<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 June 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 1-7530
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 July 23, 1999
- -------------------------- -----------------------------
Common Stock, $8 Par Value 1,125
<PAGE>
<PAGE> 2
CONTENTS
PAGE
PART I - Financial Information 1
Financial Statements of Wisconsin Gas Company (Unaudited):
Statements of Operation for the Three
and Six Months Ended June 30, 1999 and 1998 2
Balance Sheets as of June 30, 1999 and
December 31, 1998 3-4
Statements of Cash Flows for the Six
Months Ended June 30, 1999 and 1998 5
Notes to Financial Statements 6
Management's Discussion and Analysis of
Interim Financial Statements 7-9
Quantitative and Qualitative Disclosures About Market Risk 9
PART II. Other Information
Submission of Matters to a vote of Security Holders 10
Exhibits and Reports on Form 10-K 10
Signatures 11
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.
On June 27, 1999, WICOR entered into an agreement with Wisconsin Energy
Corporation ("Wisconsin Energy") providing for a strategic business
combination of WICOR and Wisconsin Energy 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 and the Securities and
Exchange Commission.
<PAGE>
<PAGE> 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 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
>> 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, 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
<PAGE>
<PAGE> 4
Part 1 - Financial Information
- ------------------------------
Item 1. 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, 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.
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<PAGE> 5
WISCONSIN GAS COMPANY
Statements of Operation (Unaudited)
[CAPTION]
<TABLE>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
(Thousands of Dollars)
<S> <C> <C> <C> <C>
Operating Revenues $ 75,322 $ 78,190 $ 245,719 $ 247,637
---------- ---------- ---------- ----------
Operating Expenses:
Cost of gas sold 42,607 46,755 136,155 148,109
Operations 21,478 19,009 45,290 41,545
Maintenance 2,228 2,244 4,110 4,184
Depreciation 8,851 8,305 17,576 16,682
Taxes, other than income taxes 1,718 2,212 4,222 4,826
---------- ---------- ---------- ----------
76,882 78,525 207,353 215,346
---------- ---------- ---------- ----------
Operating (Loss) Income (1,560) (335) 38,366 32,291
---------- ---------- ---------- ----------
Interest Expense 2,699 2,730 6,121 6,116
Other Income and (Expenses), net 269 247 568 494
---------- ---------- ---------- ----------
(Loss) Income Before Income Taxes (3,990) (2,818) 32,813 26,669
Income Tax (Benefit) Provision (1,550) (1,102) 12,283 9,883
---------- ---------- ---------- ----------
Net (Loss) Earnings $ (2,440) $ (1,716) $ 20,530 $ 16,786
========== ========== ========== ==========
The accompanying notes are an integral part of these statements.
</TABLE>
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<PAGE> 6
WISCONSIN GAS COMPANY
Balance Sheets
[CAPTION]
<TABLE>
June 30,
1999 December 31,
(Unaudited) 1998
----------- ------------
(Thousands of Dollars)
<S> <C> <C>
Assets
- ------
Property, Plant and Equipment, at cost $ 841,074 $ 828,748
Less - Accumulated depreciation 464,166 448,270
----------- ------------
376,908 380,478
----------- ------------
Current Assets:
Cash and cash equivalents 5,261 6,690
Accounts receivable, less allowance
for doubtful accounts of $15,367
and $10,170, respectively 46,567 39,580
Accrued revenues 5,479 42,524
Gas in storage, at weighted average cost 24,820 36,751
Materials and supplies, at weighted average cost 6,798 3,590
Deferred income taxes 12,578 12,579
Prepaid taxes 2,811 3,480
Other 1,429 2,330
----------- ------------
105,743 147,524
----------- ------------
Deferred Charges and Other:
Regulatory assets 56,082 59,319
Systems development costs 44,858 42,396
Prepaid pension costs 10,751 12,901
Other 9,905 8,434
----------- ------------
121,596 123,050
----------- ------------
$ 604,247 $ 651,052
=========== ============
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
<PAGE> 7
Wisconsin Gas Company
Balance Sheets
(continued)
[CAPTION]
<TABLE>
June 30,
1999 December 31,
(Unaudited) 1998
----------- ------------
(Thousands of Dollars)
<S> <C> <C>
Capitalization and Liabilities
- ------------------------------
Capitalization:
Common stock $ 9 $ 9
Other paid-in capital 120,909 120,888
Retained earnings 102,206 94,673
Accumulated other comprehensive income (2,224) (2,224)
Long-term debt 158,139 158,839
----------- ------------
379,039 372,185
----------- ------------
Current Liabilities:
Accounts payable 32,488 36,844
Accounts payable - intercompany, net 701 (440)
Short-term borrowings - 65,000
Current portion of long-term debt - 2,000
Refundable gas costs 40,478 18,570
Accrued payroll and benefits 8,748 8,394
Accrued taxes 3,775 1,675
Other 3,796 3,077
----------- ------------
89,986 135,120
----------- ------------
Deferred Credits and Other:
Postretirement benefit obligation 42,029 44,741
Deferred income taxes 40,375 40,375
Regulatory liabilities 29,553 32,153
Environmental remediation costs 5,699 7,922
Unamortized investment tax credit 6,019 6,357
Other 11,547 12,199
----------- ------------
135,222 143,747
----------- ------------
$ 604,247 $ 651,052
=========== ============
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
<PAGE> 8
WISCONSIN GAS COMPANY
Statements of Cash Flows (Unaudited)
[CAPTION]
<TABLE>
Six Months Ended
June 30,
----------------------
1999 1998
---------- ----------
(Thousands of Dollars)
<S> <C> <C>
Operations:
Net earnings $ 20,530 $ 16,786
Adjustments to reconcile net earnings to net cash flows:
Depreciation and amortization 20,843 20,134
Deferred income taxes - -
Net pension and other postretirement benefit (income) (4,468) (3,092)
Change in:
Receivables 30,059 47,255
Gas in storage 11,931 17,481
Other current assets (2,307) (993)
Accounts payable (4,356) (8,033)
Accrued taxes 2,769 1,437
Refundable gas costs 21,908 13,131
Other current liabilities 2,214 267
Other non-current assets and liabilities (6,022) (5,675)
---------- ----------
93,101 98,698
---------- ----------
Investment Activities:
Capital expenditures (14,592) (13,031)
Other, net 62 163
---------- ----------
(14,530) (12,868)
---------- ----------
Financing Activities:
Change in short-term borrowings (65,000) (78,671)
Reduction of long-term debt (2,000) (2,000)
Cash dividends paid to WICOR, Inc. (13,000) (12,000)
---------- ----------
(80,000) (92,671)
---------- ----------
Change in Cash and Cash Equivalents (1,429) (6,841)
Cash and Cash Equivalents at Beginning of Period 6,690 7,854
---------- ----------
Cash and Cash Equivalents at End of Period $ 5,261 $ 1,013
========== ==========
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
<PAGE> 9
Notes to Financial Statements (Unaudited):
- ------------------------------------------
1) At June 30, 1999, Wisconsin Gas had total unsecured lines of
credit available from several banks of $85 million. As of
June 30, 1999, no short-term borrowings were outstanding under these
credit agreements.
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 Six Months
Ended June 30,
---------------------
1999 1998
---------- ----------
(Thousands of Dollars)
Income taxes paid $ 11,691 $ 10,519
Interest paid $ 4,669 $ 6,059
3) For the three and six month periods ended June 30, 1999 and 1998,
net earnings was the only component of other comprehensive income.
<PAGE>
<PAGE> 10
Item 2.
- -------
Management's Discussion and Analysis
of Interim Financial Statements of
Wisconsin Gas Company
Results of Operations
- ---------------------
The Company's net loss was $2.4 million during the second quarter of
1999 compared with a net loss of $1.7 million in the second quarter of
1998. Net earnings for the six months ended June 30, 1999, increased
by $3.7 million, or 22%, to $20.5 million compared to the same period
last year. The improved earnings for the six month period was
attributable to increased sales caused by favorable weather and a $7.5
million annual rate increase effective August 1, 1998, offset in part
by increased operating costs. The following factors had a significant
effect on the results of operations during the three- and six-month
periods ended June 30, 1999.
Revenues, margins and volumes are summarized below. Margin, defined as
revenues less cost of gas sold, is a better 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 $1.2 million for the six months ended
June 30, 1999 and 1998.
[CAPTION]
<TABLE>
Three Months Six Months
Ended June 30, Ended June 30,
------------------ % ------------------ %
(Millions of Dollars) 1999 1998 Change 1999 1998 Change
-------- -------- ------ -------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Gas Sales Revenues $ 70.7 $ 73.5 (4) $ 233.2 $ 235.7 (1)
Cost of Gas Sold 42.6 46.8 (9) 136.2 148.1 (8)
-------- -------- -------- --------
Gas Sales Margin 28.1 26.7 5 97.0 87.6 11
Gas Transport Margin 4.6 4.7 (2) 12.6 11.9 6
-------- -------- -------- --------
Total Margin $ 32.7 $ 31.4 4 $ 109.6 $ 99.5 10
======== ======== ======== ========
</TABLE>
<PAGE>
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[CAPTION]
<TABLE>
Three Months Six Months
Ended June 30, Ended June 30,
------------------ % ------------------ %
(Millions of Therms) 1999 1998 Change 1999 1998 Change
-------- -------- ------ -------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Sales Volumes
Firm 96.9 95.4 2 423.8 397.1 7
Interruptible 5.6 8.0 (30) 15.6 22.0 (29)
Transportation Volume 106.4 99.0 7 266.7 237.0 13
-------- -------- -------- --------
Total Throughput 208.9 202.4 3 706.1 656.1 8
======== ======== ======== ========
Degree Days
Actual 875 895 (2) 4,110 3,810 8
======== ======== ======== ========
20 year average 971 4,392
======== ========
</TABLE>
The increase in firm sales volumes for the three and six months ended
June 30, 1999, respectively, was caused principally by colder weather
during the heating season in 1999 compared to 1998. The weather in
1999 was, however, warmer than normal. For both the three and six
month periods ended June 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.
Operating and maintenance expenses increased $2.5 million, or 12%, and
$3.7 million, or 8%, during the three and six months ended June 30,
1999, compared to the same periods last year. The largest increase is
attributable to quarterly charges of $1.9 million relating to PSCW-
approved additional uncollectible accounts expense, which became
effective November 1, 1998.
Depreciation expense for the three and six months ended June 30, 1999,
increased by $0.5 million, or 7%, and $0.9 million, or 5%,
respectively, as compared to the same periods in the prior year. The
1999 increase was due to additions to depreciable plant balances.
Interest expense remained relatively unchanged at $2.7 million and $6.1
million for the three and six months ended June 30, 1999, respectively,
compared to the same periods of last year.
Year-to-date income tax expense increased by $2.4 million, or 24%,
reflecting the increase in pre-tax income.
<PAGE>
<PAGE> 12
Financial Condition
- -------------------
Cash flow from operations for the six months ended June 30, 1999,
decreased by $5.6 million, or 6%, to $93.1 million compared to the same
period of 1998. Due to the seasonal nature of the energy business,
accrued revenues, accounts receivable and accounts payable are higher
in the heating season as compared with the summer months.
Additional short-term borrowing will be needed during the third and
fourth quarters of 1999 to finance working capital, primarily related
to gas purchased for injection into storage and accounts receivable.
The Company has existing lines of credit to satisfy this working
capital need.
Cash flow from operations exceeded capital expenditures and dividend
requirements for the first six months in both 1999 and 1998.
Capital expenditures through June 1999 increased by $1.6 million, or
12%, to $14.6 million. Cash flow from operations is expected to be
sufficient to fund the remaining capital expenditures for 1999.
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. 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, 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> 13
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 June 30, 1999, the
Company believes it is approximately 90% compliant on all of its
significant systems, and estimates that it will complete software
reprogramming and/or replacement in the third quarter of 1999. The
Company believes that its Operating Equipment at June 30, 1999, is
approximately 91% compliant, and the Company is targeting completion
during the third 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 June 30, 1999, the Company has spent approximately $3.8 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 $0.3 million and is expected to be funded
through operating cash flow.
<PAGE>
<PAGE> 14
Item 3. Quantitative and Qualitative Disclosures About Market.
- --------------------------------------------------------------
The Company's market risk includes the potential loss arising from
adverse changes in the price of natural gas. The Company's objective in
managing this risk is to reduce fluctuations in earnings and cash flows
associated with changes in natural gas prices. 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. The notional amount of these
contracts is not material to the Company.
<PAGE>
<PAGE> 15
Part II - Other Information
Item 4. Results of Votes of Security Holders
- --------------------------------------------
On April 22, 1999, the following persons were elected as directors of
Wisconsin Gas to serve one-year terms: George E. Wardeberg, Wendell F.
Bueche, Willie D. Davis, Jere D. McGaffey, Daniel F. McKeithan, Jr.,
Guy A. Osborn, Thomas F. Schrader and Essie M. Whitelaw. All of the
issued and outstanding shares of common stock, $8 par value, of
Wisconsin Gas (1,125 shares) were voted in favor of the election of the
foregoing persons.
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 second quarter of 1999.
<PAGE>
<PAGE> 16
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: August 12, 1999 By: /s/ Joseph P. Wenzler
Joseph P. Wenzler
Senior Vice President and
Chief Financial Officer
<PAGE>
<PAGE> 17
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 six months ended June 30, 1999 and is
qualified in its entirety by reference to such financial statements and the
related footnotes.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 376,908
<OTHER-PROPERTY-AND-INVEST> 0
<TOTAL-CURRENT-ASSETS> 105,743
<TOTAL-DEFERRED-CHARGES> 121,596
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 604,247
<COMMON> 9
<CAPITAL-SURPLUS-PAID-IN> 120,909
<RETAINED-EARNINGS> 102,206
<TOTAL-COMMON-STOCKHOLDERS-EQ> 220,900
0
0
<LONG-TERM-DEBT-NET> 158,139
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 160,000
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 0
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 225,208
<TOT-CAPITALIZATION-AND-LIAB> 604,247
<GROSS-OPERATING-REVENUE> 245,719
<INCOME-TAX-EXPENSE> 12,283
<OTHER-OPERATING-EXPENSES> 207,353
<TOTAL-OPERATING-EXPENSES> 219,636
<OPERATING-INCOME-LOSS> 26,083
<OTHER-INCOME-NET> 568
<INCOME-BEFORE-INTEREST-EXPEN> 26,651
<TOTAL-INTEREST-EXPENSE> 6,121
<NET-INCOME> 20,530
0
<EARNINGS-AVAILABLE-FOR-COMM> 20,530
<COMMON-STOCK-DIVIDENDS> 13,000
<TOTAL-INTEREST-ON-BONDS> 72
<CASH-FLOW-OPERATIONS> 93,101
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
