1
MANAGEMENT'S DISCUSSION AND ANALYSIS
Forward-Looking Statements
- --------------------------
Certain matters discussed in this report are "forward-looking statements"
intended to qualify for the safe harbor from liability established by the
Private Securities Litigation Reform Act of 1995. These forward-looking
statements generally can be identified as such because they include words
such as the Company "believes," "anticipates," "expects," or words of
similar import. Similarly, statements that describe the Company's future
plans, objectives or goals also are considered forward-looking. Such
statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from current expectations. These
factors include but are not limited to the risks and uncertainties listed
below. All of these factors are difficult to predict and generally beyond
management's control.
* the impact of warmer- or colder-than-normal weather on the
energy business
* the impact of cool or wet weather on the pump
manufacturing markets
* economic conditions, including the availability of individual
discretionary income and changes in interest rates and foreign
currency valuations
* changes in natural gas prices and supply availability
* increased competition in deregulated energy markets
* the pace and extent of energy industry deregulation
* regulatory, government and court decisions
* increases in costs to clean up environmental contamination
* the Company's ability to increase prices
* market demand for the Company's products and services
* unanticipated expenses or outcomes associated with year 2000
date conversion
General Overview
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WICOR's 1998 financial results fell short of 1997's record performance as
net earnings decreased by 8% to $45.5 million. Diluted earnings per share
in 1998 decreased 9% to $1.21 compared to a record $1.33 per share in 1997.
Continued strength in and contributions from the Manufacturing Group
partially offset the impact of extremely unfavorable weather on Energy
Group earnings.
WICOR's 1997 financial results exceeded 1996's record performance as net
income rose by 6% to $49.5 million. Diluted earnings per share in 1997 rose
5% to $1.33 compared with 1996, as the Company's manufacturing business
posted significantly improved results.
2
Results of Operations
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Energy Group - 1998 Compared with 1997
- --------------------------------------
The Energy Group's primary business is the distribution of natural gas
through Wisconsin Gas Company (Wisconsin Gas), the oldest and largest
natural gas distribution utility in Wisconsin, which represented 89% of
Energy Group revenues in 1998. The Energy Group also includes WICOR Energy
Services (WESCO), an energy marketer, and FieldTech, a utility services
company.
Margin, defined as revenues less cost of gas sold, is a better comparative
performance indicator than revenues because the mix of utility volumes
between sales and transportation service affects revenues but not margin.
In addition, changes in the cost of gas sold to utility customers are
flowed through to revenue under a gas adjustment clause.
Energy Group net earnings declined by $7.8 million, or 26%, in 1998 as
compared with 1997. During 1998, heating degree days were 17% lower than
1997 and 16% lower than the 20-year average (as published by the United
States Weather Bureau). This decline in heating degree days negatively
impacted Wisconsin Gas margins from heating customers. The lower gas
margins were driven by unseasonably warm weather in the first quarter,
combined with extremely mild weather in November and early December. Net
earnings were positively affected by a gain from a weather insurance
agreement, revenues derived from the gas cost incentive mechanism (GCIM)
and gains realized on the sale of non-utility land.
3
The following tables set forth financial data for the Energy Group and
volume data for Wisconsin Gas for each of the years ended December 31.
Energy Group
- ------------
MILLIONS OF DOLLARS 1998 1997 1996
-------- -------- --------
Revenues $ 459.0 $ 573.8 $ 588.3
Cost of gas sold 295.6 394.1 393.7
-------- -------- --------
Sales margin 163.4 179.7 194.6
Gas transportation margin 22.5 22.5 14.4
-------- -------- --------
Gross margin 185.9 202.2 209.0
Operation and maintenance 100.1 101.8 102.3
Depreciation and amortization 33.7 31.8 32.9
Taxes, other than income taxes 9.0 9.6 9.3
-------- -------- --------
Operating income 43.1 59.0 64.5
Interest expense 12.5 12.3 12.9
Other (income) expenses, net (3.6) (0.6) (0.7)
-------- -------- --------
Income before income taxes 34.2 47.3 52.3
Income taxes 12.5 17.8 20.2
-------- -------- --------
Net earnings $ 21.7 $ 29.5 $ 32.1
======== ======== ========
Wisconsin Gas Company
MILLIONS OF THERMS 1998 1997 1996
-------- -------- --------
Sales volumes
Firm 649.2 790.8 883.3
Interruptible 36.5 72.8 196.2
Transport volumes 460.2 428.8 275.8
-------- -------- --------
Total throughput 1,145.9 1,292.4 1,355.3
======== ======== ========
Heating degree days 5,865 7,094 7,458
======== ======== ========
4
The decrease in firm sales volumes in 1998 was caused principally by the
extremely mild heating season, lower average use per customer and firm
customers switching from sales to transportation service. Transportation
volumes increased mainly because more customers purchased gas from sources
other than Wisconsin Gas and transported volumes through the Wisconsin Gas
distribution system. Historically, the movement to transportation from gas
sales has had no impact on margin. Effective November 1, 1997, a slightly
lower margin rate was put into effect for transportation-only customers.
The future impact of this change on total Company margin is expected to be
immaterial. During 1998, Wisconsin Gas realized $3.8 million of margin
under a gas cost incentive mechanism (GCIM). In August 1998, Wisconsin Gas
raised its rates $7.5 million on an annual basis. This rate increase is
expected to offset increased operating expenses.
Non-regulated energy operating revenues in 1998 decreased to $52.9 million
from $59.5 million in 1997. This decrease in non-regulated energy revenues
consisted largely of decreased gas sales volumes and lower prices. The
WESCO gas supply strategy is to match purchase commitments with customer
requirements so that the Company is not exposed to significant commodity
price risk.
Total operating and maintenance expenses of $100.1 million for 1998 were
$1.7 million lower than the prior year. The decrease resulted primarily
from lower labor and benefit expenses and weather related spending
reductions at Wisconsin Gas.
Depreciation and amortization expense for 1998 increased by $1.9 million,
or 6%, compared with 1997, due to additions to depreciable plant balances.
Depreciation expense in 1999 is expected to increase due to planned capital
investments.
Interest expense in 1998 increased $0.2 million compared to 1997. The
increase reflects slightly higher average borrowing levels offset partially
by lower interest rates.
Other income, net of expenses, increased by $3.0 million in 1998 compared
to 1997. Other income was positively impacted by a $1.2 million gain
relating to a weather insurance agreement and $1.2 million in gains
realized on the sale of non-utility property.
Income tax expense decreased $5.3 million in 1998 compared to 1997,
reflecting lower pre-tax income. The effective income tax rate remained
relatively unchanged between 1998 and 1997.
Energy Group - 1997 Compared with 1996
- --------------------------------------
Energy Group net earnings decreased by $2.6 million, or 8%, in 1997 as
compared with 1996. This decrease was due primarily to reduced sales
margins resulting from warmer weather and voluntary rate reductions. Lower
operating expenses partially offset the decrease in sales margin.
5
Total Energy Group margin decreased by 3% in 1997 primarily as a result of
a 10% decrease in firm sales volumes and a $3.0 million voluntary annual
rate reduction effective November 1996, offset in part by a decrease in
operating expenses. Utility margin rates had been reduced an aggregate of
$9.0 million as a result of a November 1994 rate order of the Public
Service Commission of Wisconsin (PSCW) and through voluntary annualized
rate reductions of $1.5 million, $3.0 million and $4.5 million in 1997,
1996 and 1995, respectively. The weather in 1997 was 1% colder than the
20-year average and 5% warmer than 1996.
Transportation volumes in 1997 increased mainly because more customers
purchased gas from sources other than Wisconsin Gas and transported that
volume through the Wisconsin Gas distribution system. Historically, the
movement to transportation from gas sales has had no impact on margin.
Non-regulated energy operating revenues in 1997 increased by $30.1 million,
or 102%, to $59.5 million. This increase in non-regulated energy revenues
consisted largely of increased gas sales at WESCO primarily as a result of
customer growth.
Total operating and maintenance expenses of $101.8 million for 1997
decreased $0.5 million compared with the prior year. The decrease resulted
primarily from lower labor and benefit expenses, which included a reduction
in post-retirement benefit expenses reflecting improved health care cost
experience and the impact of a one-time $3.0 million amortization of the
uncollectible accounts receivable regulatory asset approved by the PSCW in
the fourth quarter of 1996. The decrease was partially offset by higher
costs associated with the increased operating activities of FieldTech and
increased levels of outside services.
Depreciation expense for 1997 decreased by $1.1 million, or 3%, compared
with 1996. This decrease was due to the second year impact of the
depreciation rates approved by the PSCW, the effect of which was partially
offset by additions to property, plant and equipment.
Interest expense in 1997 decreased $0.6 million, or 5%, compared with 1996.
This decrease resulted from lower average borrowing levels and slightly
lower interest rates.
Income tax expense decreased $2.4 million in 1997 compared to 1996,
reflecting lower pre-tax income. The effective income tax rate remained
relatively unchanged between 1997 and 1996.
6
Manufacturing Group - 1998 Compared with 1997
- ---------------------------------------------
The Manufacturing Group net sales increased 9% to a record $462.7 million
during 1998, outpacing sales of $424.8 million in 1997. In addition, net
earnings increased 18% to a record $23.8 million during the year.
Financial data regarding the Manufacturing Group is set forth in the table
below.
MILLIONS OF DOLLARS 1998 1997 1996
-------- -------- --------
Revenues $ 462.7 $ 424.8 $ 409.9
Cost of sales 329.2 307.2 297.1
-------- -------- --------
Gross profit 133.5 117.6 112.8
Operating expenses 92.0 82.6 86.6
Operating income 41.5 35.0 26.2
Interest expense 4.4 5.1 5.8
Other (income) expenses, net (0.3) (0.7) (0.7)
-------- -------- --------
Income before income taxes 37.4 30.6 21.1
Income taxes 13.6 10.5 6.5
-------- -------- --------
Net earnings $ 23.8 $ 20.1 $ 14.6
======== ======== ========
Domestic manufacturing sales in 1998 increased by 15% to $323.2 million as
compared with 1997. Overall shipments within the water systems, pool/spa,
filtration, industrial and the food and beverage markets in North America
were up from last year due mainly to customer growth and new product
introductions.
International sales of $139.5 million decreased by 3% compared to 1997.
International sales were negatively impacted by currency translation
related to the strengthening U.S. dollar and continued weakness in the
Asian economy. International sales accounted for 30% of total manufacturing
net sales in 1998.
Gross profit margins improved to 29% in 1998, as compared to 28% in the
previous year, due primarily to improved manufacturing productivity.
Operating expenses, as a percentage of sales, increased slightly compared
to 1997. Operating expenses in total increased by $9.4 million, or 11%, due
in part to the impact of higher support spending for acquisitions,
introductions of new products and customer development.
Interest expense in 1998 decreased $0.7 million, or 14%, compared to 1997.
The decrease reflects lower borrowing levels to fund working capital
requirements and lower interest rates.
Income tax expense increased $3.1 million in 1998 compared to 1997,
reflecting higher pre-tax income. The effective income tax rate remained
relatively unchanged between 1998 and 1997.
7
Manufacturing Group - 1997 Compared with 1996
- ---------------------------------------------
Net sales for 1997 rose 4% to a record $424.8 million as compared with
sales of $409.9 million in 1996. Net income for 1997 increased 38% to a
record $20.1 million compared to the prior year. Net income in 1996
includes one-time charges totaling $1.2 million relating to the settlement
of a product liability lawsuit and the consolidation of two Wisconsin
manufacturing plants.
Domestic manufacturing sales in 1997 increased by 4% to $281.0 million as
compared with 1996. Domestic shipments for beverage, agricultural spraying
and pool/spa markets were up from the prior year. International sales of
$143.8 million increased 2% compared to 1996. The increase in international
sales was negatively impacted by currency translation related to the
strengthening U.S. dollar and the weakening of the Korean economy.
International sales accounted for 34% of total manufacturing net sales in
1997 and 1996.
In 1997, manufacturing operating income was $35.0 million compared with
$26.2 million in 1996. The increase in 1997 operating income is
attributable to increased sales, plant consolidations and cost-saving
programs, as well as continuing productivity improvements.
Operating expenses decreased by 5% in 1997 compared to the prior year due
to cost reduction programs and improved performance of the Australian
operations. As a percentage of sales, 1997 operating expenses were 19% of
sales compared to 21% in 1996.
The Company initiated efforts to reduce costs and improve productivity and
asset utilization by consolidating certain of its manufacturing operations.
These activities resulted in the 1997 closing of a plant located in
Waterford, Wisconsin, and the 1996 closing of a plant located in Detroit,
Michigan. As a result of these plant closings, the Company recorded an
after-tax charge of $0.7 million in 1996.
Interest expense in 1997 decreased $0.7 million, or 12%, compared to last
year. This decrease resulted from lower average borrowing levels and
slightly lower interest rates.
Income tax expense increased by $4.0 million in 1997, or 62%, compared to
1996 reflecting increased pre-tax income and a higher effective income tax
rate.
8
New Accounting Standards
- ------------------------
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 133 (SFAS 133), "Accounting for
Derivative Instruments and Hedging Activities," effective in the first
quarter of 2000. SFAS 133 establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
balance sheet and measure those instruments at fair value. The Company is
currently evaluating the impact of the provisions of SFAS 133 on its
financial statements and does not believe that SFAS 133 will materially
increase volatility in earnings and other comprehensive income.
The Company adopted the American Institute of Certified Public Accountants
Statement of Position No. 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use," in 1998 which provides
guidance on accounting for the costs of computer software developed or
obtained for internal use. The after-tax impact of adopting this statement
on the Company's consolidated financial statements was less than $0.01 per
share.
Effects of Changing Prices
- --------------------------
In management's opinion, changes in the rate of inflation have not had a
significant effect on WICOR's income over the past three years.
Inflationary increases in recent years have been recovered through
productivity improvements and/or product price increases. The Company
continues to monitor the impact of inflation in order to minimize its
effects in future years through pricing strategies, productivity
improvements and cost reductions.
Wisconsin Gas rates are set under an alternative method of rate making (see
page 23 under "Regulatory Matters"). After reviewing the impact of the
margin rate cap and other factors, management believes that Wisconsin Gas's
productivity improvements have offset the impact of inflationary cost
increases.
Liquidity and Capital Resources
- -------------------------------
The Company has access to outside capital markets and has been able to
generate funds internally to meet its investment needs. WICOR's ability to
attract the necessary financial capital at reasonable terms is critical to
the Company's overall strategic plan. Acquisitions and investments have
been initially financed with short-term debt and later permanently funded
with various long-term debt securities or common equity, depending on
market conditions. Working capital was $109.5 million at the end of 1998
compared to $77.0 million and $83.4 million at the end of 1997 and 1996,
respectively. The Company's current ratio at December 31 was 1.4, 1.2 and
1.3 in 1998, 1997 and 1996, respectively.
9
Because of timing differences in the receipt and disbursement of cash and
the level of construction requirements, the Energy Group borrows on a
short-term basis. As customers move to purchase their own gas supplies
directly from producers or brokers, the impact of gas purchases on the cash
flow of the energy business may diminish.
The Company believes that cash provided from operating activities over the
next three years will satisfy normal ongoing cash requirements. The Company
may need external capital for financing acquisitions and scheduled debt
retirement.
Investment Activities
- ---------------------
Consolidated capital expenditures in 1998 decreased slightly to $49.3
million. Consolidated capital expenditures are expected to increase
modestly in 1999 due to water utility expenditures, and are expected to be
funded from operations. Capital expenditures of $51.6 million in 1997
remained relatively flat compared to the prior year.
In May 1998, the PSCW approved an increase in the amount the Company may
invest in nonutility businesses. The new investment limitation permits
nonutility investments to constitute up to 60% of the Company's total
capitalization. Under these new restrictions, the amount available to WICOR
for future nonutility investment at December 31, 1998 is $351.7 million.
(See Note 7 of Notes to Consolidated Financial Statements.)
Financing Activities
- --------------------
In November 1998, Wisconsin Gas used its existing lines of credit to issue
commercial paper, the proceeds of which were used to redeem, at par, $40
million of 7.5% Notes due in 1998. In January 1999, Wisconsin Gas issued
$50 million of 5.5% Notes due in 2009, to replace the commercial paper.
The Company's ratio of long-term debt to capitalization was 32% in 1998 as
compared to 28% in 1997 and 32% in 1996. The utility's embedded cost of
long-term debt was 6.9%, 7.1% and 7.0% for the years ended December 31,
1998, 1997 and 1996, respectively.
WICOR raised its common stock dividend by 2.3% in 1998 and by 2.4% in both
1997 and 1996. The current annual dividend rate is $0.88 per share. At
December 31, 1998, the Company had $136.8 million of unrestricted retained
earnings available for dividend payments to shareholders.
The Board of Directors approved a two-for-one stock split of the Company's
common stock to make the stock more accessible to the individual investor
(See Note 9 of Notes to the Consolidated Financial Statements). The stock
split was effective in May 1998.
10
The WICOR Plan, established in 1992, allows investors to purchase WICOR
common stock directly and through dividend reinvestment without paying fees
or service charges. Since February 1, 1995, share requirements for the
WICOR Plan have been met through open market purchases of WICOR common
stock.
As described in Note 7 of Notes to Consolidated Financial Statements, a
1993 PSCW rate order retained certain limitations with respect to equity
levels of and dividend payments by Wisconsin Gas. Restrictions imposed by
the PSCW are not expected to have any material effect on WICOR's ability to
meet its cash obligations.
Wisconsin Gas's ratio of pre-tax earnings to fixed charges decreased to 3.8
in 1998 from 4.5 in 1997, as a result of lower earnings, the effects of
which were offset in part by fixed charges that were 2% lower in 1998 than
in 1997.
Access to capital markets at a reasonable cost is determined in large part
by credit quality. Wisconsin Gas's strong financial position, as evidenced
by Moody's Investors Service 1997 upgrading of its long-term debt from Aa3
to Aa2, provides a high degree of flexibility in obtaining funds on
competitive terms. Standard and Poor's Corporation's current rating is AA-.
These ratings reflect the views of such organizations, and an explanation
of the significance of these ratings may be obtained from each agency. Such
ratings are not a recommendation to buy, sell or hold securities, but
rather an indication of creditworthiness.
The Company and its subsidiaries maintain lines of credit worldwide. The
Company's primary domestic line of credit is a $115 million unsecured
revolving credit facility with several banks which expires August 6, 2002.
Financial covenants under these facilities include leverage and interest
coverage ratios. In addition, the Company arranges domestic seasonal lines
of credit to support its commercial paper borrowing program. The Company
also has arranged lines of credit from foreign lenders which allow it to
borrow in the applicable local currency. These lines of credit total $36.6
million and are concentrated in Australia, Canada and Italy. The Company's
lines of credit generally provide borrowing at the bank reference rate or
better, which varies depending on the country where the funds are borrowed.
The Company was in compliance with all financial covenants at December 31,
1998. Wisconsin Gas and WICOR Industries finance working capital needs by
issuing commercial paper in the open market. Commercial paper outstanding,
on a consolidated basis, at December 31, 1998 and 1997 was $158.7 million
and $125.2 million, respectively.
The Company believes that it has adequate capacity to fund its operations
for the foreseeable future through its borrowing arrangements and
internally generated cash.
11
Regulatory Matters
- ------------------
Wisconsin Gas is subject to the jurisdiction of the PSCW as to various
phases of its operations, including rates, service and issuance of
securities. The PSCW has instituted generic proceedings to consider how its
regulation of gas distribution utilities should change to reflect the
changing competitive environment in the natural gas industry. To date, the
PSCW has made a policy decision to deregulate the sale of natural gas in
customer segments with workably competitive market choices. It has also
adopted standards for transactions between a utility and its gas marketing
affiliates. The PSCW has established working groups to study and make
recommendations on major deregulation issues. These working groups are
scheduled to complete their work at various times through the year 2000.
Presumably, the PSCW will use the work group reports as the basis for
recommendations to the state legislature. The impact of these proceedings
on Wisconsin Gas's future operations is uncertain at this time.
On November 1, 1996, with PSCW approval, Wisconsin Gas began a one-year
pilot supplier choice program for firm gas customers located in a small
geographic area of the Company's service territory. The program was
modified and extended for the 1997-98 and 1998-99 program years. The
Company has filed with the PSCW to further modify and extend the program
for the 1999-2000 program year, and expects to continue the program from
year to year until it is superseded by a generic PSCW order or state
legislative mandate. The pilot program was designed to test market
acceptance of supplier choice, the interest of third-party marketers in
serving firm markets, including residential, and Wisconsin Gas's
capabilities to administer transportation-only services. WICOR Energy
Services is one of the gas suppliers participating in the pilot program.
It is unclear how long it will take for customer choice to become available
in Wisconsin, and it is unknown what the impacts of customer choice may be
on the Company.
Wisconsin Gas rates are set within the framework of the Productivity-based
Alternative Ratemaking Mechanism (PARM), which was established in 1994 and
has been extended through October 31, 2001. Under PARM, Wisconsin Gas has
the ability to raise or lower margin rates within a specified range on a
quarterly basis. The PARM order also specifies margin rate floors for each
rate class. In 1997, 1996 and 1995, Wisconsin Gas reduced its base rates by
$1.5 million, $3.0 million and $4.5 million on an annualized basis,
respectively. Effective August 1, 1998, Wisconsin Gas increased its base
rates by $7.5 million on an annualized basis. With this increase, Wisconsin
Gas's rates recover $1.5 million per year less than the maximum amount
allowed by the PSCW's rate order. The rate increase is expected to offset
increased operating costs. The PARM has certain criteria that allow it to
be reopened at any time for significant deterioration in safety, failures
to meet conservation goals, significant changes in interest rates and
"extraordinary items." To date, none of the criteria have been triggered.
12
The PSCW approved a gas cost incentive mechanism (GCIM) which became
effective on November 1, 1997, for each of the three years ending October
31, 1998, 1999 and 2000. Under the GCIM, Wisconsin Gas's gas commodity and
capacity costs are compared to monthly benchmarks. If, at the end of each
GCIM year, such costs deviate by more than 1.5% from the benchmark cost of
gas, the utility shares such excess or reduced costs on a 50-50 basis with
customers. The sharing mechanism applies only to costs between 1.5% and 4%
above or below the benchmark. The new GCIM provides an opportunity for
Wisconsin Gas's earnings to increase or decrease as a result of gas and
capacity acquisition activities.
Wisconsin Gas complies with the provisions of Statement of Financial
Accounting Standards (SFAS No. 71) "Accounting for the Effects of Certain
Types of Regulation," which provides that rate-regulated public utilities
such as Wisconsin Gas record certain costs and credits allowed in the
ratemaking process in different periods than would be required for
unregulated businesses. In the event Wisconsin Gas determines that it no
longer meets the criteria for following SFAS 71, the accounting impact
would be an extraordinary, non-cash charge to operations of an amount that
could be material. Criteria that give rise to the discontinuance of SFAS 71
include (1) increasing competition that restricts Wisconsin Gas's ability
to establish prices to recover specific costs and (2) a significant change
in the manner in which rates are set by regulators from cost-based
regulation to another form of regulation. SFAS 71 continues to be
applicable to Wisconsin Gas in that its rates are approved by a third party
regulator and are designed to recover its cost of service. Wisconsin Gas
believes its current cost-based rates are competitive in the open market.
Pipeline companies have been allowed to pass through to local gas
distributors various costs incurred in the transition to FERC Order No.
636. The PSCW has authorized the recovery through rates of costs that have
been passed through to Wisconsin Gas. Although complete assurance cannot be
given, it is believed that any additional future transition costs will also
be recoverable from customers.
Environmental Matters
- ---------------------
Wisconsin Gas has identified two previously owned manufactured gas plant
sites where it is responsible for environmental remediation. Wisconsin Gas
started remediation at one site in the first quarter of 1998 and the work
should be completed during 1999. Wisconsin Gas is currently evaluating
potential remedial options at the second site. Wisconsin Gas currently
anticipates that the costs incurred in the remediation effort will be
recoverable from insurers or through rates and will not have a material
adverse effect on the Company's liquidity or results of operations.
The manufacturing segment has provided reserves believed sufficient to
cover its estimated costs related to contamination associated with its
manufacturing facilities.
For additional disclosure regarding environmental matters, see Note 8 of
Notes to Consolidated Financial Statements.
13
Year 2000 Date Conversion
- -------------------------
Issues relating to Year 2000 conversion are the result of computer software
programs being written using two digits rather than four to define the
applicable year. Any of the Company's software programs, computer hardware
or equipment that have date sensitive software or embedded chips may
recognize a date using "00" as the year 1900 rather than the year 2000.
This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary
inability to process transactions, send invoices, distribute natural gas,
manufacture products or engage in other normal business activities.
The Company has developed a formal plan to ensure that its significant
date-sensitive computer software and hardware systems (Information
Technology) and other equipment utilized in its various activities
(Operating Equipment) will be Year 2000 compliant and operational on a
timely basis. The plan addresses all of the Company's locations throughout
the world, and includes a review of computer applications that connect
elements of the Company's business directly to its customers and suppliers.
The plan also includes an assessment process to determine if the Company's
significant customers and suppliers will be Year 2000 compliant.
The Company's plan to resolve issues relating to Year 2000 conversion
includes four major phases - assessment, remediation, testing, and
implementation. To assist the Company in reaching Year 2000 compliance, the
Company has retained third party consultants. The Company has substantially
completed the assessment phase of its plan for all of its significant
Information Technology and Operating Equipment that it believes could be
affected by the Year 2000 conversion. Based upon its assessment, the
Company concluded that it would be necessary to reprogram and/or replace
certain of its Information Technology. The Company also determined that
certain of its Operating Equipment would also require modification to
ensure it remains operational.
For its Information Technology applications as of December 31, 1998, the
Company believes it is approximately 72% compliant on all of its
significant systems, and estimates that it will complete software
reprogramming and/or replacement in the second quarter of 1999. The Company
believes that the Operating Equipment at December 31, 1998 is approximately
64% compliant, and the Company is targeting completion during the second
quarter of 1999.
With respect to operations that involve third parties, the Company has made
inquiries of its significant customers and suppliers and, at the present
time and based on such inquiries, is not aware of Year 2000 issues facing
these third parties that would materially impact the Company's operations.
However, the Company has no means of ensuring that these customers and
suppliers (and, in turn, their customers and suppliers) will be Year 2000
compliant in a timely manner. The inability of these parties to
successfully resolve their Year 2000 issues could have a material adverse
effect on the Company.
14
Despite the efforts that the Company has undertaken, there can be no
assurances that every Year 2000 related issue will be identified and
addressed before January 1, 2000. An unexpected failure as a result of a
Year 2000 compliance issue could result in an interruption in certain
normal business activities or operations. For that reason, the Company is
currently developing contingency plans to address alternatives in the event
certain Year 2000 compliance failures occur.
Through December 31, 1998, the Company had spent approximately $3.9 million
for Year 2000 remediation. The amount of additional development and
remediation costs necessary for the Company to prepare for Year 2000 is
estimated to be approximately $0.9 million and is expected to be funded
through operating cash flow.
The estimated costs of, and timetable for, becoming Year 2000 compliant
constitute "forward looking statements" as defined in the Private
Securities Litigation Reform Act of 1995.
Annual Degree Days Bar Chart
% COLDER (WARMER) THAN 20-YEAR AVERAGE
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(16.4) 1.0 6.8 (2.8) (9.0)
International Revenues Bar Chart
$ IN MILLIONS
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
$ 139.5 $ 143.8 $ 140.9 $ 130.2 $ 114.2
WICOR Operating Income Bar Chart
$ IN MILLIONS
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
Energy $ 43.1 $ 59.0 $ 64.5 $ 58.8 $ 44.4
Manufacturing 41.5 35.0 26.2 20.3 22.2
-------- -------- -------- -------- --------
Total $ 84.6 $ 94.0 $ 90.7 $ 79.1 $ 66.6
======== ======== ======== ======== ========
WICOR Return on Average Common Equity Bar Chart
AS A PERCENTAGE
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
11.3 13.0 12.9 13.1 11.6
15
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of WICOR, Inc.:
We have audited the accompanying consolidated balance sheets and statements
of capitalization of WICOR, Inc. (a Wisconsin corporation) and subsidiaries
as of December 31, 1998 and 1997, and the related consolidated statements
of earnings, common equity and cash flows for each of the three years in
the period ended December 31, 1998. These financial statements are the
responsibility of WICOR, Inc.'s management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of WICOR, Inc. and
subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Milwaukee, Wisconsin,
January 25, 1999.
16
WICOR, INC.
CONSOLIDATED STATEMENT OF EARNINGS
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
YEARS ENDED DECEMBER 31,
1998 1997 1996
------------ ------------ ------------
Operating Revenues
Energy $ 481,489 $ 596,262 $ 602,685
Manufacturing 462,694 424,779 409,916
------------ ------------ ------------
944,183 1,021,041 1,012,601
------------ ------------ ------------
Operating Costs and Expenses
Cost of gas sold 295,601 394,101 393,681
Manufacturing cost of sales 329,248 307,160 297,053
Operations and maintenance 190,674 182,976 187,557
Depreciation and amortization 35,038 33,173 34,355
Taxes, other than income taxes 9,039 9,602 9,244
------------ ------------ ------------
859,600 927,012 921,890
------------ ------------ ------------
Operating Income 84,583 94,029 90,711
Interest expense (16,746) (17,404) (18,349)
Other income, net 3,706 1,222 1,114
------------ ------------ ------------
Income before income taxes 71,543 77,847 73,476
Income tax provision 26,048 28,324 26,705
------------ ------------ ------------
Net earnings $ 45,495 $ 49,523 $ 46,771
============ ============ ============
Per Share of Common Stock*
Basic earnings $ 1.22 $ 1.34 $ 1.27
Diluted earnings $ 1.21 $ 1.33 $ 1.27
Cash dividends paid $ 0.87 $ 0.85 $ 0.83
Average common shares outstanding 37,311 36,950 36,730
Average diluted shares outstanding 37,608 37,239 36,955
The accompanying notes are an integral part of these statements.
17
WICOR, INC.
CONSOLIDATED STATEMENT OF EARNINGS
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
QUARTERLY FINANCIAL DATA (UNAUDITED)
Because seasonal factors significantly affect the Company's operations
(particularly at Wisconsin Gas), the following data may not be comparable
between quarters:
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
QUARTERS:
------------------------------------------------
First Second Third Fourth
----------- ----------- ---------- ----------
1998
- ----
Operating revenues $ 303,327 $ 219,879 $ 172,746 $ 248,231
Operating income $ 42,985 $ 13,904 $ 797 $ 26,897
Earnings available for
common stock $ 24,963 $ 6,024 $ (1,211) $ 15,719
Basic earnings (loss) per
common share* $ 0.67 $ 0.16 $ (0.03) $ 0.42
Diluted earnings (loss)
per common share* $ 0.66 $ 0.16 $ (0.03) $ 0.42
1997
- ----
Operating revenues $ 349,065 $ 221,605 $ 173,342 $ 277,029
Operating income $ 48,879 $ 14,427 $ 612 $ 30,111
Earnings available for
common stock $ 27,908 $ 6,315 $ (2,071) $ 17,371
Basic earnings (loss) per
common share* $ 0.76 $ 0.17 $ (0.06) $ 0.47
Diluted earnings (loss)
per common share* $ 0.75 $ 0.17 $ (0.06) $ 0.46
Quarterly earnings per share may not total to the amounts reported for the
year since the computation is based on weighted average common shares
outstanding during each quarter.
*Adjusted for a two-for-one stock split in May 1998
18
WICOR, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
--------------------------
THOUSANDS OF DOLLARS 1998 1997
------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 13,383 $ 11,810
Accounts receivable, less allowance for doubtful
accounts of $12,511 and $15,364, respectively 137,321 164,243
Accrued revenues 47,483 44,842
Manufacturing inventories 86,312 83,431
Gas in storage 36,919 41,887
Deferred income taxes 17,195 21,531
Prepayments and other 15,542 16,924
------------ ------------
354,155 384,668
------------ ------------
Property, Plant and Equipment, at cost:
Energy 829,286 801,523
Manufacturing 153,381 141,610
------------ ------------
982,667 943,133
Less accumulated depreciation and amortization 535,002 497,239
------------ ------------
447,665 445,894
------------ ------------
Deferred Charges and Other:
Regulatory assets 59,319 53,910
Goodwill 67,552 65,953
Prepaid pension costs 50,011 42,753
Other 36,494 38,154
------------ ------------
213,376 200,770
------------ ------------
$ 1,015,196 $ 1,031,332
============ ============
19
WICOR, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
--------------------------
THOUSANDS OF DOLLARS 1998 1997
------------ ------------
LIABILITIES AND CAPITALIZATION
Current Liabilities:
Short-term borrowings $ 107,653 $ 118,900
Current portion of long-term debt 3,528 43,926
Accounts payable 70,000 75,034
Refundable gas costs 18,570 24,776
Accrued payroll and benefits 20,490 18,599
Accrued taxes 7,885 9,684
Other 16,526 16,757
------------ ------------
244,652 307,676
------------ ------------
Deferred Credits and Other Liabilities:
Postretirement benefit obligation 60,627 64,323
Regulatory liabilities 32,153 36,533
Deferred income taxes 49,065 43,975
Accrued environmental remediation costs 11,215 14,300
Unamortized investment tax credit 6,357 6,808
Other 19,217 18,987
------------ ------------
178,634 184,926
------------ ------------
Commitments and Contingencies (Note 8)
Capitalization (See accompanying statement):
Long-term debt 188,470 149,110
Redeemable preferred stock - -
Common equity 403,440 389,620
------------ ------------
591,910 538,730
------------ ------------
$ 1,015,196 $ 1,031,332
============ ============
The accompanying notes are an integral part of these statements.
20
WICOR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
THOUSANDS OF DOLLARS ----------------------------------
1998 1997 1996
Operations: ---------- ---------- ----------
Net earnings $ 45,495 $ 49,523 $ 46,771
Adjustments to reconcile net earnings to
net cash flow from operating activities:
Depreciation and amortization 54,531 53,740 54,871
Deferred income taxes 9,425 4,530 (1,103)
Net pension/postretirement benefit/(income) (6,955) (1,725) 3,133
Changes in:
Accounts receivable 14,292 2,046 (28,641)
Manufacturing inventories (2,881) (7,463) (3,590)
Gas in storage 4,968 (8,424) (9,512)
Other current assets 623 (464) (1,167)
Accounts payable (5,033) (25,975) 32,520
Refundable gas costs (6,206) (6,769) (2,802)
Accrued taxes (1,039) 8,561 (6,028)
Other current liabilities 2,745 (1,502) 4,225
Other noncurrent assets/liabilities (12,965) (16,754) (13,261)
---------- ---------- ----------
Cash provided by operating activities 97,000 49,324 75,416
Investment Activities: ---------- ---------- ----------
Capital expenditures (49,279) (51,572) (51,744)
Proceeds from sale of assets 1,762 3,362 1,249
Acquisitions (7,288) (2,065) 22
Other, net 301 293 285
---------- ---------- ----------
Cash used in investing activities (54,504) (49,982) (50,188)
Financing Activities: ---------- ---------- ----------
Change in short-term borrowings (14,284) 6,115 (969)
Issuance of long-term debt 52,828 27,000 10,045
Reduction of long-term debt (50,368) (11,157) (9,194)
Issuance of common stock 2,878 2,684 3,345
Dividends paid on common stock (32,461) (31,397) (30,485)
Other 484 439 434
---------- ---------- ----------
Cash used in financing activities (40,923) (6,316) (26,824)
---------- ---------- ----------
Change in Cash and Cash Equivalents 1,573 (6,974) (1,596)
Cash and cash equivalents at beginning of year 11,810 18,784 20,380
---------- ---------- ----------
Cash and Cash Equivalents at End of Year $ 13,383 $ 11,810 $ 18,784
========== ========== ==========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for:
Income taxes, net of refunds $ 17,847 $ 17,315 $ 34,669
Interest $ 16,590 $ 16,352 $ 16,824
The accompanying notes are an integral part of these statements.
21
WICOR, INC.
CONSOLIDATED STATEMENTS OF CAPITALIZATION
THOUSANDS OF DOLLARS DECEMBER 31,
----------------------
1998 1997
---------- ----------
Long-Term Debt
Wisconsin Gas:
Commercial paper (See Note 6 of Notes to the
Consolidated Financial Statements) $ 50,000 $ -
6.6% Notes due 2013 45,000 45,000
6.375% Notes due 2005 65,000 65,000
First mortgage bonds
Adjustable rate series, 7.2% and 8.1%,
respectively, due 1999 - 2,000
WICOR Industries, Inc.:
Commercial paper under multi-
year credit agreements 17,000 27,000
Securities loan agreement, 11.75% due semi-
annually through 2000 (includes unamortized
bond premium of $550 and $814, respectively) 6,486 6,750
First mortgage notes, adjustable rate, 4.6%
to 6.5%, due semi-annually through 2000 3,043 266
Industrial revenue bonds, 7.84%,
payable through 2000 295 830
Unamortized (discount), net (1,161) (1,343)
ESOP loan guarantee 2,807 3,607
---------- ----------
188,470 149,110
---------- ----------
Redeemable Preferred Stock
WICOR:
$1.00 par value; authorized 1,500,000 shares - -
Wisconsin Gas:
Without par value, cumulative;
authorized 1,500,000 shares - -
---------- ----------
- -
Common Equity: ---------- ----------
Common stock, $1.00 par value, authorized
120,000,000 shares; outstanding 37,359,000
and 18,601,000 shares, respectively 37,359 18,601
Other paid-in capital 216,821 232,702
Retained earnings 160,937 147,903
Accumulated other comprehensive income (7,905) (5,377)
Unearned comp. - ESOP and restricted stock (3,772) (4,209)
---------- ----------
403,440 389,620
---------- ----------
Total Capitalization $ 591,910 $ 538,730
========== ==========
The accompanying notes are an integral part of these statements.
22
WICOR, INC.
CONSOLIDATED STATEMENTS OF COMMON EQUITY
Unearned
Accumulated Compensation
Other Other ESOP and
Common Paid-in Retained Comprehensive Restricted
THOUSANDS OF DOLLARS Stock Capital Earnings Income Stock
--------- --------- ---------- ------------- ------------
Balance December 31, 1995 $ 18,237 $219,133 $ 113,491 $ (1,593) $ (5,595)
Net earnings - - 46,771 - -
Other comprehensive income:
Foreign currency translation - - - 1,474 -
Minimum pension liability - - - (485) -
--------- --------- ---------- ------------- ------------
Comprehensive income - - 46,771 989 -
--------- --------- ---------- ------------- ------------
Issued in connection with
employee benefit plans/other 170 4,908 - - -
Dividends on common stock - - (30,485) - -
ESOP loan payments - - - - 908
Issuance of restricted stock - - - - (1,208)
Amortization and forfeiture
of restricted stock - - - - 773
--------- --------- ---------- ------------- ------------
Balance December 31, 1996 18,407 224,041 129,777 (604) (5,122)
Net earnings - - 49,523 - -
Other comprehensive income:
Foreign currency translation - - - (4,375) -
Minimum pension liability - - - (398) -
--------- --------- ---------- ------------- ------------
Comprehensive income - - 49,523 (4,773) -
--------- --------- ---------- ------------- ------------
Issued in connection with
employee benefit plans/other 194 8,661 - - -
Dividends on common stock - - (31,397) - -
ESOP loan payments - - - - 800
Issuance of restricted stock - - - - (145)
Amortization and forfeiture of
restricted stock - - - - 258
--------- --------- ---------- ------------- ------------
Balance December 31, 1997 $ 18,601 $232,702 $ 147,903 $ (5,377) $ (4,209)
========= ========= ========== ============= ============
23
WICOR, INC.
CONSOLIDATED STATEMENTS OF COMMON EQUITY
Unearned
Accumulated Compensation
Other Other ESOP and
Common Paid-in Retained Comprehensive Restricted
THOUSANDS OF DOLLARS Stock Capital Earnings Income Stock
--------- --------- ---------- ------------- ------------
Balance December 31, 1997 $ 18,601 $232,702 $ 147,903 $ (5,377) $ (4,209)
Net earnings - - 45,495 - -
Other comprehensive income:
Foreign currency translation - - - (1,405) -
Minimum pension liability - - - (1,123) -
--------- --------- ---------- ------------- ------------
Comprehensive income - - 45,495 (2,528) -
--------- --------- ---------- ------------- ------------
Issued in connection with
employee benefit plans/other 96 2,781 - - -
Two-for-one common stock split 18,662 (18,662) - - -
Dividends on common stock - - (32,461) - -
ESOP loan payments - - - - 800
Issuance of restricted stock - - - - (884)
Amortization and forfeiture of
restricted stock - - - - 521
--------- --------- ---------- ------------- ------------
Balance December 31, 1998 $ 37,359 $216,821 $ 160,937 $ (7,905) $ (3,772)
========= ========= ========== ============= ============
The accompanying notes are an integral part of these statements.
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 Accounting Policies
- -----------------------------
A Principles of consolidation The consolidated financial statements
include the accounts of WICOR, Inc., and its wholly-owned subsidiaries:
Wisconsin Gas, WICOR Energy Services Company (WESCO), FieldTech and WICOR
Industries, Inc. (WICOR Industries), an intermediate holding company for
various manufacturing subsidiaries. Intercompany transactions and accounts
are eliminated in consolidation.
B Business The Company is a diversified holding company with two
principal business groups: energy services and pump manufacturing. Energy
services consists primarily of natural gas distribution through Wisconsin
Gas, the oldest and largest natural gas distribution utility in Wisconsin.
Wisconsin Gas is subject to regulation by the Public Service Commission of
Wisconsin (PSCW) and gives recognition to ratemaking policies substantially
in accordance with the FERC System of Accounts. At December 31, 1998,
Wisconsin Gas served approximately 529,000 customers in 524 communities.
The Energy Group accounted for 51% of the Company's 1998 operating revenues
and operating income. Through its subsidiary, WICOR Industries, the Company
engages in the manufacture and sale of pumps and processing equipment used
to pump, control, transfer, hold and filter water and other fluids. The
Company's products are used primarily in water system, pool and spa,
agriculture, RV/marine and beverage/food service applications. The Company
markets its manufactured products in over 100 countries.
C Gas distribution revenues and purchased gas costs Utility billings are
rendered on a cycle basis. Revenues include estimated amounts accrued for
service provided but not yet billed.
Wisconsin Gas's rate schedules contain provisions which permit the recovery
of actual purchased gas costs incurred. The difference between actual gas
costs incurred and costs recovered through rates is deferred as a current
asset or liability. Subject to the sharing mechanism discussed below, the
deferred balance is returned to or recovered from customers at intervals
throughout the year and any residual balance at the annual October 31
reconciliation date is subsequently refunded to or recovered from
customers.
A GCIM approved by the PSCW in October 1997 became effective on November 1,
1997, for each of the three years ending October 31, 1998, 1999 and 2000.
Under the GCIM, Wisconsin Gas's gas commodity and capacity costs are
compared to monthly benchmarks. If, at the end of each GCIM year, such
costs deviate by more than 1.5% from the benchmark cost of gas, the utility
shares such excess or reduced costs on a 50-50 basis with customers. The
sharing mechanism applies only to costs between 1.5% and 4% above or below
the benchmark. The GCIM provides an opportunity for Wisconsin Gas's
earnings to increase or decrease as a result of gas and capacity
acquisition activities. Reduced gas costs during the first year under the
GCIM have been shared between the Company and its customers.
25
D Income taxes The Company files a consolidated Federal income tax return
and allocates Federal current tax expense or credits to each domestic
subsidiary based on its respective separate tax computation.
For Wisconsin Gas, investment tax credits are amortized to income over the
applicable service lives of the related properties consistent with
regulatory treatment.
E Earnings per common share Effective December 31, 1997, SFAS 128
"Earnings per Share" requires a dual presentation of earnings per share -
basic and diluted. Basic earnings per common share has been computed by
dividing net earnings by the weighted average number of common shares
outstanding. Diluted earnings per share has been computed by dividing net
earnings by the weighted average number of common shares outstanding,
including the dilutive effects of stock options.
F Inventories
ENERGY - Substantially all gas in storage inventory is priced using the
weighted average method of accounting.
MANUFACTURING - Approximately 61% and 57% of manufacturing inventories, in
1998 and 1997, respectively, are priced using the last-in, first-out (LIFO)
method (not in excess of market), with the remaining inventories priced
using the first-in, first-out (FIFO) method. If the FIFO method had been
used exclusively, manufacturing inventories would have been $7.7 million
and $7.9 million higher at December 31, 1998 and 1997, respectively.
G Plant and depreciation Gas distribution property, plant and equipment
is stated at original cost, including overhead allocations. Upon ordinary
retirement of utility plant assets, original cost plus cost of removal, net
of salvage, is charged to accumulated depreciation, and no gain or loss is
recognized.
The depreciation of Wisconsin Gas's assets is computed using straight-line
rates over estimated useful lives and considers estimated removal costs and
salvage value. These rates have been consistently used for ratemaking
purposes. The composite rates were 4.4%, 4.3% and 4.5% for 1998, 1997 and
1996, respectively.
Depreciation of manufacturing property is calculated under the
straight-line method over the estimated useful lives of the assets (3 to 10
years for equipment and 30 years for buildings) and is primarily included
in cost of sales.
26
H Regulatory accounting Wisconsin Gas accounts for its regulated
operations in accordance with SFAS 71, "Accounting for the Effects of
Certain Types of Regulation." This statement sets forth the application of
generally accepted accounting principles to those companies whose rates are
determined by an independent third-party regulator. The economic effects of
regulation can result in regulated companies recording costs that have been
or are expected to be allowed in the ratemaking process in a period
different from the period in which the costs would be charged to expense by
an unregulated enterprise. When this occurs, costs are deferred as assets
in the balance sheet (regulatory assets) and recorded as expenses in the
periods when those same amounts are reflected in rates. Additionally,
regulators can impose liabilities upon a regulated company for amounts
previously collected from customers and for amounts that are expected to be
refunded to customers (regulatory liabilities).
The amounts recorded as regulatory assets and regulatory liabilities in the
Consolidated Balance Sheet at December 31 are as follows:
THOUSANDS OF DOLLARS 1998 1997
---------- ----------
Regulatory assets:
Postretirement benefit costs (Note 10) $ 36,720 $ 39,498
Deferred uncollectible expenses 19,960 11,056
Income tax-related amounts due from customers 2,295 2,648
Other 344 708
---------- ----------
$ 59,319 $ 53,910
========== ==========
Regulatory liabilities:
Income tax-related amounts due to customers $ 18,058 $ 19,725
Unrecognized pension income (Note 10) 10,929 13,780
Other 3,166 3,028
---------- ----------
$ 32,153 $ 36,533
========== ==========
Wisconsin Gas is precluded from discontinuing service to residential
customers within its service area during the heating season. Any
differences between doubtful account provisions based on actual experience
and provisions allowed for ratemaking purposes by the PSCW are deferred and
recovered in future rates.
I Cash flows Cash equivalents consist of highly liquid investments which
are readily convertible into cash and have maturities of three months or
less. Due to the short maturity of these instruments, market value
approximates cost.
Beginning in 1995, the Company, through an agent, purchased common stock in
the open market for shareholders who elected to reinvest their dividends in
common stock.
27
J Derivative financial instruments The Company uses derivative financial
instruments to manage commodity risks associated with the price of natural
gas and to manage foreign exchange risks. The Company's policy prohibits
the use of derivative financial instruments for trading purposes.
Wisconsin Gas has a commodity risk management program that has been
approved by the PSCW. This program allows Wisconsin Gas to utilize call and
put option contracts to reduce market risk associated with fluctuations in
the price of natural gas purchases and gas in storage. Under this program,
Wisconsin Gas has the ability to hedge up to 50% of its planned gas
deliveries for the heating season. The PSCW has also allowed Wisconsin Gas
to hedge gas purchased for storage during non-heating months. The cost of
the call and put option contracts, as well as gains or losses realized
under the contracts do not affect net income as they are recovered dollar
for dollar under the purchased gas adjustment clause. As of December 31,
1998, Wisconsin Gas had put options covering approximately 33% of the
volumes of gas in storage, and call options covering 15% of the expected
natural gas purchases for the remainder of the 1998-1999 heating season.
WESCO utilizes gas futures contracts to manage commodity price risk
associated with firm customer sales commitments. Unrealized gains or losses
on these instruments are deferred and recognized in earnings in the period
the sales occurs. As of December 31, 1998, WESCO had natural gas futures
contracts with a notional value of $6.6 million. Substantially all of the
futures contracts expire in 1999.
Certain manufacturing subsidiaries use foreign exchange futures and forward
contracts to hedge foreign exchange exposure resulting from international
purchases or sales of products. Gains and losses from open contracts are
deferred until recognized as part of the transaction. These contracts were
not material.
During 1998 and 1997, WICOR entered into weather insurance agreements to
hedge a portion of the impact weather has on Energy Group earnings. Under
the agreements, a payment will be made or received if the heating degree
days during the heating season fall outside a specific range. The payment
is limited to a maximum of $2.0 million per year. At December 31, 1998, the
fair value of the agreement entered into for the 1998-1999 heating season
was not significant. During 1998, the Company recorded income of $1.2
million in connection with the agreement entered into for the 1997-1998
heating season.
K Use of estimates The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
L Reclassifications Certain prior year financial statement amounts have
been reclassified to conform to their current year presentation.
28
Note 2 New Accounting Standards
- ----------------------------------
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 133 (SFAS 133), "Accounting for
Derivative Instruments and Hedging Activities," effective in the first
quarter of 2000. SFAS 133 establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
balance sheet and measure those instruments at fair value. The Company is
currently evaluating the impact of the provisions of SFAS 133 on its
financial statements. The Company does not believe that SFAS 133 will
materially increase volatility in earnings and other comprehensive income.
During 1998, the Company adopted Statement of Position No. 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use," which provides guidance on accounting for the costs of
computer software developed or obtained for internal use. The impact of
adopting this statement on the Company's consolidated financial statements
was immaterial.
Note 3 Mergers and Acquisitions
- ----------------------------------
During 1998, WICOR and its subsidiaries acquired a small municipal water
utility, made an additional equity investment in an Italian subsidiary and
entered into a joint venture arrangement with an existing Chinese pump
manufacturer. Total funds invested as a result of these activities amounted
to $7.3 million during 1998.
During 1997, WICOR and its subsidiaries completed four acquisitions. The
aggregate purchase price was approximately $10 million and was financed
using cash and by issuing 255,676 shares of the Company's common stock.
Three of the acquisitions were pump, fluid processing and filtration
equipment companies. The fourth acquisition was a utility meter reading and
meter installation company.
Each of the acquisitions was accounted for as a purchase and the results of
operations of the acquired companies were included in the consolidated
financial statements from their respective acquisition dates. The excess of
the purchase price over the estimated fair value of net assets acquired has
been recorded as goodwill and is being amortized over 40 years.
29
Note 4 Income Taxes
- ----------------------
The provision for income taxes differs from the amount of income tax
determined by applying the applicable U.S. statutory federal income tax
rate to pretax income as a result of the following differences:
YEARS ENDED DECEMBER 31,
----------------------------------------------------
THOUSANDS OF DOLLARS 1998 1997 1996
---------------- ---------------- ----------------
Statutory U.S. tax rates $ 25,064 35.0% $ 27,327 35.0% $ 25,717 35.0%
State income taxes, net 3,151 4.4 3,383 4.3 3,818 5.2
Other, net (2,167) (3.0) (2,386) (3.0) (2,830) (3.9)
---------------- ---------------- ----------------
Effective Tax Rates $ 26,048 36.4% $ 28,324 36.3% $ 26,705 36.3%
================ ================ ================
The current and deferred components of income tax expense (benefit) for
each of the years ended December 31 are as follows:
THOUSANDS OF DOLLARS 1998 1997 1996
---------- ---------- ----------
Current:
Federal $ 15,960 $ 19,229 $ 23,479
State 3,640 4,146 6,022
Foreign 1,432 808 752
---------- ---------- ----------
Total Current 21,032 24,183 30,253
---------- ---------- ----------
Deferred:
Federal 3,698 1,836 (2,610)
State 1,262 926 (264)
Foreign 56 1,379 (674)
---------- ---------- ----------
Total Deferred 5,016 4,141 (3,548)
---------- ---------- ----------
Total Provision $ 26,048 $ 28,324 $ 26,705
========== ========== ==========
30
The components of deferred income tax classified as current assets and
long-term liabilities at December 31 are as follows:
THOUSANDS OF DOLLARS 1998 1997
---------- ----------
Current deferred income tax assets:
Recoverable gas costs $ 7,176 $ 9,712
Deferred compensation 3,246 3,407
Inventory 2,398 2,421
Product related/warranty 1,123 1,254
Other 3,252 4,737
---------- ----------
$ 17,195 $ 21,531
========== ==========
Long-term deferred income tax liabilities:
Property related $ 49,427 $ 48,905
Systems development costs 5,178 6,993
Investment tax credit (4,205) (4,503)
Postretirement benefits (8,064) (9,217)
Deferred compensation (4,019) (4,042)
Pension benefits 14,798 11,033
Environmental (3,180) (4,819)
Other (870) (375)
---------- ----------
$ 49,065 $ 43,975
========== ==========
Note 5 Short-term Borrowings and Lines of Credit
- ---------------------------------------------------
As of December 31, 1998 and 1997, the Company had total unsecured lines of
credit available from banks of $266.6 million and $240.0 million,
respectively. These borrowing arrangements may require the maintenance of
average compensating balances, which are generally satisfied by balances
maintained for normal business operations, and may be withdrawn at any
time.
During 1997, the Company, and certain subsidiaries, renegotiated their
existing revolving credit facilities. Financial covenants under the
Company's five-year $115 million credit facilities, which expire in August,
2002, include leverage and interest coverage ratios.
31
The components of short-term borrowings at December 31 are as follows:
THOUSANDS OF DOLLARS 1998 1997
---------- ----------
Notes payable to banks
Non-U.S. subsidiaries $ 15,976 $ 20,668
Commercial paper - U.S. 91,677 98,232
---------- ----------
$ 107,653 $ 118,900
========== ==========
Weighted average interest rates on debt outstanding at end of year:
THOUSANDS OF DOLLARS 1998 1997
---------- ----------
Notes payable to banks
Non-U.S. subsidiaries 4.6% 5.8%
Commercial paper - U.S. 5.7% 5.8%
Highest month-end balance $ 107,653 $ 118,900
Average month-end balance $ 63,480 $ 79,701
Note 6 Long-term Debt
- ------------------------
In January 1999, Wisconsin Gas issued $50 million of 5.5% Unsecured Notes
due 2009. The proceeds of this offering were used in part to reduce
commercial paper issued in November 1998, in connection with the maturity
of $40 million of 7.5% Notes.
Maturities and sinking fund requirements during the succeeding five years
on all long-term debt total $3.5 million, $7.6 million, $1.2 million, $18.6
million and $0.4 million in 1999, 2000, 2001, 2002 and 2003.
Note 7 Restrictions
- ----------------------
On May 7, 1998, the PSCW approved an increase in the amount the Company
may invest in nonutility businesses. The new investment limitation permits
nonutility investments to constitute up to 60% of the Company's total
capitalization. The PSCW also found that the utility does not have to be
WICOR's predominant business. The PSCW conditioned the change on the
utility maintaining at least a single A bond rating and its continued
compliance with the customer service and safety standards included in the
PARM order. Failure to comply with these conditions could trigger a
reopening of the investment limitation. Under the new investment
limitation, the amount available for future nonutility investments at
December 31, 1998, was $351.7 million.
32
The PSCW has established a 13-month average equity ratio range of 43% to
50% for Wisconsin Gas and also requires Wisconsin Gas to request PSCW
approval prior to the payment of dividends on its common stock to the
Company if the payment would reduce its common equity (net assets) below
43% of total capitalization (including short-term debt). Under this
requirement, $41.4 million of Wisconsin Gas's net assets at December 31,
1998, plus future earnings, were available for such dividends without PSCW
approval. In addition, the PSCW must also approve any dividends in excess
of $16 million for any 12-month period beginning November 1 if such
dividends would reduce Wisconsin Gas's 13-month average equity below 48.43%
of its total capitalization. Wisconsin Gas paid $6.0 million in dividends
in November 1998 and expects to pay $25.5 million in dividends for the 12
months ending October 1999. At December 31, 1998, Wisconsin Gas's equity
ratio was 53.2%.
Combined restricted common equity of the Company's subsidiaries totaled
$266.7 million under the most restrictive provisions as of December 31,
1998; accordingly, $136.8 million of consolidated retained earnings is
available for payment of dividends.
Note 8 Commitments and Contingencies
- ---------------------------------------
A Gas supply Wisconsin Gas has agreements for firm pipeline and storage
capacity that expire at various dates through 2008. The aggregate amount of
required payments under such agreements totals approximately $505.9
million, with annual required payments of $105.5 million in 1999, $97.5
million in 2000, $95.6 million in 2001, $93.5 million in 2002 and $74.9
million in 2003. Wisconsin Gas's total payments for firm pipeline and
storage capacity prior to recovery from sales of excess capacity were
$113.9 million in 1998, $126.6 million in 1997 and $129.6 million in 1996.
The purchased gas adjustment provisions of Wisconsin Gas's rate schedules
permit the recovery of gas costs from its customers subject to the GCIM
sharing mechanism.
The FERC has allowed ANR Pipeline Company (ANR) to recover capacity and
"above market" supply costs associated with quantities purchased from
Dakota Gasification Company (Dakota) under a long-term contract expiring in
year 2009. Consistent with guidelines set forth in Order No. 636, ANR has
allocated 90% of Dakota costs to firm transportation service. Based on its
contracted quantities with ANR, Wisconsin Gas is currently paying
approximately $100,000 per month of Dakota costs. Transmission costs billed
to Wisconsin Gas are being recovered from customers under the purchased gas
provisions within its rate schedules.
B Capital expenditures Certain commitments have been made in connection
with 1999 capital expenditures. The Energy Group's capital expenditures for
1999 are estimated at $45.3 million. The Manufacturing Group's capital
expenditures for 1999 are estimated at $18.7 million.
33
C Environmental matters Wisconsin Gas has identified two previously
owned sites on which it operated manufactured gas plants. Such plants
ceased operations prior to the mid-1950's. During 1997, Wisconsin Gas
completed a comprehensive review of its potential environmental accrual
stemming from these two former manufactured gas plant sites. Significant
technological developments, lower unit costs and the recognition of the
"brown fields" concept by regulatory agencies all resulted in a reduction
of the estimated probable liability for cleanup to $7.9 million.
Expenditures over the next three years are expected to total approximately
$5 million.
The cleanup estimate discussed above includes the costs of feasibility
studies, data collection, soil and groundwater remediation activities and
ongoing monitoring activities through 2017. Environmental remediation work
for one of the sites was commenced in 1998 and will continue through 1999.
Wisconsin Gas is evaluating potential remedial options at the second site.
It is reasonably possible that, due to uncertainties associated with
defining the nature and extent of environmental contamination, application
of laws and regulations by regulatory authorities and changes in
remediation technology, the ultimate cost of remediation could change in
the future.
Due to anticipated regulatory treatment, changes in the recorded liability
do not immediately impact net income. Under the current ratemaking
treatment approved by the PSCW, the costs expended in the environmental
remediation of these sites, net of any insurance proceeds, would be
deferred and recovered from gas customers.
The Company's manufacturing subsidiaries are involved in various
environmental matters, including matters in which the subsidiaries or
alleged predecessors have been named as potentially responsible parties
under the Comprehensive Environmental Response Compensation and Liability
Act (CERCLA). The Company has established accruals for all environmental
contingencies of which management is currently aware in accordance with
generally accepted accounting principles.
In establishing these accruals, management considered (a) reports of
environmental consultants retained by the Company, (b) the costs incurred
to date by the Company at sites where clean-up is presently ongoing and the
estimated costs to complete the necessary remediation work remaining at
such sites, (c) the financial solvency, where appropriate, of other parties
that are responsible for effecting remediation at specified sites, and (d)
the experience of other parties that have been involved in the remediation
of comparable sites. The accruals recorded by the Company with respect to
environmental matters have not been reduced by potential insurance or other
recoveries and are not discounted. Although the Company has and will
continue to pursue such claims against insurance carriers and other
responsible parties, future potential recoveries remain uncertain and,
therefore, have not been recorded as a reduction to the estimated gross
environmental liabilities.
34
The Company periodically reviews its accrued liabilities for such
remediation costs as evidence becomes available indicating that its
remediation liability has changed. Based on the foregoing and given current
information, management believes that future costs in excess of the amounts
accrued on all presently known and quantifiable environmental contingencies
will not be material to the Company's financial position or results of
operations.
D Other The Company is party to various legal proceedings arising in the
ordinary course of business which are not expected to have a material
effect on the Company's financial position or results of operations.
Note 9 Common Stock and Other Paid-in Capital
- ------------------------------------------------
In April 1998, the Company's Board of Directors approved a two-for-one
split of the Company's common stock to be effected by the distribution of
one share for each share outstanding. Such distribution was made on May 29,
1998, to shareholders of record as of the close of business on May 14,
1998. The par value of the additional shares of common stock issued ($1 per
share) in connection with the stock split has been credited to common stock
and a like amount charged to other paid-in capital. Per share amounts
throughout the financial statements and footnotes have been restated.
In connection with stock split, the Company increased its authorized shares
of common stock from 60,000,000 to 120,000,000 of which 37,359,413 shares
and 37,201,264 shares were outstanding at December 31, 1998 and 1997,
respectively. Common stock totaling 8,273,295 shares is reserved for
issuance under the Company's dividend reinvestment, stock option and
incentive savings plans. In addition 45,661,308 shares are reserved
pursuant to the Company's shareholder rights plan.
Under certain circumstances, each right entitles the shareholder to
purchase one common share at an exercise price of $37.50, subject to
adjustment. The rights are not exercisable until 10 business days after a
person or group announces a tender offer or exchange offer which would
result in their acquiring ownership of 20% or more of the Company's
outstanding common stock, or after a person or group acquires at least 20%
of the Company's outstanding common shares. Under certain circumstances,
including the existence of a 20% acquiring party, each holder of a right,
other than the acquiring party, will have the right to purchase at the
exercise price WICOR common stock having a value of two times the exercise
price. If, after 20% or more of the outstanding shares of WICOR common
stock is acquired by a person or group and the Company is then acquired by
that person or group, rights holders would be entitled to purchase shares
of common stock of the acquiring person or group having a market value of
two times the exercise price of the rights. The rights do not have any
voting rights and may be redeemed at a price of $.01 per right. The rights
expire on August 29, 1999.
35
Note 10 Benefit Plans
- ------------------------
A Pension and other postretirement benefit plans The Company provides
defined benefit pension and postretirement benefit plans to employees.
Effective January 1, 1998, the Company adopted SFAS 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits." The
following provides a reconciliation of benefit obligations, plan assets and
funded status of the plans, at December 31, 1998 and 1997.
OTHER POSTRETIREMENT
PENSION BENEFITS BENEFITS
--------------------- ---------------------
THOUSANDS OF DOLLARS 1998 1997 1998 1997
---------- ---------- ---------- ----------
Change in benefit obligation
Benefit obligation at January 1 $ 181,018 $ 164,701 $ 105,863 $ 99,535
Service cost 4,014 4,042 1,176 2,102
Interest cost 12,782 12,742 5,822 6,731
Amendments and settlements (943) (879) (14,382) -
Actuarial loss (gain) 15,733 11,929 (15,913) 1,730
Benefits paid (13,975) (11,517) (4,266) (4,235)
---------- ---------- ---------- ----------
Benefit obligation at December 31 198,629 181,018 78,300 105,863
---------- ---------- ---------- ----------
Change in plan assets
Fair value of plan assets at January 1 273,871 232,284 54,958 40,846
Actual return on plan assets 14,804 52,446 2,732 11,320
Employer contributions - - 3,948 5,717
Benefits paid from plan assets (13,270) (10,868) (3,187) (2,925)
---------- ---------- ---------- ----------
Fair value of plan assets at December 31 275,405 273,862 58,451 54,958
---------- ---------- ---------- ----------
Funded status of the plans 76,776 92,844 (19,849) (50,905)
Unrecognized net actuarial (gain) (26,734) (49,161) (16,223) (3,890)
Unrecognized prior service cost 2,762 3,900 (26,474) (13,476)
Unrecognized net transition (asset) (9,253) (10,950) 1,919 3,948
---------- ---------- ---------- ----------
Net amount recognized $ 43,551 $ 36,633 $ (60,627) $ (64,323)
========== ========== ========== ==========
Amounts recognized in the
Consolidated Balance Sheets
Prepaid benefit cost $ 50,011 $ 42,753 $ - $ -
Accrued benefit liability (6,460) (6,120) (60,627) (64,323)
Additional minimum liability (3,474) (2,351) - -
Accumulated other
comprehensive income 3,474 2,351 - -
---------- ---------- ---------- ----------
Net amount recognized $ 43,551 $ 36,633 $ (60,627) $ (64,323)
========== ========== ========== ==========
Assumptions as of December 31
Discount rate (weighted average) 6.50% 7.25% 6.50% 7.25%
Expected return on plan assets 9.00% 9.00% 9.00% 9.00%
Rate of compensation increase 4.50% 4.50% 4.50% 4.50%
36
Net pension (income) costs and other postretirement benefit costs for each
of the years ended December 31, include the following components:
OTHER POSTRETIREMENT
PENSION BENEFITS BENEFITS
-------------------------- --------------------------
THOUSANDS OF DOLLARS 1998 1997 1996 1998 1997 1996
-------- -------- -------- -------- -------- --------
Service costs $ 4,014 $ 4,042 $ 4,713 $ 1,176 $ 2,102 $ 2,712
Interest costs on projec-
ted benefit obligations 12,782 12,742 12,833 5,822 6,731 7,330
Expected (gain) on assets (21,443) (19,884) (19,028) (5,168) (4,053) (3,412)
Amortization of:
Transition obli-
gation (asset) (1,693) (1,693) (1,723) - - -
Prior service cost 195 389 389 (1,384) (957) (957)
Actuarial (gain) loss (40) (352) 141 (1,143) (719) 208
-------- -------- -------- -------- -------- --------
(6,185) (4,756) (2,675) (697) 3,104 5,881
Amortization of regula-
tory (liability) asset (2,851) (2,851) (2,851) 2,778 2,778 2,778
-------- -------- -------- -------- -------- --------
Net benefit (income)/exp. $(9,036) $(7,607) $(5,526) $ 2,081 $ 5,882 $ 8,659
======== ======== ======== ======== ======== ========
Pension plans Employer contributions and funding policies are consistent
with funding requirements of Federal law and regulations. Commencing
November 1, 1992, Wisconsin Gas pension costs or credits have been
calculated in accordance with SFAS 87 and are recoverable from customers.
Prior to this date, pension costs were recoverable in rates as funded. The
cumulative difference between the amounts funded and the amounts based on
SFAS 87 through November 1, 1992, is recorded as a regulatory liability and
is being amortized as a reduction of pension expense over an eight-year
period effective November 1, 1994.
In 1998, the Company's Board of Directors approved certain amendments to
the plan for non-represented employees of Wisconsin Gas, effective January
1, 1998. Such amendments change the manner in which benefits accrue and the
time at which benefits become payable under the non-represented plan.
37
Postretirement health care and life insurance In addition to providing
pension benefits, the Company provides certain health care and life
insurance benefits for retired employees when they reach normal retirement
age while working for the Company. Wisconsin Gas funds the accrual annually
based on the maximum tax deductible amount. Commencing January 1, 1992,
Wisconsin Gas postretirement benefit costs have been calculated in
accordance with SFAS 106 and are recoverable from customers. The cumulative
difference between the amounts funded and the amounts based on SFAS 106
through January 1, 1992, is recorded as a regulatory asset and is being
amortized over a twenty-year period effective January 1, 1992.
In 1998, the Company's Board of Directors approved certain amendments to
the plan for non-represented employees of Wisconsin Gas, effective January
1, 1998. Such amendments change the manner in which benefits accrue and the
time at which benefits become payable under the non-represented plan and
impose a limitation on the dollar amount of the employer's share of the
cost of covered benefits incurred by a plan participant.
The postretirement benefit cost components for 1998 were calculated
assuming health care cost trend rates ranging up to 10% for 1999 and
decreasing to 5% in 2004. An increase of one percentage point in the
assumed health care cost trend rate in each year would increase the
accumulated postretirement benefit obligation as of December 31, 1998, by
$3.6 million and the aggregate of the service and interest cost components
of postretirement expense by $0.3 million. A corresponding decrease of one
percentage point would decrease the accumulated postretirement benefit
obligation by $3.1 million and the aggregate of the service and interest
cost components of postretirement expense by $0.2 million.
Plan assets are primarily invested in equities and fixed income securities.
B Retirement savings plans Certain of the Company's operating
subsidiaries maintain various employee savings plans, which provide
employees a mechanism to contribute amounts up to 16% of their compensation
for the year. Company matching contributions may be made for up to 5% of
eligible compensation including 1% for the Employee Stock Ownership Plan
(ESOP). Total contributions were valued at $1.9 million in 1998 and $1.8
million in 1997 and 1996.
C Employee stock ownership plan In November 1991, WICOR established an
ESOP covering non-union employees of Wisconsin Gas. The ESOP funds employee
benefits of up to 1% of compensation with Company common stock distributed
through the ESOP. The ESOP used the proceeds from a $10 million, adjustable
rate loan (5.6% interest rate at December 31, 1998), guaranteed by the
Company, to purchase 862,532 shares of WICOR common stock. The Company has
extended the adjustable rate loan, with similar terms, until May 31, 2002.
The unpaid balance ($2.8 million) is shown as long-term debt with a like
amount of unearned compensation reported as a reduction of common equity on
the Company's balance sheet.
The ESOP trustee is repaying the loan with dividends on shares of the
Company's common stock held in the ESOP and with Wisconsin Gas
contributions to the ESOP.
38
D Stock option plans and restricted stock The Company has a total of 131
employees participating in one or more of its common stock option plans.
All options were granted at prices not less than the fair market value on
the date of grant and expire no later than eleven years from the date of
grant.
1998 1997 1996
------------------ ------------------ ------------------
WTD AVG WTD AVG WTD AVG
THOUSANDS OF DOLLARS SHARES PRICE SHARES PRICE SHARES PRICE
---------- ------- ---------- ------- ---------- -------
Outstanding at January 1 1,959,716 $ 15.22 1,560,298 $ 13.38 1,490,100 $ 12.51
Granted 744,200 $ 23.61 538,400 $ 19.75 325,400 $ 16.50
Exercised (120,749) $ 13.23 (137,382) $ 12.11 (196,540) $ 11.55
Canceled (21,604) $ 21.13 (1,600) $ 15.66 (58,662) $ 14.69
---------- ---------- ----------
Outstanding at December 31 2,561,563 $ 17.70 1,959,716 $ 15.22 1,560,298 $ 13.38
========== ========== ==========
Exercisable at December 31 1,423,174 $ 14.30 1,246,550 $ 13.54 1,077,344 $ 12.36
========== ========== ==========
Available for future
grant at year-end 1,437,984 347,980 893,814
========== ========== ==========
SFAS 123, "Accounting for Stock-Based Compensation," became effective for
the Company on January 1, 1996. The Company will continue to apply APB
Opinion No. 25 and related interpretations in accounting for its stock
option plans. As required by SFAS 123, the Company has determined the pro
forma information as if the Company had accounted for stock options granted
since January 1, 1995, under the fair value method of SFAS 123. The
Black-Scholes option-pricing model was used with the following assumptions
for 1998, 1997 and 1996, respectively: dividend yields of 3.6%, 4.8% and
5.0%, risk-free interest rates of 5.3%, 5.1% and 5.0%, expected volatility
of 15.1%, 15.9% and 16.4%, and an expected option life of 5.64 years for
all periods. The weighted average fair value of options granted in 1998,
1997 and 1996 was $3.59, $4.22 and $3.83 per share, respectively. Had
compensation cost for the Company's 1998, 1997 and 1996 grants for
stock-based compensation plans been determined consistent with SFAS 123,
the Company's net income and diluted earnings per common share would have
been reduced to the pro forma amounts indicated below:
1998 1997 1996
-------- -------- --------
Net earnings:
As reported $45,495 $49,523 $46,771
Pro forma $44,594 $49,167 $46,557
Diluted earnings per common share
As reported $ 1.21 $ 1.33 $ 1.27
Pro forma $ 1.19 $ 1.32 $ 1.26
39
Under the Company's 1994 Long-Term Performance Plan (1994 Plan), awards
covering up to 3,490,000 shares of common stock may be granted to certain
key employees as compensation. The types of awards that may be granted
under the 1994 Plan include incentive stock options, nonqualified stock
options, stock appreciation rights and restricted stock.
Awards of restricted stock subject to performance vesting criteria have
been granted under the 1994 Plan. These awards will vest only if the
Company achieves certain financial goals over a three-year performance
period beginning in the year of grant. Recipients of restricted stock
awards are not required to provide consideration to the Company other than
rendering service and have the right to vote the shares and the right to
receive dividends thereon. Restricted shares that are forfeited revert to
theCompany at no cost.
A total of 142,700 restricted shares (net of cancellations) were issued
through 1998. Initially, the total market value of the shares is treated as
unearned compensation and is charged to expense over the vesting periods.
For both restricted stock and performance option shares, adjustments are
made to expense for changes in market value and progress towards
achievement of financial goals.
E Director compensation plan Effective January 1, 1997, the Company
converted its director compensation plan into a new Deferred Director
Compensation Plan (Director Plan) which provides for the payment of the
annual retainer and meeting fees using a combination of hypothetical shares
of Company common stock (stock units) and cash. A portion of the annual
retainer is now paid using stock units. In addition, a director may elect
to defer the cash portion of the retainer or meeting fees, or both. The
value of each stock unit is equal to the current market price of the
Company's common stock. Retirement benefits for active directors were also
converted into stock units as of December 31, 1996. Benefits will be paid
in cash and Company common stock, at the option of the holder, over varying
periods following termination of service. The Company recognized no
compensation expense in 1998 and $0.6 million of compensation expense under
the Director Plan in 1997.
Note 11 Fair Value of Financial Instruments
- ----------------------------------------------
The carrying value of cash and cash equivalents, accounts receivable and
short-term borrowings approximates fair value due to the short-term
maturities of these instruments.
The fair value of the Company's long-term debt is based on the market
prices of U.S. Treasury issues having a similar term to maturity, adjusted
for the Company's bond rating and present value of future cash flows.
40
Because Wisconsin Gas operates in a regulated environment, shareholders
probably would not be affected by realization of gains or losses on
extinguishment of its outstanding fixed-rate debt. Realized gains would be
refunded to and losses would be recovered from customers through gas rates.
Likewise, any gains or losses on gas commodity instruments used by
Wisconsin Gas are refunded to or recovered from customers under the PGAC.
The estimated fair value of WICOR's financial instruments at December 31,
is as follows:
1998 1997
CARRYING FAIR CARRYING FAIR
THOUSANDS OF DOLLARS AMOUNT VALUE AMOUNT VALUE
---------- ----------- ----------- -----------
Cash and cash equivalents $ 13,383 $ 13,383 $ 11,810 $ 11,810
Accounts receivable $ 137,321 $ 137,321 $ 164,243 $ 164,243
Short-term debt $ 107,653 $ 107,633 $ 118,900 $ 118,900
Long-term debt $ 188,470 $ 192,412 $ 149,110 $ 150,159
Note 12 Business Segment Information
- ---------------------------------------
Effective December 31, 1998, the Company adopted SFAS 131, "Disclosures
About Segments of an Enterprise and Related Information" which changes the
way the Company reports information about its operating segments.
The Company is a diversified holding company with two principal business
segments: an Energy Group responsible for natural gas distribution and
related services, and a Manufacturing Group responsible for the manufacture
of pumps and processing equipment used to pump, control, transfer, hold and
filter water and other fluids.
The Company's reportable segments are managed separately because each
business requires different technology and marketing strategies. Most of
the businesses were acquired as a unit, and the management at the time of
the acquisition was retained. The accounting policies of the reportable
segments are the same as those described in Note 1 of Notes to the
Consolidated Financial Statements. The Company evaluates the performance of
its operating segments based on income from continuing operations.
Intersegment sales and transfers are not significant.
Information regarding products and services and geographic areas are not
presented as they are not included in measures that are reviewed by the
Company.
41
Summarized financial information concerning the Company's reportable
segments is shown in the following table. The other category includes the
results of the parent company only and non-regulated energy operations
involved in energy and risk management services, automated meter reading
and other related services.
ENERGY
-------------------------------
THOUSANDS OF DOLLARS REGULATED OTHER TOTAL MANUFACTURING CONSOLIDATED
--------- --------- ----------- ------------- ------------
1998
- ----
Revenues $428,562 $ 52,927 $ 481,489 $ 462,694 $ 944,183
Depreciation and
amortization $ 40,336 $ 134 $ 40,470 $ 14,061 $ 54,531
Net earnings $ 22,668 $ (1,012) $ 21,656 $ 23,839 $ 45,495
Total assets $651,492 $ 14,284 $ 665,776 $ 349,420 $ 1,015,196
Capital expenditures $ 34,995 $ 170 $ 35,165 $ 14,114 $ 49,279
1997
- ----
Revenues $536,720 $ 59,542 $ 596,262 $ 424,779 $ 1,021,041
Depreciation and
amortization $ 39,820 $ 139 $ 39,959 $ 13,781 $ 53,740
Net earnings $ 29,335 $ 108 $ 29,443 $ 20,080 $ 49,523
Total assets $683,888 $ 13,780 $ 697,668 $ 333,664 $ 1,031,332
Capital expenditures $ 35,017 $ 131 $ 35,148 $ 16,424 $ 51,572
1996
- ----
Revenues $573,255 $ 29,430 $ 602,685 $ 409,916 $ 1,012,601
Depreciation and
amortization $ 41,111 $ 43 $ 41,154 $ 13,717 $ 54,871
Net earnings $ 32,724 $ (879) $ 31,845 $ 14,926 $ 46,771
Total assets $718,990 $ 13,418 $ 732,408 $ 304,948 $ 1,037,356
Capital expenditures $ 36,586 $ 31 $ 36,617 $ 15,127 $ 51,744
42
SELECTED FINANCIAL DATA THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS
THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS
1998 1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ---------- ----------
CONSOLIDATED
Operating Data:
Operating revenues(4) $ 944,183 $1,021,041 $1,012,601 $ 860,594 $ 867,755 $ 849,528
Net earnings $ 45,495 $ 49,523 $ 46,771 $ 39,527 $ 33,174 $ 29,313
Common Stock Data:
Basic earnings per
common share(1) $ 1.22 $ 1.34 $ 1.27 $ 1.16 $ 0.99 $ 0.91
Diluted earnings
per share(1) $ 1.21 $ 1.33 $ 1.27 $ 1.16 $ 0.99 $ 0.90
Cash dividends per
common share(1) $ 0.870 $ 0.850 $ 0.830 $ 0.810 $ 0.790 $ 0.770
Book value per
common share(1) $ 10.80 $ 10.47 $ 9.96 $ 9.42 $ 8.57 $ 8.24
Balance Sheet Data:
Long-term debt $ 188,470 $ 149,110 $ 169,169 $ 174,713 $ 161,669 $ 165,230
Common equity 403,440 389,620 366,499 343,673 289,918 270,276
---------- ---------- ---------- ---------- ---------- ----------
Capitalization at Y/E $ 591,910 $ 538,730 $ 535,668 $ 518,386 $ 451,587 $ 435,506
========== ========== ========== ========== ========== ==========
Total assets Y/E(2) $1,015,196 $1,031,332 $1,057,652 $1,008,514 $ 930,708 $ 933,726
Other General Data:
Market-to-book ratio
at year-end (%) 202 222 179 170 165 191
Dividend payout
ratio (%)(2)(3) 71.4 63.4 65.2 69.5 79.6 82.2
Yield at year-end (%) 4.0 3.7 4.7 5.1 5.6 5.0
Return on average com-
mon equity (%)(2)(3) 11.3 13.0 12.9 13.1 11.6 11.2
Price/earnings ratio
at year-end(2)(3) 17.8 17.3 14.1 13.9 14.3 17.3
Price range(1) $ 19-5/8- $16-11/16- $ 15-1/16- $ 13-5/16- $ 12-3/4- $12-13/16-
$ 25-1/2 $ 23-15/16 $ 18-7/8 $ 16-7/16 $ 16-5/16 $ 16-7/16
Registered share-
holders at Y/E(5) 21,373 22,312 23,339 27,379 25,017 23,694
Cash flow-operations $ 97,000 $ 49,324 $ 75,416 $ 69,918 $ 103,551 $ 3,401
Capital expenditures $ 49,279 $ 51,572 $ 51,744 $ 56,241 $ 55,051 $ 51,906
Employees at year-end 3,524 3,625 3,475 3,368 3,214 3,222
Debt/equity ratio Y/E 32/68 28/72 32/68 34/66 36/64 38/62
Energy Operations
Operating revenues $ 481,489 $ 596,262 $ 602,685 $ 522,840 $ 556,587 $ 574,835
Net earnings $ 21,656 $ 29,443 $ 32,141 $ 27,701 $ 18,896 $ 19,870
Capital expenditures $ 35,165 $ 35,148 $ 36,617 $ 42,852 $ 44,626 $ 42,253
43
SELECTED FINANCIAL DATA THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS
THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS
1998 1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ---------- ----------
Utility throughput
(000'S of dekatherms)
Residential 40,856 48,433 52,991 49,425 46,369 47,964
Commercial 17,967 21,922 24,257 21,157 18,598 19,060
Industrial firm 6,095 8,724 11,078 13,496 14,544 15,246
Ind. interruptible 3,657 7,277 19,624 31,353 28,217 20,849
Transported 46,017 42,883 27,578 14,549 11,908 17,408
---------- ---------- ---------- ---------- ---------- ----------
114,592 129,239 135,528 129,980 119,636 120,527
========== ========== ========== ========== ========== ==========
Utility customers Y/E 528,963 520,975 512,868 504,746 495,129 485,103
Utility customers
served per employee 549 534 516 471 419 352
Ave. cost of gas/util-
ity Dth purchased $ 3.62 $ 3.99 $ 3.47 $ 2.79 $ 3.34 $ 3.76
Ave. annual residen-
tial utility bill $ 561 $ 701 $ 725 $ 686 $ 719 $ 779
Ave. use/utility resi-
dential customer(Dth) 90 108 120 114 110 116
Degree days 5,865 7,094 7,458 6,836 6,431 6,775
% colder (warmer) than
20-year average (16.4) 1.0 6.8 (2.8) (9.0) (4.1)
Manufacturing Oper.(2)
Operating revenues $ 462,694 $ 424,779 $ 409,916 $ 337,754 $ 311,168 $ 274,693
International/export
% of total sales 30 34 34 39 37 34
Net earnings(3) $ 23,834 $ 20,080 $ 14,630 $ 11,826 $ 14,278 $ 9,443
Capital expenditures $ 14,115 $ 16,424 $ 15,127 $ 13,389 $ 10,425 $ 9,653
44
SELECTED FINANCIAL DATA THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS
THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS
1992 1991 1990 1989 1988
---------- ---------- ---------- ---------- ----------
CONSOLIDATED
Operating Data:
Operating revenues (4) $ 747,409 $ 716,767 $ 696,023 $ 741,218 $ 780,633
Net earnings $ 14,799 $ 22,966 $ 16,651 $ 33,881 $ 34,163
Common Stock Data:
Basic earnings
per common share(1) $ 0.48 $ 0.77 $ 0.57 $ 1.17 $ 1.19
Diluted earnings
per share(1) $ 0.47 $ 0.77 $ 0.57 $ 1.16 $ 1.19
Cash dividends per
common share(1) $ 0.750 $ 0.730 $ 0.710 $ 0.685 $ 0.660
Book value per
common share(1) $ 7.80 $ 7.92 $ 8.06 $ 8.42 $ 7.91
Balance Sheet Data:
Long-term debt $ 164,171 $ 168,366 $ 130,215 $ 122,639 $ 133,034
Common equity 245,287 243,453 237,407 244,351 227,080
---------- ---------- ---------- ---------- ----------
Capitalization at year-end $ 409,458 $ 411,819 $ 367,622 $ 366,990 $ 360,114
========== ========== ========== ========== ==========
Total assets at Y/E(2) $ 825,774 $ 670,250 $ 651,559 $ 620,548 $ 565,967
Other General Data:
Market-to-book ratio Y/E(%) 175 153 122 148 123
Dividend payout
ratio (%)(2)(3) 96.1 89.0 117.2 55.0 52.0
Yield at year-end (%) 5.6 6.1 7.3 5.6 6.9
Return on average
common equity (%)(2)(3) 9.2 9.5 6.8 14.3 15.3
Price/earnings ratio
at year-end(2)(3) 18.5 15.7 17.2 10.7 8.2
Price range(1) $11-7/16- $ 9-5/16- $ 9-1/8- $9-11/16- $7-13/16-
$13-11/16 $ 12-3/16 $ 12-5/8 $12-11/16 $ 10-7/16
Registered shareholders
at year-end(5) 22,864 18,503 19,463 20,509 21,611
Cash flow from operations $ 37,012 $ 50,413 $ 10,022 $ 94,623 $ 73,526
Capital expenditures $ 71,873 $ 45,113 $ 37,529 $ 40,944 $ 48,295
Employees at year-end 3,178 3,196 3,152 3,696 3,927
Debt/equity ratio Y/E 40/60 41/59 35/65 33/67 37/63
Energy Operations
Operating revenues $ 495,415 $ 474,702 $ 455,559 $ 441,477 $ 476,904
Net earnings $ 18,060 $ 17,086 $ 13,195 $ 25,169 $ 23,223
Capital expenditures $ 62,125 $ 34,473 $ 27,978 $ 25,813 $ 37,148
45
SELECTED FINANCIAL DATA THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS
THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS
1992 1991 1990 1989 1988
---------- ---------- ---------- ---------- ----------
Utility throughput (000's
of dekatherms-MDth)
Residential 45,905 45,614 43,020 48,154 46,769
Commercial 17,840 17,861 16,319 18,089 17,012
Industrial firm 14,488 15,690 15,106 16,915 16,808
Indus. interruptible 17,388 17,440 16,620 5,475 3,752
Transported 21,379 19,658 16,565 29,158 29,639
---------- ---------- ---------- ---------- ----------
117,000 116,263 107,630 117,791 113,980
========== ========== ========== ========== ==========
Utility customers at Y/E 470,956 460,549 452,906 445,771 439,063
Utility customers
served per employee 331 323 321 319 311
Average cost of gas per
utility Dth purchased $ 3.34 $ 3.18 $ 3.30 $ 3.15 $ 3.68
Average annual resi-
dential utility bill $ 712 $ 677 $ 670 $ 758 $ 770
Average use per utility
residential customer(Dth) 115 117 113 129 127
Degree days 6,683 6,416 6,103 7,382 7,124
% colder (warmer) than
20-year average (6.4) (10.8) (16.0) 1.5 (2.0)
Manufacturing Operations(2)
Operating revenues $ 251,994 $ 242,065 $ 240,464 $ 300,156 $ 303,729
International/export sales
as a % of total sales 34 31 27 24 22
Net earnings(3) $ 4,704 $ 5,880 $ 3,456 $ 8,712 $ 10,940
Capital expenditures $ 9,748 $ 10,640 $ 9,551 $ 15,131 $ 11,147
(1) Adjusted for a two-for-one stock split effected in May 1998.
(2) Includes continuing operations and discontinued operations up to the
year disposition was authorized.
(3) Before effects of 1992 accounting changes.
(4) Includes revenues (in thousands) from discontinued operations from 1988
and 1989 of $63,552 and $56,318, respectively.
(5) Reflects WICOR Plan participants beginning with 1992.