1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 - Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1999
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-7951
WICOR, Inc.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Wisconsin 39-1346701
------------------------------- -----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
626 East Wisconsin Avenue
Milwaukee, Wisconsin 53202
--------------------------------------- ----------
(Address of principal executive office) (Zip Code)
(414) 291-7026
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at April 16, 1999
- -------------------------- -------------------------------
Common Stock, $1 Par Value 37,447,115
2
INTRODUCTION
WICOR, Inc. ("WICOR" or the "Company") is a diversified holding company
with two principal business groups: 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 engages in natural gas distribution through its subsidiary,
Wisconsin Gas Company ("Wisconsin Gas"), the oldest and largest natural
gas distribution utility in Wisconsin. The Company engages in the
manufacture and sale of pumps and processing equipment through several
nonutility subsidiaries. The Company's manufactured products primarily
have water system, pool and spa, agricultural, RV/marine and
beverage/food service applications. The Company markets its pump and
processing products in about 100 countries. The Company is incorporated
under the laws of the State of Wisconsin and is exempt from registration
as a holding company under the Public Utility Holding Company Act of
1935, as amended.
CONTENTS
PAGE
PART I - Financial Information 1
Consolidated Financial Statements of WICOR, Inc. (Unaudited):
-------------------------------------------------------------
Consolidated Statements of Operation for the
Three Months Ended March 31, 1999 and 1998 2
Consolidated Balance Sheets as of
March 31, 1999 and December 31, 1998 3-4
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1999 and 1998 5
Notes to Consolidated Financial Statements 6-7
Management's Discussion and Analysis of
Interim Financial Statements 8-12
Quantitative and Qualitative Disclosures About Market Risk 12
PART II - Other Information and Exhibits
Exhibits and Reports on Form 8-K 13
Signatures 14
3
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 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, governmental and judiciary 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
Part 1 - Financial Information
- ------------------------------
4
Item 1. Financial Statements
- ----------------------------
The consolidated statements included herein have been prepared without
audit pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, although management believes that
the disclosures are adequate to make the information presented not
misleading. These condensed financial statements should be read in
conjunction with the audited financial statements and the notes thereto
included in the WICOR, Inc. Annual Report on Form 10-K for the year ended
December 31, 1998.
In the opinion of management, the information furnished reflects all
adjustments, which in all circumstances were normal and recurring,
necessary for a fair presentation of the results of operations for the
interim periods.
Because of seasonal factors, the results of operations for the interim
periods presented are not necessarily indicative of the results to be
expected for the full calendar year.
5
WICOR, INC.
Consolidated Statements of Operation (Unaudited)
(Amounts in Thousands, Except Per Share Data)
[CAPTION]
Three Months Ended
March 31,
----------------------
1999 1998
---------- ----------
Operating Revenues:
Energy $ 187,182 $ 187,003
Manufacturing 117,059 116,324
---------- ----------
304,241 303,327
---------- ----------
Operating Costs and Expenses:
Cost of gas sold 107,579 115,349
Manufacturing cost of sales 82,999 82,905
Operations and maintenance 51,975 50,737
Depreciation and amortization 9,092 8,737
Taxes, other than income taxes 2,504 2,614
---------- ----------
254,149 260,342
---------- ----------
Operating Income 50,092 42,985
---------- ----------
Interest Expense (4,457) (4,654)
Other Income, net 770 1,683
---------- ----------
Income Before Income Taxes 46,405 40,014
Income Tax Provision 17,539 15,051
---------- ----------
Net Earnings $ 28,866 $ 24,963
========== ==========
Per Share of Common Stock:
Basic earnings $ 0.77 $ 0.67
Diluted earnings $ 0.77 $ 0.66
Cash Dividends paid $ 0.220 $ 0.215
Average shares outstanding 37,413 37,242
Average diluted shares outstanding 37,619 37,623
The accompanying notes are an integral part of these statements.
6
WICOR, INC.
Consolidated Balance Sheets
[CAPTION]
March 31,
1999 December 31,
(Unaudited) 1998
Assets ----------- ------------
- ------ (Thousands of Dollars)
Current Assets:
Cash and cash equivalents $ 3,769 $ 13,383
Accounts receivable, less allowance
for doubtful accounts of $17,728
and $12,511, respectively 185,721 137,321
Accrued utility revenues 31,811 47,483
Manufacturing inventories 84,654 86,312
Gas in storage, at weighted average cost 11,723 36,919
Deferred income taxes 17,216 17,195
Prepayments and other 13,200 15,542
----------- ------------
348,094 354,155
Property, Plant and Equipment (less accum- ----------- ------------
ulated depreciation of $546,558
and $535,002, respectively) 443,273 447,665
----------- ------------
Deferred Charges and Other:
Goodwill 66,808 67,552
Regulatory assets 58,036 59,319
Prepaid pension costs 51,886 50,011
Other 35,782 36,494
----------- ------------
212,512 213,376
----------- ------------
$1,003,879 $ 1,015,196
=========== ============
The accompanying notes are an integral part of these statements.
7
WICOR, INC.
Consolidated Balance Sheets
(continued)
[CAPTION]
March 31,
1999 December 31,
(Unaudited) 1998
Liabilities and Capitalization ------------ ------------
- ------------------------------ (Thousands of Dollars)
Current Liabilities:
Short-term borrowings $ 43,823 $ 107,653
Accounts payable 70,526 70,000
Current portion of long-term debt 1,490 3,528
Refundable gas costs 50,115 18,570
Accrued payroll and benefits 18,145 20,490
Accrued taxes 21,889 7,885
Other 12,351 16,526
------------ ------------
218,339 244,652
------------ ------------
Deferred Credits and Other:
Postretirement benefit obligation 58,848 60,627
Regulatory liabilities 30,106 32,153
Deferred income taxes 49,211 49,065
Accrued environmental remediation costs 10,057 11,215
Unamortized investment tax credit 6,000 6,357
Other 19,375 19,217
------------ ------------
173,597 178,634
------------ ------------
Capitalization:
Long-term debt 187,212 188,470
Common stock 37,417 37,359
Other paid-in capital 217,456 216,821
Retained earnings 181,569 160,937
Accumulated other comprehensive income (8,284) (7,905)
Unearned compensation - ESOP
and restricted stock (3,427) (3,772)
------------ ------------
611,943 591,910
------------ ------------
$ 1,003,879 $ 1,015,196
============ ============
The accompanying notes are an integral part of these statements.
8
WICOR, INC.
Consolidated Statement of Cash Flows (Unaudited)
[CAPTION]
Three Months Ended
March 31,
----------------------
1999 1998
(Thousands of Dollars) ---------- ----------
Operations:
Net earnings $ 28,866 $ 24,963
Adj. to reconcile net earnings to net cash flows:
Depreciation and amortization 14,118 13,926
Deferred income taxes 125 153
Net pension/other postretirement benefit (income) (2,155) (1,292)
Change in:
Receivables (32,728) (37,211)
Manufacturing inventories 1,658 (4,765)
Gas in storage 25,196 33,375
Other current assets 2,342 (700)
Accounts payable 526 (699)
Refundable gas costs 31,545 23,943
Accrued taxes 14,004 11,195
Other current liabilities (6,520) (542)
Other non-current assets and liabilities, net (4,835) (2,625)
---------- ----------
72,142 59,721
Investment Activities: ---------- ----------
Capital expenditures (8,162) (8,191)
Other (23) 110
---------- ----------
(8,185) (8,081)
Financing Activities: ---------- ----------
Change in short-term borrowings (63,830) (52,474)
Reduction in long-term debt (2,157) (2,168)
Issuance of long-term debt - 2,828
Issuance of common stock 693 863
Dividends paid on common stock (8,277) (8,005)
---------- ----------
(73,571) (58,956)
---------- ----------
Change in Cash and Cash Equivalents (9,614) (7,316)
Cash and Cash Equivalents at Beginning of Period 13,383 11,810
---------- ----------
Cash and Cash Equivalents at End of Period $ 3,769 $ 4,494
========== ==========
The accompanying notes are an integral part of these statements.
9
Notes to Consolidated Financial Statements (Unaudited):
1) The Company and its subsidiaries maintain lines of credit worldwide.
At March 31, 1999 the Company had borrowings of $43.8 million and
availability of $266.3 million under unsecured lines of credit with
several banks.
A total of $30.3 million of commercial paper, classified as short-term
debt, was outstanding as of March 31, 1999 at a weighted average interest
rate of 5.0%.
2) For purposes of the Consolidated Statements of Cash Flows, income
taxes paid, net of refunds, and interest paid (excluding capitalized
interest) were as follows:
For the Three Months
Ended March 31,
-----------------------
1999 1998
---------- ----------
(Thousands of Dollars)
Income taxes paid $ 4,784 $ 6,947
Interest paid $ 3,570 $ 3,691
3) Total comprehensive income for the three months ended March 31, 1999
and 1998 is as follows:
1999 1998
---------- ----------
Net earnings $ 28,866 $ 24,963
Other comprehensive income
Currency translation adjustments (379) (543)
---------- ----------
Total comprehensive income $ 28,487 $ 24,420
========== ==========
4) Business Segment Information
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.
10
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 contained in the Company's annual
report on Form 10-K for the fiscal year ended December 31, 1998. 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.
Summarized financial information concerning the Company's reportable
segments for the three-month's ending March 31, 1999 and 1998 is shown in
the following table. The other energy 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
------------------------------
REGULATED OTHER TOTAL MANUFACTURING CONSOLIDATED
--------- --------- ---------- ------------- ------------
(Thousands of Dollars)
1999
- ----
Revenues $170,397 $ 16,785 $ 187,182 $ 117,059 $ 304,241
Depreciation and
amortization $ 10,333 $ 26 $ 10,359 $ 3,759 $ 14,118
Net earnings $ 22,970 $ 255 $ 23,225 $ 5,641 $ 28,866
Total assets $637,354 $ 15,887 $ 653,241 $ 350,638 $ 1,003,879
Capital expenditures $ 5,546 $ 66 $ 5,612 $ 2,550 $ 8,162
1998
- ----
Revenues $169,447 $ 17,556 $ 187,003 $ 116,324 $ 303,327
Depreciation and
amortization $ 10,210 $ 29 $ 10,239 $ 3,687 $ 13,926
Net earnings $ 18,502 $ 970 $ 19,472 $ 5,491 $ 24,963
Total assets $651,052 $ 15,650 $ 666,702 $ 359,133 $ 1,025,835
Capital expenditures $ 4,442 $ 35 $ 4,477 $ 3,714 $ 8,191
11
Item 2. Management's Discussion and Analysis
of Interim Financial Statements of
WICOR, Inc.
Results of Operations
- ---------------------
Consolidated net earnings for the first quarter of 1999 increased by
$3.9 million, or 16%, to $28.9 million compared to the same period of
the prior year. The increase was attributable to $3.7 million and
$0.1 million increases in Energy Group and Manufacturing Group
earnings.
The following factors had a significant effect on the results of
operations during the three-month period ended March 31, 1999.
Energy Group
- ------------
Net earnings increased to $23.2 million from $19.5 million, or 19%,
for the first quarter of 1999 compared with the first quarter of
1998. Increased gross margins contributed to the increase, which was
partially offset by increased operating expenses and reduced proceeds
related to a weather insurance agreement compared to the prior year.
The improvement in gas margins resulted primarily from increased firm
sales volumes and a $7.5 million annual rate increase effective
August 1, 1998.
Revenues, margins and volumes are summarized below. Margin, defined
as revenues less cost of gas sold, is a better comparative
performance indicator than revenues because changes in the cost of
gas sold are flowed through to revenue under a gas adjustment clause
that impacts margin only if gas costs for the period are above or
below certain thresholds established in the gas cost incentive
mechanism (GCIM). The GCIM impact on margins was insignificant in
both periods.
12
The following tables set forth margin and volume data for the Energy
Group and utility, respectively, for each of the quarters ended March
31.
Three
Months Ended
March 31,
---------------------- %
(Millions of Dollars) 1999 1998 Change
- --------------------- ---------- ---------- ------
Energy Revenues $ 179.2 $ 179.8 -
Cost of Gas Sold 107.6 115.3 (7)
---------- ----------
Sales Margin 71.6 64.5 11
Gas Transportation Margin 8.0 7.2 11
---------- ----------
Gross Margin 79.6 71.7 11
---------- ----------
Operation and Maintenance 28.5 27.8 3
Depreciation and Amortization 8.8 8.4 5
Taxes, Other Than Income Taxes 2.5 2.6 (4)
---------- ----------
39.8 38.8 3
---------- ----------
Operating Income 39.8 32.9 21
Interest Expense (3.4) (3.4) -
Other Income, net 0.7 1.5 (53)
---------- ----------
Income Before Income Taxes 37.1 31.0 20
Income Tax Expense 13.9 11.5 21
---------- ----------
Net Earnings $ 23.2 $ 19.5 19
========== ==========
(Millions of Therms)
Utility Sales Volumes
- ---------------------
Firm 326.9 301.7 8
Interruptible 10.0 14.0 (29)
Transportation Volume 160.3 138.0 16
---------- ----------
Total Throughput 497.2 453.7 10
========== ==========
Heating Degree Days
Actual 3,235 2,915 11
========== ==========
Twenty year average 3,421
==========
13
The increase in firm sales volumes for the first quarter of 1999 as
compared with the 1998 first quarter was caused principally by colder
weather. The weather was 11% colder in the first quarter of 1999
than during the same period in 1998 although still 5% warmer than the
20-year average. The increase in transportation volumes was due to
more customers purchasing gas from sources other than Wisconsin Gas
and transporting the volumes over the Wisconsin Gas distribution
system.
Non-regulated energy operating revenues for the first three months of
1999 remained relatively level at $16.8 million compared to the same
period of 1998.
Operating and maintenance expenses increased by $0.7 million, or 3%,
during the three-month period ended March 31, 1999 compared to the
same period of 1998. The increase reflects $1.9 million of PSCW
approved additional uncollectible accounts expense which became
effective November 1, 1998. The increase was partially offset by
lower labor and benefit expenses at Wisconsin Gas.
Depreciation expense for the three months ended March 31, 1999,
increased by $0.4 million, or 5%, compared with the same period of
last year. The 1999 increase was due to plant additions.
Interest expense remained unchanged at $3.4 million for the three
months ended March 31, 1999, compared with the same period of 1998.
Other income, net decreased by $0.8 million, or 53%, during the first
quarter of 1999 compared to the same period last year. The Company
recorded a gain in connection with a weather insurance agreement of
$0.4 million in the first quarter of 1999 compared to a gain of $1.3
million recorded in the same period of last year. The Company has
entered into weather derivative agreements to partially mitigate the
risk that weather has on Energy Group earnings.
14
Manufacturing Group
- -------------------
Manufacturing Group net earnings of $5.6 million for the first
quarter of 1999 was 2% higher than the first quarter of 1998.
Financial data regarding the Manufacturing Group are set forth in the
table below.
Three
Months Ended
March 31,
----------------------
1999 1998 Change
---------- ---------- ------
(Millions of Dollars)
Net Sales $ 117.1 $ 116.3 1
Cost of Goods Sold 83.0 82.9 -
---------- ----------
Gross Profit 34.1 33.4 2
Operating Expenses 23.9 23.3 3
---------- ----------
Operating Income 10.2 10.1 1
Interest Expense (1.1) (1.3) (15)
Other Income, net 0.1 0.2 (50)
---------- ----------
Income Before Income Taxes 9.2 9.0 2
Income Tax Expense 3.6 3.5 3
---------- ----------
Net Earnings $ 5.6 $ 5.5 2
========== ==========
Net sales for the first quarter of 1999 increased slightly to $117.1
million compared to the same period in 1998, reflecting expanded
business with new and existing customers, new products within the
pool/spa and industrial markets and the strong economy in the United
States. During the first quarter of 1999, domestic sales increased
by $4.8 million, or 6%, while international sales decreased $4.1
million, or 11%, compared to the same period in 1998.
Increased domestic sales were driven by higher demand within the
water systems, pool/spa, marine and R/V markets and partially offset
by lower residential sump and utility pump sales. The decrease in
residential sump and utility pump sales was the result of wet weather
in the U.S. market during 1998. Dry weather in the Southeast part of
the United States during 1999 had sparked strong demand for
irrigation and sprinkler pumps.
The decrease in international sales is attributable to the uneven
global economy, the strong U.S. dollar and the timing of product
shipments in certain European markets. For the three months ended
March 31, 1999 and 1998, international sales accounted for 28% and
31%, respectively, of total net sales for the Manufacturing Group.
15
Gross profit margins were 29.1% for the 1999 first quarter as
compared to 28.7% for the first quarter of 1998. Quarterly operating
margins grew due to ongoing cost improvement programs and
productivity gains in manufacturing processes. Manufacturing
operating expenses for the quarter increased by 3% compared to the
same period in 1998 due to increased sales and timing of market
development expenditures.
Consolidated Income Taxes
- -------------------------
Income tax expense was $2.5 million higher for the first three months
of 1999, compared to the same period last year, reflecting increased
pre-tax income.
Liquidity and Capital Resources
- -------------------------------
Cash flow from operations for the three months ended March 31, 1999
increased by $11.4 million, or 19%, from the comparable period in
1998. Due to the seasonal nature of the energy business, accrued
revenues, accounts receivable and accounts payable levels are higher
in the heating season as compared with the summer months. The cash
flow improvement is due primarily to increased earnings and lower gas
prices.
Capital expenditures were level for the three months ended March 31,
1999, compared to the same period in 1998.
The Company anticipates additional short-term borrowing during the
third and fourth quarters of 1999 to finance working capital,
primarily gas in storage and the financing of accounts receivable
during the heating season. The Company believes it has sufficient
capacity under existing lines of credit to satisfy its future working
capital needs.
Proposed New Pipeline
- ---------------------
On March 10, 1999, the Company announced the formation of a joint
venture to construct the Guardian interstate natural gas pipeline from
the Chicago market hub near Joliet, Illinois to southeastern
Wisconsin. Subsidiaries of CMS Energy, a Dearborn, Michigan based
international energy company, and Northern States Power Company, a
Minneapolis based diversified energy company, are the sponsors of the
project with WICOR. The three partners will have equal ownership
interests in the project.
16
The Guardian Pipeline will consist of approximately 150 miles of 36-
inch pipe and related compression equipment and will be designed to
carry at least 650,000 Dekatherms per day of gas. The total cost of
the project, which requires United States Federal Energy Regulatory
Commission (FERC) approval, is approximately $230 million. The
pipeline is scheduled to be in service by November 1, 2002. Wisconsin
Gas has committed to purchase 650,000 Dekatherms per day of capacity
on the pipeline and will construct a 35-mile lateral at a cost of
approximately $45 million to connect its distribution system to the
Guardian Pipeline.
The project, if approved by FERC and placed in service, is expected to
increase the availability and reliability of gas transportation
service in Northern Illinois and southeastern Wisconsin as well as
introduce or increase competition among pipelines serving the area.
Year 2000 Date Conversion
- -------------------------
Issues relating to Year 2000 date 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.
17
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 March 31, 1999, the
Company believes it is approximately 84% 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 March 31, 1999 is
approximately 86% 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.
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 March 31, 1999, the Company had spent approximately $4.3
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.
18
Euro Conversion
- ---------------
On January 1, 1999, eleven member countries of the European Union
established fixed conversion rates between their existing sovereign
currencies, and adopted the Euro as their new common legal currency.
As of that date, the Euro began trading on currency exchanges and the
legacy currencies remained legal tender in the participating
countries for a transition period between January 1, 1999 and January
1, 2002.
The Euro conversion may affect cross-border competition by creating
greater cross-border price transparency. The Company is assessing its
pricing/marketing strategy in order to ensure that it remains
competitive in a broader European market. The Company is also
assessing its information technology systems to allow for
transactions to take place in both the legacy currencies and the Euro
and the eventual elimination of the legacy currencies, and reviewing
whether certain existing contracts will need to be modified. The
currency risk and risk management for operations in participating
countries may be reduced as the legacy currencies are converted to
the Euro. Based on current information and current assessments, the
Company does not expect that transitioning to the Euro currency will
have a material adverse effect on its business or financial
condition.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
- -------------------------------------------------------------------
The Company's market risk includes the potential loss arising from
adverse changes in the price of natural gas and in foreign currency
exchange rates. The Company's objective in managing these risks is to
reduce fluctuations in earnings and cash flows associated with
changes in natural gas prices and foreign currency exchange rates.
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.
19
WICOR Energy Services Company 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.
Substantially all of the futures contracts expire in 1999. The
notional amount of these contracts is not material to the Company.
The Company manages foreign currency market risk through the use of a
variety of financial and derivative instruments. The Company uses
forward exchange contracts and other hedging activities to hedge the
U.S. dollar value resulting from anticipated foreign currency
transactions. The notional amount of these contracts is not material
to the Company.
20
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 WICOR, Inc. By-laws, as amended.
27 Financial data schedule (EDGAR version only).
(b) Reports on Form 8-K - There were no reports on Form 8-K filed by
the Company during the first quarter of 1999.
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
WICOR, INC.
Dated: April 30, 1999 By: /s/ Joseph P. Wenzler
Joseph P. Wenzler
Senior Vice President
and Chief Financial Officer