SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported) April 26, 2000
WISCONSIN ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
001-09057
(Commission file number)
Wisconsin 39-1391525
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification No.)
organization)
231 West Michigan Street, P.O. Box 2949 53201
Milwaukee, Wisconsin (Zip Code)
(Address of principal
executive offices)
(414) 221-2345
(Registrant's telephone number, including area code)
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
ACQUISITION OF WICOR, INC.
On April 26, 2000, WICOR, Inc., a Wisconsin corporation
("WICOR"), became a wholly owned subsidiary of Wisconsin Energy
Corporation ("Wisconsin Energy") through the merger of CEW
Acquisition, Inc., a Wisconsin corporation and a wholly owned
subsidiary of Wisconsin Energy ("Acquisition"), with and into
WICOR (the "Merger") pursuant to an Agreement and Plan of Merger
dated as of June 27, 1999, as amended (the "Merger Agreement") by
and among Wisconsin Energy, WICOR and Acquisition. Capitalized
terms not otherwise defined herein have the meanings assigned to
them in the Merger Agreement.
The Merger Agreement provided that, at the Effective Time of
Merger, each outstanding share of WICOR Common Stock (together
with the associated common stock purchase rights issued pursuant
to WICOR's Rights Agreement) would be converted into the right to
receive cash, 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 if the Closing
occurred by July 1, 2000 (the "Exchange Value"). The Merger
Agreement provided that prior to the Closing Date, Wisconsin
Energy would select the percentage of the Merger Consideration to
be paid in Wisconsin Energy Common Stock, which could be not less
than 40% or more than 60%; the balance would be paid in cash.
The Exchange Ratio for each share of WICOR Common Stock converted
into Wisconsin Energy Common Stock was to be determined by
dividing the Exchange Value by the average of the closing prices
of the Wisconsin Energy Common Stock on the New York Stock
Exchange for the ten trading days ending with the fifth trading
day prior to the Closing Date (the "Average Wisconsin Energy
Price"). Each WICOR shareholder was entitled to elect to receive
cash, Wisconsin Energy Common Stock or a combination thereof,
subject to proration if the cash or stock elections exceeded the
amounts permitted. However, if the Average Wisconsin Energy
Price was less than $22.00 per share, Wisconsin Energy could
elect to pay the entire Merger Consideration in cash.
As calculated under the Merger Agreement the Average
Wisconsin Energy Price was $20.73125, the average of the closing
sale prices for the ten trading days beginning with April 5, 2000
and ending with April 18, 2000. Since the Average Wisconsin
Energy Price was less than $22.00 per share, Wisconsin Energy
notified WICOR on April 19, 2000, that it elected to pay 100% of
the Merger Consideration in cash.
Accordingly, subject to the terms and conditions of the
Merger Agreement, each share of WICOR Common Stock outstanding at
the Effective Time of Merger was converted into the right to
receive $31.50 in cash. Each outstanding option to purchase
shares of WICOR Common Stock (a "WICOR Option") under WICOR's
1987 Stock Option Plan, 1992 Director Stock Option Plan or 1994
Long-Term Performance Plan (collectively, the "WICOR Option
Plans"), and each other then outstanding equity-based award or
account (including shares of WICOR New Restricted Stock awarded
after the date of the Merger Agreement) (individually a "WICOR
Award"), were assumed by Wisconsin Energy and converted into
shares, phantom shares or options to acquire shares of Wisconsin
Energy Common Stock on the same terms and conditions as were
applicable under such WICOR Option or WICOR Award immediately
prior to the Effective Time of Merger, as adjusted to reflect the
Exchange Ratio of 1.5194 shares of Wisconsin Energy Common Stock
for each share of WICOR Common Stock (the Exchange Value of
$31.50 per WICOR share divided by $20.73125, the Average
Wisconsin Energy Price), as provided in the Merger Agreement.
Immediately prior to the Effective Time of Merger, there
were 37,936,648 shares of WICOR Common Stock (excluding 38,000
shares of WICOR New Restricted Stock) outstanding which were
converted into the right to receive $31.50 per share in cash, and
there were WICOR Options outstanding under the WICOR Option Plans
to purchase an aggregate of 3,040,621 shares of WICOR Common
Stock. Accordingly, a total of $1,195,004,412 was paid in cash
in the Merger, 57,745 shares of restricted Wisconsin Energy
Common Stock were issued, and up to 4,619,969 shares of Wisconsin
Energy Common Stock are issuable upon the exercise of WICOR
Options assumed pursuant to the Merger Agreement.
The Exchange Value and other terms of the Merger Agreement
were determined by arm's-length negotiations between the parties.
The shareholders of WICOR and Wisconsin Energy approved the
Merger Agreement and the transactions contemplated thereby at
their respective special meetings held on October 27, 1999.
The Public Service Commission of Wisconsin approved
Wisconsin Energy's application to complete the Merger by an Order
dated March 14, 2000, subject to stated conditions, and the
Securities and Exchange Commission issued an Order on April 10,
2000, approving Wisconsin Energy's application under the Public
Utility Holding Company Act of 1935, as amended, to acquire all
of the outstanding WICOR Common Stock and to confirm that
Wisconsin Energy and WICOR will retain their status as exempt
holding companies after the Merger. By letter dated March 2,
2000, the Federal Trade Commission advised that its investigation
of the proposed Merger had been closed.
WICOR Common Stock ceased to trade on the New York Stock
Exchange at the close of business on April 26, 2000, and will be
delisted and deregistered.
As provided by the Merger Agreement, George E. Wardeberg,
the Chairman and Chief Executive Officer of WICOR, was elected as
a director and appointed as Vice Chairman of the Board of
Directors of Wisconsin Energy as of the Effective Time of Merger,
and Willie D. Davis, an outside director of WICOR, was also
elected to the Wisconsin Energy Board as of the Effective Time of
Merger.
WICOR is a diversified holding company with two principal
business groups: energy services and pump manufacturing. WICOR
has the following subsidiaries engaged in the indicated principal
businesses. Wisconsin Gas Company engages in retail sales and
distribution of natural gas and water. WICOR Energy Services
Company engages in natural gas purchasing, and energy and price
risk management. FieldTech, Inc. provides meter reading and
technology services for gas, electric and water utilities. Sta-
Rite Industries, Inc., SHURflo Pump Manufacturing Co. and Hypro
Corporation are manufacturers of pumps, fluid processing and
filtration equipment. WICOR Industries, Inc. is an intermediate
holding company which holds the stock of the manufacturing
subsidiaries.
Further information concerning the Merger Agreement and the
transactions contemplated by the Merger Agreement is contained in
Wisconsin Energy's Registration Statement on Form S-4 (No. 333-
86827) which was filed with the SEC under the Securities Act of
1933 on September 9, 1999, and became effective on September 10,
1999, and the Joint Proxy Statement/Prospectus dated September
10, 1999, included therein.
Wisconsin Energy is undertaking a thorough review of WICOR's
operations and studying the manner in which the operations of the
two companies can best be optimized and intends to take such
actions as a result of this review as may be deemed appropriate
under the circumstances. Wisconsin Energy currently intends to
continue the primary business operations of WICOR, and to
continue to use the physical assets of such primary business
operations for that purpose, while integrating such operations
with its own.
Financing of the Merger
The total amount of funds required to consummate the Merger
is currently estimated to be approximately $1.2 billion,
including related fees and expenses. Wisconsin Energy has
obtained the cash needed to pay the Merger Consideration through
the issuance of commercial paper in the institutional private
placement market. Wisconsin Energy has arranged a $1.0 billion
364-day bank back-up credit facility and a $0.5 billion three-
year bank back-up credit facility to provide credit support for
the issuance of Wisconsin Energy's commercial paper. In
addition, approximately $300 million of WICOR debt will remain
outstanding.
ITEM 5. OTHER EVENTS.
Securities Ratings
At the end of April 2000, in conjunction with
consummation of Wisconsin Energy's acquisition of WICOR,
Moody's Investors Service ("Moody's") assigned a general
corporate rating of A1 to Wisconsin Energy and maintained
its ratings of the debt securities of Wisconsin Energy and
Wisconsin Electric. Duff & Phelps Inc. ("D&P") reaffirmed
its long-term credit ratings of Wisconsin Energy and
Wisconsin Energy Capital Corporation as well as its short-
term rating of Wisconsin Electric, but downgraded its long-
term credit ratings of Wisconsin Electric. Fitch Investors
Service ("Fitch") assigned initial credit ratings for
Wisconsin Energy, Wisconsin Energy Capital Corporation, WEC
Capital Trust I trust preferred securities and Wisconsin
Electric commercial paper and reaffirmed its long-term
ratings of Wisconsin Electric. Also at the end of April
2000, Standard & Poors Corporation ("S&P") lowered its
ratings on Wisconsin Energy and Wisconsin Energy's
subsidiaries except for the short-term ratings of Wisconsin
Electric which were reaffirmed. In conjunction with its
debt rating adjustments at the end of April 2000, S&P
removed all long-term ratings on Wisconsin Energy and its
subsidiaries from credit watch with negative implications,
assigning a negative outlook.
In June 1999, S&P and Moody's confirmed the ratings of
securities of Wisconsin Gas Company ("Wisconsin Gas").
These rating actions followed the June 28, 1999 announcement
that Wisconsin Energy would acquire Wisconsin Gas' parent,
WICOR. In April 2000, S&P revised the outlook on Wisconsin
Gas to negative from stable.
The following table summarizes various current ratings
of Wisconsin Energy's and Wisconsin Electric's securities by
S&P, Moody's, D&P and Fitch as well as securities of
Wisconsin Gas by S&P and Moody's. WICOR has no debt
outstanding and the commercial paper of WICOR Industries,
Inc. is unrated.
<TABLE>
<CAPTION>
S & P Moody's D & P Fitch
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Wisconsin Electric Power Company
Commercial Paper A-1+ P-1 D-1+ F-1+
Senior Secured Debt AA- Aa2 AA AA
Unsecured Debt A+ Aa3 AA- AA-
Preferred Stock A aa3 AA- AA-
Wisconsin Gas Company
Commercial Paper A-1+ P-1 - -
Senior Unsecured Debt AA- Aa2 - -
Wisconsin Energy Corporation
Commercial Paper A-1 P-1 D-1 F-1
Wisconsin Energy Capital Corporation
Unsecured Debt A+ A1 A+ A+
WEC Capital Trust I
Trust Preferred Securities A- a1 A A
</TABLE>
Giddings & Lewis, Inc./City of West Allis Lawsuit
In July 1996, Giddings & Lewis, Inc., Kearney & Trecker
Corporation, now a part of Giddings & Lewis, Inc., and the
City of West Allis brought an action in the Milwaukee County
Circuit Court alleging that Wisconsin Electric had deposited
cyanide contaminated wood chips in 1959 at two sites in West
Allis, Wisconsin owned by the plaintiffs. Environmental
remediation at both sites was completed several years ago,
with the current owners paying for disposal of materials
found on their respective portions of the sites. Internal
investigations led Wisconsin Electric to believe that it was
not the source of this waste.
In July 1999, a jury issued a verdict against Wisconsin
Electric awarding the plaintiffs $4.5 million in
compensatory damages for clean-up costs and loss of property
value and $100 million in punitive damages. In October
1999, the Circuit Court denied Wisconsin Electric's post
trial motions and directed that judgment on the verdict be
entered. Wisconsin Electric has filed notice of appeal of
the judgment to the Wisconsin Court of Appeals.
In December 1999, in order to stop the post-judgment
accrual of interest at 12% during the pendency of the
appeal, Wisconsin Electric tendered a contested liability
payment of $110 million, which is part of Deferred Charges
and Other Assets - Other on the Consolidated Balance Sheet,
to the Milwaukee County Clerk of Circuit Court representing
the amount of the verdict and accrued interest. Under
Wisconsin law, the plaintiffs are liable to Wisconsin
Electric upon reversal or reduction of the judgment for the
applicable amount of the funds tendered with interest.
In further post-trial proceedings, the plaintiffs filed
with the Circuit Court a motion for sanctions based upon
representations made by Wisconsin Electric during trial that
Wisconsin Electric had no insurance coverage for the
punitive damage award. The Circuit Court held hearings on
the sanctions issue in February 2000. On April 27, 2000,
the Circuit Court Judge issued her ruling on the sanctions
matter relating to the Giddings & Lewis / City of West Allis
lawsuit. The Judge imposed the following sanctions against
Wisconsin Electric: (i) "Judgment in the alternative" as a
sanction, thereby finding an alternative basis upon which to
sustain the $104.5 million verdict returned by the jury;
(ii) a bar against Wisconsin Electric pursuing insurance
coverage for the punitive damage portion of the verdict; and
(iii) a requirement that Wisconsin Electric pay the
plaintiffs' costs relating to the sanctions matter. In
addition to its appeal of the judgment entered on the jury's
verdict, Wisconsin Electric will also appeal the Judge's
ruling on the sanctions matter.
In the opinion of management, based in part on the
advice of legal counsel, the jury verdict was not supported
by the evidence or the law and the unprecedented award of
punitive damages of this magnitude was unwarranted and
should therefore be reversed or substantially reduced on
appeal. Management also believes that the sanctions imposed
by the Judge were not supported by the evidence or the law.
As such, Wisconsin Electric has not established a reserve
for potential damages from this suit.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements of Businesses Acquired:
The following financial statements of WICOR
(Commission File No. 1-7951) are incorporated herein by
reference to Item 8 on pages 25 through 45 of WICOR's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1999 (a copy of which is filed herewith as
Exhibit 99.1):
1. Financial Statements. WICOR's consolidated
balance sheets and statements of
capitalization as of December 31, 1999 and
1998, and the related consolidated statements
of income, common equity and cash flows for
each of the three years in the period ended
December 31, 1999, together with the report
of independent public accountants dated
January 24, 2000.
(b) Pro Forma Financial Information:
It is impracticable to provide the required pro
forma financial information at the time this report is
being filed. Appropriate pro forma financial
information required pursuant to Article 11 of
Regulation S-X will be filed as soon as practicable, as
an amendment to this report, and in any event not later
than July 10, 2000.
(c) Exhibits:
See Exhibit Index following the Signatures page of
this report, which is incorporated herein by reference.
FORM 8-K
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 ENERGY CORPORATION
By: /s/ Paul Donovan
------------------------------
Paul Donovan, Senior Vice
President and Chief
Financial Officer
Date: April 27, 2000
WISCONSIN ENERGY CORPORATION
(Commission File No. 1-9057)
EXHIBIT INDEX
to
CURRENT REPORT ON FORM 8-K
Date of Report: April 26, 2000
Exhibit Incorporated Filed
Number Description Herein Herewith
- ------ ----------- by Reference to --------
---------------
2.1 Agreement and Plan of Appendix A to the
Merger, dated as of joint proxy
June 27, 1999, as statement/prospect
amended as of us dated September
September 9, 1999, by 10, 1999, included
and among Wisconsin in Wisconsin
Energy Corporation, Energy's
WICOR, Inc. and CEW Registration on
Acquisition, Inc. Form S-4 filed on
September 9, 1999
(File No. 333-
86827) (the "Form
S-4")
2.2 Amendment to Agreement Exhibit 2.2 to the
and Plan of Merger Form S-4
dated as of September
9, 1999
2.3 Second Amendment to x
Agreement and Plan of
Merger dated as of
April 26, 2000
23.1 Consent of Arthur x
Andersen LLP
99.1 WICOR, Inc.'s x
consolidated balance
sheets and statements
of capitalization as
of December 31, 1999
and 1998, and the
related consolidated
statements of income,
common equity and cash
flows for each of the
three years in the
period ended December
31, 1999, together
with the report of
independent public
accountants dated
January 24, 2000.
EXHIBIT 2.3
SECOND AMENDMENT TO
AGREEMENT AND PLAN OF MERGER
THIS SECOND AMENDMENT TO AGREEMENT AND PLAN OF MERGER
is made as of this 26th day of April, 2000 by and among WISCONSIN
ENERGY CORPORATION ("Wisconsin Energy"), WICOR, INC. ("WICOR")
and CEW ACQUISITION, INC. ("Acquisition").
RECITALS
WHEREAS, Wisconsin Energy, WICOR and Acquisition are
parties to an Agreement and Plan of Merger dated as of June 27,
1999 as amended by an Amendment to Agreement and Plan of Merger
dated as of September 9, 1999 ( the "Merger Agreement"); and
WHEREAS, the parties wish to amend the Merger
Agreement to clarify certain provisions concerning the
obligations of Acquisition as set forth in this Second Amendment
to Agreement and Plan of Merger.
NOW THEREFORE, in consideration of the Recitals and of
the mutual covenants and agreements set forth herein and for
other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, it is hereby agreed
that:
1. Amendments. The Merger Agreement is hereby
amended as follows:
(a) Section 2.6(a) of the Merger Agreement is
amended and restated in its entirety to read as follows:
"(a) Exchange Agent. As of the
Effective Time of Merger: (i) Wisconsin
Energy shall deposit, or shall cause to be
deposited, with a bank or trust company
designated by Acquisition and reasonably
acceptable to WICOR (the "Exchange Agent"),
for the benefit of the holders of shares of
WICOR Common Stock, for exchange in
accordance with this Article II of this
Agreement through the Exchange Agent,
certificates representing the aggregate
number of shares of Wisconsin Energy Common
Stock issuable pursuant to Section 2.4 of
this Agreement; and (ii) Acquisition shall
deposit, or cause to be deposited, with the
Exchange Agent for the benefit of the holders
of shares of WICOR Common Stock, for exchange
in accordance with this Article II of this
Agreement, cash representing the aggregate
amount of cash payable pursuant to Section
2.4 of this Agreement (such certificates for
shares of Wisconsin Energy Common Stock,
together with any dividends or distributions
with respect thereto, such cash and any cash
for fractional share interests paid pursuant
to Section 2.6(e) of this Agreement, being
hereinafter referred to as the "Exchange
Fund"), which deposits of certificates and
cash shall be irrevocable and the Exchange
Agent shall only make payments to Wisconsin
Energy, Acquisition and the Surviving
Corporation from the Exchange Fund pursuant
to and in accordance with Section 2.6(f) or
Section 2.6(g) of this Agreement."
(b) Section 2.6(b)(ii) of the Merger Agreement is
amended and restated in its entirety to read as follows:
"(ii) Upon surrender of a WICOR
Certificate for cancellation to the Exchange
Agent together with either a Form of Election
or a Letter of Transmittal, in each case duly
executed, and with such other documents as
the Exchange Agent may reasonably require,
the holder of such WICOR Certificate shall be
entitled to receive, and Wisconsin Energy, in
the case of Sections 2.6(b)(ii)(A) and
2.6(b)(ii)(C), and Acquisition in the case of
Section 2.6(b)(ii)(B), shall cause the
Exchange Agent to promptly deliver in
exchange therefor after the Effective Time of
Merger: (A) a certificate representing that
number of whole shares of Wisconsin Energy
Common Stock to which such holder is entitled
to receive in respect of such WICOR
Certificate pursuant to Section 2.4 of this
Agreement; and (B) a check representing the
cash that such holder is entitled to receive
in respect of such WICOR Certificate pursuant
to Section 2.4 of this Agreement; and (C) a
check for any cash in lieu of any fractional
share interest in accordance with
Section 2.6(e) of this Agreement. The WICOR
Certificate so surrendered shall forthwith be
canceled; provided, however, that fractional
share interests of any one holder shall be
aggregated to maximize the number of whole
shares of Wisconsin Energy Common Stock to be
issued and minimize the fractional interests
to be paid in cash as provided in
Section 2.6(e) of this Agreement."
(c) Section 2.6(f) of the Merger Agreement is
amended and restated in its entirety to read as follows:
"(f) Investment of Exchange Fund.
The Exchange Agent shall invest any cash
included in the Exchange Fund, as directed by
the Surviving Corporation, on a daily basis.
Any interest and other income resulting from
such investments shall be paid to the
Surviving Corporation upon termination of the
Exchange Fund pursuant to Section 2.6(g) of
this Agreement. In the event the cash in the
Exchange Fund shall be insufficient to fully
satisfy all of the payment obligations to be
made by the Exchange Agent hereunder, then
the Surviving Corporation shall promptly
deposit cash into the Exchange Fund in an
amount which is equal to the deficiency in
the amount of cash required to fully satisfy
such payment obligations."
(d) Section 2.6(g) of the Merger Agreement is
amended and restated in its entirety to read as follows:
"(g) Termination of Exchange Fund.
Any portion of the Exchange Fund which
remains undistributed to the WICOR
Shareholders after twelve (12) months after
the Effective Time of Merger shall be
delivered to the Surviving Corporation, upon
demand, and any WICOR Shareholders who have
not theretofore complied with this Article II
of this Agreement shall thereafter look only
to the Surviving Corporation for their claim
for cash and look only to Wisconsin Energy
for payment of their claim for shares of
Wisconsin Energy Common Stock, any cash in
lieu of fractional share interests and any
dividends or distributions with respect
thereto."
(e) Section 2.6(h) of the Merger Agreement is
amended and restated in its entirety to read as follows:
"(h) No Liability. Neither the
Exchange Agent nor any party to this
Agreement shall be liable to any WICOR
Shareholder for any shares of WICOR Common
Stock or Wisconsin Energy Common Stock (or
dividends or distributions with respect
thereto) or cash delivered in accordance with
applicable Law to a public official pursuant
to any abandoned property, escheat or similar
Law. If any WICOR Certificates shall not
have been surrendered prior to seven years
after the Effective Time of Merger (or
immediately prior to such earlier date on
which any shares of Wisconsin Energy Common
Stock, cash, any cash in lieu of fractional
shares of Wisconsin Energy Common Stock in
respect of such WICOR Certificates would
otherwise escheat to or become the property
of any governmental Person), then: (i) any
shares of Wisconsin Energy Common Stock, cash
in lieu of fractional share interests and
dividends or distributions in respect of such
WICOR Certificates shall, to the extent
permitted by applicable Laws, become the
property of Wisconsin Energy, free and clear
of all claims or interest of any Person
previously entitled thereto; and (ii) any
other cash shall, to the extent permitted by
applicable Laws, become the property of the
Surviving Corporation, free and clear of all
claims or interest of any Person previously
entitled thereto."
(f) Section 2.6(i) of the Merger Agreement is
amended and restated in its entirety to read as follows:
"(i) Withholding Rights.
Acquisition shall be entitled to deduct and
withhold from the cash consideration
otherwise payable pursuant to this Agreement
to any WICOR Shareholder such amounts as
Acquisition is required to deduct and
withhold with respect to the making of such
payment under the Code, or any provision of
state, local or foreign tax Law. To the
extent that amounts are so withheld by
Acquisition, such withheld amounts shall be
treated for all purposes of this Agreement as
having been paid to the WICOR Shareholder in
respect of which such deduction and
withholding was made by Acquisition."
2. Continuance of Merger Agreement. Except as
specifically amended by this Second Amendment to Agreement and
Plan of Merger, the Merger Agreement shall continue in full force
and effect.
IN WITNESS WHEREOF, the parties have caused this Second
Amendment to Agreement and Plan of Merger to be duly executed as
of the day and year first above written.
WISCONSIN ENERGY CORPORATION
By /s/ Richard A. Abdoo
---------------------------
Richard A. Abdoo,
Chairman of the Board, President
and Chief Executive Officer
WICOR, INC.
By /s/ George E. Wardeberg
---------------------------
George E. Wardeberg,
Chairman and Chief Executive Officer
CEW ACQUISITION, INC.
By /s/ Richard A. Abdoo
----------------------------
Richard A. Abdoo,
Chairman of the Board, President
and Chief Executive Officer
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in the following Registration Statements of Wisconsin Energy
Corporation of our report dated January 24, 2000 on the consolidated financial
statements of WICOR, Inc. and subsidiaries included in the Annual Report on
Form 10-K of WICOR, Inc. for the year ended December 31, 1999:
1. Registration Statement on Form S-3 (Registration No.
333-34854) - Stock Plus Investment Plan.
2. Registration Statement on Form S-8 (Registration No.
333-86467) - Employee Retirement Savings Plan.
3. Registration Statement on Form S-8 (Registration No.
33-65225) - 1993 Omnibus Stock Incentive Plan.
4. Registration Statement on Form S-3 (Registration No.
333-73137) - Trust Preferred Securities.
/s/Arthur Andersen LLP
- -------------------------------------
ARTHUR ANDERSEN LLP
Milwaukee, Wisconsin
April 24, 2000
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of WICOR, Inc.:
We have audited the accompanying consolidated balance sheets and statements
of capitalization of WICOR, Inc. (a Wisconsin corporation) and
subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of earnings, common equity and cash flows for
each of the three years in the period ended December 31, 1999. These
financial statements are the responsibility of WICOR, Inc.'s management.
Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of WICOR, Inc. and
subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the
period ended December 31, 1999, in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
- ------------------------
Milwaukee, Wisconsin,
January 24, 2000.
WICOR, INC.
CONSOLIDATED STATEMENT OF EARNINGS
YEARS ENDED DECEMBER 31,
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Operating Revenues
Energy $ 499,093 $ 481,489 $ 596,262
Manufacturing 511,020 462,694 424,779
---------- ---------- ----------
1,010,113 944,183 1,021,041
---------- ---------- ----------
Operating Costs and Expenses
Cost of gas sold 297,222 295,601 394,101
Manufacturing cost of sales 357,704 329,248 307,160
Operations and maintenance 204,290 190,674 182,976
Depreciation and amortization 37,091 35,038 33,173
Taxes, other than income taxes 7,852 9,039 9,602
---------- ---------- ----------
904,159 859,600 927,012
---------- ---------- ----------
Operating Income 105,954 84,583 94,029
---------- ---------- ----------
Interest expense (16,555) (16,746) (17,404)
Other income, net 1,711 3,706 1,222
Merger costs (3,300) - -
---------- ---------- ----------
Income before income taxes 87,810 71,543 77,847
Income tax provision 33,977 26,048 28,324
---------- ---------- ----------
Net earnings $ 53,833 $ 45,495 $ 49,523
========== ========== ==========
Per Share of Common Stock
Basic earnings $ 1.43 $ 1.22 $ 1.34
Diluted earnings $ 1.42 $ 1.21 $ 1.33
Cash dividends paid $ 0.89 $ 0.87 $ 0.85
Average common shares outstanding 37,523 37,311 36,950
Average diluted shares outstanding 37,973 37,608 37,239
</TABLE>
The accompanying notes are an integral part of these statements.
WICOR, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
THOUSANDS OF DOLLARS 1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 12,859 $ 13,383
Accounts receivable, less allowance for doubtful
accounts of $13,166 and $12,511, respectively 152,127 137,321
Accrued revenues 50,462 47,483
Manufacturing inventories 89,963 86,312
Gas in storage 42,754 36,919
Deferred income taxes 19,902 17,195
Prepayments and other 18,514 15,542
------------ ------------
386,581 354,155
------------ ------------
Property, Plant and Equipment, at cost
Energy 865,822 829,286
Manufacturing 162,887 153,381
------------ ------------
1,028,709 982,667
Less accumulated depreciation and amortization 565,641 535,002
------------ ------------
463,068 447,665
------------ ------------
Deferred Charges and Other
Goodwill 93,928 67,552
Regulatory assets 51,686 59,319
Prepaid pension costs 58,833 50,011
Other 35,827 36,494
------------ ------------
240,274 213,376
------------ ------------
$ 1,089,923 $ 1,015,196
============ ============
</TABLE>
WICOR, INC.
CONSOLIDATED BALANCE SHEETS
(Continued)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
THOUSANDS OF DOLLARS 1999 1998
------------ ------------
<S> <C> <C>
LIABILITIES AND CAPITALIZATION
Current Liabilities
Short-term borrowings $ 116,602 $ 107,653
Current portion of long-term debt 11,017 3,528
Accounts payable 78,258 70,000
Refundable gas costs 24,043 18,570
Accrued payroll and benefits 25,799 20,490
Accrued taxes 5,786 7,885
Other 25,288 16,526
------------ ------------
286,793 244,652
------------ ------------
Deferred Credits and Other Liabilities
Postretirement benefit obligation 53,864 60,627
Regulatory liabilities 27,742 32,153
Deferred income taxes 55,650 49,065
Accrued environmental remediation costs 3,372 11,215
Unamortized investment tax credit 5,909 6,357
Other 17,483 19,217
------------ ------------
164,020 178,634
------------ ------------
Commitments and Contingencies (Note 8)
Capitalization (See accompanying statement)
Long-term debt 205,444 188,470
Redeemable preferred stock - -
Common equity 433,666 403,440
------------ ------------
639,110 591,910
------------ ------------
$ 1,089,923 $ 1,015,196
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
WICOR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
THOUSANDS OF DOLLARS 1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Operations
Net earnings $ 53,833 $ 45,495 $ 49,523
Adjustments to reconcile net earnings to net
cash flow from operating activities:
Depreciation and amortization 57,682 54,531 53,740
Deferred income taxes 3,878 9,425 4,530
Net pension and other postretirement
benefit income (10,713) (6,955) (1,725)
Changes in:
Accounts receivable (12,320) 14,292 2,046
Manufacturing inventories 8,317 (2,881) (7,463)
Gas in storage (5,835) 4,968 (8,424)
Accounts payable 4,436 (5,033) (25,975)
Refundable gas costs 5,473 (6,206) (6,769)
Accrued taxes (2,099) (1,039) 8,561
Other (7,854) (9,597) (18,720)
---------- ---------- ----------
Cash provided by operating activities 94,798 97,000 49,324
---------- ---------- ----------
Investment Activities
Capital expenditures (54,729) (49,279) (51,572)
Proceeds from sale of assets 40 1,762 3,362
Acquisitions (40,995) (7,288) (2,065)
Other, net 146 301 293
---------- ---------- ----------
Cash used in investing activities (95,538) (54,504) (49,982)
---------- ---------- ----------
Financing Activities
Change in short-term borrowings (974) (14,284) 6,115
Issuance of long-term debt 27,600 52,828 27,000
Reduction of long-term debt (3,097) (50,368) (11,157)
Issuance of common stock 9,277 2,878 2,684
Dividends paid on common stock (33,394) (32,461) (31,397)
Other 804 484 439
---------- ---------- ----------
Cash provided by (used in) financing activities 216 (40,923) (6,316)
---------- ---------- ----------
Change in Cash and Cash Equivalents (524) 1,573 (6,974)
Cash and cash equivalents at beginning of year 13,383 11,810 18,784
---------- ---------- ----------
Cash and Cash Equivalents at End of Year $ 12,859 $ 13,383 $ 11,810
========== ========== ==========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for:
Income taxes, net of refunds $ 33,924 $ 17,847 $ 17,315
Interest $ 13,849 $ 16,590 $ 16,352
</TABLE>
The accompanying notes are an integral part of these statements.
WICOR, INC.
CONSOLIDATED STATEMENTS OF CAPITALIZATION
[CAPTION]
<TABLE>
THOUSANDS OF DOLLARS, DECEMBER 31,
----------------------
1999 1998
---------- ----------
<S> <C> <C>
Long-Term Debt
Wisconsin Gas:
6.375% Notes due 2005 $ 65,000 $ 65,000
5.5% Notes due 2009 50,000 -
6.6% Notes due 2013 45,000 45,000
Commercial paper (See Note 6 of Notes to the
Consolidated Financial Statements) - 50,000
First mortgage bonds
Adjustable rate series 8.1% due 1999 - 2,000
WICOR Industries, Inc.:
Commercial paper/foreign bank loans
under multi-year credit agreements 53,175 43,677
Securities loan agreement, 11.75% due
semi-annually through 2000 (includes
unamortized bond premium of $286
and $550, respectively) 6,486 6,750
First mortgage notes, adjustable rate, 4.3% due
semi-annually through 2009 5,255 3,256
Other 2,469 1,346
ESOP loan guarantee 2,007 2,807
Unamortized (discount), net (1,756) (1,161)
---------- ----------
227,636 218,675
Less:
Commercial paper included in short-term borrowings 11,175 26,677
Current maturities of long-term debt 11,017 3,528
---------- ----------
Long-term debt 205,444 188,470
---------- ----------
Redeemable Preferred Stock
WICOR:
$1.00 par value; authorized 1,500,000 shares - -
Wisconsin Gas:
Without par value, cumulative;
authorized 1,500,000 shares - -
---------- ----------
- -
---------- ----------
Common Equity
Common stock, $1.00 par value, authorized
120,000,000 shares; outstanding 37,819,000
and 37,359,000 shares, respectively 37,819 37,359
Other paid-in capital 225,638 216,821
Retained earnings 181,376 160,937
Accumulated other comprehensive income (8,220) (7,905)
Unearned compensation (2,947) (3,772)
---------- ----------
433,666 403,440
---------- ----------
Total Capitalization $ 639,110 $ 591,910
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
WICOR, INC.
CONSOLIDATED STATEMENTS OF COMMON EQUITY
[CAPTION]
<TABLE>
Accumulated
Other Other
Common Paid-in Retained Comprehensive Unearned
THOUSANDS OF DOLLARS Stock Capital Earnings Income Compensation
--------- --------- ---------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Balance December 31, 1996 $ 18,407 $224,041 $ 129,777 $ (604) $ (5,122)
Net earnings - - 49,523 - -
Other comprehensive income:
Foreign currency translation - - - (4,375) -
Minimum pension liability - - - (398) -
--------- --------- ---------- ------------- ------------
Comprehensive income - - 49,523 (4,773) -
--------- --------- ---------- ------------- ------------
Issued in connection with em-
ployee benefit plans and other 194 8,661 - - -
Dividends on common stock - - (31,397) - -
ESOP loan payments - - - - 800
Issuance of restricted stock - - - - (145)
Amortization and forfeiture
of restricted stock - - - - 258
--------- --------- ---------- ------------- ------------
Balance December 31, 1997 18,601 232,702 147,903 (5,377) (4,209)
--------- --------- ---------- ------------- ------------
Net earnings - - 45,495 - -
Other comprehensive income:
Foreign currency translation - - - (1,405) -
Minimum pension liability - - - (1,123) -
--------- --------- ---------- ------------- ------------
Comprehensive income - - 45,495 (2,528) -
--------- --------- ---------- ------------- ------------
Issued in connection with em-
ployee benefit plans and other 96 2,781 - - -
Two-for-one common stock split 18,662 (18,662) - - -
Dividends on common stock - - (32,461) - -
ESOP loan payments - - - - 800
Issuance of restricted stock - - - - (884)
Amortization and forfeiture
of restricted stock - - - - 521
--------- --------- ---------- ------------- ------------
Balance December 31, 1998 37,359 216,821 160,937 (7,905) (3,772)
--------- --------- ---------- ------------- ------------
</TABLE>
WICOR, INC.
CONSOLIDATED STATEMENTS OF COMMON EQUITY
(Continued)
[CAPTION]
<TABLE>
Accumulated
Other Other
Common Paid-in Retained Comprehensive Unearned
THOUSANDS OF DOLLARS Stock Capital Earnings Income Compensation
--------- --------- ---------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Balance December 31, 1998 37,359 216,821 160,937 (7,905) (3,772)
--------- --------- ---------- ------------- ------------
Net earnings - - 53,833 - -
Other comprehensive income:
Foreign currency translation - - - (1,398) -
Minimum pension liability - - - 1,083 -
--------- --------- ---------- ------------- ------------
Comprehensive income - - 53,833 (315) -
--------- --------- ---------- ------------- ------------
Issued in connection with em-
ployee benefit plans and other 460 8,817 - - -
Dividends on common stock - - (33,394) - -
ESOP loan payments - - - - 800
Issuance of restricted stock - - - - (1,056)
Amortization and forfeiture
of restricted stock - - - - 1,081
--------- --------- ---------- ------------- ------------
Balance December 31, 1999 $ 37,819 $225,638 $ 181,376 $ (8,220) $ (2,947)
========= ========= ========== ============= ============
</TABLE>
The accompanying notes are an integral part of these statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 Accounting Policies
- -----------------------------
A Principles of Consolidation. The consolidated financial statements
include the accounts of WICOR, Inc., and its wholly-owned subsidiaries:
Wisconsin Gas, WICOR Energy Services Company (WES), FieldTech and WICOR
Industries, Inc. (WICOR Industries), an intermediate holding company for
various manufacturing subsidiaries. Intercompany transactions and
accounts are eliminated in consolidation.
B Business. The Company is a diversified holding company with two principal
business groups: energy services and pump manufacturing. Energy services
consists primarily of natural gas distribution through Wisconsin Gas,
the oldest and largest natural gas distribution utility in Wisconsin.
Wisconsin Gas is subject to regulation by the Public Service Commission
of Wisconsin (PSCW) and gives recognition to ratemaking policies
substantially in accordance with the FERC System of Accounts. At
December 31, 1999, Wisconsin Gas served approximately 538,000 customers
in 529 communities. The Energy Group accounted for 49% and 51% of the
Company's 1999 operating revenues and operating income, respectively.
Through its subsidiary, WICOR Industries, the Company engages in the
manufacture and sale of pumps and processing equipment used to pump,
control, transfer, hold and filter water and other fluids. The Company's
products are used primarily in water system, pool and spa, agriculture,
filtration, RV/marine and beverage/food service applications. The
Company markets its manufactured products in over 100 countries.
C Gas Distribution Revenues and Purchased Gas Costs. Utility billings are
rendered on a cycle basis. Revenues include estimated amounts accrued
for service provided but not yet billed.
Wisconsin Gas's rate schedules contain provisions which permit, subject to
the sharing mechanism discussed below, the recovery of actual purchased
gas costs incurred. The difference between actual gas costs incurred
(adjusted for the sharing mechanism) and costs recovered through rates
is deferred as a current asset or liability. The deferred balance is
returned to or recovered from customers at intervals throughout the year
and any residual balance at the annual October 31 reconciliation date is
subsequently refunded to or recovered from customers.
A Gas Cost Incentive Mechanism (GCIM) approved by the PSCW in October 1997
became effective on November 1, 1997, for each of the three years ending
October 31, 1998, 1999 and 2000. Under the GCIM, Wisconsin Gas's gas
commodity and capacity costs are compared to monthly benchmarks. If, at
the end of each GCIM year, such costs deviate by more than 1.5% from the
benchmark cost of gas, the utility shares such excess or reduced costs
on a 50-50 basis with customers. The sharing mechanism applies only to
costs between 1.5% and 4% above or below the benchmark. The GCIM
provides an opportunity for Wisconsin Gas's earnings to increase or
decrease as a result of gas and capacity acquisition activities. Reduced
gas costs under the GCIM have been shared between the Company and its
customers.
D Income taxes. The Company files a consolidated Federal income tax return
and allocates Federal current tax expense or credits to each domestic
subsidiary based on its respective separate tax computation. For
Wisconsin Gas, investment tax credits are amortized to income over the
applicable service lives of the related properties consistent with
regulatory treatment.
E Earnings per common share. Basic earnings per common share has been
computed by dividing net earnings by the weighted average number of
common shares outstanding. Diluted earnings per share has been computed
by dividing net earnings by the weighted average number of common shares
outstanding, including the dilutive effects of stock options.
F Inventories.
ENERGY - Substantially all gas in storage inventory is priced using the
weighted average method of accounting.
MANUFACTURING - Approximately 70% and 61% of manufacturing inventories, in
1999 and 1998, respectively, are priced using the last-in, first-out
(LIFO) method (not in excess of market), with the remaining inventories
priced using the first-in, first-out (FIFO) method. If the FIFO method
had been used exclusively, manufacturing inventories would have been
$7.3 million and $7.7 million higher at December 31, 1999 and 1998,
respectively.
G Plant and Depreciation. Gas distribution property, plant and equipment
is stated at original cost, including overhead allocations. Upon
ordinary retirement of utility plant assets, original cost plus cost of
removal, net of salvage, is charged to accumulated depreciation, and no
gain or loss is recognized.
The depreciation of Wisconsin Gas's assets is computed using straight-line
rates over estimated useful lives and considers estimated removal costs
and salvage value. These rates have been consistently used for
ratemaking purposes. The composite rates were 4.4% for 1999 and 1998 and
4.3% for 1997.
Depreciation of manufacturing property is calculated under the straight-
line method over the estimated useful lives of the assets (3 to 10 years
for equipment and 30 years for buildings) and is primarily included in
cost of sales.
H Regulatory Accounting. Wisconsin Gas accounts for its regulated
operations in accordance with SFAS 71, "Accounting for the Effects of
Certain Types of Regulation." This statement sets forth the application
of generally accepted accounting principles to those companies whose
rates are determined by an independent third-party regulator. The
economic effects of regulation can result in regulated companies
recording costs that have been or are expected to be allowed in the
ratemaking process in a period different from the period in which the
costs would be charged to expense by an unregulated enterprise. When
this occurs, costs are deferred as assets in the balance sheet
(regulatory assets) and recorded as expenses in the periods when those
same amounts are reflected in rates. Additionally, regulators can impose
liabilities upon a regulated company for amounts previously collected
from customers and for amounts that are expected to be refunded to
customers (regulatory liabilities).
The amounts recorded as regulatory assets and regulatory liabilities in the
Consolidated Balance Sheet at December 31 are as follows:
THOUSANDS OF DOLLARS
1999 1998
---------- ----------
Regulatory assets:
Postretirement benefit costs (Note 10) $ 33,941 $ 36,720
Deferred uncollectible expenses 15,364 19,960
Income tax-related amounts due from customers 1,941 2,295
Other 440 344
---------- ----------
$ 51,686 $ 59,319
========== ==========
Regulatory liabilities:
Income tax-related amounts due to customers $ 16,293 $ 18,058
Unrecognized pension income (Note 10) 8,078 10,929
Other 3,371 3,166
---------- ----------
$ 27,742 $ 32,153
========== ==========
Wisconsin Gas is precluded from discontinuing service to residential
customers within its service area during the heating season. Any
differences between doubtful account provisions based on actual
experience and provisions allowed for ratemaking purposes by the PSCW
are deferred and recovered in future rates.
I Cash Flows. Cash equivalents consist of highly liquid investments which
are readily convertible into cash and have maturities of three months or
less. Due to the short maturity of these instruments, market value
approximates cost.
The Company, through an agent, purchases common stock in the open market
for shareholders who elected to reinvest their dividends in common
stock.
J Derivative Financial Instruments. The Company uses derivative financial
instruments to manage commodity risks associated with the price of
natural gas and to manage foreign exchange risks. The Company's policy
prohibits the use of derivative financial instruments for trading
purposes.
Wisconsin Gas has a commodity risk management program that has been
approved by the PSCW. This program allows Wisconsin Gas to utilize call
and put option contracts to reduce market risk associated with
fluctuations in the price of natural gas purchases and gas in storage.
Under this program, Wisconsin Gas has the ability to hedge up to 50% of
its planned gas deliveries for the heating season. The PSCW has also
allowed Wisconsin Gas to hedge gas purchased for storage during non-
heating months. The cost of the call and put option contracts, as well
as gains or losses realized under the contracts do not affect net income
as they are fully recovered under the purchased gas adjustment clause.
In addition, under the GCIM, Wisconsin Gas uses derivative financial
instruments to reduce the cost of gas. The cost of these financial
instruments, as well as any gains or losses on the contracts are subject
to the GCIM sharing mechanism. As of December 31, 1999, Wisconsin Gas
had put options covering approximately 34% of the volumes of gas in
storage, and call options covering 27% of the expected natural gas
purchases for the remainder of the 1999-2000 heating season.
WES utilizes gas futures contracts to manage commodity price risk
associated with firm customer sales commitments. Unrealized gains or
losses on these instruments are deferred and recognized in earnings in
the period the sales occurs. As of December 31, 1999, WES had natural
gas futures contracts with a notional value of $8.6 million.
Approximately 64% of the futures contracts expire in 2000.
Certain manufacturing subsidiaries use foreign exchange futures and forward
contracts to hedge foreign exchange exposure resulting from
international purchases or sales of products. Gains and losses from open
contracts are deferred until recognized as part of the transaction.
These contracts were not material.
During 1998 and 1997, WICOR entered into weather derivative agreements to
hedge a portion of the impact weather has on Energy Group earnings.
Under the agreements, payments were made or received when the heating
degree days during the heating season fell outside a specific range. The
payments were limited to a maximum of $2.0 million per year. At December
31, 1998, the fair value of the agreement entered into for the 1998-1999
heating season was not significant. During 1999 and 1998, the Company
recorded income of $0.4 million and $1.2 million, respectively, in
connection with the agreements entered into for the 1998-1999 and 1997-
1998 heating seasons. WICOR did not enter into a weather derivative
agreement for the 1999-2000 heating season.
K Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could differ
from those estimates.
L Reclassifications. Certain prior year financial statement amounts have
been reclassified to conform to their current year presentation.
Note 2 Proposed Merger with Wisconsin Energy Corporation
- ----------------------------------------------------------
WICOR and Wisconsin Energy Corporation (WEC)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
WEC through a merger of WICOR and a wholly-owned subsidiary of WEC (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
rights issued pursuant to WICOR's Rights Agreement) will be converted
into the right to receive cash, common stock, par value $.01 per share,
of WEC (WEC common stock), or a combination of cash and shares of WEC
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 percent per annum daily simple interest
for each day after July 1, 2000 through the closing date. Prior to the
closing date, WEC will select the percentage of the Merger consideration
to be paid in WEC 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
WEC 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 WEC 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 WEC price). If the average WEC price is less than $22.00
per share, WEC may elect to pay the entire Merger consideration in cash.
As of January 24, 2000, the closing price of WEC common stock was
$20.3125. Each WICOR shareholder will be entitled to elect to receive
cash, WEC 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 WEC common stock which
holders of WICOR common stock would otherwise receive.
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 WEC, approval by the Public Service Commission
of Wisconsin (PSCW), 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. The Merger Agreement was approved by the shareholders of both
WICOR and WEC on October 27, 1999. The PSCW approved WEC's application
to acquire WICOR on January 20, 2000The federal regulatory approval
process is expected to be completed in the second quarter of 2000.
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 WEC 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 WEC. The Merger Agreement may be
terminated if the Merger has not occurred on or before July 1, 2000.
However, the deadline is automatically extended to January 1, 2001, if
required governmental approvals have not been obtained.
The accompanying financial statements do not reflect any adjustments which
may occur in the future as a result of the proposed Merger with
Wisconsin Energy.
Note 3 Mergers and Acquisitions
- ----------------------------------
During 1999, WICOR and its subsidiaries completed six acquisitions. The
aggregate purchase price for these transactions was approximately $50
million and was financed using cash and short-term notes. Five of the
acquisitions were pump, fluid processing and filtration equipment
companies. The sixth acquisition was a small municipal water utility.
During 1998, WICOR and its subsidiaries acquired a small municipal water
utility, made an additional equity investment in an Italian subsidiary
and entered into a joint venture arrangement with an existing Chinese
pump manufacturer. Total funds invested as a result of these activities
amounted to $7.3 million during 1998.
Each of the acquisitions was accounted for as a purchase and the results of
operations of the acquired companies were included in the consolidated
financial statements from their respective acquisition dates. The excess
of the purchase price over the estimated fair value of net assets
acquired was approximately $29 million and $3 million in 1999 and 1998,
respectively. These amounts have been recorded as goodwill and are
being amortized over periods ranging up to 40 years.
Note 4 Income Taxes
- ----------------------
The provision for income taxes differs from the amount of income tax
determined by applying the applicable U.S. statutory federal income tax
rate to pretax income as a result of the following differences:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------
THOUSANDS OF DOLLARS 1999 1998 1997
---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Statutory U.S. tax rates $ 30,734 35.0% $ 25,064 35.0% $ 27,327 35.0%
Non-deductible merger costs 1,155 1.3 - - - -
State income taxes, net 3,799 4.3 3,151 4.4 3,383 4.3
Other, net (1,711) (1.9) (2,167) (3.0) (2,386) (3.0)
---------------- ---------------- ----------------
Effective Tax Rates $ 33,977 38.7% $ 26,048 36.4% $ 28,324 36.3%
================ ================ ================
</TABLE>
The current and deferred components of income tax expense for each of the
years ended December 31 are as follows:
THOUSANDS OF DOLLARS 1999 1998 1997
---------- ---------- ----------
Current
Federal $ 24,107 $ 15,960 $ 19,229
State 5,043 3,640 4,146
Foreign 2,650 1,432 808
---------- ---------- ----------
Total Current 31,800 21,032 24,183
---------- ---------- ----------
Deferred
Federal 274 3,698 1,836
State 770 1,262 926
Foreign 1,133 56 1,379
---------- ---------- ----------
Total Deferred 2,177 5,016 4,141
---------- ---------- ----------
Total Provision $ 33,977 $ 26,048 $ 28,324
========== ========== ==========
The components of deferred income tax classified as current assets and long-
term liabilities at December 31 are as follows:
THOUSANDS OF DOLLARS 1999 1998
---------- ----------
Current deferred income tax assets
Recoverable gas costs $ 5,987 $ 7,176
Deferred compensation 3,774 3,246
Inventory 2,115 2,398
Uncollectible account expense 2,077 (2,488)
Product related/warranty 1,464 1,123
Other 4,485 5,740
---------- ----------
$ 19,902 $ 17,195
========== ==========
Long-term deferred income tax liabilities
Property related $ 49,621 $ 49,427
Pension benefits 19,378 14,798
Systems development costs 3,452 5,178
Investment tax credit (3,909) (4,205)
Postretirement benefits (6,467) (8,064)
Deferred compensation (4,020) (4,019)
Environmental (1,313) (3,180)
Other (1,092) (870)
---------- ----------
$ 55,650 $ 49,065
========== ==========
Note 5 Short-term Borrowings and Lines of Credit
- ---------------------------------------------------
As of December 31, 1999 and 1998, the Company had total unsecured lines of
credit available from banks of $244.0 million and $266.6 million,
respectively. These borrowing arrangements may require the maintenance
of average compensating balances, which are generally satisfied by
balances maintained for normal business operations, and may be withdrawn
at any time.
Financial covenants under the Company's five-year $115 million credit
facilities, which expire in August, 2002, include leverage and interest
coverage ratios.
The components of short-term borrowings at December 31 are as follows:
THOUSANDS OF DOLLARS 1999 1998
---------- ----------
Notes payable to banks
Domestic subsidiaries $ 10,280 $ -
Foreign subsidiaries 5,388 15,976
Commercial paper - Domestic 100,934 91,677
---------- ----------
$ 116,602 $ 107,653
========== ==========
Weighted average interest rates on debt outstanding at end of year:
THOUSANDS OF DOLLARS 1999 1998
---------- ----------
Notes payable to banks
Domestic subsidiaries 6.0% -
Foreign subsidiaries 4.9% 4.6%
Commercial paper - U.S. 6.2% 5.7%
Highest month-end balance $ 116,602 $ 107,653
Average month-end balance $ 60,336 $ 63,480
Note 6 Long-term Debt
- ------------------------
In January 1999, Wisconsin Gas issued $50 million of 5.5% Unsecured Notes
due 2009. The proceeds of this offering were used in part to reduce
commercial paper issued in November 1998, in connection with the
maturity of $40 million of 7.5% Notes of Wisconsin Gas.
Maturities and sinking fund requirements during the succeeding five years
on all long-term debt total $11.0 million, $0.6 million, $42.6 million,
$0.6 million and $0.6 million in 2000, 2001, 2002, 2003 and 2004,
respectively.
Note 7 Restrictions
- ----------------------
During 1998, the PSCW approved an increase in the amount the Company may
invest in nonutility businesses. The new investment limitation permits
nonutility investments to constitute up to 60% of the Company's total
capitalization. The PSCW also found that the utility does not have to be
WICOR's predominant business. The PSCW conditioned the change on the
utility maintaining at least a single A bond rating and its continued
compliance with the customer service and safety standards included in
the PARM order. Failure to comply with these conditions could trigger a
reopening of the investment limitation. Under the new investment
limitation, the amount available for future nonutility investments at
December 31, 1999, was $346.5 million.
The PSCW has established a 13-month average equity ratio range of 43% to
50% for Wisconsin Gas and also requires Wisconsin Gas to request PSCW
approval prior to the payment of dividends on its common stock to the
Company if the payment would reduce its common equity (net assets) below
43% of total capitalization (including short-term debt). Under this
requirement, $38.3 million of Wisconsin Gas's net assets at December 31,
1999, plus future earnings, were available for such dividends without
PSCW approval. In addition, the PSCW must also approve any dividends in
excess of $16 million for any 12-month period beginning November 1 if
such dividends would reduce Wisconsin Gas's 13-month average equity
below 48.43% of its total capitalization. Wisconsin Gas paid $6.5
million in dividends in November 1999 and expects to pay $26.0 million
in dividends for the 12 months ending October 2000. At December 31,
1999, Wisconsin Gas's equity ratio was 52.3%.
Combined restricted common equity of the Company's subsidiaries totaled
$282.3 million under the most restrictive provisions as of December 31,
1999; accordingly, $151.1 million of consolidated retained earnings is
available for payment of dividends.
Note 8 Commitments and Contingencies
- ---------------------------------------
A Gas Supply. Wisconsin Gas has agreements for firm pipeline and storage
capacity that expire at various dates through 2008. The aggregate amount
of required payments under such agreements totals approximately $389.0
million, with annual required payments of $98.4 million in 2000, $93.7
million in 2001, $86.9 million in 2002, $71.6 million in 2003 and $9.6
million in 2004. Wisconsin Gas's total payments for firm pipeline and
storage capacity prior to recovery from sales of excess capacity were
$108.4 million in 1999, $113.9 million in 1998 and $126.6 million in
1997. The purchased gas adjustment provisions of Wisconsin Gas's rate
schedules permit the recovery of gas costs from its customers subject to
the GCIM sharing mechanism.
The FERC has allowed ANR Pipeline Company (ANR) to recover capacity and
"above market" supply costs associated with quantities purchased from
Dakota Gasification Company (Dakota) under a long-term contract expiring
in year 2009. Consistent with guidelines set forth in Order No. 636, ANR
has allocated 90% of Dakota costs to firm transportation service. Based
on its contracted quantities with ANR, Wisconsin Gas is currently paying
approximately $100,000 per month of Dakota costs. Transition costs
billed to Wisconsin Gas are being recovered from customers under the
purchased gas provisions within its rate schedules.
B Capital Expenditures. Certain commitments have been made in connection
with 2000 capital expenditures. The Energy Group's capital expenditures
for 2000 are estimated at $51.4 million. The Manufacturing Group's
capital expenditures for 2000 are estimated at $24.2 million.
During 1999, the Company announced its participation in the formation of a
joint venture to construct the Guardian interstate natural gas pipeline
from the Chicago market hub near Joliet, Illinois to southeastern
Wisconsin. Subsidiaries of CMS Energy, a Dearborn, Michigan based
international energy company, and Northern States Power Company, a
Minneapolis based diversified energy company, are the sponsors of the
project with WICOR. The three partners will have equal ownership
interests in the project.
The total cost of the project, which requires FERC approval, is
approximately $230 million. The joint venture intends to finance this
project using $75 million of capital contributions from the three co-
owners and issuing long-term debt for the balance of construction costs.
The pipeline is scheduled to be in service by November 1, 2002.
Wisconsin Gas has committed to purchase 650,000 Dekatherms per day of
capacity on the pipeline and will construct a 35-mile lateral at a cost
of approximately $54 million to connect its distribution system to the
Guardian Pipeline. The Company expects to finance this lateral project
using long-term debt.
The Guardian Pipeline, if approved by FERC and placed in service, is
expected to increase the availability and reliability of gas
transportation service in Northern Illinois and southeastern Wisconsin
as well as introduce or increase competition among pipelines serving the
area.
C Environmental Matters. Wisconsin Gas has identified two previously owned
sites on which it operated manufactured gas plants. Such plants ceased
operations prior to the mid-1950's. Environmental remediation work for
one of the sites was completed during the third quarter of 1999.
Wisconsin Gas is evaluating potential remedial options at the second
site. Wisconsin Gas has established a reserve of approximately $2.1
million at December 31, 1999, to cover the remediation and maintenance
costs of the remaining site.
The Company's manufacturing subsidiaries are involved in various
environmental matters, including matters in which the subsidiaries or
alleged predecessors have been named as potentially responsible parties
under the Comprehensive Environmental Response Compensation and
Liability Act (CERCLA). The Company has established reserves for all
environmental contingencies of which management is currently aware in
accordance with generally accepted accounting principles.
The Company periodically reviews its reserves for such remediation costs as
evidence becomes available indicating that its remediation liability has
changed. Based on the foregoing and given current information,
management believes that future costs in excess of the amounts accrued
on all presently known and quantifiable environmental contingencies will
not be material to the Company's financial position or results of
operations.
D Other. The Company is party to various legal proceedings arising in the
ordinary course of business which are not expected to have a material
effect on the Company's financial position or results of operations.
Note 9 Common Stock and Other Paid-in Capital
- ------------------------------------------------
The Company's articles of incorporation authorize 120,000,000 shares of
common stock of which 37,819,408 shares and 37,359,413 shares were
outstanding at December 31, 1999 and 1998, respectively. Common stock
totaling 7,521,747 shares is reserved for issuance under the Company's
dividend reinvestment, stock option and incentive savings plans. In
addition 22,670,578 shares are reserved pursuant to the Company's
shareholder rights agreement, as amended. WICOR has waived its rights
under the plan as it relates to the proposed Merger with Wisconsin
Energy.
Under the terms of the shareholder rights agreement, each outstanding share
of common stock has attributed thereto one common share purchase right.
Under certain circumstances, each right entitles the shareholder to
purchase one-half of one common share at an exercise price of $75 per
full share (equivalent to $37.50 for each one-half share), subject to
adjustment. The rights are not exercisable until 10 business days after
a person or group announces a tender offer or exchange offer which would
result in their acquiring ownership of 20% or more of the Company's
outstanding common stock, or after a person or group acquires at least
20% of the Company's outstanding common shares. Under certain
circumstances, including the existence of a 20% acquiring party, each
holder of a right, other than the acquiring party, will have the right
to purchase at the exercise price WICOR common stock having a value of
two times the exercise price. If, after 20% or more of the outstanding
shares of WICOR common stock is acquired by a person or group and the
Company is then acquired by that person or group, rights holders would
be entitled to purchase shares of common stock of the acquiring person
or group having a market value of two times the exercise price of the
rights. The WICOR board of directors is authorized to reduce the 20%
threshold, referred to above, to not less than 10%. The rights do not
have any voting rights and may be redeemed at a price of $0.001 per
right. The rights expire on August 29, 2009, subject to extension.
Note 10 Benefit Plans
- ------------------------
A Pension and other Postretirement Benefit Plans. The Company provides
defined benefit pension and postretirement benefit plans to certain
employees. Under the Merger Agreement, the Company's existing pension
and other postretirement benefit plans or plans substantially comparable
in the aggregate will be maintained for the benefit of Company employees
or former employees for at least one year following completion of the
Merger.
The following provides a reconciliation of benefit obligations, plan assets
and funded status of the plans, at December 31, 1999 and 1998.
[CAPTION]
<TABLE>
OTHER POSTRETIREMENT
PENSION BENEFITS BENEFITS
--------------------- ---------------------
THOUSANDS OF DOLLARS 1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Change in benefit obligation
Benefit obligation at January 1 $ 198,629 $ 181,018 $ 78,300 $ 105,863
Service cost 4,302 4,014 601 1,176
Interest cost 12,676 12,782 4,474 5,822
Amendments and settlements 124 (943) (5,491) (14,382)
Actuarial (gain) loss (26,504) 15,733 (9,677) (15,913)
Benefits paid (16,674) (13,975) (3,876) (4,266)
---------- ---------- ---------- ----------
Benefit obligation at December 31 172,553 198,629 64,331 78,300
---------- ---------- ---------- ----------
Change in plan assets
Fair value of plan assets at January 1 275,405 273,871 58,451 54,958
Actual return on plan assets 49,501 14,804 8,994 2,732
Employer contributions - - 1,919 3,948
Benefits paid from plan assets (15,905) (13,270) (2,118) (3,187)
---------- ---------- ---------- ----------
Fair value of plan
assets at December 31 309,001 275,405 67,246 58,451
---------- ---------- ---------- ----------
Funded status of the plans 136,448 76,776 2,915 (19,849)
Unrecognized net actuarial (gain) (80,054) (26,734) (28,203) (16,223)
Unrecognized prior service
cost (benefit) 2,531 2,762 (29,752) (26,474)
Unrecognized net transition
(asset) liability (7,577) (9,253) 1,176 1,919
---------- ---------- ---------- ----------
Net amount recognized $ 51,348 $ 43,551 $ (53,864) $ (60,627)
========== ========== ========== ==========
Amounts recognized in the
Consolidated Balance Sheets
Prepaid benefit cost $ 58,833 $ 50,011 $ - $ -
Accrued benefit liability (7,485) (6,460) (53,864) (60,627)
Additional minimum liability (2,395) (3,474) - -
Accumulated other comprehensive income 2,395 3,474 - -
---------- ---------- ---------- ----------
Net amount recognized $ 51,348 $ 43,551 $ (53,864) $ (60,627)
========== ========== ========== ==========
Assumptions as of December 31
Discount rate (weighted average) 7.50% 6.50% 7.50% 6.50%
Expected return on plan assets 9.00% 9.00% 9.00% 9.00%
Rate of compensation increase 4.50% 4.50% 4.50% 4.50%
</TABLE>
Net pension (income) costs and other postretirement benefit costs for
each of the years ended December 31, include the following
components:
<TABLE>
<CAPTION>
OTHER POSTRETIREMENT
PENSION BENEFITS BENEFITS
-------------------------- --------------------------
THOUSANDS OF DOLLARS 1999 1998 1997 1999 1998 1997
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Service costs $ 4,304 $ 4,014 $ 4,042 $ 601 $ 1,176 $ 2,102
Interest costs on projected
benefit obligations 12,678 12,782 12,742 4,474 5,822 6,731
Expected (return) on assets (22,625) (21,443) (19,884) (5,246) (5,168) (4,053)
Amortization of:
Transition obligation (asset) (1,694) (1,693) (1,693) - - -
Prior service cost (gain) 251 195 389 (2,212) (1,384) (957)
Actuarial loss (gain) 107 (40) (352) (1,278) (1,143) (719)
-------- -------- -------- -------- -------- --------
(6,979) (6,185) (4,756) (3,661) (697) 3,104
Amortization of regulatory
(liability) asset (2,851) (2,851) (2,851) 2,778 2,778 2,778
-------- -------- -------- -------- -------- --------
Net benefit (income) expense $(9,830) $(9,036) $(7,607) $ (883) $ 2,081 $ 5,882
======== ======== ======== ======== ======== ========
</TABLE>
Pension plans
- -------------
Employer contributions and funding policies are consistent with funding
requirements of Federal law and regulations. Commencing November 1,
1992, Wisconsin Gas pension costs or credits have been calculated in
accordance with SFAS 87 and are recoverable from customers. Prior to
this date, pension costs were recoverable in rates as funded. The
cumulative difference between the amounts funded and the amounts based
on SFAS 87 through November 1, 1992, is recorded as a regulatory
liability and is being amortized as a reduction of pension expense over
an eight-year period effective November 1, 1994.
Postretirement health care and life insurance
- ---------------------------------------------
In addition to providing pension benefits, the Company provides certain
health care and life insurance benefits for retired employees when they
reach normal retirement age while working for the Company. Wisconsin Gas
funds the accrual annually based on the maximum tax deductible amount.
Commencing January 1, 1992, Wisconsin Gas postretirement benefit costs
have been calculated in accordance with SFAS 106 and are recoverable
from customers. The cumulative difference between the amounts funded and
the amounts based on SFAS 106 through January 1, 1992, is recorded as a
regulatory asset and is being amortized over a twenty-year period
effective January 1, 1992.
The postretirement benefit cost components for 1999 were calculated assuming
health care cost trend rates ranging up to 10% for 2000 and decreasing
to 5% in 2004. An increase of one percentage point in the assumed health
care cost trend rate in each year would increase the accumulated
postretirement benefit obligation as of December 31, 1999, by $3.0
million and the aggregate of the service and interest cost components of
postretirement expense by $0.2 million. A corresponding decrease of one
percentage point would decrease the accumulated postretirement benefit
obligation by $1.8 million and the aggregate of the service and interest
cost components of postretirement expense by $0.2 million.
Plan assets are primarily invested in equities and fixed income securities.
B Retirement Savings Plans. Certain of the Company's operating subsidiaries
maintain various employee savings plans, which provide employees a
mechanism to contribute amounts up to 16% of their compensation for the
year. Company matching contributions may be made for up to 5% of
eligible compensation including 1% for the Employee Stock Ownership Plan
(ESOP). Total contributions were valued at $2.3 million in 1999, $1.9
million in 1998 and $1.8 million in 1997.
C Employee Stock Ownership Plan. In November 1991, WICOR established an
ESOP covering non-union employees of Wisconsin Gas. The ESOP funds
employee benefits of up to 1% of compensation with Company common stock
distributed through the ESOP. The ESOP used the proceeds from a $10
million, adjustable rate loan (6.5% interest rate at December 31, 1999),
guaranteed by WICOR, to purchase 862,532 shares of WICOR common stock.
The Company has extended the adjustable rate loan, with similar terms,
until May 31, 2002. The unpaid balance ($2.0 million) is shown as long-
term debt with a like amount of unearned compensation reported as a
reduction of common equity on the Company's balance sheet.
The ESOP trustee is repaying the loan with dividends on shares of the
Company's common stock held in the ESOP and with Wisconsin Gas
contributions to the ESOP. As of December 31, 1999, the value of the
unallocated shares of stock exceeded the loan balance by $3.6 million.
On November 22, 1999 Wisconsin Gas Company filed a request for
determination with respect to termination of the ESOP as called for in
the Merger Agreement. The WICOR common stock held by the plan will be
exchanged for cash or shares of Wisconsin Energy common stock, or both,
on the same terms as for other WICOR shareholders. The cash or
Wisconsin Energy common stock received by the plan will then be
distributed to the participants of the plan.
D Stock Option Plans and Restricted Stock. The Company has a total of 145
employees participating in one or more of its common stock option plans.
All options were granted at prices not less than the fair market value
on the date of grant and expire no later than eleven years from the date
of grant.
Under the Merger Agreement, at the effective time of the Merger, each
outstanding option to purchase shares of WICOR common stock and each
outstanding WICOR equity-based award or account will be assumed by
Wisconsin Energy and converted into an award or account of Wisconsin
Energy or an option to purchase shares of Wisconsin Energy common stock
on terms adjusted to reflect the terms of the Merger. However, all
options granted on or before June 27, 1999 (the date of the Merger
Agreement), will automatically become fully vested when the Merger
becomes effective.
[CAPTION]
<TABLE>
1999 1998 1997
------------------- ------------------- -------------------
WTD AVG WTD AVG WTD AVG
THOUSANDS OF DOLLARS SHARES PRICE SHARES PRICE SHARES PRICE
---------- -------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at January 1 2,561,563 $ 17.70 1,959,716 $ 15.22 1,560,298 $ 13.38
Granted 537,800 $ 19.47 744,200 $ 23.61 538,400 $ 19.75
Exercised (440,727) $ 13.62 (120,749) $ 13.23 (137,382) $ 12.11
Canceled (57,442) $ 20.89 (21,604) $ 21.13 (1,600) $ 15.66
---------- ---------- ----------
Outstanding at 12/31 2,601,194 $ 18.69 2,561,563 $ 17.70 1,959,716 $ 15.22
========== ========== ==========
Exercisable at 12/31 1,486,292 $ 16.73 1,423,174 $ 14.30 1,246,550 $ 13.54
========== ========== ==========
Available for future
grant at year-end 1,019,926 1,437,984 347,980
========== ========== ==========
</TABLE>
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its stock option plans. The Black-Scholes option-pricing
model was used with the following assumptions for 1999, 1998 and 1997,
respectively: dividend yields of 4.5%, 3.6% and 4.8%, risk-free interest
rates of 4.7%, 5.3% and 5.1%, expected volatility of 19.3%, 15.1% and
15.9%, and an expected option life of 5.64 years for all periods. The
weighted average fair value of options granted in 1999, 1998 and 1997
was $2.79, $3.59 and $4.22 per share, respectively. Had compensation
cost for the Company's 1999, 1998 and 1997 grants for stock-based
compensation plans been determined consistent with SFAS 123 "Accounting
for Stock Based Compensation", the Company's net income and diluted
earnings per common share would have been reduced to the pro forma
amounts indicated below:
1999 1998 1997
---------- ---------- ----------
Net earnings:
As reported $ 53,833 $ 45,495 $ 49,523
Pro forma $ 52,750 $ 44,594 $ 49,167
Diluted earnings per common share
As reported $ 1.42 $ 1.21 $ 1.33
Pro forma $ 1.39 $ 1.19 $ 1.32
Under the Company's 1994 Long-Term Performance Plan (1994 Plan), awards
covering up to 3,490,000 shares of common stock may be granted to
certain key employees as compensation. The types of awards that may be
granted under the 1994 Plan include incentive stock options,
nonqualified stock options, stock appreciation rights and restricted
stock.
Awards of restricted stock subject to performance vesting criteria have
been granted under the 1994 Plan. These awards will vest only if the
Company achieves certain financial goals over a three-year performance
period beginning in the year of grant. Recipients of restricted stock
awards are not required to provide consideration to the Company other
than rendering service and have the right to vote the shares and the
right to receive dividends thereon. Restricted shares that are forfeited
revert to the Company at no cost.
As of December 31, 1999, a total of 154,449 restricted shares were issued
but not yet vested. Initially, the total market value of the shares is
treated as unearned compensation and is charged to expense over the
vesting periods. For both restricted stock and performance option
shares, adjustments are made to expense for changes in market value and
progress towards achievement of financial goals. All options granted on
or before June 27, 1999 (the date of the Merger Agreement), will
automatically become fully vested when the Merger becomes effective and
the restrictions applicable to awards of restricted stock made on or
before June 27, 1999, will terminate. The unrestricted stock will be
converted into cash, shares of WEC common stock, or both, in the Merger.
Note 11 QUARTERLY FINANCIAL DATA (UNAUDITED)
- -----------------------------------------------
Because seasonal factors significantly affect the Company's operations
(particularly at Wisconsin Gas), the following data may not be
comparable between quarters:
[CAPTION]
<TABLE>
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
QUARTERS:
---------------------------------------------
First Second Third Fourth
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
1999
- ----
Operating revenues $ 304,241 $ 225,332 $ 196,956 $ 283,584
Operating income $ 50,092 $ 15,178 $ 5,961 $ 34,723
Earnings available for
common stock $ 28,866 $ 5,992 $ 642 $ 18,333
Basic earnings per common share $ 0.77 $ 0.16 $ 0.02 $ 0.49
Diluted earnings per common share $ 0.77 $ 0.16 $ 0.02 $ 0.48
1998
- ----
Operating revenues $ 303,327 $ 219,879 $ 172,746 $ 248,231
Operating income $ 42,985 $ 13,904 $ 797 $ 26,897
Earnings (loss) available
for common stock $ 24,963 $ 6,024 $ (1,211) $ 15,719
Basic earnings (loss) per
common share $ 0.67 $ 0.16 $ (0.03) $ 0.42
Diluted earnings (loss)
per common share $ 0.66 $ 0.16 $ (0.03) $ 0.42
</TABLE>
Quarterly earnings per share may not total to the amounts reported for the
year since the computation is based on weighted average common shares
outstanding during each quarter.
Note 12 Fair Value of Financial Instruments
- ----------------------------------------------
The carrying value of cash and cash equivalents, accounts receivable and
short-term borrowings approximates fair value due to the short-term
maturities of these instruments.
The fair value of the Company's long-term debt is estimated based on the
market prices of quoted market prices of U.S. Treasury issues having a
similar term to maturity, adjusted for the Company's bond rating and
present value of future cash flows.
Because Wisconsin Gas operates in a regulated environment, shareholders
probably would not be affected by realization of gains or losses on
extinguishment of its outstanding fixed-rate debt. Realized gains would
be refunded to and losses would be recovered from customers through gas
rates. Likewise, any gains or losses on gas commodity instruments used
by Wisconsin Gas are refunded to or recovered from customers under the
GCIM.
The estimated fair value of WICOR's financial instruments at December 31,
is as follows:
1999 1998
------------------------ ------------------------
CARRYING FAIR CARRYING FAIR
THOUSANDS OF DOLLARS AMOUNT VALUE AMOUNT VALUE
------------ ----------- ------------ -----------
Cash and cash equivalents $ 12,859 $ 12,859 $ 13,383 $ 13,383
Accounts receivable $ 152,127 $ 152,127 $ 137,321 $ 137,321
Short-term debt $ 116,602 $ 116,602 $ 107,653 $ 107,633
Long-term debt $ 205,444 $ 196,098 $ 188,470 $ 192,412
Note 13 Business Segment Information
- ---------------------------------------
The Company is a diversified holding company with two principal business
segments: an Energy Group responsible for natural gas distribution and
related services, and a Manufacturing Group responsible for the
manufacture of pumps and processing equipment used to pump, control,
transfer, hold and filter water and other fluids.
The Company's reportable segments are managed separately because each
business requires different technology and marketing strategies. The
accounting policies of the reportable segments are the same as those
described in Note 1 of Notes to the Consolidated Financial Statements.
The Company evaluates the performance of its operating segments based on
income from continuing operations. Intersegment sales and transfers are
not significant.
Information regarding products and services and geographic areas are not
presented as they are not included in measures that are reviewed by the
Company.
Summarized financial information concerning the Company's reportable
segments is shown in the following table. The other category includes
the results of the parent company only and non-regulated energy
operations involved in energy and risk management services, automated
meter reading and other related services. Other Energy net earnings in
1999 include $3.3 million of merger related costs.
[CAPTION]
<TABLE>
ENERGY
---------------------------------
THOUSANDS OF DOLLARS REGULATED OTHER TOTAL MANUFACTURING CONSOLIDATED
----------- --------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C>
1999
- ----
Revenues $ 439,477 $ 59,616 $ 499,093 $ 511,020 $ 1,010,113
Depreciation
and amortization $ 42,291 $ 110 $ 42,401 $ 15,281 $ 57,682
Net earnings (loss) $ 26,434 $ (2,240) $ 24,194 $ 29,639 $ 53,833
Total assets $ 672,225 $ 16,451 $ 688,676 $ 401,247 $ 1,089,923
Capital expenditures $ 42,970 $ 196 $ 43,166 $ 11,563 $ 54,729
1998
- ----
Revenues $ 428,562 $ 52,927 $ 481,489 $ 462,694 $ 944,183
Depreciation
and amortization $ 40,336 $ 134 $ 40,470 $ 14,061 $ 54,531
Net earnings (loss) $ 22,668 $ (1,012) $ 21,656 $ 23,839 $ 45,495
Total assets $ 651,492 $ 14,284 $ 665,776 $ 349,420 $ 1,015,196
Capital expenditures $ 34,995 $ 170 $ 35,165 $ 14,114 $ 49,279
1997
- ----
Revenues $ 536,720 $ 59,542 $ 596,262 $ 424,779 $ 1,021,041
Depreciation
and amortization $ 39,820 $ 139 $ 39,959 $ 13,781 $ 53,740
Net earnings $ 29,335 $ 108 $ 29,443 $ 20,080 $ 49,523
Total assets $ 683,888 $ 13,780 $ 697,668 $ 333,664 $ 1,031,332
Capital expenditures $ 35,017 $ 131 $ 35,148 $ 16,424 $ 51,572
</TABLE>
