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 September 30, 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 October 22, 1999
- -------------------------- -------------------------------
Common Stock, $1 Par Value 37,630,241
2
CONTENTS
--------
PAGE
PART I - Financial Information 1
Consolidated Financial Statements of WICOR, Inc. (Unaudited):
Consolidated Statements of Operation for the
Three and Nine Months Ended September 30, 1999 and 1998 2
Consolidated Balance Sheets as of
September 30, 1999 and December 31, 1998 3-4
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1999 and 1998 5
Notes to Consolidated Financial Statements 6-8
Management's Discussion and Analysis of
Interim Financial Statements 9-13
Quantitative and Qualitative Disclosures About Market Risk 14
PART II - Other Information and Exhibits
Legal Proceedings 15-16
Submission of Matters to a Vote of Security Holders 16
Exhibits and Reports on Form 8-K 16-17
Signatures 18
3
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 equipment used to pump,
process, 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.
WICOR has entered into an agreement and plan of merger, dated as of June
27, 1999, as amended, with Wisconsin Energy Corporation ("Wisconsin
Energy") providing for a strategic business combination of Wisconsin Energy
and WICOR through the merger of WICOR and a wholly-owned subsidiary of
Wisconsin Energy. Consummation of the merger is subject to certain closing
conditions, including the approval of the shareholders of both WICOR and
Wisconsin Energy and the approval of the Public Service Commission of
Wisconsin, the Securities and Exchange Commission and antitrust regulators.
On October 27, 1999, shareholders of WICOR and Wisconsin Energy approved
the merger at the special meetings of their respective shareholders held
for that purpose. Additional information with respect to the pending
merger with Wisconsin Energy is included in Note 1 to the financial
statements included herein.
4
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 are generally
beyond management's control. Such factors include, but are not limited to,
the following:
>> 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
>> unforeseen events delaying or preventing the consummation of
the strategic business combination with Wisconsin Energy
5
Part 1 - Financial Information
------------------------------
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 WICOR's 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.
6
WICOR, INC.
Consolidated Statements of Operation (Unaudited)
(Amounts in Thousands, Except Per Share Data)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
Operating Revenues:
Energy $ 69,110 $ 63,351 $ 343,666 $ 340,615
Manufacturing 127,846 109,395 382,863 355,337
---------- ---------- ---------- ----------
196,956 172,746 726,529 695,952
---------- ---------- ---------- ----------
Operating Costs and Expenses:
Cost of gas sold 42,298 39,728 201,678 211,226
Manufacturing cost of sales 89,786 78,443 268,574 253,261
Operations and maintenance 47,631 42,823 151,230 140,593
Depreciation and amortization 9,316 8,758 27,629 26,162
Taxes, other than income taxes 1,964 2,197 6,187 7,024
---------- ---------- ---------- ----------
190,995 171,949 655,298 638,266
---------- ---------- ---------- ----------
Operating Income 5,961 797 71,231 57,686
---------- ---------- ---------- ----------
Interest Expense (3,635) (4,049) (11,808) (12,634)
Other (Expenses) Income, net (492) 1,300 (611) 2,966
---------- ---------- ---------- ----------
Income Before Income Taxes 1,834 (1,952) 58,812 48,018
Income Tax Provision (Benefit) 1,192 (741) 23,312 18,242
---------- ---------- ---------- ----------
Net Earnings (Loss) $ 642 $ (1,211) $ 35,500 $ 29,776
========== ========== ========== ==========
Per Share of Common Stock:
Basic earnings (loss) $ 0.02 $ (0.03) $ 0.95 $ 0.80
Diluted earnings (loss) $ 0.02 $ (0.03) $ 0.94 $ 0.79
Cash Dividends paid $ 0.225 $ 0.220 $ 0.665 $ 0.650
Average shares outstanding 37,560 37,335 37,481 37,297
Average diluted shares outstanding 38,169 37,335 37,891 37,602
The accompanying notes are an integral part of these statements.
7
WICOR, INC.
Consolidated Balance Sheets
September 30,
1999 December 31,
(Unaudited) 1998
------------- ------------
Assets (Thousands of Dollars)
Current Assets:
Cash and cash equivalents $ 389 $ 13,383
Accounts receivable, less allowance
for doubtful accounts of $13,795
and $12,511, respectively 125,474 137,321
Accrued revenues 11,249 47,483
Manufacturing inventories 78,124 86,312
Gas in storage, at weighted average cost 48,026 36,919
Deferred income taxes 17,252 17,195
Prepayments and other 15,947 7,657
------------- ------------
296,461 346,270
------------- ------------
Property, Plant and Equipment (less accum-
ulated depreciation of $563,081
and $535,002, respectively) 450,338 447,665
------------- ------------
Deferred Charges and Other:
Goodwill 83,085 67,552
Regulatory assets 53,640 59,319
Prepaid pension costs 56,200 50,011
Other 35,743 36,494
------------- ------------
228,668 213,376
------------- ------------
$ 975,467 $ 1,007,311
============= ============
The accompanying notes are an integral part of these statements.
8
WICOR, Inc.
Consolidated Balance Sheets
(continued)
September 30,
1999 December 31,
(Unaudited) 1998
------------- -------------
(Thousands of Dollars)
Liabilities and Capitalization
Current Liabilities:
Short-term borrowings $ 51,257 $ 107,653
Accounts payable 81,075 70,000
Current portion of long-term debt 1,342 3,528
Refundable gas costs 21,223 18,570
Accrued payroll and benefits 22,973 20,490
Other 23,979 16,526
------------- -------------
201,849 236,767
------------- -------------
Deferred Credits and Other:
Postretirement benefit obligation 54,748 60,627
Regulatory liabilities 29,359 32,153
Deferred income taxes 49,564 49,065
Accrued environmental remediation costs 4,639 11,215
Unamortized investment tax credit 6,124 6,357
Other 19,149 19,217
------------- -------------
163,583 178,634
------------- -------------
Capitalization:
Long-term debt 192,349 188,470
Common stock 37,619 37,359
Other paid-in capital 220,627 216,821
Retained earnings 171,505 160,937
Accumulated other comprehensive income (8,540) (7,905)
Unearned compensation - ESOP
and restricted stock (3,525) (3,772)
------------- -------------
610,035 591,910
------------- -------------
$ 975,467 $ 1,007,311
============= =============
The accompanying notes are an integral part of these statements.
9
WICOR, INC.
Consolidated Statement of Cash Flows (Unaudited)
Nine Months Ended
September 30,
----------------------
1999 1998
(Thousands of Dollars) ---------- ----------
Operations:
Net earnings $ 35,500 $ 29,776
Adjust. to reconcile net earnings to net cash flows:
Depreciation and amortization 42,944 41,231
Deferred income taxes 442 650
Net pension and other postretirement benefit (income) (8,367) (5,108)
Change in:
Receivables 51,132 78,954
Manufacturing inventories 11,236 1,261
Gas in storage (11,107) (3,440)
Other current assets 299 (571)
Accounts payable 8,556 (8,759)
Refundable gas costs 2,653 (8,845)
Accrued taxes (8,432) 282
Other current liabilities 7,414 3,976
Other non-current assets and liabilities, net (12,530) (8,978)
---------- ----------
119,740 120,429
Investment Activities: ---------- ----------
Capital expenditures (37,086) (33,896)
Acquisitions (21,750) -
Other 82 326
---------- ----------
(58,754) (33,570)
Financing Activities: ---------- ----------
Change in short-term borrowings (50,396) (60,695)
Reduction in long-term debt (2,723) (12,368)
Issuance of long-term debt - 2,828
Issuance of common stock 4,066 2,155
Dividends paid on common stock (24,927) (24,242)
---------- ----------
(73,980) (92,322)
---------- ----------
Change in Cash and Cash Equivalents (12,994) (5,463)
Cash and Cash Equivalents at Beginning of Period 13,383 11,810
---------- ----------
Cash and Cash Equivalents at End of Period $ 389 $ 6,347
========== ==========
The accompanying notes are an integral part of these statements.
10
Notes to Consolidated Financial Statements (Unaudited):
- -------------------------------------------------------
1) WICOR and Wisconsin Energy have entered into an Agreement and Plan
of Merger, dated as of June 27, 1999, as amended (the "Merger Agreement"),
providing for a strategic business combination of WICOR and Wisconsin
Energy through a merger of WICOR and a wholly-owned subsidiary of Wisconsin
Energy ( the "Merger").
Subject to the terms of the Merger Agreement, at the time of the merger,
each outstanding share of WICOR common stock, par value $1.00 per share
("WICOR common stock") (together with the associated common stock purchase
right issued pursuant to WICOR's Rights Agreement) will be converted into
the right to receive cash, common stock, par value $.01 per share, of
Wisconsin Energy("Wisconsin Energy common stock"), or a combination of cash
and shares of Wisconsin Energy common stock (the "merger consideration")
having a value of $31.50 per share of WICOR common stock. In the event the
closing of the merger occurs after July 1, 2000, the $31.50 value per share
will be increased by an amount equivalent to six per cent per annum daily
simple interest for each day after July 1, 2000 through the closing date.
Prior to the closing date, Wisconsin Energy will select the percentage of
the merger consideration to be paid in Wisconsin Energy common stock, which
may be not less than 40% or more than 60%. The balance of the merger
consideration will be paid in cash. The exchange ratio for each share of
WICOR common stock converted into Wisconsin Energy common stock will be
determined by dividing $31.50 (as adjusted if the closing occurs after July
1, 2000) by the average of the closing prices of the Wisconsin Energy
common stock on the New York Stock Exchange for the 10 trading days ending
with the fifth trading day prior to the closing date (the "average
Wisconsin Energy price"). Each WICOR shareholder will be entitled to elect
to receive cash, Wisconsin Energy common stock or a combination thereof,
subject to proration if the cash or stock elections exceed the maximum
amounts permitted. Cash will be paid in lieu of any fractional shares of
Wisconsin Energy common stock which holders of WICOR common stock would
otherwise receive. If the average Wisconsin Energy price is less than
$22.00 per share, Wisconsin Energy may elect to pay the entire merger
consideration in cash. As of September 30, 1999, the closing price of
Wisconsin Energy common stock was $23.4375.
11
Consummation of the Merger is subject to satisfaction of certain closing
conditions set forth in the Merger Agreement, including approval by the
shareholders of WICOR and Wisconsin Energy, approval by the Public Service
Commission of Wisconsin, approval by the Securities and Exchange Commission
under the Public Utility Holding Company Act of 1935, as amended, and
expiration or termination of the waiting period applicable to the Merger
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.
On October 27, 1999, shareholders of WICOR and Wisconsin Energy approved
the Merger at the special meetings of their respective shareholders held
for that purpose. The regulatory approval process is expected to be
completed within 9 to 12 months from the date of the Merger Agreement.
The Merger is intended to qualify as a tax-free reorganization under the
Internal Revenue Code of 1986, as amended, to the extent that shares of
WICOR common stock are exchanged for shares of Wisconsin Energy common
stock, and will be accounted for as a purchase transaction. The Merger
Agreement provides that if the Merger Agreement is terminated under certain
circumstances and WICOR enters into a competing transaction with another
party within 21 months after the termination, WICOR will pay a termination
fee of $25 million to Wisconsin Energy.
2) The Company and its subsidiaries maintain lines of credit worldwide.
At September 30, 1999, the Company had borrowings of $7.4 million and
availability of $205.5 million under unsecured lines of credit with several
banks.
A total of $66.7 million of commercial paper was outstanding as of
September 30, 1999 at a weighted average interest rate of 5.4%. Commercial
paper borrowings of $23.0 million were classified as long-term debt as of
September 30, 1999. The Company's commercial paper borrowings are
supported by the Company's unsecured lines of credit referred to above.
3) 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 Nine Months
Ended September 30,
----------------------
1999 1998
---------- ----------
(Thousands of Dollars)
Income taxes paid $ 32,499 $ 20,355
Interest paid $ 10,404 $ 11,175
12
4) Total comprehensive income for the nine months ended September 30,
1999 and 1998 is as follows:
1999 1998
---------- ----------
(Thousands of Dollars)
Net earnings $ 35,500 $ 29,776
Other comprehensive income
Currency translation adjustments (635) (2,473)
---------- ----------
Total comprehensive income $ 34,865 $ 27,303
========== ==========
5) 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 equipment used to pump, process, 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 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. 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.
13
Summarized financial information concerning the Company's reportable
segments for the three months ending September 30, 1999 and 1998 is shown
in the following table.
Energy
------------------------------
REGULATED OTHER TOTAL MANUFACTURING CONSOLIDATED
--------- --------- ---------- ------------- ------------
(Thousands of Dollars)
1999
- ----
Revenues $ 56,827 $ 12,283 $ 69,110 $ 127,846 $ 196,956
Depreciation and
amortization $ 10,653 $ 27 $ 10,680 $ 3,731 $ 14,411
Net (loss) earnings $ (6,018) $ (528) $ (6,546) $ 7,188 $ 642
Total assets $603,678 $ 14,514 $ 618,192 $ 357,275 $ 975,467
Capital expenditures $ 14,338 $ 42 $ 14,380 $ 2,200 $ 16,580
1998
- ----
Revenues $ 53,987 $ 9,364 $ 63,351 $ 109,395 $ 172,746
Depreciation and
amortization $ 10,033 $ 33 $ 10,066 $ 3,352 $ 13,418
Net (loss) earnings $ (6,095) $ (587) $ (6,682) $ 5,471 $ (1,211)
Total assets $608,610 $ 9,651 $ 618,261 $ 324,379 $ 942,640
Capital expenditures $ 11,269 $ 63 $ 11,332 $ 2,098 $ 13,430
14
Summarized financial information concerning the Company's reportable
segments for the nine months ending September 30, 1999 and 1998 is shown in
the following table.
Energy
------------------------------
REGULATED OTHER TOTAL MANUFACTURING CONSOLIDATED
--------- --------- ---------- ------------- ------------
(Thousands of Dollars)
1999
- ----
Revenues $302,546 $ 41,120 $ 343,666 $ 382,863 $ 726,529
Depreciation and
amortization $ 31,496 $ 82 $ 31,578 $ 11,366 $ 42,944
Net earnings (loss) $ 14,512 $ (1,351) $ 13,161 $ 22,339 $ 35,500
Total assets $603,678 $ 14,514 $ 618,192 $ 357,275 $ 975,467
Capital expenditures $ 28,930 $ 121 $ 29,051 $ 8,035 $ 37,086
1998
- ----
Revenues $301,624 $ 38,991 $ 340,615 $ 355,337 $ 695,952
Depreciation and
amortization $ 30,167 $ 88 $ 30,255 $ 10,976 $ 41,231
Net earnings $ 10,691 $ 313 $ 11,004 $ 18,772 $ 29,776
Total assets $608,610 $ 9,651 $ 618,261 $ 324,379 $ 942,640
Capital expenditures $ 24,300 $ 114 $ 24,414 $ 9,482 $ 33,896
15
Item 2. Management's Discussion and Analysis
of Interim Financial Statements of
WICOR, Inc.
WICOR and Wisconsin Energy have entered into an agreement and plan of
merger, dated as of June 27, 1999, as amended (the "Merger Agreement"),
providing for a strategic business combination of WICOR and Wisconsin
Energy. Further information concerning the Merger Agreement and proposed
transaction is included in Note 1 to the financial statements included
herein.
Results of Operations
- ---------------------
Consolidated net earnings climbed to $0.6 million for the third quarter of
1999 compared to a consolidated net loss of $1.2 million in the same period
of the prior year. Continued strength in manufacturing operations enabled
the Company to post positive third quarter earnings for the first time
since it was formed in 1980. The Company's energy business typically
incurs a loss in the third quarter due to the seasonal nature of the gas
distribution utility business. Consolidated net earnings for the nine
months ended September 30, 1999, increased by $5.7 million, or 19%, to
$35.5 million compared to the same period of last year.
The following factors had a significant effect on the results of operations
during the three- and nine-month periods ended September 30, 1999.
Energy Group
- ------------
The net loss for the third quarter of 1999 was slightly less than the net
loss for the 1998 third quarter. Improved margins during the period were
partially offset by increased operating costs and merger related expenses.
Net earnings for the nine months ended September 30, 1999 increased by $2.2
million, or 20%, to $13.2 million compared to $11.0 million for the same
period last year. The improvement in year-to-date earnings was driven by
increased sales caused by favorable weather and a $7.5 million annual rate
increase effective August 1, 1998, offset in part by higher operating
expenses and $2.0 million in merger related costs.
16
Revenues, margins and volumes are summarized below for each of the periods
shown. 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 does not impact margin. The Company operates under a gas cost
incentive mechanism ("GCIM") which allows it to share in the risk and
rewards of purchasing gas. The GCIM favorably impacted margins by $1.0
million for each of the three month periods ended September 30, 1999 and
1998 and $2.2 million for each of the nine month periods ended September
30, 1999 and 1998.
The following tables set forth net (loss) earnings for the Energy Group and
volume data for the utility during each of the three- and nine-month
periods ended September 30.
17
Three Nine
Months Ended Months Ended
September 30, September 30,
----------------- % ----------------- %
1999 1998 Change 1999 1998 Change
-------- -------- ------ -------- -------- ------
(Millions of Dollars)
Energy Revenues $ 65.0 $ 59.0 10 $ 327.0 $ 324.5 1
Cost of Gas Sold 42.3 39.7 7 201.7 211.2 (4)
-------- -------- -------- --------
Sales Margin 22.7 19.3 18 125.3 113.2 11
Gas Transportation Margin 4.1 4.3 (5) 16.7 16.2 3
-------- -------- -------- --------
Gross Margin 26.8 23.6 14 142.0 129.4 10
-------- -------- -------- --------
Operation and Maintenance 22.5 21.8 3 77.4 73.7 5
Depreciation/Amortization 8.9 8.4 6 26.6 25.2 6
Taxes, Other Than Income Tax 2.0 2.2 (9) 6.2 7.0 (11)
-------- -------- -------- --------
Operating Expenses 33.4 32.4 3 110.2 105.9 4
-------- -------- -------- --------
Operating (Loss) Income (6.6) (8.8) 25 31.8 23.5 35
-------- -------- -------- --------
Interest Expense (2.8) (3.0) 7 (8.9) (9.1) 2
Other Income/(Expenses), net (0.5) 1.1 (145) (0.6) 3.0 (120)
-------- -------- -------- --------
Pretax (Loss) Earnings (9.9) (10.7) 7 22.3 17.4 28
Income Tax (Benefit) Expense (3.4) (4.0) 15 9.1 6.4 42
-------- -------- -------- --------
Net (Loss) Earnings $ (6.5) $ (6.7) 3 $ 13.2 $ 11.0 20
======== ======== ======== ========
(Millions of Therms)
Utility Sales Volumes
- ---------------------
Firm 51.2 44.8 14 475.0 441.9 7
Interruptible 5.0 6.1 (18) 20.6 28.1 (27)
Transportation Volume 96.8 92.4 5 363.5 329.3 10
-------- -------- -------- --------
Total Throughput 153.0 143.3 7 859.1 799.3 7
======== ======== ======== ========
Degree Days
Actual 121 47 157 4,231 3,857 10
======== ======== ======== ========
20 year average 155 4,547
======== ========
18
The increase in firm sales volumes for the three and nine months ended
September 30, 1999, was caused principally by colder weather during the
heating season in 1999 compared to 1998. However, the weather in 1999 was
warmer than the 20-year average. For both the three and nine month periods
ended September 30, 1999, transportation volumes increased, compared to the
same periods in 1998, mainly because more customers purchased gas from
sources other than Wisconsin Gas and transported the volumes over the
Wisconsin Gas distribution system.
Non-regulated Energy Group revenues for the first nine months of 1999
increased by $2.1 million, or 5%, compared to the same period of 1998.
Operating and maintenance expenses increased $0.7 million, or 3%, and $3.7
million, or 5%, for the three and nine month periods ended September 30,
1999, respectively, compared with the same periods last year. The increase
reflects quarterly charges of $1.9 million relating to PSCW-approved
additional uncollectible accounts expense, which became effective November
1, 1998. The increase for the quarter and year-to-date periods was
partially offset by lower labor and benefit expenses at Wisconsin Gas.
Depreciation expense for the three and nine month periods ended September
30, 1999, increased by $0.5 million and $1.4 million, respectively,
compared with the same periods of 1998. The increase in both periods was
due to increased plant additions.
Other income (expenses), net decreased by $1.6 million and $3.6 million,
during the three and nine month periods ended September 30, 1999,
respectively, compared to the same periods in 1998. During the three and
nine month periods ended September 30, 1999, the Company recorded $0.8
million and $2.0 million of expenses (approximately $0.02 and $0.05 per
share, respectively, after tax) relating to the proposed merger with
Wisconsin Energy. During the year-to-date period, the Company recorded
gains in connection with weather derivative agreements of $0.4 million in
1999 and $1.2 million in 1998. The Company entered into the weather
derivative agreements to partially mitigate the risk that warmer than
average weather has on Energy Group earnings. In addition, the third
quarter of 1998 was positively impacted by a $0.8 million pretax gain
associated with the sale of non-utility land.
19
Manufacturing
- -------------
Manufacturing net earnings for the three and nine month periods ended
September 30, 1999, increased to $7.2 million and $22.3 million,
respectively, as compared with $5.5 million and $18.8 million for the same
periods in 1998.
Three Nine
Months Ended Months Ended
September 30, September 30,
----------------- % ----------------- %
(Millions of Dollars) 1999 1998 Change 1999 1998 Change
-------- -------- ------ -------- -------- ------
Net Sales $ 127.8 $ 109.4 17 $ 382.9 $ 355.3 8
Cost of goods sold 89.8 78.4 15 268.6 253.3 6
-------- -------- -------- --------
Gross profit 38.0 31.0 23 114.3 102.0 12
Operating expenses 25.4 21.3 19 74.9 67.9 10
-------- -------- -------- --------
Operating income 12.6 9.7 30 39.4 34.1 16
Interest expense (0.9) (1.1) 18 (3.0) (3.6) 17
Other Income/(expense), net 0.1 0.2 (50) 0.1 0.1 -
-------- -------- -------- --------
Net income before income taxes 11.8 8.8 34 36.5 30.6 19
Income taxes 4.6 3.3 39 14.2 11.8 20
-------- -------- -------- --------
Net earnings $ 7.2 $ 5.5 31 $ 22.3 $ 18.8 19
======== ======== ======== ========
Net sales for the third quarter of 1999 increased $18.4 million, or 17%,
compared to the same period in 1998. During the third quarter of 1999,
domestic sales increased $15.3 million, or 19%, and international sales
increased $3.1 million, or 11%, compared to the same period last year.
20
Increased domestic sales in the third quarter were related to greater
demand within the filtration, water systems, industrial, pool/spa and RV-
marine markets. The increase resulted from customer base growth, new
product market penetration, and generally favorable economic and weather
conditions in the United States. The June 1999 acquisition of Omni
Corporation ("Omni") (see the Liquidity and Capital Resources section in
the Company's 1999 Second Quarter Form 10-Q) contributed an additional $6.5
million in the third quarter of 1999. Hurricane-related flooding in the
eastern coastal states caused higher than normal demand for drainer/utility
pumps, which resulted in increased retail sales. In addition, pool/spa
sales were up for the quarter. Domestic sales for the nine months ended
September 30, 1999, increased $30.2 million to $279.8 million.
International sales for the third quarter increase 11% to $32.7 million
over the same period last year. The increase in international sales was
due primarily to improving economies and market conditions in most overseas
markets. On a year to date basis through September 30, 1999, international
sales decreased by 3% over the same period in 1998. For the nine months
ended September 30, 1999 and 1998, international sales accounted for 27%
and 30%, respectively, of the total net sales for the Manufacturing Group.
Gross profit margins for the three and nine months ended September 30, 1999
improved to 29.7% and 29.9%, respectively, as compared with 28.3% and 28.7%
in the same periods of 1998, respectively. The improvement in operating
margins is directly correlated to ongoing cost improvement programs and
productivity gains in manufacturing processes.
Operating expenses for the nine months ended September 30, 1999, increased
10% compared to the same period for last year partially due to the impact
of higher support spending for product line acquisitions, market
introductions of new products, and customer development.
Consolidated Income Taxes
- -------------------------
Income tax expense was $5.1 million higher for the first nine months of
1999 compared to the same period last year, reflecting higher pre-tax
income.
21
Liquidity and Capital Resources
- -------------------------------
Cash flow from operations for the nine months ended September 30, 1999,
decreased slightly from the comparable period in 1998. Due to the seasonal
nature of the energy business, accrued revenues, accounts receivable and
accounts payable amounts are higher in the heating season as compared with
the summer months. Cash flow from operations exceeded capital expenditures
and dividend requirements for the first nine months in both 1999 and 1998.
Capital expenditures increased by $3.2 million, or 9%, to $37.1 million for
the nine months ended September 30, 1999, compared to the same period in
1998. Cash flow from operations is expected to be sufficient to fund
remaining capital expenditures for 1999.
Additional short-term borrowing will be needed during the fourth quarter of
1999 to finance working capital, primarily related to gas purchased for
injection into storage and the financing of accounts receivable during the
heating season. The Company believes that it has sufficient borrowing
capacity under commercial paper programs or existing lines of credit to
satisfy these working capital needs.
In October 1999, the Company acquired the assets of Simer Pump, a division
of the Rival Company of Kansas City, Missouri, and Western Dispensing
Technologies, Inc., of Santa Barbara, California. Simer manufactures sump,
utility, water well and emergency back-up pumps and accessories that are
sold in both domestic and overseas markets. Western Technologies designs
and manufactures chemical dispensing systems used in commercial laundry,
janitorial and institutional applications. The purchase price for both
acquisitions totaled approximately $17 million and the transactions have
been accounted for using the purchase method of accounting. The cost in
excess of net assets acquired was approximately $8 million and will be
amortized over forty years.
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. 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.
22
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 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 September 30, 1999, the
Company believes it is substantially compliant on all of its significant
systems, with just a few changes remaining on non mission critical systems.
The Company believes that its Operating Equipment at September 30, 1999, is
also substantially compliant. The few remaining systems will be verified or
upgraded by November 15, 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.
The Company's Year 2000 Program is designed to minimize the possibility of
serious Year 2000 interruptions. However, since their possibility cannot
be eliminated, the Company has developed contingency plans addressing Year
2000 concerns in mission critical areas of the Company, and for other areas
as deemed practicable and advisable by the Company. Such plans for mission
critical processes will continue to be revised and updated, through the end
of the calendar year; such plans are still subject to internal approvals
and will also be tested on an audit basis as the end of the calendar year
approaches. Other contingency plans will be prepared, tested and updated
as deemed practicable and appropriate by the Company.
23
The Company currently believes that the most likely worst-case scenario is
that there will be some Year 2000 disruptions at individual locations that
could affect individual business processes, facilities or third parties for
a short time. The Company does not expect such disruptions to be long-term
or for the disruptions to affect the operations of the Company as a whole.
Because of the uncertainty as to the exact nature or location of potential
Year 2000 related problems that might arise, the business
continuity/contingency planning has focused on development of flexible
plans to minimize the scope, impact and duration of any Year 2000 problems
that occur. The Company plans to have personnel and resources available to
deal with any Year 2000 problems that occur. Some of the currently planned
contingency actions include designated emergency response teams, increased
staffing at critical times, alternative suppliers of critical products and
services, heightened proactive monitoring at likely dates of impact, and
manual workarounds.
Through September 30, 1999, the Company has spent approximately $4.9
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 $0.25 million and is expected to be funded
through operating cash flow.
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
purchased 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.
24
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 occur. Substantially all of the futures
contracts expire prior to February 29, 2000. 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 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.
25
Part II - Other Information
- ---------------------------
Item 1. Legal Proceedings
- -------------------------
As previously reported, WICOR, Inc. (the "Company") entered into an
Agreement and Plan of Merger (the "Merger Agreement"), dated June 27, 1999,
as amended, by and between the Company, Wisconsin Energy Corporation
("Wisconsin Energy") and CEW Acquisition, Inc. ("Acquisition"). Pursuant to
the terms of the Merger Agreement and subject to receipt of regulatory
approvals, the Company and Acquisition will merge and, as a result, the
Company will become a wholly-owned subsidiary of Wisconsin Energy. In the
merger, shareholders of the Company will receive, either in cash, in
Wisconsin Energy common stock, or in a combination of cash and stock,
consideration valued at $31.50 for each share of Company common stock they
hold. In the event the merger occurs after July 1, 2000, the amount of the
merger consideration will increase daily by an amount computed at the rate
of approximately 6% simple interest per annum. Shareholders of the Company
and Wisconsin Energy each approved the Merger Agreement and the
transactions contemplated thereby at special meetings of shareholders held
on October 27, 1999.
On July 2, 1999, following public announcement of the execution of the
Merger Agreement, an action was filed by a shareholder of the Company in
the Circuit Court of Milwaukee County, Wisconsin against the Company, all
of the members of its Board of Directors and Wisconsin Energy. The
complaint alleges that the consideration to be received by the shareholders
of the Company in the proposed merger is inadequate and unfair to
shareholders of the Company. The complaint also alleges that Wisconsin
Energy aided, abetted and assisted in the alleged breaches of the fiduciary
duties of the individual defendants. The complaint seeks certification as
a class action on behalf of all shareholders of the Company, an injunction
against proceeding with the merger, an auction or open bidding process for
the sale of the Company, and unspecified damages. On September 9, 1999, a
stipulation of settlement was entered into with respect to the shareholder
action. The stipulation is subject to final approval by the court, but is
otherwise binding upon the parties to the action. The stipulation provides
that:
* The Company will amend its Shareholder Rights Agreement (the "Rights
Agreement"), dated as of July 27, 1999, by and between the Company and
Chase Mellon Shareholder Services, L.L.C., to increase the ownership
threshold that triggers the rights from 15% to 20%. The Company entered
into such an amendment to the Rights Agreement on September 9, 1999.
26
* The Company and Wisconsin Energy agree to amend the Merger Agreement
to remove a provision regarding resisting certain types of acquisition
proposals for the Company and to reduce the special fee payable by the
Company upon termination of the Merger Agreement in certain circumstances
from $30 million to $25 million. The parties entered into an amendment to
the Merger Agreement on September 9, 1999, to effect these modifications.
* The parties agree to use their best efforts to obtain court
certification of a shareholder class for settlement purposes, from which
members of the class cannot opt-out following an opportunity for class
members to address the court regarding the settlement, and which will
include all persons who were shareholders of the Company from June 27,
1999, through the effective date of the merger.
* The parties agree to use their best efforts to obtain the dismissal
with prejudice of all claims asserted in the action or which could have
been asserted in the action.
* The Company and Wisconsin Energy agree not to oppose a petition of
plaintiff's counsel requesting the award of $430,000 of attorneys' fees and
expenses to be paid by the Company and Wisconsin Energy upon the
consummation of the settlement.
* The consummation of the settlement is subject to, and the related
amendments to the Merger Agreement described above are conditioned upon,
final court approval and the consummation of the merger.
Although the Company believes that final court approval of the settlement
will be received, the court retains discretion not to grant approval or to
require modifications to the proposed settlement. In the event court
approval is not obtained, the Company intends to pursue a vigorous defense
against the action. If the court requires modifications to the settlement,
the Company would, in conjunction with Wisconsin Energy, evaluate the
merits of the modifications in determining whether to accept the modified
settlement.
Item 4. Submission of Matters to a Vote of Security Holders
- -----------------------------------------------------------
The Agreement and Plan of Merger, dated June 27, 1999, as amended, among
the Company, Wisconsin Energy and Acquisition was approved by the
shareholders of the Company at a special meeting of shareholders held on
October 27, 1999. With respect to such matter, the number of shares voted
for and against were 27,474,624 and 1,220,772, respectively. The number of
shares abstaining was 282,779.
27
Item 6. Exhibits and Reports on Form 8-K
- ----------------------------------------
(a) Exhibits
2.1 Amendment to Agreement and Plan of Merger, dated as of September
9, 1999, by and among Wisconsin Energy Corporation, WICOR, Inc. and CEW
Acquisition, Inc. (incorporated by reference to Exhibit 2.1 to the
Company's Current Report on Form 8-K dated September 9, 1999).
3.1 WICOR, Inc. By-Laws, as amended.
4.1 Rights Agreement, dated as of July 27, 1999, between WICOR, Inc.
and Chase Mellon Shareholder Services LLC (incorporated by reference to
Exhibit 4.1 to the Company's Current Report on Form 8-K dated July 27,
1999).
4.2 Amendment No. 1, dated as of September 9, 1999, to Rights
Agreement, dated as of July 27, 1999, by and between WICOR, Inc. and Chase
Mellon Shareholder Services, LLC, as Rights Agent (incorporated by
reference to Exhibit 4.1 to the Company's Current Report on Form 8-K dated
September 9, 1999).
10.1 Form of amendment to the Deferred Compensation Agreement between
Wisconsin Gas Company and Thomas F. Schrader.
27 Financial data schedule (EDGAR version only).
(b) Reports on Form 8-K
The following reports on Form 8-K were filed during the three months
ended September 30, 1999:
1. Current Report on Form 8-K, dated July 29, 1999, reporting under
Items 5 and 7 the adoption of a new shareholders rights plan and the
declaration of one common share purchase right for each outstanding share
of common stock, $1.00 par value, of the Company.
2. Current Report on Form 8-K, dated September 9, 1999, reporting
under Items 5 and 7 the announcement of a stipulation of settlement with
respect to an action filed by a shareholder of the Company in the Circuit
Court of Milwaukee County, Wisconsin against the Company, all of the
members of its Board of Directors and Wisconsin Energy.
28
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: November 12, 1999 By: /s/ Joseph P. Wenzler
Joseph P. Wenzler
Senior Vice President
and Chief Financial Officer
29
WICOR, Inc.
Form 10-Q Exhibits
Exhibit No. Description
- ----------- --------------------------------------------
2.1 Amendment to Agreement and Plan of Merger,
dated as of September 9, 1999, by and among
Wisconsin Energy Corporation, WICOR, Inc. and CEW
Acquisition, Inc. (incorporated by reference to
Exhibit 2.1 to the Company's Current Report on
Form 8-K dated September 9, 1999).
3.1 WICOR, Inc. By-Laws, as amended.
4.1 Rights Agreement, dated as of July 27, 1999, between
WICOR, Inc. and Chase Mellon Shareholder Services LLC
(incorporated by reference to Exhibit 4.1 to the
Company's Current Report on Form 8-K dated
July 27, 1999).
4.2 Amendment No. 1, dated as of September 9, 1999,
to Rights Agreement, dated as of July 27, 1999, by
and between WICOR, Inc. and Chase Mellon Shareholder
Services, LLC, as Rights Agent (incorporated by
reference to Exhibit 4.1 to the Company's Current Report
on Form 8-K dated September 9, 1999).
10.1 Form of amendment to the Deferred Compensation Agreement
between Wisconsin Gas Company and Thomas F. Schrader.
27 Financial data schedule