Item 1. Business
The Company is engaged in one line of business. Twin Disc designs, manufactures and sells heavy duty off-highway power transmission equipment. Products offered include: hydraulic torque converters; power-shift transmissions; marine transmissions and surface drives; universal joints; gas turbine starting drives; power take-offs and reduction gears; industrial clutches; fluid couplings and control systems. Principal markets are: construction equipment, industrial equipment, government, marine, energy and natural resources and agriculture. The Company's worldwide sales to both domestic and foreign customers are transacted through a direct sales force and a distributor network. There have been no significant changes in products or markets since the beginning of the fiscal year. The products described above have accounted for more than 90% of revenues in each of the last three fiscal years.
The Company acquired certain assets of Southern Diesel Engine Repair during fiscal year 1993. During 1995, the Company purchased the outstanding stock of Marine Diffusion, S.R.L. The acquisition did not require significant capital investment. A further description of these acquisitions appears in Note N to the consolidated financial statements on page 37 of the 1995 Annual Report which financial statements are incorporated by reference in this Form 10-K Annual Report in Part II.
In July 1994, the Company acquired a minority interest in Palmer Johnson Distributors, LLC, a major distributor of Twin Disc products. A further description of this transaction appears in Note E to the consolidated financial statements on page 29 of the 1995 Annual Report which financial statements are incorporated by reference in this Form 10-K Annual Report in Part II. The Company also began operations of a fully owned marketing subsidiary in Madrid, Spain in fiscal year 1994. The establishment of this subsidiary did not require significant capital investment.
The Company's products receive direct widespread competition, including from divisions of other larger independent manufacturers. The Company also competes for business with parts manufacturing divisions of some of its major customers. Ten customers accounted for approximately 44% of the Company's consolidated net sales during the year ended June 30, 1995. Caterpillar Inc. accounted for approximately 12% of consolidated net sales in 1995.
Unfilled open orders for the next six months of $72,183,000 at June 30, 1995 compares to $47,395,000 at June 30, 1994. Since orders are subject to cancellation and rescheduling by the customer, the six-month order backlog is considered more representative of operating conditions than total backlog. However, as procurement and manufacturing "lead times" change, the backlog will increase or decrease; and thus it does not necessarily provide a valid indicator of the shipping rate. Cancellations are generally the result of rescheduling activity and do not represent a material change in backlog. Most of the Company's products are machined from cast iron, forgings, cast aluminum and bar steel which generally are available from multiple sources and which are believed to be in adequate supply.
The Company has pursued a policy of applying for patents in both the United States and certain foreign countries on inventions made in the course of its development work for which commercial applications are considered probable. The Company regards its patents collectively as important but does not consider its business dependent upon any one of such patents. (2)
Engineering and development costs include research and development expenses for new product development and major improvements to existing products, and other charges for ongoing efforts to refine existing products. Research and development costs charged to operations totalled $2,718,000, $2,649,000 and $2,129,000 in 1995, 1994 and 1993, respectively. Total engineering and development costs were $7,411,000, $6,843,000 and $7,093,000 in 1995, 1994 and 1993, respectively.
Compliance with federal, state and local provisions regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, is not anticipated to have a material effect on capital expenditures, earnings or the competitive position of the Company.
The number of persons employed by the Company at June 30, 1995 was 1,097.
The business is not considered to be seasonal except to the extent that vacations are taken mainly in the months of July and August curtailing production during that period.
Management recognizes that there are attendant risks that foreign governments may place restrictions on dividend payments and other movements of money, but these risks are considered minimal due to the political relations the United States maintains with the countries in which the Company operates or the relatively low investment within individual countries.
A summary of financial data by geographic area for the years ended June 30, 1995, 1994 and 1993 appears in Note D to the consolidated financial statements on pages 27 through 29 of the 1995 Annual Report to Shareholders which financial statements are incorporated by reference in this Form 10-K Annual Report in Part II.
Item 2.

Item 2. Properties
The Company owns three manufacturing, assembly and office facilities in Racine, Wisconsin, U.S.A. and one in Nivelles, Belgium. The aggregate floor space of these four plants approximates 750,000 square feet. The Racine facility includes office space which is the location of the Company's corporate headquarters.
The Company also has operations in the following locations all of which are used for sales offices, warehousing and light assembly or product service. The following properties are leased except for the Johannesburg, South Africa location, which is owned:
Jacksonville, Florida, U.S.A. Brisbane, Queensland, Australia Miami, Florida, U.S.A. Perth, Western Australia, Australia Loves Park, Illinois, U.S.A. Viareggio, Italy Coburg, Oregon, U.S.A. Singapore Seattle, Washington, U.S.A. Johannesburg, South Africa Madrid, Spain
The properties are generally suitable for operations and are utilized in the manner for which they were designed. Manufacturing facilities are currently operating at less than 70% capacity and are adequate to meet foreseeable needs of the Company. (3)
Item 3.

Item 3. Legal Proceedings
Twin Disc is a defendant in several product liability or related claims considered either adequately covered by appropriate liability insurance or involving amounts not deemed material to the business or financial condition of the Company.
The Company has joined with a group of potentially responsible parties in signing a consent decree with the Illinois Environmental Protection Agency to conduct a remedial investigation and feasibility study at the Interstate Pollution Control facility in Rockford, Illinois. The consent decree was signed on October 17, 1991, and filed with the federal court in the Northern District of Illinois. The Company's total potential liability on the site cannot be estimated with particularity until completion of the remedial investigation. Based upon current assumptions, however, the Company anticipates potential liability of $300,000 to $400,000.
The Company also is involved with other potentially responsible parties in various stages of investigation and remediation relating to other hazardous waste sites, some of which are on the United States EPA National Priorities List (Superfund sites). While it is impossible at this time to determine with certainty the ultimate outcome of such environmental matters, they are not expected to materially affect the Company's financial position.
Item 4.

Item 4. Submission of Matters to a Vote of Security Holders
None.
Executive Officers of the Registrant
(Pursuant to General Instruction G(3) of Form 10-K, the following list is included as an unnumbered Item in Part I of this Report in lieu of being included in the Proxy Statement for the Annual Meeting of Shareholders to be held on October 20, 1995.)
Officers are elected annually by the Board of Directors at the first meeting of the Board held after each Annual Meeting of the Shareholders. Each officer shall hold office until his successor has been duly elected, or until he shall resign or shall have been removed from office.
PART II
Item 5.

Item 5. Market for the Registrant's Common Stock and Related Shareholder Matters
The dividends per share and stock price range information set forth under the caption "Sales and Earnings by Quarter" on page 1 of the Annual Report for the year ended June 30, 1995 are incorporated into this report by reference.
As of June 30, 1995 there were 1,124 shareholder accounts. The Company's stock is traded on the New York Stock Exchange. The market price of the Company's common stock as of the close of business on September 1, 1995 was $24.75 per share.
Pursuant to a shareholder rights plan (the "Rights Plan"), on June 17, 1988, the Board of Directors declared a dividend distribution, payable to shareholders of record on July 1, 1988, of one Preferred Stock Purchase Right for each outstanding share of Common Stock. The Rights will expire 10 years after issuance, and will be exercisable only if a person or group becomes the beneficial owner of 20% or more (or 30% in the case of any person or group which currently owns 20% or more of the shares or who shall become the Beneficial Owner of 20% or more of the shares as a result of any transfer by reason of the death of or by gift from any other person who is an Affiliate or an Associate of such existing holder or by succeeding such a person as trustee of a trust existing on the Record Date) of the Common Stock (such person or group, an "Acquiring Person") or commences a tender or exchange offer which would result in the offeror beneficially owning 30% or more of the Common Stock. A person who is not an Acquiring Person will not be deemed to have become an Acquiring Person solely as a result of a reduction in the number of shares of Common Stock outstanding due to a repurchase of Common Stock by the Company until such person becomes beneficial owner of any additional shares of Common Stock. Each Right will entitle shareholders to buy one newly issued unit of one one-hundredth of a share of Series A Junior Preferred Stock at an exercise price of $80, subject to certain antidilution adjustments. The Company will generally be entitled to redeem the Rights at $.05 per Right at any time prior to 10 business days after a public announcement of the existence of an Acquiring Person. (5)
If (i) a person or group accumulates more than 30% of the Common Stock (except pursuant to an offer for all outstanding shares of Common Stock which the independent directors determine to be fair to and otherwise in the best interests of the Company and its shareholders and except solely due to a reduction in the number of shares of Common Stock outstanding due to the repurchase of Common Stock by the Company), (ii) a merger takes place with an Acquiring Person where the Company is the surviving corporation and its Common Stock is not changed or exchanged, (iii) an Acquiring Person engages in certain self-dealing transactions, or (iv) during such time as there is an Acquiring Person, an event occurs which results in such Acquiring Person's ownership interest being increased by more than 1% (e.g., a reverse stock split), each Right (other than Rights held by such Acquiring Person and certain related parties which become void) will represent the right to purchase, at the exercise price, Common Stock (or in certain circumstances, a combination of securities and/or assets) having a value of twice the exercise price. In addition, if following the public announcement of the existence of an Acquiring Person the Company is acquired in a merger or other business combination transaction, except a merger or other business combination transaction that takes place after the consummation of an offer for all outstanding shares of Common Stock that the independent directors have determined to be fair, or a sale or transfer of 50% or more of the Company's assets or earning power is made, each Right (unless previously voided) will represent the right to purchase, at the exercise price, common stock of the acquiring entity having a value of twice the exercise price at the time.
The Rights have certain anti-takeover effects. The Rights will cause substantial dilution to a person or group that attempts to acquire the Company without conditioning the offer on a substantial number of Rights being acquired. However, the Rights are not intended to prevent a take-over, but rather are designed to enhance the ability of the Board of Directors to negotiate with an acquiror on behalf of all of the shareholders. In addition, the Rights should not interfere with a proxy contest.
The Rights should not interfere with any merger or other business combination approved by the Board of Directors since the Rights may be redeemed by the Company at $.05 per Right prior to 10 business days (as such period may be extended) after the public announcement of the existence of an Acquiring Person.
The press release announcing the declaration of the Rights dividend, dated June 20, 1988, and a letter to the Company's shareholders, dated June 22, 1988, explaining the Rights, filed as Item 14(a)(3), Exhibits 4(a) and (b) of Part IV of the Annual Report on Form 10-K for the year ended June 30, 1988 are hereby incorporated by reference. Item 6.

Item 6. Selected Financial Data
The information set forth under the caption "Ten-Year Financial Summary" on pages 40 and 41 of the Annual Report to Shareholders for the year ended June 30, 1995 is incorporated into this report by reference.
Item 7.

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The information set forth under the caption "Management's Discussion and Analysis" on pages 19 through 21 of the Annual Report to Shareholders for the year ended June 30, 1995 is incorporated into this report by reference. (6)
Item 8.

Item 8. Financial Statements and Supplementary Data
The following Consolidated Financial Statements of Twin Disc, Incorporated and Subsidiaries set forth on pages 22 through 39 of the Annual Report to Shareholders for the year ended June 30, 1995 are incorporated into this report by reference:
Consolidated Balance Sheets, June 30, 1995 and 1994
Consolidated Statements of Operations for the years ended June 30, 1995, 1994 and 1993
Consolidated Statements of Cash Flows for the years ended June 30, 1995, 1994 and 1993
Consolidated Statements of Changes in Shareholders' Equity for the years ended June 30, 1995, 1994 and 1993
Notes to Consolidated Financial Statements
Report of Independent Accountants
The supplementary data regarding quarterly results of operations set forth under the caption "Sales and Earnings by Quarter" on page 1 of the Annual Report to Shareholders for the year ended June 30, 1995 is incorporated into this report by reference.
Item 9.

Item 9. Change in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
PART III
Item 10.

Item 10. Directors and Executive Officers of the Registrant
For information with respect to the executive officers of the Registrant, see "Executive Officers of the Registrant" at the end of Part I of this report. For information with respect to the Directors of the Registrant, see "Election of Directors" on pages 5 through 7 of the Proxy Statement for the Annual Meeting of Shareholders to be held October 20, 1995, which is incorporated into this report by reference.
Item 11.

Item 11. Executive Compensation
The information set forth under the captions "Compensation of Executive Officers", "Stock Options" and "Compensation Pursuant to Plans" on pages 8 through 10 of the Proxy Statement for the Annual Meeting of Shareholders to be held on October 20, 1995 is incorporated into this report by reference. Discussion in the Proxy Statement under the captions "Board Executive Selection and Salary Committee Report on Executive Compensation" and "Corporate Performance Graph" is not incorporated by reference and shall not be deemed "filed" as part of this report. (7) Item 12.

Item 12. Security Ownership of Certain Beneficial Owners and Management
Security ownership of certain beneficial owners and management is set forth on pages 3 and 4 of the Proxy Statement for the Annual Meeting of Shareholders to be held on October 20, 1995 under the caption "Principal Shareholders and Share Ownership of Directors and Executive Officers" and incorporated into this report by reference.
There are no arrangements known to the Registrant, the operation of which may at a subsequent date result in a change in control of the Registrant.
Item 13.

Item 13. Certain Relationships and Related Transactions
None.
PART IV
Item 14.

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1) The following Consolidated Financial Statements of Twin Disc, Incorporated and Subsidiaries set forth on pages 22 through 39 of the Annual Report to Shareholders for the year ended June 30, 1995 are incorporated by reference into this report in Part II:
Consolidated Balance Sheets, June 30, 1995 and 1994
Consolidated Statements of Operations for the years ended June 30, 1995, 1994 and 1993
Consolidated Statements of Cash Flows for the years ended June 30, 1995, 1994 and 1993
Consolidated Statements of Changes in Shareholders' Equity for the years ended June 30, 1995, 1994 and 1993
Notes to Consolidated Financial Statements
Report of Independent Accountants
The supplementary data regarding quarterly results of operations under the caption "Sales and Earnings by Quarter" on page 1 of the Annual Report to Shareholders for the year ended June 30, 1995 is incorporated by reference into this report in Part II hereof.
Individual financial statements of the 50% or less owned entities accounted for by the equity method are not required because such 50% or less owned entities do not constitute significant subsidiaries. (8) (a)(2) Consolidated Financial Statement Schedule (numbered in accordance with Regulation S-X) for the three years ended June 30, 1995:
Page
Report of Independent Accountants 13
Schedule II-Valuation and Qualifying Accounts 14
Schedules, other than those listed, are omitted for the reason that they are inapplicable, are not required, or the information required is shown in the financial statements or the related notes thereto.
The Report of the Independent Accountants of the Registrant with respect to the above-listed consolidated financial statement schedule appears on page 13 of this report.
(a)(3) List of Exhibits: (numbered in accordance with Item 601 of Regulation S-K)
2 Not applicable
3 a) Articles of Incorporation, as restated October 21, 1988 (Incorporated by reference to Exhibit 3(a) of the Company's Form 10-K for the year ended June 30, 1989).
b) Corporate Bylaws, amended through June 16, 1995.
4 Instruments defining the rights of security holders, including indentures
a) Form of Rights Agreement dated as of June 17, 1988 by and between the Company and the First Wisconsin Trust Company, as Rights Agent, with Form of Rights Certificate (Incorporated by reference to Exhibits 1 and 2 of the Company's Form 8-A dated June 27, 1988).
b) Announcement of Shareholder Rights Plan per press release dated June 20, 1988 and explanation of plan per letter to Company's shareholders dated June 20, 1988 (Incorporated by reference to Exhibit 4(a) and (b), respectively, of the Company's Form 10-K for the year ended June 30, 1988).
9 Not applicable (9) 10 Material Contracts a) * The 1988 Incentive Stock Option Plan (Incorporated by reference to Exhibit B of the Proxy Statement for the Annual Meeting of Shareholders held on October 21, 1988).
b) * The 1988 Non-Qualified Stock Option Plan for Officers, Key Employees and Directors (Incorporated by reference to Exhibit C of the Proxy Statement for the Annual Meeting of Shareholders held on October 21,1988).
c) * Amendment to 1988 Incentive Stock Option Plan of Twin Disc, Incorporated (Incorporated by reference to Exhibit A of the Proxy Statement for the Annual Meeting of Shareholders held on October 15, 1993).
d) * Amendment to 1988 Non-Qualified Incentive Stock Option Plan for Officers, Key Employees and Directors of Twin Disc, Incorporated (Incorporated by reference to Exhibit B of the Proxy Statement for the Annual Meeting of Shareholders held on October 15, 1993).
e) * Form of Severance Agreement for Senior Officers and form of Severance Agreement for Other Officers (Incorporated by reference to Exhibit 10(c) and (d), respectively, of the Company's Form 10-K for the year ended June 30, 1989).
f) * Supplemental Retirement Plan (Incorporated by reference to Exhibit 10(a) of the Company's Form 10-K for the year ended June 30, 1986).
g) * Director Tenure and Retirement Policy (Incorporated by reference to Exhibit 10(f) of the Company's Form 10-K for the year ended June 30, 1993).
h) * Form of Twin Disc, Incorporated Corporate Short Term Incentive Plan (Incorporated by reference to Exhibit 10(g) of the Company's Form 10-K for the year ended June 30, 1993). * Denotes management contract or compensatory plan or arrangement.
11 Not applicable
12 Not applicable
13 Annual Report of the Registrant for the year ended June 30, 1995 is separately filed as Exhibit (13) to this Report (except for those portions of such Annual Report separately incorporated by reference into this Report, such Annual Report is furnished for the information of the Securities and Exchange Commission and shall not be deemed "filed" as part of this report).
18 Not applicable
21 Subsidiaries of the registrant
22 Not applicable
23 Consent of Independent Accountants (10) 24 Power of Attorney
27 Financial Data Schedule for the year ended June 30, 1995 is separately filed as Exhibit (27) to this report. (This schedule is furnished for the information of the Securities and Exchange Commission and shall not be deemed "filed" for purposes of Section 11 of the Securities Act or Section 18 of the Exchange Act.)
28 Not applicable
99 Foreign Affiliate Separate Financial Statements a) Niigata Converter Co., Ltd. financial statements for the year ended March 31, 1995 prepared in accordance with Japanese Commercial Code are separately filed as Exhibit (99a) to this report. (This schedule is furnished for the information of the Securities and Exchange Commission.)
b) Niigata Converter Co., Ltd. financial statements for the year ended March 31, 1994 prepared in accordance with Japanese Commercial Code are separately filed as Exhibit (99b) to this report. (This schedule is furnished for the information of the Securities and Exchange Commission.)
c) Niigata Converter Co., Ltd. financial statements for the year ended March 31, 1993 prepared in accordance with Japanese Commercial Code are separately filed as Exhibit (99c) to this report. (This schedule is furnished for the information of the Securities and Exchange Commission.)
d) Niigata Converter Co., Ltd. financial statements for the year ended March 31, 1992 prepared in accordance with Japanese Commercial Code are separately filed as Exhibit (99d) to this report. (This schedule is furnished for the information of the Securities and Exchange Commission.)
Copies of exhibits filed as a part of this Annual Report on Form 10-K may be obtained by shareholders of record upon written request directed to the Secretary, Twin Disc, Incorporated, 1328 Racine Street, Racine, Wisconsin 53403. (11) 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.
TWIN DISC, INCORPORATED
By FRED H. TIMM -------------------------------------- Fred H. Timm, Corporate Controller and Secretary (Chief Accounting Officer)
September 15, 1995
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.
By MICHAEL E. BATTEN -------------------------------------- Michael E. Batten, Chairman, Chief Executive Officer and Director
September 15, 1995 By MICHAEL H. JOYCE -------------------------------------- Michael H. Joyce, President, Chief Operating Officer and Director
By JAMES O. PARRISH -------------------------------------- James O. Parrish, Vice President- Finance, Treasurer and Director (Chief Financial Officer)
William W. Goessel, Director Jerome K. Green, Director John L. Murray, Director Paul J. Powers, Director September 15, 1995 Richard T. Savage, Director David L. Swift, Director Stuart W. Tisdale, Director David R. Zimmer, Director
By JAMES O. PARRISH -------------------------------------- James O. Parrish, Attorney in Fact (12) REPORT OF INDEPENDENT ACCOUNTANTS (See Item 14) Consolidated Financial Statement Schedule of Twin Disc, Incorporated and Subsidiaries
To the Shareholders Twin Disc, Incorporated Racine, Wisconsin
Our report on the consolidated financial statements of Twin Disc, Incorporated and Subsidiaries has been incorporated by reference in this Form 10-K from page 39 of the 1995 annual report to shareholders of Twin Disc, Incorporated and Subsidiaries. In connection with our audits of such financial statements, we have also audited the related financial statement schedule listed in the index on page 9 of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein.
COOPERS & LYBRAND L. L. P.
Milwaukee, Wisconsin July 28, 1995 (13)
(14)
(16)


Item 1. BUSINESS
(a) General
Wisconsin Gas Company (the "Company" or "Wisconsin Gas") is a Wisconsin corporation and a wholly-owned subsidiary of WICOR, Inc. ("WICOR") and maintains its principal executive offices in Milwaukee, Wisconsin. The Company is the largest natural gas distribution public utility in Wisconsin. At December 31, 1995, Wisconsin Gas distributed gas to approximately 505,000 residen- tial, commercial and industrial customers in 503 communities throughout Wisconsin having an estimated population of nearly 2,000,000 based on the State of Wisconsin's estimates for 1995. The Company is subject to the jurisdiction of the Public Service Commission of Wisconsin ("PSCW") as to various phases of its operations, including rates, service and issuance of securities.
Wisconsin Gas' business is highly seasonal, particularly as to residential and commercial sales for space heating purposes, with a substantial portion of its sales occurring in the winter heating season. The following table sets forth the volumes of natural gas delivered by Wisconsin Gas to its customers.
*One therm equals 100,000 BTU's
The volumes shown as transported represent customer-owned gas that was delivered by Wisconsin Gas to such customers. The remaining volumes represent quantities sold and delivered to customers by the Company.
(b) Gas Supply, Pipeline Capacity and Storage
(1) General
Prior to the Federal Energy Regulatory Commission's ("FERC") Order No. 636, the interstate pipelines serving Wisconsin Gas were the primary suppliers of natural gas to Wisconsin Gas. During the transition period prior to the issuance of Order No. 636, Wisconsin Gas gradually assumed responsibility for the acquisition of supply 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 capacity and gas supplies. Local distribution companies, such as Wisconsin Gas, must contract for capacity and supply sufficient to meet the peak day firm demand of their customers. Peak or near peak days occur only a few times each year, so capacity release facilitates higher utilization of capacity during those times when the capacity is not needed by the utility. Through pre-arranged agreements and day-to-day electronic bulletin board postings, interested parties can purchase that capacity. The proceeds from these transactions are passed-through to the ratepayers, thereby helping to offset the costs associated with holding the capacity. During 1995, Wisconsin Gas was an active participant in the capacity release market.
Operating under Order No. 636, Wisconsin Gas Company has been able to meet its contractual obligations with both its suppliers and its customers despite periods of severe cold and unseasonably warm weather, including the record cold weather in late January and early February, 1996.
(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 the Company's supply portfolio and that Canada represents an important long-term source of reliable, competitively priced gas.
Because of the seasonal variations in gas usage in Wisconsin, Wisconsin Gas has also contracted with ANR and NNG for substantial underground storage capacity, primarily in Michigan. There are no known underground storage formations in Wisconsin capable of commercialization. Storage enables Wisconsin Gas to optimize its overall gas supply and capacity costs. In summer, gas in excess of market demand is transported into the storage fields, and in winter, gas is withdrawn from storage and combined with gas purchased in or near the production areas ("flowing gas") to meet the increased winter market demand. As a result, Wisconsin Gas can contract for less 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 production area which is designed to deliver gas when other supplies cannot be delivered during extremely cold weather.
Wisconsin Gas' firm winter daily transportation and storage capacity entitlements from pipelines under long-term contracts are set forth below. Maximum (Thousands Pipeline of Therms*) ----------- ANR Mainline 2,999 Storage 4,879 NNG Mainline 1,085 Storage 150 Viking Mainline 72 Peaking Facilities 69 ----------- Total 9,254 =========== *One therm equals 100,000 BTU's.
(3) Term Gas Supply
Wisconsin Gas has contracts for firm supplies with terms in excess of 30 days with approximately 30 gas suppliers for gas produced in each of the three producing areas discussed above. The term contracts have varying durations so that only a portion of the Company's gas supply expires in any year. the Company 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 (Thousands of Therms*) ----------- Domestic flowing gas 2,350 Canadian flowing gas 1,482 Storage withdrawals 5,029 ----------- Total 8,861 =========== *One therm equal 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. The Company has purchased spot market gas since 1985 and has supply relationships with a number of sellers from whom it purchases spot gas.
(c) Employees
The Company had 1,089 full-time equivalent active employees at December 31, 1995
Item 2.

Item 2. PROPERTIES
Wisconsin Gas owns a distribution system which, on Decem- ber 31, 1995, included approximately 8,300 miles of distribution and transmission mains, 414,000 services and 539,000 active meters. The Company's distribution system consists almost entirely of plastic and coated steel pipe. The Company owns its main office building in Milwaukee, office buildings in certain other communities in which it serves, gas regulating and meter- ing 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.
Item 3.

Item 3. LEGAL PROCEEDINGS
There are no material legal proceedings pending, other than ordinary routine litigation incidental to the Company's busi- ness, to which the Company is a party, except as discussed below. There are no material legal proceedings to which any officer or director is a party or has a material interest adverse to the Company's. There are no material administrative or judicial proceedings arising under environmental quality or civil rights statutes pending or known to be contemplated by governmental agencies to which the Company is or would be a party.
Wisconsin Gas has identified two previously owned sites on which it operated manufactured gas plants that are of environmental concern. Such plants ceased operations prior to the mid-1950's. Wisconsin Gas has engaged an environmental consultant to help determine the nature and extent of the contamination at these sites. Based on the test results obtained and the possible remediation alternatives available, the Company has estimated that cleanup costs could range from $22 million to $75 million. As of December 31, 1995, the Company has accrued $36.4 million for future cleanup costs. These estimates are based on current undiscounted costs. It should also be noted that the numerous assumptions such as the type and extent of contamination, available remediation techniques, and regulatory requirements which are used in developing these estimates are subject to change as new information becomes available. Any such changes in assumptions could have a significant impact on the potential liability. Due to anticipated regulatory treatment, changes in the recorded liability do not immediately impact net income.
The Wisconsin Department of Natural Resources ("WDNR") issued a Probable Responsible Party letter to Wisconsin Gas for these two sites in September 1994. Following receipt of this letter, Wisconsin Gas and the WDNR held an initial meeting to discuss the sites. At the meeting it was agreed that Wisconsin Gas would prepare a remedial action options report from which it will select specific remedial actions for recommendation to the WDNR. During 1995, the Company gathered additional environmental data regarding these two sites, held extensive discussions concerning remedial options with current land owners and solicited information from environmental consulting and remediation firms on technology and approaches that would best suit the sites. The efforts were directed toward preparing a remedial action options report and recommendations for presentation to the WDNR in 1996. Once such a plan is approved, initial remediation work will begin. Expenditures over the next three years are expected to total approximately $20 million. Although most of the work and costs are expected to be incurred in the first few years of the plan, monitoring of sites and other necessary actions may be undertaken for up to 30 years.
In March 1994, Wisconsin Gas commenced suit against nine insurance carriers seeking a declaratory judgment regarding insurance coverage for the two sites. Settlements were reached with each of the carriers during 1994. Additional insurance recoveries are being pursued. The Company expects full recovery of incurred remediation costs, less amounts recovered from insurance carriers. If the amount recovered from the insurance carriers is insufficient to remediate both sites, expenditures not recovered are expected to be allowed full recovery (other than for carrying costs) in rates based upon recent PSCW orders. Accordingly, a regulatory asset has been recorded for the accrued cost. Certain related investigation costs incurred to date are currently being recovered in utility rates. However, any incurred costs not yet recovered in rates are not allowed by the PSCW to earn a return. As of December 31, 1995, $4.8 million of such costs had been incurred.
Wisconsin Gas also owns a service center that is constructed on a site that was previously owned by the City of Milwaukee and was used by the City as a public dump site. The Company has conducted a site assessment at the request of the WDNR and has sent the report of its assessment to the WDNR. Management cannot predict whether or not the WDNR will require any remediation action, nor the extent or cost of any remediation actions that may be required. In the judgment of management, any remediation costs incurred by the Company will be recoverable from the City of Milwaukee or in Wisconsin Gas' rates under the PSC orders discussed above.
Item 4.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Omitted pursuant to General Instruction J (2) (c).
PART II
Item 5.

Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
WICOR owns all the issued and outstanding common stock of the Company. The Wisconsin Business Corporation Law, the Company's Indenture of Mortgage and Deed of Trust and the indentures supplemental thereto, and the agreements under which debt is outstanding each contain certain restrictions on the payment of dividends on common stock. By order of the PSCW, Wisconsin Gas is generally permitted to pay dividends up to the amount projected in its rate case ($16 million). The Company may pay dividends in excess of $16 million so long as the payment will not cause its common equity ratio to fall below 48.43%. If payment of projected dividends would cause its common equity ratio to fall below 43% of total capitalization (including short-term debt), or if payment of additional dividends would cause its common equity ratio to fall below 48.43%, Wisconsin Gas must obtain PSCW approval to pay such dividends. Wisconsin Gas has projected the payment of $19 million of dividends during the 12 months ending October 31, 1996. See Note 6 of Notes to Financial Statements contained in Exhibit 13, the WICOR 1995 Annual Report to Shareholders, which note is incorporated herein by reference. The PSCW desires Wisconsin Gas to target its common equity level at 43% to 50% of total capitalization. For the year ended December 31, 1995, the Company's average common equity level was 51%.
The Company paid cash dividends of $16,000,000 on common stock to WICOR in 1995 and 1994, respectively.
Item 6.

Item 6. SELECTED FINANCIAL DATA
Omitted pursuant to General Instruction J(2)(a).
Item 7.

Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Reference is made to the section entitled "Financial Review" set forth in the WICOR 1995 Annual Report to Shareholders. Such section is included in Exhibit 13, which, insofar as it pertains to the Company, is hereby incorporated herein by reference.
Item 8.

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements for the Company together with the report of independent public accountants are included in Part IV of this report.
Item 9.

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 auditors on any matter of accounting principles or practices or financial statement disclosure re- quired to be reported pursuant to this item.
PART III
Item 10.

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Omitted pursuant to General Instruction J(2)(c).
Item 11.

Item 11. EXECUTIVE COMPENSATION
Omitted pursuant to General Instruction J(2)(c).
Item 12.

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Omitted pursuant to General Instruction J(2)(c).
Item 13.

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Omitted pursuant to General Instruction J(2)(c).
PART IV
Item 14.

Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Annual Report on Form 10-K:
1. All Financial Statements and Report of Independent Public Accountants.
Statement of Income.
Balance Sheet.
Statement of Cash Flows.
Statement of Common Equity.
Statement of Capitalization.
Notes to Financial Statements.
2. Financial Statement Schedules.
Not required.
3. Exhibits
3.1 Wisconsin Gas Company Restated Articles of Incorporation, as amended (incorporated by reference to Exhibit 3.1 to the Company's Form 10-K Annual Report for 1988).
3.2 Amendment to Wisconsin Gas Company By-laws, effective February 28, 1995 (incorporated by reference to Exhibit 3.2 to the Company's Form 10-K Annual Report for 1994).
3.3 Wisconsin Gas Company 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 the 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 the 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 the 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).
4.5 Officers' Certificate, dated as of September 15, 1993, setting forth the terms of the Company's 6.60% debentures due 2013 (incorporated by reference to Exhibit 4.1 to the Company's Form 8-K Current Report for September, 1993).
4.6 Officers' Certificate, dated as of November 7, 1995, setting forth the terms of the Company's 6-3/8% Notes due 2005 (incorporated by reference to the Company's Form 8-K Current Report dated November 7, 1995.
4.7 Revolving Credit and Term Loan Agreement dated as of March 29, 1993, among Wisconsin Gas Company and the Bank of New York, Citibank, N.A., Firstar Bank of Milwaukee, N. A. Harris Trust & Savings Bank, M&I Marshall & Ilsley Bank and Citibank, N.A., as Agent (incorporated by reference to Exhibit 4.2 to the Company's Quarterly Report on Form 10-Q dated as of August 9, 1993).
4.8 Extension of Revolving Credit and Term Loan Agreement dated as of March 29, 1994, among Wisconsin Gas Company and Citibank, N.A., Firstar Bank Milwaukee, Harris Trust and Savings Bank, M&I Marshall & Ilsley Bank and Citibank, N.A., as Agent (incorporated by reference to Exhibit 4.9 to the Company's Form 10-K Annual Report of 1994).
4.9 Loan Agreement dated as of November 4, 1991, by and among M&I Marshall & Ilsley Bank, Wisconsin Gas Company Employee's Savings Plans Trust and WICOR, Inc. (incorporated by reference to Exhibit 4.16 to the Company's Form 10-K Annual Report for 1991).
4.10 Loan Agreement Amendment effective December 21, 1995, by and among Wisconsin Gas Company Employees' Savings Plan Trust, WICOR, Inc., and M&I Marshall and Ilsley Bank.
10.1 Service Agreement dated as of June 1, 1994, among WICOR, Inc., Wisconsin Gas Company, WEXCO of Delaware, Inc., Sta-Rite Industries, Inc. and SHURflo Pump Manufacturing Co.
10.2# WICOR, Inc. 1987 Stock Option Plan, as amended (incorporated by reference to Exhibit 4.1 to the WICOR, Inc. Form S-8 Registration Statement No. 33-67134).
10.3# Forms 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 Form 10-K Annual Report for 1991).
10.4# WICOR, Inc. 1992 Director Stock Option Plan (incorporated by reference to Exhibit 4.1 to WICOR, Inc.'s Form S-8 Registration No. 33-67132).
10.5# Form of nonstatutory stock agreement used in conjunction with the WICOR, Inc. 1992 Director Stock Option Plan (incorporated by reference to Exhibit 4.2 to WICOR, Inc.'s Form S-8 Registration Statement No. 37-67132).
10.6# WICOR, Inc. 1994 Long-Term Performance Plan (incorporated by reference to Exhibit 4.1 to the WICOR, Inc. Form S-8 Registration Statement No. 33-55755).
10.7# Form of nonstatutory stock option agreement used in connection with the WICOR, Inc. 1994 Long-Term Performance Plan (incorporated by reference to Exhibit 4.2 to the WICOR, Inc. Form S-8 Registration Statement No. 33-55755).
10.8# Form of restricted stock agreement used in connection with the WICOR, Inc. 1994 Long-Term Performance Plan (incorporated by reference to Exhibit 4.3 to the WICOR, Inc. Form S-8 Registration Statement No. 33-55755).
10.9# Wisconsin Gas Company Principal Officers' Supplemental Retirement Income Program (incorporated by reference to Exhibit 10.6 to the Company's Form 10-K Annual Report for 1993).
10.10# Wisconsin Gas Company 1996 Officers' Incentive Compensation Plan.
10.11# Wisconsin Gas Company Group Travel Accident Plan (incorporated by reference to Exhibit 10.23 to the Company's Form 10-K Annual Report for 1992).
10.12# Form of Deferred Compensation Agreement between Wisconsin Gas Company and certain of its officers (incorporated by reference to Exhibit 10.25 to the Company's Form 10-K Annual Report for 1991).
10.13# WICOR, Inc. Retirement Plan for Directors, as amended (incorporated by reference to Exhibit 10.25 to the Company's Form 10-K Annual Report for 1992).
13 "Financial Review" portions of WICOR, Inc. 1995 Annual Report to Shareholders.
27 Financial Data Schedule. (EDGAR version only)
(b) Reports on Form 8-K.
Form 8-K Current Report dated November 7, 1995.
# Indicates a plan under which compensation is paid or payable to directors or executive officers of the Company.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
WISCONSIN GAS COMPANY
Date: March 12, 1996 By JOSEPH P. WENZLER Joseph P. Wenzler Vice President and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed on the succeeding pages by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
WISCONSIN GAS COMPANY
Signature Title Date
THOMAS F. SCHRADER Thomas F. Schrader President, Chief Executive Officer and Director (Principal Executive Officer) March 12, 1996
JOSEPH P. WENZLER Joseph P. Wenzler Vice President and March 12, 1996 Chief Financial Officer (Principal Financial and Principal Accounting Officer)
WENDELL F. BUECHE Wendell F. Bueche Director March 12, 1996
WILLIE D. DAVIS Director March 12, 1996 Willie D. Davis
JERE D. MCGAFFEY Jere D. McGaffey Director March 12, 1996
DANIEL F. MCKEITHAN, JR. Dan F.McKeithan,Jr Director March 12, 1996
GUY A. OSBORN Guy A. Osborn Director March 12, 1996
STUART W. TISDALE Stuart W. Tisdale Director March 12, 1996
GEORGE E. WARDEBERG George E Wardeberg Director March 12, 1996
ESSIE M. WHITELAW Essie M. Whitelaw Director March 12, 1996
WILLIAM B. WINTER William B. Winter Director March 12, 1996
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Wisconsin Gas Company:
We have audited the accompanying balance sheet and statements of capitalization of WISCONSIN GAS COMPANY (a Wisconsin corporation and a wholly owned subsidiary of WICOR, Inc.) as of December 31, 1995 and 1994, and the related statements of income, common equity and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Wisconsin Gas Company as of December 31, 1995 and 1994, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Milwaukee, Wisconsin, January 22, 1996
WISCONSIN GAS COMPANY Statements of Income
The accompanying notes are an integral part of these statements. WISCONSIN GAS COMPANY Balance Sheet
The accompanying notes are an integral part of these statements.
WISCONSIN GAS COMPANY Balance Sheet
The accompanying notes are an integral part of these statements. WISCONSIN GAS COMPANY Statements of Cash Flow Increase (Decrease) in Cash and Cash Equivalents
The accompanying notes are an integral part of these statements. WISCONSIN GAS COMPANY Statements of Common Equity
The accompanying notes are an integral part of these statements. WISCONSIN GAS COMPANY Statements of Capitalization
The accompanying notes are an integral part of these statements. Wisconsin Gas Company Notes to Financial statements
1. ACCOUNTING POLICIES
a. Business
Wisconsin Gas Company (Wisconsin Gas), the oldest and largest natural gas distribution utility in Wisconsin, is a public utility engaged in the distribution of natural gas throughout Wisconsin. Most of its revenues, however, are derived from gas delivered in southeastern Wisconsin. Wisconsin Gas is subject to regulation by the Public Service Commission of Wisconsin (PSCW) and gives recognition to ratemaking policies substantially in accordance with the Federal Energy Regulatory Commission (FERC) System of Accounts. At December 31, 1995, Wisconsin Gas served approximately 505,000 customers in 503 communities.
b. Gas Distribution Revenues and Purchased Gas Costs
Utility billings are rendered on a cycle basis. Revenues include estimated amounts accrued for service provided but not yet billed. Wisconsin Gas' rate schedules contain purchased gas adjustment (PGA) provisions which permit the recovery of actual purchased gas costs incurred. The difference between actual gas costs incurred and costs recovered through rates, adjusted for inventory activity, is deferred as a current asset or liability. 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.
c. Plant and Depreciation
Gas distribution property, plant and equipment is stated at original cost, including overhead allocations. Upon ordinary retirement of plant assets, their cost plus cost of removal, net of salvage, is charged to accumulated depreciation, and no gain or loss is recognized. The depreciation of Wisconsin Gas' assets is computed using straight-line rates over estimated useful lives and considers salvage value. These rates have been consistently used for ratemaking purposes. The composite rates are 4.2%, 4.5% and 4.7% for 1995, 1994 and 1993, respectively.
d. Regulatory Accounting
Wisconsin Gas accounts for its regulated operations in accordance with Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation." This statement sets forth the application of generally accepted accounting principles to those companies whose rates are determined by an independent third-party regulator. The economic effects of regulation can result in regulated companies recording costs that have been or are expected to be allowed in the ratemaking process in a period different from the period in which the costs would be charged to expense by an unregulated enterprise. When this occurs, costs are deferred as assets in the balance sheet (regulatory assets) and recorded as expenses as those same amounts are reflected in rates. Additionally, regulators can impose liabilities upon a regulated company for amounts previously collected from customers and for amounts that are expected to be refunded to customers (regulatory liabilities).
The amounts recorded as regulatory assets and regulatory liabilities in the balance sheet at December 31, 1995 and 1994 are as follows:
(Thousands of Dollars) 1995 1994 ---------- ---------- Regulatory assets: Postretirement benefit costs (Note 8) $ 45,054 $ 47,832 Deferred environmental costs 41,457 41,942 Income tax-related amounts due from customers (Note 2) 3,357 3,711 Pipeline transition costs 261 7,411 Other 14,016 16,000 ---------- ---------- $ 104,145 $ 116,896 ========== ========== Regulatory liabilities: Income tax-related amounts due to customers (Note 2) $ 22,891 $ 24,098 Pension costs (Note 8) 19,482 22,333 Other 22,523 14,469 ---------- ---------- $ 64,896 $ 60,900 ========== ==========
Consistent with PSCW regulation, Wisconsin Gas has capitalized computer systems development costs and amortizes the costs to expense over a five- to ten- year period. Wisconsin Gas is precluded from discontinuing service to residential customers within its service area during a certain portion of 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. See Notes 6 and 8 for discussion of additional deferred charges.
e. Income Taxes
Wisconsin Gas as a wholly owned subsidiary of WICOR, Inc. is included in WICOR's consolidated Federal income tax return. WICOR allocates Federal current tax expense or credits to Wisconsin Gas based on its respective separate tax computation. Investment tax credits were recorded as a deferred credit on the balance sheet and are being amortized to income over the applicable service lives of the related properties in accordance with regulatory treatment.
f. Cash Flows
Wisconsin Gas considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. Due to the short maturity of these instruments, market value approximates cost.
For purposes of the Consolidated Statements of Cash Flow, income taxes paid (net of refunds) and interest paid were as follows for each of the years ended December 31, 1995, 1994 and 1993:
(Thousands of Dollars) 1995 1994 1993 - ----------------------- ---------- ---------- ---------- Income taxes paid $ 19,928 $ 30,059 $ 8,188 Interest paid $ 13,636 $ 13,374 $ 15,043
g. Derivative Financial Instruments
Wisconsin Gas has a limited involvement with derivative financial instruments and does not use them for trading or speculative purposes. The Company purchased options in 1995 to hedge a small portion of gas costs incurred for resale. The cost of options and any gains or losses realized do not affect income since they are accounted for under the purchased gas adjustment clause.
h. Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those results.
i. Reclassifications
Certain prior year financial statement amounts have been reclassified to conform to their current year presentation.
2. INCOME TAXES
The current and deferred components of income tax expense for each of the years ended December 31, are as follows:
(Thousands of Dollars) 1995 1994 1993 - ------------------------ ---------- ---------- ---------- Current Federal $ 23,474 $ 19,245 $ 15,082 State 5,808 4,771 3,761 ---------- ---------- ---------- Total Current 29,282 24,016 18,843 ---------- ---------- ---------- Deferred Federal (10,101) (10,789) (6,432) State (2,084) (2,234) (1,131) ---------- ---------- ---------- Total Deferred (12,185) (13,023) (7,563) ---------- ---------- ---------- Total Provision $ 17,097 $ 10,993 $ 11,280 ========== ========== ==========
The provision for income taxes differs from the amount of income tax determined by applying the applicable U.S. statutory federal income tax rate to pre-tax income as a result of the following differences:
The components of deferred income tax assets and liabilities at December 31, 1995 and 1994 are as follows:
(Thousands of Dollars) 1995 1994 - -------------------------- ---------- ---------- Deferred Income Tax Assets Recoverable gas costs $ 13,416 $ 7,258 Inventory 2,614 3,755 Deferred compensation 1,667 1,335 Other (916) 835 ---------- ---------- $ 16,781 $ 13,183 ========== ========== Deferred Income Tax Liabilities Property related $ 37,715 $ 34,643 Systems development costs 11,586 13,675 Pension benefits 3,070 1,276 Gas transition costs 105 2,974 Investment tax credit (5,109) (5,416) Environmental (4,725) (1,669) Postretirement benefits (3,177) (3,122) Deferred compensation (2,119) (2,160) Other (692) (179) ---------- ---------- $ 36,654 $ 40,022 ========== ==========
3. SHORT-TERM BORROWINGS
As of December 31, 1995 and 1994, Wisconsin Gas had total unsecured lines of credit available from banks of $120.0 million and $135.0 million, respectively. At December 31, 1995, $57.5 million of commercial paper was outstanding at a weighted average interest rate of 5.9%. At December 31, 1994, $85.0 million of commercial paper was outstanding at a weighted average interest rate of 5.9%. 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.
4. 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. In September 1993, Wisconsin Gas issued $45 million of 6.6% Notes due in 2013, the proceeds of which were used to refinance $45 million of first mortgage bonds. Substantially all gas distribution property is subject to a first mortgage lien. Maturities and sinking fund requirements during the succeeding five years on all long-term debt total $4.0 million, $2.0 million, $42.0 million, $2.0 million and zero in 1996, 1997, 1998, 1999 and 2000, respectively.
5. RESTRICTIONS
A November 1993 rate order issued by the PSCW sets an equity range of 43% to 50% for the utility 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, $26.8 million of Wisconsin Gas' net assets at December 31, 1995, 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 dilute Wisconsin Gas' total equity below 48.43% of its total capitalization. Wisconsin Gas paid $4 million in dividends in November 1995 and expects to pay $19 million in dividends for the 12 months ending October, 1996.
6. 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 $1,010 million, with annual required payments of $133 million in 1996, $132 million in 1997, $125 million in 1998, $123 million in 1999 and $123 million in 2000. Wisconsin Gas' total payments of fixed charges under all agreements were $130.5 million in 1995, $130.4 million in 1994 and $133.9 million in 1993. The purchased gas adjustment provisions of Wisconsin Gas' rate schedules permit the recovery of gas costs from its customers. In 1992, the FERC issued Order No. 636 that, among other things, mandated the unbundling of interstate pipeline sales service and established certain open access transportation regulations that became effective beginning in the 1993-94 heating season. 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 $14.5 million at December 31, 1995 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. The FERC has allowed ANR Pipeline Company to recover capacity and "above market" supply costs associated with quantities purchased from Dakota Gasification Company ("Dakota") under a long-term contract expiring in the year 2009. Consistent with guidelines set forth in Order No. 636, ANR has allocated 90% of Dakota costs to firm transportation service recoverable through a reservation rate surcharge and 10% to interruptible service. ANR and other pipelines reached a settlement with Dakota governing the price of Dakota gas. A FERC administrative law judge ("ALJ") has overturned the settlement and ordered refunds of amounts collected from pipeline customers. The ALJ's decision is subject to review by FERC. Pending a final resolution, ANR currently recovers the difference between costs paid to Dakota and the current market price. Based on Wisconsin Gas contracted quantities with ANR, Wisconsin Gas is currently paying approximately $500,000 per month of Dakota costs. This amount varies month-to-month and across years based on the spread between ANR contract terms with Dakota and the market indices for pricing spot gas. Transition costs billed to Wisconsin Gas are being recovered from customers under the purchased gas provisions within its rate schedules. Assuming no drastic changes in the market for natural gas, Wisconsin Gas does not expect transition costs to significantly affect the total cost of gas to its customers because (1) Wisconsin Gas will purchase its wellhead gas supplies based upon market prices that should be below the cost of gas previously embedded in the bundled pipeline sales service and (2) many elements of transition costs were previously embedded in the rates for the pipelines' bundled sales service. The unbundling of pipeline sales service requires Wisconsin Gas to contract directly and separately for wellhead gas supply and firm transportation services. As a result of FERC Order No. 636, Wisconsin Gas has contracted directly for underground storage since 1993.
b. Capital Expenditures Certain commitments have been made in connection with 1996 capital expenditures. Wisconsin Gas capital expenditures for 1996 are estimated at $48 million.
c. Environmental Matters Wisconsin Gas has identified two previously owned sites on which it operated manufactured gas plants that are of environmental concern. Such plants ceased operations prior to the mid-1950's. Wisconsin Gas has engaged an environmental consultant to help determine the nature and extent of the contamination at these sites. Based on the test results obtained and the possible remediation alternatives available, the Company has estimated that cleanup costs could range from $22 million to $75 million. As of December 31, 1995, the Company has accrued $36.4 million for future cleanup costs. These estimates are based on current undiscounted costs. It should also be noted that the numerous assumptions such as the type and extent of contamination, available remediation techniques, and regulatory requirements which are used in developing these estimates are subject to change as new information becomes available. Any such changes in assumptions could have a significant impact on the potential liability. Due to anticipated regulatory treatment, as discussed below, changes in the recorded liability do not immediately impact net income. The Wisconsin Department of Natural Resources (WDNR) issued a Probable Responsible Party letter to Wisconsin Gas for these two sites in September 1994. Following receipt of this letter, Wisconsin Gas and WDNR held an initial meeting to discuss the sites. At the meeting it was agreed that Wisconsin Gas would prepare a remedial action options report from which it will select specific remedial actions for recommendation to the WDNR. During 1995, the Company gathered additional environmental data regarding these two sites, held extensive discussions concerning remedial options with current land owners and solicited information from environmental consulting and remediation firms on technology and approaches that would best suite the sites. These efforts were directed toward preparing a remedial action options report and recommendations for presentation to the WDNR during 1996. Once such a plan is approved, initial remediation work will begin. Expenditures over the next three years are expected to total approximately $20.0 million. Although most of the work and the cost are expected to be incurred in the first few years of the plan, monitoring of sites and other necessary actions may be undertaken for up to 30 years.
In March 1994, Wisconsin Gas commenced suit against nine insurance carriers seeking a declaratory judgment regarding insurance coverage for the two sites. Settlements were reached with each of the carriers during 1994. Additional insurance recoveries are being pursued. Under recent PSCW rate orders, the Company expects full recovery of incurred remediation costs, less amounts recovered from insurance carriers. If the amount recovered from the insurance carriers is insufficient to remediate both sites, expenditures not recovered will be allowed full recovery (other than for carrying costs) in rates based upon recent PSCW orders. Accordingly, the accrual for future remediation costs has been deferred as a regulatory asset. Accordingly, a regulatory asset has been recorded for the accrued cost. Certain related investigation costs incurred to date are currently being recovered in utility rates. However, any incurred costs not yet recovered in rates are not allowed by the PSCW to earn a return. As of December 31, 1995, $4.8 million of such costs had been incurred.
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 operation.
7. COMMON STOCK AND OTHER PAID-IN CAPITAL
During 1994 and 1993, WICOR invested in Wisconsin Gas, $5 million and $12 million, respectively. No amounts were invested by WICOR in 1995.
8. BENEFIT PLANS
a. Pension Plans Wisconsin Gas has non-contributory pension plans which cover substantially all its 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 included in the utility cost of service 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 following table sets forth the funded status of pension plans at December 31, 1995 and 1994. 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.
The weighted average discount rate assumptions used in determining the actuarial present value of the projected benefit obligation were 7.5%, 8.25% and 7.5% for 1995, 1994 and 1993, respectively. The expected long-term rate of return on assets was 8.5%, 8.5% and 8.0% for 1995, 1994 and 1993, respectively. The expected long-term rate of compensation growth was 5.0%, 5.5% and 6.0% for 1995, 1994 and 1993, respectively. Net pension costs for each of the years ended December 31, include the following (income) expense:
(Thousands of Dollars) 1995 1994 1993 - -------------------------- ---------- ---------- ---------- Service costs $ 3,529 $ 4,265 $ 4,872 Interest costs on projected benefit obligations 9,305 8,860 9,023 Actual (gain) loss on plan assets (21,057) 1,880 (13,474) Net amortization/deferral 7,232 (15,195) (1,424) Gain on early retirement incentive - (268) - Amortization of regulatory liability (2,851) (475) - ---------- ---------- ---------- Net pension income $ (3,842) $ (933) $ (1,003) ========== ========== ==========
b. Postretirement Health Care and Life Insurance In addition to providing pension benefits, Wisconsin Gas 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. Net postretirement health care and life insurance costs for each of the years ended December 31, consisted of the following components:
(Thousands of Dollars) 1995 1994 1993 - ---------------------- ---------- ---------- ---------- Service cost $ 1,847 $ 2,492 $ 2,575 Interest cost on projected benefit obligation 5,336 5,665 5,396 Actual (gain) loss on plan assets (6,185) 147 (1,414) Amortize regulatory asset 2,778 2,778 2,651 Net amortization/deferral 2,477 (2,628) - Loss on early retirement incentive - 3,650 - ---------- ---------- ---------- Net postretirement benefit cost $ 6,253 $ 12,104 $ 9,208 ========== ========== ==========
The 1994 postretirement benefit cost was increased due to the early retirement of 131 employees under a voluntary early retirement incentive plan for employees age 55 and over.
The following table sets forth the plans' funded status, reconciled with amounts recognized in the Company's Statement of Financial Position at December 31, 1995 and 1994, respectively.
Accumulated benefit obligation (Thousands of Dollars) 1995 1994 - ------------------------------------- ---------- ---------- Retirees $ (38,966) $ (40,510) Active employees (37,633) (26,716) ---------- ---------- Accumulated benefit obligation (76,599) (67,226) Plan assets at fair value 39,417 30,666 ---------- ---------- Accumulated benefit obligation in excess of plan assets (37,182) (36,560) Unrecognized prior service costs (15,915) (16,347) Unrecognized actuarial (gain) loss 129 (2,717) ---------- ---------- Accrued postretirement benefit $ (52,968) $ (55,624) ========== ==========
The postretirement benefit cost components for 1995 were calculated assuming health care cost trend rates beginning at 11% in 1995 and decreasing to 6% in 23 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 APBO as of December 31, 1995 by $12.4 million and the aggregate of the service and interest cost components of postretirement expense by $1.7 million. The assumed discount rate used in determining the actuarial present value of the accumulated postretirement benefit obligation was 7.5%, 8.25% and 7.50% in 1995, 1994 and 1993, respectively. Plan assets are primarily invested in equities and fixed income securities.
c. Retirement Savings Plans Wisconsin Gas maintains various employee savings plans, which provide employees a mechanism to contribute amounts up to 16% of their compensation for the year. Company matching contributions may be made for up to 5% of eligible compensation including 1% for the Employee Stock Ownership Plan (ESOP). See Note 8.d. Total contributions were valued at $1.2 million in 1995, $1.3 million in 1994 and $1.3 million in 1993.
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, 3-year adjustable rate loan with a 6.44% interest rate at December 31, 1995, guaranteed by WICOR, to purchase 431,266 shares of original issue WICOR common stock. The ESOP extended the adjustable rate loan, with similar terms, until March 29, 1996. WICOR expects to refinance the adjustable rate loan in the first quarter of 1996. Because WICOR has guaranteed the loan, the unpaid balance ($5.3 million) is shown as long-term debt with a like amount of unearned compensation being recorded as a reduction of common equity on WICOR's balance sheet. The ESOP trustee is repaying the $10 million loan with dividends on shares of WICOR common stock in the ESOP and with Wisconsin Gas contributions to the ESOP.
e. Postemployment Benefit Plans Effective January 1, 1994 the Company adopted SFAS No. 112, "Employers' Accounting for Postemployment Benefits," which requires accrual for all other postemployment benefits. Total postemployment benefit expense was $0.6 million in 1995 and 1994, respectively, including a one-time cumulative adjustment in 1994. The incremental costs of adopting this statement are insignificant on an ongoing basis.
9. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash and cash equivalents, accounts receivable and short-term borrowings approximates fair value due the short-term maturities of these instruments.
The fair value of Wisconsin Gas' long-term debt is estimated based on the quoted market prices of U.S. Treasury issues having a similar term to maturity, adjusted for the Company's bond rating and the present value of future cash flows. Because Wisconsin Gas operates in a regulated environment, shareholders would probably not be affected by realization of gains or losses on extinguishment of its outstanding fixed-rate debt. Realized gains would be refunded to and losses would be recovered from customers through gas rates. The estimated fair value of Wisconsin Gas' long-term debt at December 31, is as follows:
10. QUARTERLY FINANCIAL DATA (Unaudited)
Because seasonal factors significantly affect Wisconsin Gas operations, the following data is not comparable between quarters:
(Thousands of dollars) First Second Third Fourth - ----------------------- -------- --------- --------- --------
Operating Revenues $192,484 $ 93,985 $ 70,959 $161,970 Operating Income (Loss) $ 38,572 $ 2,226 $ (8,492) $ 27,356 Net Income (Loss) $ 21,532 $ (570) $ (7,332) $ 14,447
Operating Revenues $242,148 $ 99,349 $ 76,675 $138,415 Operating Income (Loss) $ 43,331 $ (3,680) $(13,172) $ 17,885 Net Income (Loss) $ 24,878 $ (4,292) $(10,485) $ 8,795 /TABLE
EXHIBIT INDEX
3.1 Wisconsin Gas Company Restated Articles of Incorporation, as amended (incorporated by reference to Exhibit 3.1 to the Company's Form 10-K Annual Report for 1988).
3.2 Amendment to Wisconsin Gas Company By-laws, effective February 28, 1995 (incorporated by reference to Exhibit 3.2 to the Company's Form 10-K Annual Report for 1994).
3.3 Wisconsin Gas Company 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 the 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 the 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 the 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).
4.5 Officers' Certificate, dated as of September 15, 1993, setting forth the terms of the Company's 6.60% debentures due 2013 (incorporated by reference to Exhibit 4.1 to the Company's Form 8-K Current Report for September, 1993).
4.6 Officers' Certificate, dated as of November 7, 1995, setting forth the terms of the Company's 6-3/8% Notes due 2005 (incorporated by reference to the Company's Form 8-K Current Report dated November 7, 1995.
4.7 Revolving Credit and Term Loan Agreement dated as of March 29, 1993, among Wisconsin Gas Company and the Bank of New York, Citibank, N.A., Firstar Bank of Milwaukee, N. A. Harris Trust & Savings Bank, M&I Marshall & Ilsley Bank and Citibank, N.A., as Agent (incorporated by reference to Exhibit 4.2 to the Company's Quarterly Report on Form 10-Q dated as of August 9, 1993).
4.8 Extension of Revolving Credit and Term Loan Agreement dated as of March 29, 1994, among Wisconsin Gas Company and Citibank, N.A., Firstar Bank Milwaukee, Harris Trust and Savings Bank, M&I Marshall & Ilsley Bank and Citibank, N.A., as Agent (incorporated by reference to Exhibit 4.9 to the Company's Form 10-K Annual Report of 1994).
4.9 Loan Agreement dated as of November 4, 1991, by and among M&I Marshall & Ilsley Bank, Wisconsin Gas Company Employee's Savings Plans Trust and WICOR, Inc. (incorporated by reference to Exhibit 4.16 to the Company's Form 10-K Annual Report for 1991).
4.10* Loan Agreement Amendment effective December 21, 1995, by and among Wisconsin Gas Company Employees' Savings Plan Trust, WICOR, Inc., and M&I Marshall and Ilsley Bank.
10.1 Service Agreement dated as of June 1, 1994, among WICOR, Inc., Wisconsin Gas Company, WEXCO of Delaware, Inc., Sta-Rite Industries, Inc. and SHURflo Pump Manufacturing Co.
10.2# WICOR, Inc. 1987 Stock Option Plan, as amended (incorporated by reference to Exhibit 4.1 to the WICOR, Inc. Form S-8 Registration Statement No. 33-67134).
10.3# Forms 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 Form 10-K Annual Report for 1991).
10.4# WICOR, Inc. 1992 Director Stock Option Plan (incorporated by reference to Exhibit 4.1 to WICOR, Inc.'s Form S-8 Registration No. 33-67132).
10.5# Form of nonstatutory stock agreement used in conjunction with the WICOR, Inc. 1992 Director Stock Option Plan (incorporated by reference to Exhibit 4.2 to WICOR, Inc.'s Form S-8 Registration Statement No. 37-67132).
10.6# WICOR, Inc. 1994 Long-Term Performance Plan (incorporated by reference to Exhibit 4.1 to the WICOR, Inc. Form S-8 Registration Statement No. 33-55755).
10.7# Form of nonstatutory stock option agreement used in connection with the WICOR, Inc. 1994 Long-Term Performance Plan (incorporated by reference to Exhibit 4.2 to the WICOR, Inc. Form S-8 Registration Statement No. 33-55755).
10.8# Form of restricted stock agreement used in connection with the WICOR, Inc. 1994 Long-Term Performance Plan (incorporated by reference to Exhibit 4.3 to the WICOR, Inc. Form S-8 Registration Statement No. 33-55755).
10.9# Wisconsin Gas Company Principal Officers' Supplemental Retirement Income Program (incorporated by reference to Exhibit 10.6 to the Company's Form 10-K Annual Report for 1993).
10.10#* Wisconsin Gas Company 1996 Officers' Incentive Compensation Plan.
10.11# Wisconsin Gas Company Group Travel Accident Plan (incorporated by reference to Exhibit 10.23 to the Company's Form 10-K Annual Report for 1992).
10.12# Form of Deferred Compensation Agreement between Wisconsin Gas Company and certain of its officers (incorporated by reference to Exhibit 10.25 to the Company's Form 10-K Annual Report for 1991).
10.13# WICOR, Inc. Retirement Plan for Directors, as amended (incorporated by reference to Exhibit 10.25 to the Company's Form 10-K Annual Report for 1992).
13* "Financial Review" portions of WICOR, Inc. 1995 Annual Report to Shareholders.
27* Financial Data Schedule. (EDGAR version only)
* Indicates document filed herewith
# Indicates a plan under which compensation is paid or payable to directors or executive officers of the Company