO) primarily as a result of customer growth. The WESCO strategy has been to have gas supply arrangements consistent with customer requirements so that the Company is not exposed to significant commodity risk. Total operating and maintenance expenses of $101.8 million for 1997 decreased $0.5 million compared with the prior year. The decrease resulted primarily from lower labor and benefit expenses, which included a reduction in post- retirement benefit expenses reflecting improved health care cost experience. The decrease was partially offset by higher costs associated with the increased operating activities of FieldTech, Inc. (FieldTech) and increased levels of outside services. Operation and maintenance expenses decreased $1.2 million, or 1%, in 1996 as compared with 1995 as a result of the Company's continuing efforts to reduce operating costs. The decrease was due mainly to lower labor and related benefit expenses ($4.3 million) which was partially offset by a one-time $3.0 million amortization of the uncollectible accounts receivable regulatory asset approved by the PSCW in the fourth quarter of 1996. Depreciation expense for 1997 decreased by $1.1 million, or 3%, compared with 1996. This decrease was due to the second year impact of the depreciation rates approved by the PSCW, the effect of which was partially offset by additions to property, plant and equipment. Depreciation expense in 1998 is expected to increase due to planned capital investments. Depreciation expense for 1996 increased by $3.9 million, or 13%, compared with 1995. The increase was due to additions to plant and increased depreciation rates permitted by the PSCW. 5 Manufacturing Group - ------------------- The Manufacturing Group had an outstanding year in 1997. Net sales for 1997 rose 4% to a record $424.8 million, outpacing sales of $409.9 million in 1996. Net income for the year increased 38% to a record $20.1 million compared to the prior year. Net income in 1996 includes one-time charges totaling $1.2 million relating to the settlement of a product liability lawsuit and the consolidation of two Wisconsin manufacturing plants. Financial data regarding the Manufacturing Group are set forth in the table below. Millions of Dollars 1997 1996 1995 ---------- ---------- ---------- Revenues $ 424.8 $ 409.9 $ 337.8 Cost of sales 307.2 297.1 245.7 ---------- ---------- ---------- Gross profit 117.6 112.8 92.1 Operating expenses 82.6 86.6 71.8 ---------- ---------- ---------- Operating income 35.0 26.2 20.3 Interest expense and other 4.4 5.1 2.7 ---------- ---------- ---------- Income before income taxes 30.6 21.1 17.6 Income taxes 10.5 6.5 5.8 ---------- ---------- ---------- Net earnings $ 20.1 $ 14.6 $ 11.8 ========== ========== ========== Domestic manufacturing sales in 1997 increased by 4% to $280.9 million as compared with 1996. Domestic shipments for beverage, agricultural spraying and pool/spa markets were up from the prior year. International sales of $143.8 million increased 2% compared to 1996. The increase in international sales was negatively impacted by currency translation related to the strengthening U.S. dollar and the weakening of the Korean economy. Manufacturing sales in 1996 increased $72.1 million, or 21%, to $409.9 million compared to 1995. The increase was due partly to the incremental sales from the acquisition of Hypro Corporation (Hypro), which accounted for $25.9 million of the increase (See Note 3 of Notes to Consolidated Financial Statements). Domestic sales increased $61.4 million, or 30%, to $269.0 million. Overall shipments for water systems, pool and spa, food service, industrial and firefighting applications continued their upward trend from 1995. International sales increased by 8% in 1996 as compared with 1995. Although international sales increased to $140.9, they were hampered by sluggish economic conditions and unfavorable weather in Europe. International sales accounted for 34% of total manufacturing net sales in 1997 and 1996 and 39% in 1995. International Revenues in millions of dollars (CHART) 1993 1994 1995 1996 1997 ---------- ---------- ---------- ---------- ---------- $ 93.8 $ 114.2 $ 130.2 $ 140.9 $ 143.8 6 In 1997, manufacturing operating income was $35.0 million compared with $26.2 million in 1996 and $20.3 million in 1995. The increase in 1997 operating income is attributable to increased sales, plant consolidations and cost- saving programs, as well as continuing productivity improvements. The increase in 1996 operating income was due to increased sales levels and strong domestic operating performances, particularly in the water systems, pool/spa, food service, industrial, RV/marine and firefighting segments. WICOR Operating Income in millions of dollars (CHART) 1993 1994 1995 1996 1997 ---------- ---------- ---------- ---------- ---------- $ 64.0 $ 66.6 $ 79.1 $ 90.7 $ 94.0 Operating expenses decreased by 5% in 1997 compared to the prior year due to cost reduction programs and improved performance of the Australian operations. Operating expenses increased by 21% in 1996 over 1995 due primarily to increased sales-related expenses. As a percentage of sales, 1997 operating expenses were 19% of sales compared to 21% in both 1996 and 1995. In order to reduce costs and improve productivity and asset utilization, the Company has recently taken steps to consolidate certain of its manufacturing operations. These activities resulted in the 1997 closing of a plant located in Waterford, Wisconsin, and the closing, in 1996, of a plant located in Detroit, Michigan. As a result of these closures, the Company recorded an after-tax charge of $0.7 million in 1996. Interest Expense, Other Income and Income Taxes - ----------------------------------------------- Interest expense in 1997 decreased $0.9 million, or 5%, compared to last year. This decrease resulted from lower average borrowing levels and slightly lower interest rates. Interest expense of $18.3 million for 1996 was $0.9 million, or 5%, lower than in 1995, primarily due to lower average interest rates. The lower rates were partially offset by increased debt incurred in connection with the Hypro acquisition. Other income decreased by $1.3 million in 1996 as compared with 1995. Other income in 1995 was positively impacted by the sale of the Company's investment in Filtron Technologies Corporation for an after-tax gain of $0.8 million ($0.05 per share). Income tax expense increased by $1.6 million in 1997, or 6%, compared to 1996 reflecting increased pre-tax income. Income tax expense increased $4.0 million in 1996 compared to 1995 reflecting increased pre-tax income. The effective income tax rate remained relatively unchanged in 1997, 1996 and 1995 7 New Accounting Standards - ------------------------ During 1997, the Financial Accounting Standards Board (FASB) issued two new accounting standards which the Company adopted in 1997. Statement of Financial Accounting Standards (SFAS) No. 128 "Earnings Per Share," establishes standards for computing and presenting earnings per share (EPS) for the current year and all prior period EPS data. SFAS No. 130 "Reporting Comprehensive Income," establishes standards for the reporting and displaying of comprehensive income. American Institute of Certified Public Accountants Statement of Position No. 96-1, "Environmental Remediation Liabilities," establishes specific criteria for the recognition and measurement of environmental remediation liabilities. The adoption of these statements in 1997 did not have a significant effect on the Company's financial condition or results of operation. Effects of Changing Prices - -------------------------- In management's opinion, changes in the rate of inflation have not had a significant effect on WICOR's income over the past three years. Inflationary increases in recent years have been recovered through productivity improvements and/or product price increases. The Company continues to monitor the impact of inflation in order to minimize its effects in future years through pricing strategies, productivity improvements and cost reductions. In November 1994, Wisconsin Gas received approval from the PSCW to use an alternative method of rate making that includes a three-year margin rate cap. In November 1997, the PSCW approved a one-year extension of the margin rate cap through October 31, 1999. After reviewing the impact of the margin rate cap and other factors, management believes that Wisconsin Gas's productivity improvements have offset the impact of inflationary cost increases. This alternative method is discussed on page 24 under "Regulatory Matters." Liquidity and Capital Resources - ------------------------------- The Company has access to outside capital markets and has been able to generate funds internally to meet its investment needs. WICOR's ability to attract the necessary financial capital at reasonable terms is critical to the Company's overall strategic plan. Acquisitions and investments have been initially financed with short-term debt and later permanently funded with various long-term debt securities or common equity, depending on market conditions. Working capital was $74.8 million at the end of 1997 compared to $83.4 million and $74.6 million at the end of 1996 and 1995, respectively. The Company's current ratio at December 31 was 1.2 in 1997 and 1.3 in both 1996 and 1995. Because of timing differences in the receipt and disbursement of cash and the level of construction requirements, the Energy Group may borrow on a short- term basis. As customers take advantage of deregulation within the natural gas industry and move to purchase their own gas supplies directly from producers or brokers, the impact of gas purchases on the cash flow of the energy business may diminish 8 Cash flows from operating activities decreased by $26.1 million to $49.3 million in 1997. The decrease is attributable to lower gas prices and warmer weather in the fourth quarter of 1997, as compared to 1996, which resulted in a lower accounts payable balance at December 31, 1997. Cash flows from operating activities increased by $5.5 million to $75.4 million in 1996 as compared with 1995. The Company believes that cash provided from operating activities over the next three years will satisfy normal ongoing cash requirements. The Company may need external capital for financing acquisitions, scheduled debt retirement and the proposed pipeline project discussed below. Various outside parties have proposed to construct a Viking Voyageur pipeline which will extend from the Minnesota-Canada border to Joliet, Illinois and cross the state of Wisconsin. If the proposed pipeline is built, Wisconsin Gas expects that it would construct lateral lines to connect to the new pipeline. The proposed owners of Viking Voyageur filed an application to construct the pipeline with the Federal Energy Regulatory Commission (FERC) in October 1997, and, if approved, the pipeline is scheduled to be in service on November 1, 1999. The Company is actively supporting the project because it will provide additional pipeline capacity to serve future growth in Wisconsin, increase the reliability of supply for the state and create true competition for pipeline capacity serving Wisconsin. As a result, the pipeline should reduce the cost of gas delivered to the state. The Company anticipates that additional outside financing may be needed to construct the lateral lines if the pipeline project is approved. Investment Activities - --------------------- Capital expenditures of $51.6 million in 1997 remained relatively flat compared to the prior year. Consolidated capital expenditures are expected to increase modestly in 1998, and are expected to be funded from operations. Capital expenditures decreased by $4.5 million in 1996 compared to 1995. During fiscal 1997, WICOR and its subsidiaries consummated four acquisitions totaling approximately $10 million using a combination of cash and the issuance of approximately 128,000 shares of the Company's common stock. Three of the acquisitions involved pump, fluid processing and filtration equipment companies. The fourth acquisition was a contract meter reading and meter installation company. Each of the acquisitions was accounted for as a purchase and the results of operations of the acquired companies were included in the consolidated financial statements of the Company from their respective acquisition dates. In January 1995, WICOR sold its interest in Filtron Technologies Corporation, a manufacturer of filtration products, for approximately $5.1 million. In 1992, the PSCW issued an order prescribing an equity-based formula for determining the limitation on nonutility investments. As of December 31, 1997, WICOR would be permitted to invest an additional $45.7 million in nonutility equity under this order. Nonutility subsidiaries can also borrow additional amounts for acquisitions within certain PSCW guidelines (See Note 7 of Notes to Consolidated Financial Statements) 9 Financing Activities - -------------------- Cash flows used by financing activities were $6.3 million in fiscal 1997, primarily resulting from scheduled repayments of long-term debt and dividend payments. During 1997, the Company, and certain subsidiaries, renegotiated their existing revolving credit facilities and subsequently refinanced the remaining outstanding principal balance (approximately $27 million) of the credit facility entered into in connection with the July 1995 acquisition of Hypro. Restrictive covenants under the new five-year $115 million credit facilities, which expire on August 6, 2002, include leverage and interest coverage ratios. The Company's ratio of long-term debt to capitalization decreased to 28% in 1997 as compared to 32% in 1996 and 34% in 1995. The utility's embedded cost of long-term debt was 7.1%, 7.0% and 8.1% for the years ended December 31, 1997, 1996 and 1995, respectively. WICOR raised its common stock dividend by 2.4% in both 1997 and 1996 and by 2.5% 1995. The current annual dividend rate is $1.72 per share. At December 31, 1997, the Company had $127.3 million of unrestricted retained earnings available for dividend payments to shareholders. WICOR Return on Average Common Stock as a percentage (CHART) 1993 1994 1995 1996 1997 ---------- ---------- ---------- ---------- ---------- 11.2% 11.6% 13.1% 12.9% 13.0% The WICOR Plan, established in 1992, allows investors to purchase WICOR common stock directly and through dividend reinvestment without paying fees or service charges. Since February 1, 1995, share requirements for the WICOR Plan have been met through open market purchases of WICOR common stock. As described in Note 7 of Notes to Consolidated Financial Statements, a 1993 PSCW rate order retained certain limitations with respect to equity levels of and dividend payments by Wisconsin Gas. Restrictions imposed by the PSCW are not expected to have any material effect on WICOR's ability to meet its cash obligations. Wisconsin Gas's ratio of pre-tax earnings to fixed charges decreased to 4.5 in 1997 from 4.9 in 1996, as a result of lower earnings, the effects of which were offset in part by fixed charges that were 2% lower in 1997 than in 1996. Access to capital markets at a reasonable cost is determined in large part by credit quality. Wisconsin Gas's strong financial position, as evidenced by Moody's Investors Service 1997 upgrade of its long-term debt from Aa3 to Aa2, provides a high degree of flexibility in obtaining funds on competitive terms. Standard and Poor's Corporation's current rating is AA-. These ratings reflect the views of such organizations, and an explanation of the significance of these ratings may be obtained from each agency. Such ratings are not a recommendation to buy, sell or hold securities, but rather an indication of creditworthiness 10 The Company and its subsidiaries maintain lines of credit worldwide. The Company's primary domestic line of credit is a $115 million unsecured revolving credit commitment from several banks which expires August 6, 2002. In addition, the Company has arranged lines of credit from foreign lenders which allow it to borrow in the applicable local currency. These lines of credit total $35.0 million and are concentrated in Australia, Canada and Italy. The Company's lines of credit generally provide borrowing at the bank reference rate or better which varies depending on the country where the funds are borrowed. The Company's domestic lines of credit are subject to standard covenants relating to leverage and interest coverage ratios. The Company was in compliance with all financial covenants at December 31, 1997. Wisconsin Gas and WICOR Industries finance working capital needs by issuing commercial paper in the open market. Commercial paper outstanding, on a consolidated basis, at December 31, 1997 and 1996 was $125.2 million and $71.6 million, respectively. The Company believes that it has adequate capacity to fund its operations for the foreseeable future through its borrowing arrangements and internally generated cash. Regulatory Matters - ------------------ Wisconsin Gas is subject to the jurisdiction of the PSCW as to various phases of its operations, including rates, service and issuance of securities. The PSCW has instituted generic proceedings to consider how its regulation of gas distribution utilities should change to reflect the changing competitive environment in the natural gas industry. To date, the PSCW has made a policy decision to deregulate the sale of natural gas in customer segments with workably competitive market choices. It has also adopted standards for transactions between a utility and its gas marketing affiliates. The PSCW has established working groups to study and make recommendations on major deregulation issues. These working groups are scheduled to complete their work at various times in 1998 and 1999. The impact of these proceedings on Wisconsin Gas's future operations is uncertain at this time. Wisconsin Gas is actively seeking to create the competitive market conditions necessary to exit the natural gas sales business and provide only gas transportation services within its utility service territory. In response to filings made by Wisconsin Gas, the PSCW approved gas supplier choice pilot programs for segments of the utility's firm market effective November 1, 1996. These programs, with some refinements, were extended for a second year beginning in November 1997. Under these limited pilot programs, 216 large- volume firm, 688 commercial and 1,426 residential customers elected to purchase gas through third-party gas suppliers until October 31, 1998. These pilot programs are designed to test market acceptance of supplier choice, the interest of third-party marketers in serving these market segments and Wisconsin Gas's capabilities to administer transportation-only services. WICOR Energy Services, as a gas marketer, is one of the suppliers participating in the pilot programs. At this point, it is uncertain how long it will take for Wisconsin Gas to fully exit the gas sales business for all customer classes, if indeed it will be permitted to do so, and what costs, if any, shareholders might be required to bear in connection with existing contractual commitments and in transforming Wisconsin Gas's business 11 Under a November 1994 rate order, Wisconsin Gas's rates were subject to a three-year margin rate cap (through October 1997) based upon rates approved in November 1993. At Wisconsin Gas's request, the PSCW extended the margin cap to October 31, 1999. The PSCW order also specified margin rate floors for each rate class. Wisconsin Gas has the ability to raise or lower margin rates within the specified range on a quarterly basis. Wisconsin Gas reduced its base rates by $1.5 million, $3.0 million and $4.5 million on an annualized basis in 1997, 1996 and 1995, respectively. With these reductions, Wisconsin Gas's rates are designed to recover $9.0 million per year less than the maximum margin recovery allowed by the PSCW's rate order. The Productivity- based Alternative Ratemaking Mechanism (PARM) has certain criteria that allow either Wisconsin Gas or the PSCW to reopen PARM at any time. These are for significant deterioration in safety, failures to meet conservation goals, significant changes in interest rates and "extraordinary items." To date, none of the criteria have been triggered. As required by the PSCW, Wisconsin Gas filed a Gas Cost Incentive Mechanism (GCIM) specifying how Wisconsin Gas would recover in rates its costs of acquiring gas and pipeline transportation and storage capacity. The GCIM replaced the traditional dollar-for-dollar purchased gas adjustment clause (PGA). The PSCW approved Wisconsin Gas's proposal, with modification, effective November 1, 1997. Under the GCIM, Wisconsin Gas's gas and capacity costs are compared to monthly benchmarks. If, at the end of each year, such costs deviate by more than 1-1/2% from the benchmark cost of gas, the utility shares such excess or reduced costs on a 50-50 basis with customers. The sharing mechanism applies only to costs between 1-1/2% to 4% above or below the benchmark. The new PGA mechanism provides an opportunity for Wisconsin Gas's earnings to increase or decrease as a result of gas and capacity acquisition activities. However, management does not believe such increases or decreases are likely to be material. During the first two months under the GCIM, actual costs were within 1-1/2% of the benchmark. ANR Pipeline Company's (ANR) 1993 general rate case before the FERC was settled by the parties in November 1997. ANR is a primary supplier to Wisconsin Gas. The settlement provides for a reduction in the rates for most of ANR's services. The settlement is subject to FERC's approval which is expected in the first quarter of 1998. Wisconsin Gas complies with the provisions of Statement of Financial Accounting Standards (SFAS No. 71) "Accounting for the Effects of Certain Types of Regulation," which provides that rate-regulated public utilities such as Wisconsin Gas record certain costs and credits allowed in the ratemaking process in different periods than would be required for unregulated businesses. In the event Wisconsin Gas determines that it no longer meets the criteria for following SFAS 71, the accounting impact would be an extraordinary, non-cash charge to operations of an amount that could be material. Criteria that give rise to the discontinuance of SFAS 71 include (1) increasing competition that restricts Wisconsin Gas's ability to establish prices to recover specific costs and (2) a significant change in the manner in which rates are set by regulators from cost-based regulation to another form of regulation. SFAS No. 71 continues to be applicable to Wisconsin Gas in that its rates are approved by a third party regulator and are designed to recover its cost of service. Wisconsin Gas believes its current cost-based rates are competitive in the open market 12 Pipeline companies have been allowed to pass through to local gas distributors various costs incurred in the transition to FERC Order No. 636. The PSCW has authorized the recovery through rates of costs that have been passed through to Wisconsin Gas. Although complete assurance cannot be given, it is believed that any additional future transition costs will also be recoverable from customers. Environmental Matters - --------------------- Wisconsin Gas has prepared and submitted to the Wisconsin Department of Natural Resources a remedial action options report and recommendation concerning a previously owned site on which Wisconsin Gas operated a manufactured gas plant. Wisconsin Gas started remediation at this site in the first quarter of 1998. Furthermore, Wisconsin Gas will address a second such site during 1998. Wisconsin Gas currently anticipates that the costs incurred in the remediation effort will be recoverable from insurers or through rates and will not have a material adverse effect on the Company's liquidity or results of operations. The manufacturing segment has provided reserves believed sufficient to cover its estimated costs related to contamination associated with its manufacturing facilities. For additional disclosure regarding environmental matters, see Note 8 of Notes to Consolidated Financial Statements. Year 2000 Date Conversion - ------------------------- The Company recognizes the need to ensure its operations will not be adversely impacted by Year 2000 software failures. Potential software failures due to processing errors arising from calculations using the Year 2000 date are a risk. The Company is in the process of addressing this risk to the availability, reliability and integrity of financial and operational systems. The Company has established processes for evaluating and managing the risks and costs associated with this problem. The computing portfolio was identified and an initial assessment has been completed. The cost for the Company of achieving Year 2000 compliance is estimated to be approximately $5 million over the cost of normal software upgrades and replacements through fiscal 1999. As of December 31, 1997, nearly $2 million has been incurred to achieve Year 2000 compliance. 13 Report of Independent Public Accountants To the Shareholders and Board of Directors of WICOR, Inc.: We have audited the accompanying consolidated balance sheets and statements of capitalization of WICOR, Inc. (a Wisconsin corporation) and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income, common equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of WICOR, Inc.'s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of WICOR, Inc. and subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Arthur Andersen LLP Milwaukee, Wisconsin, January 26, 1998. 14 WICOR, INC. Consolidated Statements of Earnings
thousands of dollars, except per share amounts Years Ended December 31, ---------------------------------------- 1997 1996 1995 ------------ ------------ ------------ Operating Revenues Energy $ 596,262 $ 602,685 $ 522,840 Manufacturing 424,779 409,916 337,754 ------------ ------------ ------------ 1,021,041 1,012,601 860,594 ------------ ------------ ------------ Operating Costs and Expenses Cost of gas sold 394,101 393,681 322,198 Manufacturing cost of sales 307,160 297,053 245,688 Operations and maintenance 182,976 187,557 174,515 Depreciation and amortization 33,173 34,355 29,696 Taxes, other than income taxes 9,602 9,244 9,421 ------------ ------------ ------------ 927,012 921,890 781,518 ------------ ------------ ------------ Operating Income 94,029 90,711 79,076 ------------ ------------ ------------ Interest expense (17,404) (18,349) (19,299) Other income and expenses 1,222 1,114 2,438 ------------ ------------ ------------ Income Before Income Taxes 77,847 73,476 62,215 Income taxes 28,324 26,705 22,688 ------------ ------------ ------------ Net Earnings $ 49,523 $ 46,771 $ 39,527 ============ ============ ============ Per Share of Common Stock - ------------------------- Basic earnings $ 2.68 $ 2.55 $ 2.32 Diluted earnings $ 2.66 $ 2.53 $ 2.31 Cash dividends paid $ 1.70 $ 1.66 $ 1.62 Average common shares outstanding (thousands) 18,475 18,365 17,020
The accompanying notes are an integral part of these statements. 15 WICOR, INC. 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: thousands of dollars, except per share amounts Quarters: First Second Third Fourth(b) ---------- ---------- ---------- ---------- 1997 - ---- Operating revenues $ 349,065 $ 221,605 $ 173,342 $ 277,029 Operating income $ 48,879 $ 14,427 $ 612 $ 30,111 Earnings available for common stock $ 27,908 $ 6,315 $ (2,071) $ 17,371 Basic earnings (loss) per common share (a) $ 1.52 $ 0.34 $ (0.11) $ 0.93 Diluted earnings (loss) per common share (a) $ 1.51 $ 0.34 $ (0.11) $ 0.93 1996 - ---- Operating revenues $ 328,747 $ 227,600 $ 175,139 $ 281,115 Operating income (loss) $ 54,943 $ 13,300 $ (3,416) $ 25,884 Earnings available for common stock $ 30,949 $ 5,652 $ (4,478) $ 14,648 Basic earnings (loss) per common share (a) $ 1.69 $ 0.31 $ (0.24) $ 0.80 Diluted earnings (loss) per common share (a) $ 1.68 $ 0.31 $ (0.24) $ 0.79
(a) Quarterly earnings per share may not total to the amounts reported for the year since the computation is based on weighted average common shares outstanding during each quarter. (b) The fourth quarter of 1996 includes the effects of charges relating to the settlement of a product liability lawsuit and the consolidation of two Wisconsin manufacturing plants. These charges decreased consolidated net income by $1.2 million or $0.07 per share. 16 WICOR, INC. Consolidated Balance Sheets
thousands of dollars December 31, -------------------------- 1997 1996 ------------ ------------ ASSETS Current Assets Cash and cash equivalents $ 11,810 $ 18,784 Accounts receivable, less allowance for doubtful accounts of $15,364 and $14,429, respectively 164,243 150,076 Accrued revenues 44,842 59,794 Manufacturing inventories 83,431 72,316 Gas in storage 41,887 33,463 Deferred income taxes 21,531 21,706 Prepayments and other 16,924 16,566 ------------ ------------ 384,668 372,705 ------------ ------------ Property, Plant and Equipment, at cost Energy 801,523 786,643 Manufacturing 141,610 132,342 ------------ ------------ 943,133 918,985 ------------ ------------ Less: Accumulated depreciation and amortization 497,239 477,577 ------------ ------------ 445,894 441,408 ------------ ------------ Deferred Charges and Other Regulatory assets 53,910 83,465 Goodwill 65,953 61,366 Prepaid pension costs 42,753 36,869 Systems development costs 17,424 23,052 Other 20,730 18,491 ------------ ------------ 200,770 223,243 ------------ ------------ $ 1,031,332 $ 1,037,356 ============ ============
The accompanying notes are an integral part of these statements. 17 WICOR, INC. Consolidated Balance Sheets
thousands of dollars December 31, -------------------------- 1997 1996 ------------ ------------ Liabilities and Capitalization Current Liabilities Short-term borrowings $ 118,900 $ 114,810 Accounts payable 75,034 98,951 Current portion of long-term debt 43,926 4,061 Refundable gas costs 24,776 31,545 Accrued payroll and benefits 17,573 17,246 Accrued taxes 9,684 1,260 Other 19,999 21,464 ------------ ------------ 309,892 289,337 ------------ ------------ Deferred Credits and Other Liabilities Postretirement benefit obligation 64,323 66,391 Regulatory liabilities 36,533 43,406 Deferred income taxes 43,975 39,668 Accrued environmental remediation costs 12,084 36,222 Unamortized investment tax credit 6,808 7,265 Other 18,987 19,399 ------------ ------------ 182,710 212,351 Commitments and Contingencies (Note 8) Capitalization (See accompanying statement) Long-term debt 149,110 169,169 Redeemable preferred stock - - Common equity 389,620 366,499 ------------ ------------ 538,730 535,668 ------------ ------------ $ 1,031,332 $ 1,037,356 ============ ============
The accompanying notes are an integral part of these statements. 18 WICOR, INC. Consolidated Statements of Cash Flows
thousands of dollars Years Ended December 31, ---------------------------------- 1997 1996 1995 ---------- ---------- ---------- Operations Net earnings $ 49,523 $ 46,771 $ 39,527 Adjustments to reconcile net earnings to net cash flow from operating activities: Depreciation and amortization 53,740 54,871 48,477 Deferred income taxes 4,530 (1,103) (6,436) Changes in: Accounts receivable 2,046 (28,641) (33,298) Manufacturing inventories (7,463) (3,590) (1,931) Gas in storage (8,424) (9,512) 14,121 Other current assets (464) (1,167) 3,545 Accounts payable (25,975) 32,520 (4,652) Refundable gas costs (6,769) (2,802) 16,289 Accrued taxes 8,561 (6,028) (7,839) Other current liabilities (1,502) 4,225 2,939 Other noncurrent asset and liabilities (18,479) (10,128) (824) ---------- ---------- ---------- Cash provided by operating activities 49,324 75,416 69,918 ---------- ---------- ---------- Investment Activities - --------------------- Capital expenditures (51,572) (51,744) (56,241) Proceeds from sale of assets 3,362 1,249 5,099 Acquisitions (2,065) 22 (58,256) Other, net 293 285 365 ---------- ---------- ---------- Cash used in investing activities (49,982) (50,188) (109,033) ---------- ---------- ---------- Financing Activities - -------------------- Change in short-term borrowings 6,115 (969) 4,059 Issuance of long-term debt 27,000 10,045 65,000 Reduction of long-term debt (11,157) (9,194) (57,700) Issuance of common stock 2,684 3,345 40,285 Dividends paid on common stock (31,397) (30,485) (27,454) Other 439 434 167 ---------- ---------- ---------- Cash (used in) provided by financing activities (6,316) (26,824) 24,357 ---------- ---------- ---------- Change in Cash and Cash Equivalents (6,974) (1,596) (14,758) Cash and cash equivalents at beginning of year 18,784 20,380 35,138 ---------- ---------- ---------- Cash and Cash Equivalents at End of Year $ 11,810 $ 18,784 $ 20,380 ========== ========== ==========
The accompanying notes are an integral part of these statements. 19 WICOR, INC. Consolidated Statements of Capitalization
thousands of dollars December 31, ---------------------- 1997 1996 ---------- ---------- Long-Term Debt Wisconsin Gas: First mortgage bonds Adjustable rate series, 8.1% and 7.2%, respectively, due 1999 $ 2,000 $ 4,000 7-1/2% Notes due 1998 - 40,000 6.6% Notes due 2013 45,000 45,000 6-3/8% Notes due 2005 65,000 65,000 WICOR Industries, Inc.: Commercial paper under multi-year credit agreements 27,000 3,000 Securities loan agreement,11-3/4% due semi- annually through 2000 (includes unamor- tized bond premium of $814 and $1,078, respectively) 6,750 7,014 First mortgage notes, adjustable rate, 4.4% to 4.6%, due semi-annually through 2000 266 633 Industrial revenue bonds, 7.84%, payable through 2000 830 1,320 Capital lease obligations and other - 342 Unamortized (discount), net (1,343) (1,547) ESOP loan guarantee 3,607 4,407 ---------- ---------- 149,110 169,169 ---------- ---------- Redeemable Preferred Stock WICOR: $1.00 par value; authorized 1,500,000 shares - - Wisconsin Gas: Without par value, cumulative; authorized 1,500,000 shares - - ---------- ---------- - - ---------- ---------- Common Equity Common stock, $1.00 par value, authorized 60,000,000 shares; outstanding 18,601,000 and 18,407,000 shares, respectively 18,601 18,407 Other paid-in capital 232,702 224,041 Retained earnings 147,903 129,777 Accumulated other comprehensive income (5,377) (604) Unearned compensation - ESOP and restricted stock (4,209) (5,122) ---------- ---------- 389,620 366,499 ---------- ---------- Total Capitalization $ 538,730 $ 535,668 ========== ==========
The accompanying notes are an integral part of these statements. 20 WICOR, INC. Consolidated Statements of Common Equity
Accumulated Unearned Other Other Compensation- Common Paid-in Retained Comprehensive ESOP and thousands of dollars Stock Capital Earnings Income Restricted Stock --------- --------- ------------ ------------- ---------------- Balance December 31, 1994 $ 16,918 $180,000 $ 101,418 $ (1,550) $ (6,868) Net earnings - - 39,527 - - Other comprehensive income: Translation/minimum pension liability adjustments - - - (43) - --------- --------- ------------ ------------- ---------------- Comprehensive income - - 39,527 (43) - --------- --------- ------------ ------------- ---------------- Issued in connection with underwritten public offering 1,265 37,684 - - - Issued in connection with dividend reinvestment, customer stock purchase, employ benefit plans/other 54 1,449 - - - Dividends on common stock - - (27,454) - - ESOP loan payments - - - - 1,055 Amortization and forfeiture of restricted stock - - - - 218 --------- --------- ------------ ------------- ---------------- Balance December 31, 1995 18,237 219,133 113,491 (1,593) (5,595) --------- --------- ------------ ------------- ---------------- Net earnings - - 46,771 - - Other comprehensive income: Translation/minimum pension liability adjustments - - - 989 - --------- --------- ------------ ------------- ---------------- Comprehensive income - - 46,771 989 - --------- --------- ------------ ------------- ---------------- Issued in connection with dividend reinvestment, customer stock purchase, employee benefit plans/other 170 4,908 - - - Dividends on common stock - - (30,485) - - ESOP loan payments - - - - 908 Issuance of restricted stock - - - - (1,208) Amortization and forfeiture of restricted stock - - - - 773 --------- --------- ------------ ------------- ---------------- Balance December 31, 1996 18,407 224,041 129,777 (604) (5,122) --------- --------- ------------ ------------- ---------------- Net earnings - - 49,523 - - Other comprehensive income: Translation/minimum pension liability adjustments - - - (4,773) - --------- --------- ------------ ------------- ---------------- Comprehensive income - - 49,523 (4,773) - --------- --------- ------------ ------------- ---------------- Issued in connection with dividend reinvestment, customer stock purchase, employee benefit plans/other 194 8,661 - - - Dividends on common stock - - (31,397) - - ESOP loan payments - - - - 800 Issuance of restricted stock - - - - (145) Amortization and forfeiture of restricted stock - - - - 258 --------- --------- ------------ ------------- ---------------- Balance December 31, 1997 $ 18,601 $232,702 $ 147,903 $ (5,377) $ (4,209) ========= ========= ============ ============= ================
The accompanying notes are an integral part of these statements. 21 Notes to Consolidated Financial Statements ------------------------------------------- Note 1 Accounting Policies - -------------------------- A - Principles of consolidation The consolidated financial statements include the accounts of WICOR, Inc., and its wholly-owned subsidiaries: Wisconsin Gas, WESCO, FieldTech and WICOR Industries, Inc. (WICOR Industries), an intermediate holding company for various manufacturing subsidiaries. Intercompany transactions and accounts are eliminated in consolidation. B - Business The Company is a diversified holding company with two principal business groups: energy services and pump manufacturing. Energy services consists primarily of natural gas distribution through Wisconsin Gas, the oldest and largest natural gas distribution utility in Wisconsin. Wisconsin Gas is subject to regulation by the PSCW and gives recognition to ratemaking policies substantially in accordance with the FERC System of Accounts. At December 31, 1997, Wisconsin Gas served approximately 521,000 customers in 521 communities. The Energy Group accounted for 58% and 63% of the Company's 1997 operating revenues and operating income, respectively. Through its subsidiary, WICOR Industries, the Company engages in the manufacture and sale of pumps and processing equipment used to pump, control, transfer, hold and filter water and other fluids. The Company's products are used primarily in water system, pool and spa, agriculture, RV/marine and beverage/food service applications. The Company markets its manufactured products in over 100 countries. C - Gas distribution revenues and purchased gas costs Utility billings are rendered on a cycle basis. Revenues include estimated amounts accrued for service provided but not yet billed. Wisconsin Gas's rate schedules contain PGA provisions which permit the recovery of actual purchased gas costs incurred. The difference between actual gas costs incurred and costs recovered through rates is deferred as a current asset or liability. Subject to the sharing mechanism discussed below, the deferred balance is returned to or recovered from customers at intervals throughout the year and any residual balance at the annual October 31 reconciliation date is subsequently refunded to or recovered from customers. The PSCW is currently permitting Wisconsin Gas to recover pipeline supplier take-or-pay settlement costs, allocating a portion of the direct-billed costs to each customer class, including transportation customers. In October 1997, the PSCW approved Wisconsin Gas's proposed GCIM which became effective November 1, 1997. The GCIM establishes a reference for the cost of gas, including pipeline capacity and storage costs. The reference price is based on a current month index of prices from the supply basins where the gas is purchased. If the actual costs deviate from the reference by more than 1- 1/2% but less than 4%, Wisconsin Gas and its customers share equally in the amount within the band. If actual costs deviate from the reference cost by more than plus or minus 4%, Wisconsin Gas customers bear all the costs above 4% and receive all the benefits of the costs below 4%. 22 D - Income taxes The Company files a consolidated Federal income tax return and allocates Federal current tax expense or credits to each domestic subsidiary based on its respective separate tax computation. For Wisconsin Gas, investment tax credits are a deferred credit on the balance sheet and are amortized to income over the applicable service lives of the related properties consistent with regulatory treatment. E - Basic earnings per common share Basic earnings per common share is based on the weighted average number of shares outstanding during the period. F - Inventories Energy - Substantially all gas in storage inventory in 1997 and 1996 were priced using the weighted average method of accounting. Manufacturing - Approximately 57% and 55% of manufacturing inventories, in 1997 and 1996, respectively, are priced using the last-in, first-out (LIFO) method (not in excess of market), with the remaining inventories priced using the first-in, first-out (FIFO) method. If the FIFO method had been used exclusively, manufacturing inventories would have been $7.9 million and $8.5 million higher at December 31, 1997 and 1996, respectively. G - Plant and depreciation Gas distribution property, plant and equipment is stated at original cost, including overhead allocations. Upon ordinary retirement of utility plant assets, original cost plus cost of removal, net of salvage, is charged to accumulated depreciation, and no gain or loss is recognized. The depreciation of Wisconsin Gas's assets is computed using straight-line rates over estimated useful lives and considers estimated removal costs and salvage value. These rates have been consistently used for ratemaking purposes. The composite rates were 4.3%, 4.5% and 4.2% for 1997, 1996 and 1995, respectively. Depreciation of manufacturing property is calculated under the straight-line method over the estimated useful lives of the assets (3 to 10 years for equipment and 30 years for buildings) and is primarily included in cost of sales. H - Regulatory accounting Wisconsin Gas accounts for its regulated operations in accordance with SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation." This statement sets forth the application of generally accepted accounting principles to those companies whose rates are determined by an independent third-party regulator. The economic effects of regulation can result in regulated companies recording costs that have been or are expected to be allowed in the ratemaking process in a period different from the period in which the costs would be charged to expense by an unregulated enterprise. When this occurs, costs are deferred as assets in the balance sheet (regulatory assets) and recorded as expenses in the periods when those same amounts are reflected in rates. Additionally, regulators can impose liabilities upon a regulated company for amounts previously collected from customers and for amounts that are expected to be refunded to customers (regulatory liabilities). 23 The amounts recorded as regulatory assets and regulatory liabilities in the Consolidated Balance Sheet at December 31, are as follows: thousands of Dollars 1997 1996 ---------- ---------- Regulatory assets: Postretirement benefit costs (Note 10) $ 39,498 $ 42,275 Deferred uncollectible expenses 11,056 10,152 Income tax-related amounts due from customers 2,648 3,003 Deferred environmental costs 76 23,025 Other 632 5,010 ---------- ---------- $ 53,910 $ 83,465 ========== ========== Regulatory liabilities: Income tax-related amounts due to customers $ 19,725 $ 21,369 Unrecognized pension income (Note 10) 13,780 16,631 Other 3,028 5,406 ---------- ---------- $ 36,533 $ 43,406 ========== ========== In the fourth quarter of 1997, the Company completed a comprehensive review of its environmental clean-up liability which ultimately resulted in a reduction of the liability to $12 million as of December 31, 1997. The regulatory asset previously recorded was also adjusted to reflect the results of this review. (See Note 8 for a more detailed description of this matter.) Wisconsin Gas is precluded from discontinuing service to residential customers within its service area during the heating season. Any differences between doubtful account provisions based on actual experience and provisions allowed for ratemaking purposes by the PSCW are deferred for later recovery in rates as a cost of service. The most recent PSCW rate order provides for a $13.9 million allowable annual provision for doubtful accounts, including amortization of prior deferred amounts. In the fourth quarter of 1996, the PSCW approved a one-time charge of $3.0 million relating to uncollectible accounts receivable expense. See Notes 8 and 10 for discussion of additional regulatory assets. I - Cash flows Cash equivalents consist of highly liquid investments which are readily convertible into cash and have maturities of three months or less. Due to the short maturity of these instruments, market value approximates cost. Beginning in 1995, the Company, through an agent, purchased common stock for shareholders who elected to reinvest their dividends in common stock. 24 For purposes of the Consolidated Statements of Cash Flows, income taxes paid (net of refunds) and interest paid (net of capitalized amounts) were as follows for each of the years ended December 31: thousands of Dollars 1997 1996 1995 ---------- ---------- ---------- Income taxes paid $ 17,315 $ 34,669 $ 27,801 Interest paid $ 16,352 $ 16,824 $ 18,855 J - Derivative financial instruments The Company has a limited involvement with derivative financial instruments and does not use them for trading or speculative purposes. Foreign exchange futures and forward contracts are used to hedge foreign exchange exposure resulting from international purchases or sales of products. Gains and losses from open contracts are deferred until recognized as part of the purchase transaction. Such gains and losses included in net income in the Consolidated Statements of Income for the years ended December 31, 1997, 1996 and 1995 were not material. The Energy Group purchased derivatives in 1997 and 1996 to hedge a portion of inventory and gas costs to be purchased for resale. The cost of the options and gains or losses realized do not affect income since they are recovered dollar for dollar under the purchased gas adjustment clause and are not subject to the GCIM sharing mechanism. During 1997, WICOR entered into a three-year weather insurance agreement to hedge a portion of the impact weather has on Energy Group earnings. Under this agreement, a payment will be made or received if the heating degree days from December 1, 1997 to March 31, 1998 fall outside a specific range. The payment is limited to a maximum of $2.0 million per year. The counterparty has the option to extend this agreement for the following two heating seasons with substantially the same terms. At December 31, 1997, the fair value of this agreement was not significant. K - Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. L - Reclassifications Certain prior year financial statement amounts have been reclassified to conform to their current year presentation. Note 2 New Accounting Standards - ------------------------------- During 1997, the Financial Accounting Standards Board issued two new accounting standards effective in fiscal year 1997. SFAS No. 128, "Earnings Per Share," establishes standards for computing and presenting earnings per share. The Company has adopted the requirements of SFAS No. 128 for the current year and all prior periods in the Consolidated Statements of Income and Selected Financial Data. SFAS No. 130, "Reporting Comprehensive Income," establishes standards for the reporting and displaying of comprehensive income and its components. The Company has reported comprehensive income in the Consolidated Statements of Common Equity. American Institute of Certified Public Accountants Statement of Position No. 96-1, "Environmental Remediation Liabilities," establishes specific criteria for the recognition and measurement of environmental remediation liabilities. The adoption of the statement in 1997 did not have a significant effect on the Company's financial condition or results of operation. 25 Note 3 Mergers and Acquisitions - ------------------------------- During fiscal 1997, WICOR and its subsidiaries consummated four acquisitions. The aggregate purchase price was approximately $10 million and was financed using cash and by issuing 127,838 shares of the Company's common stock. Three of the acquisitions were pump, fluid processing and filtration equipment companies. The fourth acquisition was a contract meter reading and meter installation company. Each of the acquisitions was accounted for as a purchase and the results of operations of the acquired companies were included in the consolidated financial statements from their respective acquisition dates. The excess of the purchase price over the estimated fair value of net assets acquired amounted to approximately $7 million, which has been recorded as goodwill and is being amortized over 40 years. On July 19, 1995, the Company completed the acquisition of Hypro Corporation (Hypro) for $58 million in cash and the assumption of operating liabilities totaling $13.3 million. Hypro designs, manufactures and markets pumps and water processing equipment for the agricultural, high-pressure cleaning, marine, industrial and fire protection markets. The acquisition was accounted for as a purchase and the results of operations of Hypro have been included in the consolidated financial statements commencing July 19, 1995. The purchase price was allocated to the net assets based upon their estimated fair market values. The excess of the purchase price over the estimated fair value of net assets acquired amounted to approximately $58 million, which has been recorded as goodwill and is being amortized over 40 years on a straight-line basis. Note 4 Income Taxes - ------------------- The provision for income taxes differs from the amount of income tax determined by applying the applicable U.S. statutory federal income tax rate to pretax income as a result of the following differences:
Year ended December 31, --------------------------------------------------- 1997 1996 1995 thousands of dollars --------------- --------------- --------------- Statutory U.S. tax rates $27,327 35.0% $25,717 35.0% $21,775 35.0% State income taxes, net 3,383 4.3 3,818 5.2 3,235 5.2 Excess of foreign (benefit) provision over U.S. statutory tax rate (280) (0.4) (229) (0.3) 378 0.6 Investment credit restored (451) (0.6) (453) (0.6) (457) (0.7) Amortization of excess deferred taxes (630) (0.8) (556) (0.8) (507) (0.8) Adjustment of prior year's estimated liability (401) (0.5) (578) (0.8) (361) (0.6) Other, net (624) (0.7) (1,014) (1.4) (1,375) (2.2) --------------- --------------- --------------- Effective Tax Rates $28,324 36.3% $26,705 36.3% $22,688 36.5% =============== =============== ===============
26 The components of deferred income tax classified as current assets and long- term liabilities at December 31, are as follows: thousands of Dollars 1997 1996 ---------- ---------- Current deferred income tax assets Recoverable gas costs $ 9,712 $ 12,658 Deferred compensation 3,407 2,968 Inventory 2,421 1,078 Product related/warranty 1,254 1,691 Other 4,737 3,311 $ 21,531 $ 21,706 Long-term deferred income tax liabilities Property related $ 48,905 $ 46,867 Systems development costs 6,993 9,252 Investment tax credit (4,503) (4,806) Postretirement benefits (9,217) (8,914) Deferred compensation (4,042) (3,734) Pension benefits 11,033 8,118 Environmental (4,819) (5,677) Other (375) (1,438) ---------- ---------- $ 43,975 $ 39,668 ========== ========== The current and deferred components of income tax expense (benefit) for each of the years ended December 31, are as follows: thousands of Dollars 1997 1996 1995 ---------- ---------- ---------- Current Federal $ 19,229 $ 23,479 $ 25,728 State 4,146 6,022 6,641 Foreign 808 752 1,256 ---------- ---------- ---------- Total Current 24,183 30,253 33,625 ---------- ---------- ---------- Deferred Federal 1,836 (2,610) (10,275) State 926 (264) (1,816) Foreign 1,379 (674) 1,154 ---------- ---------- ---------- Total Deferred 4,141 (3,548) (10,937) ---------- ---------- ---------- Total Provision $ 28,324 $ 26,705 $ 22,688 ========== ========== ========== 27 Note 5 Short-term Borrowings and Lines of Credit - ------------------------------------------------ As of December 31, 1997 and 1996, the Company had total unsecured lines of credit available from banks of $240.0 million and $230.5 million, respectively. These borrowing arrangements may require the maintenance of average compensating balances, which are generally satisfied by balances maintained for normal business operations, and may be withdrawn at any time. During the third quarter of 1997, the Company, and certain subsidiaries, renegotiated their existing revolving credit facilities and subsequently refinanced the remaining outstanding principal balance (approximately $27 million) of the credit facility entered into in connection with the July 1995 acquisition of Hypro. This amount is included as long-term debt on the Consolidated Balance Sheet. Respective covenants under the new five-year $115 million credit facilities, which expire in August, 2002, include leverage and interest coverage ratios. thousands of Dollars 1997 1996 ---------- ---------- Notes payable to banks U.S. subsidiaries $ - $ 27,000 Non-U.S. subsidiaries 20,668 19,210 Commercial paper - U.S. 98,232 68,600 ---------- ---------- $ 118,900 $ 114,810 ========== ========== Weighted average interest rates on debt outstanding at end of year: thousands of Dollars 1997 1996 ---------- ---------- Notes payable to banks U.S. subsidiaries - 5.8% Non-U.S. subsidiaries 5.8% 7.2% Commercial paper - U.S. 5.8% 5.7% Highest month-end balance $ 118,900 $ 114,810 Average month-end balance $ 79,701 $ 69,915 Note 6 Long-term Debt - --------------------- In November 1995, Wisconsin Gas issued $65 million of 6-3/8% Notes due in 2005. A portion of the proceeds were used to redeem $50 million of 9-1/8% Notes due in 1997. Maturities and sinking fund requirements during the succeeding five years on all long-term debt total $43.9 million, $3.9 million, $7.6 million, $0.8 million and $27.8 million in 1998, 1999, 2000, 2001 and 2002, respectively. 28 Note 7 Restrictions - ------------------- A November 1993 rate order issued by the PSCW sets a 13-month average equity range of 43% to 50% for Wisconsin Gas and also requires Wisconsin Gas to request PSCW approval prior to the payment of dividends on its common stock to WICOR if the payment would reduce its common equity (net assets) below 43% of total capitalization (including short-term debt). Under this requirement, $41.8 million of Wisconsin Gas's net assets at December 31, 1997, plus future earnings, were available for such dividends without PSCW approval. In addition, the PSCW must also approve any dividends in excess of $16 million for any 12 month period beginning November 1 if such dividends would reduce Wisconsin Gas's 13-month average equity below 48.43% of its total capitalization. Wisconsin Gas paid $5.5 million in dividends in November 1997 and expects to pay $23.5 million in dividends for the 12 months ending October 1998. At December 31, 1997, Wisconsin Gas's equity was 53.3%. Combined restricted common equity of the Company's subsidiaries totaled $262.4 million under the most restrictive provisions as of December 31, 1997; accordingly, $127.3 million of consolidated retained earnings is available for payment of dividends. Historically, the PSCW has imposed restrictions on public utility holding companies, including WICOR, relating to future nonutility investments. Under current restrictions, Wisconsin Gas should remain WICOR's predominant business, generally as measured by equity. Under these restrictions, the amount allowable for future nonutility equity investment at December 31, 1997, was $45.7 million. Also, nonutility subsidiaries can borrow additional amounts for acquisitions; however, if debt for the combined nonutility entities exceeds 40% of total capitalization for these entities, further PSCW actions may be necessary. Debt was 32% of total capitalization for the nonutility entities at December 31, 1997. Note 8 Commitments and Contingencies - ------------------------------------ A - Gas supply Wisconsin Gas has agreements for firm pipeline and storage capacity that expire at various dates through 2008. The aggregate amount of required payments under such agreements totals approximately $640 million, with annual required payments of $110 million in 1998 and 1999, $106 million in 2000, $101 million in 2001 and $97 million in 2002. Wisconsin Gas's total payments for firm pipeline and storage capacity prior to recovery from sales of excess capacity were $126.6 million in 1997, $129.6 million in 1996 and $128.1 million in 1995. The purchased gas adjustment provisions of Wisconsin Gas's rate schedules permit the recovery of gas costs from its customers subject to the GCIM sharing mechanism. FERC Order No. 636 permits pipeline suppliers to pass through to Wisconsin Gas any prudently incurred transition costs, such as unrecovered gas costs, gas supply realignment costs and stranded investment costs. Wisconsin Gas estimates its portion of such costs from all of its pipeline suppliers would approximate $4.2 million at December 31, 1997, based upon prior filings with FERC by the pipeline suppliers. The pipeline suppliers will continue to file quarterly with the FERC for recovery of actual costs incurred. 29 The FERC has allowed ANR Pipeline Company (ANR) to recover capacity and "above market" supply costs associated with quantities purchased from Dakota Gasification Company (Dakota) under a long-term contract expiring in year 2009. Consistent with guidelines set forth in Order No. 636, ANR has allocated 90% of Dakota costs to firm transportation service. Based on its contracted quantities with ANR, Wisconsin Gas is currently paying approximately $100,000 per month of Dakota costs. Transmission costs billed to Wisconsin Gas are being recovered from customers under the purchased gas provisions within its rate schedules. B - Capital expenditures Certain commitments have been made in connection with 1998 capital expenditures. The Energy Group's capital expenditures for 1998 are estimated at $45 million. The Manufacturing Group's capital expenditures for 1998 are estimated at $16 million. C - Environmental matters Wisconsin Gas has identified two previously owned sites on which it operated manufactured gas plants. Such plants ceased operations prior to the mid-1950's. Wisconsin Gas completed a comprehensive review of its potential environmental liabilities stemming from these two former manufactured gas plant sites. Significant technological developments, lower unit costs and the recognition of the "brown fields" concept by regulatory agencies have all resulted in a reduction in 1997 in the estimate of the probable liability for cleanup to $12 million. This cleanup estimate considered a number of factors, including the estimated extent and volume of contaminated soil and/or groundwater and is based on current undiscounted costs. In addition, management believes it is possible, but not likely, that approximately $5 million in additional remediation costs may be incurred. Expenditures over the next three years are expected to total approximately $8 million. These new estimates have been reflected in the Consolidated Balance Sheet as of December 31, 1997. The cleanup estimate discussed above includes the costs of feasibility studies, data collection, soil and groundwater remediation activities and ongoing monitoring activities through 2017. Environmental remediation work for one of the sites was commenced in the first quarter of 1998 and will continue through 1999. It is reasonably possible that, due to uncertainties associated with defining the nature and extent of environmental contamination, application of laws and regulations by regulatory authorities and changes in remediation technology, the ultimate cost of remediation could change in the future. The Company periodically reviews its accrued liabilities for such remediation costs as evidence becomes available indicating that its remediation liability has changed. Due to anticipated regulatory treatment, changes in the recorded liability do not immediately impact net income. Under the current ratemaking treatment approved by the PSCW, the costs expended in the environmental remediation of these sites, net of any insurance proceeds, would be deferred and recovered from gas customers. The Company's manufacturing subsidiaries are involved in various environmental matters, including matters in which the subsidiaries or alleged predecessors have been named as potentially responsible parties under the Comprehensive Environmental Response Compensation and Liability Act (CERCLA). The Company has established accruals for all environmental contingencies of which management is currently aware in accordance with generally accepted accounting principles. 30 In establishing these accruals, management considered (a) reports of environmental consultants retained by the Company, (b) the costs incurred to date by the Company at sites where clean-up is presently ongoing and the estimated costs to complete the necessary remediation work remaining at such sites, (c) the financial solvency, where appropriate, of other parties that are responsible for effecting remediation at specified sites, and (d) the experience of other parties that have been involved in the remediation of comparable sites. The accruals recorded by the Company with respect to environmental matters have not been reduced by potential insurance or other recoveries and are not discounted. Although the Company has and will continue to pursue such claims against insurance carriers and other responsible parties, future potential recoveries remain uncertain and, therefore, have not been recorded as a reduction to the estimated gross environmental liabilities. Based on the foregoing and given current information, management believes that future costs in excess of the amounts accrued on all presently known and quantifiable manufacturing-related environmental contingencies will not be material to the Company's financial position or results of operations. D - Other The Company is party to various legal proceedings arising in the ordinary course of business which are not expected to have a material effect on the Company's financial position or results of operations. Note 9 Common Stock and Other Paid-in Capital - --------------------------------------------- The Company's articles of incorporation authorize 60,000,000 shares of common stock, of which 18,600,632 shares and 18,407,286 shares were outstanding at December 31, 1997 and 1996, respectively. In December 1995, the Company sold in a public offering 1,265,000 shares of its common stock which generated net proceeds of approximately $38.9 million. The proceeds were used to pay a portion of the debt incurred for the acquisition of Hypro. Common stock totaling 3,469,604 shares is reserved for issuance under the Company's dividend reinvestment, stock option and incentive savings plans. In addition 22,700,217 shares are reserved pursuant to the Company's shareholder rights plan. Under certain circumstances, each right entitles the shareholder to purchase one common share at an exercise price of $75, subject to adjustment. The rights are not exercisable until 10 business days after a person or group announces a tender offer or exchange offer which would result in their acquiring ownership of 20% or more of the Company's outstanding common stock, or after a person or group acquires at least 20% of the Company's outstanding common shares. Under certain circumstances, including the existence of a 20% acquiring party, each holder of a right, other than the acquiring party, will have the right to purchase at the exercise price WICOR common stock having a value of two times the exercise price. If, after 20% or more of the outstanding shares of WICOR common stock is acquired by a person or group and the Company is then acquired by that person or group, rights holders would be entitled to purchase shares of common stock of the acquiring person or group having a market value of two times the exercise price of the rights. The rights do not have any voting rights and may be redeemed at a price of $.01 per right. The rights expire on August 29, 1999. 31 Note 10 Benefit Plans - --------------------- A - Pension plans The Company's subsidiaries have non-contributory pension plans which cover substantially all their employees and include benefits based on levels of compensation and years of service. Employer contributions and funding policies are consistent with funding requirements of Federal law and regulations. Commencing November 1, 1992, Wisconsin Gas pension costs or credits have been calculated in accordance with SFAS No. 87 and are recoverable from customers. Prior to this date, pension costs were recoverable in rates as funded. The cumulative difference between the amounts funded and the amounts based on SFAS No. 87 through November 1, 1992, is recorded as a regulatory liability and is being amortized as a reduction of pension expense over an eight-year period effective November 1, 1994. Subsequent to the 1997 measurement date, the Company's Board of Directors approved certain amendments to the plan for non-represented employees of Wisconsin Gas, effective January 1, 1998. Such amendments change the manner in which benefits accrue and the time at which benefits become payable under the non-represented plan. Based on the requirements of SFAS No. 87, the Company will measure Plan assets and liabilities at the January 1, 1998, amendment effective date. The Company expects this interim 1998 measurement will result in an approximate $14 million decrease to the accumulated benefit obligation compared to obligations measured prior to the plan amendment. Based on this interim measurement, the Company expects that the 1998 pension income will increase compared to the 1997 reported amount. The following table sets forth the funded status of pension plans at December 31, 1997 and 1996.
Assets Exceed Accumulated Benefits Accumulated Benefits Exceed Assets ---------------------- ---------------------- thousands of dollars 1997 1996 1997 1996 ---------- ---------- ---------- ---------- Accumulated benefit obligation Vested benefits $(112,518) $(102,638) $ (7,974) $ (6,419) Nonvested benefits (18,795) (17,051) (631) (2,242) ---------- ---------- ---------- ---------- (131,313) (119,689) (8,605) (8,661) Effect of projected future compensation levels (39,976) (35,348) (1,148) (1,148) ---------- ---------- ---------- ---------- Projected benefit obligation (171,289) (155,037) (9,753) (9,809) Plan assets at fair value 273,416 231,822 452 503 ---------- ---------- ---------- ---------- Plan assets greater (less) than projected benefit obligation 102,127 76,785 (9,301) (9,306) Unrecognized net (asset) liability at September 30, 1985 being recognized over approx. 16 years (11,515) (13,269) 568 876 Unrecognized prior service costs 3,677 4,099 223 240 Unrecognized net (gain) loss (51,536) (30,746) 2,364 1,557 Additional minimum liab. recorded - - (2,351) (1,953) ---------- ---------- ---------- ---------- Prepaid asset (accrued liability) $ 42,753 $ 36,869 $ (8,497) $ (8,586) ========== ========== ========== ==========
32 The weighted average discount rate assumptions used in determining the actuarial present value of the projected benefit obligation were 7.25%, 7.75% and 7.5% for 1997, 1996 and 1995, respectively. The expected long-term rate of return on assets was 9.0% for 1997 and 1996 and 8.6% for 1995. The expected long-term rate of compensation growth was 4.5%, 4.8% and 5.3% for 1997, 1996 and 1995, respectively. Net pension (income) costs for each of the years ended December 31, include the following components: thousands of Dollars 1997 1996 1995 ---------- ---------- ---------- Service costs $ 4,042 $ 4,713 $ 4,374 Interest costs on projected benefit obligations 12,742 12,833 12,830 Actual (gain) on plan assets (52,404) (25,338) (29,107) Net amortization and deferral 30,864 5,117 10,760 Amortization of regulatory liability (2,851) (2,851) (2,851) ---------- ---------- ---------- Net pension income $ (7,607) $ (5,526) $ (3,994) ========== ========== ========== B - Postretirement health care and life insurance - ------------------------------------------------- In addition to providing pension benefits, the Company provides certain health care and life insurance benefits for retired employees when they reach normal retirement age while working for the Company. Wisconsin Gas funds the accrual annually based on the maximum tax deductible amount. Commencing January 1, 1992, Wisconsin Gas postretirement benefit costs have been calculated in accordance with SFAS No. 106 and are recoverable from customers. The cumulative difference between the amounts funded and the amounts based on SFAS No. 106 through January 1, 1992, is recorded as a regulatory asset and is being amortized over a twenty-year period effective January 1, 1992. Subsequent to the 1997 measurement date, the Company's Board of Directors approved certain amendments to the plan for non-represented employees of Wisconsin Gas, effective January 1, 1998. Such amendments change the manner in which benefits accrue and the time at which benefits become payable under the non-represented plan and impose a limitation on the dollar amount of the employer's share of the cost of covered benefits incurred by a plan participant. The Company expects this interim 1998 measurement will result in an approximate $15 million decrease to the accumulated benefit obligation compared to obligations measured prior to the plan amendment. Based on this interim measurement, the Company expects that the 1998 postretirement benefit cost will decrease compared to the 1997 reported amount 33 The following table sets forth the plans' funded status, reconciled with amounts recognized in the Company's Statement of Financial Position at December 31, 1997 and 1996, respectively. Accumulated benefit obligation thousands of dollars 1997 1996 ---------- ---------- Retirees $ (56,104) $ (52,331) Active employees (49,759) (47,204) ---------- ---------- Accumulated benefit obligation (105,863) (99,535) Plan assets at fair value 58,907 46,562 ---------- ---------- Accumulated benefit obligation in excess of plan assets (46,956) (52,973) Unrecognized prior service costs (13,475) (14,432) Unrecognized actuarial (loss) gain (3,892) 1,014 ---------- ---------- Accrued postretirement benefit $ (64,323) $ (66,391) ========== ========== Net postretirement health care and life insurance costs for each of the years ended December 31, consisted of the following components: thousands of Dollars 1997 1996 1995 ---------- ---------- ---------- Service cost $ 2,102 $ 2,712 $ 2,023 Interest cost on projected benefit obligation 6,731 7,251 6,694 Actual (gain) on plan assets (11,356) (4,695) (6,185) Amortization of regulatory asset 2,778 2,778 2,778 Net amortization and deferral 5,627 613 2,531 ---------- ---------- ---------- Net postretirement benefit cost $ 5,882 $ 8,659 $ 7,841 ========== ========== ========== The postretirement benefit cost components for 1997 were calculated assuming health care cost trend rates ranging up to 11% for 1997 and decreasing to 5% over 5 to 17 years. The health care cost trend rate has a significant effect on the amounts reported. Increasing the assumed health care cost trend rates by one percentage point in each year would increase the accumulated postretirement benefit obligation as of December 31, 1997, by $14.6 million and the aggregate of the service and interest cost components of postretirement expense by $1.5 million. The assumed discount rate used in determining the actuarial present value of the APBO was 7.25% in 1997 and 7.75% in 1996. Plan assets are primarily invested in equities and fixed income securities. C - Retirement savings plans Certain of the Company's operating subsidiaries maintain various employee savings plans, which provide employees a mechanism to contribute amounts up to 16% of their compensation for the year. Company matching contributions may be made for up to 5% of eligible compensation including 1% for the Employee Stock Ownership Plan (ESOP). Total contributions were valued at $1.8 million in 1997 and 1996 and $1.7 million in 1995 34 D - Employee stock ownership plan In November 1991, WICOR established an ESOP covering non-union employees of Wisconsin Gas. The ESOP funds employee benefits of up to 1% of compensation with Company common stock distributed through the ESOP. The ESOP used the proceeds from a $10 million, three-year adjustable rate loan (6.2% interest rate at December 31, 1997), guaranteed by the Company, to purchase 431,266 shares of WICOR common stock. The Company has extended the adjustable rate loan, with similar terms, until May 31, 2002. The unpaid balance ($3.6 million) is shown as long-term debt with a like amount of unearned compensation reported as a reduction of common equity on the Company's balance sheet. The ESOP trustee is repaying the loan with dividends on shares of WICOR common stock in the ESOP and with Wisconsin Gas contributions to the ESOP. E - Stock option plans and restricted stock The Company has a total of 134 employees participating in one or more of its common stock option plans. All options were granted at prices not less than the fair market value on the date of grant and expire not later than eleven years from the date of grant. A summary of the Company's stock option plans at December 31, 1997, 1996 and 1995 and changes during the years then ended is as follows: 1997 1996 1995 ----------------- ----------------- ----------------- Wtd Avg Wtd Avg Wtd Avg Shares Price Shares Price Shares Price --------- ------- --------- ------- --------- ------- Outstanding at January 1 780,149 $ 26.76 745,050 $ 25.01 664,633 $ 24.10 Granted 269,200 $ 39.50 162,700 $ 33.01 136,400 $ 28.31 Exercised (68,691) $ 24.23 (98,270) $ 23.10 (44,299) $ 20.90 Canceled (800) $ 31.31 (29,331) $ 29.39 (11,684) $ 27.34 Outstanding at December 31 979,858 $ 30.45 780,149 $ 26.76 745,050 $ 25.01 Exercisable-End of Year 623,275 $ 27.08 538,672 $ 24.72 434,980 $ 23.46 Available for future grant at year-end 173,990 446,907 607,200 Statement of Financial Accounting Standards No. 123, "Accounting for Stock- Based Compensation" (SFAS 123), became effective for the Company on January 1, 1996. The Company will continue to apply APB Opinion No. 25 and related interpretations in accounting for its stock option plans. As required by SFAS 123, the Company has determined the pro forma information as if the Company had accounted for stock options granted since January 1, 1995, under the fair value method of SFAS 123. The Black-Scholes option-pricing model was used with the following assumptions for 1997, 1996 and 1995: dividend yields of 4.8%, 5.0% and 5.7%, risk-free interest rates of 5.1%, 5.0% and 5.8%, expected volatility of 15.9%, 16.4% and 16.8%, and an expected option life of 5.64 years for all periods. The weighted average fair value of options granted in 1997, 1996 and 1995 was $4.22, $3.83 and $3.29 per share, respectively. Had compensation cost for the Company's 1997, 1996 and 1995 grants for stock-based compensation plans been determined consistent with SFAS No. 123, the Company's net income and diluted earnings per common share would have been reduced to the pro forma amounts indicated below 35 1997 1996 1995 ---------- ---------- ---------- Net earnings: As reported $ 49,523 $ 46,771 $ 39,527 Pro forma $ 49,167 $ 46,557 $ 39,438 Diluted earnings per common share As reported $ 2.66 $ 2.53 $ 2.31 Pro forma $ 2.64 $ 2.52 $ 2.31 Because the SFAS No. 123 method of accounting has not been applied to options granted prior to January 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years. Under the Company's 1994 Long-Term Performance Plan (1994 Plan), awards covering up to 820,000 shares of common stock may be granted to certain key employees as compensation. The types of awards that may be granted under the 1994 Plan include incentive stock options, nonqualified stock options, stock appreciation rights and restricted stock. Awards of restricted stock subject to performance vesting criteria have been granted under the 1994 Plan. These awards will vest only if the Company achieves certain financial goals over a three-year performance period beginning in the year of grant. Recipients of restricted stock awards are not required to provide consideration to the Company other than rendering service and have the right to vote the shares and the right to receive dividends thereon. Restricted shares that are forfeited revert to the Company at no cost. A total of 52,950 restricted shares (net of cancellations) were issued through 1997. Initially, the total market value of the shares is treated as unearned compensation and is charged to expense over the vesting periods. For both restricted stock and performance option shares, adjustments are made to expense for changes in market value and progress towards achievement of financial goals. F - Director compensation plan Effective January 1, 1997, the Company converted its director compensation plan into a new Deferred Director Compensation Plan (Director Plan) which provides for the payment of the annual retainer and meeting fees using a combination of hypothetical shares of Company common stock (stock units) and cash. A portion of the annual retainer is now paid using stock units. In addition, a director may elect to defer the cash portion of the retainer or meeting fees, or both. The value of each stock unit is equal to the current market price of the Company's common stock. Retirement benefits for active directors were also converted into stock units as of December 31, 1996. Benefits will be paid in cash and Company common stock, at the option of the holder, over varying periods following termination of service. The Company recognized $0.6 million of compensation expense under the Director Plan in 1997 36 Note 11 Fair Value of Financial Instruments - ------------------------------------------- The carrying value of cash and cash equivalents, accounts receivable and short-term borrowings approximates fair value due to the short-term maturities of these instruments. The fair value of the Company's long-term debt is based on the market prices of U.S. Treasury issues having a similar term to maturity, adjusted for the Company's bond rating and present value of future cash flows. Because Wisconsin Gas operates in a regulated environment, shareholders probably would not be affected by realization of gains or losses on extinguishment of its outstanding fixed-rate debt. Realized gains would be refunded to and losses would be recovered from customers through gas rates. The estimated fair value of WICOR's financial instruments at December 31, is as follows: 1997 1996 ---------------------- ---------------------- Carrying Fair Carrying Fair Amount Value Amount Value thousands of dollars ---------- ---------- ---------- ---------- Cash and cash equivalents $ 11,810 $ 11,810 $ 18,784 $ 18,784 Accounts receivable $ 164,243 $ 164,243 $ 150,076 $ 150,076 Short-term debt $ 118,900 $ 118,900 $ 114,810 $ 114,810 Long-term debt $ 149,110 $ 150,159 $ 169,169 $ 169,962 Note 12 Other Financial Information - ----------------------------------- See page 26 for unaudited quarterly financial data. See Financial Review on page 20 for industry segment data. 37 Selected Financial Data thousands of dollars, except per share amounts
1997 1996 1995 1994 1993 1992 1991 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Consolidated Operating Data: Operating revenues (4) $1,021,041 $1,012,601 $ 860,594 $ 867,755 $ 849,528 $ 747,409 $ 716,767 Net earnings $ 49,523 $ 46,771 $ 39,527 $ 33,174 $ 29,313 $ 14,799 $ 22,966 Common Stock Data: Basic earnings per common share (1) $ 2.68 $ 2.55 $ 2.32 $ 1.99 $ 1.82 $ 0.96 $ 1.54 Diluted earnings per share (1) $ 2.66 $ 2.53 $ 2.31 $ 1.98 $ 1.80 $ 0.95 $ 1.54 Cash dividends per common share (1) $ 1.70 $ 1.66 $ 1.62 $ 1.58 $ 1.54 $ 1.50 $ 1.46 Book value per common share (1) $ 20.95 $ 19.91 $ 18.84 $ 17.14 $ 16.47 $ 15.60 $ 15.84 Balance Sheet Data: Long-term debt $ 149,110 $ 169,169 $ 174,713 $ 161,669 $ 165,230 $ 164,171 $ 168,366 Redeemable preferred stock - - - - - - - Common equity 389,620 368,452 345,266 291,468 270,276 245,287 243,453 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Capitalization at year-end $ 538,730 $ 537,621 $ 519,979 $ 453,137 $ 435,506 $ 409,458 $ 411,819 ========== ========== ========== ========== ========== ========== ========== Total assets at year-end (2) $1,031,332 $1,057,652 $1,008,514 $ 930,708 $ 933,726 $ 825,774 $ 670,250 Other General Data: Market-to-book ratio at YE (%) 222 179 170 165 191 175 153 Dividend payout ratio (%)(2)(3) 63.4 65.2 69.5 79.6 82.2 96.1 89.0 Yield at year-end (%) 3.7 4.7 5.1 5.6 5.0 5.6 6.1 Rtrn on ave common equity (%)(2)(3) 13.0 12.9 13.1 11.6 11.2 9.2 9.5 Price/earnings ratio at YE (2)(3) 17.3 14.1 13.9 14.3 17.3 18.5 15.7 Price range $ 33 3/8 - $ 30 1/8 - $ 26 5/8 - $25 1/2 - $25 5/8 - $22 7/8 - $18 5/8 - $ 47 7/8 $ 37 3/4 $ 32 7/8 $ 32 5/8 $ 32 7/8 $ 27 3/8 $ 24 3/8 Registered shareholders at YE (5) 22,312 23,339 27,379 25,017 23,694 22,864 18,503 Cash flow from operations $ 49,324 $ 75,416 $ 69,918 $ 103,551 $ 3,401 $ 37,012 $ 50,413 Capital expenditures $ 51,572 $ 51,744 $ 56,241 $ 55,051 $ 51,906 $ 71,873 $ 45,113 Employees at year-end 3,625 3,475 3,368 3,214 3,222 3,178 3,196 Debt/equity ratio at year-end 28/72 31/69 34/66 36/64 38/62 40/60 41/59
38 Selected Financial Data thousands of dollars, except per share amounts
1990 1989 1988 1987 ---------- ---------- ---------- ---------- C> Consolidated Operating Data: Operating revenues (4) $ 696,023 $ 741,218 $ 780,633 $ 699,418 Net earnings $ 16,651 $ 33,881 $ 34,163 $ 19,682 Common Stock Data: Basic earnings per common share (1) $ 1.14 $ 2.33 $ 2.38 $ 1.39 Diluted earnings per share (1) $ 1.13 $ 2.32 $ 2.37 $ 1.38 Cash dividends per common share (1) $ 1.42 $ 1.37 $ 1.32 $ 1.30 Book value per common share (1) $ 16.12 $ 16.83 $ 15.82 $ 14.68 Balance Sheet Data: Long-term debt $ 130,215 $ 122,639 $ 133,034 $ 127,833 Redeemable preferred stock - - - 8,000 Common equity 237,407 244,351 227,080 207,658 ---------- ---------- ---------- ---------- Capitalization at year-end $ 367,622 $ 366,990 $ 360,114 $ 343,491 ========== ========== ========== ========== Total assets at year-end (2) $ 651,559 $ 620,548 $ 565,967 $ 536,998 Other General Data: Market-to-book ratio at YE (%) 122 148 123 117 Dividend payout ratio (%)(2)(3) 117.2 55.0 52.0 91.1 Yield at year-end (%) 7.3 5.6 6.9 7.6 Rtrn on ave common equity (%)(2)(3) 6.8 14.3 15.3 9.3 Price/earnings ratio at YE (2)(3) 17.2 10.7 8.2 12.4 Price range $18 1/4 - $19 3/8 - $15 5/8 - $13 3/8 - $ 25 1/4 $ 25 3/8 $ 20 7/8 $ 21 7/8 Registered shareholders at YE (5) 19,463 20,509 21,611 23,010 Cash flow from operations $ 10,022 $ 94,623 $ 73,526 $ 41,237 Capital expenditures $ 37,529 $ 40,944 $ 48,295 $ 34,264 Employees at year-end 3,152 3,696 3,927 4,040 Debt/equity ratio at year-end 35/65 33/67 37/63 37/63
39 Selected Financial Data thousands of dollars, except per share amounts
1997 1996 1995 1994 1993 1992 1991 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Energy Operations Operating revenues $ 596,262 $ 602,685 $ 522,840 $ 556,587 $ 574,835 $ 495,415 $ 474,702 Net earnings $ 29,443 $ 32,141 $ 27,701 $ 18,896 $ 19,870 $ 18,060 $ 17,086 Capital expenditures $ 35,148 $ 36,617 $ 42,852 $ 44,626 $ 42,253 $ 62,125 $ 34,473 Utility throughput (thousands of dekatherms-MDth) Residential 48,433 52,991 49,425 46,369 47,964 45,905 45,614 Commercial 21,922 24,257 21,157 18,598 19,060 17,840 17,861 Industrial firm 8,724 11,078 13,496 14,544 15,246 14,488 15,690 Industrial interruptible 7,277 19,624 31,353 28,217 20,849 17,388 17,440 Transported 42,883 27,578 14,549 11,908 17,408 21,379 19,658 ---------- ---------- ---------- ---------- ---------- ---------- ---------- 129,239 135,528 129,980 119,636 120,527 117,000 116,263 ========== ========== ========== ========== ========== ========== ========== Utility customers at year-end 520,975 512,868 504,746 495,129 485,103 470,956 460,549 Utility customers served/employee 534 516 471 419 352 331 323 Average cost of gas per utility Dth purchased $ 3.99 $ 3.47 $ 2.79 $ 3.34 $ 3.76 $ 3.34 $ 3.18 Ave annual residential utility bill $ 701 $ 725 $ 686 $ 719 $ 779 $ 712 $ 677 Use/utility resident customer(Dth) 108 120 114 110 116 115 117 Degree days 7,094 7,458 6,836 6,431 6,775 6,683 6,416 % colder (warmer) than 20-yr normal 1.0 6.8 (2.8) (9.0) (4.1) (6.4) (10.8) Manufacturing Operations (2) Operating revenues $ 424,779 $ 409,916 $ 337,754 $ 311,168 $ 274,693 $ 251,994 $ 242,065 International/export sales as a % of total sales 34 34 39 37 34 34 31 Net earnings (3) $ 20,080 $ 14,630 $ 11,826 $ 14,278 $ 9,443 $ 4,704 $ 5,880 Capital expenditures $ 16,424 $ 15,127 $ 13,389 $ 10,425 $ 9,653 $ 9,748 $ 10,640
40 Selected Financial Data thousands of dollars, except per share amounts
1990 1989 1988 1987 ---------- ---------- ---------- ---------- Energy Operations Operating revenues $ 455,559 $ 441,477 $ 476,904 $ 424,069 Net earnings $ 13,195 $ 25,169 $ 23,223 $ 12,580 Capital expenditures $ 27,978 $ 25,813 $ 37,148 $ 24,344 Utility throughput (thousands of dekatherms-MDth) Residential 43,020 48,154 46,769 39,369 Commercial 16,319 18,089 17,012 14,510 Industrial firm 15,106 16,915 16,808 16,106 Industrial interruptible 6,620 5,475 3,752 4,714 Transported 16,565 29,158 29,639 26,129 ---------- ---------- ---------- ---------- 107,630 117,791 113,980 100,828 ========== ========== ========== ========== Utility customers at year-end 452,906 445,771 439,063 432,509 Utility customers served/employee 321 319 311 288 Average cost of gas per utility Dth purchased $ 3.30 $ 3.15 $ 3.68 $ 3.74 Ave annual residential utility bill $ 670 $ 758 $ 770 $ 660 Use/utility resident customer(Dth) 113 129 127 108 Degree days 6,103 7,382 7,124 6,185 % colder (warmer) than 20-yr normal (16.0) 1.5 (2.0) (14.8) Manufacturing Operations (2) Operating revenues $ 240,464 $ 300,156 $ 303,729 $ 275,349 International/export sales as a % of total sales 27 24 22 20 Net earnings (3) $ 3,456 $ 8,712 $ 10,940 $ 7,102 Capital expenditures $ 9,551 $ 15,131 $ 11,147 $ 9,920
41 (1) Adjusted for a two-for-one stock split in March 1989. (2) Includes continuing operations and discontinued operations up to the year disposition was authorized. (3) Before effects of 1992 accounting changes. (4) Includes revenues (in thousands) from discontinued operations from 1987 to 1989 of $58,318, $63,552 and $56,318, respectively. (5) Reflects WICOR Plan participants beginning with 1992. EX-21 6 SUBSIDIARIES 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% State or Country Percent Voting Subsidiaries of 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 100% 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% Onga (New Zealand) Pty. Ltd. New Zealand 100% Sta-Rite Holdings, B.V. Netherlands 100% Webster Electric Co. 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% 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 95.5% GmbH Europa Nocchi Pompe S.p.A. Italy 77% 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 90% Subsidiary of SHURflo Pump Country in Which Percent Voting Manufacturing Company Incorporated Stock Owned SHURflo Ltd. England 100% EX-23 7 CONSENT OF INDEPENTENT PUBLIC ACCOUNTANTS 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 and 333-43257) and Form S-3 (Nos. 33- 50682 and 333-27415). Milwaukee, Wisconsin, ARTHUR ANDERSEN LLP March 16, 1998. EX-27 8 FINANCIAL DATA SCHEDULE
UT This schedule contains summary financial information extracted from the WICOR, Inc. FORM 10-k for the year ended December 31, 1997 and is qualified in its entirety by reference to such financial statements and the related footnotes. 1,000 YEAR DEC-31-1997 DEC-31-1997 PER-BOOK 379,971 65,923 384,668 200,770 0 1,031,332 18,601 232,702 147,903 389,620 0 0 149,110 0 110,000 98,232 43,926 0 0 0 350,444 1,031,332 1,021,041 28,324 927,012 955,336 65,705 1,222 66,927 17,404 49,523 0 49,523 31,397 525 49,324 2.68 2.66
EX-99 9 WICOR'S 1998 PROXY 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 23, 1998 To the Shareholders of WICOR, Inc.: NOTICE IS HEREBY GIVEN THAT the Annual Meeting of Shareholders of WICOR, Inc. will be held Thursday, April 23, 1998, 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 four directors to hold office until the 2001 Annual Meeting of Shareholders and until their successors are duly elected and qualified. 2. To approve the 1994 Long-Term Performance Plan, as amended. 3. 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 23, 1998, 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 13, 1998 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 23, 1998 This Proxy Statement is being furnished to shareholders by the Board of Directors of WICOR, Inc. (the "Company") beginning on or about March 13, 1998, 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 23, 1998, 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 the 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 23, 1998, are entitled to vote at the Annual Meeting and at any adjournment or postponement thereof. On that date, the Company had outstanding and entitled to vote 18,627,281 shares of Common Stock. The record holder of each outstanding share of Common Stock is entitled to one vote per share. 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 The Board consists of 10 directors. 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 four directors to hold office until the 2001 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 any 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 any of the listed nominees will be unable or unwilling to continue to serve as a director if elected. However, in the event that any 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 four 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 more than the past five years. 4 NOMINEES FOR ELECTION TO THE BOARD OF DIRECTORS For Three-Year Terms Expiring April, 2001 A photograph of each nominee and director continuing in office appears adjacent to the nominee's/director's name and personal information WENDELL F. BUECHE Mr. Bueche, 67, is the Chairman and a Audit and Compensation director of IMC Global, Inc., a producer Committees and marketer of crop nutrients. He was Director since 1984 named to that position in 1997. He served as Chairman and Chief Executive Officer of IMC from 1994 to 1997 and as President and Chief Executive Officer from 1993 to 1994. Mr. Bueche previously was Chairman, President and Chief Executive Officer of Allis-Chalmers Corporation. Mr. Bueche is a director of Marshall & Ilsley Corporation and M&I Marshall & Ilsley Bank. DANIEL F. McKEITHAN, JR. Mr. McKeithan, 62, 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 wells. Director since 1989 Since 1995 he has also been President and Chief Executive Officer of both Active Investor Management, Inc., a manager of oil and gas wells, and 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, 62, is Chairman and Chief Nominating Committee Executive Officer of the Company and Director since 1992 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 served in other executive capacities with the Company and its subsidiaries beginning in 1989. He is a director of M&I Marshall & Ilsley Bank and Twin Disc, Inc. ESSIE M. WHITELAW Ms. Whitelaw, 49, is Vice President - Nominating and Retirement National Business Development and Govern- Plans Investment Committees ment Employee Services of Blue Cross & Blue Director since 1992 Shield United of Wisconsin, a comprehensive health care insurer. She has held her current 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 MEMBERS OF THE BOARD OF DIRECTORS CONTINUING IN OFFICE TERMS EXPIRING APRIL, 1999 JERE D. McGAFFEY Mr. McGaffey, 62, is a partner in the law firm Nominating (Chairman) and of Foley & Lardner.(1) He has been in practice Retirement Plans Investment with that firm since 1961 and has been a Committees partner since 1968. Mr. McGaffey is a director Director since 1980 of Smith Investment Company. THOMAS F. SCHRADER Mr. Schrader, 48, is President and Chief Director since 1988 Operating Officer of the Company and Vice Chairman of Wisconsin Gas, WICOR Energy and FieldTech. He was elected to those positions in 1997. Previously, he served as President and Chief Executive Officer of Wisconsin Gas, WICOR Energy and FieldTech, and Vice President of the Company. Mr. Schrader is a director of Firstar Bank Milwaukee, N.A. STUART W. TISDALE Mr. Tisdale, 69, retired as Chairman and Chief Audit and Nominating Executive Officer of the Company in 1994. He Committees is a director of Marshall & Ilsley Corporation Director since 1980 Corporation, M&I Marshall & Ilsley Bank, Modine Manufacturing Co. and Twin Disc Inc. MEMBERS OF THE BOARD OF DIRECTORS CONTINUING IN OFFICE TERMS EXPIRING APRIL, 2000 WILLIE D. DAVIS Mr. Davis, 63, is President, Chief Audit (Chairman) and Executive Officer and a director of All Pro Compensation Committees Broadcasting, Inc., which owns and operates Director since 1990 radio stations in Los Angeles and Milwaukee. Mr. Davis is a director of Alliance Bank, The Dow Chemical Co., Johnson Controls, Inc., Kmart Corp., L.A. Gear Inc., MGM Grand Inc., Rally's Hamburgers, Inc., Sara Lee Corporation and Strong Capital Management, Inc. GUY A. OSBORN Mr. Osborn, 62, retired as Chairman of Compensation (Chairman) and Universal Foods Corporation, an international Retirement Plans Investment manufacturer and marketer of value-added food Committees products, in 1997. He is a director of Director since 1987 Universal Foods Corporation and Fleming Companies, Inc., and is a Trustee of The Northwestern Mutual Life Insurance Company. WILLIAM B. WINTER Mr. Winter, 69, retired as Chairman, Chief Audit and Nominating Executive Officer and a director of Bucyrus- Committees Erie Company, a manufacturer of mining Director since 1980 machinery, and its parent corporation B-E Holdings Inc., in 1994. (1) Foley & Lardner was retained in 1997 by the Company and its subsidiaries to provide legal services and has been similarly retained in 1998. 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. 6 THE BOARD OF DIRECTORS GENERAL The Board held seven meetings in 1997. 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 1997. 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 1997. 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 1997. 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 1987 Stock Option Plan, 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 three meetings in 1997. 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 revised its director compensation program effective January 1, 1997, to eliminate the retirement plan for directors, to tie more of the directors' compensation to the performance of the Common Stock, and to adjust the overall compensation level. Only non-employee directors receive compensation for service as directors. 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 $900 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 directors an annual cash retainer fee of $4,000, and $600 for each Board meeting they attend. 7 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, 557 deferred stock units (334 from the Company and 223 from Wisconsin Gas). Each stock unit has an economic value equivalent to a share of Common Stock. As of December 31, 1997, these deferred stock units had a value of $25,866 based on the price of a share of Common Stock on that date ($46.4375). 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. On January 1, 1997, directors also received a one-time grant of deferred stock units corresponding to the then present value of their accrued benefit under the director retirement plan which was terminated on December 31, 1996. 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 2,000 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, 1997, Messrs. Bueche, Davis, McGaffey, McKeithan, Osborn, Tisdale and Winter and Ms. Whitelaw each received an option to purchase 2,000 shares of Common Stock at a per-share exercise price of $36.125. 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 24, 1998, options to purchase an additional 2,000 shares of Common Stock were granted to each non- employee director at a per-share exercise price of $46.875. 8 SECURITY OWNERSHIP OF MANAGEMENT The following tabulation sets forth the number of shares of Common Stock beneficially owned, as of February 28, 1998, 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 14,168 - 6,520 Willie D. Davis 12,533 - 4,474 James C. Donnelly 85,616 - Jere D. McGaffey 15,229 - 4,934 Daniel F. McKeithan, Jr. 13,000 - 4,446 Robert A. Nuernberg 44,284 - Guy A. Osborn 14,000 - 4,948 Thomas F. Schrader 141,811 - Stuart W. Tisdale 90,081 (6) - 4,747 George E. Wardeberg 99,999 (7) - Joseph P. Wenzler 142,419 (8) - Essie M. Whitelaw 12,000 - 1,949 William B. Winter 14,588 (9) - 6,415 All directors and executive officers as a group (14 persons) 699,728 3.8% 38,433 (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, 1998: Mr. Donnelly, 75,649; Mr. Nuernberg, 31,248; Mr. Schrader, 98,824; Mr. Wardeberg, 54,499; Mr. Wenzler, 90,650; Messrs Bueche, Davis, McGaffey, McKeithan, Osborn and Winter and Ms. Whitelaw, 12,000 each; Mr. Tisdale, 10,000; and all directors and executive officers as a group, 448,870. (3) Includes the following numbers of shares of restricted stock over which the holders have sole voting but no investment power: Mr. Donnelly, 5,500; Mr. Nuernberg, 1,200; Mr. Schrader, 6,000; Mr. Wardeberg, 11,600; and Mr. Wenzler, 4,500; and all directors and executive officers as a group, 28,800. The number of shares include restricted stock grants to become effective April 23, 1998, following approval by the shareholders of the 1994 Long-Term Performance Plan, as amended. See "Item No. 2, Approval of the 1994 Long-Term Performance Plan, as amended - Outstanding Future Awards." 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. (4) Where no percentage figure is set out in this column, the person owns less than 1% of the outstanding shares 9 (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 4,852 shares owned by Mr. Tisdale's spouse. (7) Includes 4,200 shares owned jointly by Mr. Wardeberg and his spouse. (8) Includes 526 shares owned by Mr. Wenzler's spouse. (9) Includes 2,588 shares owned by Mr. Winter's spouse. 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 1997 and each of the Company's four other most highly compensated executive officers whose total cash compensation exceeded $100,000 in 1997. 10 SUMMARY COMPENSATION TABLE
Long Term Annual Compensation Compensation Awards ---------------------------- -------------------------- Securities Restricted Underlying All Other Name and Principal Stock Options/ Compensation Position Year Salary ($) Bonus ($) Awards ($)(2) SARs (#) ($) (3) - ------------------------------ ---- ---------- --------- ------------- ---------- ---------- George E. Wardeberg, Chairman 1997 $ 440,833 $185,200 20,000 $ 19,233 and Chief Executive Officer 1996 $ 393,750 $217,638 $ 264,000 20,000 $ 17,250 of the Company and its sub- 1995 $ 368,750 $192,455 15,000 $ 16,250 sidiaries (4)(7) Thomas F. Schrader, President 1997 $ 321,616 $144,700 10,000 $ 14,465 and Chief Operating Officer 1996 $ 290,650 $177,903 $ 132,000 10,000 $ 13,126 of the Company and Vice 1995 $ 278,500 $176,857 10,000 $ 12,640 Chairman of certain of its subsidiaries(5) James C. Donnelly, Vice-Pres- 1997 $ 287,250 $ 78,000 10,000 $ 14,775 ident of the Company and 1996 $ 277,525 $ 59,218 $ 132,000 10,000 $ 12,735 President and Chief Execu- 1995 $ 267,800 $ 28,253 10,000 $ 13,185 tive Officer of Sta-Rite Joseph P. Wenzler, Senior 1997 $ 286,825 $ 96,400 7,500 $ 13,073 Vice President, Treasurer 1996 $ 272,050 $120,296 $ 99,000 7,500 $ 12,382 and Chief Financial Officer 1995 $ 261,850 $106,700 7,500 $ 11,974 of the Company; Vice Presi- dent and Chief Financial Officer of Wisconsin Gas; Secretary and Treasurer of SHURflo and Hypro; and Vice- President and Treasurer of WICOR Energy and FieldTech (6)(7) Robert A. Nuernberg, Secretary 1997 $ 148,875 $ 39,000 2,000 $ 7,444 of the Company, WICOR Energy 1996 $ 142,750 $ 49,125 $ 26,400 2,000 $ 7,138 and FieldTech; Vice Presi- 1995 $ 138,000 $ 48,307 2,000 $ 6,900 dent-Corporate Relations and Secretary of Wisconsin Gas (7)
11 (1) The aggregate amount of personal benefits provided by the Company and its subsidiaries to the executive officers named in this table in any year did not exceed the lesser of $50,000 or 10% of each officer's annual salary and bonus reported in the table for any of the years indicated. (2) 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, 1997, were as follows: Mr. Wardeberg, 8,000 shares, $371,500; Messrs. Schrader and Donnelly, 4,000 shares, $185,750; Mr. Wenzler, 3,000 shares, $139,313; and Mr. Nuernberg, 800 shares, $37,150. The restricted stock vests three years after issuance provided the Company's three-year total return to shareholders exceeds a pre-established goal. 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, 1998, are set out in footnote 3 to the Security Ownership of Management table. (3) The amounts shown in this column for 1997 are comprised of the following items: Company contributions to 401(k) and supplemental savings plans: Mr. Wardeberg, $19,233; Mr. Schrader, $14,465; Mr. Donnelly, $13,090; Mr. Wenzler, $13,073; and Mr. Nuernberg, $7,444; and above-market earnings on deferred compensation: Mr. Donnelly, $1,685. (4) On July 22, 1997, Mr. Wardeberg was elected Chairman and Chief Executive Officer of the Company. He previously served as President and Chief Executive Officer. He continues as Chairman of the Company's subsidiaries. (5) On July 22, 1997, Mr. Schrader was elected President and Chief Operating Officer of the Company. He previously served as Vice President. On December 16, 1997, Mr. Schrader was elected Vice Chairman of Wisconsin Gas, WICOR Energy and FieldTech. He previously served as President and Chief Executive Officer of those subsidiaries. (6) On July 22, 1997, Mr. Wenzler was elected Senior Vice President, Treasurer and Chief Financial Officer of the Company. He previously served as Vice President, Treasurer and Chief Financial Officer. He continues in his positions with the Company's subsidiaries. (7) These executive officers were elected to their positions with SHURflo in 1993, Hypro and WICOR Energy in 1995, and FieldTech in 1996. 12 Stock Option Information The Company has in effect benefit plans pursuant to which options to purchase Common Stock may be granted to key employees (including executive officers) of the Company and its subsidiaries. The following tabulation sets forth information regarding grants of options made by the Company in 1997 to the executive officers named in the Summary Compensation Table. No SARs were awarded in 1997. OPTION/SAR GRANTS IN 1997 FISCAL YEAR
Individual Grants - --------------------------------------------------------------------------------- Number of Sec. Percent of Total Grant Underlying Options Granted Exercise or Date Options/SARs to Employees Base Expiration Present Name Granted (#) (1) in Fiscal Year Price ($/sh.) Date Value (2) - ------------------- --------------- ---------------- ------------- ---------- --------- George E. Wardeberg 20,000 7.9 $ 35.1875 2/18/07 $ 84,400 Thomas F. Schrader 10,000 3.9 $ 35.1875 2/18/07 $ 42,200 James C. Donnelly 10,000 3.9 $ 35.1875 2/18/07 $ 42,200 Joseph P. Wenzler 7,500 3.0 $ 35.1875 2/18/07 $ 31,650 Robert A. Nuernberg 2,000 0.8 $ 35.1875 2/18/07 $ 8,440
(1) The options reflected in the table (which are nonstatutory stock options for purposes of the Internal Revenue Code) were granted on February 18, 1997 and vest ratably over the three-year period from the date of grant. (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 5.09%; (c) volatility (variance of rate of return) of 15.94%; and (d) a dividend yield of 4.8%. 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. 13 The following tabulation sets forth information regarding the exercise of stock options during 1997 and the unexercised options held at December 31, 1997, by each of the executive officers named in the Summary Compensation Table. AGGREGATED OPTION/SAR EXERCISES IN 1997 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 0 $ 0 36,166 38,334 $ 594,699 $ 495,113 Thomas F. Schrader 0 $ 0 93,424 20,001 $2,121,815 $ 262,725 James C. Donnelly 0 $ 0 65,649 20,001 $1,424,103 $ 262,725 Joseph P. Wenzler 0 $ 0 87,750 15,000 $2,027,881 $ 197,031 Robert A. Nuernberg 0 $ 0 29,249 4,001 $ 687,907 $ 52,651
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 as 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 current participants, the plan grants each 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. 14 The plan's actuaries project that for 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. 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. The plan's actuaries have projected the ultimate benefits for the named executive officers. Because of the ten-year guarantee until the end of 2007 and the fact that Messrs. Wardeberg, Wenzler and Nuernberg will have attained age 65 prior to that time, the actuaries project that the pre-1998 final average earnings formula will provide the better benefit. The following tabulation sets forth estimated annual retirement benefits payable under the pension plans, as supplemented, for Messrs. Wardeberg, Wenzler and Nuernberg. 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
Remuneration 10 15 20 25 30 - ------------ ---------- ---------- ---------- ---------- ---------- $ 300,000 $ 58,726 $ 88,089 $ 117,452 $ 134,384 $ 138,884 $ 400,000 $ 78,526 $ 117,789 $ 157,052 $ 179,684 $ 185,684 $ 500,000 $ 98,326 $ 147,489 $ 196,652 $ 224,984 $ 232,484 $ 600,000 $ 118,126 $ 177,189 $ 236,252 $ 270,284 $ 279,284 $ 700,000 $ 137,926 $ 206,889 $ 275,852 $ 315,584 $ 326,084 $ 800,000 $ 157,726 $ 236,589 $ 315,452 $ 360,884 $ 372,884 For Messrs. Schrader and Donnelly, who have more than 10 years until their attainment of the normal retirement age of 65, using a 6.5% earnings assumption and assuming continuation of compensation at the level paid in 1997 as defined in the plan, the plan actuaries projected estimated annual benefits under the pension plan, as supplemented, payable upon retirement at normal retirement age of 65 of $280,995 and $139,660, 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 Nuernberg have 8, 19, 10, 23 and 28 years, respectively, of credited service under the pension plan. Pursuant to a supplemental retirement plan, Messrs. Schrader and Nuernberg will receive a supplemental retirement benefit of $25,000 per year for 15 years beginning at age 65, payable in monthly installments. 15 A retired executive officer 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 plan), subject to the claims of the Company's creditors. Such trust is only nominally funded until the occurrence of a potential change of control. AGREEMENTS WITH CERTAIN EXECUTIVE OFFICERS The Company has agreements with Messrs, Wardeberg, Schrader, Donnelly and Wenzler 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. 16 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. - - 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. 17 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 50% 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. Long-term incentive plan. The Company's long-term incentive compensation plan provides for annual awards of stock options and biennial awards of performance-based restricted stock. The plan splits an officer's long-term incentive opportunity equally (based on value) between stock options and performance-based restricted stock. 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; 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 an exercise price equal to the fair market value 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 (the PaineWebber Gas Distribution Utility Index). For other subsidiary officers who participate in the plan, the restricted stock will vest in three-years provided the appropriate subsidiary's three- year financial performance (three-year cumulative earnings for Wisconsin Gas and return on assets for Sta-Rite) equals or exceeds the pre-established goal. 18 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 weights 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 1997 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. No restricted stock grants were made in 1997. Compensation of the Chief Executive Officer The Compensation Committee increased the base salary of George E. Wardeberg, the Company's Chief Executive Officer, by $35,000 or 8.8% effective April 1, 1997. The increase reflects his overall performance, as demonstrated by record earnings for the Company in 1996, an increase in earnings per share of 10% and a total return of 17%, along with his position in the salary range. The increase set Mr. Wardeberg's salary in the second quartile of the range targeted by the Compensation Committee. During July, 1997, Mr. Wardeberg was named the Company's Chairman in addition to being Chief Executive Officer. In light of the increased responsibilities, the Compensation Committee increased his base salary by $35,000 or 8%, effective August 1, 1997. The Compensation Committee awarded Mr. Wardeberg 20,000 nonstatutory stock options in 1997. The number of options awarded was at the targeted number established in the long-term incentive compensation plan. 19 The annual incentive award to Mr. Wardeberg for 1997 was $185,200 or 42% of his salary as compared to a target of 50% of salary. This award reflects Mr. Wardeberg's contributions to the Company during 1997. 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 8.2%, less than targeted at 8.5% and earnings per share growth at 5%, less than targeted at 10%. This was caused by the Company's manufacturing operations falling short of a very aggressive target. Despite this shortfall, manufacturing had an exceptionally strong year with net earnings up 38% over the prior year. As a result, WICOR's net earnings and earnings per share increased 6% and 5%, respectively. WICOR 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 successfully executed succession plan. The Compensation Committee exercised its judgment in determining the weights 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 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 the PaineWebber Gas Distribution Utility Index, comprised of 34 U.S. natural gas distribution utilities. The information presented assumes that all dividends were reinvested. [Performance graph will appear here.] Total Return Comparison * Among WICOR, Inc. S&P 500 Index and PaineWebber Gas Distribution Utility Index Measurement Period - FYE Measurement Point - December 31, 1992 1992 1993 1994 1995 1996 1997 -------- -------- -------- -------- -------- -------- WICOR $ 100 $ 121 $ 116 $ 139 $ 162 $ 218 S&P $ 100 $ 111 $ 112 $ 153 $ 188 $ 251 Industry $ 100 $ 114 $ 100 $ 130 $ 154 $ 198 * Includes Reinvested Dividends ** PaineWebber Gas Distribution Utility Index 20 ITEM NO. 2: APPROVAL OF THE 1994 LONG-TERM PERFORMANCE PLAN, AS AMENDED General The Board has unanimously adopted three amendments to the Company's 1994 Long-Term Performance Plan contingent upon shareholder approval of such plan, as so amended, at the Annual Meeting. The Long-Term Performance Plan, as amended, is referred to herein as the "1994 Plan". The 1994 Plan provides for the grant of options to purchase Common Stock, stock appreciation rights ("SARs") and shares of restricted Common Stock to key employees of the Company and its subsidiaries. The first amendment to the 1994 Plan increases the authorized number of shares for which awards may be made thereunder from 820,000 to 1,745,000. On February 17, 1998, without giving effect to the amendment, only 155,990 shares of Common Stock remained available for future awards under the 1994 Plan. The Board approved the amendment increasing the number of shares for which awards may be made under the 1994 Plan to provide the opportunity for additional awards to be granted thereunder in the future. The second amendment to the 1994 Plan modifies the limitations on awards made to individual participants under the 1994 Plan. Without giving effect to the amendment, the 1994 Plan provides that during the term of the Plan no participant may receive grants that could result in the participant exercising options for, or SARs with respect to, more than 125,000 shares of Common Stock, or receiving restricted stock awards for more than 25,000 shares of Common Stock. As amended, the 1994 Plan provides that no participant may receive awards in any calendar year of options for, or SARs with respect to, more than 150,000 shares of Common Stock, or receive restricted stock awards in any calendar year of more than 10,000 shares of Common Stock. The modification of the individual limitations on awards is being proposed both to reflect the increase in the number of authorized shares under the 1994 Plan and to minimize the burden of administering the 1994 Plan by changing the limitations to calendar year restrictions as opposed to limitations for the term of the 1994 Plan. The third amendment modifies the criterion that must be satisfied for restricted stock to vest. Without giving effect to the amendment, the 1994 Plan provides that restricted stock grants to Company executive officers and subsidiary chairmen and presidents will vest if the Company attains, over a period of at least three years, a specified compounded annual total return to shareholders (stock price appreciation plus Company cash dividends paid and assumed to be reinvested in Common Stock) compared to a specified group of gas distribution utilities. Restricted stock granted to other participants under the 1994 Plan prior to amendment would vest based on such conditions as the Compensation Committee determined. As amended, the 1994 Plan provides that restricted stock grants to all participants will vest if the Company attains over a specified period a compounded annual total return to shareholders fixed by the Compensation Committee at the time of the grant. The Company remains committed to permitting restricted stock to vest based on the performance of the Company. However, as the Company's manufacturing and non-utility energy- related businesses become larger in size and of greater importance to the Company's overall performance, the Board believes it is inappropriate to require Company performance to be measured solely by comparison to gas utility distribution companies 21 The 1994 Plan was initially adopted by the Board effective March 1, 1994, and was approved by shareholders on April 28, 1994. The 1994 Plan, as amended, was approved by the Board on February 26, 1998. The 1994 Plan, as amended, is included as Appendix A to this Proxy Statement. The description of the 1994 Plan set forth below is qualified in its entirety by reference to Appendix A. Purpose The purpose of the 1994 Plan is to enhance the ability of the Company and its affiliates to attract, retain and motivate key salaried employees upon whom, in large measure, the sustained growth and profitability of the Company depend, and to provide incentive to those salaried employees that are more directly linked to the profitability of the Company's businesses and increases in shareholder value. Administration The 1994 Plan is administered by the Compensation Committee (the "Committee") of the Board which consists of four non-employee directors. Subject to the terms of the 1994 Plan, the Committee has authority to interpret the 1994 Plan, prescribe, amend and rescind rules and regulations relating to the 1994 Plan, and make all other determinations necessary or advisable for the administration of the 1994 Plan. Participation The Committee selects participants in the 1994 Plan from among key salaried employees of the Company and its affiliates. The Committee solicits and considers recommendations of the Chief Executive Officer in determining those key salaried employees who will be eligible to participate in the 1994 Plan. Approximately 110 employees are currently eligible to participate in the 1994 Plan. Stock Subject to the 1994 Plan Assuming the 1994 Plan, as amended, is approved by the shareholders, the maximum number of shares issuable thereunder will be 1,745,000, subject to adjustment as described below. Awards may be granted as options (either incentive stock options or nonstatutory stock options), SARs or restricted stock. If any shares covered by an award granted under the 1994 Plan, or to which any award relates, are forfeited or if an award otherwise terminates, expires or is canceled prior to the delivery of all of the shares or of other consideration issuable or payable pursuant to such award, and if such forfeiture, termination, expiration or cancellation occurs prior to the payment of dividends or the exercise by the holder of other indicia of ownership of the shares to which the award relates, then the number of shares counted against the number of shares available under the 1994 Plan in connection with the grant of such award, to the extent of any such forfeiture, termination, expiration or cancellation, will again be available for granting of additional awards under the 1994 Plan. Notwithstanding the foregoing, if a new award for additional shares is granted to a participant in connection with such an expiration, forfeiture, cancellation or termination, then the shares subject to the expiration, forfeiture, cancellation or termination will reduce the number of shares that can otherwise be issued under the 1994 Plan. Shares to be issued under the 1994 Plan may be either authorized but unissued or treasury shares. 22 In the event of any change in the outstanding shares of Common Stock by reason of a stock dividend or split, recapitalization, merger, consolidation, combination, spin-off, exchange of shares or other similar corporate change, the number of shares subject to outstanding options and their stated option prices, and the number of shares subject to the 1994 Plan, will be adjusted equitably by the Committee. In such event, the Committee will also adjust equitably the number of shares subject to restricted stock grants and the number of outstanding SARs and related grant values. Options Options may be granted to participants at such times as determined by the Committee. The Committee will also determine the number of options granted and whether an option is to be an incentive stock option or nonstatutory stock option. Pursuant to the Internal Revenue Code, the aggregate fair market value of Common Stock with respect to which incentive stock options are exercisable for the first time by a participant during any calendar year shall not exceed $100,000. The option price per share of Common Stock will be fixed by the Committee, but will not be less than the fair market value of the Common Stock on the date of grant and cannot be subsequently changed except as noted above. No option shall be granted, directly or indirectly, in connection with the expiration, forfeiture, cancellation or termination of an option previously granted under the 1994 Plan prior to its normal expiration date if such expired, forfeited, canceled or terminated option had an exercise price higher than the exercise price of the option proposed to be granted. The Committee will determine the expiration date of each option, but the expiration date will not be later than the tenth anniversary of the grant date. Options will be exercisable at such times and be subject to such restrictions and conditions as the Committee deems necessary or advisable. No options will be assignable or transferable by a participant, except by will or the laws of descent and distribution and may be exercised during the life of the participant only by the participant. At the time of exercise, the option price must be paid in full. The Committee will determine the form of payment, which may include either (i) cash; (ii) tendering shares of Common Stock having a fair market value at the time of exercise equal to the option price; (iii) electing to have the Company withhold from shares of Common Stock otherwise issuable upon exercise that number of shares of stock having a fair market value at the time of exercise equal to the option price; (iv) a combination of (i), (ii) and (iii); or (v) such other form of payment as the Committee determines. The Committee may permit the practice known as "pyramiding" whereby shares of Common Stock acquired upon exercise of an option are simultaneously surrendered in exchange for all or part of the remaining shares subject to the option. Stock Appreciation Rights The Committee may also grant SARs under the 1994 Plan, independently or in tandem with a related option, giving the participant the right to receive a payment (in cash, shares of Common Stock, or a combination thereof as the Committee shall determine) equal to the excess of the fair market value of a share of Common Stock at the date of exercise over the exercise price. SARs granted in tandem with options will be exercisable at such times, on such conditions and to the extent that the related option may be exercised. 23 Restricted Stock The Committee may grant shares of restricted stock to participants in such amounts and at such times as it determines. Under the 1994 Plan, as amended, restricted stock awards will vest based on attaining a specified compounded annual total shareholder return (stock price appreciation plus Company cash dividends paid and assumed to be reinvested in Common Stock). Shares of restricted stock may not be transferred in any way, other than by will or by the laws of descent and distribution, for the period of restriction. After the period of restriction, the shares of restricted stock become freely transferable. The Committee may impose such other restrictions on restricted stock as it may deem appropriate. If any dividends or distributions are paid in shares of capital stock, the shares will be subject to the same restrictions on transferability as the shares on which the dividends or distributions are paid. Tax Withholding Whenever shares of Common Stock are to be issued under the 1994 Plan, the Company may withhold from any cash otherwise payable to the participant or require the participant to remit to the Company an amount sufficient to satisfy federal, state and local withholding taxes. Unless the Committee determines otherwise, a participant may satisfy such withholding requirements by tendering already owned shares of Common Stock or requesting that the Company withhold shares of Common Stock issuable in connection with the award. Certain Federal Income Tax Consequences Stock Options. The grant of an option under the 1994 Plan creates no income tax consequences to the employee or the Company. An employee who is granted a nonstatutory stock option will generally recognize ordinary income at the time of exercise in an amount equal to the excess of the fair market value of the Common Stock at such time over the exercise price. The Company will be entitled to a deduction in the same amount and at the same time as ordinary income is recognized by the employee. A subsequent disposition of the Common Stock will give rise to capital gain or loss to the extent the amount realized from the sale differs from the tax basis, i.e., the fair market value of the Common Stock on the date of exercise. This capital gain or loss will be short-term, mid-term or long-term capital gain or loss depending on the holding period. In general, an employee will recognize no income or gain at the time of exercise of an incentive stock option (except that the alternative minimum tax may apply). If the employee holds the shares of Common Stock acquired pursuant to the exercise of an incentive stock option for at least two years from the date of grant and one year from the date of exercise, any gain or loss realized by the employee on the disposition of the Common Stock will be treated as a long-term or mid-term capital gain or loss depending on the holding period. No deduction will be allowed to the Company. If these holding period requirements are not satisfied, the employee will recognize ordinary income at the time of the disposition equal to the lesser of (i) the gain realized on the disposition; or (ii) the difference between the exercise price and the fair market value of the shares of Common Stock on the date of exercise. Any gain realized by the employee over the fair market value at the time of exercise will be treated as a capital gain which will be a short-term, mid-term or long-term capital gain depending on the holding period. The Company will be entitled to a deduction in the same amount and at the same time as ordinary income is recognized by the employee. The Committee may provide for a sharing between the Company and the participant of any tax benefits to the Company arising from such disqualifying disposition. 24 Stock Appreciation Rights. The grant of an SAR will create no income tax consequences for the employee or the Company. Upon exercise of an SAR, the employee will recognize ordinary income equal to the amount of any cash and the fair market value of any shares of Common Stock or other property received, except that if the employee receives restricted stock upon exercise of an SAR, recognition of income may be deferred in accordance with the rules applicable to such an award. The Company will be entitled to a deduction in the same amount and at the same time as income is recognized by the employee. Restricted Stock. An employee will not recognize income upon the award of restricted stock under the 1994 Plan unless the election described below is made. However, an individual who has not made such an election will recognize ordinary income at the time the restrictions lapse in an amount equal to the fair market value of the restricted stock at such time. The Company will be entitled to a corresponding deduction in the same amount and at the same time as the participant recognizes income. Any otherwise taxable disposition of the restricted stock after the restrictions lapse will result in capital gain or loss (short-term, mid-term or long-term depending on the length of time the restricted stock is held after the restrictions lapse). Dividends paid in cash and received by a participant prior to time the restrictions lapse will constitute ordinary income to the participant, and the Company will be entitled to a corresponding deduction for such dividends. Any dividends paid in stock will be treated as an award of additional restricted stock subject to the tax treatment described above. An employee may, within 30 days after the date of the award of restricted stock, elect to recognize ordinary income as of the date of the award in an amount equal to the fair market value of such restricted stock on the date of the award. The Company will be entitled to a corresponding deduction in the same amount and at the same time as the participant recognizes income. If the election is made, any cash dividends received with respect to the restricted stock will be treated as dividend income to the participant in the year of payment and will not be deductible by the Company. Any otherwise taxable disposition of the restricted stock (other than by forfeiture) will result in capital gain or loss (long-term or short-term depending on the holding period). If the participant who has made an election subsequently forfeits the restricted stock, the participant will not be entitled to deduct the amount previously included in income as a loss. The Company would then be required to include as ordinary income the amount of the deduction it originally claimed with respect to such shares 25 Outstanding Future Awards On February 17, 1998, the Committee granted Options and restricted stock to participants effective as of the date of the Annual Meeting, assuming shareholder approval of the 1994 Plan, as amended. The Options will have a per-share exercise price equal to the fair market value of a share of Common Stock on the effective date of the grant. On February 27, 1998, the closing per-share price of Common Stock on the New York Stock Exchange was $47.8175. The following tabulation sets out the grants of stock options and restricted stock to participants. NEW PLAN BENEFITS 1994 Long-Term Performance Plan Number of Shares Number of Shares of Name and Position Subject to Options Restricted Stock - --------------------- ------------------ ------------------- George E. Wardeberg 100,000 3,600 Chairman and Chief Executive Officer Thomas F. Schrader 30,000 2,000 President and Chief Operating Officer James C. Donnelly 20,000 1,500 Vice President Joseph P. Wenzler 20,000 1,500 Senior Vice President, Treasurer and Chief Financial Officer Robert A. Nuernberg 2,000 400 Secretary Executive Group 192,000 9,000 Non-Executive 155,100 9,700 Officer Group Except as set forth in the table, the Company cannot currently determine awards that may be made to eligible participants under the 1994 Plan, as amended. Such determination will be made from time to time by the Committee. Duration of Plan The 1994 Plan will remain in effect until all Common Stock subject to it has been purchased or acquired, unless terminated earlier by the Board. However, no option, SAR or restricted stock may be granted after March 1, 2004. 26 Amendment, Modification and Termination The Board may amend, modify or terminate the 1994 Plan at any time, provided that no such action of the Board, without approval of the shareholders, may (i) increase the maximum number of shares issuable under the 1994 Plan or the maximum number of shares which can be awarded to any participant; (ii) modify the performance criteria pursuant to which restricted stock vests; (iii) materially modify the eligibility requirements for participation in the 1994 Plan; or (iv) materially increase the benefits to participants under the 1994 Plan. Termination, amendment or modification of the 1994 Plan will not adversely affect the right of participants under options, SARs or restricted stock previously granted, without the consent of the participant. Vote Required for Approval The affirmative vote of a majority of the votes cast on the proposal by shareholders is required for approval of the 1994 Plan, as amended, provided that a majority of the outstanding shares of Common Stock are voted on the proposal. Assuming such proviso is met, any shares not voted (whether by broker non-vote or otherwise, except abstentions) will have no impact on the vote. Shares as to which shareholders abstain from voting will be treated as votes against the 1994 Plan, as amended. The shares represented by the proxies received will be voted FOR approval of the 1994 Plan, as amended, unless a vote against such approval or to abstain from voting is specifically indicated on the proxy. In the event that the 1994 Plan, as amended, is not approved by the shareholders at the Annual Meeting, the 1994 Plan (without giving effect to the amendments described above) will remain in full force and effect. THE BOARD RECOMMENDS THAT THE SHAREHOLDERS VOTE "FOR" APPROVAL OF THE 1994 PLAN, AS AMENDED, ITEM NO.2. PROXIES SOLICITED BY THE BOARD WILL BE SO VOTED UNLESS SHAREHOLDERS SPECIFY A DIFFERENT CHOICE. SHAREHOLDER PROPOSALS Proposals which shareholders of the Company intend to present at and have included in the Company's proxy statement for the 1999 Annual Meeting of Shareholders must be received by the Company by the close of business on November 13, 1998. OTHER MATTERS Arthur Andersen LLP was retained as the Company's independent auditors for the year ended December 31, 1997 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, 1998. 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. 27 The Company will file with the Securities and Exchange Commission on or before March 31, 1998, an annual report on Form 10-K for the fiscal year ended December 31, 1997. 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 intention 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 has also retained ChaseMellon Shareholder Services to assist in the solicitation of proxies, and expects to pay such firm a fee of approximately $4,750, plus out-of-pocket expenses. 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 Robert A. Nuernberg Secretary March 13, 1998 28 APPENDIX A WICOR, INC. 1994 LONG-TERM PERFORMANCE PLAN (as proposed to be amended) Proposed additions to Section 4(a)(i), Section 4(a)(ii) and Section 6(c)(iii) of the Company's 1994 Long-Term Performance Plan that would be effected if the shareholders approve the 1994 Plan, as amended, have been underlined and proposed deletions have been indicted by overstriking. Section 1. Purpose The purpose of the WICOR, Inc. 1994 Long-Term Performance Plan (the "Plan") is to enhance the ability of WICOR, Inc. (together with any successor thereto, the "Company") and its Affiliates (as defined below) to attract, retain and motivate key salaried employees upon whom, in large measure, the sustained growth and profitability of the Company depend and to provide incentives to such key salaried employees which are more directly linked to the profitability of the Company's businesses and increases in shareholder value. Section 2. Definitions As used in the Plan, the following terms shall have the respective meanings set forth below: - "Affiliate" shall mean any entity that, directly or through one or more intermediaries, is controlled by, controls, or is under common control with, the Company. - "Award" shall mean any Option, Stock Appreciation Right or Restricted Stock granted under the Plan. - "Award Agreement" shall mean any written agreement, contract, or other instrument or document evidencing any Award granted under the Plan. - "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. - "Commission" shall mean the United States Securities and Exchange Commission or any successor agency. - "Committee" shall mean a committee of the Board of Directors of the Company designated by such Board to administer the Plan and composed of not less than two directors, each of whom is a "non-employee director" within the meaning of Rule 16b-3. - "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time. - "Fair Market Value" shall mean, with respect to any property (including, without limitation, any Shares or other securities), the fair market value of such property determined by such methods or procedures as shall be established from time to time by the Committee. - "Incentive Stock Option" shall mean an Option granted under Section 6(a) of the Plan that is intended to meet the requirements of Section 422 of the Code, or any successor provision thereto. - "Key Salaried Employee" shall mean any officer or other key salaried employee of the Company or of an Affiliate who is responsible for or contributes to the management, growth or profitability of the business of the Company or any Affiliate as determined by the Committee. - "Non-Qualified Stock Option" shall mean an Option granted under Section 6(a) of the Plan that is not intended to be an Incentive Stock Option. - "Option" shall mean an Incentive Stock Option or a Non-Qualified Stock Option. 29 - "Participant" shall mean a Key Salaried Employee designated to be granted an Award under the Plan. - "Person" shall mean any individual, corporation, partnership, association, limited liability company, joint-stock company, trust, unincorporated organization, or government or political subdivision thereof. - "Released Securities" shall mean Shares of Restricted Stock with respect to which all applicable restrictions have expired, lapsed, or been waived. - "Restricted Securities" shall mean Awards of Restricted Stock or other Awards under which issued and outstanding Shares are held subject to certain restrictions. - "Restricted Stock" shall mean any Shares granted under Section 6(c)of the Plan. - "Rule 16b-3" shall mean Rule 16b-3 as promulgated by the Commission under the Exchange Act, or any successor rule or regulation thereto. - "Shares" shall mean shares of common stock of the Company and such other securities or property as may become subject to Awards pursuant to an adjustment made under Section 4(b) of the Plan. - "Stock Appreciation Right" shall mean any right granted under Section 6(b) of the Plan. - "Total Shareholder Return" shall mean the appreciation of the price of a share of common stock of the Company, plus the value of dividends paid thereon assuming reinvestment in common stock of the Company. Section 3. Administration The Plan shall be administered by the Committee; provided, however, that if at any time the Committee shall not be in existence, the functions of the Committee as specified in the Plan shall be exercised by those members of the Board of Directors of the Company who qualify as "non-employee directors" under Rule 16b-3. Subject to the terms of the Plan and applicable law, the Committee shall have full power and authority to: (i) designate Participants; (ii) determine the type or types of Awards to be granted to each Participant under the Plan; (iii) determine the number of Shares to be covered by (or with respect to which payments, rights, or other matters are to be calculated in connection with) Awards granted to Participants; (iv) determine the terms and conditions of any Award granted to a Participant; (v) determine whether, to what extent, and under what circumstances Awards granted to Participants may be settled or exercised in cash, Shares, other securities, other Awards, or other property, or canceled, forfeited, or suspended to the extent permitted in Section 7 of the Plan, and the method or methods by which Awards may be settled, exercised, canceled, forfeited, or suspended; (vi) determine whether, to what extent, and under what circumstances cash, Shares, other securities, other Awards, other property, and other amounts payable with respect to an Award granted to Participants under the Plan shall be deferred either automatically or at the election of the holder thereof or of the Committee; (vii) interpret and administer the Plan and any instrument or agreement relating to, or Award made under, the Plan (including, without limitation, any Award Agreement); (viii) establish, amend, suspend, or waive such rules and regulations and appoint such agents as it shall deem appropriate for the proper administration of the Plan; and (ix) make any other determination and take any other action that the Committee deems necessary or desirable for the administration of the Plan. Unless otherwise expressly provided in the Plan, all designations, determinations, interpretations, and other decisions under or with respect to the Plan or any Award shall be within the sole discretion of the Committee, may be made at any time, and shall be final, conclusive, and binding upon all Persons, including the Company, any Affiliate, any Participant, any holder or beneficiary of any Award, any shareholder, and any employee of the Company or of any Affiliate. 30 The Committee shall solicit and consider the recommendations of the Chief Executive Officer of the Company with regard to, among other things, the designation of Participants, the type of Awards to be granted under the Plan to such Participants and the number of Shares to be subject thereto, and the other terms and conditions of Awards granted to Participants, subject to the limitations of Rule 16b-3. Section 4. Shares Available for Award (a) Shares Available. Subject to adjustment as provided in Section 4(b): (i) Number of Shares Available. The total number of Shares with respect to which Awards may be granted under the Plan shall be 820,000 1,745,000. If, after the effective date of the Plan, any Shares covered by an Award granted under the Plan, or to which any Award relates, are forfeited or if an Award otherwise terminates, expires or is canceled prior to the delivery of all of the Shares or of other consideration issuable or payable pursuant to such Award and if such forfeiture, termination, expiration or cancellation occurs prior to the payment of dividends or the exercise by the holder of other indicia of ownership of the Shares to which the Award relates, then the number of Shares counted against the number of Shares available under the Plan in connection with the grant of such Award, to the extent of any such forfeiture, termination, expiration or cancellation, shall again be available for granting of additional Awards under the Plan; provided, however, that if an Award covering additional Shares is granted to a Participant in connection with such forfeiture, termination, expiration or cancellation, then the Shares subject to the forfeiture, termination, expiration or cancellation shall be counted against the total number of Shares with respect to which Awards may be granted under the Plan and the maximum number of Shares that may be the subject of Awards granted to individual Participants under the Plan in an amount equal to the number of Shares to which such additional grant relates. (ii) Limitation on Awards to Individual Participants. No During any one calendar year, no Participant shall be granted Awards that could result in such Participant exercising of Options for, or Stock Appreciation Rights with respect to, more than 125,000 150,000 Shares or receiving receive more than 25,000 10,000 Shares of Restricted Stock under the Plan. (iii) Accounting for Awards. The number of Shares covered by an Award under the Plan, or to which such Award relates, shall be counted on the date of grant of such Award against the number of Shares available for granting Awards under the Plan; provided, however, that if Options and Stock Appreciation Rights are granted in tandem and the exercise of either an Option or Stock Appreciation Right results in an offsetting reduction in the number of Options or Stock Appreciation Rights subject to the Award, then the number of Shares to which such Award relates shall only be counted against the number of Shares available for granting Awards under the Plan to the extent of the aggregate number of Shares as to which such Award may be exercised. (iv) Sources of Shares Deliverable Under Awards. Any Shares delivered pursuant to an Award may consist, in whole or in part, of authorized and unissued Shares or of treasury Shares. 31 (b) Adjustments. In the event that the Company shall pay a dividend on its common stock in Shares, effect a stock split, or effect a similar corporate transaction or event that affects the Shares such that an adjustment is determined by the Committee to be appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan, then the number of Shares subject to the Plan and which thereafter may be made the subject of Awards and the number of Shares subject to outstanding Awards under the Plan, and the exercise and grant prices thereof, shall be equitably adjusted by the Committee such that the number of Shares, as adjusted, shall bear the same relation to the total number of outstanding shares of common stock of the Company following the transaction or event as immediately prior to such transaction or event; provided, however, that the number of Shares subject to any Award payable or denominated in Shares shall always be a whole number. Section 5. Eligibility Any Key Salaried Employee, including any executive officer or employee who is also a director of the Company or of any Affiliate, who is not a member of the Committee shall be eligible to be designated a Participant. Section 6. Awards (a) Options. The Committee is hereby authorized to grant Options to Participants with the terms and conditions as set forth below and with such additional terms and conditions, in either case not inconsistent with the provisions of the Plan, as the Committee shall determine; provided, however, that no Option shall be granted, directly or indirectly, in connection with the forfeiture, termination, cancellation or expiration of an Option previously granted under the Plan prior to its normal expiration date if such forfeited, terminated, canceled or expired Option has an exercise price higher than the Option proposed to be granted. (i) Exercise Price. The exercise price per share under an Option shall be determined by the Committee; provided, however, that such exercise price shall not be less than 100% of the Fair Market Value of a Share on the date of grant of such Option; and provided further, that such exercise price shall not be adjusted following the date of grant of such Option except as provided in Section 4(b) hereof. (ii) Option Term. The term of each Option shall be fixed by the Committee; provided, however, that in no event shall the term of any Option exceed a period of ten years from the date of its grant. (iii) Exercisability and Method of Exercise. An Option shall become exercisable in such manner and within such period or periods and in such installments or otherwise as shall be determined by the Committee. The Committee also shall determine the method or methods by which, and the form or forms, including, without limitation, cash, Shares, other securities, other Awards, or other property, or any combination thereof, having a Fair Market Value on the exercise date equal to the relevant exercise price, in which payment of the exercise price with respect to any Option may be made or deemed to have been made. (iv) Incentive Stock Options. The terms of any Incentive Stock Option granted under the Plan shall comply in all respects with the provisions of Section 422 of the Code, or any successor provision thereto, and any regulations promulgated thereunder. 32 (b) Stock Appreciation Rights. The Committee is hereby authorized to grant Stock Appreciation Rights to Participants. Subject to the terms of the Plan and any applicable Award Agreement, a Stock Appreciation Right granted under the Plan shall confer on the holder thereof a right to receive, upon exercise thereof, the excess of (i) the Fair Market Value of one Share on the date of exercise over (ii) the grant price of the right as specified by the Committee, which shall not be less than the Fair Market Value of one Share on the date of grant of the Stock Appreciation right. Subject to the terms of the Plan, the grant price, term, methods of exercise, methods of settlement (including whether the Participant will be paid in cash or Shares, or a combination thereof), and any other terms and conditions of any Stock Appreciation Right shall be as determined by the Committee; provided, however, that the grant price of a Stock Appreciation Right may not be adjusted following the date of grant of such Stock Appreciation Right except as provided in Section 4(b) hereof. The Committee may impose such conditions or restrictions on the exercise of any Stock Appreciation Right as it may deem appropriate, including, without limitation, restricting the time of exercise of the Stock Appreciation Right to specified periods as may be necessary to satisfy the requirements of Rule 16b-3. (c) Restricted Stock Awards (i) Issuance. The Committee is hereby authorized to grant Awards of Restricted Stock to Participants. (ii) Restrictions. Shares of Restricted Stock granted to Participants shall be subject to such restrictions as the Committee may impose, which restrictions may lapse separately or in combination at such time or times, in such installments or otherwise, as the Committee may deem appropriate. (iii) Performance Criteria. The restrictions applicable to Company executives and the Chairman and President of each subsidiary of the Company Participants shall be based on the criteria of attaining over a period of at least three years a compounded annual percentage rate of Total Shareholder Return compared to a specified group of gas distribution utilities. The restrictions applicable to other executives of the subsidiaries shall be as determined by the Committee. (iv) Registration. Any Restricted Stock granted under the Plan to a Participant may be evidenced in such manner as the Committee may deem appropriate. In the event any stock certificate is issued in respect of Shares of Restricted Stock granted under the Plan to a Participant, such certificate shall be registered in the name of the Participant and shall bear an appropriate legend (as determined by the Committee) referring to the terms, conditions, and restrictions applicable to such Restricted Stock. (v) Payment of Restricted Stock. At the end of the applicable restriction period relating to Restricted Stock granted to a Participant, one or more stock certificates for the appropriate number of Shares, free of restrictions, shall be delivered to the Participant, or, if the Participant received stock certificates representing the Restricted Stock at the time of grant, the legends placed on such certificates shall be remove. (vi) Forfeiture. Except as otherwise determined by the Committee, upon termination of employment of a Participant (as determined under criteria established by the Committee) for any reason during the applicable restriction period, all Shares of Restricted Stock still subject to restriction shall be forfeited by the Participant and reacquired by the Company. 33 (d) General. (i) No Consideration for Awards. Awards shall be granted to Participants for no cash consideration unless otherwise determined by the Committee. (ii) Award Agreements. Each Award granted under the Plan shall be evidenced by an Award Agreement in such form (consistent with the terms of the Plan) as shall have been approved by the Committee. (iii) Awards May Be Granted Separately or Together. Awards to Participants under the Plan may be granted either alone or in addition to, in tandem with, or in substitution for any other Award or any award granted under any other plan of the Company or any Affiliate. Awards granted in addition to or in tandem with other Awards, or in addition to or in tandem with awards granted under any other plan of the Company or any Affiliate, may be granted either at the same time as or at a different time from the grant of such other Awards or awards. (iv) Limits on Transfer of Awards. No Award (other than Released Securities), and no right under any such Award, shall be assignable, alienable, salable, or transferable by a Participant otherwise than by will or by the laws of descent and distribution (or, in the case of an Award of Restricted Securities, to the Company); provided, however, that a Participant at the discretion of the Committee may be entitled, in the manner established by the Committee, to designate a beneficiary or beneficiaries to exercise his or her rights, and to receive any property distributable, with respect to any Award upon the death of the Participant. Each Award, and each right under any Award, shall be exercisable, during the lifetime of the Participant, only by such individual or, if permissible under applicable law, by such individual's guardian or legal representative. No Award (other than Released Securities), and no right under any such Award, may be pledged, alienated, attached, or otherwise encumbered, and any purported pledge, alienation, attachment, or encumbrance thereof shall be void and unenforceable against the Company or any Affiliate. (v) Term of Awards. Except as otherwise provided in the Plan, the term of each Award shall be for such period as may be determined by the Committee. (vi) Rule 16b-3 Six-Month Limitations. To be extent required in order to comply with Rule 16b-3 only, any equity security offered pursuant to the Plan may not be sold for at least six months after acquisition, except in the case of death or disability, and any derivative security issued pursuant to the Plan shall not be exercisable for at least six months, except in case of death or disability of the holder thereof. Terms used in the preceding sentence shall, for the purposes of such sentence only, have the meanings, if any, assigned or attributed to them under Rule 16b-3. (vii) Share Certificates; Representation by Participants. In addition to the restrictions imposed pursuant to Section 6(c) hereof, all certificates for Shares delivered under the Plan pursuant to any Award or the exercise thereof shall be subject to such stop transfer orders and other restrictions as the Committee may deem advisable under the Plan or the rules, regulations, and other requirements of the Commission, any stock exchange or other market upon which such Shares are then listed or traded, and any applicable federal or state securities laws, and the Committee may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions. The Committee may require each Participant or other Person who acquires Shares under the Plan by means of an Award originally made to a Participant to represent to the Company in writing that such Participant or other Person is acquiring the Shares without a view to the distribution thereof. 34 Section 7. Amendment and Termination; Waiver of Conditions (a) Amendments to the Plan. The Board of Directors of the Company may amend, alter, suspend, discontinue, or terminate the Plan at any time; provided, however, that no amendment, alteration, suspension, discontinuation or termination of the Plan shall in any manner (except as otherwise provided in this Section 7) adversely affect any Award granted and then outstanding under the Plan without the consent of the Participant; provided further that, notwithstanding any other provision of the Plan or any Award Agreement, without the approval of the shareholders of the Company, no amendment, alterations, suspension, discontinuation, or termination of the Plan shall be made that would: (i) increase the total number of Shares available for Awards under the Plan or the maximum number of Shares with respect to which Awards may be made to individual Participants, except as provided in Section 4(b) hereof; (ii) modify the performance criteria pursuant to which Restricted Stock vests; (iii) materially increase the benefits accruing to Participants under the Plan; or (iv) Materially modify the requirements as to eligibility for participation in the Plan. (b) Adjustments of Awards Upon Certain Acquisitions. In the event the Company or any Affiliate shall assume outstanding employee awards or the right or obligation to make future such awards in connection with the acquisition of another business or another corporation or business entity, the Committee may make such adjustments, not inconsistent with the terms of the Plan, in the terms of Awards granted to Participants as it shall deem appropriate in order to achieve reasonable comparability or other equitable relationship between the assumed awards and the Awards granted under the Plan to Participants as so adjusted. (C) Correction of Defects, Omissions, and Inconsistencies. The Committee may correct any defect, supply any omission, or reconcile any inconsistency in any Award or Award Agreement in the manner and to the extent it shall deem necessary or desirable to carry the Plan into effect. Section 8. General Provisions (a) No Rights to Awards. No Key Salaried Employee, Participant or other Person shall have any claim to be granted any Award under the Plan, and there is no obligation for uniformity of treatment of Key Salaried Employees, Participants, or holders or beneficiaries of Awards under the Plan. The terms and conditions of Awards need not be the same with respect to each Participant. (b) Withholding. No later than the date as of which an amount first becomes includible in the gross income of a Participant for federal income tax purposes with respect to any Award under the Plan, the Participant shall pay to the Company, or make arrangements satisfactory to the Company regarding the payment of, any federal, state, local or foreign taxes of any kind required by law to be withheld with respect to such amount. Unless otherwise determined by the Committee, withholding obligations arising with respect to Awards to Participants under the Plan may be settled with Shares (other than Restricted Securities), including Shares that are part of, or are received upon exercise of, the Award that gives rise to the withholding requirement. The obligations of the Company under the Plan shall be conditional on such payment or arrangements, and the Company and any Affiliate shall, to the extent permitted by law, have the right to deduct any such taxes from any payment otherwise due to the Participant. The Committee may establish such procedures as it deems appropriate for the settling of withholding obligations with Shares, including, without limitation, the establishment of such procedures as may be necessary to satisfy the requirements of Rule 16b-3. 35 (c) No Limit on Other Compensation Arrangements. Nothing contained in the Plan shall prevent the Company or any Affiliate from adopting or continuing in effect other or additional compensation arrangements, and such arrangements may be either generally applicable or applicable only in specific cases. (d) Rights and Status of Recipients of Awards. The grant of an Award shall not be construed as giving a Participant the right to be retained in the employ of the Company or any Affiliate. Further, the Company or any Affiliate may at any time dismiss a Participant from employment, free from any liability, or any claim under the Plan. Except for rights accorded under the Plan and under any applicable Award Agreement, Participants shall have no rights as holders of Shares as a result of the granting of Awards hereunder. (e) Unfunded Status of the Plan. Unless otherwise determined by the Committee, the Plan shall be unfunded and shall not create (or be construed to create) a trust or a separate fund or funds. The Plan shall not establish any fiduciary relationship between the Company and any Participant or other Person. To the extent any Person holds any right by virtue of a grant under the Plan, such right (unless otherwise determined by the Committee) shall be no greater than the right of an unsecured general creditor of the Company. (f) Governing Law. The validity, construction, and effect of the Plan and any rules and regulations relating to the Plan shall be determined in accordance with the internal laws of the State of Wisconsin and applicable federal law. (g) Severability. If any provision of the Plan or any Award Agreement or any Award is or becomes or is deemed to be invalid, illegal, or unenforceable in any jurisdiction, or as to any Person or Award, or would disqualify the Plan, any Award Agreement or any Award under any law deemed applicable by the Committee, such provision shall be construed or deemed amended to conform to applicable laws, or if it cannot be so construed or deemed amended without, in the determination of the Committee, materially altering the intent of the Plan, any Award Agreement or the Award, such provision shall be stricken as to such jurisdiction, Person, or Award, and the remainder of the Plan, any such Award Agreement and any such Award shall remain in full force and effect. (h) No Fractional Shares. No fraction Shares or other securities shall be issued or delivered pursuant to the Plan, any Award Agreement or any Award, and the Committee shall determine (except as otherwise provided in the Plan) whether cash, other securities, or other property shall be paid or transferred in lieu of any fractional Shares or other securities or any rights thereto shall be canceled, terminated, or otherwise eliminated. (i) Headings. Headings are given to the Sections and subsections of the Plan solely as a convenience to facilitate reference. Such headings shall not be deemed in any way material or relevant to the construction or interpretation of the Plan or any provision thereof. Section 9. Effective Date of the Plan The Plan shall be effective as of March 1, 1994, subject, however, to the approval of the plan by the shareholders of the Company at the next annual meeting of shareholders, or any adjournment thereof, within twelve months following the date of adoption of the Plan by the Board of Directors of the Company. 36 Section 10. Term of the Plan No Award shall be granted under the Plan after March 1, 2004. However, unless otherwise expressly provided in the Plan or in an applicable Award Agreement, any Award theretofore granted may extend beyond such date, and, to the extent set forth in the Plan, the authority of the Committee to amend, alter, adjust, suspend, discontinue, or terminate any such award, or to waive any conditions or restrictions with respect to any such Award, and the authority of the Board of Directors of the Company to amend the Plan, shall extend beyond such date. 37 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 AND for ITEM 2.. - ---------------------------------------------------------------------------- 1. Election of the following nominees as directors for three-year terms: Wendell F. Bueche, Daniel F. McKeithan, Jr., George E. Wardeberg and Essie M. Whitelaw 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) 2. To approve and adopt the 1994 Long-Term Performance Plan, as amended. For Against Abstain / / / / / / ------------------------------------------- . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 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. - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 38 FOLD AND DETACH HERE March 13, 1998 Dear WICOR Employee Shareholder: Enclosed is a notice of WICOR's annual shareholders meeting, coming up April 23, 1998, in Milwaukee. Also enclosed is a proxy statement, voting authorization card and WICOR 1997 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 23, 1998, 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 President 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. 39 --- (BACKSIDE OF VOTER AUTHORIZATION FORM) --- WICOR VOTING AUTHORIZATION The undersigned acknowledges receipt of the WICOR, Inc. Annual Report for 1997 and the proxy solicitation material relative to the Annual Meeting of Shareholders of WICOR, Inc. to be held April 23, 1998. 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 23, 1998. (continued on the reverse side) 40 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 and FOR item 2.. - ------------------------------------------------------------------------ 1. Election of the following nominees as directors for three-year terms: Wendell F. Bueche, Daniel F. McKeithan, Jr., George E. Wardeberg and Essie M. Whitelaw 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) ------------------------------------------ 2. To approve the 1994 Long-Term Performance Plan, as amended. FOR AGAINST ABSTAIN / / / / / / 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. - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 41 FOLD AND DETACH HERE March 13, 1998 Dear WICOR Shareholder: We're pleased to send you the enclosed 1997 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 23, 1998. 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, VOTE ON THE 1994 Long-Term Performance Plan, as amended, discuss 1997 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 23. Sincerely, George E. Wardeberg President and Chief Executive Office 42 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 23, 1998, 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, "FOR" Item 2, 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 23, 1998. - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - FOLD AND DETACH HERE Map of downtown Milwaukee, Wisconsin, showing location of annual meeting and the routes to take within Milwaukee and from Chicago, Green Bay and Madison. 1
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