<PAGE>
<PAGE> 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, 1998
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 1-7530
Wisconsin Gas Company
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Wisconsin 39-0476515
-------------------------------- --------------------
(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)
414-385-7000
----------------------------------------------------
(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 16, 1998
- -------------------------- -------------------------------
Common Stock, $8 Par Value 1,125
<PAGE>
<PAGE> 2
INTRODUCTION
------------
Wisconsin Gas Company ("Wisconsin Gas" or "Company"), a natural
gas distribution public utility, is a Wisconsin corporation and a
wholly-owned subsidiary of WICOR, Inc. ("WICOR"), a diversified
holding company.
CONTENTS
--------
PAGE
------
PART I. Financial Information 1
Management's Discussion and Analysis of
Interim Financial Statements 2-5
Financial Statements of Wisconsin Gas Company (Unaudited):
Statements of Operation for the Three and Nine
Months Ended September 30, 1998 and 1997 6
Balance Sheets as of September 30, 1998 and
December 31, 1997 7-8
Statements of Cash Flows for the Nine
Months Ended September 30, 1998 and 1997 9
Notes to Financial Statements 10
PART II. Other Information 11
Signatures 12
<PAGE>
<PAGE> 3
Part I - Financial Information
Financial Statements
--------------------
The financial 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 Company's Annual Report on Form 10-
K for the year ended December 31, 1997.
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.
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 are beyond management's
control.
>> the impact of warmer- or colder-than-normal weather on the
energy business
>> economic conditions, including the availability of
individual discretionary income and changes in interest rates
>> 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
<PAGE>
<PAGE> 4
Management's Discussion and Analysis
of Interim Financial Statements of
Wisconsin Gas Company
Results of Operations
- ---------------------
The Company typically incurs a loss in the third quarter due to
the seasonal nature of the gas distribution utility business.
The net loss for the third quarter of 1998 was $6.1 million, or
7% less than the net loss for the 1997 third quarter. Net income
for the nine months ended September 30, 1998, was $10.7 million,
or 39% less than 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,
1998.
The decline in the net loss for the third quarter resulted
primarily from lower operating and maintenance expenses and a
gain realized on the sale of non-utility land. The effect of
these factors was partially negated by decreased gas margins,
resulting from lower firm sales volumes, which were in turn
partially offset by an increase in rates within the framework of
the Performance-based Alternative Ratemaking Mechanism (PARM) and
the impact of the gas cost incentive mechanism (GCIM)(see
Regulatory Matters). The decrease in 1998 year-to-date net
income was due to warmer weather during the heating season (18%
warmer than last year). The decrease was partially offset by
lower operating expenses.
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 the mix
of volumes between sales and transportation service affects
revenues but not margin. In addition, changes in the cost of gas
sold are flowed through to revenue under a gas adjustment clause.
The following tables set forth margin and volume data for each of
the periods shown.
<PAGE>
<PAGE> 5
<TABLE>
<CAPTION>
Three Nine
Months Ended Months Ended
September 30, September 30,
----------------- % ----------------- %
(Millions of Dollars) 1998 1997 Change 1998 1997 Change
-------- -------- ------ -------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Gas Sales Revenues $ 49.7 $ 54.1 (8) $ 285.4 $ 361.9 (21)
Cost of Gas Sold 32.1 36.2 (11) 180.2 241.7 (25)
-------- -------- -------- --------
Gas Sales Margin 17.6 17.9 (2) 105.2 120.2 (12)
Gas Transport Margin 4.3 4.4 (2) 16.2 16.1 1
-------- -------- -------- --------
Total Margin $ 21.9 $ 22.3 (2) $ 121.4 $ 136.3 (11)
======== ======== ======== ========
Sales Volumes
(Millions of Therms)
- --------------------
Firm 44.8 53.0 (15) 441.9 541.8 (18)
Interruptible 6.1 10.7 (43) 28.1 58.6 (52)
Transportation Volume 92.4 88.1 5 329.3 309.2 6
-------- -------- -------- --------
Total Throughput 143.3 151.8 (6) 799.3 909.6 (12)
======== ======== ======== ========
Degree Days
Actual 47 162 (71) 3,857 4,692 (18)
======== ======== ======== ========
20 year average 155 4,539
======== ========
</TABLE>
The decrease in firm sales volumes for the nine months ended
September 30, 1998, was caused principally by warmer weather,
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 the volumes over the Wisconsin
Gas distribution system. Historically, the movement to
transportation from gas sales had no impact on margin. A
slightly lower margin rate was put into effect on November 1,
1997, for transportation-only customers. The future impact of
this margin adjustment on total Company earnings is expected to
be immaterial. The weather was 15% warmer than the 20-year
average during the first nine months of 1998 and 18% warmer than
the same period in 1997.
<PAGE>
<PAGE> 6
Operating and maintenance expenses decreased by $0.7 million, or
3%, during the third quarter of 1998 compared to the third
quarter of 1997. Year-to-date operating and maintenance expenses
decreased $3.7 million, or 5%, compared to the same period of
last year. The decrease for the quarter and year-to-date periods
was due mainly to lower labor and benefit expenses.
Depreciation expense for the three and nine months ended
September 30, 1998, increased by $0.4 million, or 5%, and $1.7
million, or 7%, respectively, as compared to the same periods in
the prior year. The increase in both periods was due to
additions to depreciable plant balances.
Interest expense remained relatively level at $3.0 million and
$9.1 million for the three and nine months ended September 30,
1998, respectively, compared to the same periods of last year.
Other income and expense increased during the three- and six-
month periods ending September 30, 1998, due to a $0.8 million
pre-tax gain resulting from the sale of non-utility land.
Income tax expense was $4.6 million lower for the first nine
months of 1998, compared with the same period last year,
reflecting the decrease in pre-tax income.
Financial Condition
- -------------------
Cash flow from operations for the nine months ended September 30,
1998, decreased slightly from the comparable period in 1997. Due
to the seasonal nature of the energy business, accrued revenues,
accounts receivable and accounts payable are higher in the
heating season.
The Company anticipates additional short-term borrowing during
the fourth quarter of 1998 to finance working capital needs
primarily related to gas storage and the financing of accounts
receivable during the heating season. The Company has the
ability to issue commercial paper and borrow under existing lines
of credit to satisfy this working capital need.
In November, 1998, $40 million, 7-1/2% notes will mature. The
Company will use commercial paper to retire the notes and will
evaluate long-term financing options for the notes.
Cash flow from operations exceeded capital expenditures and
dividend requirements for the first nine months in both 1998 and
1997.
Capital expenditures remained relatively flat for the nine months
ended September 30, 1998, at $24.3 million compared to the same
period of last year. Cash flow from operations is expected to be
sufficient to fund remaining capital expenditures for 1998.
<PAGE>
<PAGE> 7
Regulatory Matters
- ------------------
The GCIM approved by the Public Service Commission of Wisconsin
(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 1-1/2% from the benchmark
cost of gas, the utility shares such excess or reduced costs on a
50-50 basis with customers. The sharing mechanism applies only
to costs between 1-1/2% to 4% above or below the benchmark. The
new 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 under the GCIM have been shared
between the Company and its customers.
The Company increased its rates, within the framework of PARM by
$7.5 million on an annualized basis effective August 1, 1998.
With this increase, Wisconsin Gas's rates recover $1.5 million
per year less than the maximum amount allowed by the PSCW's
November 1994 rate order. The Company has the ability to raise
or lower margin rates within a specified range on a quarterly
basis. The rate increase is expected to offset increased
operating costs.
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 all of 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, 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.
<PAGE>
<PAGE> 8
The Company's plan to resolve issues relatin to Year 2000
compliance 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 to assist with the project. 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 modifications to ensure it
remains operational.
For its Information Technology applications, the Company believes
it is approximately 52% 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 is
approximately 35% 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 inquires, 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 September 30, 1998, the Company had spent approximately
$3.0 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 (see Part 1
of this Form 10-Q).
<PAGE>
<PAGE> 9
WISCONSIN GAS COMPANY
Statements of Operation (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
(Thousands of Dollars)
<S> <C> <C> <C> <C>
Operating Revenues $ 53,987 $ 58,537 $ 301,624 $ 378,059
---------- ---------- ---------- ----------
Operating Expenses:
Cost of gas sold 32,073 36,205 180,182 241,721
Operations 16,926 17,530 58,471 61,883
Maintenance 2,266 2,341 6,450 6,759
Depreciation 8,397 7,989 25,079 23,416
Taxes, other than income taxes 2,196 2,307 7,022 7,091
---------- ---------- ---------- ----------
61,858 66,372 277,204 340,870
---------- ---------- ---------- ----------
Operating (Loss) Income (7,871) (7,835) 24,420 37,189
---------- ---------- ---------- ----------
Interest Expense 2,992 2,967 9,108 9,100
Other Income and (Expenses), net 1,138 247 1,632 470
---------- ---------- ---------- ----------
(Loss) Income Before Income Taxes (9,725) (10,555) 16,944 28,559
Income Tax (Benefit) Provision (3,630) (3,979) 6,253 10,888
---------- ---------- ---------- ----------
Net (Loss) Earnings $ (6,095) $ (6,576) $ 10,691 $ 17,671
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
<PAGE> 10
WISCONSIN GAS COMPANY
Balance Sheets
<TABLE>
<CAPTION>
September 30,
1998 December 31,
(Unaudited) 1997
------------- ------------
(Thousands of Dollars)
<S> <C> <C>
Assets
- ------
Property, Plant and Equipment, at cost $ 819,463 $ 801,069
Less - Accumulated depreciation 441,566 421,098
------------- ------------
377,897 379,971
------------- ------------
Current Assets:
Cash and cash equivalents 191 7,854
Accounts receivable, less allowance
for doubtful accounts of $11,854
and $13,306, respectively 29,218 72,238
Accrued revenues 5,602 39,986
Gas in storage, at weighted average cost 44,648 40,657
Materials and supplies, weighted average cost 4,094 3,192
Deferred income taxes 17,667 17,667
Prepaid taxes 3,846 6,162
Other 1,632 1,984
------------- ------------
106,898 189,740
------------- ------------
Deferred Charges and Other:
Regulatory assets 61,668 53,910
Systems development costs 13,976 17,424
Prepaid pension costs 40,076 35,212
Other 8,095 7,398
------------- ------------
123,815 113,944
------------- ------------
$ 608,610 $ 683,655
============= ============
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
<PAGE> 11
Wisconsin Gas Company
Balance Sheets
(continued)
<TABLE>
<CAPTION>
September 30,
1998 December 31,
(Unaudited) 1997
------------- ------------
(Thousands of Dollars)
<S> <C> <C>
Capitalization and Liabilities
- ------------------------------
Capitalization:
Common stock $ 9 $ 9
Other paid-in capital 120,557 120,677
Retained earnings 88,698 96,005
Accumulated other comprehensive income (1,442) (1,442)
Long-term debt 108,803 110,657
------------- ------------
316,625 325,906
------------- ------------
Current Liabilities:
Accounts payable 32,290 43,491
Accounts payable - intercompany, net 55 (233)
Short-term borrowings 43,946 78,671
Current portion of long-term debt 42,000 42,000
Refundable gas costs 15,930 24,776
Accrued payroll and benefits 9,921 8,066
Accrued taxes 1,807 5,537
Other 3,135 3,829
------------- ------------
149,084 206,137
------------- ------------
Deferred Credits and Other:
Regulatory liabilities 33,648 36,533
Postretirement benefit obligation 45,445 48,942
Deferred income taxes 37,690 37,689
Environmental remediation costs 9,277 12,084
Unamortized investment tax credit 6,584 6,808
Other 10,257 9,556
------------- ------------
142,901 151,612
------------- ------------
$ 608,610 $ 683,655
============= ===========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
<PAGE> 12
WISCONSIN GAS COMPANY
Statements of Cash Flows (Unaudited)
[CAPTION]
<TABLE>
Nine Months Ended
September 30,
----------------------
1998 1997
---------- ----------
(Thousands of Dollars)
<S> <C> <C>
Operations:
Net earnings $ 10,691 $ 17,671
Adjustments to reconcile net earnings
to net cash flows:
Depreciation and amortization 30,167 29,413
Deferred income taxes - -
Change in:
Receivables 67,405 78,072
Gas in storage (3,992) (16,702)
Other current assets (549) (983)
Accounts payable (11,201) (25,391)
Accrued taxes (1,414) 3,991
Refundable gas costs (8,845) (12,350)
Other current liabilities 1,449 5,101
Other non-current assets and liabilities (12,561) (7,222)
---------- ----------
71,150 71,600
---------- ----------
Investment Activities:
Capital expenditures (24,300) (24,228)
Other, net 212 240
---------- ----------
(24,088) (23,988)
---------- ----------
Financing Activities:
Change in short-term borrowings (34,725) (33,975)
Reduction of long-term debt (2,000) (2,000)
Cash dividends paid to WICOR, Inc. (18,000) (16,500)
---------- ----------
(54,725) (52,475)
---------- ----------
Change in Cash and Cash Equivalents (7,663) (4,863)
Cash and Cash Equivalents at
Beginning of Period 7,854 8,960
---------- ----------
Cash and Cash Equivalents at End of Period $ 191 $ 4,097
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
<PAGE> 13
Notes to Financial Statements (Unaudited):
- ------------------------------------------
1) At September 30, 1998, Wisconsin Gas had total unsecured
lines of credit available from several banks of $105 million. As
of September 30, 1998, commercial paper totaling $43.9 million
was outstanding under these credit agreements with a weighted
average interest rate of 5.5%.
2) For purposes of the 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,
----------------------
1998 1997
---------- ----------
(Thousands of Dollars)
Income taxes paid $ 10,615 $ 11,235
Interest paid $ 7,723 $ 7,710
3) For the three and nine month periods ended September 30,
1998 and 1997, net earnings was the only component of other
comprehensive income.
4) Certain prior year financial statement amounts have been
reclassified to conform to their current year presentation.
<PAGE>
<PAGE> 14
Part II - Other Information
- ---------------------------
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
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 third quarter of 1998.
<PAGE>
<PAGE> 15 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.
WISCONSIN GAS COMPANY
Dated: October 30, 1998 By: /s/ Joseph P. Wenzler
Joseph P. Wenzler
Senior Vice President and
Chief Financial Officer
<PAGE>
<PAGE> 16
Wisconsin Gas Company
FORM 10-Q Exhibits
Exhibit No. Description
- ----------- -------------------------
27 Financial data schedule
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
This schedule contains summary financial information extracted from the
Wisconsin Gas Company FORM 10-Q for the nine months ended September 30, 1998 and
is qualified in its entirety by reference to such financial statements and the
related footnotes.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 377,897
<OTHER-PROPERTY-AND-INVEST> 0
<TOTAL-CURRENT-ASSETS> 106,898
<TOTAL-DEFERRED-CHARGES> 123,815
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 608,610
<COMMON> 9
<CAPITAL-SURPLUS-PAID-IN> 120,557
<RETAINED-EARNINGS> 88,698
<TOTAL-COMMON-STOCKHOLDERS-EQ> 207,822
0
0
<LONG-TERM-DEBT-NET> 108,803
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 110,000
<COMMERCIAL-PAPER-OBLIGATIONS> 43,906
<LONG-TERM-DEBT-CURRENT-PORT> 42,000
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 206,079
<TOT-CAPITALIZATION-AND-LIAB> 608,610
<GROSS-OPERATING-REVENUE> 301,624
<INCOME-TAX-EXPENSE> 6,253
<OTHER-OPERATING-EXPENSES> 277,204
<TOTAL-OPERATING-EXPENSES> 283,457
<OPERATING-INCOME-LOSS> 18,167
<OTHER-INCOME-NET> 1,632
<INCOME-BEFORE-INTEREST-EXPEN> 19,799
<TOTAL-INTEREST-EXPENSE> 9,108
<NET-INCOME> 10,691
0
<EARNINGS-AVAILABLE-FOR-COMM> 10,691
<COMMON-STOCK-DIVIDENDS> 18,000
<TOTAL-INTEREST-ON-BONDS> 234
<CASH-FLOW-OPERATIONS> 71,150
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
